Pension or ISA in retirement?

It seems with all the changes in legislation over the past couple of years, the full freedoms to pension savers and the launch of the Lifetime ISA (LISA) has opened up the need to consider how funding ISAs fits in with investors longer term objectives.

ISAs are traditionally used for savings in a tax efficient way, free of income tax and capital gains with no tax to pay when cashed in unlike pensions which receive upfront tax relief and up to 25% taken as tax-free cash.

The “LISA” which launched in April is a long term saving product, locking up cash until the saver buys their first home or takes the pot as a pension and contributions being boosted by the government. Eligible for over 18 and under 40 and contributions receive a government bonus on any sum up to £4000 a year.

If you are under 40 maybe its worth opening a LISA, you only need £1 to secure the option in investing and once you’ve passed your 40th birthday you’ll loose the chance to open an account.

According to a MetLife study 34% of savers are looking to the ISAs for the majority of their guaranteed income in retirement. Even over 55’s (more than a quarter 28%) are considering using ISAs. Around 21% of pension savers are making more use of ISAs following pension freedoms.

MetLife UK wealth management director, Simon Massey, said: “The increase in annual ISA subscription limits from £15,240 to £20,000 in April this year highlights how much can be saved tax-free, and makes them a real option for retirement planning.”

The MetLife research shows that financial advisors are welcoming the flexibility that pension freedoms, and the incoming ISA subscription limits are bringing. However, saver should be careful before dismissing pensions as tax benefits are still the clear winner over ISAs especially for the higher-rate taxpayer and a pension can only be drawn on after the age of 55 unlike an ISA where funds can be taken before retirement.

Ultimately a hybrid strategy of pension and ISA funding is probably the best idea giving the investor more flexibility moving forward for retirement.

Professional advice is essential

When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.

NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

Source:
The Telegraph
The  Actuary

PENSIONS – FURTHER CHANGES AHEAD

Just when we were all getting used to the new pension changes that came into force in April, the Chancellor, George Osborne, announced further measures and reforms in his SumRB2mer Budget

NEW CEILING FOR THE ANNUAL ALLOWANCE
With effect from April 2016, those with a net income of more than £110,000 could see the annual amount they can contribute to their pension that attracts tax relief reduced from the current annual limit of £40,000 tapering away to £10,000. Those with income, excluding pension contributions, above £110,000 will need to add on their own and their employer’s pension contributions. If this gives a figure in excess of £150,000 their annual allowance will be restricted by £1 for every £2 by which their income exceeds the threshold.
REDUCTION IN THE LIFETIME ALLOWANCE
The Lifetime Allowance is a limit on the amount of pension benefit that can be drawn from pension schemes (either in the form of a lump sum or a retirement income) without triggering an extra tax charge. The figure for tax year
2015-16 is £1.25m. From April 2016, the maximum amount that pension savers will be able to draw from their pensions without paying extra tax will reduce to £1m. From 6th April 2018, the allowance will be adjusted in line with the Consumer Prices Index. Transitional protection will be introduced for those who have been saving with the current £1.25 million threshold in mind.

SELLING AN ANNUITY
The Chancellor announced in his March Budget that pensioners who had used their pension savings to buy annuities would be able to sell them for a cash sum from April 2016 if they chose to. However, this has now been postponed until 2017 to allow more time for the necessary administration procedures to be put in place.
PROPOSALS ON FURTHER TAX CHANGES
The favourable tax treatment of pension contributions has long been viewed as a major incentive to save for retirement. The Chancellor has decided to explore further possibilities intended to make the taxation of pensions clearer and more transparent. Announcing a Green Paper entitled ‘Strengthening the incentive to save: a consultation on pensions tax relief’, he proposed an overhaul of the current system. Pensions, he said, could be treated like Individual Savings Accounts (ISAs) for tax purposes. This review will consider whether the present system that sees pension contributions receivingtax relief, funds being exempt from tax while invested and taxed when paid out, could be overhauled. This could, for instance, be replaced by a system where contributions don’t receive tax relief, but are tax exempt while invested and tax exempt when paid out.
The government’s consultation closed on 30th September and the ensuing report will no
doubt make interesting reading.

