YOUR STATE PENSION – TIME IS RUNNING OUT

TODAY’S BLOG

YOUR STATE PENSION – TIME IS RUNNING OUT…

When the new State Pension was introduced from 6 April 2016, the Government also provided an easement to the normal six-year window which allows individuals to pay Voluntary (Class 2 or Class 3) National Insurance Contributions (NICs) to fill in gaps as far back as 6 April 2006. However, this easement is coming to an end on 5 April 2023 meaning individuals have a little over nine months to take advantage of this easement. I repeat…

THE EASEMENT TO BACK FILL YOUR NI CONTRIBUTIONS ENDS ON 5 APRIL 2023.

This was picked up in the press:

Telegraph (18 June 2022): How to boost your state pension by £55,000.
Express (25 June 2022): Pensioners could boost their state pension by up to £55,000 – how you could do it.

The headline grabbing figure of £55,000 is based upon the increase in State Pension following backfilling ten qualifying years, increasing an individual’s State Pension by £52.90 per week and paid for an assumed 20 years from State Pension Age (SPA).

For those of you not yet drawing your State Pension, I regularly remind you to check both your National Insurance record and obtain a proper State Pension forecast. To say that politics has been mucking around with your State Pension would be a significant understatement. You can also do this via your Personal tax account.

BEFORE TOPPING UP

However, people considering topping up need to take a range of factors into account. For example:

Some years can be ‘cheaper’ to top up than others; for example, people who have worked part-year and have paid some NICs may be able to complete that year more cheaply than buying a completely blank year;
Filling blanks for certain years (particularly those before 2016/17) can sometimes have no impact on your State Pension. This is particularly relevant for people who have already paid in 30 years by April 2016 and who were long-term members of a ‘contracted out’ pension arrangement;
People who expect to be on benefits in retirement may find that some or all of any improvement in their State Pension may be clawed back in reduced pension credit or housing benefit;
People who were self-employed can save money by paying voluntary Class 2 contributions (currently £163.80 per year) rather than Class 3 contributions (£824.20 per year);
Before paying voluntary NICs, individuals should see if they can claim NICs credits for a particular year. For example, those looking after grandchildren may be able to claim credits transferred from the child’s parent, and this could be a cost-free way of boosting their State Pension.

THREE KEY GROUPS

There are three groups for whom top-ups may be of particular interest:

Early-retired public servants, or private sector individuals who have been members of a ‘contracted out’ occupational pension scheme; the period of contracting out is likely to reduce their State Pension below the maximum amount, and their early retirement is likely to mean they have ‘gaps’ in their NICs record which can be filled;
The self-employed, who may have gaps in their NICs record and may be able to go back to any year since 2006/07 to top it up; this group is less likely to be affected by complications around ‘contracting out’.
Anyone that took a career break to look after children.

TAKE ACTION:

If YOU haven’t started to receive your State Pension, please do take this as an urgent reminder to check your pension. The State Pension is now roughly £9,660 a year each – which is a guaranteed income for the remainder of your life. Whether you think this is a lot or a little isn’t of concern here – just that you receive what you are entitled to.

For the record, no I don’t think its enough… which is why I do what I do and you pay me to do it.

LINKS:

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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YOUR STATE PENSION – TIME IS RUNNING OUTDominic2023-12-01T12:12:48+00:00

WAITING LONGER FOR YOUR PENSION

TODAY’S BLOG

WAITING LONGER FOR YOUR PENSION

The start of the next increase to state pension age (SPA) is still nearly five years away, at which point it will be phased up to 67 by April 2028.In the meantime, the Government has confirmed a rise in pension age for private pension provision that was originally suggested in March 2014.

THE NORMAL MINIMUM PENSION AGE – NMPA

The increase is to be made to the normal minimum pension age (NMPA). This is the earliest age from which non-state pension benefits can be drawn, subject to very limited exceptions. The current NMPA is 55, set in 2010 as 10 years below the then male SPA of 65. The new NMPA from 2028 will be 57, 10 years below what by then will be the SPA for both sexes.

