The Future of Pensions

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The Future of Pensions

I am currently at my annual conference in Wales – the Chartered Institute for Securities and Investments (CISI) with whom the IFP – Institute of Financial Planning merged last year. Yesterday we covered a number of valuable topics, but the talk that resonated most with me was from former Pensions Minister MP Steve Webb, who talked about the future of pensions – amongst other things.

I had to admit that my BS radar is usually on hyperdrive when listening to any politician these days, which is probably a sad reflection on me, however I was very impressed by what he had to say, albeit he did not paint a terribly pleasant picture of the future. Of course, only time will tell if his predictions come about and in fairness, he was quick to remind us of the problems with predicting the future, particularly in a climate where since the last general election all of the major political parties have changed their leaders and the country has voted to leave the EU.

Book cover of Yes Minister - A Very Courageous Decision

Play it again Sam…(or Phil)

Webb was clear that changing pensions is pretty difficult and appears to be a low priority to either the Government of Civil Service. He gave an insight into the slow turning wheels of Whitehall, sounding much like an episode from Yes Minister. Given all the change that we have had (State Pension, Auto Enrolment, Pension Freedoms, Annual Allowance Taper, Lifetime Allowance…) he suspects and urges a period of quiet inaction from the Chancellor, Philip Hammond. This is particularly pertinent to those concerned about the loss or reductions of tax relief on pension contributions or changes to the tax free cash entitlement. He made the case that the public and financial planners could not plan ahead in confidence if the rules are changed every year, yet warned at Chancellors are easily tempted by ideas to collect more tax, however short-sighted.

Whilst on the subject of tax he made it clear that the Treasury are naturally inclined to taxing now rather than in the years ahead, so there is a very real pressure to take the view that tax relief reductions in the short-term outweigh the advantages of taxed incomes in the future, so by inference, a system of loss of tax relief and no taxation of pension income is a genuine prospect. He argued that this was evidenced by the Treasury’s love for ISAs and obvious contempt for pensions with the Lifetime Allowance reductions (and associated tax penalties) and the new tapered annual allowance. Personally he would scrap the LTA but retain a cap on annual pension contributions (which I certainly agree with). He did point out that of course putting trust in future Chancellors to honour a commitment not to tax pension income in the future required a high degree of faith, which deliberately provoked some mirth from the audience.

Turning to Brexit, he simply outlined his view that interest rates are likely to be very low for a long time, which would place pressure on people to look for better returns than the puny sums they achieve from their savings. He argued that this would likely lead to yet more scams as people fall for yet more illusory promises of high returns. He also warned of the impact on final salary pension schemes which, because of the assets that they hold and the way calculations are performed, would have larger deficits in their pensions (due to low interest rates) probably leading to some, or perhaps a majority of companies trimming their dividend payments.. which in turn makes the task of achieving investment income harder still.

He seemed to have little regard for our regulator of whom he said was “not fit for purpose” and thought the new LISA was perhaps the most badly constructed investment idea for years. If you follow me on social media, you will know my thoughts on this already.

So, whilst Steve Webb found a receptive audience, I was left with the sinking feeling that there was little hope for common sense to return to the Treasury… but who knows… we all get to find out in a few weeks time for the Autumn Statement.

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

The Future of PensionsDominic2025-01-21T15:03:17+00:00

The Budget 2016

There’s nothing like the Budget to divide people along political lines, I shall refrain from making political statements. All Chancellors perform a merry dance taking from one pocket to give to another, the current Chancellor is no exception (indeed there are none).

Lifetime ISA & Pensions

The stand out issues are that there has been no attack on pension tax relief, as leaked following leaked rumours that it would be. However a new Lifetime ISA looks a lot like a pension – with an effective tax relief of 20% but maintaining the ability to access the money before retirement (before 55). This is much like Individual Retirement Accounts in the US and something that many have called for over the years. The problem is simply that a pension has the advantage of being a long-term lock away pot, there for your retirement. Enabling people to access funds earlier is designed to help homebuyers. On the surface this is a good thing, in practice access to money does not deal with the problem of over-priced housing, if anything it is likely to make things worse (think about it).

That said the ISA allowance is going to rise to £20,000 – which is good news for investors seeking tax-free growth. If I were a cynic I might suggest that these two issues are connected – the prospect of a lifetime allowance for ISAs could be introduced for all. So reading between the lines, the direction of travel seems to be to have 20% tax relief, accessible funds, but restrictions on the value of the pot…. we shall see in the fullness of time.

