Successfully planning for retirement, should as a matter of course involve limiting your exposure to unnecessary taxes. Doing so should simply be seen as a prudent allocation of your carefully built assets. I would never advocate tax avoidance, and you should never consider it either because it’s a path only fools tread.
That said…
Today we are going to look at the pros and cons of two important types of investments that can help you in retirement, explaining the benefits of both.
As time rolls on and the date for the beginning of the possibly the biggest ever changes to our pensions system, I thought it was a good time to speak out to all you employers and employees out there who will be effected by this.
Make no mistake about it, employers are going to face additional cost and administration burdens under this new pension regime. However, the good news is that there is time to plan and prepare, but time is running out.
There are four basic steps that can help employers plan.
1. Find out when the staging date is
This will give employers a deadline for implementation and a point to work back from. The staging date will be based on how many workers an employer has or, if there are less than 50 workers, the last two characters of the employer’s ‘Pay As You Earn’ reference.
There are more than 40 staging dates spread over four years from 2012. Larger employers will go first, smaller employers last.
You can find out your corporate client’s staging date by using this handy staging date calculator from Scottish Life.
2. Find out the duties that are likely to apply
Every employer will have some duties to perform but the duties will be different depending on the types of worker they employ. As a rule of thumb, any worker over age 22 and under state pension age, and who earns more than around £7,500 a year, will be treated as an ‘eligible jobholder’.
These workers will need to be automatically enrolled into a pension scheme by their employer. As long as these workers stay in the pension scheme, the employer will have to pay contributions. Those workers who don’t fall within this category will still have to be offered a pension scheme by the employer, and in some cases the employer will have to pay into it.
3. Review pension provision
Employers who already offer some form of pension provision will need to make sure that their existing scheme meets a minimum standard. This generally means that there must be a minimum contribution rate, made up of both employer and employee contributions.
If the scheme isn’t up to scratch contributions will have to increase. Building up these contributions to the minimum standard slowly could be preferable to employers rather than waiting until the last minute and facing a high up-front bill.
Employers who don’t have a pension scheme will have to set one up sooner or later. Again, starting to do this as early as possible would help employers to build the scheme up at their own pace.
4. Consider the impact on the business
There is no doubt that automatic enrolment will have cost implications for every employer, large or small. Employers will need to consider how they will meet these costs.
Can they simply absorb the costs, potentially reducing profits?
Will the costs of their goods or services need to increase?
Will staff remuneration structures have to change?
Will HR processes and systems need to change?
Will business plans need to be adjusted to reflect the increase in costs?
These are just some of the questions that finance directors and business owners will need to address. Planning ahead, well before the staging date, could help smooth any cost increases, avoiding last minute shocks.
It’s clear that employers will face a major challenge when their employer duties start. With the economic climate as it is, it is probably even more important to plan as early as possible. It won’t be easy but help is out there. If you wish to have a free initial consultation with us please just get in touch and we’ll be more than happy to have a chat about your situation.
As promised here is an article on the changes to Unsecured Pensions( also known as drawdown).
Summary of the proposed changes
The age 75 rules on annuitisation, value protection lump sums, pension commencement lump sums (PCLS) and trivial commutation lump sums will be removed.
The age 75 rules on contributions and Lifetime Allowance checks will remain.
Pension funds will be able to remain in an Unsecured Pension (USP) indefinitely. This is referred to as “capped drawdown”.
Alternatively Secured Pensions (ASPs) will cease to exist.
The USP maximum withdrawal limit may be reviewed. The current limit of 120% of GAD rates is regarded as probably too high at older ages and may have to be less than 100% to avoid the risk of people exhausting their funds.
A USP customer will be able to access additional flexibility through “flexible drawdown” provided they have met a minimum income requirement (MIR). This minimum income will need to be a secure pension income for life and escalate by the lower of 2.5% or inflation. The customer would then be able to withdraw up to 100% of the remainder of their fund. This will be taxed as income.
The minimum income required is not set out in the consultation paper. However, it is expected to take account of not just current means-tested benefits, but also potential health costs and future expenditure needs.
Lump sum death benefits will be taxed at 55% to counteract tax relief given – this includes value-protection payments. The only exception is for pension savings where no part has been used for an income when the saver dies before 75, where the fund will be tax free.
Importantly, the Government has already announced on 22 June 2010 that in
anticipation of the drawdown rules changing, clients may remain in USP until
age 77 as an interim measure. At present any Pension Commencement Lump Sum
(PCLS) must be taken by age 75.
