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As Carillion liquidates we review workplace and private pensions

As Carillion liquidates we review workplace and private pensions

In the news recently leading construction company Carillion went into liquidation. As with British Home Stores and with Tata Steel the workplace pension fund is short; in Carillion’s case by an estimated £580m. This workplace pension deficit has placed an additional burden on the Pension Protection Fund (PPF). It is expected that the PPF will take over the pension scheme if Carillion goes into administration. Though current Carillion retirees will not see any changes to their pension terms, existing employees that are soon to retire may see their funds cut by as much as 20%; and top-earners may have some of their pensions capped.

Why some workplace pensions are in trouble

Though workplace pensions are not new, the Roman army had them from around 30 BC, struggling funds are a relatively recent phenomena. There are two main drivers of this change.

Defined Benefits (DB) pensions guarantee pensions linked to an individual’s pay. Years ago, this meant that firms could slow down pay increases for staff, but make up lower wages with increased pension funds for retirement. Funding pensions, however is a challenge. There is a growing retired population and a shrinking tax contributing working population. Effectively the pensions candle is burning at both ends.

In 1960 the average life expectancy of a British male was 75 years, and for females it was 80 years. Now the average life expectancy of a British male is 83 years, and for females it is 85 years. But also, the amount of tax available to go towards later-life living costs: healthcare and the NHS, public transport, infrastructure and state pensions is in decline.

And though the Chancellor has taken steps to buoy the Pension Protection Fund it is clear that some workplace pensions, particularly Defined Benefit ones are becoming too costly to sustain.

The appeal of private pensions

Private pensions (also known as Defined Contribution schemes) where; an individual saves from their earnings into a pension fund, can run alongside workplace pensions and state pensions, or be the main pension scheme for the saver. Contributors must be aged 18 years’ old and also be a UK resident. Tax relief is available on private pension contributions, which makes this a particularly attractive savings ‘vehicle’.

In addition to the above, contributions are invested in funds which benefit from a tax-efficient status. When choosing to draw benefits from the plan, up to 25% of the fund can be taken which is also tax-free.

Personal Pensions are extremely flexible in comparison to DB schemes. Finally, when taking benefits from the private pension fund, there are no restrictions on the amount of money that can be withdraw at any one time.

Though HMRC proposes to increase the minimum retirement age for pension schemes from 55 to 57 by 2028, the state pension retirement age will increase to 67, meaning that private pensions can fund an earlier retirement.

It is clear, with the sad demise of the likes of Tata Steel, BHS and Carillion, that both Defined Benefit and Defined Contribution pension funds can be complicated. As ever we would advise you to speak to a local Independent Financial Advisor about pensions, retirement planning or any other financial concern that you have. Please call our team of Chichester based IFAs on 01243 532 635 to arrange a consultation.

To discuss pensions, retirement and investment plans with us please ask to speak to Richard Smith.

To discuss Life, serious illness, equity release (to provide for retirement income) and income protection insurances please ask to speak to Hamish Gairns.

To discuss mortgages & insurances please ask to speak to James Mayne.

Staying healthy for a longer working life

Staying healthy for a longer working life

At least half of the babies born in 2000 in the UK are expected to live into their hundreds. The average life expectancy of 50% of babies born in 2007 in the UK is 103, and in Japan it is 107. Current retirees, those aged 65 plus, are enjoying relatively good health and also, despite retiring earlier, frequently are not ready to stop working altogether. The current life expectancy for pensioners is 85. Though some suffer chronic illnesses, they are diagnosed and treated sooner; meaning that (thankfully) the survival rate and life expectancy of this generation has steadily increased since the 1950’s.

Many retirees currently choose to draw a pension before they are 65 however often they continue to work. In fact, degree educated 65-69 year olds in the UK are more likely to be in employment and also earn more than unqualified 16-24 year olds.

