Pensions – more needless headaches the Lifetime Allowance

Solomons-financial-advisor-wimbledon-blogger

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

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

Pensions – more needless headaches the Lifetime AllowanceDominic2023-12-01T12:19:50+00:00

Auto Enrolment – the rising tide

Auto enrolment pretty much effects everyone that isn’t yet retired. In a nutshell, having faffed around with pensions for the last 30 years the Government are now forcing employers to offer pensions to their staff. Employers will be required to contribute 3% of salary… employees 5%.

It’s true that this is not a compulsory pension. Employees can opt out. Employers cannot. There are hefty daily fines for those that fail to meet the deadline to implement their new, qualifying staff pension. Everyone has to comply…. not doing so isn’t an option.

All the UKs biggest businesses have now set up their auto enrolment pensions (also called workplace pensions…. helpful eh?). Just pause to think what an administrative nightmare this is… staff coming and going on a daily basis, all needing to comply else suffer fines. What a headache… thankfully technology will reduce the headache, but action still needs to be taken.

Now small and medium-sized firms are gradually reaching their “staging date” (start date) and there will be a massive number of them. Few realise that there are implications for contracts of employment and of course operating costs. However the biggest issue is technology as all staff need to have a working email address… presumably a work email address is easiest to monitor and demonstrate that information has been sent by the employer.

Pain Relief

Most financial advisers and Accountants aren’t getting too involved in auto enrolment. Frankly because the work can be expensive and small firms don’t want that. So we have found a solution – a bit of really good IT. Its called AE in a Box. It isn’t a pension. It’s a project management tool that ensures that you are compliant with the rules, makes it easy to set up a scheme and communicate with your staff.

If you are an employer (even if you run a Limited company with only one other Director or member of staff) you have to comply. So check out the very easy to use tool. It is a monthly license subscription (and you will need the ongoing support) as even those that opt out of your pension, will need to be opted back in every 3 years… the Government hope that inertia will ensure more people join pensions and thus build up their own resources, rather than relying solely on the State Pension… which is already over-stretched.

Are you an Employee?

Do your boss a favour, point them to our tool and earn some brownie points. I promise you that auto enrolment is a headache and leaving it until thousands of employers are trying to do the same thing at the same time will end in tears…. and fines. As an employer myself, I really value people who bring me solutions not problems.

Are you an Accountant?

The tool enables Accountants to assist in the process, providing and checking data. This will make your life much easier on so many levels when dealing with your small firm clients.

Click this link to get more information, its low-cost with a single sign up fee. The monthly fee isn’t taken until 6 months before your scheduled staging date. But whatever you do, now is the time to take action.

Dominic Thomas
Solomons IFA

Auto Enrolment – the rising tideDominic2023-12-01T12:19:57+00:00

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

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

Pensions: State Pension changes

The State Pension is changing…. again!

Like anyone else I am rather fed up with the constant tinkering and general messing around with pensions, in particular the State pension. It seems to me that it isn’t so much that the goalposts are regularly moved, but more that you don’t know whether the game requires, a ball, bat, horse or car. I came across a rather good succinct short video by financial journalist Sarah Pennells. I see no reason to reinvent the wheel when someone else puts all you need to know concisely. Sarah runs a financial information website called www.savvywoman.co.uk which aims to help women in particular. It’s certainly worth checking out. Anyway here she is summarising the changes.

Your State Pension

It would be wise to obtain a State pension forecast if you can. You can do this by visiting the main website to obtain one.

Dominic Thomas
Solomons IFA

Pensions: State Pension changesDominic2023-12-01T12:20:12+00:00

What’s the row over pension charges now?

You may have been listening to Radio 4 or perhaps seen the TV news, Steve Webb the pensions Minister is doing the media rounds having announced that charges on pensions should be capped at 0.75% which he announced yesterday and has been plugging his cause since. There is no doubt that there are many very expensive pensions and I would go as far to say that there have been lots of “rip off” pensions. There are too many vested interests, this has broken out in a row over pension charges.

