Important pension notice: 55% ‘death tax’ abolished

Ahead of the major pension changes already announced for April 2015, the Chancellor, George Osborne, this week announced another shift in pension policy that could have a big impact on many savers and their financial planning requirements.

Speaking at the Conservative Party’s Annual Conference, Mr Osborne announced the abolition of a so-called ‘death tax’, which can see any pension remaining on death taxed at a rate of 55%, before it is passed on to a beneficiary. The change, as with the other changes to pensions already announced, will be introduced from April next year.

The 55% tax is already waived when pension savings are passed to a spouse or a financially dependent child under the age of 23. The government estimates that the new change announced by Mr Osborne will impact an extra 320,000 people outside of the above groups. The details of the changes revealed different permutations for beneficiaries depending on how old the pension holder is at the time of their death.

• If the deceased is 75 or over, beneficiaries will pay only their marginal rate of income tax, with no limit on how much of the pension fund can be accessed at any one time.
• If the deceased is under 75, access to the pension fund will be tax free, including situations where the pension has already entered drawdown.

The proposal only impacts defined contribution pensions, although there may be new options to consider for individuals in final salary schemes. Similarly, the vast majority of the 320,000 people per year the government estimates this change will benefit will be individuals already in retirement. For those who pass away having not yet started to access their pensions, passing on savings to a beneficiary is a simpler affair, as your pension is counted as being outside of your estate for tax purposes.

The change has been seen by many as a continuation of the changes announced by Mr Osborne during March’s Budget. During that announcement, the Chancellor effectively abolished the need for savers to rely on an annuity in retirement, a device which could also see a portion of pension savings effectively wasted, when it comes time to pass on your estate to your family. The new taxation system announced this week effectively aligns the taxing of pension savings on death with the new approach to pensions which is due to become active in April 2015.

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Sources: George Osborne Conservative Party Conference speech (29/09/14), http://www.theguardian.com/money/2014/sep/29/who-benefits-abolition-55-percent-tax-pensions, http://www.bbc.co.uk/news/uk-politics-29402844

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

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

More over-55’s now seek financial advice but there are still plenty who could benefit from talking to an adviser

More over-55s are turning to financial advisers than did so four years ago, new research from Aviva into the shape of financial advice for retirement in 2014, shows. But with 77% of over-55s having no relationship with an adviser – and no plans to establish one – Aviva’s findings reveal a worrying lack of understanding about the nature of financial issues in later life.

• Almost one in five (18%) of over-55s have spoken to an adviser in the last year.
• Sadly, 77% are entirely out of the loop with no plans to seek advice.
• Growing numbers are being surprised by the reality of retirement incomes.
• When seeking advice, getting the most from their pensions is the over-55s’ number one concern.
• Transparency has improved post-RDR – but many are still unsure on costs.

Almost one in five of over-55s (18%) now have an active relationship with a financial adviser, compared with 14% in February 2010. The biggest change has been among over-75s, with 17% now having a financial adviser compared with 11% four years ago.

Those aged 65-74 remain the most likely to use a financial adviser, with 19% having done so in the last year. Just 16% had done the same in February 2010. A further 3% of all over-55s are currently looking to establish a relationship with a financial adviser. However, with 3% unsure, this leaves more than three quarters (77%) with no active relationship with a financial adviser and no plans to establish one.

The advice gap is especially worrying in light of the widening gulf between expectations and reality when it comes to retirement incomes. The percentage of retired over-55s who are disappointed by their retirement income has increased from 10% to 15% since February 2010.

Encouragingly, more retired over-55s have incomes beyond their expectations than was the case four years ago (19% in January 2014 from 15% in February 2010). Over-55s are also more likely to underestimate than overestimate their retirement income (19% v 15%).

Getting the most from their pensions (52%) is the most pressing retirement issue over-55s would discuss with a financial adviser, which is a good sign, given the recent review of the annuities market and the potential to select a bad pension deal without proper financial advice.

Other priorities for over-55s include tax efficiency, budgeting for care costs and other major expenses, and options for drawing on their total wealth to cover the costs of retirement. 11%, sadly, were seeking advice on how to manage the debts they had.

Sitting down with an adviser can help to answer many of these questions for over-55s and can help to uncover alternative plans and opportunities in retirement. Getting financial advice can also help you to plan for the unexpected, giving you a full picture of how you are likely to be able to live your retirement.

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Sources: aviva.co.uk

Don't put your retirement dreams on hold!

Almost two thirds of people who had planned to retire in 2011 would consider having to pospone retirement and continue working in order to give a vital boost to their retirement income.

New research from Prudential's Class of 2011 survey has revealed that almost 50% say they will definately continue working beyond their planned retirement age in order to supplement pensions and build further savings before they retire.

The Prudential Class of 2011 surveyed people who had the original intention of retiring throughout this year. The results highlight the growing trend of individuals phasing retirement gradually in the UK as a result of the reality of having to fund a much longer period in retirement.

