“RETIREMENT” PLANNING

A majority of the work we are doing currently concerns “retirement”. It is not a word we care to use
as it implies a person will give up useful work and do little or nothing. We prefer to view it as a change of operating basis – of being able to move away from what one has had to do to make money, to other activities which one simply wants to do. Of course, there still does need to be adequate money available which is the reason why you should plan for this changeover.

Pensions are the source of income in later years for most people. They start with the new State Pension which currently pays £168.80 per week for those who have put in at least 35 years of work (and paid National Insurance in those years or were credited with years – for example, when raising children).

For the employed there are also occupational or workplace pensions. While the days of the best company pensions have faded into the past, they can still provide an excellent source of income in retirement with both the employer and employee having contributed. The self-employed need to establish their own pensions and make adequate payments if they are going to have their pension providing a reasonable amount of income. With people moving jobs more frequently there is often a number of smaller pensions from one’s work history. The main advantages of pensions is that you receive tax relief on what you invest into it (up to an annual maximum amount). For the Basic Rate taxpayer for example, the £1.00 they put into their pension will get 25p more added by the Government so it turns £1.00 to £1.25 overnight without risk. And a Higher Rate taxpayer gets even more tax relief.

“FREEDOM” NOT TO HAVE ONE!

The first “Freedom” one has is not to have any pension at all! If you are self-employed, you do not have to contribute to a pension (other than the State Pension) and even if you are employed, you can opt out of the company’s Workplace Pension. Clearly, however, there is not much value in a "Freedom” which means you have very little to live on in retirement.

A number of people plan to use other sources of income in their later years such as renting out property or down-sizing to recover value from their own property. We would advise all our clients to use pensions to provide at least part of the income they will need in retirement. If you are unsure of why this is a good idea, do take advice.

WORKPLACE PENSIONS/AUTO-ENROLMENT

Those with a pension in their workplace will have an enforced increase to their pension contributions

from the 6th of April. Instead of both the individual and the company putting 1% of their salary into

the employee’s pension, it increases to 3% by the employee and a minimum of 2% by the employer. Someone earning £20,000 could find his monthly contribution going up from £14.00 or so per month to £40.00 per month. While that may not be a welcome extra cost, do remember that the increase also means more from the employer and, taking into account the additional amount the Government has to put in, that £40.00 per month taken from the employee would end up with them getting £83.00 in their pension – over 100% return on their money. Not bad!!

WORKPLACE PENSION PAYMENTS TO INCREASE

By now anyone who is paid on a PA YE (Pay As You Earn) basis will find themselves having been automatically enrolled into their employer’s Workplace Pension.

Both the employer and employee have to make contributions into the employer’s pension.

The initial level of compulsory payment has started very low – 1% of pay by employers and a similar amount by the employee. However, these will start to rise annually until they reach the final level currently required of 5% by the employee and 3% by the employer. The first increase was originally scheduled to take place in October 2017; however in 2015 the Government announced that the first increase would not take place until 6 April 2018 and then

on the 6th of April in subsequent years.

For most people the increase on the 6th of April 2018 will be from 1% to 3% for their own contributions and from 1% to 2% for their employer’s contributions. For example, a person earning £400.00 per week will have been paying £3.20 per month and the Government would have added 80p and the employer would have paid £4.00. That means the employee would have had £8.00 go into his pension for only a £3.20 payment monthly by himself. This is a 250% immediate return on his contribution!

The change in April for the same employee earning £400.00 per month will mean they would be paying £9.60 per month with the Government adding £2.40 and the employer £8.00. That is still a very attractive total of £20.00 into the pension for a £9.60 contribution – more than a 100% return on investment. It would be very difficult to get a better return than that! For most people being part of their Workplace Pension is a very good idea.