Government Pension Reforms

Matt Loadwick
Dec 2024 • 5 min read

Government Pension Reforms

Chancellor Rachel Reeves recently announced plans for major reforms to UK pension schemes, described as “the biggest pension reform in decades”, with possible implications for both UK public sector pension funds and private sector pensions.

These plans formed a key part of her first Mansion House speech as Chancellor, which is the annual address given by the incumbent Chancellor to senior bankers and financial industry leaders at the Annual Financial and Professional Services Dinner.

Typically, this speech is used to indicate future plans for the industry and is closely watched by those wanting to keep a close eye on the Government’s next steps.

What is the Government trying to achieve?

Through these reforms, it seems that the Government is seeking to achieve two objectives in particular;

To increase investment in UK projects / businesses to help stimulate economic growth; and
To increase returns on savings for UK pensioners

It is understood that the Government will not mandate where the funds will be invested, but it is hoped that a significant proportion will naturally end up invested in UK-based projects and growing businesses.

Some savers may find the framing of these reforms unsettling, as in the first instance they appear to be promoted as a vehicle for economic growth, rather than looking primarily at the needs of savers.

What are the plans?

According to the official Government press release, the reforms, (which will be introduced through a new Pension Schemes Bill in 2025) will merge the 86 Local Government Pension Scheme assets, and consolidate defined contribution schemes into ‘megafunds’.

It is understood that smaller defined contribution schemes from private businesses across the UK would also be pooled into funds of £25bn to £50bn

These megafunds would reflect set-ups in Australia and Canada, where pension funds take advantage of size to invest in assets that have higher growth potential. The Government hopes that this could deliver £80 million of investment in new businesses and critical infrastructure, while boosting the pension pots of defined contribution savers.

Are these new ideas?

It should be clarified that these plans are not exactly ‘new’ ideas from a UK government perspective, with the previous Conservative Governments proposing similar reforms in the last decade, most notably so with David Cameron in 2015, and Chancellor Jeremy Hunt as recently as Autumn 2023. It would seem that the fact that these reforms have cross-party support, at a time when UK politics is increasingly polarised, this would suggest that this is not altogether a terrible idea.

What opportunities might Megafunds offer?

The idea is that the larger the fund, the larger the sums of money that can be invested, into a wider range of both higher risk and longer-term assets, increasing the chances of improved returns for savers.

These pooled funds would be managed by professional investors, which should in turn help to cut costs by reducing fees paid to the various teams of advisers / lawyers / asset managers employed by individual firms each year.

What are the issues?

Risk and reward is inherent in all investments, and any investment decision should be defined through the investor’s attitude to risk, capacity for loss, and their need for returns.

Pension savers across the UK will all wish to see good returns on their investments in order to support a comfortable retirement, and in this regard the proposed reforms could be seen as a positive move.

However, not all savers will have the same attitude to risk, and an individual’s capacity for loss on their pension funds will change throughout their working lives. For instance, a saver in the early part of their career would be more likely to accept their funds taking a significant hit, as there would be plenty of time for them to recover before they retire. Conversely, a saver who may be looking to retire imminently would have less capacity for loss, as there would be less time for their funds to recover in the event of any significant losses.

These Canadian / Australian models often have a higher proportion of their funds invested in higher risk assets such as private equity, with a lower proportion held in assets that are typically less volatile, such as Government bonds or shares in listed companies.

Such investments come with particular risks, that not all savers have an appetite for. A key example of such investments going wrong is the Ontario Municipal Employees Retirement Scheme, who invested into utility provider Thames Water. Well-documented financial issues have led the pension fund to reduce the value of its 31.7% stake in the parent company of Thames Water to zero.

Undoubtedly, there will also be plenty of examples of success stories of these funds, whereby investments into higher risk assets provide the returns that investors hoped they would. But given the nature of our news and media cycle, which tends to focus on the negative, we are less likely to hear about such stories.

Implications?

As ever with these things, the devil will be in the detail, and given that the Bill will not be officially introduced to Parliament until next year, there is time for some of this detail to change.

Solomon’s will be on hand to support all our clients through whatever comes of these reforms; so if you have any questions or concerns – please let us know.

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Government Pension ReformsJemima Thomas2025-01-21T15:02:04+00:00

Autumn 2024 Budget

Dominic Thomas
Oct 2024 • 5 min read

The Autumn 2024 Budget

I expect further analysis to be necessary, here are some of the initial Autumn Budget highlights. I think firstly there is some good news. The tax-free cash from pensions has not been abolished (I didn’t think it would be).

The Taxman on Steroids

Whatever your political persuasion, the Government is raising an extra £40bn and raising an estimated £1,229bn in 2025-26. One might conclude that all the fuss amounts to a total increase of 3.3% which isn’t that far off the rate of inflation. This merely fuels my general, (admittedly cynical) belief that a Budget is a bit like rearranging the deckchairs on the Titanic. Is ‘the system’ fixed? and will it benefit the nation? are always the questions without answer.

