Category: retirement planning

Changes to the UK State Pension

The Department for Work and Pensions has just launched a new campaign to explain the new single-tier state pension.

The new single-tier state pension, which will replace both the basic state pension and the state second pension (S2P) is now only 16 months away. While the focus of late has been on increased flexibility for private pensions, the state pension reform is in some respects more significant, if only because it will affect many more people.

The Department for Work & Pensions (DWP) has launched what it describes as a “new multi-channel advertising campaign” which it hopes will “ensure everyone knows what the State Pension changes mean for them.” That may be a tall order to judge from some research results which the DWP published alongside the press release announcing its new campaign. That research showed:
• 42% of people yet to retire admitted that they needed to find out more about saving for retirement;

• 38% conceded they “try to avoid thinking about” what will happen when they stop working;

• Only 60% of those surveyed realised it is possible to take action to increase their State Pension; and

• 37% of those aged 65 or over thought (wrongly) that the amount of their state pension will change as a result of the reforms. Although the DWP did not ask the obvious question, the chances are very few in that group were expecting a cut in payments after April 2016.

The DWP’s ministers “are urging everyone – and the over-55s in particular – to look at what the changes will mean for them and to secure a detailed State Pension statement so that everyone can plan accurately for retirement.” It is a recommendation we thoroughly agree with. However, be warned that if you have ever been a member of a contracted pension scheme you could well find that your projected state pension is less than “around £150 a week”, which is commonly quoted – even by the DWP in its press release.

Who would predict the price of oil?

The price of crude oil has fallen around 40 per cent since a recent peak in June this year. This has a profound effect on economies and markets around the world as the cost of manufacturing and transporting goods falls along with oil producers’ income and the currencies of oil-rich countries.
The theory goes that consumer spending will rise because people have more disposable income; that inflation will fall as the price of goods eases; and that companies with high energy bills will become more profitable. If lower prices hold, the effect might become political and environmental as the balance of world power shifts from oil exporters to oil importers, and the impetus to develop cheaper clean energy wanes. Oil seeps so deep into the global economy you might think that to be a successful investor you need to have an accurate view on its price and its impact on asset prices. But you would be wrong.

No-one with an opinion about oil knows whether their view is right or wrong, and only the changing price will confirm which they are. Market prices are a fair reflection of the balance of opinion because they are created by many buyers and sellers agreeing on individual transactions. As an investor you can take a view of whether that balance – that price – is right but, like all other people with an opinion, you have no way of knowing whether you are right or wrong until the price moves.

Knowing this, it seems irrational to take a view (or a risk) on something so random as the direction of the oil price. In fact, why would one take a view on anything related to the changing price of oil; the US economy, for example; or the price of Shell; or Deutsche Post; or anything else?
The rational approach is to let capital markets run their course and to have a sufficiently diversified portfolio that allows you to relax in the knowledge that, over time, you will benefit from the wealth-generating power of your investments as a whole; without risking your wealth on a prediction that might go one way or the other.

Temporary Transfer Relaxation for pensions carrying higher tax free cash or early retirement age

Formerly pension scheme members with schemes carrying a higher entitlement to tax free cash or an early retirement age would loose these when transferring to a new plan, unless at least one other member of the same scheme transferred with them at the same time, to the same scheme. For schemes without any other members, such as section 32 plans, one person EPPs or assigned policies, this meant that the option to preserve protections when transferring to personal pensions was not available.

However, solo transfers are now permissible, as long as the following criteria are met:

• The transfer must fully extinguish all rights within the current plan
• The transfer must be made in a single transaction
• The transfer must be completed before 6 April 2015
• The new plan must be fully crystallised (including any other rights held within the new plan) before 6 October 2015
• Benefits are payable from age 55 (unless a protected retirement age is available).

As the transfer must be completed before 6 April, the investor would also have the choice to set up a capped drawdown arrangement, should they wish to retain the higher annual allowance. It should also be noted that any GMP benefits will be lost on transfer.

So what does this mean?

Pension scheme members who have held off transferring their benefits due to a potential loss of tax free cash or because they will loose the ability to retire early may now make an individual transfer to a new plan without loosing the enhanced benefits.

