FREEDOM BRINGS RESPONSIBILITY

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Freedom Brings Responsibility

I hope that you are aware that since April 2015 pensions have had considerable improvements. Rather than having to buy an annuity anyone with a pension can simply take income from age 55 however they want (note that this age is gradually rising to be within 10 years of your State Pension Age which you can check here). As income it is taxable, but your pension fund has the benefit of 25% of anything “crystallised” being tax free. This you may remember, concerned some that there would be a rush on Lamborghini’s… which didn’t materialise. Mind you at £270,000 for a new Aventador, you would need to withdraw around double that to be able to pay the net price.

Many of you have been accessing your pensions under these new conditions. According to the latest HMRC data in Q2 (April to end June) of 2018 the number of individuals to whom payments were made reached 264,000. A total of £2,269m was paid out to them. The system has now been in place for 3 years and the value of all payments is now nearly £20,000m (some would say that’s £20bn).

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Gone in 0-60 Seconds?

The basic caveat is that once your pension fund is spent, well… its gone. There have been many mistakes made – particularly in terms of taking too much money out and paying tax unnecessarily. As the income from the pension is assessed as income, those that believe that they can simply have their money are right, but invariably forget that the amount means that they must pay 40% or 45% income tax. Clever, or rather sensible planning can keep tax at 20% or less.

The Government and HMRC are probably rather pleased with this, it means that they are taking way more tax than they would have done, particularly as many of those drawing money from pensions are doing so before they are even retired.

Tax First, Ask Questions Later

HMRC also apply their own brand of logic, which is tax first, ask questions later. In other words, you must reclaim tax when too much has been taken. Despite lobbying by financial advisers and the pension industry generally, HMRC aren’t budging on changing their approach, claiming that people are better off paying too much than too little and then having to find money to pay their tax. Since the start of pension freedoms this “over-taxing” has amounted to more than £280m. So hardly a surprise that they won’t budge. Of course, this ought to be reclaimed… but therein lies the problem of theory and practice and in any event the Office of Tax Simplification recently warned that pension freedom withdrawals are poorly understood… one might be forgiven for wondering what on earth the OTS achieve.

To put your mind at ease, you need to complete the snappy titled “P55”to reclaim overpaid tax on your flexible pension. You can find the form here.

Here’s a video of an Aventador being tested by Autocar… no need to form a queue.

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

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FREEDOM BRINGS RESPONSIBILITYDominic2025-01-21T15:51:59+00:00

Are Annuity Rates on the Rise?

Annuities may be starting to improve again. Why is this relevant to you? Well, if you plan to retire you would be wise to consider an annuity as an option for all or part of your retirement income. If you are already retired and using a Drawdown arrangement, improvement in rates may also be worth your attention.

New Rates

I recently received an email from one of the UKs largest insurance companies advising of change to their annuity rates. In general rates have begun to increase upwards. As an example, a 65 year-old with the maximum single life annuity from £100,000 would now receive £4,944 a year rather than £4,896 a year, an increase of about 1%.

How long is a lifetime of income?

Anyone wanting to build in a spouse’s pension of 50% (i.e. once the “owner” (annuitant) of the annuity dies, income would reduce to 50% for the remainder of the spouse’s life) can expect the same fund to buy an annuity of £4,420 up from £4,375. These are for level annuities (the income remains the same). You could build in a degree of inflation-linking, doing so would reduce the initial income for a joint life annuity £2,818 a year increasing by 3% each year.

The crossover point

The alarming detail is that it would take 17 years (in my example) for the inflation (rising) annuity to match the annual income of the level annuity, at which point it continues to pay out more each year (i.e. a 65-year-old would be 82). It takes a total of 30 years before the total income paid out would exceed that of the level annuity. Remember that this is for someone that started their annuity at age 65.

In truth, there are better annuity rates out in the market. You should also note that if you have any form of health problems, or smoke, you would probably qualify for an enhanced annuity. However most people would look at a pot of £100,000 and think an income of £4,420 is not terribly much and any “bells and whistles” added just make it worse. Hence pension freedoms and the abolition of the requirement to buy an annuity.

However, despite appearances annuities offer a guaranteed lifetime income, no other alternative really does that, but instead relies upon investment returns, which obviously means risk. Since pension freedoms (April 2015) many people have chosen not to buy an annuity and have taken their income from a drawdown pension instead. Unfortunately, according to recent research, many will run their pension pot dry within 12 years. Most people take too much it would seem, or at least an unsustainable amount. Almost everyone under-estimates their life expectancy, which is a crucial discussion to have and one that needs regular reassessment.

So now you know that:

There are different and better (higher) annuities available in the market
Health issues might provide a better (enhanced) annuity
Drawdown pensions carry risk
Life expectancy is a key factor
Most people are expected to run out of money
Review, review, review – especially if you have a Drawdown pension

Dominic Thomas
Solomons IFA

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Are Annuity Rates on the Rise?Dominic2025-01-21T15:50:47+00:00

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

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