What we do know is that Labour are going to ramp up tax collecting, which in truth is probably a continuance of previous Conservative policy. By the end of November 2024 there will be 200 new HMRC compliance staff, with the intention of creating 5,000 new compliance jobs at HMRC. This is part of the strategy to collect more of the unpaid tax (tax gap) that is owed. HMRC are also launching an app for your phone. HMRC do have powers that enable them to take money from your account and I would expect to see more of this sort of thing occur for frequent late payers.

Similarly, Labour will be aggressively going after those who cheat the welfare state, with fairly tough consequences for those who are caught.

Inheritance Tax

Agricultural property relief and business property relief will alter from April 2026. These will retain 100% relief from inheritance tax up to £1m but thereafter be subject to a 20% inheritance tax rate (half the actual rate). So this is probably a better result than many feared, but there cannot be many agricultural properties worth much below £1m. The reduced IHT exemption will also apply to AIM shares (a commonly used but very high risk tool used by some within the sector) which will inevitably now be less appealing.

Surprisingly, there has been some certainty provided in that the Nil Rate Band of £325,000 is now secured until 2030 as is the Main Residence Relief Rate of £175,000 for estates up to £2m. There is no inheritance tax between spouses.

Farmers will certainly be caught by the changes and I wonder if there may be an amendment for smaller farms (sub £5m in value). It isn’t a good idea to upset those who provide our food and rural management, but it is evident to many that some are considerably more prosperous than others and shouldn’t be totally exempt from IHT.

Pensions

Sadly but not unexpectedly, your unused pension pots will begin to be part of IHT assessment for anyone who dies after 5^th April 2027. Currently, unused pension pots are exempt from IHT, but this will end in two and bit years time. This may change some strategies for leaving your pension pot as long as you can, but we have time to make adjustments if necessary. This slight change in policy was always expected and remains one of the many reasons for keeping your retirement provision under review.

The truth is that this will create more administration for Probate which will likely increase the time that the process takes. It is also yet another opportunity for HMRC to learn the value of your pension assets.

Tax-free cash on pensions remains as it was, as does the tax relief on contributions (the latter being a surprise to me). As ever, it rather suggests that you really shouldn’t listen to ‘news’ reports, which are sadly driven by ideology rather than actual facts.

I cannot find anything about changes to Lifetime Allowance, Annual Allowance or Small Pensions rules in the 164 pages of the report. Indeed, it is confirmed that there are no other changes to existing pension rules and allowances, except for offshore pensions, which you do not have anyway! This impacts QROPS (if you know, you know, but you don’t need to if you don’t!).

ISAs

There were no changes to the ISA, LISA or JISA rules and allowances, despite what media pundits suggested. Clearly use of these allowances is sensible, don’t waste yours. The one thing they have scrapped is the British ISA which was announced but never implemented. I think it best assumed that this was a flag-waving attempt for the election.

Non-Dom

Nothing to do with me, but non-domiciled. The rules are changing with the intention being to ensure that people who live in the UK pay their taxes in the UK, both whilst alive and deceased. So this impacts people born outside of the UK. Ultimately, if you have made the UK your home then your worldwide assets will be liable to UK inheritance taxes. Reading between the lines, this is really aimed at very wealthy people with jets and large yachts.

Capital Gains Tax

Capital Gains tax will rise for any disposals from Budget Day (deeply embedded on page 129) this will make our calculations particularly onerous for 2024/25. However, the increase is much as expected, though frankly still lower than I thought might be the case. CGT will increase to 18% (for basic rate taxpayers) and 24% (for higher and additional rate taxpayers). This is still less than income tax. This makes an even stronger case to ensure you use your ISA allowances (£20,000) where CGT does not apply.

There was no change to the CGT allowance of £3,000 – the gain you can make before paying the tax; also no changes to your ability to use realised losses as well

Allowances and rates

There was no change to the annual giving allowance, inheritance tax rates or allowances (other than the above exemptions). The tax bands remain frozen (as previously planned and expected). This means that more people will end up paying tax as they drift into higher tiers.

Business Owners

Arguably business owners (like me) were the ‘hardest hit’ in the Budget. Whilst employees may not pay more National Insurance, employers will collectively pay rather more, some £24bn more from the next tax year and beyond. The employer rate will rise from 13.8% to 15% and be paid from a lower starting level of £5,000 rather than £9,100 (this alone is an extra £615 a year). However small businesses do get Employment Allowance, so the calculated NI they pay only applies after £5,000, this is extended to £10,500 from the new tax year and will apply to all businesses.

This is going to make salary sacrifice schemes more appealing for employers, but I wonder if they might otherwise be even more circumspect about new appointments. This also prompts thoughts about bonuses and pay rises being paid into pensions rather than as salary.

