Pension 25% TFC won't be abolished?

Pensions minister Steve Webb has said the 25% tax free cash lump sum from pensions will not be scrapped.
This was in conversation with professional publication 'New Model Adviser'

The government has recently faced calls to abolish the 25% tax free cash lump sum to make up for lost taxes resulting from this year’s Budget announcement, that post retirement pension fund withdrawals would be taxed at a person’s marginal rate rather than 55%.

Labour leader Ed Miliband has called for the lump sum to be limited to £36,000.

Some Green Financial clients (over the age of 55)  have requested their 25% 'just in case' the lump sum does go.
Green Financial have never been ones to advise on financial planning based on speculation. Almost every year in my almost 2 decades in this profession, I've heard the 'rumour' that 40% tax relief on pension contributions will go!

So it's a personal decision for each client.

And if a politician is saying "it won't be scrapped" then surely that's enough?

After all, when has any politician, from any party, ever gone back on their word...?
Chortle.


UPDATE - 22 JULY 2014

Yesterday, the Government gave a clear green light to the radical rewriting of the pension rule book. The Government response to the 2015 ‘freedom & choice' consultation delivers on the Chancellor's Budget promise of much more DC pension flexibility and provides further detail on some of the changes in store from next April. Advisers can now start planning in earnest to ensure clients make the most of this new pension freedom when it comes.

Today's announcement confirmed:

• DC flexibility will go ahead from April 2015.
• A £10k AA will apply after a client accesses flexibility, to counter abuse of the new freedom.
• The guidance guarantee will be delivered by a range of independent providers, including MAS and TPAS.
• Tax-free cash will stay at 25%. [IG - there it is]
• DB transfers will still be allowed - but only after professional advice.
• Death benefit tax will come down from 55% - new tax rate to be confirmed in Autumn Statement.
• Normal minimum pension age is going up to 57 from 2028.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/294795/freedom_and_choice_in_pensions_web_210314.pdf

Auto-Enrolment, July 2013 update

Flexible drawdown

Flexing drawdown for better client outcomes

This article has been written by the technical department at Standard Life

Flexibility to vary income to adapt to changing needs is perhaps the key appeal of income drawdown. So the drawdown changes announced in March's Budget create a catalyst for advice to help drawdown clients achieve better outcomes in retirement.


Advice is the key to good client outcomes

Standard Life's research shows that, particularly for wealthier clients, income needs are unlikely to match the conventional pension income shapes produced by annuities or defined benefit schemes.

SMILE!
•For many, we've identified a 'retirement income smile' pattern. This is driven by higher demand for income early in retirement when clients are still active. Income needs drop off with age, then pick up again as personal assistance and long term care needs develop.

•Others simply want a relatively modest, sustainable income – but with scope to turn it up if their circumstances change.

•Some wealthy clients' main need is to draw as much income as early as possible to gift to loved ones, via trusts or pension plans as well as directly, as part of a wealth transfer strategy.

Income drawdown is well suited to meet all these diverse client needs and aims. And the higher the income limit available, the more room there is to manoeuvre. Which is why the Budget announcement was so welcome.

But it's not about always taking the maximum allowed, it's about having the flexibility to take more income when it's needed and cut it back again when it isn't.

This is where advice is key. Drawdown isn't a 'self-service' option. It's complicated. There has never been a better time for advisers to demonstrate their true worth by helping drawdown clients do the right thing to exploit this flexibility to attain their financial goals.



Where did it all go wrong?

Drawdown users, and their advisers, have had a rough ride in the last few years. Markets have been difficult. But much of the pain has been imposed by the drawdown regime itself:

•The linking of drawdown rates to gilt yields means that plunging yields fuelled by QE have had a disproportionate impact on income limits.

•And the 20% limit cut, and new GAD tables, in 2011 simply compounded the problems.

A typical example illustrates this:

•A 60 year old man starting drawdown with a £100,000 pot in August 2007 (when gilt yields were 5.25%) would have had an income limit of £8,280 a year.

•At his 5-yearly review in August 2012, even if he'd maintained his £100,000 pot, this client's new income limit would only have been £5,300 (56% lower than the old limit)! This is partly owing to the 20% headline limit cut – but primarily because, by then, the gilt yield had dropped to 2%.

It's a case of the tail wagging the dog. Logically, with the same pot having to last him 5 years less, this gent's allowable income should have gone up!



Light at the end of the tunnel – an advice opportunity

Thankfully core elements are coalescing to create light at the end of the tunnel.

•Most importantly, gilt yields appear to have at last bottomed out (IG: but remember, this may not be the case and they could fall further).

•Markets remain volatile, but they're well up on the lows of 2009 that saw the FTSE 100 drop to almost 3,500. And the increasing availability of sophisticated, risk-based investment solutions makes it easier to reduce the volatility that can be so damaging in a decumulation environment.

•These factors, combined with the move back to 120%, should get income limits back to more realistic levels from the start of drawdown users' next income year after 25 March 2013.

Here is an example:

Edith started pension drawdown on 1 August 2012. She was 60, her drawdown pot was worth £150k and the GAD drawdown yield was 2.0% - giving an income limit of £6,450.

If no action is taken, this will simply increase by 20% to £7,740 from 1 August 2013.

But what if Edith triggers an earlier review by paying more money into her drawdown pot on 30 March? Changes since August could really boost her income limit:

•Unisex rates: Edith now benefits from 'unisex' (male) drawdown rates, following the implementation of the EU Gender Directive into UK law in December 2012.

•Rising yields: The GAD drawdown yield has gone up from 2.0% to 2.75% since August 2012.

•Rising markets: The FTSE has grown by about 25% over the same period. Suppose Edith's drawdown fund has done the same. So, even after taking her maximum £6,450 income, it's now worth about £180k.

•Getting older: And Edith has had a birthday, so is now 61.

Edith's new 100% income limit is £9,360 – allowing her to take an extra £2,910 from her drawdown pot before her new income year starts on 1 August.

This will increase by 20% to £11,232 on 1 August - over 45% more than if no action was taken (and over 74% higher than her August 2012 limit).


And the Government's kick-start of an early review to get GAD drawdown rates themselves back to reality mean there's more good news in the pipeline.


