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Getting enough state pension?

Dominic Thomas
Dec 2022  •  12 min read

Are you getting enough state pension?

This item is relevant to women aged at least 69 and men 71 or older.

The State Pension is regularly in the news, yet it is widely misunderstood. It has not helped that Government policy over the decades has altered it considerably as society has changed, both in terms of equality and longevity. As a result there are layers to the State Pension, not everyone gets the same amount.

In recent years it came to light that some pensioners had not been receiving what they were due. According to the DWP this dates back at least as far as 1985. Initially in March last year the DWP estimated that about 134,000 pensioners had been underpaid, but by  July this year the figure rose to 237,000 with underpayments worth about £1.4bn.

The main challenge is accurately assessing all the data and making recompense and in practice the DWP have flagged a possible 400,000 cases that require a review. To complete the review process alone along the original timescales is by the end pf 2024 (which will be too late for many) means reviewing 19,000 cases a month, at the last count only 4,000 cases were being reviewed each month. The DWP is hoping that increasing staff from 500 to 1500 and better automated systems will help them get on track… errm, good luck with that. Let’s remember that the problem is one of poor data in the first place with errors going unspotted for many years, there is already concern that even the solutions will contain errors.

At the time of writing around £200m has been paid of the estimated £1.46bn and many suggest the process may well take 5 years to complete.

According to the DWP, those impacted are people that claimed their pension before April 2016 and do not have a full National Insurance record, largely impacting married (or widowed) women. Tracing people is problematic but around 118,000 that could be traced were underpaid by an average £8,900 each. Some payments are much larger.

The DWP advise that they will be in touch, frankly I would not wait for them to contact you if you think you may be affected. You can and should check your State Pension here: www.gov.uk/state-pension. Please note this problem really relates to the older State pension, not the one that superseded it in 2016. In reality that means if you are a man and born before 6 April 1951 or a woman born before 6 April 1953. Today (December 2022) you would therefore be at least 69 if a woman 71 if a man. If it helps, Liverpool football legend Kenny Dalglish and pop veteran Chris Rea (On The Beach and Driving Home for Christmas) were both born 4th March 1951 or American Mary Steenburgen (of Back to the Future) in February 1953 or our own Jenny Agutter (The Railway Children and Logan’s Run) who was born in December 1952.

THOSE PROBABLY SHORT-CHANGED

The DWP focus on these main categories

  • Someone already getting State Pension who got divorced or had their civil partnership dissolved.
  • A married woman whose husband reached State Pension age after them and who became entitled to his State Pension before 17 March 2008
  • A husband, wife or civil partner in a couple where both had reached State Pension age and the other person has died and not yet claimed their State Pension, or
  • Someone aged 80 and over who has either no State Pension or Graduated Retirement Benefit, as they need to make a claim to get any Category D State Pension.

APRIL 2023 – THE INCREASE for 2023/24

I was asked recently if everyone’s State Pension will be increased by the inflation rate of 10.1% announced in the November Budget. I can confirm that according to all the Government website information this is the case. I have used this link as the source: https://www.gov.uk/government/publications/benefit-and-pension-rates-2023-to-2024/benefit-and-pension-rates-2023-to-2024  but to save you the trouble, the salient information is shown below. The new State Pension has a much later retirement age and this is likely to be extended further. A small footnote in the Budget showed that the Government would set out its intention in 2023.

THE “OLD” STATE PENSION

Category Rates for 2022/23 Rates for 2023/24
Category A or B basic pension £141.85 / £7,376.20 £156.20 / £8,122.40
Category B (lower) basic pension – spouse or civil partner’s insurance £85.00 / £4,420 £93.60 / £4,867.20
Category C or D – non-contributory £85.00 / £4,420 £93.60 / £4,867.20

THE NEW STATE PENSION

New State Pension Rates for 2022/23 Rates for 2023/24
Full State Pension £185.15 per week / £9,627.80 per year £203.85 per week / £10,600.20 per year

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

Getting enough state pension?2023-12-01T12:12:40+00:00

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.