Though longevity is something that we are all grateful for it is also an economic dilemma. This is because the burden on the young (work force) to support an ever aging one is increasing. And though, to ease this burden, the government plans to increase the retirement age to 75 by 2040…

…Our noughties (2000+) children will be in their forties and facing at least another 30 years of work by 2040.

How do we stay healthy to support a longer working life; and a happy later life?

We have asked Ben Hanton, Elitas gym founder and owner to provide some health advice for working age and later life people. As we age there are a number of important health markers that decline every year, here are some of the main ones:

  • Physical strength;
  • Bone mineral density;
  • Muscle mass;
  • Insulin sensitivity.

Though the decline of these health markers is part of a natural ageing process, we can reduce the decline by making lifestyle changes to exercise, diet and physical activity.

As regards physical activity, the recommended daily amount of steps to be taken is: 10,000 – dog (or grand children) walking could help to achieve this target.

Weekly moderate aerobic exercise of 150 minutes (around 20-25 minutes per day) is also recommended. This could include fast walking/slow jogging, dancing, tennis, kickboxing, participating in or coaching team sports, and swimming.

Two bouts of strength training; which includes using light weights or your own body weight – calisthenics, is enough to dramatically reduce the risk of almost all forms of disease.

As regards nutrition:

Refined carbohydrates – found in cakes, processed foods, biscuits are to be avoided, as are sugary drinks and also alcohol.

Whereas vegetables, fruit and protein should be consumed regularly.

The most effective way to remain healthy into later life is to choose exercises that the individual finds productive and enjoyable. Avoid high impact activities eg road-running and activities that are overly repetitive. Think too about posture when exercising. Posture should be symmetrical and activities should be undertaken whilst standing up or lying down, not whilst seated in an office chair. To get the most benefit from activities make the exercise intense and do exercise or activities in short bursts.

If you are finding this fitness advice a little complex speak to a local personal trainer, they should be able to create a fitness regime with you that meets your needs. Making big lifestyle changes all at once is a big task. It is advisable to choose one small change rather than trying to do everything at once.

So How do we plan for a longer working life?

Whether you are of working age or enjoying later life we at Marchwood IFA would advise you to regularly consult your Financial Advisor as your lifestyle and finance goals and income needs change.

To arrange a consultation with Marchwood IFA please call 01243 532 635. We have specialists that are able to discuss specific options with you.

To discuss retirement and investment plans with us please ask to speak to Richard Smith.

To discuss Life, serious illness and income protection insurances (to protect a debt such as a mortgage or to make sure that your family is well looked after financially after the death of a parent/partner) or equity release to help you plan for income in retirement please ask to speak to Hamish Gairns.

To discuss mortgages and insurances please ask to speak to James Mayne.

Drawdown pensions; why they appeal

Drawdown pensions – why they appeal

Recently the Financial Conduct Authority (FCA) has expressed concern at the growing number of retirees that are drawing down on their pension funds rather than buying annuities with them.

Drawdowns – (capped or flexible) are where a pension pot is left invested but an amount is taken as income.

Annuities – where the pension pot is used to buy a regular income from an insurance company.

Changes to the way in which pensions can be spent and invested were triggered by the launch of pension freedoms in 2015. Though designed to give retirees and over 55’s more choice, many are choosing drawdowns without seeking professional advice from a finance expert – 5% prior to 2015 but now that figure is at 30%. Without professional advice seniors may pay too much tax, miss out on benefits, or on other investment growth.

Most seniors that drawdown entire pension pots have:

  • Relatively small savings at £30,000 (or lower) and;
  • Have other sources of income.

Drawdown monies are most often used to:

  • Clear loans, for example mortgages (whole or in-part);
  • Make purchases such as home repairs, cars or holidays;
  • Invest in property, stocks and shares, bonds or other investments;
  • Save into another fund.

The FCA found that an undercurrent of ‘pensions investment distrust’ lead many retirees to drawdown and move money out of their pension pot. Over 70% of seniors accessing retirement funds are aged under 65 years’ of age.