Professional advice is essential

When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.

NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

 

Further complications for pensions

Pension reforms have sting in the tail

Pension reforms have sting in the tail

The wider options offered to pension plan holders have been widely welcomed, however, this liberalisation of funds has also thrown up some complications that may not have been fully realised. An example of such is in the case of a divorce.

Since April of this year a member of a pension scheme, is no longer obliged to take the pension fund as an income or an annuity. They can now take it all out as a cash lump sum, albeit most of that being taxable at their standard income tax rate.

This in itself raises issues for anyone divorced, or in the process of being divorced. It is often the case that one party or another of the partnership is awarded a part of the other spouse’s pension fund or funds as part of the divorce settlement through a pensions earmarking order.

Therefore, a legal wrangle could ensue as to splitting the lump sum and whether any proposed or existing ‘earmarking’ of such pension funds by the courts applies equally to either cash lump sums, pension income or both.
If you would like advice on any of the issues raised here, please do not hesitate to contact us.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.
NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

Can SIPPs star as pensions take centre stage?

Inevitably, the mid-2012 national airwaves were dominated by the activities of athletes in the prime of life. Meanwhile, in the financial arena where inflation, unemployment and a fragile economy perform for the crowds, people of all ages will need to follow the events set to affect everyone’s pension, from basic State provision to more sophisticated SIPPs. Yes, 2012 looks like a vintage year for legislative and other developments that impact pensions, thus providing opportunities to get the SIPP message across to clients in the appropriate categories.

Back in January, the last remaining FTSE 100 company with a fully-active final salary pension scheme, Shell, announced plans soon to offer new staff only a defined contribution plan. At the same time, another Anglo-Dutch giant, Unilever, faced early-2012 industrial action over its previously announced plans to do the same thing. So, a couple more nails being driven into the coffin of private-sector final salary pensions.

This was all fuel to the Government’s arguments on public-sector pensions – that the gold-plated final salary schemes enjoyed by many civil servants are not only unaffordable but also far more generous than the schemes of companies that produce rather than (some say) consume the nation’s wealth. With the various public sector unions not entirely at one, strikes and increasingly prolonged negotiations should be expected.

Two changes already under way are relevant to some SIPP holders because they may adversely affect their tax position as regards annual and lifetime contributions. The 2011-12 Tax Year, of course, saw a massive reduction in the Annual Allowance for pension contributions to qualify for Tax Relief, whilst the new 2012-13 Tax Year has brought a cut, from £1.8m to £1.5m, in the Lifetime Allowance, albeit with some relief.

Increases to qualifying ages for State Pension continue, initially taking women on a journey from 60 to 65, following which they and men will see the qualifying age rise first to 66 and then 67. Thereafter, the Budget confirmed in March, it will be linked to life expectancy and, the Chancellor added, age-related income tax allowances will be frozen at 2012-13 levels and phased out. Just as well, then, that the default retirement age was abolished during 2011-12. Then came 2012’s main attraction, in pension terms, the rollout in October of auto-enrolment for employees of major companies, with smaller employers forming a queue behind them. Interesting times.

Not all of the happenings in the pensions arena have a direct impact on holders or prospective holders of SIPPs. They do, on the other hand, focus the spotlight on pensions generally, which could get small business owners, for example, thinking about their own pension provision. For them, the new slimline Annual Allowance is an issue that should prompt a review, to ensure that any unused balances of prior years’ allowances are carried forward to best effect.

Indeed, 2012 is probably an ideal time for clients to take stock of their financial situation, the performance and funding of their pension and their likely income needs when, sooner or later, retirement comes. Some may need reminding that tax relief on pension contributions remains valuable and should be maximised to the extent compatible with individual circumstances and aspirations.

The huge 2011-12 reduction in Annual Allowance for tax relief purposes, from £255,000 to £50,000, will hit some high earners, but at least the Carry Forward facility has been reintroduced. This permits balances left over from notional £50,000 Annual Allowances from earlier tax years to be used to gain 40% or 50% tax relief, as applicable.

