Tag: state pension


The Pensions Triple Lock: what does the Government’s broken promise mean for Pensioners?

At the last General Election the Conservative Government made a promise, a so-called “manifesto commitment.” That pledge is commonly known as the “pensions triple lock:” that the state pension will be increased each year by annual price inflation, average earnings growth or a guaranteed 2.5%, whichever is the greater. 

For pensioners this has been good news. It meant that pensions would keep pace with wage growth and inflation and, if both those were low in one particular year, pensioners would be a little better off. 

That, of course, was before the pandemic, the enormous cost of it and the financial juggling the Chancellor will need to do to pay for all the support measures put in place, and the consequent sharp rise in Government borrowing. 

In early September, as had been widely rumoured, the Government broke not one, but two manifesto pledges. It increased national insurance to pay for social care and, crucially for pensioners, it suspended the triple lock for a year. 

This was obviously bad news, and the move begs an immediate question. If the Government has suspended it for one year, could it do it for another year? After all, the bill for Covid-19 is not going to be paid any time soon. 

Unsurprisingly, a poll showed that two-thirds of pensioners were against the suspension. Interestingly though, the research carried out by ComRes suggested that the move would be largely forgiven by the next General Election. 

In this instance the triple lock has been watered down and become a “double lock,” with the wages element removed. But as we hinted above, we might well see other elements removed in the future, now that the precedent has been set. Many commentators expect inflation to hit 4% by the end of the year, could the Government remove that element in the future, too? 

It will be interesting to see what Chancellor Rishi Sunak has to say when he delivers his Budget speech on October 27th. He will presumably be setting out plans for starting to repay the enormous cost of the pandemic. Given the cost of servicing all the new borrowing the Government is vulnerable to a rise in interest rates, and nothing, including the triple lock, can be ruled out. The next Election is not due until December 2024 and the Government may gamble on the pandemic and the measures taken to counter it being a distant memory by then. 

The uncertainty for pensioners means that your ongoing financial planning becomes more important than ever. It is important that your existing savings and investments are arranged as tax-efficiently as possible and that you make use of all your available allowances.


Why moving abroad can affect your state pension

Retiring overseas is a dream for many Brits. After all, who wouldn’t be tempted by the better climate and the amazing travel opportunities found abroad. Where you choose to spend your retirement, however, will affect how much state pension you get.

State pensions are frozen if you decide to move abroad to certain countries, such as Australia, New Zealand, Canada or India. Whilst normal state pensions rise according to the triple lock, in these countries your pension would be frozen. The triple lock means that pensions currently rise by the highest of inflation, average earnings or 2.5% Whether or not your state pension is frozen depends on whether the Government has struck individual deals with the country you move to. As it stands, the Government has only made deals with the EU, the US, Switzerland, Norway, Jamaica, Israel and the Philippines. It has been decades since any new deals have been made.

To illustrate what this freeze means, an expat who retired when the basic rate was £67.50 a week in 2000 would still get that, rather than the £125.95 received by those whose pensions have not been frozen. Likewise, if you qualify for the full state pension of £164.35 and already live in or move to one of the ‘frozen’ countries, the amount you receive will not increase while you stay abroad.

This freeze currently reduces the pensions of approximately 550,000 British pensioners.

However, upon returning to the UK, pensioners are eligible to get their state pension uprated back to the full amount by applying directly to the Department for Work and Pensions service centre.

What about Brexit?

As it stands, nothing is certain until we get a final deal (or no deal!). However, it’s likely that state pensions in the EU will not be frozen. An update on Brexit talks published jointly by the EU and UK indicated they had ‘convergence’ of their positions on state pension increases.

If you’re planning on moving to a ‘frozen’ country like Australia, it’s best to consider the implications of a frozen state pension on your finances sooner rather than later. It will be easier to mitigate the effects when you’re younger and still have greater financial ties to the UK.


As a parent, could you be missing out on your state pension?

There’s no reason why being a parent, and particularly being a non-earning parent with commitments to their children, should put you at risk of decreasing your state pension entitlement. Currently, however, there are potentially hundreds of thousands of people in this exact position – although thankfully, there are steps to take so that it can be avoided.

Figures supplied to the Treasury by HMRC suggest that there could be around 200,000 households missing out on these pension boosting entitlements. If the child benefits are being claimed by the household’s highest earner, and not the the lower earner or non-earner, these potential national insurance contributions can fall by the wayside. Treasury select committee chairman and MP Nicky Morgan says; “The Treasury committee has long-warned the government of the risk that for families with one earner and one non-earner, if the sole-earner claims child benefit, the non-earner, with childcare commitments forgoes National Insurance credits and potentially, therefore, their entitlement to a full future state pension.”