Is there any such thing as a free lunch?

We now have various think tanks and Providers all taking the opportunity to price to the bottom and distance themselves from “rip off pensions” as quickly as possible. An assortment of spurious views about the impact on the final value of a pension fund is now doing the rounds. The vast majority of this is utter drivel. We are all to blame for this (advisers, providers, investors, regulators and Governments) why? Well because over the years we have colluded in the deceit that anything to do with financial services is free. It isn’t. I had hoped that this delusion would have been put to bed by the introduction of RDR, yet AE (auto enrolment) exposes the deep resistance to a shift in mindset.

Can a pension have low charges?

It is perfectly possible to use a pension that has low investment charges and by low I mean less than 0.30%. However this is merely one element of the piece. The administration costs are high due to well intentioned regulation. The “sales costs” are high due to well intended regulation. The regulation is designed to protect the investor and the wider market.

Why does AE have unique charging problems?

The unique problem that AE brings is that there are some very tiny premiums. Suppose you earn £10,000 a year and in several years time you will have contributions of 8% a year (£800) a cap of 0.75% on this would be £6… ok its based on the value of your fund, but given that most will not be more than £4,000 that’s £30 to cover the investment and administration for the year (and by the way you can opt in and out, switch funds, vary the payments creating more administration). It’s a nightmare for pension providers. Some have come up with some low cost solutions (hardly any investment choice) and some have a fixed monthly fee. Well even at £1.50 a month (£18 a year) that’s a higher proportional charge on a small fund of £1,000 (1.80% to be precise). The Government backed (taxpayer funded) NEST is loss making and will be for many years. This is typical of Whitehall delusion that they then expect commercial enterprise to replicate. We all know Governments are not good at maths… don’t we?

The solution is right under their noses

Stakeholder pensions (with low charges) failed because there were other better alternatives at a lesser or more competitive price. The Government (this one and the previous one) believe compulsory membership isn’t quite ok, so we have a “difficult not to join” approach. However, I would argue that today employers and employees already have a proper pension system. It’s called National Insurance and the State pension. We know it’s not good enough, so why not simply make it better for everyone? It has no investment risk and is already set up. For those that want (and need) more than the State pension (most of us) then there are plenty of very good pensions around, any decent adviser can structure a sensible plan – but it is not free… neither should it be. If we want to create a society of that is independent of the State, we all need to face some adult truths.

Dominic Thomas: Solomons IFA

What’s the row over pension charges now?Dominic2023-12-01T12:38:33+00:00

Auto enrolment – fools rush in?

If you are not drawing your State pension, then by now you should have picked up that pensions are changing – again! This time rather than making employers set up a pension that nobody might use, they have decided to force employers to set up a pension that everyone in that firm will use (unless they have an exemption or opt out). This will include mandatory contributions, which will be 3% from the employer and 5% from the employee (eventually). Whilst the employee can opt, he or she will be opted back in after 3 years (with the option to opt out again) – the ideal being that eventually you will forget and naturally begin building up a pension. Auto-enrolment is the path of least resistance.

Employers have begun (well some months ago) asking about AE. To say that there have been teething problems for the first of the large schemes would be an understatement. So today Steve Webb has intimated that SMEs will have a more simplified approach – now please note that AE is already meant to be a “no brainer” with no question asked other that “do you want in or out?”. I am left perplexed at what other new idea could be so simple… perhaps reforming NI and collecting payments directly would be sensible? I suspect that such “radical thinking” would be rather unwelcome. Anyhow when any Government uses terms like “simplified” or “simplistic” my cynicism really kicks in, as invariably this is code for “we have no idea of the consequences” but someone at a think tank thought this would work.

I am attending another presentation on AE next week, I am hoping that this will provide better insight into the latest “alteration”. I freely confess that it is better to change and adapt based upon experience, but for once, it would be nice to have some firm guidelines so that we all know where we stand..