For example, improving market conditions mean advisers can potentially help boost clients' income limits sooner than the start of their next income year. This can also turbocharge the effect of the 20% hike when it comes. An early income review can be triggered simply by phasing more funds into an existing drawdown pot. Or by requesting an ad hoc limits review from the start of the new drawdown year.



This sort of flexibility supports holistic advice strategies that help put the client's needs first. Which is what drawdown is all about. But good professional advice is the key that can unlock it – creating the fundamental building blocks for the successful use of income drawdown as part of an efficient, flexible, but sustainable wealth decumulation strategy.

If you are a client of Green Financial - or not - and would like an income drawdown review, please contact me

Pensions as food?

Today I've had my eye on pensions and food after @GHLumsden posted a piece suggesting ISAs were like fish 'n' chips. He's now comparing pensions to kebabs (?! - you can view here : http://citywire.co.uk/money/how-pensions-work-and-why-theyre-like-kebabs)

Later today whilst reading the professional press I noted Andy Zanelli of Axa saying "Advising on pensions is like peeling an onion. As you peel off the skin it starts to get painful and by the time you have chopped, sliced and diced, the eyes are really stinging and full of tears"
As an IFA, I know the feeling Andy.

Axa Andy's quote reminded me of seventy-year-old Eletharias of Greece. I saw him on the news last month collecting onions from some wheelie bins.


Since the euro crisis he says he cannot afford to go the supermarket any more, so for the past few months he has started rummaging for food in dustbins. He goes out in Athens at night so that no one sees him.
"Since my pension was cut, I can't buy food so I look through the garbage," he said.
http://news.sky.com/story/20186/families-crumble-in-greeces-economic-crisis
 
Just a few days ago NEST, the new goverment designed compulsory pension thingy showed the results of a survey : Food, fun and football? ... why ‘Tomorrow is worth saving for’
The survey suggests that low confidence, rather than unwillingness, may be one of the main reasons for people not saving enough for their later lives.
http://www.nestpensions.org.uk/schemeweb/NestWeb/includes/public/news/Food-fun-and-football-NEST-asks-consumers-why-Tomorrow-is-worth-saving-for.html
The majority (71 per cent) agree they may not have put enough aside because they don't want to make the wrong decision about saving for retirement, whereas nearly half (47 per cent) agree it’s because they don’t know enough about what would be their best option.

Here's a final sobering statistic that I calculated myself. If you retired at age 60 and ate a Happy Meal 3x a day (say £3 for the McMeal) and you lived for 25 years, even without inflation, that would be over £80,000 you'd spend on food. From a taxable pension income that means a fund of £100,000!
http://www.mcdonalds.co.uk/ukhome/more-food/happy-meal.html

So if you have aspirations to live happily ever after, but eat more than just happy meals, do visit your retirement planning. Perhaps even consider allowing Green Financial to assist ...




 

End of Tax Year Tips 2011-12

workplace pension reform – quick update

In the run up to 2014 (for most Green Financial employer/pension clients) please find following a quick update

The pension scheme you have in place as an employer has a number of standards as a minimum to be met. These include the benefits it provides and the amount of contributions paid to it. Another standard is auto-enrolment for all eligible workers and for any new employees when they become eligible.


Who or What is ‘eligible’?
An eligible employee is someone earning above the income tax personal allowance (2011/12 = £7,475). They must be between the ages of 22 and the state pension age, which varies depending on when you were born and if you are a male or female. You can find out your state pension age on this government web page : http://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/DG_4017919

Qualifying earnings
For auto-enrolled employees these are between £5,035 & £33,540.

Contributions
Eventually, when all the various phases have finalised, there will be a contribution of 8% of qualifying earnings to the pension. This will be made up of a minimum of 3% from the employer, with 4% from the employee and the remaining 1% as tax relief.

This will need to be in place by October 2017. Until then, from Oct 2012 to Sept 2016 the minimum will be 2% of qualifying earnings with at least 1% from the employer and Oct 2016 – Sept 2017 a total of 5% with at least 2% from the employer.

However, there are ‘staging dates’ for taking part as an employer depending on your size, as measured by number of PAYE employees. Big companies with 120,000 or more employees are first, in October 2012. Then until July 2013 other companies join in. Those with less than 3,000 employees will be summer 2013.

Those employers with 50 – 250 employees will be spring to summer 2014 and those employers with less than 50 employees phased in from summer 2014 to autumn 2016. The exact date will depend on your tax reference.
Clients of Green Financial can contact us to discover their exact date if they wish to know it. We will be in touch nearer the time though.

The main consideration at this time is budgetary – the employer contributions will need to be funded and budgeted for so it is worth starting to consider now.


There is more generic information regarding workplace pensions and NEST here on this government web page
http://www.direct.gov.uk/en/Pensionsandretirementplanning/Companyandpersonalpensions/WorkplacePensions/DG_183783

After all this regarding auto-enrollment criteria, employees will be able to opt out of auto enrolment! More info here:
http://www.direct.gov.uk/en/Pensionsandretirementplanning/Companyandpersonalpensions/WorkplacePensions/DG_200723

Retirement + 2 children = 49%

New research among 45-65 year olds by Standard Life reveals having children living in your household can have a big impact on your retirement decisions.
Almost half of respondents (49 per cent) with two children in the household have no financial plans to provide for the future, compared to just over a third (35 per cent) without children. Children also impact decisions on when to stop working and retire. You are more likely to retire later if you have children in the household with 10 per cent of adults who aren’t retired not planning to retire until 71-75 compared to only 2 per cent who don’t have children living with them.

Price inflation

Taking a career break or deciding to work part time can have a significant impact on your pension fund at retirement. A female saving £150 a month, increasing annually in line with price inflation from age 20 to age 65, could have a pension fund of £559,000 *1.
Taking a 5-year career break from age 30 during which pension contributions stop reduces the pension fund to £480,000 - a decrease of over 14 per cent. If you work part-time and cut in half your contributions from age 30 onwards this could reduce the pension fund to £380,000 - a decrease of over 31per cent.

