A shake-up for UK pensions

2012 could well come to be seen as a watershed year for UK pensions thanks to the introduction of auto-enrolment. The scheme, which is intended to provide wider access to pension savings, has been described as "the biggest shake-up" in UK pensions for more than a century. According to the Department of Work & Pensions (DWP), approximately 13.5 million workers did not contribute to a pension during 2011 – the vast majority of them in the private sector. Pension saving has declined across all age groups, but the drop among 20-somethings has been particularly marked. People working in industries such as construction, distribution, hotels and agriculture are the least likely to have a workplace pension. Even pension saving in financial sectors has declined sharply. The DWP estimates up to 11 million people will qualify for auto-enrolment. From 1 October 2012, those between 22 and state-pensionable age, who earn more than £8,105 a year and who are not already enrolled in a qualifying pension scheme, will be enrolled in their workplace pension scheme. The worker and the employer will contribute to the scheme unless the worker decides to opt out. Eventually, workers will contribute 4% of earnings and the employer will contribute 3%, with a further 1% in the form of tax relief. The largest companies will start auto-enrolment first, with the whole process having to be completed by April 2017. Around 600,000 people are expected to be enrolled by the end of 2012 and as many as 4.3 million by May 2015.

Taking with one hand

When it came to personal investments in his Autumn Statement on 5 December, Chancellor George Osborne gave with one hand and took away with the other. He extended the Isa allowance for the 2013/14 tax year to £11,520 – up from £11,280 in 2012/13 – and the government is consulting on whether to allow Aim shares to form part of an Isa. The Chancellor also raised the child trust fund and junior Isa limits – from £3,600 to £3,720 a year. Equally, he made a small extension to the capital gains tax allowance – from £11,000 in 2014/15 to £11,100 in 2015/16. However, pensions were subjected to a raid. The annual contribution limit was reduced from £50,000 to £40,000 for the 2014/15 tax year. This was mitigated to some extent by some changes in the carry forward rules, which mean that investors are now able to carry forward any unused allowance from the previous three years to the current tax year. Meanwhile the lifetime allowance is to be reduced from £1.5m to £1.25m from 2014/15. That said, the Chancellor was more generous with drawdown limits, which are to be increased from 100% of the value of an equivalent annuity to 120%. Some commentators suggested the basis for the calculation should move away from the 15-year gilt yield and, until this happens, income levels were likely to remain low and fluctuate over time. Osborne also made some changes to business tax rates, including extending the temporary doubling of the Small Business Rate Relief scheme until April 2014.

WORKPLACE PENSION

The Government is trying to force us to make more pension savings. Starting in 2012 and coming in over the next several years is the Workplace Pension. With few exceptions everyone who is employed on PAYE will be automatically enrolled into a pension scheme his employer must provide. The employee and employer will be required to both make payments into a pension for the employee. It will phase in over several years starting with both employee and employer contributing 1% of their pay and building up until finally from October 2017 the employer must contribute 3% while the employee must put in 5% of his pay. Where an employer already has a pension scheme in place that provides benefits at least as good as the Workplace Pension, no changes will be required. The employee does have the right to Opt Out of the pension arrangements simply by notifying his employer. While we understand the Government’s wish to try to help people increase their savings for retirement, we do not believe that an effort to force people into saving will succeed in the long term. But we would encourage anyone who is not yet contributing into a pension to take advantage of any employee contributions on offer!

Advance Warning

Some significant changes in financial services are to come into effect at the end of 2012. The Financial Services Authority will be replaced by two(!) new regulators – the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). Along with this change are requirements for higher standards for financial advisers and a move away from commission being paid for investment advice to advisers charging fees. Firms of advisers also need to decide whether they will provide advice from the whole market and qualify thereby as "independent" or will work with a specified set of suppliers and then be termed as providing "restricted advice". We will continue to provide independent advice. Contact us on 01342 313302.

Life Assurance Likely To Get More Expensive!

Life assurance has been around for a few hundred years, dating back to times when groups first worked out that they could buy some piece of mind for themselves and their families by each making a contribution to a pooled fund which would be available to help other members of that group or their families in the case the wage earner died early.


While it has become more popular, and thus cheaper, it still remains primarily a way to buy peace of mind for those with commitments such as family or business. The cost of life assurance is based on risk. To help in assessing this risk the life assurance companies have all of the records of people dying and from what cause (the Mortality Tables) and also details of a person’s medical history. If one is young and in good health, life assurance is very cheap indeed. As one grows older, and where there are medical problems (past or present), the risk, and thus the cost, goes up.

At the end of December 2012 a European Court decision will come into force affecting all insurance companies. It basically dictates that all premiums for insurances must be the same for men and women who are otherwise of equal risk. Historically, as per the records, women live longer than men and life assurance for women has usually been cheaper for a man of the same age. Despite these facts the European Court has decided that equates to sex discrimination! Frankly we think that is nuts, but it will not be the first piece of nutty European legislation. The result will be more expensive life assurance for women. One would think it would also mean somewhat cheaper life assurance for men, but at the same time the life assurance companies are being required to hold more reserves, which will make it more expensive for them to trade. This will almost certainly drive life assurance costs up for both men and women. In short then, it is probably a good time to review your life assurance and make any changes needed. We are likely to look back and see this as having been a particularly cheap time to take out life assurance. And remember the research indicates the cost of taking on people to do the work of a Mum works out at about £30,000 and a Dad at about £21,000! We can quickly provide you with any life assurance quotes you may need. Contact us on 01342 313302 or info@sovereignfinance.org

Pensions – Looking For A Better Income

INCOME PLEASE – (after you have taken your tax-free cash)


Option 1: Take a guaranteed income for life (Annuity).

Option 2: Receive a higher guaranteed income for life due to an adverse medical condition or medical history or history of smoking (Enhanced Annuity).

Option 3: Take a fixed income for a period of time (usually 5 years) and have a guaranteed amount left at the end so you can then review your options (Temporary Annuity).

Option 4: Get an income which can possibly increase depending on the underlying investments (Investment Based Annuity).

Option 5: Leave your monies invested with the option to draw an income from the fund itself (Drawdown). There are two possibilities here. The first is called Capped Drawdown. With this one the maximum you can take is based on your age and the value of the pension fund. The second is called Flexible Drawdown. This allows you to take out as much as you want from your pension fund – but only if you already have a guaranteed pension income of at least £20,000 per annum (this can be made up of the State Pension and Private Pension income, but cannot be made up of other earned income or investment income.)

Pensions – Looking For A Better Income

ALL AS CASH PLEASE!


If you are aged 60 or older and the total value of all your pensions is less than £18,000, you can take it all as cash. 25% is tax-free and the balance is taxed as if it were income you had earned in that tax year. If you cannot take advantage of that option, but have a couple of very small pension pots (£2,000 or less), you can do the same with them – up to two such small pots per person.