Carry Forward to the 2012-13 Tax Year may be possible for unused balances (£50,000 less any contributions made that year) from each of the previous three years. There is also, though only until 2013-14, HMRC’s transitional concession under which any amount over £50,000 contributed in one of the three previous tax years will only affect that year’s allowance and not reduce either of the other two years’ unused allowances.

We are here to help you address these issues, so call us to discuss your specific needs.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.

NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

Putting enough into pensions?

The pension auto-enrolment scheme started this month. It involves the biggest companies first. Employers and employees will have to contribute a minimum percentage of pay to a qualifying pension, unless the employee opts out. This means 1% each from employer and employee to start with, but contributions will rise in steps to 3% and 4%, respectively, within five years. If you take account of tax relief on the employee contribution, 8% of salary will be going in.

To achieve an acceptable retirement income from a defined contribution (money purchase) scheme, many experts think that a greater proportion of salary must be paid in. As it happens, there is already a voluntary scheme that requires a higher level, with 6% contributed by the employer towards a minimum of 10% overall. The Pension Quality Mark scheme (PQM) was started three years ago by the National Association of Pension Funds to lift confidence in defined contribution occupational pensions, as more generous final salary schemes were being closed.

The PQM emerged in the wake of Government action to assist defined contribution schemes through pension regulation changes. The 2006 regulations were made with the aim of increasing flexibility in the amounts contributed, variety of investment options, benefits provided and retirement age chosen. It nevertheless remains the case that defined contribution pensions put investment risk on the employee and make their eventual pension income rather less predictable than with a final salary scheme.

Considering the turmoil and uncertainty affecting many pensions, the big pension funds wished to boost belief in the capacity of defined contribution schemes to provide worthwhile pension income in retirement. They could not guarantee pension levels, which would be dictated mainly by long-term investment performance and future annuity rates, so the NAPF opted to set minimum contribution levels for PQM eligibility and demand high standards from those professionals engaged in setting up and operating occupational pensions.

The NAPF also wanted PQM to achieve the aim of making pensions easier to understand, to help individuals with the decisions they need to make. Some professional advisers were already taking steps in this direction, when individuals or companies sought their advice, but the NAPF wanted to go further. Thus, PQM demands clear and engaging communication with members concerning their scheme. External input is sometimes needed to aid communication on pension matters, as not all employers have the required capability in-house, so PQM encourages advisers to maintain high standards when assisting pension scheme development and employee communication on behalf of employers.

To sum up, the ‘8% of salary’ contribution under auto-enrolment is seen as an absolute minimum, with the 10% required under PQM as more realistic and something higher still as the goal.

If you need guidance on any of these issues, contact us.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.

NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

Public sector pensions get major reform

In a further erosion of the concept of global final salary pension provision, The UK Treasury has just announced their plans to drastically reduce the cost base for the provision of public sector pensions.

Their efforts to reduce by 50% the cost to the tax payer for this sectors pension provision will result in the government saving approximately £65bn over the next 50 years. This would account for a large proportion of the total savings hoped for by the Treasury of £430bn in the overall costs of those pensions.

The main thrust of the savings being proposed in ‘The Public Service Pensions Bill’ is the abolition of the concept of a final salary scheme for civil servants and this being replaced with a career average income pension scheme.  At the same time these civil servants will also be expected to work longer before receiving their pensions.  An exception here is being made for the armed forces, the police, and fire-fighters. Here their pensions will be linked to their normal state pension retirement date.

A buffer has also been included, however, for those who are currently within 10 years of retirement (to be calculated from April 1st 2012).  This group will see no change in their retirement age (or date) or any decrease in their presently anticipated pension amount.

Confirming that the present and future pension provision for civil servants is still amongst the best available in the UK, Danny Alexander, the Chief Secretary to the Treasury was quoted as saying about this bill that: “It will cut the cost to taxpayers by nearly a half, while ensuring that public sector workers, rightly, continue to receive pensions amongst the very best available.”

This action is seen to be a continuation of the erosion of final salary pension provision here in the UK, so careful forward planning must be undertaken by not only private sector workers but now public sector workers as well to ensure that a comfortable retirement income will be made available, when that time comes.

Contact us for guidance and assistance in this regard.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.

NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.