Auto enrolment – fools rush in?Dominic2023-12-01T12:23:27+00:00

State Pension News

State Pension Announcement

The State pension has been under review by the Coalition Government. The system is currently very complicated, involving elements of National Insurance contributions at different rates and levels over many years. In a noble attempt to ensure that pensioners cannot fall below a minimum income, various credits and guarantees had been introduced over the years. The main problem with this is that it punished those that saved who then lost out on extra money that would have been provided. Of course this is a problem for the poorest in society and not everyone, although we all obviously have to collectively contribute tax towards the welfare state.

State pension – a target for means-testing?

Today the Government is expected to announce a flat £144 a week rate for the State pension. It is anticipated that this will require additional qualifying years of NI payments (35 years instead of 30) and of course we all know that the State pension retirement date is moving upwards from 65. Quick sums will tell you that £144 a week is £7,488 a year, which forms part of taxable income, is itself below the annual personal allowance, so effectively tax free. So any changes to genuinely simplify the benefit and State pension system are welcome. There’s almost certainly a catch. The State pension is fairly expensive and we have an ageing population as we all know. We have seen the alteration of Child Benefit to a means-tested benefit and I would suggest that the State pension is almost certainly likely to become a target for means-testing within the next 20 years. By then, who knows what shape UKplc will be in, but the mathematics of the State system look fragile if we continue to make the same central Government spending choices and promises into the future. The new proposals (which are just that) are scheduled for implementation in 2017 (a different Government) and will not effect existing pensioners.

Here’s a video that I found on You Tube. I regret that I do not know its source or if it’s ok for me to put it here. There’s no commercial agenda on my part here. I have assumed that it has been taken from BBC television somehow.

State Pension NewsDominic2023-12-01T12:23:21+00:00

Has Clegg implied the means-tested State pension?

1938: Test Pilot – Fleming

A Means Tested State Pension?

The LibDem conference concluded with Nick Clegg’s speech. You may have seen him on the news last night talking about cutting some of the free benefits to rich pensioners. He said “it is difficult to explain why Alan Sugar’s free bus pass should be protected when housing benefit is being cut”. Now I don’t want to get too political, but I doubt that Alan Sugar uses the bus and if he has been sent a free pass, I suspect it is in the bin and never been used (wild speculation on my part).

Alan Sugar’s Bus Pass

One would have thought it would be wiser to ask people to apply – hang on a moment, according to the DirectGov website you only get a free bus pass when you apply for one and the same is true for the London freedom pass. So I very much doubt that Lord Sugar has ever applied, which begs the question what on earth does Mr Clegg mean? Perhaps he is suggesting that there should be no free bus passes? let’s face it, anyone with a car is less likely to apply and they are only available to people with disabilities or of State pension age with modest to low incomes. I’ll take a wild guess that Mr Clegg does not wish to alienate these groups.

Winter Fuel Allowance

So what of the Winter fuel allowance? to which he also referred well this is paid to households that are in receipt of a State pension. It isn’t really claimed, it’s paid as a bit extra, with a couple of exceptions – those claiming child benefit, council tax benefit or housing benefit all need to claim it. It’s worth £100-£300 dependant upon age and the number of people that you live with.

Reading between the lines

I’m therefore perplexed at what he is really meaning. It occurs to me that this is merely a warming up of a notion that may gain momentum. The notion being that some people are wealthy enough not to need State support or benefits. If I might suggest this would possibly include the State Pension, which is probably the only “benefit” that most “wealthy” retired people could receive. There is probably some mileage in this, after all a similar thing has happened to child benefit. However, if this were to become practice, it would mean that the State Pension would become means-tested, which if the case begs the question of why pay national insurance? and where is the line drawn? Whilst I’m not wishing to stir the pot (well, maybe a little) I suspect that Mr Clegg has inadvertently indicated the way in which his or the Coalition Government’s thinking may be going. Any thoughts? How about those with final salary pensions like the NHS paying a pension of over £35,000 a year? how much “guaranteed” income do you think might render you ineligible for a State Pension if it became means-tested?

Has Clegg implied the means-tested State pension?Dominic2023-12-01T12:22:54+00:00

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