Category: Pension

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Could using a pension reduce higher rate tax payments?

At the beginning of March Chancellor Rishi Sunak presented his Budget. His aim: to chart a course out of the economic damage wrought by the pandemic. A year earlier he had said he would do “whatever it takes” to protect jobs and businesses. Twelve months on, with Government borrowing breaking all records, it is clear that it will take a very long time to pay the bill for “whatever it takes.”

One of the key measures in the Budget was the freezing of personal allowances: the higher 40% rate will be frozen at £50,270 from April 2021 to the 2025/26 tax year. This means that 5m people in the UK – roughly one in six taxpayers – will be paying higher rate tax by 2026 as wages rise with inflation. As many commentators pointed out, it looks like middle class savers will be paying the bill for the pandemic.

Is there any way to avoid this? Good news! – The answer is ‘yes.’ Putting more money into your pension will help you save for the future and avoid an increasing tax bill. This is because pension contributions attract tax relief at the same rate you pay income tax, meaning savers could effectively eliminate higher-rate tax bills by saving anything above £50,270 into their pensions.

Under the proposed tax freeze, someone now earning £49,000 whose pay rises by 3% per year will see their annual tax bill increase by £3,128 by 2026. However, if they put £500 per month into their pension, their tax bill will be just an extra £609 – despite them earning an extra £7,804 by the end of the Chancellor’s freeze.

What the freeze on thresholds – which also sees the basic rate threshold frozen at £12,570 – very clearly illustrates is the need for financial planning. This is not the place for complicated examples, but what is clear is that many people will enjoy significant pay rises over the next five years and will – without adequate financial planning advice – end up paying significantly more in tax.

It is worth pointing out that the freeze on thresholds also applies to inheritance tax, with that threshold frozen at £325,000. Many people will find themselves paying significantly more tax on their earnings and – without proper planning – seeing the value of their parents’ estates reduced by inheritance tax.

The Daily Telegraph described the tax rises in the Budget as ‘eye-watering,’ commenting that they take the UK back to levels of taxation not seen since the sixties. What’s clear is that the Chancellor’s decision to freeze thresholds to pay part of the bill for the pandemic makes long-term financial planning more important than it has ever been.

Sources
https://www.telegraph.co.uk/politics/2021/03/04/eye-watering-tax-hikes-will-take-britain-back-1960s/
https://www.thisismoney.co.uk/money/pensions/article-9343481/How-using-pension-stop-Rishi-picking-pocket.html

Pensions as a force for good

Many in the financial services industry will remember the first advice we were taught to give clients: ‘Save first, and then spend what’s left. Don’t do it the other way round.’ 

Or words to that effect…

The problem was, of course, that many people were not good savers, especially when it came to saving for retirement. After all, it was a long way off, and there was this year’s holiday in Spain to pay for…

Could it be, though, that a relatively recent development is about to change that? 

Money is flowing into ‘green,’ ‘responsible’ or ‘ethical’ investment funds. Fund managers talk of SRI – socially responsible investing. Companies have ESG – ethical, social and good corporate governance – right at the top of their to-do list. 

Could savings – and in particular saving for a pension – become a force for good? And could that in turn lead to more young people seeing saving not as something they reluctantly do, but as a driver of social change? 

In both cases the answer appears to be ‘yes.’ 

Governments around the world are increasingly committed to green initiatives: as many people will know, the UK government has banned the sale of new petrol and diesel cars and vans from 2030. The Biden administration in the US will unquestionably adopt similar policies, following on from the decision to re-join the Paris Climate Accord. 

In their early years, ethical investment funds – largely avoiding tobacco, gambling and the arms industry – had something of a mixed track record. That is now changing, with ESG funds more than holding their own amid last year’s difficult trading conditions. 

Factor in the increasing dominance of Millennials and Generation Z – demographic cohorts who want to work for, and invest in, companies that share their ethical values – and the shift towards green investing can only gather pace. 

The more these ‘new’ investors say, ‘I want my pension to be invested in funds that care about the environment’, the more fund managers will be forced to respond. And the more ESG investment funds that become available, the more young people will be willing to save. It is easy to see a virtuous circle emerging – more saving driving more ESG funds which in turn drives yet more saving. 

A lot of people used to see saving for a pension as something distant and hard to understand: if the accelerating trend to ESG funds changes that, then it can only be a good thing, for both the industry and the savers.