STATE PENSION COUNTDOWN

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:

  1. 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;
  2. 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’.
  3. 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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The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

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Call – 020 8542 8084

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The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

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YOUR STATE PENSION – TIME IS RUNNING OUT2023-12-01T12:12:48+00:00

STATE PENSION INCREASE

TODAY’S BLOG

STATE PENSION INFLATION INCREASE

You will have noticed the impact of inflation on various goods and services that you have bought lately. Inflation always hits those on a fixed income harder. That mainly means those that are drawing their pensions.

The ONS publish data about inflation every month, but I suspect your actual lived experience of inflation may differ from the general averages for the entire country. There has been much coverage of this in the news, in particular the real inflation on supermarket products.

You can check the official current rate of inflation here (click here)…. Or you could look at your utility bills.

Retirees in Britain face the worst disparity in their state pension payments when set against inflation since the triple lock was introduced over a decade ago, findings warn. In April 2022, state pension pay-outs will rise by 3.1%, and be based on Consumer Price Index figure from last September. But earlier in the month, new official figures revealed that inflation was running at 5.5% in the year to January.

Pensioners would currently see a real term loss of 2.4% in the amount of state pension income they receive from the Government, and the problem could worsen with forecasts of inflation peaking at around 7.25% in April, according to experts at Quilter.

The basic state pension will rise by £4.25 to £141.85 per week, or around £7,370 a year, in April. The full flat rate will rise by £5.55 to £185.15 per week, or around £9,630 a year. Since the triple lock was launched in 2010, there have only been 22 months when inflation stood above the uprating of the state pension for the previous April and five of those months were in 2021, says analysis by Quilter. The previous biggest disparity was 0.6% back in November 2017, when inflation ran higher than the state pension uprating for 11 months, but only on average creating a disparity of 0.4% over the period.

I have no wish to get political, but I would add that this is a difficult situation for any Government. The number of people claiming the State pension is rising and there are fewer “working” people (paying NI) to cover the cost. This is, to be blunt a timebomb. The State Pension is a political punchbag, in theory paid for by the combined employer/employee or self employed National Insurance contributions.

See the links below (for those not yet drawing a State Pension).

Remember that the State Pension is income and taxable, it is simply that for most people it is within the personal allowance for the tax year (the 0% allowance). The personal allowance for 2022/23 remains at £12,570.

STATE PENSION INCREASE

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk 
Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

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Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk    Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Take Survey

PRIVACY POLICY  |  DATA PROTECTION

STATE PENSION INCREASE2023-12-01T12:12:53+00:00

HOW MUCH FOR A HAPPY RETIREMENT?

TODAY’S BLOG

HOW MUCH FOR A HAPPY RETIREMENT?

Doubtless your will have heard of Which? Magazine. They conducted a survey recently in an attempt to understand how much is really enough for people to have a comfortable retirement. They concluded that a two-person household needs an average annual income of £26,000 for a comfortable retirement.

However you have coped with the pandemic, many people have not been able to spend money in the way they normally would. Many have saved the sums that would have been spent on holidays, travel, commuting, work clothes, weekday lunches, meals out and so on. This has given many of us the opportunity to pause for thought and reflect on how much we spend and the lifestyles we lead.

Some people have elected to retire earlier than they had planned, some have had this forced upon them. In practice, the warning signs for higher unemployment have been around for some time. We shall all begin to see the reality of things once the lockdown ends properly and the furlough system comes to an end. I do not see this going well. I implied, no… I stated that the Budget in March worked on the assumption of unemployment rising by 500,000 over the next 2 years with the largest increase in the current 2021/22 tax year.

A BREAD & BUTTER LIFESTYLE

£26,000 OR £19,000

Anyway, many have been giving thought to how much income they are likely to need when they stop earning. In February, Which? asked around 7,000 retirees about their spending.

