I would like to thank Victoria Derbyshire for inviting me to discuss the new pension reforms on her show on BBC Radio 5 Live this morning. There is an interesting debate surrounding the new pensions rules and we will be watching developments in this space closely.
You can listen to the broadcast using the BBC catch up service here.
Following the news last week that we would all have freedom to access our full pension pots at retirement, the media quickly began talking about sports cars and luxury holidays. The problem with the way in which the new pension rules were presented, was that the ‘take the full pot at retirement’ option seemed to be the only one which was being discussed.
The media seemed to miss the fact that for many people an annuity or income drawdown will still be the best way to go, especially for those with low levels of other pension income. While we welcome the new flexibility and simplicity being introduced into the pensions landscape, it does come with several health warnings, namely:
– The risk that people ‘take the full pot at retirement’ and spend all of the money. Clearly this will leave them with a lower income for the rest of their lives.
– The risk that people ‘take the full pot at retirement’ and don’t spend the money. All the saver would have done here is transferred capital out of a tax efficient environment, into a taxable one and paid a large chunk of income tax in the process.Hardly prudent financial management.
– The risk that people will ‘take the full pot at retirement’ and purchase a buy to let property. This particular option seems to be a favourite in the media at the moment, however it does come with some notable flaws. First of all, income tax will need to be paid on the full pension fund (minus the 25% tax free cash), which for many will push them into the higher (40%) rate tax band. A property will then need to be purchased which will incur stamp duty and many other costs, and finally income from property is taxable.
There are many other pitfalls to be aware of when planning your retirement. If you would like advice on suitable options for you, please contact us here.
It was only a couple of months ago now that I penned an article for this blog on the importance of taking a holistic view on retirement planning. I predicted possible increases to the minimum age at which pension benefits could be drawn on and it would seem that my premonitions have come true.
While it was not widely publicised in the aftermath of the budget speech, contained within the consultation document was the revaluation that the minimum age at which pension assets can be drawn upon is set to rise to 57 (from 55 currently) in 2018. This age will then be linked to increases in the state pension age which, in turn, is linked to life expectancy.
While the reforms announced in the budget certainly provide far greater flexibility to prospective retirees and will, no doubt, increase the attractiveness of a pension as a retirement planning tool, for those of us who wish to retire early, there could start to be problems.
The minimum pension age has always been fixed (in a manner of speaking) and has only changed as the result of a budget or policy initiative. That has all changed now, with the minimum pension age set to be linked to our seemingly ever-increasing life expectancy.
For those who still dream of a retirement before their 60th birthday, it will be more important than ever before to take a holistic view on retirement planning, and make use of the newly increased ISA allowance and other savings vehicles in order to provide accessible funds when they are required.
The need for high quality financial planning advice both at and during retirement will be greater than ever to ensure that accumulated pension and retirement funds will provide sufficient income for life. With greater flexibility comes greater risk, and the chancellor yesterday placed the responsibility on individual pension savers to ensure that they provide for themselves in retirement.
If you would like to find out how the pension changes announced in the budget might impact on your retirement planning, please get in touch to request your discovery meeting, provided at our expense.
Commentary before the budget announcement earlier today had suggested that we were in for a surprise and boy did we get one. The chancellor announced the biggest and most wide ranging set of pension reforms in over 100 years!
The measures are designed to make pension withdrawal far more flexible, reduce previously punitive tax rates on pensions and hand back more responsibility to savers to be in control of their own income in retirement.
The main changes announced today include:
The ability to take 25% tax free cash as usual and then take the remainder of a pension pot as cash which will be taxed at an individuals marginal rate.
A reduction in the flexible drawdown limit to £12,000 meaning that far more people will have unfettered access to their pension savings.
An increase in the capped drawdown GAD rate, meaning people in drawdown plans will be able to take a higher income each year.
The ability to take pension pots under £10,000 in cash. This facility can be used on up to 3 pension pots, giving a total of £30,000 which can be taken in a cash lump sum.
A review into the current 55% tax rate on crystallised pension benefits on death.
There are also some other areas which are being consulted on, most notably the intention for the government to prevent people in public sector pension schemes being able to transfer their benefits into an alternative plan.
We will be following developments in this area closely and will be providing further updates as the situation develops.
In 5 days time George Osborne will deliver his 5th budget as chancellor of the exchequer. If the leaks and predictions are anything to go by (which they seem to be if the past two years are anything to go by) then this budget could have significant impacts from a financial planning perspective.
We are all too aware of the fragile state of the economic recovery and as such we expect this budget to be “cost neutral”. That is, any tax cuts or spending increases, will have to be paid for from increased takings elsewhere.