Sources
https://www.thisismoney.co.uk/money/diyinvesting/article-8820103/How-make-pension-investments-green.html

How much should I be saving towards my pension?

Research shows that we put ambitious targets on our retirement income and then underestimate how much we need to save to get there.

Before we delve into how much you should be saving, here’s a quick overview of the two main types of pension schemes:

In a defined benefit scheme your employer promises to deliver you an income in retirement. You’ll most likely have to contribute each month too, putting in a required amount.

These ‘gold-plated’ schemes are increasingly rare.

The other type of scheme is a defined contribution scheme. If you have this type of scheme, you will save into this and get contributions from your employer too. The money is invested to build a pot which will then fund your retirement.

If you have a defined benefit scheme, you just need to save as much as your employer says. But with a defined contribution scheme things are a little more complicated… The onus is on you to deliver the money you need in retirement – the more you save, the more you get.

How much will I need in retirement?

In retirement, your outgoings are likely to be lower. For instance, most people will be mortgage free and not supporting children. In the finance industry, there’s a vague rule that some currently aged 40 would need around 50% of their current income to have the same standard of life in retirement.

You should also factor in the state pension. Under the new flat-rate scheme this is worth £155.65 per week (£8,094 per year). So, someone targeting a retirement income of £23,000 would need to contribute £16,000 from their own pensions.

How much should I be saving?

Naturally, the amount you need to save depends on the size of the pension you want. However, it also depends on your age.

For instance, putting 12% of your salary towards your pension might be enough if you start in your 20s, but if you leave it until you’re 40, you might need to pay in closer to 20% to get the same level of income.

It’s sometimes said that the rule for working out what percentage of your salary needs to be going into a pension is half the age from when you started saving. So, if you started at age 30 it would be 15%.

This said, given the variation in salaries and personal circumstances, it can be a good idea to get a slightly more profound insight into your finances. 

You could use some sort of pension calculator. There are plenty of different calculators online that let you play around with the numbers. A quick search on Google will reveal plenty. 

All things considered, this can’t give you quite as clear a view on your financial retirement scenario as speaking to an independent financial adviser. They should have the knowledge and experience to help you get both a clear view of your current situation and the changes you could make so that your money works harder towards your goals.

Sources
https://www.thisismoney.co.uk/money/howmoneyworks/article-3177112/How-money-need-save-pension.html

Will triple lock state pensions survive the current economic crisis?

The Covid-19 pandemic has dealt a crippling blow to the British economy. The latest predictions from the Office for Budget Responsibility say that the country is on track to see the largest economic decline for 300 years, with output falling by at least 10% over 2020. While the long term economic outlook is uncertain, the various economic support measures announced by the government will go some way to protecting it. For instance, the job retention scheme, where the government paid the wages of 6.3 million people, should prevent some of the fallout that would be caused by large scale mass unemployment.

However, all this needs to be paid for. For the first time in 50 years, government debt exceeds the size of the economy. Income from tax, National Insurance and VAT has plummeted while government spending has soared.

All this means that the state pensions triple lock could again come under the microscope. Under the triple lock system, state pension payments rise by the higher of inflation, wages or 2.5% each year. This policy has been a central part of the government’s commitment to pensioners over the last ten years.

Recently, experts have been increasingly vocal in their opinion that the triple lock will have to be abandoned in order to pay for the fallout of the lockdown. The Social Market Foundation think tank advised the government to scrap the triple lock system, calling for a double lock system where the state pension would rise in line with either average earnings or inflation. The think tank estimates that this would contribute to £20bn worth of savings over the next five years.

An added concern is that following this year’s fall in average earnings – predicted to be 7.3% – average  earnings could then soar next year in the event of a sharp recovery. One estimate places this figure at over 18%. This figure would form the basis of the earnings element of the triple lock system for 2021 and 2022, meaning that state pensions could rise by over 21% in just two years. 

This kind of increase would be unsustainable, especially given the severe hardship that millions of workers will face over the next few years.

However, the triple lock pension scheme was a key part of Johnson’s manifesto, a commitment he reaffirmed in parliament back in May.

What’s more, there are some models of the country’s economic recovery which show a more restrained recovery than the one mentioned above. 

Under the Office for Budget Responsibility’s latest prediction for a “moderate” recovery, the triple lock would only see earnings rise by 5% next year, meaning that state pensions would also rise by 5%. This is a far more prudent figure than 18%, meaning Johnson could still find traction to stick with his triple lock pledge. 

