Paul Leatherbarrow, Liverpool
2010 has seen a radical change in pension legislation; at last the government has made headway in to dealing with the pension conundrum.
Now we need the coalition to come good on their intentions and deliver the reform they have promised. But this must only be the beginning of change; otherwise this will be A- day, pension simplification all over again; Hopefully all this reform will focus individuals on planning for their retirement.
Auto enrolment will start the ball rolling with most employees being offered a work place pension scheme by 2012 The biggest impact will be among wealthier clients, who will be happier with the relaxation of restrictions on how they can take benefits from their pensions and pass on pension assets to their family members.
Public sector workers were told that the government funded pensions system would be reviewed with the implication that payments may be cut or contributions levels may rise The abolishment of the default retirement age was essential due to better health care and people taking care of them selves no longer will people be considered no longer a benefit to the work force.
This has a bias in favour of the employee which can only be good news for those who want to carry on working or those who financially need to. The proposed rise in the state pension age is essential in making the reforms affordable, due to people living longer and the working population decreasing. People have to understand the working population is paying for the pensioners of today in the hope the youth of today will pay for them. The Main Changes during the past year Retirement age moved to 55 A change in the normal minimum pension age from 50 to 55.This increases occurred overnight on 5 April 2010 and caused concern for those who intend to retire after this date but who will not be aged 55, including those ‘phasing’ their pension benefits.
This can be quite a problem as it does not leave any time to re adjust your plans Changes to qualification for Basic State Pension Individuals reaching state pension age after 5 April 2010 now only need 30 qualifying years to receive a full Basic State Pension. Great news, especially for women who in the past have taken time off to bring up their children. Female state pension age begins to increase from 60 to 65 The state pension age for women born on or after 6 April 1950 will increase gradually between 2010 and 2020. Again this brings the same problem as before there will be many women who had planned to retire at 60 who will now have to wait another 5 years 2020 will see the pension age for both men and women be 66 50% tax rate for high earners
This was introduced from 6 April 2010 for those with incomes greater then £150,000. Brought forward from April 2011 and increased from 45%. Personal allowance changes There will be a loss of £1 in personal allowance for every £2 of income earned over £100,000. Personal allowance lost when earnings approximately equal £112,950 – giving an effective 60% tax rate.
This can be offset by a pension contribution equal to the amount of income in excess of £100,000. Already there are strategies to mitigate this with a simple strategy of salary sacrifice Planned changes for 2011 Pension tax relief restrictions on income greater than £150,000 This will be introduced from 6 April, reducing the tax relief received from 50% to 20% for those with income over 180,000. There will be a tapered reduction to relief for those with income between £150,000 and £180,000. Annual allowance Will be reduced from £225,000 to £50,000 April 2011; the previous allowance was too generous. Not so good is intention not to index link the allowance until 2016 which means inflation will erode the value of allowance over the next five years. It is the government’s intention not to impose the allowance in year of death or event of lump sums being paid due to ill health but there will be no exemption in event of redundancy. This change only affects a small percentage of the working population if the majority of the UK working population was utilising this allowance we would not have a pension crisis.
Yet again the government has sweetened the blow by allowing three years carry back Planned changes for 2012 Personal accounts/workplace pension auto-enrolment projected introduction in October 2012 but will be phased in over a period depending on the size of the employer. Workers who are eligible will be automatically enrolled into a qualifying workplace pension. Employees can choose to opt out. This does not go the whole way, yet again just like stakeholder there are reasons not to participate in the scheme none more so being asking a young employee to save in a low risk fund for such a long time. (Will the opt out option be too easy for both employees and employers) Lifetime allowance Will be reduced from 1.8 million to 1.5 million in April 2012. Will only affect a small minority of people. anyone benefiting from enhanced or primary protection will continue to do so, anyone with between 1.5 and 1.8 million maximum and anyone who has funded their pension based on the current lifetime allowance can elect to have protection at 1.8 million in exchange for no further pension funding any subsequent funding would automatically reduce the lifetime allowance to 1.5 million. Again only effect small percentage of the working population
The DWP announced an end to occupational pension schemes ability to contract out of the second tier of the state scheme from 2012 members of Defined Benefit schemes that are contracted out will not able to transfer to certain types of money purchase arrangement including personal pension schemes. Abolition of Defined Contribution contracting out/protected right funds. This is expected to take place with effect from 6 April 2012.
