Pensions – more needless headaches the Lifetime Allowance

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Pensions – more needless headaches

You may recall that Mr Osborne in his great wisdom has decided to reduced the current lifetime allowance even further, just to clarify – the Lifetime Allowance is the value of your pensions, either in payment or being built up. It currently stands at a figure of £1.25million but from 6th April 2016 will reduce to £1million.

It is very easy to calculate the value of your pensions, provided that they are purely investments pensions, such as personal pensions, SIPPs (self-invested personal pensions). You can also exclude the value of your State pension.

However, if you have an annuity in payment or old final salary pensions or perhaps simply a current final salary (or career average) pension (called a defined benefit pension scheme) such as the NHS or Teachers Pension, the sums are considerably more complex.

Long story short, once the value of your pensions has been calculated you may find that you have exceeded the lifetime allowance – which is reducing. So you will need to do something about this, which may well involve some uncomfortable decisions about future membership of pensions, even or perhaps especially, good ones, which is utterly daft.

Another bonkers pension policy

Yes, I did say bonkers. Despite what Mr Osborne may say about helping people to help themselves, he is actually restricting the amount that you can build in your own pension, actively discouraging saving, which does seem to be rather at odds with any historic Conservative policy in history, unless you count the lamentable decision by Norman Fowler to remove the rule that enabled employers to make membership of an occupational pension scheme a condition of employment, allowing the employee to contract out and not join the pension scheme. In fairness to Mr Osborne, with the benefit of hindsight, Mr Fowler probably takes the prize for arguably the most loopy pension decision for generations.

Mr Fowler was under the misguided impression that this brought about freedom for employees to decide if they really wanted to be in their employer’s pension. Mr Osborne can only be motivated by collecting more tax as there are 55% tax charges applied to amounts that exceed the lifetime allowance, unless you have the relevant protection, which is also not really guaranteed.

We are not talking about small sums of money here. So you need to gather your information, for two specific dates 5th April 2014 and 5th April 2016. This creates a headache for you, a massive task for me and in my opinion the lifetime allowance is one of the worst pension ideas in history – penalising both those that save and a successful investment strategy. This is a subject that I will return to frequently before 6th April 2016.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

UK Pension rules are a post-modern farce

The state of the UK pension system, supposedly one of the best in the world, is a shambles. It is high time this Government got its act together and decided that either we should all be saving and encourage us to do so, or give up. The bureaucrats at Whitehall are the only winners in the pensions mess, with endless tinkering with the rules that are gradually constricting the life out of a system that is supposed to encourage and reward savers and employers alike.

You may recall that the last Government decided to draw a line under pension rules and adopt a new approach called “pensions simplification”. Well intended it may have been, but it has been a shambles. The current administration are just as bad. Pension simplification was meant to give everyone a maximum pension fund allowance (the lifetime allowance). Not easy when you consider that a lot of pensions are not real money – a final salary scheme, such as the NHS or Civil Service are not investment based pensions, but service based. Irrespective of what the employee contributes the end result is assured based upon a proportion of final salary. For the record, this has also been messed around with. Anyhow, these schemes were given a formula. Let’s keep it simple and suppose you have built a pension of £25,000 a year and the lump sum would be 3x times this amount. The formula was 2ox pension + LS. in other words £575,000 in this instance. Then this needs to be checked against the lifetime allowance, originally £1.5m – so in this case fine. The problem comes if your pension is worth £65,000 a year – which is not unreasonable in 2013 for a Consultant with 40 years of NHS service. Those with more than £1.5m at A-Day (when the new rules came in on 6 April 2006) could protect their existing funds by applying for enhanced or primary protection, essentially agreeing not to pay more in.

The Lifetime allowance has been increased and then decreased and heading to £1.25m from 6 April 2014. The amount that you can contribute has also been restricted. Severe tax penalties apply for anything over the limit. In essence there is an incentive to restrict growth and payments. Don’t forget that “the other side” of retirement, when you actually take your pension, this is taxable income. Argh! yes there are new levels of protection too, just to meet the problems of a reducing lifetime allowance and the latest raft of rules published by HMRC are out for consultation until 2nd September. These outline two more forms of protection Individual Protection (IP14) and Fixed Protection 2014 (FP14).

All of this needs very careful advice. But just in case anyone from central or any far off field of Government is bothering to listen. Here’s a question for you. Can YOU tell me what your pension is worth today? (all of them) and can you tell me what it will be worth when you retire? can you even tell me who your pensions are with? and are you aware of the potential problems for those with “workplace pension” or “auto enrolment” for those with large pension pots? No, like most people, you attempt to understand the mass of paper that may or may not arrive each year outlining the income that you might get if XYZ does something useful with your money.

If anyone in Government had a modicum of common sense the only restriction on a pension should be the amount that can be paid in that qualifies for tax relief. That is all. Have this as a fixed percentage of income – just one level, not dozens based on your age. Make it attractive. Don’t mess with it, leave it alone. YOU will get your tax relief back anyway in the form of income tax, reduced reliance upon the state and eventually in some cases inheritance tax. Here’s my suggestion after 20+ years of dealing with pensions and handling everything from the very basic questions to the most complex. Offer tax relief of 25% at source, with no need to reclaim it. Only allow those that pay income tax to receive the tax relief and restrict the amount to 25% of taxable income (in total from employer and employee). Oh, and keep the ability to have tax free cash of 25% of the fund at retirement, but no more. It bet that in 2 days you will still be able to remember my suggested fantasy rules. As for the more complex issues – allow carry back to only the last tax year and for non earners, or non taxpayers frankly there are likely to be more pressing matters for their money and a myriad of alternative forms of saving vehicles.

I wait in anticipation of the revolution that puts investors/savers/ the UK public first…. no I am not a member of UKIP.

Dominic Thomas – Solomons IFA