The findings can be used as a guide to how much people are likely to spend and how much they might need to save, factoring in the state pension and tax bills. Couples need a pot of around £155,000 alongside their state pension to produce the annual income for a comfortable retirement of £26,000 via pension drawdown – or just over £265,000 through a joint-life annuity. Two-person households would need around £442,000 in a drawdown plan to fund the luxury retirement target (£41,000 per year) – or £589,000 if they’ve taken the full 25% tax-free lump sum available at the outset. If you opt for the guaranteed income provided by a joint-life annuity, you’ll require an initial fund of around £757,000.

For single-person households, achieving a comfortable retirement would mean a pot of around £192,290 alongside the state pension to get to an annual income of £19,000 via pension drawdown, or £305,710 through an annuity. For a retirement at the ‘essential’ level, single-person households would need £77,350 in a pension drawdown or £123,365 to buy an annuity plan to meet an annual target income of £13,000. A couple receiving the current average amount of £155 each per week will get just over £16,000 a year to add to private pensions. Pension drawdown figures are based on the savers withdrawing all of their income over 20 years from the age of 65, with investment growth of 3%, inflation at 1% and charges levied at 0.75%.

TWADDLE – THAT THING ABOUT ASSUMPTIONS

So let me respond by clearly saying “twaddle!” but it’s a helpful guide.That is all it is, there are huge holes in the assumptions and thinking, for starters, assuming a 2 decade retirement. Life rarely happens so “neatly”.

Over the years our processes have evolved with the technology that is available. We stress test your financial plan each week. Considering the likelihood of your life expectancy to the tenth percentile… which means the 1 in 10 chance you live a really long time. We consider sustainable income levels that fluctuate with inflation and changing investment returns based upon historical facts rather than regulatory unicorn utopias.

In any event, why would you care about a survey where your lifestyle is dictated? Surely your financial plan should be about protecting and ensuring that your current lifestyle endures as long as you do…. Or do you want less?

That’s why it is important, no – why its vital to have your own plan, based on sensible assumptions that we review together. Unless you have some mind-blowing news for me, you get one life and the clock is ticking. So have your own plan, know what you want and check with us that you are on track.

Need help? Know someone that does? get in touch... share the truth. It won’t hurt.

Its Your Lifestyle: how much is enough?

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

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk 
Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Take Survey

PRIVACY POLICY  |  DATA PROTECTION

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk    Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Take Survey

PRIVACY POLICY  |  DATA PROTECTION

HOW MUCH FOR A HAPPY RETIREMENT?2023-12-01T12:13:06+00:00

RETIREMENT PLANS BEFORE ITS TOO LATE 50+

TODAY’S BLOG

50+ SLEEPWALKING TO RETIREMENT NIGHTMARE

A growing number of people are at risk of being unable to afford a decent standard of living after retirement, according to a new report released this month. The report, ‘What is an adequate retirement income?’ estimates a quarter of people approaching retirement, the equivalent to five million people, are at risk of missing out on the income they need.

The report by the Pensions Policy Institute, sponsored by the Centre for Ageing Better, warns millions of people between the age of 50 and the State Pension Age are running out of time to prepare financially for retirement. That’s about 11 million people.

  • Around 3 million will not receive a minimum income
  • Around 5 million will not receive a personally acceptable income
  • Around 10 million will not receive a comfortable income

As a reminder, someone turning 50 this year would have been born in 1971, the year that T-Rex had a summer hit single “Get It On”, Clive Dunn was number 1 with “Grandad” and Rod Stewart “Maggie May”. The year that Gary Barlow, Clare Balding, Amanda Holden, Charlie Brooker, Ewan McGregor and David Tennant were all born, I doubt any of these will have a pension problem, but the majority of those born before 1971 look set to do so. It was also the year that the great David Hockney (83 and still working) completed one of his most famous works “Mr & Mrs Clark and Percy” (below) You can see Hockney’s work “The Arrival of Spring, Normandy 2020” at the Royal Academy until 26 September 2021.