Loss of pension

John Lawson, Head of Pensions Policy at Standard Life said: “It isn’t surprising that those with children living in the household have even more financial constraints than those without. Apart from the actual cost of bringing children up there are so many other considerations these days - such as childcare costs, then for some there are school and university fees to consider. There is obviously only so much money to go round. But the loss of pension can be a forgotten cost for many when making decisions, in particular by going part time."
But there are things you can do, and it’s never too late. If we can save even a small amount for retirement it can make a difference. How and when we retire has changed, we no longer have to retire at age 65, we can work flexibly for much longer.

Other findings from the research of 45-65 year olds include:
- 34 per cent of those with two children in the household will make up for lost time and travel the world in retirement
- 63 per cent with two children in the household are looking forward to spending their time with their children and grandchildren in retirement
- 44 per cent of those questioned without children in their household and who haven’t yet retired intend to stop working completely.

If you have one child in the household, 42 per cent intend to stop work completely but if you have two children only 27 per cent intend to stop working completely

As part of the Changing Face of Retirement research, Standard Life has published a list of top tips to help people re-engage with their financial planning:

- Don’t panic!
- Seek professional financial advice - see also http://www.iangreen.com/
- Continually review your financial goals
- If you don’t have one, make a plan.
- Ask for a state pension forecast and calculate your state pension retirement age)
see also http://greenfinancial.blogspot.com/2012/01/state-pensions-and-missing-14462581.html

- Review your investments
- Consider deferring taking the state pension at your default retirement age - for every year you defer taking benefits you can increase the pension by 10.4 per cent *2

- If you have moved jobs, ensure you have kept your old employer up to date with address changes so you can claim any workplace pension when you retire

If you can, increase your savings If you’re a higher rate tax payer, ensure you claim the tax-relief. Standard Life estimates 300,000 people are not claiming this currently

The above article is available in the Green Financial January/February client magazine at http://www.iangreen.com/magazine.php or via www.facebook.com/GreenFinancial

Notes:
*1. The pension fund figures assume investment returns of 7 per cent p.a. before charges, an annual management charge of 1.7 per cent p.a. and price inflation of 2.57 per cent p.a. The first monthly contribution is made at exactly age 20 and the last contribution is one month before the 65th birthday. The pension fund of £559,000 adjusted for price inflation in today’s terms would be £184,000 at age 65. A five year career break would reduce the figure to £158,000 in today’s terms.
Reducing contributions by half from age 30 would reduce the figure to £124,000 in today’s terms.


2. Source: DirectGov.

How have the pension income drawdown rules changed from 6 April 2011

How have the pension income drawdown rules changed from 6 April 2011



Some important changes were made to the pension benefit rules from 6 April 2011.

In particular:



•Pensions and lump sums no longer have to be taken by age 75;

•New income drawdown rules have replaced the existing unsecured pension (USP) and alternatively secured pension (ASP) rules, which have been abolished;

•A new type of income drawdown, known as flexible drawdown, is available for those who meet the new minimum income requirement (MIR);

•Existing USP and ASP cases will be gradually moved fully onto the new basis under transitional rules;

•The death benefit rules, and aspects of their tax treatment, have changed.

Do pensions and lump sums have to be taken by age 75?

After 5 April 2011, benefits don't have to be taken from a registered pension scheme by age 75 - they can just be left in the scheme as unused funds until the member needs them. Where scheme rules allow, this gives members the flexibility to delay taking their pension or tax-free lump sum until after age 75 - potentially even continuing a phased retirement strategy into their 80s or beyond.

However, the benefits still have to be tested against the lifetime allowance by age 75 (as a benefit crystallisation event). So even though the member may not be taking anything from their fund, if those unused funds are greater than the remaining lifetime allowance, a lifetime allowance tax charge will have to be paid. Any lifetime allowance charge incurred at age 75 would be at the rate of 25%, with the residual excess fund retained in the scheme to provide taxable pension income.



This also means that lump sum death benefits paid after age 75, even from unused funds, will be subject to the 55% tax charge - unless it's a charity lump sum death benefit (which can be paid tax-free).



From 6 April 2011, the following lump sums can also be paid after 75:



•Trivial commutation lump sums;

•Trivial commutation lump sum death benefits;

•Winding up lump sums;

•Serious ill-health lump sums (but only from unused arrangements and subject to a 55% tax charge).

What are the new pension income drawdown rules from 6 April 2011?

On 6 April 2011, the unsecured pension (USP) and alternatively secured pension (ASP) rules were replaced by a new single set of income drawdown rules that are similar to the current USP rules. The key features of the new rules are as follows:



Income limits



•The highest income allowed in a pension year is 100% of the basis amount from the GAD tables at all ages (down from the 120% USP limit, but up from the 90% ASP limit).

•The lowest yearly income allowed is nil (the same as the USP rules, but significantly more flexible than the 55% minimum that had to be taken under the current ASP rules).

Those who meet the new minimum income requirement (MIR) may also have the option of flexible drawdown, which allows unlimited income to be taken at any time.



The GAD tables have been updated to reflect recent mortality improvements and extended to cover ages after 75.



Income reviews

•Until age 75, the income limit must be reviewed at least every three years.

•Once over 75, the limit must be reviewed every year.



Death benefits

•Lump sum death benefits are allowed from income drawdown funds at any age (a welcome relaxation for the over 75s).

•For deaths after 5 April 2011, any lump sum death benefit paid from an income drawdown fund (or after age 75 from unused funds) are taxed at 55% (up from the 35% that previously applied under USP). Lump sums paid on or after 6 April 2011 as a result of a death in USP before then will still be taxed at 35%.



Timing

•The new rules apply immediately to any arrangement moved into income drawdown for the first time after 5 April 2011.

•People in USP or ASP before 6 April 2011 will be moved fully onto the new rules over a period of up to 5 years under transitional rules.

What is pension flexible drawdown?

Flexible drawdown is perhaps the most radical aspect of the new income drawdown rules from 6 April 2011. Under flexible drawdown there's no limit on the amount of income that can be drawn each year - the individual can take their entire income drawdown fund out in one go if they really want to!



The usual tax free lump sum is allowed, but any other withdrawals taken by the individual will be taxed as income in the tax year they're paid. If an individual becomes non-UK resident whilst in flexible drawdown, any income drawn when non-resident will be subject to UK tax if they return to the UK within five tax years of taking it.