57 IS THE NEW 55

The Government has indicated that there will be exceptions to the higher NMPA covering:

Members of the armed forces, police and fire services pension schemes, who will have a ‘protected pension age’ of 55;
Anyone who has a protected pension age for scheme benefits arising from the last increase in NMPA; and
Anyone who, on 11 February 2021, had a right under a pension scheme to draw benefits before age 57. In this context, the right has to be unqualified, i.e. there must be no requirement for consent from any other person, such as a trustee or employer. It will also apply on an individual scheme basis, so you might find some benefits can be drawn before 57, while others cannot because consent is required.

It would appear that if you have a personal pension established by the February cut-off date, you will generally meet the ‘unqualified right’ requirement, giving you a protected pension age of 55. However, some experts believe this could change when the necessary legislation emerges. When the previous NMPA increase was made, there was no such protection for personal pension owners.

Born between April 1971 and April 1973?

If you were born on 6 April 1973, you are potentially the worst hit by the change, unless you have benefits that are subject to a protected pension age. That is because you will reach your 55th birthday on the very day the NMPA increase to 57 takes effect – unlike the changes to SPA, there is no phasing in of the change. If you were born in the preceding two years, you will be in the odd position of being able to draw benefits at age 55 until 5 April 2028, but then need to wait until you reach age 57 before setting up any new drawings from you pension.

A realistic retirement age?

The idea of retiring at 57, yet alone 55 may sound appealing, but is it at all realistic? Consider these two factors for a start:

1. At age 57, the average man has 27 years of retirement ahead of him, while the average woman has 30, according to the Office for National Statistics. 1 in 4 of those men will live until age 92, the corresponding age for 25% of women is 94.

2. From 2028, there will be a gap of at least 10 years before your state pension starts. With the current state pension of £179.60 a week, that means an income hole to fill of at least £93,400 (plus inflationary increases).

A recent report showed that the average age of those ‘retiring’ in 2021 was 60. However, it also revealed:

37% had brought forward their retirement in the past year, with the three main reasons being pandemic related;
27% will work part time to support themselves in retirement;
37% were worried about not having enough money to last through retirement;
Two thirds of retirees risked running out of money in retirement according to calculations by the report’s authors, even though the planned average total spend was a modest £21,000 a year.

ACTION

The change to a normal minimum pension age of 57 is largely irrelevant – few people can afford to retire so early – but it might affect you if you plan to draw some benefits early, e.g. to clear a mortgage.

Are you sure your planned retirement age is not going to leave you among those two thirds who might run out of money before they run out of life? Thats the main purpose of proper financial planning – to help ensure that your funds do not run our before you do. The sooner you know where you are, the quicker you can, if necessary, make the necessary adjustments.

Dominic Thomas
Solomons IFA

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WAITING LONGER FOR YOUR PENSIONDominic2023-12-01T12:13:03+00:00

The Sting in the Tale Of Your State Pension

TODAY’S BLOG

THE STING IN THE TALE OF YOUR PENSION

If you are a client, even a very new one, you will know that one of the many things we check is your State Pension. This has two key elements to check – your State Pension forecast and your National Insurance record. Have a look here to get yours again (click here)

I know that many are frustrated by their State Pension age or entitlement to it. You will doubtless have heard about women who believe that they were never properly told about the equalisation of State Pension Age (SPA) which has resulted in them waiting longer than their 60th birthdays to collect their weekly State Pension.

I am not going to “get into” the debacle of WASPI and the unfairness or otherwise of equalisation, earnings and careers. In my limited experience, most Governments fail to communicate well and most of us vote based on little evidence and plenty of personal bias. Few people take the time to check Government records, most of us live in the hope that fairness is achieved. There is a further sting in the tail of this tale…

You may have picked up that the state pension has been underpaid for an estimated 200,000 women, so it would be “sensible” to check your entitlement regularly. I am going to make this clearer…. CHECK YOUR STATE PENSION.

Solomons IFA State Pensions Sting in the Tale..

DOUBLE STANDARDS

Those working within the financial sector know well that there is not really a time-barring for complaints. However our wonderfully inept Government doesn’t have to suffer the same criteria, responsibility is something that is simply passed along to the next gaggle of woefully hapless sycophants, or ignored, denied and moving on….