The FCA have said:
“Drawdown is complex and [retirees] may need more support and protection.”

As the shape of our economy and ageing population changes it is hardly surprising that retirees wish to invest differently. We would advise however that anyone looking to change their pension investments should speak to an independent financial advisor, but also one that specialises in pensions.

We cannot advise generically on the best investment for you we would ask that you please book a pensions/investments consultation either with Hamish Gairns or, with Richard Smith.

But we do have some lifestyle and health tips especially for over 55’s.

  1. Identifying and fulfilling a sense of purpose has been found to lead to a longer life. Patrick Hill and Nicholas Turiano conducted the longer life research at Oxford University. The good news is that finding a sense of purpose can happen later in life to the same effect.
  2. Creating a retirement plan that gives prominence to what people want to do, and how they want to live in later life helps to shape conversations around finance and inheritance planning. We would suggest that finances that compliment a retirement plan are discussed with a retirement specialist IFA.
  3. As the UK population is an ageing one, putting health at the centre of a retirement plan is a good idea. It might be that joining classes and groups takes the grind out of physical and mental exercise. And activities that are completed in groups enable participants to extend their social circles. Learning a language, or to dance is proven to keep minds and bodies active.

Here’s to enjoying many later years.

Contact MarchwoodIFA for pension, investment, mortgage, equity release, and living inheritance planning advice: 01243 532 635.

Protecting pension pots

Protecting pension pots; private, State and workplace pensions explained.

We last updated you about specific changes to pension schemes in November 2015 which were as a result of the Chancellor’s autumn budget. Since that update significant changes to company (or workplace), state and private pension schemes have been in the news. This means that if you or your spouse, or partner have a pension we would recommend that you review it with your IFA. And if neither of you have pensions we would recommend that you speak to an IFA about pension options.

Private pensions explained

A private pension is a savings plan, where an individual contributes money or investments from their earnings. The pension scheme may invest a proportion of pension savers money in stocks and shares. Upon retirement (which can be as young as 55) the private pension fund pays income to the pension saver. Private pensions run separately to State pensions, a pensioner can receive both. All working people that pay tax and make National Insurance Contributions (NCIS) pay into a State pension.

To invest in a private pension the saver must be:

  • Over 18 years of age;
  • Resident in the UK;
  • Eligible for tax relief on your pension payments;
  • Tax relief on private pension contributions can be worth up to 100% of annual earnings or £40,000 (whichever is the least). If contributions go above 100% of earnings then the pension holder would be required to pay tax relief back to HM Revenue and Customs (HMRC);
  • In addition Lifetime Allowance (LTA – the total amount you can hold within your pension without paying an extra amount of tax) has fallen from £1,800,000 in tax year 2010-11 to £1,000,000 in tax year 2016-17;
  • For those pension savers that have over £1,000,000 within their pension, and therefore exceed the new LTA limit, the pension fund could be taxed at a higher rate, above the rate of normal income tax the saver would usually pay, up to as much as 55%. Pension savers that are concerned about their Lifetime Allowance, or Annual Allowance pension contributions should contact their IFA to talk through their options;
  • Savers that have a private pension and pay basic rate tax should also contact their IFA for a pension review as the retirement age for State pensions has changed, and the recent sad demise of BHS and British Steel has placed a company (or workplace) contribution deficit burden on the Pension Protection Fund (PPF).

According to the Economist private pensions have done well for today’s pensioners, this is largely because for most of the 20th century stockmarket returns were high. For a retiree in the top income quintile (around 1.5% of the UK population), a private pension now pays out 2.5 times as much as one from the State, up from less than 1.5 times more than the State in the early 1980s. Pensioners in the top income quintile tend to be well educated and work in the services industries. They have seen their earnings from salaries and self-employment rise in real terms by 60% in the past 30 years. The strong performance of private pensions has topped up these earnings.