There is speculation that the chancellor may announce yet another increase to the state pension age (as I alluded to in my previous blog), as well as making yet further reductions to the annual or lifetime pensions allowances.
Add in the fact that there could well be a significant change to income tax legislation, and a reform of the capital gains tax rules, and we have a budget that anyone who is interested in financial planning will want to keep a close eye on.
We will be watching the budget and blogging live as it happens. We will also be preparing a short guide to the major announcements and providing specific advice to clients over the coming months.
If you would like to find out how the budget will impact on your finances, please get in touch to arrange your discovery meeting, provided at our expense,
At present the amount of pension savings that can be accumulated by an individual is limited by both an “annual allowance” and a “lifetime allowance”.
As the names would suggest the “annual allowance” is a limit on the amount of tax advantaged pension savings and individual can make in a single “pension input period”, not to be confused with the tax year. This allowance used to be £255,000 per annum, which meant that it was not a concern for all but the most wealthy pension savers. Recent legislation has sought to reduce this allowance though, and on 6th April this year it will reduce to £40,000 per annum.
The “lifetime allowance” restricts the amount of pension savings one can accumulate in their lifetime. Any excess over the allowance carries a rather severe 55% tax charge. Like its annual counterpart, the lifetime allowance has been on the chopping block in recent budgets, falling from a previous £1.8m to £1.25m on 6th April 2014.
Some commentators are predicting that the government will announce the abolition of the lifetime allowance in the 2014 budget (at least for some individuals). This is one prediction which I do hope turns into reality.
It seems counterintuitive to limit an individuals lifetime pension savings, which are influenced by market growth and other factors over which they have no control, when we are already setting a limit on the annual pension input amount.
Surely it makes far more sense to simply limit the annual level of contributions, and stop taxing people on the growth in their pension funds. After years of increasingly complex pension legislation, any move to simplify things is surely a step in the right direction.
If you would like assistance with your own pension provision, please get in touch to arrange your discovery meeting, provided at our expense.
In an interview with the Financial Times, Legal & General chief executive Nigel Wilson has called for several financial products to become compulsory, namely income protection and long term care insurance, in addition to the already launched auto enrolment pension system.
The case made is that the state cannot be expected to continue to provide for us in the event that we fall ill or require long term nursing care. Wilson suggests that insurance for these needs should be compulsory, however perhaps this is a bit too much of a one-size-fits-all approach.
While I agree that most individuals do require further planning and protection in these areas, is compulsion really the solution? It would seem that if we are going to force people to take out these insurance products, then an increase in taxation and state provision would be the simplest, if not the most desirable solution.
Many people certainly need to do more to protect themselves in the event of a spell of time off work, or the need for long term nursing care, however, there are many ways that this protection can be achieved.
One way for example, is to hold a sufficiently large emergency fund in cash and other investments. The fortunate people who already have this type of provision in place would justifiably feel a little aggrieved if they were forced to purchase insurance to cover a need that they have already taken care of.
Income protection and certainly long term care insurance are complex products with myriad different options. Surely it would be better for individuals to have a say in the type (and cost) of the cover that they require, rather than trying to fit all individuals into one mass solution.
With pension charges back in the news again last week following the governments decision to delay the cap on charges for auto enrolment schemes, perhaps now is a good time to consider value, rather than price. In the famous words of Warren Buffet “price is what you pay, value is what you get”.
Please don’t get me wrong; I am not excusing, nor defending, overly high or punitive pension scheme charges. In fact, I am one of the strongest proponents of better value pension savings vehicles. It does seem however, that in our never-ending quest to make all financial products cheaper, that we have forgotten all about value for money. Surely this should be the deciding factor.
Lets illustrate this with a simple example and assume for a second that both options are similar in terms of risk profile and financial strength. Fund A charges 1.5% per annum and generates a return of 8%, fund B charges 1% but only delivers a return of 4%. All other things being equal, I will choose fund A thank you very much.
Now clearly the above example is quite extreme, but the principle is sound. It should be the value for money of a particular scheme that we are questioning, not the fee itself. Part of any good fund analysis should take into account the level of charges made by the fund manager, and the additional performance that the manager has generated (or, heaven forbid, subtracted) from the fund. Only then can we get a true idea of the value for money that the proposed investment represents.
While the government is right to look into the cost of pension plans for workers under the auto enrolment regime, surely it should be value for money, and not cost alone that is the primary focus of any review.