State Pension payments are understandably important to millions of people right across the UK as a source of income in retirement, however, due to an error at the Department for Work and Pensions (DWP), thousands of women may find they have been underpaid their entitlement. The issue arises for those claiming the old state pension due to rules about how much a woman could receive. Under the system, married women who were looking at a limited state pension in their own right were permitted to claim a 60% basic state pension sum. This was based on the National Insurance record of their husband at the time.

Women were only allowed to undertake this action, however, if the sum was bigger than the state pension they would have received based on their own National Insurance record. An uplift to the state pension sum should have been applied automatically since March 2008. However, due to a system error, in certain circumstances some women did not have this increase automatically applied.

Individuals retiring before this date needed to make what is being described as a “second claim” to uplift their state pension sum. These women will have needed to take action, however, the DWP stated it wrote to those affected telling them what they could do next. Issues, however, arose when certain women stated they received no such correspondence and were thus left out of the loop. Women who have been impacted will have missed out on potentially years of higher state pension payments.

However, another issue is arising for women which is causing further strain. Under present rules, individuals can only get backdated payments for the boosted state pension sum for 12 months. This means many have missed the opportunity to receive years of contributions. Rectifying the issue, though, is likely to provide significant peace of mind to the female state pensioners who have been impacted.

The DWP is now taking action to contact those individuals who may have been hit by the error. However, experts such as former pensions minister Sir Steve Webb have urged women to take action by contacting the DWP if they feel they have been affected.

Dominic Thomas
Solomons IFA

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The Sting in the Tale Of Your State PensionDominic2023-12-01T12:13:07+00:00

TAX FREE AT 65 – IT’S ABOUT TIME…

TODAY’S BLOG

TAX FREE AT 65, IT’S ABOUT TIME…

I am going to have to put a lot of caveats with this item on tax free money. There are lots of ways to have tax free money, but I want to highlight a couple of issues, the first being the different tax treatment of different financial products and secondly how these might be used in conjunction with the current tax rules.

Joan is 65 and now finally retired – it’s about time!

Joan (10/02/1954) was 65 at the start of the tax year but she stopped working in February when she turned 65. She is single and back in the late 80’s a dead-ringer for Kim Bassinger. She has worked since leaving University in 1977 and much like her favourite band Fleetwood Mac, she has gone her own way. She did a bit of employed work whilst at Uni, but got her “first proper job” working as a junior assistant in an advertising company. Over the years she worked for various employers, most didn’t have pension schemes, anyway most wouldn’t let you join them until you were 30, so by the time she actually joined a scheme at 35 (in 1989), she didn’t really feel that she was too late to the party. She didn’t really like pensions, or rather the sharp suited, red-tie wearing blokes from Merchant Investors that sold them, they reminded her of some of the worst people in advertising. Then there was Robert Maxwell, no she didn’t like pensions at all. Mind you she was quite pleased that her current adviser found an old Contracted Out of SERPS pension, worth about £85,000 – so one of those fellas must have persuaded her to sign a form at some point. It helped top up her pension fund quite a lot to about £400,000.

At the age of 30 Joan bought her Wimbledon house in 1984 for £34,000 which was a lot back then. She recalls a great house warming party – lots of Wham! and Duran Duran. Looking back she wondered how she afforded it, (the house, not the party) given that interest rates were about 10% and kept going up. However property prices seemed to be rising (hers had doubled in value in 5 years) and she was forming a habit for nice things, which nearly got out of hand, but she spoke to her bank and remortgaged, increasing her loan in 1988 to almost £60,000. When the property crash happened shortly afterwards life got a little tricky, she had to economise. She enjoyed applying tips to improve her home from Tessa Shaw and the team on Home Front. She loved relaxing in the evening having done a bit of decorating whilst listening to Simply Red’s “Stars” curled up on the sofa. It heped her manage her feelings about her large mortgage which barely seemed to reduce in the first 10 years, but at least it was – and she hung in there. She finally paid off her mortgage 10 years ago at the age of 55. She still believes it was her best investment.