Sources

https://www.moneyobserver.com/news/state-pension-triple-lock-revised-forecasts-suggest-stay-execution

https://www.bbc.co.uk/news/business-53104734

https://citywire.co.uk/new-model-adviser/news/triple-lock-bill-could-hit-20bn-as-gov-t-grapples-with-finances/a1367917

What questions should you be asking before you access your pension?

According to HMRC, record numbers of people have been taking money out of their pensions since the beginning of the year. 348,000 people made a withdrawal between January and March, a 23% increase from 284,000 in the same quarter in 2019. The value of the payments was £2.46bn, the highest amount recorded for that period since pension freedoms began in 2015. 

Given these uncertain times, you too may be considering accessing your pension to increase your disposable income and ease any financial pressures. The rules allow you to take out as much as you want from your pot, once you reach the age of 55. The first 25% withdrawal is tax-free while the remaining 75% is subject to your marginal rate of income tax.  

However, just because the freedoms are there doesn’t mean taking them is the right course of action. Here are some key considerations: 

Are there any other savings you can use before you tap into your pension?    

Accessing your pension is a major step. Make sure you’ve explored all your other options first. Have you accessed any government grants that you may be eligible for first? Have you got any other cash savings that could tide you over?   

Remember that if you have a defined contribution pension, a significant proportion of it will probably have been invested in stocks and shares, which will have taken a hit in recent months. So if you access cash from your pension during the current downfall, that money won’t have the opportunity to regain its value once the stock markets recover.     

How much do you really need? 

The purpose of a pension is to give you enough money to live off throughout your retirement. Whatever you take out now will influence what you have to live off in later life. That’s why it’s a good idea to try and leave as much as you can in your pension so that it has the opportunity to benefit from future market rises.  

Most people take the whole of their 25% tax-free lump sum when they first access their pension. But you can take out money from your pension in stages, in line with what you actually need. This way you have a smaller tax-free lump sum at the outset but further tax-free entitlements throughout your retirement. It’s important to seek advice as to what is best for your personal circumstances.     

How much tax will you pay?

It’s worth being aware that by taking a large amount of your pension in a particular tax year     you could be tipping yourself into a higher tax bracket, meaning you will pay more tax than you would have done if you’d taken smaller amounts over a longer time.  

Another consideration is that HMRC will ask your pension provider to deduct income tax when you take an income from your pension pot for the first time (not counting your tax-free lump sum). They will assume that what you take the first month is what you will take every month, which could again push you into the higher bracket. If you haven’t been taking that every month and are a basic rate taxpayer, you can claim the extra tax back.        

Want to continue to pay into your pension in the future?

You may just be focused on accessing some funds for your current circumstances. It’s important to realise, however, that if what you take now is above the tax-free limit, you could be restricting how much you and your employer will be able to contribute to your pension fund in the future. According to the Money Purchase Annual Allowance, your joint contributions cannot exceed £4,000 a year without incurring penalties.           

If you’re considering accessing your pension, do get in touch with us to discuss the implications.    

Sources
https://www.yourmoney.com/retirement/aged-55-or-over-questions-you-should-ask-before-accessing-your-pension/
https://yourmoney.com/saving-banking/savings-market-awash-with-pension-freedoms-cash/

What is a Self-Invested Personal pension?

Self-Invested Personal Pensions (SIPPs) are designed to give you greater control over your retirement savings. With a SIPP you can choose from a wide range of high quality investments, manage them for yourself and consolidate your existing pensions in one place.

A SIPP is different to other pension saving forms and can give you more control over your pension through a provider with a wide range of funds and the flexibility to manage your own investments.

SIPPs are not suitable for everyone. If you don’t want to invest across different asset classes or don’t think you will make use of the investment choices that SIPPs give you then a SIPP might not be right for you. Self-directed investors should regularly review their SIPP portfolio, or seek professional advice from an independent financial adviser, to ensure that the underlying investments remain in line with their pension objectives. Prevailing tax rates and the availability of tax reliefs are dependent on your individual circumstances and are subject to change.

While SIPPs are definitely suited to investors keen to look after their own money, you don’t have to be confident with or interested in investing. You can still benefit from financial planning and investment management services, so you can usually have as much or as little involvement as you like with your SIPP.