If you do own your own business, then the first £1m you get from selling it has a reduced capital gains tax rate (10%); gains above this are at normal CGT rates. This is known as Business Asset Disposal Relief (BADR) and Investors Relief. The £1m allowance will persist but the rates will increase to 14% for 25/26 and 18% for 26/27. So if you were planning to sell or close your business you probably don’t have enough time to take advantage of the lower rate. In practice the extra tax is no more than £40,000 in 25/26 then £80,000 from 26/27.

Business rates (the council tax businesses pay for having an office, shop or factory without any right to local vote or waste disposal) are going to rise. The temporary discount of 75% on rates expires in April and will become a 40% discount.

Corporation tax will remain at the same rate (25%) – that’s business profit taxed at 25% before the balance is distributed as dividends (which are also taxed). The small business rate (profits under £250,000) is retained at 19%, but is of course reduced in real terms (which is what politicians mean by retained or frozen).

Families With Young Children

For those of you with children and are paying for private education or plan to do so, VAT will now be added to your invoice (20%). You may also find that the fees increase as Public Schools will not be able to claim rates relief.

Child benefit rules are remaining as they were. Long gone are the days when families collected child benefit for each child, irrespective of income or need. Today the benefit is withdrawn (or more accurately must be repaid) if the higher earner’s income tops £80,000 (High Income Child Benefit Charge). The one change is that this can now be resolved through the PAYE system rather than dealing with self-assessment returns which invariably are forgotten by employees – leading to fines.

Helping First Time Buyers

There is little attempt to help any first time buyers in the south of the country. The Stamp Duty Land Tax (Stamp Duty), currently has a threshold of £425,000 before SDLT is paid. This is going to be reduced to £300,000. So First Time Buyers and indeed anyone, will now pay more tax when purchasing a home, so make sure it’s the right location, location, location. Those buying a second property (not their main residence) will see SDLT increase further.

There was noise about building homes and allowing councils to keep funds from sale of council houses under the Right to Buy scheme, which it is hoped will aid the housing market crisis of overpriced and not enough. Perhaps the extra tax on pensions may result in more beneficiaries selling inherited homes as well.

Specifics and Personal – Get In Touch

Of course, more detail may be needed for your specific personal situation, but these are the main headlines. I think most of us know that Government like to tax fuel, alcohol and cigarettes. Your green holiday flight tax will also rise by £2 for economy. If you go by private jet, the levy will increase by 50%. Reeves rather pointedly glared at Sunak as she gave an example of a flight to California.

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Autumn 2024 BudgetJemima Thomas2025-01-23T10:49:36+00:00

New start

Dominic Thomas
August 2024 • 2 min read

New start?

Do I dare ‘get political’ and risk offending you? Assuming you have pretty thick skin and are not easily offended … I’m going to proceed. I’m rather glad to see the back of the last Government. I appreciate that many people believe the narrative that Conservative governments are good at managing the national finances and Labour governments are not, however I don’t see any evidence to support this over the last 14 years or so.

In practice we saw a Conservative government launch a half-baked referendum on leaving the EU and ending our working relationship. Sure the EU has its faults, but not a single proponent had any real idea or plan for non-membership other than some rather Victorian notions of empire. I’m not sure that anyone could be worse than the collection of PMs that we have had over the last 14 years, who largely seem to be self-serving and unable to convey any vision.

So we have a new PM and Chancellor, the first female Chancellor in English history. It’s probably fair to say that this Labour leadership are right-leaning centrists and appear eager to reassure the public that they can handle our finances wisely, with economic growth being obviously important. We will see how this shapes up in practice.

Public spending can only really happen with public money, which is of course taxation and loans (Government debt). It is of course divisive political opinion about whether Government debt used to fund public spending creates wealth. On the one hand, better infrastructure and a healthy, educated workforce generate the conditions for growth and therefore more tax collected; on the other hand, debt needs to be repaid and the matter of how much and how quickly is of course the domain of spin doctors to suit your chosen narrative. Practically, we know on a personal level that spending more than you earn and building debt isn’t a great idea, but then this is public money – personal overspending is generally about consumption not investment into the hardwiring of our system (which is quite a different matter).

The truth is that life and politics are nuanced. Rarely is anything simple or either/or. All of us now have a refreshed understanding of inflation and for me, this is probably the more important element of the economics. Every year brings new challenges and we are undoubtedly at a watershed moment in technological advancement, perhaps the degree of change is as it ever was – overestimated in the short term with its impact underestimated in the long term.

We shall see how Mr Starmer handles the pressure compared to his predecessors.

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New startJemima Thomas2024-08-02T17:28:14+01:00

ISAs are being ”Simplified”

Dominic Thomas
April 2024 • 5 min read

ISAs are being ”Simplified”

I don’t like sounding (or being) cynical (there’s a but coming isn’t there!) … but – when a Government or HMRC use the word “simplification” they seem to merely describe their own thought process and nothing else. The intention is usually good, the real-world working, well … not so much.