 

To opt for flexible drawdown, an individual must:



•meet the minimum income requirement (which is a safety net, so they won't fall back onto State benefits); and

•not make contributions to a money purchase pension scheme in that tax year - including employer and third party payments; and

•not be an active member of a final salary scheme at the time of making the declaration.

Protected rights

Protected rights funds can use the normal income drawdown basis but can't go into flexible drawdown.



When will the 2011 income drawdown rules apply to existing unsecured or alternatively secured pensions?

People already in unsecured pension (USP) or alternatively secured pension (ASP) before 6 April 2011 will be moved fully onto the new income drawdown rules over a period of up to 5 years.



Unsecured pension (USP) - income limits

Those in USP on 5 April 2011 will keep the 120% income limit until the earliest of:

•Next reference period: The start of their first new reference period (that is, when their five year review falls due or at any earlier interim annual review); or

•Drawdown transfer: The start of their next drawdown year after transferring their drawdown fund; or

•Age 75: The start of their next pension year after age 75.

New phasing, part annuitisation or pension sharing after 5 April 2011 will still trigger an income review. The limit will be calculated using the new GAD tables, but the maximum income will still be 120% of this revised amount. This review won't change the five year reference date or trigger a move to the new 100% income limit.



So someone who goes into USP before 6 April 2011, or resets their five year reference period by requesting an interim review on the anniversary of their drawdown year before 6 April 2011, may not move onto the lower 100% income limit and more frequent reviews until well after 2011.



Alternatively secured pension (ASP) - income limits

Those in ASP on 5 April 2011 will have their first income review using the new rules at the start of their next pension year.



•Until then, the basis amount calculated at their last income review will remain in force.

•However they can switch off their income, or increase it to 100% of their existing basis amount, immediately from 6 April 2011.

How have the pension death benefit rules changed from 6 April 2011?

From 6 April 2011, there are some significant changes to the pension death benefit rules:



•Lump sum death benefits are allowed at any age.

•For deaths after 5 April 2011, the tax charge on lump sum death benefits paid from crystallised rights is 55% (up from the current 35%).

•Tax-free charity lump sum death benefits are allowed in more circumstances.

•The scope for an IHT charge against pension rights has been narrowed.

Death benefits paid from 6 April 2011 relating to a death before then are still be covered by the old rules.



Death before age 75

On death after 5 April 2011 aged less than 75, any lump sum death benefit is:

•still tax free if paid from uncrystallised rights;

•but normally taxed at 55% if paid from crystallised rights (such as income drawdown funds or a value protected annuity). The only exception is for charity lump sum death benefits, which can be paid tax-free from crystallised rights.

Death on or after age 75

On death after 5 April 2011 aged 75 or over, it's okay to pay lump sum death benefits. This is a sea-change from the previous position on death in alternatively secured pension (ASP), where only a charity could legitimately have benefited from a lump sum on death.

•Any lump sum death benefit paid after 75 (including those from unused funds) is taxed at 55%.

Charity lump sum death benefits

Before 6 April 2011, a charity lump sum death benefit could be paid tax free to a nominated charity on death in ASP where there were no surviving dependants. For deaths after 5 April 2011, this option has been extended to cover death in drawdown before age 75.

To qualify as a tax free charity lump sum death benefit, all the following criteria must be met:

•The lump sum is paid from income drawdown funds; and

•There are no surviving dependants of the member to pay a pension to; and

•The deceased member (or dependant) had nominated a recipient charity (it's no longer possible for the scheme administrator to make a nomination).

Lump sums that don't meet these criteria can still be paid to charities, but they will be treated as normal lump sum death benefits - so if they come from crystallised rights the usual 55% tax charge would apply.



IHT

Before 6 April 2011, pension rights could create IHT liabilities - albeit only in fairly limited circumstances. Two significant changes were made from 6 April 2011 that make the risk of IHT charges even smaller:

•The abolition of the ASP rules mean that the IHT charges that previously applied on death in ASP don't apply for deaths after 5 April 2011.

•The ability for HMRC to levy IHT where they consider that someone has deprived their estate through an "omission to act" (for example, by delaying taking their pension) has been removed for omissions after 5 April 2011.

Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.

State Pensions and the missing £144,625.81

Pension Insight magazine (http://www.pensions-insight.co.uk ) editor Bob Campion recently wrote that the gradual reduction in maximum state pension benefits could end up costing some people £144,625.81.
He calculated this is the amount you’d need to buy an annuity to replace the lost £6,326.84 a year if the maximum state pension reduced from £13,606.84 to £7,280

The £13,606.84 is the theoretical maximum for someone with full basic state pension (BSP, currently £102.15pw in 2011/12 available to those with more than 30 years NI contributions) and maximum second state pensions (SERPS and S2P). This contrasts with the maximum £7,280 payable if we move to the proposed £140 per week flat rate system. It would affect most higher earners and those who do not qualify for any kind of pension credits or means tested pension top ups. At present almost 1 in 2 pensioners are eligible for top ups of some kind but for those who do not qualify for state assistance over and above the basic state pension the changes to state pension rules looks likely to mean a significant reduction in available benefits over the coming decades, with less effect on those retiring sooner, especially in the next 10 years.

As a point of interest if the new rules all come in when proposed (but it looks likely they will be brought forwards) it will be into the 2080’s before everyone is on the same rate. Until then there will be a mixture of different regimes and people will have multiple pensions (private and state) with different rules and retirement ages applying depending on age and pension structure.

This makes it nigh on impossible to accurately calculate one’s own state pension benefits until the point you reach them. Indeed even the DWP are not really sure what income a pensioner will get until they reach state pension age (65 and rising). As an IFA it makes it financially impractical to charge a client to work this out. The time and cost involved outweigh the benefit!

Contracting out (called SERPS up until April 2002 and S2P afterwards) will soon no longer be available from money purchase schemes, which includes personal pensions and SIPPs – see also http://greenfinancial.blogspot.com/2011/12/contracting-out-serps-s2p-all-that.html

It used to be the case, that as an IFA, I could estimate whether it was ‘worth’ contracting out or not. There were a multitude of individual factors but the biggest was often if aged under or over 45. So the ending of contracting out from money purchase schemes is a welcome simplification but as indicated above the change to the new regime will bring complification [ED: not a real word but should be] well into the 2080s. Again, on the plus side, the new rules should benefit lower earners.