State pensions explained

State pensions affect anyone working in the UK that pays tax and makes National Insurance Contributions (NICS). Currently there are 12 million pensioners in the UK variously they draw State, company (or workplace) and, perhaps, private pensions. The basic state pension is £116 a week, compared with the median full-time salary of working people which is £530 a week. This makes Britain near the bottom of a 34-country ranking calculated by the Organisation for Economic Co-operation and Development (OECD). When compared to what those of a working age could earn State pensions have been in sharp decline from 1980 to 2009.
However since April 2016 the government’s flagship proposal is a ‘flat rate’ pension, fixed initially at £155.65 a week. The new flat rate State pension will replace a confusing mix of a basic pension at £119.30 per week and an earnings-related supplement and means-tested benefits. Means-tested benefits will ensure that those without any other income get at least £155 a week. But, the means tests apply to couples, not individuals; meaning that married people without the right NICS record (35 years of contributions each) may get less than the flat rate. Simple it is not…
We would again urge couples, in particular, to contact their IFA to discuss pension savings options.

Company and workplace pensions explained

Company pensions, which are now known as workplace or occupational pensions, are retirement plans that are arranged by employers for their employees. A percentage of pay is put into the workplace pension scheme on every payday. Many businesses also add additional funds into the pension plan for the employee. Again there is the potential for tax relief from HMRC on these contributions.

A new ‘automatic enrolment law means that every employer must automatically enrol employees into a workplace pension scheme if they:

  • Are aged between 22 and the State pension age (now 66);
  • Earn more than £10,000 per annum;
  • Work in the UK;
  • As an employee you have the right to either ‘Opt in’ or ‘Opt out’ of this scheme.
  • Tax relief that is taken at source is either taken out of pay before deducting income tax or the pension provider claims tax relief on behalf of the employee at 20% and adds it to the employee’s pension.

Protecting your pension pot and the Pension Protection Fund

  • Following the Maxwell scandal of the early 1990s, when the Mirror Group newspaper publisher was found to have plundered more than £400m from the company pension scheme, the British government attempted to protect workplace pensioners’ interests by introducing the Pension Protection Fund (PPF);
  • The (PPF) offers insurance for employees that are part of defined benefit schemes only when and if companies fail, by charging a levy on all participating companies that offer this type of pension scheme.
    The PPF is backed by the Pensions Regulator, a Body that is meant to ensure that companies are fulfilling their obligations to pension scheme savers;
  • If, as is the case with BHS and British Steel, a company does fail and there is a significant workplace pension scheme deficit; there is no explicit guarantee of taxpayer backing were the PPF have failed to ensure adequate contributions to the workplace pension fund;
  • In the short term, the burden of corporate failure would fall on other companies funded by a higher levy rather than on the taxpayer;
  • Despite British companies contributing £500 billion to pension schemes since 2000, the collective deficit has tripled and is now at £800 billion.
  • For those employees that are members of Defined Contribution Schemes (such as the new Auto-enrolment pensions) then the pension being used is normally supplied by the Pension provider and will then be covered by the Financial Services Compensation Scheme (FSCS).

Many factors are contributing to rising inequality between older pensioners and new retirees: market turmoil, lower equity returns, the gender pay gap, low-wages (since 2008) and the extended State retirement age for women. “Nearly half of working-age Britons doubt they will save enough money for a comfortable retirement [according to the Economist] and three-quarters believe they will be worse off than their parents.”

With so many moving parts the time is right to speak to a trusted IFA about your pension options.

Contact Marchwood IFA today to arrange a consultation.

Autumn Statement 2015

1) U-turn on tax credits
There will be no further cuts to tax credits.
The disregard will be £2,500. This will mean that any reduction in income in a year of less than £2,500 will have no impact on a tax credit award. In addition, no further changes will be made to the universal credit taper, or to the work allowances beyond those that passed through parliament already.
The minimum income floor in universal credit will increase with the national living wage.
Despite the freeze, Mr Osborne said government will still achieve the promised £12bn per year of welfare savings, unveiling a raft of civil service cuts.