There are some rule changes, announced by the Chancellor in the Autumn statement, that are designed to simplify the scheme and encourage more people to invest tax-free, allowing for a more ‘balanced’ investment portfolio. There are too many ISAs being used as cash deposit accounts by ‘nervous’ investors. Our clients tend not to fall into this trap, but of course millions of people do. Inflation is best beaten over time by investment into assets that grow (holdings in companies listed on the world stock markets). Cash is simply giving banks your money so that they can invest it for their benefit.

Here are the six reforms from HMRC:

The Government announced a package of ISA reforms and will make these changes to ISAs from 6 April 2024:

Increase the age for opening Cash ISAs from 16 to 18 and over. This is consistent with the age requirement already in place for opening Stocks and Shares, Innovative Finance and Lifetime ISAs.
Allow subscriptions to multiple ISAs of the same type, with the exception of Lifetime ISA, within the tax year, removing the limit on subscribing to one ISA of each type per year. All subscriptions must remain within the overall ISA limit of £20,000.
Remove the requirement for an investor to make a fresh ISA application where an existing ISA account has received no subscription in the previous tax year.
Allow Long-Term Asset Funds to be permitted investments in an Innovative Finance ISA, which does not require access to funds within 30 days.
Allow open-ended property funds with extended notice periods to be permitted investments in an Innovative Finance ISA.
Allow partial transfers of current year ISA subscriptions between ISA managers.

The government also plans to hold discussions with industry on allowing certain fractions of shares to become permitted ISA investments.

Most of this will not impact you, everything we do here at Solomon’s is flexible and one of the benefits of regular reviews is that we can assess and check ongoing suitability of the financial products we have arranged for you and the portfolio being used.

If you have any questions at all, please get in touch. If you need a review sooner than normal or feel one may be overdue, please drop us a line.

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ISAs are being ”Simplified”Jemima Thomas2025-01-23T10:50:33+00:00

Taxing times

Dominic Thomas
Jan 2024 • 5 min read

Taxing times

Tax is perhaps one of the most divisive issues. At the time of writing, just before the Christmas break 2023, the Scottish Government has announced that it is imposing the additional rate of income tax (45%) at a much lower level. Unlike England and Wales, the Additional Rate will start at £75,000.

Here in England and Wales, the 45% rate starts at that “only a quango could come up with it” number of £125,140 for tax year 2023/24. So someone earning more than £125,140 pays 45% income tax, but in Scotland the line is drawn much sooner.

By comparison, a Scottish resident earning £125,140 will pay an extra £2,507 on the same income. I doubt that the extra tax is enough to prompt thoughts about moving south, but it may well alter behaviour at the ballot box.

As a reminder, the tax rates for this tax year (2023/24) which comes to a close on 5^th April 2024 are as follows:

Band	Taxable Income	Tax Rate
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571-£50,270	20%
Higher Rate	£50,271-£125,140	40%
Additional Rate	Over £125,140	45%

These are the income tax rates on earned income, not dividends (which have lower tax rates).

If you are breathing a sigh of relief because you live in England or Wales, remember that this tax year saw the Government reduce the higher rate band so that Additional Rate begins at £125,140 rather than £150,000.

Most of us have been impacted by inflation, yet the personal allowance remained frozen as did the basic rate tax band. So more people pay more income tax. This is what the media and whoever is in opposition, like to call “stealth taxes” basically an increase in tax in real terms.

Additional Rate tax was introduced in the tax year 2010-11, and saw 236,000 people pay 45% raising £34.5billion. Ten years later, the HMRC 2020-21 data saw this number increase to 481,000. There is no doubt that whichever way one observes the data produced by HMRC, we all pay more tax.

There are of course some things that you can do about reducing tax or even obtaining tax reliefs, these are all part of a good financial plan. However what I often observe is how little attention is paid to good arrangement of financial ‘stuff’ so that you can minimise tax payments. How much and where from become really important when drawing money from your portfolio. It’s one thing to get tax relief or use an allowance, it’s another to draw money out so that you pay less than 20% tax.

I recently produced a White Paper that you may find of interest called ‘Understanding Adviser Fees’, which includes and explanation about the value that we bring. Whilst I firmly believe that every little helps, if you focus purely on costs and ignore taxes, you will quickly wonder why you bothered. You can find the paper (which is designed to be readable – feedback welcome) here.

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Taxing timesJemima Thomas2024-02-01T09:21:01+00:00

The Autumn Statement – the Ghost of Christmas Past

Dominic Thomas
Nov 2023 • 2 min read

The Autumn Statement – the Ghost of Christmas Past

We are in the closing weeks of the year. Our thoughts turn to Christmas celebrations and perhaps looking ahead to the New Year. The familiarity of our traditions poses a challenge to attempts to change them, yet even the harshest of men, Mr Scrooge, managed to pay attention to what is important and change his behaviour.

