30th Anniversary

No more compulsory purchase

Britons are set to enjoy greater financial flexibility during retirement under draft legislation released by the UK Treasury ahead of the 2011 Finance Bill. From 6 April 2011, individuals will no longer be forced to buy an annuity by the age of 75 with the money that they have saved in their personal pension scheme. Instead, they will have the additional option of continuing to save or moving to a drawdown arrangement in which their pension pot is left invested and money is drawn out. Nevertheless, the measures include restrictions, notably the amount of money that can be withdrawn from a personal pension scheme at any one time. This will be limited to 100% of the equivalent single-person annuity that could have been bought with the funds in their pension pot. This restriction is intended to prevent individuals from withdrawing and spending all the money in their pension scheme and then calling on the state to support them. However, individuals can withdraw more than this amount if they can prove that they receive pension income of at least £20,000 per year. In this case, they can take out as much as they like. The increase in flexibility will end a rigid system in which individuals are forced to buy an annuity by the age of 75, even when annuity rates are particularly poor. An increase in life expectancy and an environment in which older people work for longer have made the 75-year cut-off appear progressively more unrealistic and draconian. Treasury figures show that 450,000 individuals bought an annuity in 2009, while 200,000 people are in income drawdown arrangements. According to Treasury figures based on data from the Financial Services Authority (FSA), approximately 50,000 people who are currently in drawdown arrangements could benefit from flexible drawdown, while an additional 12,000 people could access flexible drawdown. The National Association of Pension Funds (NAPF) has welcomed the additional flexibility, but also believes that the new rules are most likely to benefit those with large pension pots and multiple income streams. Many people are still likely to choose to purchase an annuity, which will provide a fixed income over their remaining lifetime. Moreover, NAPF warned that most people are simply not saving enough into their pension schemes, and urged the government to do more to encourage and support strong occupational pension schemes and “creative, flexible” ways for individuals to save for their retirement.

Time to take action

Total UK personal debt had reached £1,454 billion by November 2010, according to figures from Credit Action – more money than the whole country produces in a year and a sum that equates to around £8,500 per household. Contrast that with the nation’s current savings levels, which have seen the average household save just £996 over the last 12 months – or £2.73 a day. However, in an environment where it has become the norm and, until recently, all too easy for individuals to make purchases with debt, changing this ‘enjoy now, pay later’ mentality is going to be difficult. You may be sure, however, that the coalition government is keen to encourage such a change. Work & Pensions Secretary Iain Duncan Smith has been quoted as saying: “We do not save enough in this country…it is appalling, and changing the culture is critical”. Right now, the main incentives to encourage such saving involve limiting the amount of tax you pay on certain savings products. Certainly, the Government needs to do more if they are going to generate the kind of interest that will push more people to act. Yet, if there was ever a good reason to start changing our behaviour, it is surely the fact it costs the average household £2,500 a year in net income just to meet its interest payments. That is approximately 15% of the average net wage going to lenders that could otherwise be heading into our pockets. That fact really should be an incentive to start saving.

DEATH AND INCAPACITY

Death and incapacity are unpleasant subjects but they are a reality of life. You can either ignore these matters until they affect you or your family or you can do some sensible forward planning. Unfortunately we will all die at some time. At that point our possessions will be shared out. If we have made a will, they will go to those people we have chosen. If we have not made a will, they will go to people other than those we wanted them to go to, including even the Tax Man! The simple solution is to make a will. You can do this yourself or take professional advice. We can provide recommendations if needed. With death comes a funeral. You can make it clear in your will how you want your funeral to be. Viking funerals with a burning boat could prove rather costly. However, even a simple funeral can involve considerable expense. If you are not otherwise setting aside money in some way for this, there are pre-paid funeral plans available which, once paid for, guarantee to cover the costs of a traditional cremation without any further costs – regardless of how much prices rise in the future. (Note: Viking burials on burning ships come at a somewhat higher costs!). We can help advise on the pre-paid funeral plans. Going into care is not the sure bet that death is, but it is pretty likely that if you or one of your family beat the grim reaper past the three score and 10 on the score card, that you will have to deal with the problems of care and even mental difficulties. If you or your parents or other relatives are not able to look after their affairs for one reason or another, they will need someone to do it for them. As soon as this begins to become a possibility, we recommend that you find out about and arrange a Lasting Power of Attorney. “Attorney” simply refers to someone with the power to act on the behalf of another. Such an arrangement can either be just for financial matters or for health care decisions, or both. And as the final point of this rather unpleasant section, there is the option of a Living Will. This is simply an advance decision which you document about what medical treatments you do not wish to have in the future, if you are not in a condition to make an informed decision at the time.

TAKING THE RIGHT RISKS

Pension policies and investments do need regular reviews to ensure that the money in the fund is being invested in the way that the person wants. All too often people leave their pension or investment funds unmonitored and that is a bit like the captain of a ship leaving no one at the helm while he goes to play shuffleboard with the passengers. It makes it uncertain as to whether the ship is going to reach its destination undamaged. We would be pleased to assist with a review of how your pensions or other investments are invested without charge.

PENSIONS – RINGING THE CHANGES

While we are still awaiting final approval of the Finance Bill, the writing on the wall looks in pretty permanent ink. 75 will cease to be the age for compulsory annuities. Those reaching 75 years of age will be able to maintain their pension options, including Drawdown. Maximum pension payments will be limited to £50,000 from 6 April next year. However, it will be possible for a person to pay up to a further £50,000 for each of the past three years – if he has not already contributed that much over those three years. Taking into account some of the other fine print, in fact, a person who had made no pension contributions in the previous 3 years could conceivably contribute up to £250,000 early in the next Tax Year.

OFFSET – MAKING YOUR MORTGAGE WORK HARDER

If you have both a mortgage and significant cash savings (£25,000 plus), you may with to consider an offset mortgage. This allows you to have a savings account that is linked to the mortgage account. You only pay interest on the difference between the two. For example, if your mortgage is £100,000 and your savings amount to £25,000, you only pay interest on £75,000. With savings rates being very low, this is a way of getting more out of your savings. With a mortgage rate of, say, 4.0%, it means that you are effectively getting a net 4.0% on your savings without risk.