149 days of tax

Tax Freedom Day is the day when Britons begin working for themselves rather than the taxman and falls on May 30 in 2011, compared to May 27 in 2010. The Adam Smith Institute calculates this each year and this is the latest.

http://www.adamsmith.org/blog/tax-and-economy/tax-freedom-day-will-be-30-may-2011/

The main reason for the three extra days appears to be the rise in VAT (Value Added Tax), which increases from 17.5 per cent to 20 per cent on January 4.

Tom Clougherty, executive director of the Adam Smith Institute, described Britons as being “desperately overtaxed”.

It is interesting to view the tax freedom date and the comments of Mr Clougherty alongside the recent Government announcement that a review of the tax system will be undertaken with 'tax simplification' the aim. Call me a cynic but I just don't see the taxation system becoming simplified anytime soon and I have less faith that the overall tax burden on the nation will fall...

Tax Freedom Day has moved on six days since 2009, but remains less than the previous decade’s peak of 2006 when Britons needed to work until June 4 before they began working for themselves rather than the taxman.

So this means the average Briton will have to work for 149 days to pay their taxes in 2011. Every penny earned in the UK between January 1 and May 29 will be taken by the taxman to support government expenditure.

I have long maintained with my client facing work that much of my value lies in helping clients to pay less tax on their income - legitimately - and that whilst I cannot promise returns of x% or y% each year I can guarantee savings of 20% or 40%. This makes a big difference in capital needed to support income and the benefit increases over time, especially when tax freedom day moves later in the year.

Crikey! BAD News about pensions - FOR ME!

Readers of yesterday's blog would have rejoiced over the latest changes to pension legislation.

Not such good news for me as in the post today I received two annually updating technical reference books, over 1,000 pages combined, total cost to me North of £200 - much of which is now out of date.

Bah!

Crikey! - Good News on Pensions

Today, the government has given more details of how it is planning to make changes to pension legislation from April 2011.

These include:
• no specific age deadline for buying an annuity
• a cap on the amount "drawndown" annually from a pension pot by an individual without buying an annuity
• a withdrawal of this cap if the individual can prove they have enough income to never run out and rely on the state.

The level set for this cap, and the minimum income required for the cap to be taken away, will be part of an eight-week consultation on the proposals.

Regular readers and clients of Green Financial would have been aware that there was an interim measure announced in the budget that increased the maximum annuity age from 75 to 77.
Assuming the new proposals get through Parliament the new rules should be in place by April 2011.

One of the best announcements, in my opinion, was the removal for many of income drawdown limits. As long as a lifetime income of £20,000+ can be secured, there will be no limit. In effect, you’ll have to show that you won’t run your fund down to nothing and THEN go cap in hand to the state for benefits. Thus rewarding those that save a decent sum into their pension, letting them extract a level more commensurate with what they were used to during their working lifetime.

There is a sting in the tail – tax on death benefits looks set to rise to 55% from 35% thus making any kind of pension related / inheritance tax loopholes look unlikely but this is a fair trade off given the positives and the real purpose of pensions ie to provide income in retirement, not to bypass inheritance tax for future generations

It remains to be seen what the actual effect of deferring annuity purchase past 75 will be as ‘mortality drag’ may have a detrimental impact.

Mark Hoban, financial secretary to the Treasury says "The more you save for retirement, the more control and flexibility you will have and ultimately, the more you will be able to pass on to your family on death. Combined with the tax breaks available on pensions, these simple messages will be very popular with investors."
To encourage people to take greater responsibility for their financial future, including in retirement, we need to give people greater flexibility over how they use the savings they have accumulated”

I started on a positive but cynically perhaps, will finish on a slight negative. Let’s hope, unlike so much other recent legislative change, that the positive ‘headlines’ are not undermined with negative detail. More on the new proposals as the details emerge…
Ian Green

for Green Financial Employer Clients - Am I ready to NEST?

Many of my employer clients are now being bombarded with info on the impending 'NEST' pension requirements, due to land in 2012.

For most Green Financial clients, compliance with the new rules will be simple.
It will likely mean increased overall pension expenditure on employee contributions and ensuring this is factored into budgets and accounting, but the actual legislation itself should hold no fears.

