Archive for the ‘Pensions’ Category
For whom the Scheme Pays? Final Salary Schemes and High Earners
As we mentioned in our last post we were worried when we started the blog whether there would be enough to write about! We certainly needn’t have worried.
This article is really focused on employers who run final salary schemes and are likely to have members of their scheme who are long-serving and who probably earn over about £60,000. Equally it will apply to you if you are one of those members. Otherwise you may want to click away or speed read this post.
This month the Government will publish a piece of legislation that is rather bizarrely called “scheme pays”. Well why not – someone has to pay after all!
Scheme pays relates to will make it much easier for individuals to pay annual allowance charges that they may face. Great news for members facing a big tax bill but employers need to keep an eye on the cost implications for the scheme. The charge results from the annual allowance for pensions tax relief being reduced from its current level of £255,000 to £50,000.
The problem is that most employers thought that faced with the prospect of a big tax bill most members would opt for a cash payment rather the increased benefits. Now there’s likely to be a fly in that particular ointment. Scheme pays will make it possible for members to make the pension scheme pay most of the tax bill for them. Other than in exceptional circumstances can the scheme refuse.
Scheme pays will take much of the sting out of the annual allowance charge by reducing the cash flow strain on the individual. The current approach that most employers are adopting of offering affected people, particularly in final salary schemes, a choice of whether to maintain their full pension and pay the tax (stay-and-pay) or take a restricted benefit with a cash top-up, will find that for their people stay-and-pay is the better choice.
This is bad news for employers. This is because the cost of providing the benefits and the cost of administrating scheme pays will be significant. Draft legislation has already been published that means a scheme must provide the member with a Pensions Savings Statement. This will calculate the pension amounts for that tax year, and the three preceding years. Coupled with the difficulties of an annual ‘scheme pays’ event, the administration costs could well be thousands of pounds a year for each individual member involved.
Employers may well need a Plan B or even C to cope with all this. Plan B may be to loo at any offer you have made members to make it more attractive if the cash being offered is not enough to make this worthwhile for the member.
Plan C will apply to those employers who want to reduce costs and is simply to remove the choice altogether. Given current economic conditions employers may well look at introducing a system that makes sure that benefits granted each year are not more than the annual allowance.
Coupled with the reduction in the Lifetime Allowance that we wrote about in our earlier post Pension Snakes & Ladders this all means if you are running a final salary scheme and have higher earners you need to be looking at all this to make sure that you understand the implications.
If you would like some help with this, or if your existing consultant hasn’t highlighted this yet, 44 Financial would love to assist. Drop us a line at talk2us@44financial.co.uk.
Pension Snakes & Ladders – are you protected?
You may remember, back in the days when we thought that Pension Simplification would be just that, the government introduced a limit on the amount of money you could build up in registered pension schemes. This is known as the lifetime allowance. It started off at £1.5m in 2006 and has gradually grown to £1.8m in this tax year.
If you were affected by this limit, or thought you might be in the future, you could apply for protection. Not the type of protection you get from guys with sharp suits, wide lapels and violin cases but protection from the nasty tax charges that bite when you exceed the lifetime allowance.
In th
is new era of financial austerity high earners are bearing their share of the financial pain. The Finance Bill 2011 will introduce a new lifetime allowance of £1.5m from 2012. It’s the Treasury’s version of pension snakes and ladders.
So basically we are back where we started? No, not quite. The government have said that a new type of protection will be introduced. They’ve called it Fixed Protection. It will allow individuals to take advantage of the current £1.8 million lifetime allowance so long as they build up any further benefits. If you’ve claimed protection under the 2006 rules you can still have up to the £1.8m limit.
If you employ high earners with substantial pension benefits it’s worth looking at those whose pension values are between £1.5m and £1.8m
If you are an employee and you think that you may be affected you really should get some specialist advice.
Well there you have it. Pensions Simplification? As if!
The Devil is in the Detail – Retirement Age Regulations Published
You’ll probably remember that we wrote in our blog recently about the removal of the Default Retirement Age from April. The post is here.
Just a short post today to keep you up to speed. As you know we aim to trawl through all the information slushing about online to bring you stuff that’s relevant, fresh and that we think you’ll find interesting. If you are not one of our clients we’re sure that your advisers will be doing the same for you, won’t they?
Those all round good eggs at DLA Piper LLP have issued an update on the new regulations that have been issued by the government regarding the removal of the Default Retirement Age. In the old days the ink would still have been wet it’s the information is so fresh!