I don’t think it is contentious to say that the Conservatives are a party of tax cutting and yet we currently have one of the highest rates of personal taxes in the main economies. Few of us enjoy paying taxes, perhaps because often it seems that our hard-earned money is wasted on expensive ideas and ‘kit’ that doesn’t work very well at all … anyone tried the NHS IT system or indeed any ‘converting to digital’ Governmental system, let alone the military’s ability to spend a fortune on malfunctioning weaponry to cite just a couple of examples. We all have opinions. (As an aside the Power of Attorney system is going digital in 2024, so I urge you to sort yours before they muck it up and make the backlog even longer).

The Conservatives came to power in May 2010, admittedly with the assistance of the LibDems, but then we have had an entire mess of Government ever since.

According to Jeremy Paxton in 2018, David Cameron was the worst Prime Minister since Eden:

“[He] got to the top of a tree in order to set it on fire and cleared off, put the interests of his party before the country and decided to have this referendum, believed one thing was the only right outcome for the country, didn’t campaign for it, got the opposite outcome and XXX off. It doesn’t seem like leadership to me”.

Given the PMs we have had since 2018, Cameron might actually look a lot better, the bar seems woefully low, anyway, for now Cameron is back, this time as Foreign Secretary.

The backdrop of a Covid enquiry which merely proves what most of us thought, that Mr Johnson is an unreliable character (I am being polite), we have the prospect of an election looming by the end of January 2025. The Labour party seems set on sabotage and the plethora of political open goals being squandered is lamentable. The traditional approach of appealing to the notion “everyone has their price” is in the hands of the Chancellor, who is being tempted to cut taxes now that inflation appears to be returning to a more comfortable figure (4.7% October 2023 ONS).

Which of us doesn’t want to pay less tax? In an environment of rising prices, seeing your net pay remain pitifully stagnant is irksome. Yet we also know that tax pays to keep society running in some vaguely civil way. We can all find things to disagree with, it’s almost a rite of passage into a fifth decade. It’s clear that ‘the system’ doesn’t work for all, and indeed seems to generally work best for the few. The sadness is that there seems to be so few alternatives to the binary choices we have here in the UK; stuck in traditions that don’t work for the good of the country. Creativity and visionary leadership remain sadly elusive.

There was a time when the economy was thought about as a way of serving society, yet here in 2023 we are evidently a society that is serving the economy. There is no good reason why this cannot change, and despite experience, I remain an optimist in a sufficient number of decent people.

For the record, I have no intention of offending your political beliefs, but I do think we all deserve rather better than we have had. On 22 November 2023 we shall get further notice …

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The Autumn Statement – the Ghost of Christmas PastJemima Thomas2025-01-23T10:49:36+00:00

Golden handcuffs

Dominic Thomas
Jan 2023 • 6 min read

Golden handcuffs…

For many employees, a key reason to remain with their employer is because of pension benefits, however the playing field of employer pension schemes is far from level and the cynic in me questions whether Government tax policy is deliberately attempting to reduce the cost of pensions to employers, particularly the State employers such as the NHS.

Firstly, it’s important to understand the two basic types of pension. The clue to what they are is in the unusually straight-forward name.

1 – Defined Benefit (DB) or Final Salary Scheme

Your pension (benefit) is based on your final salary when you leave the scheme, whenever that is at the scheme normal retirement date (NRD).

The amount you get is a fraction of your final salary, your membership of the scheme and work for the employer builds your entitlement. So a scheme with a 1/60th rate of “Accrual” 25 years of membership would provide 25/60ths (41.6%) of your final salary. This will be inflation-linked within parameters set by the scheme.

The amount you receive has nothing to do with how much you contribute, that can be any amount (sometimes nothing). It is your employers duty to honour the agreement not simply for the remainder of your life but likely the remainder of your spouse’s life as well.

According to ONS data to 2019 (the most recent at the time of writing) there are about 7.6m active members (people still building benefits) of DB schemes, of these 6.6m are in Public Sector schemes.

2 – Defined Contribution (DC) or Money Purchase Scheme

These schemes are more straightforward in that they are investment-based schemes and the only guaranteed definitions are how much the employer is going to contribute as a percentage of pensionable salary (and the employee). How much this is ultimately worth will depend on how well the money is invested and the charges applied. Many employers use fairly cautious investment strategies in the misguided belief that this is better, yet as most people will save for their retirement for three or four decades, this will be rather like driving with the handbrake on.

The Auto Enrolment pensions that were introduced to automatically add staff to a pension rather than ask them if they wanted to join are essentially defined contribution schemes. They have been a success in the sense that more people are now saving into a pension.