But what is the detriment to higher earners?

The loss of the income as stated at outset in this article is one but there is another. The impact on attaining qualification for the new ‘flexible drawdown’
- download Green Financial guide here:  http://www.iangreen.com/downloads/Flexible.pdf
or view on facebook here:
http://www.facebook.com/media/set/?set=a.279726955386751.88831.136170059742442&type=1&l=b96248bd07

This requires a lifetime pension income provision of at least £20,000. So having state benefits of £13,000+ goes much further towards this than £7,280! If you had the £13,606 to buy a comparable annuity to top up to £20,000 would mean you’d need a personal pension of about £93,000 to buy the annuity. At the lower state pension income you’d need more like £200,000 to top up.

To repeat a fact I tweeted last year, to purchase an annuity (so income for life) on the same terms as the state pension a 65 year old male would need a private pension fund of £310,343.19

So in summary, pension and state pension simplification is of course welcomed by all, especially me as I will be far better placed to assist clients in calculating what there state pension entitlement might be. But the journey to a simple state pension regime is far from defined and will be a long journey whatever direction it takes.
Under current proposals I’ll be aged 109 when all pensioners are on a flat rate pension income!

For those retiring in the next ten years, there is not so much to worry about as the status quo all but applies, with changes to retirement age (upwards, see link to calculator below to work out yours) being the main factor coming slowly in.

But for those retiring 10 years out, especially those who aspire to or consider they will have taxable income at the higher rate of tax it is well worth making sure your pension – and most importantly forecast pension income - is reviewed to ensure it is on track to meet your aims.

If you are a pension or retirement income client of Green Financial or would be interested in becoming one, please do contact us. We’d love to help if possible.

Further Reading and Resources

28 page Green Financial Retirement Planning Guide - http://www.iangreen.com/downloads/Retirement.pdf

Government Money Advice Service - http://www.moneyadviceservice.org.uk/yourmoney/pensions_and_retirement/default.aspx

State Pension Age Calculator -
http://pensions-service.direct.gov.uk/en/state-pension-age-calculator/home.asp

Getting a State Pension Forecast - http://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/StatePensionforecast/DG_10014008

Green PEAs – The Green financial Pension Evaluation and Analysis Service for personal pensions -
http://www.iangreen.com/pensionperformance.php

Contracting Out, SERPS, S2P & all that

The powers that be are ending 'contracting out' from 6 April 2012

What does this mean?

Many people have built up pension pots since the 80s based on the fact they contracted out. This pension was known as ‘protected rights’. What happened, in simplistic terms, was rather than have a portion of their National Insurance (NI) contributions build up a second state pension (not to be confused with the basic state pension, which is not affected by this) their NI was diverted into a separate pot often alongside their personal pension contributions from earnings. The personal contributions were known as ‘non-protected rights’ or ‘ordinary benefits’. This could even be done if you didn't make any personal contributions yourself. I remember meeting a pension salesman in the mid 90s who built his entire career based on contracting out New Zealanders whilst they worked here in the UK.

The contracting out pension was once referred to as SERPS (State Earnings Related Pension Scheme) and in more recent times S2P (State 2nd Pension).

From 6th April 2012 there will no longer be the option to ‘contract out’ of S2P.

The change won’t affect any past benefit accrued in the tax years before 6 April 2012 – they’ll remain invested in the same way you have them now. However, there will be more flexibility over how you draw the benefits from the pension.

The rules and flexibility over accessing SERPS and S2P have changed in recent years. The latest big change is that at the moment (pre April 2012) you are forced to take a pension that also pays a pension to your spouse or civil partner when you die but after April 2012 this will no longer be the case – although you could if you wanted to of course.

Further reading is available on the Government website :
www.direct.gov.uk/en/pensionsandretirementplanning/statepension/DG_180010

What do you have to do now?

For most people the answer is nothing, the changes happen automatically.

However now might be a good time to review your pension contributions and what you might expect from your pension when you retire to see if it will be sufficient for your needs. It is important now, more than ever, to work out as best you can what the state will provide and therefore what gap needs to be made up personally.

I have more information on how I can help in reviewing your pension on my website:
http://www.iangreen.com/pensionperformance.php

Or my Guide to retirement guide on facebook:

http://www.facebook.com/media/set/?set=a.279745942051519.88838.136170059742442&type=1&l=e9d045b20c

(also available with many other guides here http://www.iangreen.com/education.php )

Could you live on £140 per week? or £161 million for life?

The Government has recently proposed a single-tier, flat-rate state pension worth around £140 a week, and are currently consulting on how this might be introduced in 2015 at the earliest. Recent research from Standard Life has revealed that almost two out of three people (63%) think they couldn't live on £140 a week in retirement, rising to 72% for the 55 and overs.
And with more than one in six Brits (17%) not doing any financial planning, now is a excellent time to consider your own financial planning and ensure it is up to date (or exists!)

And in this sense, retirement planning is not just pensions, although they play a big part. Much of my work with clients is showing how to provide income in retirement, that won't run out before you do.
Whether that is improving and fine tuning your pensions, considering other sources of future income such as property rental income or investment income or something else entirely.

One thing my work does not include is a recommendation to invest in lottery tickets just in case you are the next lucky winner of £161 million! Although if the recent UK big winner is reading this, I'd be delighted to help with future tax efficient income planning ;-)

Shopping around for lifetime annuities

The Open Market Option
Annuity rates vary from one life company to another, so you should make sure you shop around to get the best deal for you. There are a few things to think about first.

• If you're getting a pension from a personal pension arrangement, your pension provider should send you information between four and six months before you are due to retire, setting out what they will offer you based on the value of your fund. They will also tell you that you can shop around for a higher annuity. About six weeks before you retire your pension provider should give you an estimate of the value of your fund. You can use this to compare products from other providers. This is known as your open market option.



• Don’t assume the same company with which you built up your fund will automatically offer you the best rate. You may do better to shop around and check whether another company could offer you more. The annuity rate you get can affect your income by hundreds of pounds a year for the rest of your life.



• If you're getting a pension from an occupational defined contribution pension scheme, the trustees may buy your annuity for you, but you can also shop around on the open market and find the insurance company with the best annuity rate for you, or your scheme trustees can do this for you if you ask.