Who does this affect?

• Sports people and members of professions who were previously entitled to early retirement ages
• Members of occupational defined contribution pension schemes such as Executive Pensions, Small Self Administered Schemes (SSAS), Contracted Out and Contracted In Money Purchase Schemes (COMPs and CIMPS)
• Those who have transferred their benefits to a Section 32 Buy-Out

This is a complex area and advice from a pensions specialist should always be taken before implementing any transactions.

The press was full of ‘pension bank account’ stories in October. Will it be that simple?

The Taxation of Pensions Bill, which will put most of the Budget 2014 pension changes into law, was published in mid-October. It contained few surprises, not least because it had been issued in draft in August, along with detailed explanatory notes. Nevertheless, the Treasury pumped out a press release and the media duly splashed the (old) news.

The emphasis in the press coverage was, to quote the Treasury release “Under the new tax rules, individuals will have the flexibility of taking a series of lump sums from their pension fund, with 25% of each payment tax free and 75% taxed at their marginal rate, without having to enter into a drawdown policy.” It was this reform which prompted the talk of using pensions as bank accounts. However, things may not be quite that simple in practice:

• The new rules do not apply to final salary pension schemes, which may only provide a scheme pension and a pension commencement lump sum.

• It is already possible to make this type of 25% tax free/75% taxable withdrawal under the flexible drawdown provisions introduced in 2011. This has not proved very popular.

• The new rules are meant to come into effect on 6 April 2015, but they are not mandatory, so some pension providers may choose not to offer them. It seems likely that many occupational money purchase schemes will avoid any changes, as they were never designed to make payments out – that was the job of the annuity provider. Similarly many insurance companies may not be willing to offer flexibility on older generations of pension plan – just as some do not currently offer drawdown.

• The short timescale has been criticised by the pensions industry. Systems and administrative changes can only be finalised once the Bill has become law and that will be perilously close to April, making it difficult for providers to bring in the changes from day one.

• If you are able to take a large lump from your pension, the tax consequences could be most unwelcome. For example, drawing out £100,000 would mean adding £75,000 to your taxable income – enough to guarantee you pay at least some higher rate tax, regardless of your income, and quite possibly sufficient to mean the loss of all or part of your personal allowance. No wonder the Treasury expects to increase tax revenue as a result of the reforms.

• Ironically another of the pension reforms, reducing the tax on lump sum death benefits, could mean you are best advised to leave your pension untouched and draw monies from elsewhere.

The new pension tax regime will present many opportunities and pitfalls, not all of which are immediately apparent. Do make sure you ask for our advice before taking any action.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Tips to Maximise Your Retirement Savings

Use these best practices to build a secure retirement plan.

Saving Early.
By beginning your retirement saving at an early age, you allow more time for your money to grow. As gains each year build on the prior year’s, it’s important to understand the power of compounding and take advantage of the opportunity to help your money grow.

Set realistic goals.
Review your current situation and establish retirement expenses based on your needs.

Focus on Asset Allocation.
Build a portfolio with proper allocation of stocks and bonds, as it will have a huge impact on long-term goals.

For the best long-term growth, choose stocks.
Over long periods, stocks have the best chance of attracting high returns.

Don’t overweight a portfolio in bonds.
Even in retirement, do not move heavy into bonds. Many retirees tend to make this move for the income, however, in the long-term, inflation can eliminate the purchasing power of bond’s interest payments.

If in doubt, see a properly qualified independent financial adviser who can help you put together a plan to achieve your financial goals and implement the necessary arrangements to put it into effect.

Pension death benefits – you can take it or leave it!

Those looking to pass on their pension fund received a boost today when the Government confirmed they’re following through on their promise to scrap the current 55% tax charge on death. This means the tax system will no longer penalise those who draw sensibly on their pension fund, making pensions a very attractive wealth transfer wrapper.

What’s changing?
Your age at death will still determine how your pension death benefits are treated. The age 75 threshold remains, but with some very welcome amendments.

