Pension Simplification and what it means to your pensions savings
Pensions have gotten a lot simpler
Much has changed recently, and will be changing over the next few years, that will impact your savings plans and retirement. Here we highlight the major changes. Remember if you have any doubt over what is the best course of action for you, visit an independent financial adviser.
From 6th April 2006, so-called “A-Day” or pensions simplification, life got simpler for retirement savers as the government brought in a new simplified set of rules, effectively shelving the eight previous tax frameworks for pensions.
- One change is that all pension policyholders will be able to take 25% of the value of the fund as a tax-free lump sum, when they come to take benefits. This levels the playing field between different pensions.
- It’s a good idea to re-consider which pension arrangements are the most attractive to you with the help of an expert IFA.
- Another new rule is that you and your employer will be able to pay up to one annual allowance into your pension. This amount is up to 100% of your earnings and for the tax year 2008/09 is capped at £235,000, with the limit set at £3,600 for low or non-earners paying into personal and stakeholder pensions.
- A further move designed to encourage us to save more is the greater ease with which people can save into a number of different pensions at the same time under the new rules.
- As well as the annual allowance, there is also a limit on your entire pension savings, including any private pensions, occupational pensions and free-standing additional voluntary contributions.
- In the tax year 2008/2009 this amount is £1.65m, with the threshold expected to rise over the years to allow for the impact of inflation.
- Introducing one lifetime limit for pension fund size effectively bins the sometimes complicated calculations savers could be forced to work through.
- If you exceed £1.65m, you will be hit by the new lifetime allowance charge, or recovery tax, which will be charged at up to 55%.
- A pension fund of more than £1.65m might sound like the preserve of the very rich, but it is likely that more individuals than they realise will be in danger of breaching the lifetime limit.
- If you have already breached the £1.65m threshold or are concerned about doing so, you are strongly recommended to seek professional advice.
Changes to the State Pension
The state pension system is also experiencing a considerable shake-up.
- The Pensions Act 2007, which became law on 25 July 2007, made changes which will, generally speaking, affect people who reach state pension age on or after 6 April 2010.
- At the moment, the basic state pension is paid to women at age 60 and men at 65.
- But from 6 April 2020, the state pension age for both men and women will be 65. In 2024, it will rise to 66, in 2034 it will be 67 and then in 2044 it will reach 68.
- However if you were born before 6 April 1950, the changes won’t affect you.
- These rises are in response to the fact that people are living much longer, and it is becoming a burden for the government to support pensioners from the age of 65.
- While working longer may seem like bad news, the good news is that the number of years’ national insurance contributions people will need to achieve a full basic state pension will reduce to 30, for both men and women, from 2010. This is a significant reduction from the current requirement of 44 years for men and 39 years for women.
- Another change is a plan to re-link the state pension with earnings, rather than inflation, in 2012.
- Because earnings accelerate faster than inflation does each year, the state pension will become more generous.
- The fourth big change for state pensions is the move of the state second pension to a simple flat rate. If you think this may affect you, seek professional advice from an experienced IFA.
Personal Accounts – the new workplace pension plan from 2012
I hope you’ve digested all of that, because the government has proposed even more changes on top. In the same year that the capital is hosting the Olympics, a new model of pension saving is planned, called personal accounts.
- All employees aged 22 and over and earning more than £5,000 per year, who aren’t offered access to an employer pension arrangement, will be auto-enrolled into personal accounts in 2012.
- You do have the chance to opt out, should you wish. But if you don’t let your employer know that you have opted out, you will automatically join the scheme and pay 4% of your salary into it.
- Your employer will contribute 3% of your earnings, and an extra 1% from tax relief will be added in making a total of 8%.
- So, if your employer doesn’t offer a pension scheme at present, they will have to offer personal accounts and it may be a good idea to stay opted in as you will receive employer contributions, a bit like a delayed pay rise.
- However, as some means-testing issues have yet to be ironed out with regards to personal accounts, it may be worth seeking financial advice about whether you should opt out or not.
Finding A Pension IFA
The range of qualifications an IFA can have in order to be able to give specialist pensions advice is expanding, reflecting the changes taking place with pensions regulation. When choosing for an adviser to give you pensions advice, there are other qualifications for consumers to watch out for such as the advanced pensions paper, “G60”, or “AF3”, exams “J04” and “J05”, which deal with post-retirement planning, and the APMI pension qualification. There is also the pensions simplification paper CF9.
Those shopping around for independent financial advice should be sure to enquire about the qualifications an adviser has, but should also bear in mind it might be as helpful and meaningful to enquire about an adviser’s experience in certain areas.
Many IFAs offer the first half hour consultation free of charge, giving you an opportunity to find out more about their expertise and how they will be able to help you.
An IFA will be able to help you decide what action to take. Questions include:
- How much should I save into my pension?
- How much can I save without incurring a tax penalty?
- What are my options when I come to take benefits from my pension?
- Now the tax treatment for all types of pensions is similar, how can I tell which are best suited to my needs?
- Is there any action I ought to consider because of rule changes at A-Day to safeguard my benefits and make the most of new tax breaks?
Proposed contribution annual allowances
- 2008/2009: £235,000
- 2009/2010: £245,000
- 2010/2011: £255,000
Proposed lifetime allowance limits
- 2008/2009: £1.65m
- 2009/2010: £1.75m
- 2010/2011: £1.80m
For further information on the subject contained in this guide, please contact your independent financial adviser.