It can be difficult or impossible to change your lifetime annuity provider after you've bought your lifetime annuity, so take some time to choose the one that’s right for you.

 

Check what your existing provider offers

Before shopping around, make sure you understand what your existing provider is offering you. Check:

• whether your provider offers a guaranteed annuity rate. This is not the same as a guarantee period. A guaranteed annuity rate means that the provider has to offer a minimum annuity rate for your pension fund. Now that annuity rates are a lot lower than in the past, a guaranteed annuity rate can be very valuable and could give a higher retirement income than can currently be bought on the open market;

• whether your provider will charge your fund if you buy your annuity from another company.

Your existing provider will usually give you a quote for a specific type of annuity. Make sure you get a quote for the type of annuity you want, not just the one the provider offers you.

How long have you got?

Annuity quotes are usually valid for between 7 and 28 days.

If you change your mind – you may have the right to withdraw or cancel. If so, the provider will tell you and also tell you how quickly you must act.

Shopping around for your annuity

1. Get an estimate of the value of your pension fund, taking account of any charges, from your provider.

2. Decide whether you want to take a tax-free lump sum, and if so, how much (usually up to a quarter of your fund). If you decide to take a tax-free lump sum, deduct it from the pension fund value your pension provider gives you.

3. Decide whether you want:

o a single or joint-life annuity. If joint life, whether the pension paid to your partner is paid in full or reduced (say by a third) – or

o a level or escalating annuity

4. Think about whether you want your annuity to continue to be paid for a specific number of years (5 or 10), should you die shortly after you buy it.

5. Does your fund need to be a certain size to qualify for the better rates offered by another company? Some firms may not be interested in providing an annuity for small sums.

6. Are you a smoker? If you are, you may get a better rate from some annuity providers.

7. Do you have a medical condition that could reduce your life expectancy? If you do, you may get a better rate from some annuity providers. Some providers of impaired life annuities will also accept pension funds of less than £5,000.

You should now have the facts you need to get quotes from a range of providers.


Or we can do it for you – contact us to discuss our fees for this service

Simpler Tax for Pensioners?

The Office of Tax Simplification (honestly, this IS a real department, it is not run by Sir Humphrey and today is not April Fool’s Day) has announced it will review the pensioner tax system as the Treasury attempts to simplify the pensions tax regime alongside the generally stated aim of the Government of simplifying tax as announced in the recent budget.


The OTS chairman Michael Jack has said: “For the estimated 5.6m people of pensionable age paying tax, this area is widely acknowledged as causing too many problems for a group, some of whom are the least able to cope with them.
The OTS will be looking for ways in which pensioners’ tax affairs can be dealt with in a much more straightforward way - especially for those with multiple sources of income.”

The OTS has now been ordered to carry out a review of pensioner taxation. But for now at least this will not include tax relief on pension contributions.

The Treasury exchequer secretary David Gauke commented: “I would like the OTS to carry out a review which identifies and examines which parts of the tax system cause the most complexity for pensioners, looks at how this varies across the pensioner population, and proposes ways to make their tax affairs simpler.
I look forward to an interim report on these issues ahead of the Budget 2012, and a final report with policy recommendations later in the year.”

So it seems the aim of the review will be to examine and identify which areas of the tax system cause the most complexity and uncertainty for pensioners, consider how these issues vary within the pensioner population and explore what changes could achieve simplification (There’s that word again!) and what the wider implications of these might be.

I’ve said it before and I’ll say it again. Simplification, Tax and Government are 3 words which just don’t seem to work for me in the same sentence. Call me a cynic, but there you are. That said, I’ll look forward to what comes of this and hope it achieves its aims. I just won’t be holding my breath while waiting...

Shopping Around for Lifetime Annuities

- The "Open Market Option"

Annuity rates vary from one life company to another, so you should make sure you shop around to get the best deal for you.

There are a few things to think about first.

• If you're getting a pension from a personal pension arrangement, your pension provider should send you information between four and six months before you are due to retire, setting out what they will offer you based on the value of your fund. They will also tell you that you can shop around for a higher annuity. About six weeks before you retire your pension provider should give you an estimate of the value of your fund. You can use this to compare products from other providers. This is known as your open market option.

• Don’t assume the same company with which you built up your fund will automatically offer you the best rate. You may do better to shop around and check whether another company could offer you more. The annuity rate you get can affect your income by hundreds of pounds a year for the rest of your life.

• If you're getting a pension from an occupational defined contribution pension scheme, the trustees may buy your annuity for you, but you can also shop around on the open market and find the insurance company with the best annuity rate for you, or your scheme trustees can do this for you if you ask. It can be difficult or impossible to change your lifetime annuity provider after you've bought your lifetime annuity, so take some time to choose the one that’s right for you.

Check what your existing provider offers
Before shopping around, make sure you understand what your existing provider is offering you. Check:

• whether your provider offers a guaranteed annuity rate. This is not the same as a guarantee period. A guaranteed annuity rate means that the provider has to offer a minimum annuity rate for your pension fund. Now that annuity rates are a lot lower than in the past, a guaranteed annuity rate can be very valuable and could give a higher retirement income than can currently be bought on the open market;

• whether your provider will charge your fund if you buy your annuity from another company. Your existing provider will usually give you a quote for a specific type of annuity. Make sure you get a quote for the type of annuity you want, not just the one the provider offers you. How long have you got? Annuity quotes are usually valid for between 7 and 28 days. If you change your mind – you may have the right to withdraw or cancel. If so, the provider will tell you and also tell you how quickly you must act.

Shopping around for your annuity
1. Get an estimate of the value of your pension fund, taking account of any charges, from your provider.

2. Decide whether you want to take a tax-free lump sum, and if so, how much (usually up to a quarter of your fund). If you decide to take a tax-free lump sum, deduct it from the pension fund value your pension provider gives you. Remember, if you have less than £18,000 in total you may be able to take the whole amunt as a tax free sum under the 'triviality' rules.

3. Decide whether you want: - a single or joint-life annuity. If joint life, whether the pension paid to your partner is paid in full or reduced (say by a third) – or - a level or escalating annuity

4. Think about whether you want your annuity to continue to be paid for a specific number of years (5 or 10), should you die shortly after you buy it.

