SOME PENSION BASICS – THE ‘ANNUITY’

While pensions can be complex and difficult to deal with because of all of the past pension legislation and changes, it is important for everyone to have some grasp of the basic concepts. In this section we are only discussing personal pensions, i.e. not company pensions where the benefit is assessed based on years of service and salary. A personal pension can be viewed very simply as a box into which you are putting money to save until you are aged 55 plus. This box has some advantages, as the Government can also add money to the money that you put in.

Inside the box your savings are looked after for you by a pension company. The pension company finds out how you want to invest your money and will do its best to make extra value for you. If you want no risk, you can arrange to have your savings kept in a cash account. Otherwise there will be an investment risk with your savings and the value can go up and down. Over 10 years and longer the results show that generally people are better off if they take some risk with the money in their pension box.

Come age 55 the happy day arrives whereby you can dip into your pension box. That is the earliest age that you can be for the Government to let you get your hands into your pension box (with some exceptions including serious ill health). This pension box, however, generally does not let you take it all out (except for some exceptions for small pension pots for those aged 60 or over). You can get your hands on 25% of what is in the box. This is tax-free and can be used however you wish. The remaining 75% has to be used to provide an income and this is where we come up against “The Annuity!” While there are various options open to you as regards using the 75% (which we will be happy to discuss), most people will end up getting an “Annuity”. We will now seek to make the “Annuity” concept as simple as we can.

SMALL PENSION POTS

Many people have built up small pension pots from one employment or another or from one pension savings strategy to another. Up to now these were difficult to deal with at retirement because of their small size. The Government has seen some sense in this regard and now each individual aged 60 or over can take up to two small pension pots (each no more than
£2000) all as cash. 25% of the pot can be taken as tax-free cash and the remaining cash will be taxed as if it had been earned in the year that you take the money. Those of you who like solving problems will probably have immediately realised that if you had one pot worth £4,000, that you could split it in two to get the required £2000 size.

TIME FOR A FINANCIAL REVIEW

Review all of your cash deposit accounts
Find out what interest rate you are receiving. You may be shocked to find interest rates of 0.10% in monies held in a saving account with the glorified name of “Gold” or “Silver” savings account. Look for a better rate. You should be able to achieve at least 2.0% or better.

Use your Capital Gains Tax Allowance
If you have investments that have gone up in value you can realise tax-free profits of up to £10,600. As with your ISA allowance, you cannot carry this forward. So you use it or lose it!

Be aware of your Tax Allowances
Personal Tax Allowance: 2011/12 = £7,475; 2012/13 = £8,105
For those aged 65/74: 2011/12 = £9,940; 2012/13 = £10,500
For those 75 and over: 2011/12 = £10,090; 2012/13 = £10,660

Note: The Age Related Allowances above are only available to those whose total income is less than £24,000 (2011/12) and £25,400 in the new Tax Year.

Review Your Life Assurance Arrangements
Pull out the documents and see how much you are covered for, and for how long. You may find a policy is coming to its end, and you can also ask us to check the cost to ensure you are not overpaying for your life assurance or critical illness insurance.

Review Your Pensions
You may have pension pots in various places from previous employments or pension saving arrangements. Find out what the fund values are and what funds you are invested in. You can then look squarely at what you are likely to have available in your later years and act accordingly. We will be happy to help you work out what these might add up to eventually. Make sure that all of these pension providers have your current address so they do not lose track of you.

Review Your Mortgage Arrangements
If you on your lender’s Standard Variable Rate and paying more than 4.5%, find out what else your lender can offer and contact us to find out your other options.

Maximise Your Pension Contributions

You can put a maximum of £50,000 into your pension, and even more if you have not used up your pension payment allowance in the preceding three years. This is a case where allowances from previous years can be used. Note: talk to us if you are thinking of doing this and we can help advise you how to do this in the most efficient way possible. There are rules to be followed.

PENSION CHANGES COMING ON 6TH OF APRIL

The State Pension consists of two parts. There is the Basic State Pension which everyone is entitled to, whether they are employed or self-employed. The other part is only for those who are employed on a PAYE basis. It is now called the State 2nd Pension but used to be called SERPS (the State Earnings Related Pension Scheme). When you hit State Retirement Age, any entitlement you have built up with the State 2nd Pension is added to your Basic State Pension. In 1988 the Government gave people who were employed an option. Instead of building up an extra entitlement to the State 2nd Pension/SERPS, each year the Government would pay an amount annually into their personal pension plan. This was called “Contracting Out”- by which was meant that people chose to contract out of the State 2nd Pension year by year. Many people did “Contract Out”. The monies that the Government paid out to these people went into their personal pension and were called “Protected Rights” as some strings were attached to those monies. The Government has now changed their mind and, as of 6 April 2012, people no longer have the choice to “contract out”. The monies that have been paid into their pensions will remain there and all strings are being removed so that those monies are no longer referred to as “Protected Rights” and they will be treated like any other money in a pension. If you have any questions on this, please feel free to ring. Remember that this only ever affected those who were employed, as the self-employed were never part of this.

Use your Cash ISA allowance

Cash savings almost always will do better in a Cash ISA. Generally the interest rates are better and, of course, you get the interest free of tax. Since you can arrange to have immediate access to the cash in an ISA, it makes virtually no sense not to have as much of your cash in possible in Cash ISAs. In this tax year (2011/2012) each individual can put £5,340 into a Cash ISA. After the 6th of April this maximum rises to £5,640. This ISA allowance cannot be carried forward into another tax year. If you do not use your 2011/12 ISA allowance, you have lost it. Aim for an interest rate of between 2.5% and 3.0%. Note: You also have your Stocks and Shares ISA allowance, which is available for you to use if you are willing to take the risk.

Pensions implications

The Autumn Statement from the chancellor of the Exchequer George Osborne, contained only a few measures relating to pensions and retirement, with the UK’s projected £33bn overspend and the resulting extension of the government’s austerity measures offering little room for manoeuvre, particularly in terms of positive news.

On the plus side, the full basic state pension will rise to £107.45 a week in April 2012. However, the state pension age will increase to 67 between April 2026 and April 2028. Research by PWC suggests this increase in the state pension age will cost a 50-year-old £80 per month if they have to fill in these missing two years themselves while a 35-year-old would have to save an additional £35 a month to retire at the same time. This delay in the state pension age is expected to save around £60bn in today’s prices between 2026/27 and 2035/36.

Osborne also introduced a new scheme to help finance infrastructure investment in the UK that may indirectly affect a number of retirees. He is aiming to raise £20bn from UK pension funds to invest in infrastructure projects with a view to boosting the economy.

UK pensions funds have, to date, been reluctant investors in infrastructure, in spite of the long-term, index-linked income stream available on some of these projects. Principally this has been down to a lack of expertise in the asset class. A number of commentators have suggested that, if successful, this infrastructure-spending plan should provide an effective economic stimulus.