Hockney 1971 Mr & Mrs Clark & Percy

PAIN IS COMING FOR THE UNPREPARED

The research found a low state pension, increasing unemployment and the transition to workplace pension schemes reliant on employee contributions are all factors leading to this risk. It warns this is an immediate cause of concern for those currently in their 50s and 60s. Not only that, but generations to come also risk being pushed into poverty if action isn’t taken to address financial insecurity in retirement, the report warned. It found 90 percent of people of all ages with Defined Contribution pensions may be at risk of falling short on their expected retirement income.

Despite recent measures such as auto-enrolment having resulted in more people saving into their workplace pensions, savers aged over 50 spend less time in auto-enrolment schemes and consequently benefit less. Most pension contributions remain inadequate, and challenges for savers have been exacerbated by COVID-19. The report also highlighted that those aged over 50 had the highest redundancy rate during the pandemic and warns that this age group is more likely than younger groups to experience long-term unemployment.

Worryingly, increasing job losses and unemployment levels may result in the generation currently approaching retirement being pushed out of work and left with a pension that does not provide them a decent standard of living. The report calls for a new consensus on what adequacy means, urging the Government to build a consensus between employers, industry, unions and individual stakeholders on what an adequate income in retirement is. Furthermore, Ageing Better is calling on employers to match workplace pension contributions at a higher rate, as well as better support for groups at risk of financial insecurity.

Hopefully your financial plan demonstrates that you will have enough or you know what the future looks like and have a plan to do something about it. However, I do want to labour this point… many of your peers, friends and family are unlikely to be as well prepared as you. Whether its Mr & Mrs Clark or Smith, the vet bills for Percy will be fairly unwelcome in retirement. So please urge them to get some advice, send them this blog post in an email and tell them to get in touch with us. I know the pictures of you finally out and about enjoying normal life after lockdown are all good to share, but do your real friends a favour, share our details with them! We can help prepare them for the future, making the most of the remaining time.

Share This Story, Choose Your Platform!

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

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk 
Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Take Survey

PRIVACY POLICY  |  DATA PROTECTION

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk    Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Take Survey

PRIVACY POLICY  |  DATA PROTECTION

RETIREMENT PLANS BEFORE ITS TOO LATE 50+2023-12-01T12:13:07+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

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

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk 
Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Take Survey

PRIVACY POLICY  |  DATA PROTECTION

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk    Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Take Survey

PRIVACY POLICY  |  DATA PROTECTION

The Sting in the Tale Of Your State Pension2023-12-01T12:13:07+00:00

The State Pension – What’s Ahead

TODAY’S BLOG

THE STATE PENSION INCREASE

In early December the Department for Work & Pensions announced the proposed increases to benefits for 2021/22. Most of the working age benefits and the earnings-linked pension benefits, such as the old State Second Pension, will rise by 0.5%, in line with annual CPI inflation to September 2020. However, the new state pension and its predecessor will both increase by five times as much.

The costly Triple Lock

Both new and old (basic) state pensions benefit from the Triple Lock, which currently requires an increase which is the greater of:

  • Earnings growth;
  • Price inflation (as measured by the CPI); and
  • A floor of 2.5%.

For the 2021/22 increase, the 2.5% minimum was a clear winner, with earnings growth at the bottom of the trio. As the chart shows, in this context earnings growth is a misnomer; earnings fell by 1% over the year because of the impact of the pandemic.

State Pension 2021/22 Triple Lock

10 YEARS LATER… NOT ON PLAN

Over the ten years to 2021/22, the 2.5% floor has been the basis for four increases, something which was probably not anticipated when the Triple Lock was announced by the coalition government in 2010. Then, as now, the Bank of England’s inflation target was 2.0%. Earnings were expected to outpace inflation by 1% or more, making the 2.5% floor a safety net that probably would only be called upon in a deep recession.