The Chancellor also appears to have tidied up some of the older tax rules about inherited pensions. When somone dies before 75 with a pension in drawdown, there is no tax to pay by the beneficiaries, after 75 the proceeds are taxed at the recipients marginal rate of tax (which could be 0% or up to 45%).

Pension Advice

The Money Advice Service (funded by levies on financial advisers and pension companies) is to be scrapped, it isn’t working and the name itself is misleading (it’s not advice, but information). I along with many others was peeved about the advertising which suggested a return to the lie that financial advice is free – it never has been and never will be. Given that this was paid for by levy, it felt rather like the biting the hand that feeds. In any event, go-faster stripe paint at the ready… there will be changes (hmm… plenty of opportunity to get some consultants in to test new names, design a logo that will inevitably be less than satisfactory).

Employers that pay for pension advice to employees can currently claim £150 per head without it becoming a benefit in kind (and taxable on the employee) this is being raised to £500 per head. I wonder what might happen…

Capital Gains Tax

The rate of tax payable on capital gains is to be reduced to 10% and 20% (from 18% and 28%) and further suggests a more streamlined approach to taxation, where income taxes and other taxes seem to be at similar rates. I would welcome this as it moves towards a more genuine tax simplification and reduces the number of tax rates, making life easier for planning effectively. The new CGT rates come into effect from 6th April 2016… which will help those lucky enough to nurse some investment gains of late.

Personal Tax

The personal allowance is increasing to £11,000 from 6th April and to £11,500 from 6th April 2017. The amount of income you can earn before the 40% tax rate begins has also been raised. This will not help anyone earning more than £100,000 at which point the personal allowance begins to reduce by £1 for every £2 of income over £100,000.

Small Businesses

Corporation tax is due to fall further, this is a tax tool designed to help encourage enterprise and I think we all welcome actions to stop businesses legally evading tax through transfer pricing etc – the Starbucks or Google loophole looks like one that may be closing…. we shall see.

Small businesses also look set to benefit from rates being cut – which of course is very welcome, its a very odd tax. Business owners do not get to vote for their local authority unlike council taxpayers and many find the costs punitive. Most will be receiving demands this month for the next year and be very pleased at the prospect of a reduction in 12 months time (if I have correctly understood when it will be introduced).

Other stuff… the Budget will be dissected in the media, you will possibly be bored with it already. Of course its important, but the issues invariably are about attempting to make the bad news look good and the good news look “absolutely fabulous” (all Chancellors, all parties). These things tend to come out in the wash… can you remember the Budget from 2011 or 2012? probably not…

Solomons APP

All the changes will hopefully be updated on our APP by the end of the evening. Do let me know how you are getting on with the APP – its full of useful calculators and tools… but only if you use them. Its free to download and use – so do tell others. Don’t forget it works on iphone, ipad and Android.

Dominic Thomas
Solomons IFA

The Budget 2016Dominic2025-01-27T17:02:28+00:00

When in Rome

When in Rome..

I recently visited Rome for the first time. It was one of those places that I have been meaning to visit but simply had never found the time. I have always had good holidays in Italy and am happy to report that Rome more than lived up to expectations.

All roads lead to Rome

Being something of a film fan, I was keen to ensure that a few of the locations used in Roman Holiday, La Dolce Vita …were included in my visit. Having studied Latin at school (which dates me) I was also interested to see the ancient sites, many of which were part of the translation exercises that I sweated through somewhat reluctantly…. the Appian Way.

The experience of Rome reminded me of the story of the man that went to Africa and saw a huge opportunity to sell shoes, given the number of people without them. Business school suggested that this could be seen two ways – an opportunity to sell shoes or evidence that most people didn’t see the need or have the desire for them. Anecdotal observation is insufficient for making any solid business plan.

Opportunity discussion forum

Today, I might suggest opportunity of such a nature exists in Rome for driving instructors, graffiti removers and retail space designers. The driving in Rome is something to be seen to be believed. Opportunity or dead horse?

Tempus Fugit MMXVI

The Budget is now just a couple of weeks away. There is plenty of opportunity for speculation as you may have gathered. There is rumour that tax relief might be axed entirely or reduced (more likely). Supposed leaks suggest that perhaps the 25% tax-free cash lump sum will be scrapped (so some are now rushing to take theirs whilst they can). However this is in the context of the option of a pension income that is not taxed. Changes to the Lifetime Allowance, Annual Allowance and the prospect of a pension ISA.…. But by doing so, this would likely require a pre and post 2016 pension regime– just to add further complexity.