Self-Invested Personal Pensions are described by providers as right for people who want the freedom to choose and manage their own retirement investments. SIPPs are often thought of as pensions specifically for people with a lot of money or investing experience and whilst this might have been true in the past, competition between SIPP providers means costs have generally decreased and some SIPPs are now promoted by providers to be amongst the best value pensions around. You should investigate costs carefully before choosing, however, and always seek independent financial advice if you are unsure.

Sources

www.bestinvest.co.uk

What has survived from the original Pension Schemes Bill?

 You may have read various headlines about the Pensions Bill which was first announced in the Queen’s Speech in October. Its progress was subsequently halted with the calling of the General Election but it has now been confirmed by the Queen and is on its way to becoming law. 

Given all the to-ing and fro-ing, you could be forgiven for being unclear as to what it actually includes. It has, in fact, remained largely unchanged and has met with widespread cross-party support.  

The main initiatives include:

  • The introduction of the framework for pensions dashboards
  • Legislation to establish collective defined contribution (CDC) schemes
  • Greater powers for The Pensions Regulator 

The government said the purpose of the bill was to “support pension saving in the 21st century, putting the protection of people’s pensions at its heart.”

Pensions dashboards 

The long-awaited pensions dashboards are designed to allow savers to view all their lifetime savings in one place through a digital interface. Data will be retrieved directly from pension providers and updated in real time. The Pensions Bill has introduced new rules that will provide a framework so that providers will be compelled to provide accurate information. State pension data should also be visible.       

Experts warn, however, that primary legislation will take most of 2020 to reach the statute book and it could be several years before much of the older data from company and private pensions is accessible. Research has shown that 65.8% of respondents would like to use a dashboard to see how much their pension is worth and what type of income that would translate to in retirement. 54% of those surveyed, though, said they would be unlikely to use the system if it only contained partial information.

It’s clear that dashboards have the potential to revolutionise retirement planning but the industry wants to ensure early users are not put off by incomplete versions.The Bill is really only the beginning.          

Collective Defined Contribution schemes 

The Bill also announced its commitment to the creation of a ‘framework for the establishment, operation and regulation of Collective Defined Contribution (CDC) schemes.’ Currently, employers can offer either a Defined Benefit (DB) scheme or a Defined Contribution (DC) scheme but both have their disadvantages. DB schemes can present significant risks to the employer while DC schemes may give a less predictable income for scheme members. As a result, the Government has decided to offer this new type of scheme, the CDC, also known as a Collective Money Purchase scheme. 

As the name suggests, both the employer and the employee would contribute to a collective fund from which the retirement funds would be drawn. The scheme does not produce individual pension pots and the funding risk would be shared collectively by the individual investors.       

Unlike DB schemes, CDC schemes do not guarantee a certain amount in retirement. Instead, they have a target amount they will pay out, based on a long-term mixed risk investment plan. 

Greater powers for The Pensions Regulator  

The other key part of the proposed Bill is that The Pensions Regulator (TPR) will be given stronger powers to obtain the correct information about a pension scheme and its sponsoring employer in a timely manner. This will ensure it can gain redress for members when something goes wrong. Any company boss found to have committed ‘wilful or grossly reckless behaviour’ in relation to a pension scheme will be guilty of a criminal offence, which will carry a prison sentence of up to seven years.

Sources
https://www.pensionsage.com/pa/Pension-Schemes-Bill-reintroduced-in-Queens-Speech.php

https://www.pensionsage.com/pa/Over-half-of-savers-unlikely-to-use-incomplete-dashboard.php

https://www.ftadviser.com/pensions/2020/01/08/govt-s-revolutionary-pensions-bill-re-enters-parliament/

https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-8674

Can I afford to retire?

Retirement has often been described as “the longest holiday of your life.” But attractive as that sounds, can you afford to pay for the holiday?

Research by one leading insurance company shows that 69% of people over the age of 50 are concerned about their income in retirement.

Many people underestimate how much income they will need when they retire. If you’ve been used to having two cars, going on foreign holidays and eating out then it is unlikely that you’ll want to give those up simply because you’ve stopped work. In fact, many people find that their need for income actually increases when they retire. After all, if you’re behind a desk all day, the only money you’ll spend will probably be on a sandwich at lunchtime. Contrast this with how much you spend on a day off.

As worries about income in retirement increase, so do people opting to keep working after their normal retirement date.

Many people who have their own business argue that “my business is my pension.” Again, that works well in theory – but it assumes that you can sell the business for the price you want at exactly the time you want. With technology changing ever more quickly and more and more businesses losing market share to the internet, relying on your business to fund your retirement can be a high risk strategy.