2) Further crackdown on tax evasion and changes for VCTs and CGT
New penalties will be introduced for the General Anti-Abuse Rule, action will be taken on disguised remuneration schemes and stamp duty avoidance.
Mr Osborne said he would also stop abuse of the intangible fixed assets regime and capital allowances.
Energy generation will now be excluded from the venture capital schemes, in a move Mr Osborne said was “to ensure that they remain well targeted at higher risk companies”.
Once digital tax accounts are in place in 2016, he said capital gains tax will have to be paid within 30 days of completion of any disposal of residential property.

3) Auto-enrolment changes and increases to state pension
The next two phases of contribution rate increases for auto-enrolment schemes will be aligned with the tax years.
Mr Osborne said he will increase the state pension age with life expectancy in order to maintain a triple lock on the value of the state pension.
Next year the basic state pension will increase by £3.35 to £119.30 a week. The full rate for the new state pension is set at £155.65.
The savings credit will be frozen at its current level where income is unchanged.

4) The Chancellor wants to build as well as balance the books
The housing budget is doubled to more than £2bn a year and 400,000 more affordable new homes are set to be built by the end of the decade.
Mr Osborne said: “That’s the biggest house building programme by any government since the 1970s.”
Almost half of the building will be starter homes, sold at 20 per cent off market value to young first-time buyers. A total of 135,000 will be Help to Buy: Shared Ownership.
Right to Buy will be extended to housing association tenants and from midnight tonight, tenants of five housing associations will be able to start the process of buying their own home.
The planning system is set for reform and public land suitable for 160,000 homes will be released along with unused commercial land re-designated for starter homes.
The government will also launch London Help to Buy, which will see Londoners with a 5 per cent deposit able to get an interest-free loan worth up to 40 per cent of the value of a newly-built home.

5) Bad news for buy-to-let and property investors
To tackle cash purchases that were not hit by the Summer Budget changes to mortgage interest relief, new rates of stamp duty will be introduced at 3 per cent higher on the purchase of additional properties like buy-to-lets and second homes.
This rate will be introduced in April next year and government will consult on the details so that corporate property development isn’t affected.

Savers switching from annuities to income drawdown after pension changes

At retirement you have two choices:

1. Convert your pension into income by purchasing an annuity
2. Keep the pension invested and withdraw money when you need it; this is called income drawdown.

Latest figures from the Association of British Insurers (ABI) show that people over 55 are moving away from buying annuities towards income drawdown policies. We’ve noticed the trend growing for a few years, but it has definitely strengthened since the new pension rules came into force in April.

Annuities v Income Drawdown, 2012-2015

Of those buying a retirement income in the two months after 6th April 2015, 53% chose an income drawdown policy, while 46% chose an annuity. Just three years ago, in 2012, annuities accounted for 90% of policies purchased.

65,000 people exercised their new right to withdraw cash – taking out more than £1bn, the ABI said.

So what were the April 2015 pension changes exactly?

  • People aged 55+ are allowed to withdraw any amount from a Defined Contribution (DC) – also known as a ‘money purchase’ – pension scheme, subject to income tax
  • Tax changes have now made it easier to pass pension savings on to descendants
  • Many people with Defined Benefits (DB) – also known as ‘final salary’ – pension schemes will be allowed to transfer to DC plans

(Existing annuity holders are unaffected for the time being.)

What are Annuities?
Most people buy an annuity with a lump sum of cash from their pension pot; an annuity gives you a guaranteed, taxable income for the rest of your life, giving you certainty throughout your retirement. If you have a relatively small pension, an annuity is probably the right option for you, however it does not give you the flexibility of income drawdown.

Where can I get one?
Your pension provider will offer you an annuity but your adviser should shop around for the best deal, taking the ‘open market option’. This can increase your annuity income by as much as 20%. If you have health problems, consider an ‘enhanced annuity’ which pays you more because you are expected to live for a shorter time. See our blog ‘Enhanced and Impaired Life Annuities for a higher retirement income’.