Joan quite liked PEPs and ISAs. She remembered getting a little lucky with a few Building Societies that demutualised and even put the proceeds into a Single Company PEP. She wasn’t sure why she liked them, perhaps it was because she was told she could get her money out if she needed to (she never did) or perhaps it was because it seemed that they were more glamorous, or was that because she seemed to remember a tune by Right Said Fred called “I’m Too Sexy For My Shirt” that was playing a lot at the time. It wasn’t, that was 1991, no perhaps it was all those boy bands like Westlife and Boyzone that she secretly liked she remembers them being around in 1999, that was Tony Blair and all the optimism and promise of equality of new Labour. She kept up her regular savings and built up her ISAs, which began 20 years ago in 1999.

Joan had learned a bit about investing, the important things like ignoring what everyone else said, she first learned this as her Yuppie thirtysomething friends got into a panic in the crash of October ’87 which she ignored. Then shortly after opening her new ISA learned never to invest in a technology themed fund when the dot-com bubble burst. She chalked it up to “experience”. Other than that, she took investment news in her stride, largely ignoring the mountains of paper that seemed to pile up each year. Over time she observed that stock markets tend to go up and down and up again. Admittedly Joan got a little lucky – 10 years ago at 55 when she had cleared off her mortgage, her career was going well and she had a decent disposable income. She saw an adviser who suggested she add more to her pension and ISA, as luck would have it the Government increased the amount she could contribute and she took advantage of 40% tax relief. It was just as well as her State Pension Age was being pushed even further into the future.

Not long afterwards, she started investing into VCTs, (Venture Capital Trusts) well, she had a few friends that had some good business ideas, she had watched The Apprentice and Dragon’s Den and thought a little bit of a flutter was probably ok. She saved into a VCT for few years ago but has since stopped adding money.

Joan has always paid her National Insurance and has a full State Pension which only started in the summer when she was 65, 4 months and 26 days old. Her State pension is £168 a week. She was a bit miffed that it wasn’t 65 (and when she started out at Uni, it would have been 60) but she had enjoyed the benefits of working until 65.

Joan’s Portfolio

£400,000 – Personal Pension Plan
£400,000 – Stocks and Shares ISA Portfolio
£80,000 – VCT (Venture Capital Trust)
£50,000 – Bank Deposit Account
£600,000 – Home

Not an unreasonable sum of money – in fact having paid off her mortgage and owning her home, Joan has savings and investments of £930,000. Her home is not an investment, its where she lives. Though her friends regularly tell her that it is an investment if she sells and moves away from Wimbledon. However what would be the point? her friends all live in the area, she loves going jogging on the Common with some of them. Her mum (91) is still alive and living nearby, though Joan is worried that she may need care at some point and the cost of care in Wimbledon is, well… there may not be much of an inheritance.

Tax Free Allowances

In the current tax year 2019/20. Joan has a personal allowance of £12,500 before she pays any income tax. Her State Pension will use up a lot of this. Income up to £50,000 is taxed at 20% (when the personal allowance is considered).

The VCT is a fairly “high-risk” type of investment, she isn’t paying any money into it any longer, but does enjoy income from it of 3% a year, this is tax free within a VCT. That’s £2,400 a year.

Her ISA is doing well, she has set up a monthly payment from it to her of £4,000 a quarter (£16,000 a year). As this is an ISA, the income that she takes (or capital) is tax free. By way of note £16,000 4% of £400,000.

The State Pension – Joan is caught by equalisation.

Joan originally expected her State Pension to start when she was 60, but following various rule changes and seeking advice in the early 2000’s she realised that it would be later than that. Joan’s State Pension actually began this summer on 6 July 2019. Over the full remainder of the tax year she will have 38 payments of £168 (£6,384) normally in a full tax year it would obviously be 52 weeks (£8,736) but she is one of many women that saw their State Pension Age increased. She’s a little miffed at having an extra 5 years to wait and wanted to know how she can minimise her tax payments.