The majority of employers do not offer a DB scheme, in fact hundreds have been closed over the years. There are barely any open DB schemes in the private sector, because they cost an awful lot to run and provide. There are roughly 10.4m people drawing a pension from a DB scheme and it’s fairly evenly split between private and public sector pensions. Remember that these are pensions payable for many years with a degree of inflation-proofing. Back in 2006 there were about 3m members of private sector DB schemes, half of them were closed, but by 2019 only 0.6m members were actively building benefits due to the number of closed schemes, deemed too expensive. Contrast this to the 0.9m members of open private sector DC schemes in 2006 which has risen to a whopping 10.6m.

To put a little more ‘flesh on the bones’ of the open private sector DB schemes, employers contribute a weighted average of 19.1% with employees adding a further 6.5%. Compare this to the weighted average private sector DC scheme where employers contribute 3.5% and employees just 1.6%. It doesn’t take a maths genius to work out that its much cheaper (by a country mile) for employers to provide a DC scheme, for which they pay annual contributions when their member of staff works for them and not a penny more thereafter.

Stating the obvious, if you are running any business, profit is what sustains a future; reducing costs increases profits (or should). The Public Sector cannot generally make quick and substantial changes like this. Generally the approach has been to alter existing DB schemes, with pensions starting later (65, 67, 68 as opposed to 60). Member employee contribution rates have increased – doubling in many cases. Finally, the rate of accrual has also been changed, often dressed up as better, but invariably forfeiting other benefits such as a lump sum. This is where most Union and legal challenges have been directed.

So taking a typical doctor who began their career paying 6% into a 1/80th pension scheme that would provide a pension for life from age 60 and a one-off tax-free lump sum. If they started working without any career breaks they might build 36 years of service (36/80ths) providing a 45% pension of their final salary (say £130,000) of £58,500 a year and a one off lump sum of £175,500.

If we exclude inflation, a same salary doctor will need to work an extra 7 years to get their pension at 67. They pay closer to 13.5% of salary to the pension and build it as 43/54ths of 79% of their salary (no lump sum)… but the Government was smarter than that, the maths isn’t really 1/54th of final salary, it’s of each year … the term ‘career average earnings’ captures this. A doctor starting out is obviously paid substantially less than one at the peak of their expertise and career earnings – so it’s nothing like a final salary but an average salary over 43 years. Taking the midpoint as an example, 21 years into a career – or retiring on a salary that you had 21 years ago. In fairness it isn’t quite like that, there is some inflation-linking, but this is detail you don’t need to know right now. The principle is how pensions in the Public Sector have been sliced and diced to save money.

When you add in draconian Government/HMRC rules about the Lifetime Allowance (a tax charge of 25% or 55% for those with pensions valued at over £1,073,100 and the Annual Allowance formula used, (which for many triggers a substantial tax on a pension income they have not yet had), it is very hard to conclude anything other than a deliberate strategy to remove higher paid long-term employees … like doctors.

So quite apart from the awful treatment medics often get in the media and utterly fictional suggestions of Consultants barely breaking from a round of golf to turn up for work occasionally, there is little wonder that most of them feel betrayed by a nation that they chose to serve. I can certainly tell you that from three decades of working with NHS doctors, I’ve not met any that became multi-millionaires through their work within healthcare. Some are certainly more entrepreneurial than others, but most of them simply love medicine and get satisfaction making a real difference in people’s lives, more likely describing it as a ‘calling’.

The reasons for the NHS being in crisis are complex and many, but part of the reason is that many doctors are being forced to reduce the number of sessions that they work or retire early so as to avoid a scenario where they are essentially paying more tax than the income they earn … actually paying to work. It is down to the Government and policymakers to have an adult approach to pensions and scrapping many of the really very badly thought through self-defeating rules.

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

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Golden handcuffsJemima Thomas2023-12-01T12:12:39+00:00

The mini budget – Sept 2022

The mini budget – September 2022

You may have gathered that I ended up pouring myself a stiff drink after I listened to the ‘mini budget’ last week. To say that it wasn’t quite as expected would be an understatement. Some would have us believe that we live in an age of being offended by any old opinion, the truth is quite different, but as ever these societal messages all have a purpose to serve, just usually not yours or mine. I felt the heading here ought to have a date, as there may be another one along any minute now … it’s a bit of a mini adventure!

Setting aside partisan politics, which is relatively easy to do these days, because no party looks anything like they should. I give you the budgie … I mean budget, a mini one, though probably one of those BMW minis on steroids that runs off a wall socket and can easily swallow a double bed.

TAX CUTS

We had tax cuts… well, more accurately, we have been promised tax cuts from April and National Insurance cuts from November. Anyone who has built up 35 tax years of NI payments since 16 will barely wake up to this marvellous news, the rest however have had an increase removed … or it will be. A saving of 1.25% within the NI threshold. As a well-known supermarket may say, every little helps … yes – if you believe that somehow your NI is not simply another tax, that for most of us is the price of membership to get a State Pension. Yes, it does provide a few other things.