It has not worked out that way. Earnings and inflation have virtually matched each other over the period at just under 2%. In other words, there has been no increase in the buying power of average earnings over the past ten years. In contrast the Triple Lock has delivered a real terms increase of almost 11%. If you are on the receiving end of the Triple Lock, that is good news, but if you are under State Pension Age (66 now, don’t forget) it means more government expenditure you have to finance.

Looking ahead

The Triple Lock has been widely criticised by experts ranging from the Institute for Fiscal Studies to the Pensions Select Committee for being an unnecessarily expensive protection that creates intergenerational unfairness. In private politicians would generally agree but, at the last Election, all of the mainstream political parties committed to retaining the Triple Lock. The pensioner vote is not one to put at risk.

The pandemic may have changed that mindset. Last year the government introduced emergency technical legislation to ensure the Triple Lock would work in the face of zero earnings growth. However, the measures put in place only applied for a single year. There have been suggestions that, if no action is taken, an earnings bounce in 2021 as the economy recovers could mean a 5% 2022/23 increase under the Triple Lock formula at a time when inflation is below 2%. Given the dire position of public finances, such a scenario would offer Rishi Sunak the golden opportunity to justify a reworking of the Triple Lock.

But…  

Despite the new state pension’s outpacing of inflation and earnings growth, it will remain a distinctly modest sum in April 2021: a maximum of £179.60 a week. Viewed another way, that is equivalent to just over 20 hours’ work at the National Living Wage rate for 2021/22 (£8.91 an hour) or a little under one-third of current average earnings (£560 a week). No wonder the UK is likely to remain in bottom place of the OECD’s league table based on the proportion of earnings replaced by state pensions…

ACTION

If you want to check your projected state pension benefit, CLICK HERE TO GO TO THE STATE PENSION SITE.

The state pension is not enough for a comfortable retirement. Make sure you talk to us about how you should be supplementing it – preferably before the Budget.

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

GET IN TOUCH

Solomon’s Independent Financial Advisers
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The State Pension – What’s Ahead2023-12-01T12:13:10+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.

Fleetwod Mac - Go Your Own Way

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

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

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk 
Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Take Survey

PRIVACY POLICY  |  DATA PROTECTION

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk    Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Take Survey

PRIVACY POLICY  |  DATA PROTECTION

TAX FREE AT 65 – IT’S ABOUT TIME…2023-12-01T12:17:07+00:00

FREEDOM BRINGS RESPONSIBILITY

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).

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 RESPONSIBILITY2023-12-01T12:17:54+00:00

Now we’re talking money

Now we’re talking money

Clients will shortly be receiving a hard copy of Talking Money. In it we highlight the inevitable end of tax year issues that need consideration – or at least some of them. We also have a feature on China “Enter the Dragon” in which five fund managers provide some thoughts about the state of the Chinese market each has a point to make.

We also outline a few of the changes to the State Pension – where for once the highly complex is actually becoming more simplified, this is truly a rarity when it comes to pensions. There is also a very small note in the news section which points to some of the problems of not using an adviser.

The real cost of not taking advice

In January the FCA produced some market data in an attempt to understand the impact of the new pension freedoms (introduced from April 2015). The figures show that one in five people who encashed a pension pot of £250,000 or more took no advice.

This is alarming because they would have automatically paid tax of 45% on the pension (as income above £150,000 is taxed at 45%). Huge sums of tax have been needlessly paid, reducing the value of a pension fund far more than the credit crunch – which at least has recovered somewhat.

Some speculate that this was and is the only real reason for allowing pension freedoms – to collect far more tax. Perhaps the Budget on 16th March will provide further insight into this position.

Similarly, only yesterday I met with someone who had not protected his Lifetime Allowance, which will result in a large tax liability.

Taking advice does have a cost, but so does not taking advice, however taking advice also has a value, not doing so does not.

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

Now we’re talking money2023-12-01T12:19:21+00:00

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