Joan would like to know how much she could take from her pension without paying any tax. As her other investments are tax free, the only taxable income she has is money from her State pension (£6,384 in 2019/20) the personal allowance is £12,500. She puts £8,154 of her pension into a Flexible Access Drawdown pension. This enables her to take £2,038.50 as a tax free lump sum (25%) and £6,115 as taxable income. So rather like this:

State Pension £6,384 (taxable at 0%)
Drawdown Pension £6,115 (taxable at 0%)
Tax Free lump sum from pension £2,038 (tax free)
VCT income £2,400 (tax free)
ISA income £16,000 (tax free)
TOTAL income £32,927 and NO INCOME TAX

More and Less

The first point to make is that the above is not the maximum income that Joan could have. I simply want to identify some options. She could take more from her ISA, she is entitled to tax free interest on her money at the bank. She could take more from her pension (a larger tax free lump sum and no income from the pension if she was so minded). As an employed income £32,927 in 2019/20 would for most people result in about £7,000 paid in tax and national insurance.

Joan will need advice to adjust her portfolios and determine the most suitable way for her to draw income. Next year she will have a larger State pension, using more of her personal allowance as it will be a full year of income for her (and a likely increase in April).

Annuity Option

When she retired at the start of the year at 65, Joan had investigated using her pension to buy an annuity. She was going to simply take the 25% from her fund and put it in the bank and then use the £300,000 to buy an annuity. As a single person in very good health, she wanted an inflation-proofed income. The best annuity available would guarantee that she receives £9,851 a year rising by 3% a year. Job done. That’s an annuity rate of roughly 3.2%, but the income is taxable. In the first year she would have total income of £16,255 from the annuity and her State Pension, paying tax of £747. Her VCT and ISA income remain the same at £18,400 in all. So her total income would be £34,655 (more) but with tax of £747 (net £33,908) She has £300,000 less on her personal balance sheet and has £981 extra income in the year.

In the second year, she would expect £10,146 from the annuity and a State Pension of £8,736 a total of £18,882, which if the personal allowance remains at £12,500 would mean that £6,382 is taxed at 20% (£1,276.40 tax). Whilst there are good things about an annuity (it’s a guaranteed income) this is also a problem for tax planning as the income cannot be switched off and is taxable.

The purpose of this fictional case study is simply meant to highlight the issues involved, everyone’s circumstances will be different. I have not considered that Joan may live a very long time and whether taking 4% from her ISA is a good idea or indeed if she has a suitable globally diverse portfolio. I have done no inheritance tax planning and no contributions to anything that might get tax relief. Had Joan had other investments, she could also use her capital gains tax allowance. There are lots of options.

Dominic Thomas
Solomons IFA

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TAX FREE AT 65 – IT’S ABOUT TIME…Dominic2023-12-01T12:17:07+00:00

WHAT IS THE CURRENT STATE PENSION AGE?

TODAY’S BLOG

WHAT IS THE CURRENT STATE PENSION AGE?

It sounds an easy question, but right now it is a moving target. If you answered 65, you are wrong because that stopped being the State Pension Age (SPA) last December. Until 6 October 2020 SPA is in a transitional period where there is no specific age, just a set of dates, each separated by two months, on which it arrives, depending upon date of birth. So, for example, if you were born between 6 February 1954 and 5 March 1954, you reach your SPA on 6 July 2019. From 6 October 2020 until 5 April 2026, SPA will remain at 66, before starting another two-year transitional period, en route to 67. To provide an example… John Travolta was born 18 February 1954. You will remember him as a 20 year-old Danny Zuko in the 1978 movie “Grease” (about the summer of ’58). He played opposite Olivia Newton-John, who is now 70.

And the result is…

Source: National Statistics

The SPA has been on the rise since 2010, when the process of equalising state pension ages for men and women began. The effect of that controversial reform can already be seen in UK labour market statistics. In April 2010, at the start of the equalisation process, 58.5% of women aged between 50 and 64 were in the work. By January 2019 that proportion had risen to 68.1% – an increase of almost a sixth. As the graph shows, in that age band there are still proportionately more men in work, but the gap between the sexes has been narrowing since 2010.

Beyond 65, too

The trend of increased working life extends beyond age 65, as the two lower lines on the graph indicate. In January 2019, 7.9% of women aged 65 and over were still working, as were 14.2% of men. Many of the jobs involved are part-time.