5. Does your fund need to be a certain size to qualify for the better rates offered by another company? Some firms may not be interested in providing an annuity for small sums.

6. Are you a smoker? If you are, you may get a better rate from some annuity providers.

7. Do you have a medical condition that could reduce your life expectancy? If you do, you may get a better rate from some annuity providers. Some providers of impaired life annuities will also accept pension funds of less than £5,000.

You should now have the facts you need to get quotes from a range of providers. Or we can do it for you – our fee is £147 (+VAT).

We can also help you arrange the annuity too, we have a separate fee for that depending on the amount and type of annuity you require.

Contact us for full details.

7 Financial Year End Tips – Checklist 2011

The weekends are passing fast in the run up to the end of the tax year. Before we know it, it will be 23rd March when the budget will be announced so why not get a head start on the financial planning needed before the end of the tax year and check the list below.

1. National Savings
The interest rates may not be market leading but as National Savings and Investments is 100% backed and guaranteed by the UK Treasury it is arguably the safest place for your money. Disappointingly they currently have no tax free savings certificates on offer – But you can save up to £30,000 tax free into Premium Bonds with a chance every month to win £1 million or one of hundreds of thousands of other tax-free cash prizes. And you can get your original money back at any time.

2. Capital Gains Tax
Got Gains? - Have you incurred capital gains this year? Each individual, even children, have a Capital Gains Tax (CGT) allowance of up to £10,100. You could crystallise gains (for example from gains in the value of shares you hold) without paying a penny of tax.

3. Use your ISA allowance
You can shelter up to £10,200 this tax year. Funds saved in an ISA (cash or stocks & shares) means you pay no further income tax and no tax on any gains.
For more reasons why to use your ISA allowance see the article on:
http://greenfinancial.blogspot.com/2011/03/fye-tips-55-reasons-isa.html

4. Use your pension allowance
Depending on your situation you could contribute anywhere from up to £3,600 to £255,000 before April.
Everyone, even non-earners or non taxpayers can pay in up to £2,880. If you pay this amount the tax man automatically adds £720! Making a total of £3,600 invested.
So real cost to you is £2,880 for £3,600 in your pension
Parents and Grandparents can even do this for their children or grandchildren.
See previous blog posts for more end of tax year pension tips


5. Inheritance Tax
There are numerous ways to mitigate or reduce your liability but a simple end of year allowance that is often missed is the ability to give away £3,000 from your capital each year without any inheritance tax implications. This saves £1,200 per person in potential future inheritance tax liability.
Remember you can also give away smaller gifts of up to £250 per donee

6. Venture Capital Trusts
Often only for the brave of heart or very risk orientated Venture Capital Trusts (VCTs) offer adventurous investors the chance to invest in some of the smaller companies in the UK. In return for taking on more risk a generous tax rebate of up to 30% could be available. Definitely one for professional advice though, not generally a ‘DIY’ product.

7. Will Review (or finances in general)
Have your circumstances changed this year. Births, Deaths & Marriages and all sorts of other happenings can be the catalyst for reviewing and changing your Will, or even triggering a review of your finances in general. Financial Spring Clean anyone?

And finally, want to keep one step ahead?
Why not plan for next year’s ISA contribution now? The annual allowance will rise to £10,680, with half of that available to invest in cash if you wish.

FYE, Pension - Carry Forward 3 years

The annual allowance that can be contributed to apension falls from £255,000 for most people to £50,000 in the new tax year starting 6 April 2011.

However there is a welcome return for 'carry forward' legislation.




This is where a person can carry forward unused relief from the previous 3 years

And even better news, this is being introduced retrospectively, so large payments are possible from 6 April 2011.

This could be ideal for high earners (normally considered around the £130,000-£150,000+ mark, see previous 3 blog posts) whose payments were restricted to £20,000 in each of the last two years (2010/11 & 2009/10)

Case study:
Dorothy Perkins paid £35,000 into her pension in 2008/09
Her payment for the next two years was restricted to £20,000 in each year (although if she'd been allowed, Dorothy would have contributed the £35,000 she wanted to)
So on 6 April 2011, Dorothy could pay:
£50,000 + the unused relief from the previous 3 years
= £15,000 from 2008/09 + £30,000 from 2009/10 + £30,000 from 2010/11
= a total of £75,000 carry forward

So Dorothy (and her employer) could contribute a total of £125,000 for the 'pension input period' (see previous blog posts for Jargon buster on pension inputs) ending in 2011/12

FYE, Tips Pension – Earner OVER £130,000

FYE, Tips Pension – Earner OVER £130,000

Anti-Forestalling rules will restrict the level of tax relief for individuals with ‘relevant income’ of £130,000 or more (in this or one of the previous two tax years)

This blog post will show you how some people could actually pay up to 12x more than they thought (£255,000 instead of £20,000) into a pension and still obtain full tax relief

Two options are:
1.
Reducing relevant income by making
a) a pension payment of up to £20,000
b) a gift aid payment

2.
Closing the pension input period (see yesterday’s blog for a jargon buster on pension input periods) before tax year end – then making higher payments as soon as the new tax year begins

Case Study
Brian Jenkins earns £149,999. He could make a gross pension payment of £20,000, thus reducing his total relevant income to £129,999. At this level the anti-forestalling rules don’t apply so Brian can now make full use of the £255,000 annual allowance!

FYE Tips, Pension - 57% tax relief?

Almost 60% tax relief?

Anyone with a taxable income of MORE than £100,000 loses £1 of their income tax free personal allowance for every £2 earned.
This means any client whose income exceeds £112,950 effectively loses their entire personal allowance of £6,475 (2010/11)

However if you earn over £100,000 and are able to manipulate your income - for example you own and run your own business - you can legally receive almost 60% income tax relief on pension contributions

Example:
John Smith has taxable income of £115,000. He makes a net (before tax relief) contribution to his pension of £12,000 - this is the amount that leaves his bank account.

This is immediately grossed up with the addition of basic rate tax (20% 2010/11) to £15,000 - so John now has this in his pension.

This pension contribution has now reduced John's taxble income to £100,000 and reinstates his entire personal allowance, making a saving.

In addition, as usual, John will benefit from higher rate tax relief (40% 2010/11) on the pension payment. The total saving is £8,590 - equivalent to 57.26% tax relief on John's payment.