The main things that will cause concern to existing Drawdown customers is the extra 20% charge on lump sum benefits from the scheme. This will automatically change in April so it is vital that you review your situation. The changes to maximum income are not so straightforward because if you are in an existing contract and taking maximum income (120% GAD) then you can continue with this until your first review date which is normally 5 years after the contract was taken out. Again though it is probably wise that you do contact your adviser to discuss these changes.
CONCLUSION
As I have already alluded to it is vital that if you are in a drawdown contract that you regularly review your situation because it may not be the contract for you anymore. Decline in health for example means that you may want to purchase an impaired life annuity and the 10 year guarantees offered by annuities may be more appealing, given the 55% tax charge on death in USP. Your attitude to risk may also have changed as there is obviously an investment element to these contracts, so reviewing your options here is vital.
If you require a review of your situation or if you are considering drawdown for the first time please just drop me an e-mail or contact me on 0800 321 3508 – free from a landline.
Alternatively call me direct on my mobile at 0757 679 1009.
Well probably not but there have been enough changes in the last few months to cause more than a few heated debates amongst interested parties. Pensions are headline news and trust me that is not going to change anytime soon!
Over the next week or two I’m going to be putting up a series of articles which will highlight stuff that could well be relevant to you. Changes such as the scrapping of the need to take annuity by age 75, the limits to how much you can put in a pension, proposed auto-enrolment, the big changes to drawdown contracts etc etc etc.
I’ll start tomorrow with the changes to drawdown and this effects those who are currently in an unsecured pension and those considering entering into drawdown.
Maybe not the new rock’n’roll but these changes are going to effect each and everyone of us. Until next time…
Your retirement could last decades.Life expectancy after retirement
Retirement could last
longer than you imagine…
People often think of their pensions as a bit like savings accounts. So they pay money in while they’re working, and when they retire they think they can take that money out, as and when they need it. But that’s not actually how pensions work. Unless you have a “Defined Benefit” or “Final Salary” pension scheme, the reality is that you will have to purchase a retirement income using your pension savings.
There are a range of retirement income options available. Choosing the right retirement income is one of the most important decisions you’ll make, especially as once set up, the majority of retirement income options cannot be changed. There are many important factors to consider and to discuss with your financial adviser to ensure the option you take is right for you. It’s a fact that people are living longer than they used to. Someone aged 60 retiring today can typically expect to live more than 20 years.
This article is available as a downloadable PDF file, click here to download and is also available to read online.
There was positive news on pensions today with the release of a document explaining new rules which will do away with the need for people who have defined contribution (aka money purchase) pension schemes to purchase an annuity by the age of 75. This proposed change is aimed to come into force in April 2011.
Effectively this will mean that those of you with defined contribution pension pots, such as Personal Pensions, will now be able to continue with income drawdown arrangements (where you draw on pension savings keeping the pot invested) for as long as they choose beyond the age of 75. The one drawback to these changes is that tax on unspent pension funds levied on death will be higher (at 55%) after age 75 than the rate (35%) that applies before the age of 75.
The changes will also mean greater flexibility for those people who have a secured income of at least £20,000 a year. Where people are in that position, and clearly will not ever fall on to the State for support, the flexibility of income drawdown that they have on additional pension pots is to be greatly extended.
This additional flexibility (drawdown or similar) will, of course, be of real use only to people with higher than average levels of pension saving. However I have to say that I don’t think that it is a bad idea to make it more attractive to people to make more provision for retirement. The indication from Whitehall seems to be that while the Government is working to make pensions more flexible ‘the more you save, the more flexibility you will get’.
The following is a link which explains the changes in greater detail for those of you who like a bit more meat on the bone.
So, to conclude; the age-75 rule is being removed; all DC pension savers will have the right to income drawdown indefinitely; a new form of flexible drawdown is being introduced for people who already have a secured retirement income above a certain level.
This has to be a step in the right direction. As ever if you need more information just drop an e-mail or give me a call on either 0800 321 3508 – free from a landline, or direct on my mobile at 0757 679 1009. Until next time…
NOTE: I have been writing articles here since 2007 so please take note the date of the article, because obviously, things like laws or tax allowances etc may have changed since then.
I do try my best to keep up to date, but I'm only an humble advisor and there are hundreds of my financial articles here! Please call or email if you need to double check something. I'll gladly help.
"I have introduced many clients of mine to Billy as I have complete trust in his professional ability." Tom Queen, Solicitor - Thomas Queen & Co. Dunfermline, Fife.
"I've found Billy a personable yet professional practitioner who offers sound advice and realistic proposals backed up by facts. I'd wholeheartedly recommend Billy." Rory Paterson, Director - Mediacom Scotland Ltd
Retirement could last