The rise in SPA is not the only driver to the changing age profile of the workforce. Legislation that largely prohibits mandatory retirement ages has made it easier for employees to keep in harness. Tight labour markets – UK unemployment is under 4% – has encouraged employers to hang on to staff, on a full or part-time basis, rather than compete for new employees.

The income factor

Probably the main reason for the growing grey-haired workforce is a financial one: they need the earnings. The state pension (theoretically £168.60 a week in 2019/20) hardly offers a comfortable retirement. Another factor is the gradual demise of final salary pension schemes, which most private sector employers have now closed to existing employees as well as new recruits. Such schemes often made it easier to take early retirement, especially if the employer added redundancy incentives. Workplace pension ages have also been rising too, often tracking the move in SPA.

Action

When you retire should be a decision you make, not a timing effectively set by the state or financial pressure. The only way to have that freedom of choice is to build up sufficient resources before you retire, by way of pensions and/or other investments

Dominic Thomas
Solomons IFA

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WHAT IS THE CURRENT STATE PENSION AGE?Dominic2023-12-01T12:17:21+00:00

70 is the new 60…. well for the State Pension

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70 is the new 60….for the State Pension

One wonders what we are doing to future generations. Today I read an article suggesting that the State pension age will inevitably become 70, all due to the fact that more people are living longer. The State pension age used to be 60 for women and 65 for men, this has undergone a period of “equalisation” and will be 65 for both men and women from 2018. As this ideological “hurdle” was achieved some time ago, successive Governments have simply made plans to extend the age at which a State pension is provided. The State pension age will be 66 by 2020 and 67 from 2028.

The reason is really two-fold, cost and longevity. The State pays pensions in various forms, the most obvious being the State pension, which now costs about £110bn a year. Disability pensions costs around £42.2bn and survivors pensions about £1.1bn, amounting to roughly £153.3bn which is about 20% of all Government spending and by far the largest component of Government spending. Details here (click).

Looking ahead

In essence anyone born since 1960 can expect to have to work longer. Given the increasing life expectancy and inherent problems with ageing, care costs are expected to soar, resulting in further dilemmas for Government about how to meet costs…. from a population that is having fewer children.

Episode IV – A New Hope

Consider those that graduated this summer and are just starting out on their careers, born in the early 1990’s they were only just teenagers when the credit crunch occurred the property boom had happened. If you understand my heading (refering to the very first Star Wars movie in 1977) this generation can be forgiven for thinking that the Star Wars films were made sequentially when episode I was actually released in 1999 – they were 7). Student loans are now part of their deductions each month, along with compulsory pensions. I don’t like to be a pessimist, but the generation just starting out have inherited the debts of previous Governments (currently interest payments are around £40bn a year), have little prospect of “getting on the property ladder” and an ageing population that received their State pension many years younger than they will. Any academic results they achieve are met with accusations of “easy exams” and employers seem almost eager to say “we cannot find good enough people”. Not even to mention the problems with the environment. I appreciate that you already know this.

The Breakfast Club

I am reminded of the 1985 film, “The Breakfast Club” written and directed by John Hughes, which recently celebrated its 30th anniversary. This was a group of teenagers held back in detention one Saturday morning and who eventually reveal the stories that brought them there. Vernon, the supervising teacher, representative of a now uncaring, disillusioned, bored older generation loathes the fact that he is also forced to spend his Saturday supervising misfits. He is caught by Carl, the caretaker, fishing through the personnel files hoping to find scandal that he can use against his peers. This results in a conversation between the two, in which he complains about the youth of today and ends with this dialogue.

VERNON: You think about this…when you get old, these kids; when I get old, they’re gonna be runnin’ the country.

CARL: Yeah?

VERNON: Now this is the thought that wakes me up in the middle of the night…That when I get older, these kids are gonna take care of me…

CARL: I wouldn’t count on it!

No… neither would I…. perhaps we all need to think rather more carefully about how we are planing not just our own future, but that of future generations… as Simple Minds remind in the closing title music – Don’t You Forget About Me. Perhaps there could be some redemption… even Darth Vader managed to salvage something with his own offspring.

Dominic Thomas
Solomons IFA

70 is the new 60…. well for the State PensionDominic2023-12-01T12:19:59+00:00