What is Income Drawdown?
This option will allow you to take the tax free lump sum immediately, from the age of 55 onwards, and leave the remaining pension pot invested which can be used to either provide an income within government defined amounts known as GAD (Government Actuary’s Department) rates or an income can be deferred, up to the age of 75, until you decide to take an annuity. It is more risky than purchasing an annuity, because your pension remains in investments that may go up or down, so your future income may do so as well. However, it does allow you to benefit from future increases in the stock market and you can manage your cash flow better because you only draw the income when you need it.

Where can I get one?
Income drawdown is a complex area and we recommend that you speak to an Independent Financial Adviser specialising in this area who will be able to tell you more about the different variations of drawdown products that are available in the market place and whether they are suited to you.

Next steps
If, having read this blog, you’re still not sure which option is the best for you, then please call Marchwood IFA now and ask us to review your pension arrangements. We can help you make the right decisions to help you achieve your retirement goals.

Pension changes: more choices mean more decisions

As you will probably be aware, we are in the middle of what George Osborne has described as the “most far-reaching reform to the taxation of pensions since the regime was introduced in 1921”. From this month, the rules have changed radically about how and when you can take money from your pension pot.

Once you reach 55 you will now have more choices than ever before about how to take your pension. And more choices mean more decisions to make, decisions that will affect the rest of your life.

Depending on your current pensions arrangements, what could you do?

  1. Use your pension pot to buy a regular income for the rest of your life, whilst also taking up to 25% as a tax-free cash lump sum.
  2. Keep your money invested and have access to it when you need it – and take up to 25% as a tax-free cash lump sum.
  3. Take some or all of your pension pot as a cash lump sum, as and when you choose, but do remember that any lump sums (after the initial 25% tax-free) will be liable to income tax”.

On average, we spend around 20 years in retirement (Source: Money Advice Service) so are you confident that you could make your pension last that long? Choosing exactly what to do with your pension pot is a decision that will affect what you can do in retirement – and what you can’t.

Next steps

Pensions planning is a complex area and one where you should always take the professional advice of a fully qualified independent pensions advisor. Please call Marchwood IFA now and ask us to review your pension arrangements. We can help you make the right decisions to help you achieve your retirement goals.

7 good reasons to pay into a pension before April

As the end of the tax year approaches and the new pension rules come into effect in April, here at Marchwood IFA we have identified 7 reasons why you might want to consider making the most of your pension contributions now. If you are interested in doing so, you should take the advice of a fully qualified pensions advisor to help you make the right decisions to achieve your retirement goals.

Remember that higher rate (40%) tax payers and additional rate (45%) tax payers who use the full £40,000 pension annual allowance can convert a tax bill of £16,000 (40% of £40,000) into their own retirement savings.

1. Immediate access to savings for the over 55s
The new flexible pensions rules from April will mean that anyone over 55 will have the same access to their pension savings as they do to any other investments. With the combination of tax relief and tax free cash, pensions may well outperform ISAs on a like for like basis. So if you are over 55, you should at least consider maximising your pension contributions before saving through other investments.

2. Providing for loved ones
The new death benefit rules will make pensions an extremely tax efficient way of passing on wealth to family members – there’s typically no IHT payable and the possibility of passing on funds to any family members free of tax for deaths before age 75.

You might want to consider moving savings which would otherwise be subject to IHT into your pension to shelter funds from IHT and benefit from tax free investment returns. And provided you’re not in serious ill-health at the time, any savings will be immediately outside the estate, with no need to wait 7 years to be free of IHT.

3. Get personal tax relief at top rates now in case you earn less next year
If you are a higher or additional rate tax payer this year, but are uncertain of your income levels next year, a pension contribution now will secure tax relief at your higher marginal rates.

Typically, this may affect employees whose remuneration fluctuates with profit related bonuses, or self-employed individuals who have perhaps had a good year this year, but aren’t confident of repeating it in the next.