Veritas

The truth will not be known until some time after the Budget (not the Budget itself) which needs clarifying, checking and approval, is generally a promise, not a guarantee. Indeed assuming that anything that any Government says about pensions is “guaranteed” is best probably thought of only within the very short-term nature of a Government… the most obvious example being the “triple lock” guarantee for the State Pension.

Which reminds me again of Rome, and wondering how many in our political system or media would have survived the mouth of truth…. When it comes to pensions it would appear that many will simply be flung to the lions.

MouthofTruth

Dominic Thomas
Solomons IFA

When in RomeDominic2025-01-27T17:02:28+00:00

Pension Tax Relief Changes?

It would appear that further changes for pensions are likely. Pension tax relief has been “under review” which I always take to mean a report into the impact of a decision has been already made. At present whatever your rate of tax you receive as relief for any pension payment that you make.

As outlined within this blog before, in practice this costs HMRC a lot of money and is essentially a gift back to anyone that appears to be deemed as “rich” which as far as I can tell from Government and Opposition policy is anyone earning something between £50,000 and £1million as anyone with an income above £1m seems to largely avoid paying any tax her in the UK.

The expectation is that relief will be 33% so that a neat little explanation of tax relief can be spun by the media – 2 for 1… that is £2 from you £1 from the Government. Personally I fail to see how this is sensible as it’s an extra 13% for most people and a reduction of only 7%-12% for higher and additional rate taxpayers. It would be more sensible to have a standard rate of 25% which then at least correlates to the 25% tax free cash lump sum. 3 for 1 is just as simple to spin.

Constant Changes to Pensions

This comes on the back of other pension reforms

Pension freedom – abolition of any requirement to buy an annuity, retaining your pension as an investment portfolio.
Reduction in the Lifetime Allowance (£1m from 6th April 2016)
Online application for Lifetime Allowance Protection
Reduction in the Annual Allowance to £40,000
Annual Allowance tapering for those with income of £150,000+ from 6th April 2016 reducing the annual allowance to a maximum of £10,000.
Auto Enrolment or Workplace pensions
Changes to what constitutes a “year” input years are reverting to tax years.
Flat rate State Pension
Changes to the State Pension Age
Legislation to give HMRC the ability to take money from your bank account

Some of these changes are welcome, some are not, and many seem to be altered each tax year, making planning for the future somewhat awkward to say the very least.

Dominic Thomas
Solomons IFA

Pension Tax Relief Changes?Dominic2025-01-27T17:02:29+00:00

Pensions – more needless headaches the Lifetime Allowance

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

Pensions – more needless headaches the Lifetime AllowanceDominic2025-01-21T15:03:49+00:00

Retiring Doctors and GPs?

Lately I have found myself between a rock and a hard place when advising my medical clients. Through no fault of their own, many long-serving Consultants are being punished due to poorly thought through rules about the Lifetime Allowance and Annual Allowance. Whilst on the one hand they are “lucky” to have large pension funds, that are by comparison “brilliant” the fault of successive Governments to fail to do their sums is hardly their fault. Indeed if ever there was an appropriate use of the term “moving the goalposts” it is surely fitting for what has happened to public sector pensions, particularly the NHS Pension Scheme, which was revised in 2008 and has now morphed into the 2015 Scheme (from the start of this month).

The changes have meant that members have to guess when they might best retire… in some specialities that is “a challenge”, most have to pay more, work longer and accrue less, whilst, (if reports are to be believed) having to cope with a greater workload, politically motivated “targets” and an under resourced organisation.

As a result of blown 2012 Fixed Protection and further reductions to the Lifetime Allowance, many of those that I work with are somewhat fed up with the powerlessness that they feel in relation to their pension rights. I cannot speak of widespread disatisfaction, but certainly those that I know within the medical community (quite a number) are “cheesed off”. The way benefits are calculated are ludicrously complicated and often mean that extra taxes are payable – through no fault of the doctor – simply by being in the scheme and having an increase in pay which is out of sync with the defined limits. I’m not talking small taxes here – but excess amounts that are deemed to have been paid as income, even though this is not the case in reality (it isn’t paid as income)…

According to the BMA, a poll of over 15,000 GP’s indicated that 34% of them expected to retire within the next 5 years. Statistics out of context can be used to support any argument, so a headline such as this one needs some unpicking.