You can click through to the article here. There’s some really good stuff in there on Group Insured Benefits and the Transitional Arrangements as well as an excellent summary under Implications. I must say that the stuff that DLA Piper issue is really good like that in giving a good clear summary.
The insured benefit stuff isn’t quite as we were led to believe. In the previous post we wondered whether the government would “walk the talk”. Well the good news is that it has – almost.
The exemption only applies to employees who are the older of 65 or State Pensionable Age. At the moment that’s not a problem as they are broadly the same – younger for women. The government are planning to move us all to a State Pensionable Age of 68 in the future. That means you could be looking at covering employees up to 68.
Employers will need to give some thought to whether they still want to provide benefits like life assurance, income protection and critical illness to employees over State Pensionable Age.
As if you didn’t have enough on your plate to think about!
£33bn Improvement in pension deficits in FTSE 350 companies – Hymans Robertson
Baby Boom or Bust – the financial tsunami
As the first wave of baby boomers turn 65, the number of people in the UK approaching retirement is growing at a pace never seen in our history. 
However, the problem is, for many of them, their bank accounts aren’t.
The crush of the economic downturn – which saw many people lose some of their life savings – has forced some people to work several more years than they originally hoped for when they were looking at their retirement plans.
Others simply haven’t saved enough of a nest egg over the decades to live comfortably in what should be the best years of their lives.
Just under half (45%) of employees in the UK don’t have a pension plan. The Office for National Statistics latest Pension Trends publication states that in 2007 about 9 million people were members of a company pension scheme and about 7 million were paying into a personal pension plan. The UK working population hovers around the 29 million mark. So that means only 55% are using a pension plan to save for their retirement.
A Financial Tsunami?
Baby boomers may be reaching their retirement in waves, but a financial tsunami could be in their wake.
New research by the Oddfellows Friendly Society and the Centre for Retirement Reform (CRR) into understanding of retirement income has highlighted a worrying knowledge gap among those approaching retirement.
The survey – which was conducted among 1,200 Oddfellows members aged between 55 and 65 – found that on average, £25,000 per year was considered enough to provide for a reasonable standard of living.
Nearly 20 per cent of those yet to retire either didn’t know or didn’t answer when asked how much they would need to save to enjoy the post-retirement lifestyle they want.
More worrying was the fact that most of those who said they did know actually underestimated the figure. The average answer was £380,000 when it’s closer to £500,000. According to the Pensions Policy Institute the average size of pension fund used to buy an annuity was £24,330. Unless you have a company pension to bridge the gap, or have accumulated 20 of these “”average “pension plans, it’s likely you’ll miss the target.
Clearly if these baby boomers want to maintain the same standard of living, it’s going to be difficult. It’s not an immediate problem, but it’s a problem that’s going to creep up on us in the future.
One of the effects of the prolonged economic slump is that many workers aren’t retiring at 65 and are now working for several years more than originally planned just to comfortably exist. With the removal of the Default Retirement Age making it more difficult for employers to justify retiring an employee some people who are currently working may never retire.
So what’s the answer? 
Is there one? In my previous post I wrote about my concern that we were sleepwalking towards a very poor old age.
The government is taking some action by forcing us to save for retirement with automatic enrolment into workplace pensions. However, you’re going to have to go some to build up £500,000 of a pot by the time you retire.
Many people have grown up over the last few decades with no real saving mentality or habit. Some are even largely excluded from financial products – sometimes voluntarily. Brian Pomeroy – who is the Chairman of the Financial Inclusion Taskforce – said recently:
“The single thing which is most likely to make someone who is really distrustful of the banks open a bank account is wanting a Sky TV contract.”
At the other end of the scale the boom in house prices over the last twenty years has lulled people into seeing the equity in their house as a means of financing their retirement. However, in words of one campaigner for pensioner rights “You can’t eat the front doorstep”.
Realistically there is no magic bullet. As a nation I believe that we have to:
-
Educate our children about the need to save from an early age.
-
Get finance into the school curriculum.
-
Realise that the government isn’t going to support us when we retire.
-
Make financial products simpler and more straightforward.
-
Make our pension system easier to understand for the man in the street.
-
Plan ahead. Having a financial roadmap helps us navigate life’s ups and downs.
Most of all it’s really simple – we’ve all got to save long and save hard for our future.