For example, an additional rate taxpayer this year, who feared their income may dip to below £150,000 next year, could potentially save up to an extra £5,000 on their tax bill if they had scope to pay £100,000 now.

4. Don’t lose your £50,000 allowances from 2011/12, 2012/13 and 2013/14
Carry forward for 2011/12, 2012/13 and 2013/14 will still be based on a £50,000 allowance. If you have contributed less than £50,000 (annual allowance) in total to your pensions in any of the past three years, the carry forward principle allows you to make up for that.

But as each year passes, the new £40,000 allowance dilutes what can be paid. Up to £190,000 can be paid to pensions for this tax year without triggering an annual allowance tax charge. By 2017/18, this will drop to £160,000 – if the allowance stays at £40,000. And there could be further cuts.

5. Use next year’s allowance now
You may be willing and able to pay more than your 2014/15 allowance in the current tax year – even after using up all your unused allowances from the three carry forward years. Perhaps you’ve had a particularly high income for 2014/15 and want to make the biggest contribution you can with 45% tax relief?

6. Avoid the child benefit tax charge
An individual pension contribution can ensure that the value of child benefit is saved for the family, rather than being lost to the child benefit tax charge. And it might be as simple as redirecting existing pension saving from the lower earning partner to the other.

The child benefit, worth £2,475 to a family with three kids, is cancelled out by the tax charge if the taxable income of the highest earner exceeds £60,000. There’s no tax charge if the highest earner has income of £50,000 or less. A pension contribution reduces your income for this purpose, thus the tax charge can be avoided.

7. Sacrifice bonus for employer pension contributions
Have you been offered a bonus this year? Sacrificing bonus for an employer’s pension contribution before tax year end can bring several benefits. The employer and employee National Insurance savings could be used to boost pension funding, giving more in the pension pot for every £1 lost in ‘take-home’ pay. In addition, your taxable income is reduced, potentially taking you under a specific tax threshold which could mean avoiding the child benefit tax charge.

Next steps
Pensions planning is a complex area and one where you should always take the professional advice of a fully qualified independent pensions advisor. Please call Marchwood IFA now and ask us to review your pension arrangements. We can help you make the right decisions to help you achieve your retirement goals.

Are you ready for the pension changes in April 2015?

In his 2014 Budget, Chancellor George Osborne announced a set of radical pension reforms, some of which are already in effect. Others are due to come into force in April 2015, having been confirmed in the Taxation of Pensions Bill published on 14 October 2014. But what do the changes mean to you?

Changes already in effect

1. More flexibility for people with small pension pots
a. If you are aged 60 or over, the maximum amount of your overall pension wealth you can take as a lump sum has increased from £18k to £30k.
b. If you are aged 60 or over and have any personal pension pots smaller than £10k, you can take up to three of them as lump sums.

2. New higher income drawdown limits
The maximum amount you can take out each year from a capped drawdown arrangement has increased from 120% to 150% of an income based on Government calculations, as long as you start the drawdown arrangement after 27 March 2014.

3. Flexible drawdown accessible to more people
Flexible drawdown allows pension holders who have a secure pension income of £12,000 a year (including state pension) to make unlimited and uncapped withdrawals from their pension pot.

Changes from April 2015
These changes can be summarised as ‘Pension holders will be able to take the whole of their pension as a lump sum.’

1. Freedom to draw down cash
From April 2015, if you are 55 and have a defined contribution pension, you can either take 25% of your pension tax-free in one lump sum or have 25% of any withdrawals made tax free. So, if you had a pension worth £100,000 you could either:

a. Take £25,000 tax-free in one lump sum, with any subsequent drawdowns taxed as income

b. Make a series of withdrawals when convenient to you and receive 25% of each drawdown tax free

The second option could be useful to help you manage your tax liability (not available when buying an annuity with the pension fund).