The suggestion by pensions minister Steve Webb on Sunday that providers should offer so called “switchable” annuities has raised some eyebrows amongst those in the advice profession. You see the concept of a switchable annuity is nothing new; in fact, it has been around for quite some time.
Fixed term annuities involve the purchase of a short-term annuity (up to 5 years) with a part of your pension fund. Using this type of annuity can have a number of advantages for clients:
As with all attractive financial planning options however, there are some risks. The main one being if annuity rates continue their long-term downward trend. In the same way as fixing into a mortgage deal can be a risk if interest rates fall lower the same is true for a fixed term annuity. You could find that the rate has fallen when you come to “renew” your retirement income.
As I have argued for some time now, surely the best way to ensure a comfortable retirement is to diversify your retirement income in the same way that you would diversify an investment portfolio. For many clients taking an income from a variety of different sources could be a suitable hedge against “annuity rate risk”. For example, you may wish to take some income in the form of a lifetime annuity, some from a fixed term annuity and some in the form of a drawdown pension.
Clearly the correct mix of retirement income will depend on your personal circumstances and objectives and given the long term nature of annuity purchase, I would recommend that you take advice from a Chartered Financial Planner before making any important decisions.
With the new year now underway, I thought it time to share our early thoughts on some of the key financial planning issues clients are likely to face in 2014.
1. Re-balance investments
Given the fantastic market performance of 2013 both in the UK and abroad it is likely that many portfolios will now be out of balance when compared to the intended asset allocation. If left unchecked this can cause a large increase in the risk and volatility within a portfolio and could lead to larger than expected losses in future years. As such now would be a prudent time to review your financial planning goals for the years ahead and rebalance investment portfolios accordingly.
2. Plan ahead for pension legislation changes on 6th April
The 6th April 2014 sees the introduction of a reduced lifetime and annual allowance for pensions. The annual allowance is a limit on the amount of tax advantaged pension contributions an individual can make in a single “pension input period”. The lifetime allowance limits the total amount of pension savings you can accumulate in your lifetime. Any excess over these allowances can lead to large tax charges, which in some cases can be as high as 55%. This is a high priority area, which should be looked at well in advance of the deadline of 6th April. Clients who are members of a final salary or public sector pension scheme could be particularly vulnerable in this area.
3. Make considered use of tax allowances – Now!
Many people make use of their various tax allowances right at the last minute, especially ISA payments. In some cases this means that there is not sufficient time to complete the significant research required to make a suitable recommendation for investment and we are unable to assist. Furthermore, by leaving the use of these allowances to the very end of the tax year you are effectively losing out on a whole years worth of tax advantaged fund growth. Now is the time to start planning for the end of the tax year on 5th April and it would also be a great time to start planning for the 2014/15 tax year as well.
Some diligent individuals who have made full use of their ISA allowance since it’s introduction now have in excess of £1m sheltered away in a tax efficient home with no income or capital gains tax liability. For most this would make a most welcome addition to any retirement planning or investment goals.
4. If you are an employer – Start preparing for auto enrolment
While the new auto enrolment rules have already taken effect for the largest of employers, 2014 is the year where this new legislation will really start to impact on owner-managed business. Each employer will have an auto-enrolment staging date, this is the date on which a particular business will be required to comply with the new legislation. At an absolute minimum we would recommend that employers start preparing 6 months before their staging date preferably a year or more. If you would like an initial assessment of your auto-enrolment staging date and liabilities as an employer, please do get in touch.
5. Make the most of the low interest rate environment – While you still can!
While the low bank of England base rate is likely to persist for some months yet, the markets are starting to price in a rise in the benchmark interest rate within the next 18 months or so. This will begin to have an impact on the rate at which lenders can secure funds and In turn, this will start to filter down to mortgage rates. Clearly each individual will have different circumstances but in general those clients who have variable rate mortgages or borrowing may want to consider locking into the historically low rates currently available. While no-one can say for sure exactly when a rate rise will occur, we can say with some certainty that the base rate will have to increase at some point from its current low.
6. Make a thorough financial plan
We all have different financial goals and objectives, however many of us are unsure as to exactly how or when those objectives will be achieved. Whether you aspire to retire early or fund a new business venture, by creating a comprehensive cash-flow model we are able to predict how close your existing provisions are to meeting your personal needs. As well as looking at the “ideal” scenario a cash flow plan will also enable you to consider your financial position in a number of “what if” scenarios such as the illness of a family member. This exercise is often eye opening and can show how well prepared (or not) you are for the financial challenges which life could throw at you.
By making time to sit down with a Chartered Financial Planner, you will be able to start 2014 with a suitable plan in place to ensure that you meet those all important financial objectives.
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