There could be a potential problem ,because you have to leave your fund with your old employer if you leave their employment, the problem arises if the employer goes bust the scheme automatically goes into the pension protection fund which means members have no control of their fund Change from RPI to CPI for basic state pension Change to increases to the Basic State Pension From 2012 or, at the latest, by the end of the next parliament, the Basic State Pension will increase in line with national average earnings rather than retail prices inflation as it does currently. Full implementation of RDR proposals from 31 December, the new regulatory framework is expected to be introduced. Basic state pension to undergo major overhaul
There is to be a major shakeup of the state pension system which will see pensioners receiving higher payments. A simplified payment system is being drafted which may involve a flat rate pension £140 per week (£7,280 per annum) and bring an end to means testing. Today the basic state pension is £97.65 per week plus pension top credit which increases the amount to £132 per week if you have insufficient savings. The new pension is expected to be in force by 2015. The new plans will be more beneficial for women and couples. The proposals should remove the uncertainty about how pension savings will affect future benefits, which currently is a big disincentive to save for retirement. The plans for a flat rate state pension will be good news for those making extra provision for retirement as it will mean an end to means testing, For a long time, many have felt it was unfair for those who have made their own provision to see those who did not be given a helping hand. The Pension reforms on public sector pensions public sector pensions are to expensive to maintain, more concerning is that the government has been using artificially high discount rates to calculate the employer and employee contribution rates for public sector pensions, Which means the pensions which we believed are costing us too much are costing us considerably more The main schemes are set at around 20% of salary but the true value when measured using a discount rate based on the current yields on index linked gilts is over 40% of salary.
Options for the short term 1. One consideration would be to contract public service schemes into the second state pension, which would generate more national insurance contributions for the government.
2. Another option would be to either reduce the level of benefits paid or increase member’s contributions, while protecting the lowly paid and the armed forces.
Addressing long term aims
1. The retirement age should be raised or linked to longevity the commission will also look at schemes which combine elements of defined benefits and defined contributions
2. Collective defined contribution schemes to be placed in one fund, managed on behalf of the members
3. It cited plans to index pensions to the consumer price index rather than the retail price index.
For a long time public sector workers were paid significantly less than their private sector counterparts, but the official figures from the office for national statistics for 2009 show that the average public sector worker is earning £539 per week compared with £465 for the private sector (extra £296 a month) So the argument traditionally put forward that they should not forego some of their pension benefits as it is their pay off for earning a lower wage no longer holds water.
Final salary pensions in the private sector were not switched off overnight private sector employees went through the same process as Lord Hutton is proposing. The basic problem is that the cost for the employer is too high so employees may need to either pay more to retain the same benefits or make the same contributions and get reduced benefits.
Change is essential especially is the need for any future measures to be based on the actual costs of the benefits, which requires more transparency from the government and due to longevity the public sector pension has to be looked at and cannot remain immune Finance bill 2011 (take effect 6/4/2011) The minimum income requirement (MIR) of £20,000 secured lifetime pension income to gain access to drawdown pension funds without any cap on withdrawals The tax rate on lump sum death benefits will be 55% for deaths after 75.
Before will still remain tax free Treasury has confirmed pension drawdown funds will not be subject to IHT from registered schemes even if die after reaching the age of 75. IHT will still apply to unregistered schemes at any time Changes to death benefits and tax charges. If you die whilst your pension fund is in either form of drawdown, or after the age of 75, all your remaining fund can be used to provide a taxable income for a spouse or dependant. Alternatively it can be passed on to a beneficiary of your choice as a lump sum, subject to a 55% tax charge (or nil charge if paid to a charity). No tax is welcomed with open arms, but a 55% tax charge is a vast improvement on previous tax charges of up to 82% on lump sums paid after age 75.5t will now be possible to leave your pension fund untouched for as long as you like There had been fears that the government may reduce or remove the ability to take a quarter of your pension tax free.
Fortunately there has actually been little change to the tax free lump sum, with the exception that you can now take it after age 75 if you so choose The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.
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