A BRIMFUL OF ASHA ON THE 45… (YOU KNOW, OR YOU GOOGLE)

The big news is really the additional rate of tax being abolished. That’s the extra 5% tax that anyone with income over £150,000 must pay. Instead, they will simply continue to pay 40% on all income from the higher rate threshold. That also means that the additional rate is abolished on dividends and additional rate taxpayers can have back a £500 personal savings allowance (non-taxpayers and basic rate taxpayers have £1,000 allowance, higher rate taxpayers £500). That’s £500 of interest tax-free (all interest is taxable, it’s just that there is a personal savings allowance, which until the recent interest rate rises you’d need £50,000 to £100,000 on deposit to achieve).

For context, anyone earning £150,000 does not get a personal allowance of £12,570 which has a 0% tax rate … apparently, they don’t deserve it. Anyone earning over £240,000 a year (heaven forbid – it’s actually just about enough to get a mortgage to buy a 2up2down terraced house in Edna Road, SW20) can only contribute 10% of the £40,000 annual allowance towards a pension, meaning they are actually penalised from saving into pensions. If you are an NHS doctor in the pension scheme, you don’t even have to earn anything like these sums to get clobbered with tax on money you will not get until you retire, as you well know, but Joe Public seems oblivious to. These measures have not been altered, but the great injustice of the day is to allow them to retain an extra 5% of income above £150,000. That’s 5p in every £1 or £5,000 for every £100,000 (on which they still pay 40% or £40,000 in every £100,000).

STYLUS and STYLE LESS

What we deem fair depends on who you are and what you earn. However, one thing is clear, the Chancellor has failed to read the room, much like he did at a recent funeral. This is the age of appearances, in all but hairstyles (I write with no sense of envy at the naturally enforced lack of one).

What we have is messages that miss the target, appearing to help and appease the ‘wealthy’ which I would argue is never income, always capital when talking about money. When many will evidently struggle to pay for power and heating this winter (our little office in SW20 has had a tenfold increase, 10x good grief, I am definitely in the wrong industry!). The appearance and indeed the impact of the cuts is woefully poor messaging. Bankers’ bonuses being uncapped to most of us sounds insane, until you realise that the cap resulted in higher salaries (fixed costs) for poor performance and many that couldn’t keep the score they wanted decided to pay income tax in Paris, Frankfurt or the Caymans… scrap that last one. Anyway, keeping them here paying 40% of everything seems logical to me as opposed to nothing of nothing.

But facts don’t make for good news or even bluff and thunder. Equally neither does the promise to pay for it all at some point in the future. This is the age-old problem of Government printing money (Bonds) as an IOU and hoping enough of us buy them and believe that, as previously there will be enough tax revenues to enable them to keep paying the coupons (interest) and ultimately return the capital at redemption date.

THE GREAT RECKONING OR REDEMPTION?

Redemption is perhaps the right word – can Liz Truss salvage the car crash of politics that Mr Johnson left. Johnson has had many forgive him, at least three wives have done so at times. Whether this is a gamble that Truss has the hand or nerve to match remains to be seen. I am hopeful; but deeply sceptical. As she clearly can drive a tank, I won’t suggest we watch to see if she can parallel park a mini.

WHEN LESS IS LESS (YES REALLY)

Side note. Lower basic rate tax at 19% means on the first £37,700 (after the personal allowance) you will pay income tax of £7,173 rather than £7,540 a saving of £377 a year or £31.42 a month … the milky bars are on me! (I jest at the price of confectionary and anyone old enough will recall the advert).

Additional side note, that means your basic rate tax relief on pensions will also reduce from 20% to 19%. In maths we can relate to, £81 invested by you sees £19 added by HMRC rather than £80 and £20. So for those paying say £300 gross a month into a pension (as I advise many people to do even if retired and under 75) that means you will now pay £243 a month rather than £240 (from 6^th April). Yes it costs a little more…. it’s the classic giveth and taketh away (all Chancellors do this).

I imagine you may have questions, some are being answered by the markets (which seem to be calling this a game of bluff and double-bluff). Some will appear in your newspapers, though I suspect they will be full of rather more conjecture and opinion than fact. If you wish to genuinely understand the impact of reduced taxes on your wealth, get in touch or hold fast until your next review. We are all playing the long game here, but none of us know how long.

No politicians were hurt in the writing of this article.

According to the ONS in 2020/21 the average disposable (after tax and NI) income is £37,622 but the median (the mid-point if you lined up everyone) is £31,385. If you separate out the non-retired and retired, the former has an average of £39,349 and mean of £32,934. Retirees see this considerably lower at £29,408 and £25,405. It is generally true that retirees have no mortgage payments and unless they are our clients, apparently never have any fun either (joke!).