John might also want to read yesterday's blog (!) in case he can have his company make further payments up to a maximum of £255,000 - another opportunity that will disappear after this tax year ends.

I am grateful to the good and clever people at Standard Life Technical Support for pointing out this opportunity to me and my clients

FYE Tips, Pension - Earner UNDER £130,000

Financial Year End April 2011 Tips
- Pension -
3 Tips for those earning UNDER £130,000

1. Until this tax year end individuals with income below £130,000 can make pension payments equivalent to 100% of their income.
Their employer could also top up payments to a maximum of £255,000

So if you earn £100,000 (say) with tax relief you will only need to contribute £60,000 net. The remaining 40% (£40,000!) will be income tax relief
Your employer could contribute a further £150,000 (say) and have that amount as an allowable business expense.

What a deal!

2. Individuals over age 55 who are able to take pension benefits before 6 April 2011 are exempt from the annual allowance (see jargon buster below)

3. From 6 April the option to disregard the annual allowance (see jargon buster below) in the year benefits are taken will no longer be avilable

Remember, contribution payments are measured against the annual allowance are those made during the input period (see jargon buster below) ending in the tax year - not those made during the tax year overall.

Jargon Buster
Annual allowance
An annual allowance for pension savings applies each year, which is based on an input period (see below). This limits the amount of tax privileges available on pension savings each year.

Members are subject to a 40% tax charge on the amount of any contribution (both member, contributions on behalf of the member and employer) paid in excess of the annual allowance each year.

In Tax Year 2006/07 the Annual Allowance was £215,000

In 2010/11 as mentioned in the text above it is £255,000

The annual allowance applies in total to all pension benefits a member may have.


Input Period
Since 6th April 2006, members of a pension have been able to set a Pension Input Period to make contributions. A Pension Input Period is a period (usually, but not always, a year) in which a contribution can be made. The original idea was to make things easier for companies that had year ends that were different to the tax year end i.e. company year end of 31st December.


- PIPs are fiendishly complex but can be used to great effect for higher earners to make sizeable contributions - more in a later blog or contact us for more details or examples

E&OE - Please remember this is just a blog with a few tips - Please don't take this as personal or specific financial advice. Pension legislation is huge, varied, complex and subject to almost constant change. What is right for you will be wrong for someone else - what you should do will depend greatly on your specific circumstances - PLEASE take professional advice in this area before acting unless you are really confident you know what you are doing.

for Green Financial pension drawdown clients

Changes to Income Drawdown / Income Withdrawal type pension arrangements

Please note this post is intended to be an introduction for my existing clients. It is intended to be a brief guide and summary, not an all encompassing technical piece nor should it be taken as specific personal financial advice in any way!

April 6th 2011, the next tax year, heralds new income limits on drawdown plans.

The legislative changes are complex in part and with many of the new proposals (such as so-called ‘flexible drawdown’) many pension providers are unlikely to finalise their products to match the new legislation until well into the new tax year.

One of the major changes will be income limits – The most headline worthy change is that “maximum income on capped drawdown plans will decrease from 120% to 100% of GAD income”
Putting aside for one moment the awful acronyms and jargon that simply means maximum income for most people will fall by around 16%

However, some clients may benefit from preserving the old (higher) limits on their plan for as long as possible. This is likely to mean 5 years – that being the maximum ‘deferral time’ before the new limits MUST apply.
Depending on your type of plan, provider, anniversary date of plan & your age you may be able to ‘lock-in’ to these higher rates before April.
Remember the income is taxable, so don’t just take it because it is higher for a while – especially if you don’t need it or it pushes you into a higher tax bracket. Don’t be fooled by a ‘buy now while stocks last’ if this doesn’t apply to you. To really mix an old phrase up – ‘Don’t let the change in legislation tail wag the financial planning dog’!

There may be limits on what you can you with your plan and IF you want higher income and IF you want to do this pre-April it MAY be necessary to move your plan to another provider which MAY in itself have a cost. But even this could mean being drawn under the new limits sooner than leaving it where it is – this really is a complex scenario for most people in drawdown.
Even asking for an additional review (if you have already had one in your current pension year) may trigger an admin charge.

So in summary, a lot to think about and many variables all with some fairly lengthy and complex legislation behind it – and with a few future unkowns still lurking about.
If you are happy with your income (it may even be zero at the moment), don't need any more and don't want to draw out as much as possible as soon as possible you may not want to do anything.
But if you wish to discuss your own specific drawdown situation, please contact me.
www.iangreen.com has all the contact points – email, mobile, postal address etc



Action points reminder – with jargon included!
• Clients aged over 55 considering drawing benefits using income withdrawal, should consider crystallisation of benefits before the end of the tax year. This will lock clients into a five-year review based on current GAD limits rather than the rates and the three-year review periods that will apply on crystallisation from 6 April 2011.
• Recycle excess income as a contribution to improve tax efficiency of a client’s retirement funds. The maximum is £3,600 if a client has no relevant earnings, but could be greater where relevant earnings still apply.
• When gifting excess income for this tax year ensure clients take the relevant income withdrawals before the tax-year end. This probably means income withdrawals taken in March 2011.
• Review impact of potential additional designation. This may deliver higher maximum annual income on an existing income withdrawal fund for the rest of the existing five-year period, and will benefit from the potentially higher maximum income limits that will apply on additional designations before 6 April 2011.
• Ensure transfers of income withdrawal arrangements are completed by 5 April 2011 to preserve both the maximum annual income and the remainder of the client's current five year review period.


JARGON BUSTER!
GAD - Government Actuaries Department
GAD rates - maximum income from drawdown is calculated using GAD tables which take into account age and interest rates
crystallisation of benefits - in this context mostly means taking tax free cash and/or income withdrawals
flexible drawdown - a new type of drawdown coming in April 6 2011 with no limit but with restrictions on other areas
capped drawdown plans - the name for drawdown plans that are not 'flexible' (see above) - pretty much what plans are now and the type of plan facing the maximum income reduction
pension year - set at outset of policy and relevant to calculating quinquennial review dates. a pension year normally runs in line with the policy anniversary date
reference period - the time between reference dates, currently 5 years and moving (back to) 3 years after April 6 2011

E&OE