According to the GMC, there are about 60,000 licensed doctors on the GP Register for the whole of the UK. The GP register has been around since 2006 and requires that all practicing GPs keep their license and records up to date. This figure is for the whole of the UK and does include some possible double-counting as some specialists are GPs and vice versa. In England there are 40,584 GPs and according to data published last month by the Health and Social Care Information Centre (HSCIC), for the first time there are now more practicing female GPs (20,435) than male GPs (19,801). In any event, a suvery of 15,000 is therefore a survey of about 37% of the entire workforce by headcount… which is a significant survey, one might say a very solid survey, certainly when considered as a percentage of the relevant population – unlike the current political polls or those TV adverts for women’s products that claim high rates of satisfaction (so small that it is questionable if the people conducting the survey actually left their office building)… so this survey, unlike some, is rather “worth it”. Of course, not all GPs work full-time, the figures are a headcount, not a precise allocation of full-time GPs, the full-time equivalent number of GPs is 36,920. If trainees and retainers are excluded, then the full-time equivalent is 32,628.

By way of “hard facts” here are some NHS statistics to consider, I have taken these from the HSCIC report, which frankly could make the statistics much clearer… anyway…

1,387,692 Total NHS workforce (1,187,606 FTE)

of which

701,872 are professionally qualified clinical staff (623,050 FTE)… 50.5%

42,733 Consultants (40,443 FTE)…. 3.0% of NHS staff

55,079 Hospital Doctors (53,786 FTE)…. 3.9% of NHS staff

37,078 Managers (35,164 FTE)….2.6%

36,920 General Practitioners (32,628 FTE)… 2.6%

377,191 Nurses, including GP nurses (328,577 FTE)….27.1%

The problems of staffing within GP surgeries looks set to continue and frankly, if politicians contrinue to play havoc with the pensions (Lifetime Allowance and Annual Allowance nonsense) of doctors and nurses, they may well also be considering earlier retirement. Future PM, you have been warned…

Dominic Thomas

Retiring Doctors and GPs?Dominic2025-01-27T16:12:32+00:00

The Budget 2015 – A New Mad Max

So, the Budget is already ancient history, the political hoo-hah has been left to fester, tweak and develop into an election manifesto campaign. So what, if anything grabbed my attention?

Jilted Bribe

Firstly, I have to admit that I was expecting there to be a little more of an electoral bribe. Whilst the Chancellor certainly made much of the fact that he wasn’t going to (and thus seek to be understood as prudent or sensible) the truth is that, well… he didn’t really offer a bribe (unless its one I missed). Frankly with the national purse in the shape its in, I was rather glad, (though I remain open to the possibility of solving the problems differently).

ISA with tax relief? – future implied?

That said, the first time buyer ISA does sound like a good idea. The detail needs further examination, but in essence there is 20% tax relief on the annual ISA allowance for people that are 18 or over and don’t (and have never) own a home. £3,000 of the £15,000 ISA allowance will be paid by the Government. Whilst everyone that qualifies will benefit, in practice, this will be a very good way of saving if you qualify… if not you, perhaps your children… opening up further options for more wealthy parents.

Pensions and Politicians… taking the …point?

As for pensions, I have to admit that the utter folly of politicians in relation to pensions has shifted gear over the last 10 years. Whilst knowing that we all need to save more so that there is less reliance on the State system… perhaps even the prospect of a means-tested State pension (who knows?) they are determined to punish successful investing and saving.

Here in the UK we are now restricted on how much can be paid into a pension and how much the pension fund can be worth. Utter madness. Yes £1m is a lot of money, but are we also going to cap how much can be held in a bank account or the value of property? what about the value of a business? These are measures to appear a poorly informed crowd by a poorly informed media. I would immediately abolish the Lifetime Allowance and simply restrict how much tax relief is provided on payments to pensions. It doesn’t have to be more complex than that. However we have a new maximum pot size for your pension. To say that this complicates life further for anyone in a Defined Benefit (DB) pension such as the NHS, would be a masterful understatement. Just so that we are clear… the Lifetime Allowance has reduced from £1.8m to £1.25m already and the Budget has reduced this to £1m in 12 months time. Ok, there will be some form of protection, but if recent experience is to go by, this is about as useful as pushing someone out of an aeroplane with an umbrella instead of a parachute. As for those that put a commercial property in their pension pot… good luck with that! The Annual allowance is now £40,000 a year as the maximum value of contributions to pensions, which may as well be written in algebra when attempting to calculate this for DB members.

Final note: our free APP is updated with all the changes announced for personal allowances, savings rates and so on.

Dominic Thomas

The Budget 2015 – A New Mad MaxDominic2025-01-27T17:04:13+00:00

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