The survey highlighted that over 30% would consider working for up to a further two years if it secured them a greater income in retirement. Where more than one in five would consider an extra two to five years working, 8% said they would be prepared to work for five to ten years longer.

Not all those surveyed planned to continue working beyond planned retirement due to financial constraints as many were happy to continue working on. Over 50% said they did not feel ready to retire and actually still enjoyed working.

I see more clients nearing retirement with a more flexible approach to how and when they retire and the option of part-time and consulting work is attractive for many clients.

The secret to all of this is in carefully planning your retirement in advance and arranging with professional financial advice appropriate investment portfolios and a suitable retirement strategy.

This prevents you having to delay your retirement dreams and allows you to stay in control of your retirement aspirations for which should be an exciting, enjoyable and relaxing period of your life.

Government looking to abolish means testing and pension credits creating simpler flat rate state pension

Iain Duncan Smith signalled a move by the government to a flat-rate state pension in a speech today (8 March).

The work and pensions secretary said the government was looking at abolishing means testing and pensions credits.

Mr Duncan Smith claimed the current system was so complex that most people have no idea what any of this will mean for them now and in their retirement.

He argued means testing was demeaning and was known to put people off from making a claim, as well as acting as a disincentive to save.

Mr Duncan Smith said: "Too many people on low incomes who do the right thing in saving for their retirement find those savings clawed back through means-testing.

"When they reach pension age they discover that while they have foregone spending opportunities and made plans to be self-sufficient, others, who haven’t saved a penny, are able to get exactly the same income as them by claiming pension credit.

"We have to change this.

"We have to send out a clear message across both the welfare and pension systems – you will be better off in work than on benefits, and you will be better off in retirement if you save."

Mr Duncan Smith said he was seeking a debate on the next generation of pension reform.

He said: "I want a state pensions system fit for a 21st century welfare system, which is easy to understand and rewards those who do the right thing and save.

"My department has been working closely with colleagues at the Treasury on options for reform."

"As the Chancellor made clear late last year, he is keen to look at options for simplifying the pension system, and that is precisely what we are doing."

Maggie Craig, acting director general of the Association of British Insurers (ABI), said the ABI would strongly welcome plans to simplify the state pension to establish a flat-rate payment.

She said: "Ahead of the Budget the ABI has already written to the government urging them to take this step.

"The current system is complicated, confusing and leaves many people uncertain of the benefits of saving."

Joanne Segars, chief executive of the National Association of Pension Funds (Napf), claimed it was a turning point for pensions in the UK.

She said: "Radical state pension reform to create a single, simple and more generous state pension could take millions of pensioners out of poverty, and provide a firm foundation for saving for old age.

"For the first time in a generation, people would know that it pays to save.

"Today's commitment comes not a moment too soon."

Removal of Default Retirement Age

The government yesterday announced its plans to remove the default retirement age (DRA) this year, despite calls from employers to delay the measures, according to reports.

The decision will provide more choices to people in work about when they wish to retire. At present it is possible for employers to make staff retire when they reach the age of 65.

The Default Retirement Age will be phased out over a period between 6th April 2011 and 1st October 2011. It will ne necessary for employers to give staff a notice period of at least six months when using the Default Retirement Age to force retirement.

The main reason for the change is due to people living longer and healthier lives. Forcing people to retire at age 65 is often causing financial difficulties where people are relying on the ability to keep working in older age to supplement other sources of retirement income, such as the State Pension.

Ed Davey, minister for employment relations, consumer and postal affairs, said the government would help businesses deal with the change.

‘Older workers have a lot to offer in the workplace and it's time we got rid of this outdated form of age discrimination. We will do all we can to support businesses with the change,’ he said.

People should not necessarly rely on the removal of the default retirment age as a retirement strategy as individulas may not be able to work beyond age 65 due to for example ill health.

It is important to adopt a flexible retirement strategy and create a personal Financial Plan and this move gives more flexibility to individuals in doing so.

Baby boomers turn 65 in 2011!

2011 is a remarkable year where record numbers of the 'baby boom’ generation reach retirment age 65 throughout 2011.

The Department for Work and Pensions have advised that around 650,000 people reach the age of 65 this year. It has been suggested that this will be the largest number to reach age 65 in one single year since the records began.

There will also be a record number of men and women turning 65 next year with around 800,000 expected to turn 65 in 2012. This is an indication of the ageing population problems still to come.

Turning 65 is an important retirement age for many men and women and it is an important time to consider the many decisions that should be made around retirment and the many retirement payment options available.

If this is a time where you or someone you know will be reaching age 65 either this year or in 2012 it is an ideal time to consider your overall financial planning requirements. It is recommended you discuss these retirement options with an independent financial adviser who is in a position to review with you the many retirement payment options available to you.

This will allow you to gain an impartial view on your options and make better decisions on your retirement future.

Garry Hale
www.hkwealthmanagers.co.uk