Pension planning: good news
and bad news
Two huge changes in funding our retirement – one planned for years, the other a Budget bolt out of the blue – mean a major pensions rethink.
There's a new compulsion on employers to provide pension contributions to staff. And there's the Budget surprise of new pension freedom. You will soon be able to do what you like with a personal pension pot including, according to one government minister, blowing the lot on a Lamborghini. However, as the car costs over £300,000, and the average sum is £30,000, most won't get further than a wheel or two.
Pension changes are complex - a mix of good, maybe good and bad news. But they are important – a pension can be more than 40 years in construction and last for 30 or more years.
Workplace “Auto-enrolment” obliges employees to join although they can then opt out. Employers have to contribute, an incentive to stay in.
So far, just one in ten have quit, but these are from firms employing at least 10,000, organisations probably with good existing pensions and staff communications. The acid test comes when smaller firms have to join. By May 1, those with over 90 staff must set up a plan while the smallest employer has to join by April 2017.
Auto-enrolment currently demands a minimum 2 per cent of earnings – with one per cent from the employer. This rises to 5 per cent in October 2017 and 8 per cent in October 2018 when employees will put in 5 per cent to the employer's 3 per cent.
The scheme only applies to total earnings between £5,772 and £41,865 (for the 2014/15 tax year).
Although the UK has a higher than average state retirement age, others are catching up.
Many people have small sums tied up in personal pensions when their main retirement income will come from elsewhere such as an employer plan. Now up to three amounts up to £10,000 can be cashed in – the old limit was two pots at £2,000. And the total pension savings you can take as a lump sum goes up from £18,000 to £30,000.
Maybe good news:
Overshadowing everything was the surprise abolition of the requirement either to buy an annuity, widely seen as poor value, or enter into a income drawdown strategy, complex, risky and only for the better off. It could be good news as it offers freedom from compulsion or it could be bad news if pensioners spend it on that Italian luxury car. Australia has freedom for two decades but now some argue for a return to compulsory annuities. This is not due to come into force until April 2015, so the debate has only just started. The final rules remain to be published – and no one knows what new ideas insurance companies will present as alternatives to annuities for which demand, according to Barclays Bank, is expected to fall by two thirds.
The better off see maximum pension contributions squeezed. In 2006, you could put up to 100% of earnings into a scheme. Then the ceiling was reduced to £50,000 – and from 6 April, the annual maximum drops to £40,000. On the same date, the “lifetime allowance” - the most you can hold in a plan and qualify for tax benefits falls from £1.5m to £1.25m. Anything over that could attract a 55 per cent tax bill.
The state pension age is going up to 66 (for both women and men) from 2019, affecting those born from 6 December 1953 onwards. And it was due to rise to 67 (for those born after 5 April 1968) in 2034 with a further increase to 68 in 2044 (hitting those born after 5 April 1977).
But now it is planned to accelerate the increase to age 67 so it impacts in 2026 – hitting first those born from 6 April 1960. And no one will be surprised if those born in the 1980s and afterwards have to wait until they are 70 to draw the state pension. We are living longer, starting work later and expecting a higher living standard in retirement. Something has to give.
It's a trend repeated elsewhere. Although the UK has a higher than average state retirement age, others are catching up.
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