Do contact me if you have any questions. Meanwhile, there is some helpful info below. I am indebted to the pensions technical department at AEGON for originating much of the following text:

For many Green Financial employer clients, so-called ‘self-certification’ (see orange text below) will be the best way to meet their employee pension contribution obligations from 2012.
But it's likely to mean reviewing the current contribution structure and making changes to scheme design. This will take time, so we need to start taking action now.

From October 2012, employers will have a number of new obligations. Not only will they have to auto-enrol their eligible jobholders (see jargon list at end of blog) at the right time, they also have to make sure jobholders benefit from at least the minimum contribution into an auto enrolment scheme.

This creates a challenge for employers. The problem is that the vast majority of ‘defined contribution schemes (such as group personal pensions or stakeholder arrangements) don't base contributions on qualifying earnings. Contributions tend to be based on basic salary with no salary offset. This means you will have to carry out onerous checking either monthly or yearly, to make sure that every jobholder in an auto enrolment scheme receives the minimum contribution. And if the contribution actually turns out to be less than the minimum, the employer has to make up the difference!

Of course, one solution to avoid this administrative hassle and complexity would be to simply base contributions on qualifying earnings. But this 'levelling down' of contributions means the first £5,715 a year wouldn't be pensionable, which means lower earners, especially women, would be worse off – not something that most employers would want to do to their valued employees.

A much simpler solution, avoiding onerous checking and reducing administrative costs, while also reducing the risk of levelling down of contributions, is for employers to self-certify each year that their contributions meet a minimum test. This is appropriate for schemes which have high total contributions. The Pensions Act 2008 allows for a process known as self-certification. This allows employers to certify with the Pensions Regulator that, overall, their scheme meets the quality test for a DC scheme. The pension industry and employer groups have worked very closely with the Department for Work and Pensions (DWP) to develop a workable self-certification model. So far the model is still a proposal, but the approach has been accepted in principle by the government.

Under the proposed self-certification model, a scheme meeting one of the following tests allows the employer to certify that it meets the quality test:

Test 1
The scheme has minimum contributions for each jobholder of 9% of pensionable pay where the employer pays a minimum 4% contribution.

Test 2
The scheme has minimum contributions for each jobholder of 8% of pensionable pay, where the employer pays a 3% minimum contribution, but pensionable pay is at least 85% of total pay. The ratio of pensionable pay to total pay can be calculated as an aggregate across the scheme.

Test 3
The scheme has minimum contributions of 7% of pensionable pay for each jobholder (where the employer pays a minimum of 3% contribution) and 100% of pay is pensionable.
Employers will need to self-certify that their scheme meets the quality test every year.

The minimum contribution will be phased in from 2012. It's expected that the self-certification test will reflect this. We expect the DWP to issue the self-certification draft guidance and draft regulations before the end of the year.

Action for Green Financial Clients

Start talking to me now about your staging date, how you’re going to comply with the new obligations and how you can meet the minimum contribution. I can help you to:

• review the total contributions level for all categories of member
• review the employer's contribution for all categories of member
• review the definition of pensionable pay against gross earnings
• draw up a plan to increase contributions using a phased approach
• find out when the employer's staging dates falls
• consider salary exchange
• consider matching of contributions and save more today
• put together a communications plan explaining the value of saving

Jargon Buster:

Eligible jobholder – employee who earns £7,336 (in today's terms), aged at least 22 years but under state pension age and ordinarily works in Great Britain.

Qualifying earnings – a band of earnings between £5,715 (in today's terms) and £33,540 (in 2006/07 terms) with proportionate amounts for a period less than 12 months. Earnings for this purpose include salary and a number of variable payments such as bonuses, overtime, commission, shift allowances and some statutory payments, for example Statutory Maternity Pay.

Staging date – the latest date an employer must start auto enrolling eligible jobholders.

Minimum contributions – 8% of qualifying earnings, of which at least 3% must be paid by the employer. Any balance is payable by the employee and will include tax relief from the government.

Quality test – for a defined contribution (DC) scheme, this is a check to see that at least the minimum contribution is paid into a scheme.

Auto enrolment scheme – an occupational pension scheme or a personal pension that meets the quality test and allows the jobholder to join without the need to make any choices or provide any information.

The above is correct as of my understanding as at November 2010. Further updates will be made on this blog as and when required.