With 7.9 million UK households currently receiving child benefits, there is potential for a large number of people to be affected. Thanks to data from the Department for Work and Pensions, it’s suspected that around 3% of those (around 200,000) may be in this situation. It’s worth noting that the family resources survey covered 19,000 UK households and as the estimate is sample-based, there is some uncertainty on the exact numbers of those at risk. Nicky Morgan continues, “Now that we have an idea of the scale of this problem, the Government needs to pull its finger out and make sure that people are aware of the issue and know how to put it right.”



From the Adviser-Store

Basic State Pension Increasing

Basic State Pension Increasing To £102.15
The maximum Basic State Pension (BSP) is rising in April 2011 to £102.15 per week. This is a rise of 4.6%. This is the first time the new increase rules have been applied – the BSP will increase annually by the greater of earnings, prices or 2.5%.
Other rates from April 2011 include:
• Pension Credit – £137.35 pw (single) and £209.70 pw (couple)
• Personal Tax Allowance – £7,475 pa (under 65), £9,940 pa (65-74) and £10,090 pa (75 and over)
• Lower Earnings Limit – £102 pw
• Upper Earnings Limit – £817 pw
• Primary Threshold – £139 pw
• Class 1 National Insurance Contribution (NIC) Rate – 12% (on earnings between primary threshold and upper earnings limit) and 2% (on earnings above upper earnings limit)
• Class 2 (self-employed) NIC Rate – £2.50 pw
• Class 2 NIC Small Earnings Exception – £5,315 pa
• Class 3 (voluntary) NIC Rate – £2.60 pw
• Class 4 (self-employed) NIC Rate – 9% (on profits between lower and upper profits limits) and 2% (on profits above upper profits limit)
• Class 4 NIC Lower Profits Limit – £7,225 pa
• Class 4 NIC Upper Profits Limit – £42,475 pa
• Widowed Parent’s Allowance – £100.70 pw
• Bereavement Allowance (Standard) – £100.70 pw

Planning ahead

Throughout every stage of your life, finding the right balance of investments can be a challenge. When stock markets are volatile, investor sentiment is fragile and economic growth is weak, it can seem even more of a conundrum, particularly if you are near retirement. Achieving the right balance of investments is crucial if you want to enjoy a comfortable old age.

Britons are living longer, and it is now not unreasonable to expect 30 – or even 40 – years of retirement. State pensionable age is likely to continue its rise, forced higher by the massive budget deficit and increased lifespans in the UK. It is wise to start planning early – you shouldn’t wait until you are near retirement before considering your circumstances, so take stock of your situation well in advance. 

In order to do this you need ask yourself some questions; When do you want to retire? How much do you need to ensure a comfortable lifestyle? What are your liabilities?  What have you saved so far? Consider all your assets that might be able to generate future income for you, in order to determine the maximum income you might be able to achieve. 

As you approach retirement, your attitude to risk is likely to change, and effective asset allocation becomes even more important. Higher-risk asset classes, such as equities, tend to perform well over the long term; however, as you near retirement, your portfolio will have less scope to recover from a stock-market decline. Therefore, as you grow older, it makes sense for your portfolio’s asset allocation to evolve with you and you might want to consolidate your gains and shift into assets with a lower risk profile.

A reduced risk profile is likely to lead to a portfolio that focuses less on volatile assets, such as equities, and more on lower-risk asset classes such as bonds and cash. One simple rule of thumb relates to an investor’s age: if you are 25, 25% of your portfolio should be in bonds and cash; if you are 40, 40% of your portfolio should be in bonds and cash. On this basis, by the time you reach the age of 65, your portfolio should have a maximum of 35% invested in higher-risk investments such as equities.  At Concept Financial Planning we use risk and time adjusted portfolios which balance the risk reward trade off.

Of course, everyone’s circumstances are different, but proper planning will help you towards the retirement you want.  Nevertheless, this is a complex area; expert advice is essential.

Pension Planning Guide

Pension Income Options

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Emergency Budget 22nd June 2010

In summary key highlights are:

Capital Gains Tax (CGT)

  • CGT will remain at 18% for basic rate taxpayers, but will rise to 28% for higher rate tax payers from midnight tonight.
  • The annual CGT allowance of £10,100 stays the same for this tax year but will increase in line with inflation year on year.

Pension Taxation

  • The Chancellor plans to launch a review of personal annual allowances for pension contributions to somewhere in the region of £30,000 to £45,000, with effect from April 2011. The Government still aims to raise the same revenue using this revised approach, as well as simplifying the rules for employers and scheme members. Individuals on income of less than £130,000, who were not impacted previously, may now be, particularly if they are a member of a Defined Benefit scheme.

The perceived ‘compulsory annuitisation’ by age 75 will be extended to age 77, while the Government consults on a permanent change to these rules. It will still not be possible to contribute to a pension after age 75

What’s so wrong with an Annuity?

The continued unwillingness of people to make provision for their retirement continues to be a source of concern to policy makers. Much of the debate as to how to encourage retirement saving has centred on tax breaks and product design and the obligation to purchase an annuity is frequently cited as one of the reasons people do not contribute to registered pension schemes. Indeed the Tories have now promised to end compulsory annuity purchase if they get into power and presumably, should this happen, pension providers will be flooded with new applications. But are annuities really that bad?

