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.”