Death before 75
The pension fund can be taken tax free, at any time, whether in instalments, or as a one-off lump sum. This will apply to both crystallised and uncrystallised funds, which means those in drawdown will see their potential tax charge on death cut from 55% to zero overnight. Using the fund to provide beneficiaries with a sustainable stream of income allows it to potentially grow tax free, while remaining outside their estate for IHT.

Death after 75
DC Pension savers will be able to nominate who ‘inherits’ their remaining pension fund. This fund can then be taken under the new pension flexibility and will be taxed at the beneficiary’s marginal rate as they draw income from it. Alternatively, they’ll be able to take it as a lump sum less a 45% tax charge.

What does this mean for advice?

Funding
Taken with all the other pension changes coming in April 2015, this creates a genuine incentive to save, knowing that family members can benefit from the remaining fund. It means that a pension will become a family savings plan, enabling one generation to support the next.

Drawing an income
The current 55% tax charge on death acts as a penalty for scheme members who take a sustainable income from their pension pot. The only way to delay this charge is for a surviving dependant to continue taking an income from the fund.

The option of taking a lump sum is often overlooked in favour of postponing the tax charge until the dependant’s death.

The new rules will mean that beneficiaries other than dependants may now benefit from the remaining fund, without suffering a 55% penalty.

Death before age 75 offers the option of a tax free lump sum. But it also allows the fund to remain within the pension wrapper which the beneficiaries would have flexible access to. And nominating a loved one to take over the flexible pension pot will also be a popular choice when death occurs after this age.

These changes will standardise the death benefit treatment for the different flexible income options from next April. There won’t, for example, be any difference between taking phased flexi-drawdown or phased withdrawal, as crystallised and uncrystallised funds will be treated the same on death.

Making instructions known

It will become even more important that death benefit instructions mirror the scheme member’s wishes. A nomination or expression of wish will help to guide the scheme trustees in their decision making. You wouldn’t knowingly entrust what happens to your home or other assets on death to a stranger. If there are no instructions in place, you’re relying on the pension scheme trustees to second guess your intentions. And with such wholesale changes to the death benefit rules to come, advisers will need to revisit existing nominations at their next client reviews.

All eyes on 3rd December

It’s worth stressing that more detail is awaited, particularly on the operational elements of how the new rules will work in practice. The next step is to see the full details in the Autumn Statement on 3rd December. We’ll provide updates on the final pieces of the pensions reform jigsaw, as it all starts to slot into place. Watch this space.

The Seven-Day News Diet

The financial media recently has been consumed by the issue of ultra-fast computer-driven trading and what it might mean for ordinary investors. But arguably what does the most harm to people are their own responses to high frequency news.

The growth of 24/7 business news channels and, more recently, financial blogs, Twitter feeds and a myriad of social media outlets has left many people feeling overwhelmed by the volume of information coming at them.

The frequent consequence of the constant chatter across mainstream and social media is that investors feel distracted and unanchored. They drift on tides of opinions and factoids and forecasts that seem to offer no single direction.

The upshot is they end up second guessing themselves and backing away from the resolutions they made in less distracted times under professional guidance.

Remonstrations by advisors can steer them back on track for a little while, but soon enough, like binge eaters raiding the fridge, they’re quietly turning on CNBC and opening up Twitter to sneak a peek at what’s happening on the markets.

Quitting an ingrained habit is never easy, particularly when asked to go cold turkey. But there are ways of gradually weaning oneself off media noise. And one idea is a “seven-day news diet” that eliminates the distractions a little at a time:

Day: 1 Switch off CNBC. Business news is like the weather report. It changes every day and there’s not much you can do about it. If you really want drama, colour and movement, stick to Downton Abbey.
Day: 2 Avoid Groundhog Day and reprogram the clock radio. Waking up every day to market headlines can be more grating than Sonny and Cher.
Day: 3 Read the newspaper backwards. Start with the sports and weather at the back and skip the finance pages. Small talk will be easier, at least.
Day: 4 Set up some email filters. Do you really need “breaking live news updates” constantly spamming your inbox?
Day: 5 Try “anti-social” media. Facebook is great, but it’s like a fire hose. If you want to be social, pick up the phone and ask someone to lunch.
Day: 6 Feeling the pangs of withdrawal? Go to the library and look up some old newspapers. They can give you a sense of perspective.
Day: 7 You’re nearly there. Use this window to decide on a long-term financial media diet. You might decide to check the markets once a week, instead of once a minute. The important point is to have a plan.
Those who swear off the financial media, if only for a little while, often find they feel more focused and less distracted. The ephemeral gives way to the consequential and they come away from the hiatus with a greater sense of control.