More than any other aspect of financial planning, your retirement demands careful consideration. From checking on your likely state pension to tracking down any previous pensions you might have to making sure you’re contributing sufficient to your current pension – retirement planning needs to be done thoroughly and reviewed regularly.

How the gender gap even affects children’s pensions

We’re familiar with the gender gap in pensions for adults but there is evidence that this actually starts much earlier on. According to data from HMRC, parents and grandparents are more likely to save into a boy’s pension than a girl’s.

A Freedom of Information request by Hargreaves Lansdown revealed that 13,000 girls aged 15 or under had money paid into a pension for them in 2016/17 compared with 20,000 boys. The disparity means the pension gap can actually start from birth onwards.

This only exacerbates the situation as women are likely to have less in their pension due to the gender pay gap. Nest found men are twice as likely to be in the highest income bracket and women are three times as likely to be earning less than £10,000 per year, which is the auto enrolment threshold for a single job.

Women are also more likely to take career breaks or work part-time to bring up a family. Added to which, they are more likely to live longer and spend longer in retirement so, in reality, will need more in their pension pot than men.

Research in 2017/18 by the union Prospect found that the pensions gender gap equated to 39.9 per cent or a £7,000 gap in retirement income between women and men.

Hargreaves Lansdown has calculated that paying £100 per month into a child’s pension until the child reaches 18 can increase their savings by as much as £130,000 by retirement. Yet the cost is only £21,600 plus tax relief of £5,400. Forward planning pays off!

Someone without any earnings can pay up to £2,880 each year into a pension and receive 20 per cent tax relief (up to £720) so it’s possible for parents and grandparents to make a significant difference to a young person’s financial future by starting a plan early. An added advantage is that once the money is in a pension, it can grow without attracting capital gains tax.

It’s unclear why the anomaly between paying into boys’ and girls’ pensions has existed in the past. Some feel it may be because gifting has traditionally come from the baby boomer’s generation where men were more likely to have had the greater share of pension in retirement.

Whatever the reason historically, the current message is to use children’s pensions to give the younger generation a helping hand but to do it equally.

Sources
https://www.ftadviser.com/pensions/2019/10/04/gender-pension-gap-seen-among-kids/

https://citywire.co.uk/new-model-adviser/news/gender-pensions-gap-begins-at-birth/a1277113

4 steps to keeping track of your pension

A recent study has revealed the worrying statistic that over a fifth of all people with multiple pensions have lost track of at least one, with some admitting to have forgotten the details of all of them. With around two thirds of UK residents having more than one pension, this amounts to approximately 6.6 million people with no idea how much they’ve put away for their retirement. Double the amount of people admit to not knowing how much their pensions are worth.

It’s an undesirable side effect of the modern working world. Whereas in previous generations someone might stay at a single employer for their entire working life, the typical worker today will hold eleven different jobs throughout their career, which could potentially mean opting into the same number of pensions through as many different providers. The new legal requirement for all employers to offer a pension scheme through auto-enrolment is likely to add further complexities.

As a result, the Pensions Dashboard is set to launch in 2019 in the hope that it will make it easier for savers to keep track of their pensions in one place. Until then, however, there are four relatively simple steps to help you track down information on any pensions you’ve forgotten about:

  1. Find your pension using the DWP Pensions tracing service at www.gov.uk/find-pension-contact-details. Start by entering the name of your former employer to discover the current contact address for them. You’ll then need to write to them providing your name (plus any previous names), your current and previous addresses and your National Insurance number.
  2. In the case of a pension scheme which hasn’t been updated for a while, you’ll be required to fill out an online form to receive contact details. You’ll be required to give your name, email address and any relevant information to help track down your pension details. This could include your National Insurance number and the dates you worked for the company.
  3. You can also receive a forecast of your State pension either online or in paper format by going to www.gov.uk/check-state-pension. After entering a few details to confirm your identity, you’ll be told the date you can access your State pension and how much you’ll receive.
  4. Finally, and most importantly, once you’ve managed to track down all of your pension information, get some advice. Consolidating your pensions might be tempting to make managing your savings easier, but you also want to make sure you don’t lose out on any benefits by doing so. Before you make any decisions regarding your pensions, seek professional independent advice on what to do next.

Sources
http://www.independent.co.uk/money/modern-careers-risk-billions-in-lost-retirement-savings-a7545091.html