Government Sanctioned information here

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The mini budget – Sept 2022Jemima Thomas2025-01-23T10:49:37+00:00

Hard Truths

Solomons-financial-advisor-wimbledon-blogger

Hard truths

As Wimbledon begins, some hard truths will be faced. Some players will not be “on their game”; some will peak too early and some will enjoy good luck whilst others might curse technology, training, lack of sleep or why on earth they did or didn’t do something that may have made all the difference. We will all have our favourites, but in the end only one person can win the singles championship. In just a couple of weeks all the questions, hopes and dreams for Wimbledon 2017 will be consigned to history.

In a similar vein, June was interesting and is now over. An election, a minority Government, a deal with the DUP, various horrendous disasters and circling political vultures all attempting to appeal to the crowds, some more obviously than others. Much of this we cannot control, despite what some might suggest within social media.

A new savings low

The FT reported the rather grim news that Britons are saving less of their disposable incomes that at any time since 1963 when such records began. An alarming 1.7% of income was left unspent in the first quarter of 2017, significantly below the long-term average of 9.2%. Reports also continue to make the argument that around 1 in 6 people use a credit card to get through the month. In tennis terms – there’s not enough left in the locker.

Squeezed rises

Whatever your view of austerity, clearly if income falls behind the rate of inflation, you effectively have a pay cut. This is something that the State Pension triple lock is designed to prevent (after many years when the State Pension arguably fell in real terms). It is estimated that the triple lock costs around £6bn. It would certainly appear that the days of austerity are coming to an end and that there is growing support for the end to the cap on Public Sector salaries which have been held back since 2010 (when Rafael Nadal won the men’s singles and Serena Williams won the women’s singles at Wimbledon).

Self-defeating

However, unless people begin to save for their own futures, arguments about austerity are going to seem like the proverbial storm in a teacup. The undeniable truth is that we all need to budget and live within our means. Most don’t appear to do this. No Government in recent history has achieved it either. If you cannot control what you earn, you can only control what you spend, which means accounting for how your money is spent. The truth is that hardly anyone likes to budget and probably dislikes drawing one up a little more. Our clients are no exception – and most don’t really “need to budget” but of course it is a discipline that we advise and encourage to ensure that your hard-earned income sticks to you.

However, it is vital to understand where your money goes. The chequebook (remember those?) does not lie. It is very easy to spend and keep spending in a society that is expert in parting you from your hard-earned cash.

As with politics, in tennis with patience, generally your opponent will tend to beat themselves. Sure, you may need to play well, but invariably the loser is the one that makes the most and more significant mistakes or errors. The most basic of these to make in financial planning is failing to budget, ignore it at your peril. In tennis terms, its the equivalent of not being able to serve.

Dominic Thomas
Solomons IFA

Email me to get in touch

Hard TruthsDominic2025-02-03T10:37:24+00:00

Great Rivals

Perhaps you watched the men’s Australians Open final, which saw Roger Federer eventually overcome Rafa Nadal. The speech at the end by Roger Federer was typical of him, but many that don’t follow tennis might wonder if he wasn’t simply saying some well-rehearsed lines, which sound very nice but aren’t really true. Those who do follow tennis, will recognise that it seems to have an unusually generous, gracious and humble group of people at the top of their game. Respect is not something demanded, as it is in some sports, but modelled.

What if businesses took a similar approach?

Let us not forget that this is a highly competitive sport, a battle of skill, stamina and psychology and the momentum flows back and forth like the ball itself. Imagine if this sort of respect was found in business, if competition was performed with grace. If being “the best” didn’t mean others were annihilated in the process. An awareness that being “the best” only lasts so long, whilst you are good enough to be better than, rather than because you once were. I wonder how this sort of approach might alter the way companies behave. It might change the way they invested in their staff, sector or community rather than simply focus on the quickest and cheapest way to get what they want.

… and how about the Public Sector?

I had thought that the non-business sector might be different. Schools might collaborate rather more than they do, but in practice Head Teachers are invariably under pressure of targets. Achieve results, retain pupils and so on, which might be in the interests of the pupil, but might not. The targets incentivise certain types of behaviour and as usual, you get what you measure. What therefore requires challenging is the targets being set, which within the Public Sector are set by Governments. I appreciate that many within the Public Sector may well collaborate, but this is rarely incentivised or encouraged.

Rise above the noise

Similarly, when it comes to your own financial planning, the targets that you set, should be yours, not those set for you by others. The fact that your favourite radio or TV station feels the need to report the level of the FTSE100 every half-an-hour is beyond my comprehension. It is irrelevant information to anyone other than a financial trader – who already has it! So, when you play your game best, you don’t have to beat the market, you don’t have to beat other people. Your financial plan “simply” needs to align with your values and then make use of the most suitable financial planning techniques. The difference is fundamental and fundamentally about confidence …and some good humour.

Dominic Thomas
Solomons IFA

Great RivalsDominic2025-01-28T13:29:12+00:00

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