Any changes they make to their investments are then based on their own life circumstances and risk appetites, not on the blitzkrieg of noise coming at them minute to minute via media outlets.

Ultimately, going on a news diet can be about challenging our patterns of consumption and thinking more intently and less reactively about our decisions.

We can still take an interest in the world, of course, but at our own pace and according to our own requirements, not based on the speed of the information coming at us from dozens of gadgets.

In the words of the American political scientist and economist Herbert Simon “a wealth of information creates a poverty of attention”. So it follows that if you economise on your information diet, you can maximise your attention.

Changes to Early Retirement Rules

On 6th April 2010 the minimum age at which you can access your pension benefits will increase from 50 to 55.

Both your employer’s pension schemes (past or present) and any individual pension plan’s you hold will be subject to the new rules. From 6th April 2010 therefore, you will not be able to access pension benefits unless you are at least age 55.

There are some very limited circumstances where retirement prior to age 55 will still be allowed after this date which are detailed below:

1. Some sportspeople/those in hazardous occupations or those who had a ‘contractual right’ to an early retirement age as at December 2003.

2. Those individuals who are in ill health can still apply to take benefits early and the scheme trustees will determine, following a medical report, whether it will be granted.

In the majority of cases, it is more worthwhile to leave your pension benefits to grow for as long as possible. However, if you need to access some or all of your pension benefits early, between the ages of 50 and 55 you should contact your financial adviser as soon as possible for further guidance.

For the avoidance of doubt, this could affect you if your date of birth is between 7th April 1955 and 5th April 1960.

Top firms’ pension funds plummet

The BBC today reported that the top 100 UK firms have a combined shortfall on their Final Salary pension funds of £96Billion (yes Billion!). This represents a deterioration from a combined deficit of £41Billion at the same time last year. Most of the fall in value has been attributed to falls in share prices but changes in the assumptions, which are used to determine the level of funding needed to meet promised benefits, have also had a significant bearing. In some cases the value of the underfunding actually exceeds the value of the company.

The BBC article goes on to suggest that this will lead to more schemes being closed to new members. Of the top 100 companies, only three still offer Final Salary Pensions to new members. If you are interested, they are Cadbury, Diageo and Tesco.

What the article does not mention is that there are many more Final Salary pensions, mostly held on behalf of small to medium sized employers (and most people in Britain work for one of these rather than a top 100 firm). These will also be suffering from substantial deficits. The difference between a lot of the smaller firms and the top 100 firms is that they are often privately owned and therefore do not have the same access to additional capital as companies that are quoted on the Stock Exchange.

The issue with the smaller companies, who will be feeling the pinch every bit as badly at the moment is that, they are more likely to go bust and therefore be unable to make up the under-funding on their pension funds. Where this occurs the benefits will come under the auspices of the Pension Protection Fund, about which I have blogged before Protection for Final Salary Scheme Benefits could be under threat.

To cut a long story short, the PPF provides limited protection which, over time, can fall substantially short of what was originally promised. Furthermore, due to potential difficulties with funding the protection (based on levies charges to the remaining schemes which are already in financial difficulties) PPF benefits could need to be reduced in future.

So what should you do if you have final salary benefits either with your current or a previous employer? Well, for certain you should obtain details of the Transfer Value and the benefits to which you are entitled. These should be reviewed on your behalf by a pensions specialist (who will also take a whole range of other factors into account such as the state of funding of the scheme and the financial health of the sponsoring employer, amongst others). From this you will be able to form a realistic assessment of the safety of your benefits and whether you ought to move them to an arrangement that provides you with greater personal control.

If you are a financial adviser reading this article and you are not qualified to provide Pension Transfer Advice, consider referring your clients to an adviser who will work with you to ensure that your client’s needs are met in this regard.