Budget 2014: How the Pensions System changed forever

Following the Budget statement in March, the Government has unveiled plans to completely overhaul the UK’s current pension system.

From April 2015, from age 55, whatever the size of a person’s defined contribution pension pot, the Government proposes that they’ll be able to take it however they want, subject to their marginal rate of income tax in that year. 25% of their pot will remain tax-free and individuals will benefit from increased flexibility. People who continue to want the security of an annuity will be able to purchase one and people who want greater control over their finances can drawdown their pension as they see fit. Those who want to keep their pension invested and drawdown from it over time will be able to do so.

The current system is much less flexible for savers when they come to access their defined contribution pension during their retirement. Savers are currently charged 55% tax if they withdraw the whole pot and three quarters of people currently have little option but to buy an annuity – an insurance product where a fixed sum of money is paid to someone each year, typically for the rest of their life. A ‘capped drawdown’ pension allows you to take income from your pension, but there is a maximum amount you can withdraw each year. With ‘flexible drawdown’ there’s no limit on the amount you can draw from your pot each year, but, using the previous rules you must have a guaranteed income of more than £20k per year in retirement to trigger this option. The one exception granted was for small pension pots, where savers aged 60 and over and with an overall pension saving of less than £18k could take their entire fund in one lump sum.

The Treasury states that the Government has already helped to increase the security of people’s income in retirement by introducing automatic enrolment into workplace pensions and the triple lock guarantee. Ahead of the changes in April 2015, the following further changes have been introduced as of March 27th 2014:

• The amount of overall pension wealth you can take as a lump sum has increased from £18k to £30k. The amount of guaranteed income needed in retirement to access flexible drawdown has reduced from £20k per year to £12k per year.
• The maximum amount you can take out each year from a capped drawdown arrangement has increased from 120% to 150% of an equivalent annuity.
• The size of a small pension pot that you can take as a lump sum, regardless of your total pension wealth, has been increased from £2k to £10k.
• The number of personal pension pots you can take as a lump sum under the small pot rules has increased from two to three.

If you would like to discuss how the new pension rules might influence you and the different ways in which you could now choose to take your pension income, then please do feel free to get in touch, at which point we will be more than happy to discuss your individual situation and how you could best enjoy your retirement!

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Sources: gov.uk

Scottish Independence: What would it mean for business and your investments?

Scottish Independence: What would it mean for business and your investments?

Even if you live in a cave on top of a mountain a very long way from anywhere, it won’t have escaped your attention that the referendum on Scottish independence is drawing inexorably closer.

Voting will take place on September 18th – little more than five months from now – and at the moment the indications are that the ‘no’ camp will prevail. That said, the bookmakers will only give you 3/1 against a ‘yes’ vote, with the opinion polls currently suggesting around 45% of the votes will be cast in favour of independence.

At the moment, therefore, a ‘yes’ vote appears unlikely but very far from impossible. Rightly, many of our clients have asked what the implications of an independent Scotland would be for their savings and investments – and the wider economic prospects of the country. The notes below reflect our current thinking: we’ve tried to answer the questions clients are most often asking us. However, they are necessarily general in tone – if you would like to have a more specific discussion, please don’t hesitate to contact us.

Would an independent Scotland keep the pound?

The ‘yes’ campaign would like to, with John Swinney, the Scottish finance secretary, arguing that the benefits of a currency union are “clear for both sides.” However, George Osborne has specifically ruled out a currency union with an independent Scotland and at the moment is supported in this by all parties at Westminster.
In practice, a currency union would be very difficult. After independence, the economies of Scotland and the rest of the UK are likely to diverge. For example, Scotland would be a major oil exporter while the UK would continue as an importer. And if currency union did go ahead, clearly it would be under the control of the Bank of England – with the rest of the UK ten times the size of Scotland, there is little doubt where priorities would lie.

What would be the impact on business?

Clearly, the UK is Scotland’s biggest market and Business Secretary Vince Cable is fairly specific on the threats independence would pose. “Breaking up Scotland’s most lucrative market would potentially put growth and jobs at risk.” The ‘yes’ campaign dismiss this as ‘scaremongering’ but there is little doubt that business would be affected by a vote for independence. The impossible question to answer is ‘how much?’

There is clearly the potential for significant differences between an independent Scotland and the rest of the UK: regulations, employment law and the tax regime would all be different. Different businesses would be affected in different ways and the simple answer at the moment is that nobody knows who the winners and losers would be.

Would businesses leave Scotland?

Quite possibly. Again, it is difficult to estimate accurately and much would depend on factors such as the regulatory framework and taxation regime in an independent Scotland, but inevitably some companies would want to operate under UK law. Standard Life – which employs 5,000 people in Scotland – has warned that it could relocate, and is believed to have already set up subsidiary English companies in case it made such a move.

Royal Bank of Scotland has also voiced concerns, suggesting that an independent Scotland could damage its credit rating. Clearly, many major businesses have worries and in the event of a ‘yes’ vote it is likely that at least some of them would vote with their feet and cross the border.

What about the banks?

At the moment, Scottish banks and other financial institutions operate under UK law. In the event of a ‘yes’ there would need to be a new regulatory framework and new measures for consumer protection. Against that the pro-independence lobby point to many European countries roughly the size of Scotland that operate banking and financial sectors quite successfully – albeit very often under the EU umbrella. What’s clear is that Scotland cannot vote for independence on September 18th and be admitted as a member of the EU on September 19th.

How would financial services be affected?

Inevitably the regulatory regime would change in an independent Scotland. It may well be the case that some products and services currently available may cease to be available. At the moment, clients’ policies and investments are governed by UK law – whether a policy set up under UK law could still operate under that law if Scotland were independent is a question which must have the barristers rubbing their hands. So yes, financial services and its regulation could very well change, as could the taxation treatment of clients’ policies and investments.

We hope the above is helpful – sadly, for many of the issues there are far too many ‘don’t knows’ for comfort and as September 18th draws closer, it is likely to be the rhetoric – not the clarity – which is increased.