The main objections to annuities are that they are inflexible, poor value if you die prematurely, and rates are poor. True, they are inflexible in that once you select the features of your annuity you cannot change them. Yes they are poor value if you are short lived but conversely they are good value if you are long lived. But are rates really poor? And if so, what are they poor in comparison to?

Certainly annuity rates have fallen significantly since their peak in 1990 so are they poor value on a historic basis? No not really. In 1990 interest rates hit 14% and inflation was running at around 7% per annum. While this was very bad news for borrowers it was good news for savers. Today savers are lucky to get a 3% return on their cash. Furthermore, in the last 20 years we have seen life expectancy increase further.

A 60 year old man in good health can currently expect to receive an annuity rate of just over 6%. This is for a level annuity with a 10 year guarantee. When considering equity based investments an assumed rate of growth of 7% is generally used. This might lead one to conclude that annuities are poor value since the annuitant only receives what might reasonably be expected as an investment return, while the capital itself is sacrificed.

The key point though is that an annuity carries no investment risk. Buying a level annuity involves exposure to inflationary risk, life company solvency risk and mortality risk, but not investment risk.

To assess whether paying into a pension and then buying an annuity, is worthwhile we need to look at a similar risk alternative.

Case Study

Let us consider the case of Owen Michaels who is nearing retirement. Owen is aged 50, earns a salary of £40,000 and is in good health.
Let us assume that rather than invest into a pension fund Owen chooses to use Cash ISAs as his retirement funding vehicle. This means he is free to draw money out without restriction and without tax liability.

ISA contributions of £400 per month are made from net salary for the next 10 years. After 10 years, the value of his ISA portfolio (assuming a 3% growth rate net of charges) stands at £55,896.

If contributions of £400 a month had been made to a personal pension fund, tax relief of 20% would have been received and at the end of 10 years (again assuming a 3% net growth rate) Owen’s pension fund would be worth £69,870. From this amount, he could take tax free cash of £17,467 and a net income of £2,527 would be generated via the annuity. From the tax free cash let us assume that £631 a year were withdrawn (25% of the net annuity rate) giving a total annual income of £3,158.

If Owen were to draw £3,158 each year from his ISA portfolio, and assuming a continued net growth rate of 3% per annum, the ISA portfolio would be exhausted after 23 years. Coincidentally, the average life expectancy for a 60 year old male is now just over 23 years.

Clearly if Owen does not survive the 23 years the decision to save via ISAs would have been vindicated but, if he had gone down the pension route and taken tax free cash his beneficiaries would still have access to the residual tax free cash and remember, the annuity rate used had a 10 year guarantee so the minimum return would be £25,270 (£2,527 for 10 years). After 10 years Owen’s ISA is worth £35,642 but the pension residual tax free cash would be worth £15,339, so the worst case scenario is a loss of £20,303 when compared to the ISA route.

So when viewed against a similar risk alternative, annuity purchase continues to stack up reasonably well. The real benefit it offers is as an insurance against longevity and if it were viewed as insurance rather than investment it might get a better press. Like any insurance it is good value if you claim (live beyond average life expectancy) and poor value if you don’t claim (die prematurely).

Pensions are intended as a vehicle to providing income in retirement. As a mechanism for turning capital into an income stream which is guaranteed for life, annuities are perfect. Certainly there are more flexible alternatives and it is possible that in future these alternatives will be available beyond age 75 but for those unwilling to accept investment risk annuity purchase continues to be the most appropriate option and still has much going for it.

State Pension Age – What’s your number ??!!

State Pension Ages are changing for men and women.

Between 2010 and 2020, the SPA for women will increase to 65 to ensure equality. Women born between 6 April 1950 and 5 April 1955 are affected by this change.

Between 2024 and 2026, 2034 and 2036 and 2044 and 2046, the SPA for both men and women will rise to 66, 67 and 68, respectively. Those born after 6 April 1959 are affected by these changes.

Use the link to find out what age your state pension will be paid …
State Pension Age Calculator

Concept Financial Planning

State pension increase ‘will not apply to additional benefits’

An increase in the state pension, announced in the 2009 Pre-Budget Report, will not apply to all areas of the pension system, it has been revealed.

Chancellor Alistair Darling announced that the basic state pension would increase by 2.5% in April, bringing the full basic rate to £97.65 a week.

However, a number of additional pension-related benefits are set to be frozen, including the State Earnings Related Pension Scheme (Serps).

Meanwhile, recent reports have suggested that graduated pension schemes could also remain frozen, together with the extra pension paid to men with wives under the age of 60, and the additional pension paid to over 60s who have delayed their retirement.

Pensions minister Angela Eagle has said that the decision to freeze additional benefits was made in order to ensure a ‘level playing field’ between the public and private sectors.
The decision is expected to save the Treasury around £350m.

Concept Financial Planning