2. Flexible access to pensions from age 55
From April 2015 pension investors aged at least 55 will have flexibility on how they draw an income from their pension, over and above drawing down the tax-free lump sum/s. They can:

a. Take the whole fund as cash in one go
b. Take smaller lump sums, as and when they like
c. Take a regular income via income drawdown – where they draw directly from the pension fund, which remains invested
d. Take a regular income via an annuity – where they receive a guaranteed income for life but lose their pension capital.

Any withdrawals over and above the tax-free amount will be taxed as income at your marginal rate. So, if you are a basic-rate (20%) taxpayer, any income you draw from your pension will be added to any other income you receive (e.g. your salary) and this could push you into the 40% or even 45% bracket. It is therefore essential to take independent pensions advice.

3. 55% pension ‘death tax’ to be abolished
Currently, it is only possible to pass a pension on as a tax-free lump sum if you die before age 75 and you have not taken any tax-free cash or income. Otherwise, any lump sum paid from the fund is subject to a 55% tax charge.

From April 2015 this tax charge will be abolished. The tax treatment of any pension you pass on will depend on your age when you die.

If you die before age 75, your beneficiaries can take the whole pension fund as a lump sum or draw an income from it tax free, when using income drawdown. Dependants can also choose to buy an annuity, in which case the income will be taxed.

If you die after age 75, your beneficiaries have three options:

a. Take the whole fund as cash in one go: the pension fund will be subject to 45% tax (current proposal).

b. Take a regular income through income drawdown or an annuity: the income will be subject to income tax at your beneficiary’s marginal rate.

c. Take lump sums through income drawdown: the lump sum payments will be treated as income, so subject to income tax at your beneficiary’s marginal rate.

4. Transferring a ‘final salary’ scheme
Anyone with a non public sector ‘final salary’ pension scheme will be able to transfer the benefits to a defined contribution scheme (e.g. a SIPP) and then take advantage of the flexibility of the new rules. However, some benefits of the final salary scheme may be lost and independent pensions advice should be taken.

5. Retirement age set to increase
The minimum age at which you can draw your pension is currently 55. This will rise in 2028 to 57 and then rise in line with any rise in the state pension age, normally remaining 10 years below the state pension age.

Could you benefit?
To find out more, contact your independent pensions advisor, Richard Smith, on 01243 532635 or

Small business owner? 5 reasons why auto-enrolment is not boring!

Theo - I'm in!

Auto Enrolment (AE), the scheme by which millions of workers are being automatically enrolled into a workplace pension by their employer, has been a great success so far. The big businesses who have already joined the scheme have found that relatively few of their employees have wanted to opt out. (For more details see our blog ‘Auto-enrolment: 5 top tips for employers’)

However, small business owners are in danger of missing the deadlines because they have too many other competing priorities and just aren’t interested in auto-enrolment yet. It is true that small and medium-sized enterprises (SMEs) with less than 50 workers will not need to enrol their staff until June 2015 at the earliest. But even the smallest employer has a quite lengthy ‘to do list’ for auto-enrolment (changing contracts, for instance, which needs a 3 month consultation period) and, given how busy you probably are, it will take some time to complete.

Here are 5 reasons why you need to think about Auto-enrolment now

  1. It costs more not to comply. You can incur a fine of up to £5,000 personally and your business could be fined £50,000 if you do not hit the dates set by The Pensions Regulator (TPR).
  2. You may be ‘named and shamed’ by TPR. This might be the biggest piece of PR your business has ever received, but that’s not good
  3. TPR knows who you are and where you are. It has already written to you with your staging date so it knows where you live.
  4. If you cannot afford auto-enrolment, then you need to talk to an insolvency practitioner about the future of your business.
  5. It might be a bit boring, but you still have to do it.

Next steps

If, having read this blog, you’re still not sure exactly how you are going to approach auto-enrolment, then please call Marchwood IFA now and ask us to review your auto-enrolment plans. We can help you through the whole process, particularly the selection of the right pension scheme for your employees and how to clearly communicate its benefits.

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