February snippets – you may have missed…

A recent Saga article claims that the battle to give women a fairer deal over their state pensions scored a significant victory early in January, when it was the subject of a House of Commons debate. Although the debate had no power to directly alter government policy, it represented yet another important step in bringing the campaign into the public eye and gathering support from politicians.

A campaign group known as WASPI (Women Against State Pension Inequality) has been fighting to bring justice to hundreds of thousands of women who are facing delays in receiving their pensions from the government, saying that women born in the 1950s – specifically those born on or after 6 April 1951 – have faced two increases to their state pension age, which until 2010 had remained at 60 for several decades. WASPI states that many of the women affected by the 1995 and 2011 pension law changes face an unfair double delay in becoming eligible for their pensions.

WASPI’s campaign is based on the contention that successive governments have not done enough to inform those affected of these delays, and that the 2011 reforms are being implemented too quickly. This has resulted in many women being given too little time to plan their retirement finances, the group says.

In the debate, members of the House of Commons voiced concern that the acceleration of state pension age equalisation directly discriminated against women, adversely affected retirement plans and caused “undue hardship” in some cases, with many women facing difficulty as a result of lower pay and careers interrupted by bringing up children. From the Government benches it was stated that there are currently “no plans to alter state pension age arrangements” for the women affected by the equalisation of eligibility ages and without change, our current state pension arrangements will simply not be financially sustainable. It was also suggested that hardship was avoidable as people were given notice of the change, allowing them to plan.

The debate is likely to put pressure on the government to respond in more detail to WASPI’s requests for fairer transitional arrangements. Financial journalist Paul Lewis, who was quoted during the debate, commented:

“It was gratifying that so many MPs from all parties broadly supported the campaign and that the information which the WASPI women and I have extracted from the DWP was widely quoted. Sadly, even a 158:0 vote for the motion to give some transitional help is not binding on the Government and no hint of change was given by the Minister. But the pressure is certainly on the Government and we can only hope that it is at least looking again at what, if anything, it might do.”

The value of your investment can go down as well as up and you may not get back the full amount you invested. The value of tax reliefs depends on your individual circumstances. Tax laws can change.

Given recent comment from George Osborne, and mentions of the same during the Autumn Statement, it appears as though pension tax is set for a shake-up in 2016. With that in mind, there appears to be a potential opportunity for higher-rate taxpayers to make the most of their savings while the good times last.

Though not confirmed at this current time, it appears that the writing may be on the wall for up to five million pension savers enjoying the higher-rate tax relief. There is a suggestion that the generous reduction is about to be heavily curtailed – and could be scrapped altogether, with the Chancellor already indicating that major reforms to pension taxation will be announced in the March budget. The changes could see higher-rate taxpayers lose the 40% relief currently offered on pension contributions.

Instead all savers, no matter what rate of income tax they pay, may be offered tax relief at a flat rate of more than 20% but less than 40%. The Government may also create a less generous tax system for savers with valuable final salary pensions. The Government could also choose to eliminate tax relief on pension contributions, making pensions more like ISAs. This could apply to all savers, or just to those who pay higher rates of tax.

The Government spends £35bn of its £50bn annual pension tax relief bill on higher earners. This has grown substantially from £17.6bn in 2001-2002. Many feel the wealthy should not be able to reclaim large amounts of income tax while in work and pay reduced rates in old age. However, commentators believe the Government has to walk a very fine line here. Take away too much of the incentive to save and millions of people could end up woefully underprepared for retirement. The cost of supporting struggling pensioners would inevitably fall on the state – and working taxpayers.

We already know the annual allowance – the amount you can save into your pension every year and receive tax relief on – will fall for higher earners from April. Anyone whose income exceeds £150,000 will see their annual allowance fall, via a sliding scale, from £40,000 to as little as £10,000. The lifetime allowance, the maximum value your pension is allowed to reach at any stage, is also falling, from £1.25m to £1m in April. So higher-rate taxpayers should potentially consider pouring as much money into their pensions as they can soon before the days of generous tax breaks are gone for good.

The value of your investment can go down as well as up and you may not get back the full amount you invested. The value of tax reliefs depends on your individual circumstances. Tax laws can change.

The Government has recently finished a consultation looking at how pension taxation could work in the future. The Chancellor, George Osborne, has said that he expects to reveal the findings and the direction he is going to take during the March Budget. But is there any way to take an advance look at the situation? What has the Chancellor considered and what might his decision be in March?

Whilst there are no certainties in this situation, Scottish Widows in particular has identified a number of key ingredients it believes could make the system successful. These ideas may well have made it into consultation responses, so it’s this sort of thing that the Chancellor may well be debating over, as we type!

Employers must remain positively incentivised to play a central role. Employers account for 80% of savings in our pension system (excluding the State Pension), where National Insurance Contribution (NIC) relief encourages employers to be much more generous than the law requires and often also encourages employees to save more in order to unlock higher levels of employer contribution.

A pension should offer a superior return compared to any alternatives. Under any new system there will be winners and losers relative to the current system. However, this is largely irrelevant once the old system has gone. Whether or not an individual will put money away over the long term for retirement depends on the extent to which it is more beneficial to do so over other savings options available to them (including ISAs or buy to let property.)

Incentives should apply to both the employed and the self employed. Whilst statutory employer contributions now make workplace pensions attractive to most employees, there is less incentive for the self employed, who make up 15% of the working population. A modern system should provide similar incentives to the self employed.

Tax relief should be promoted and appreciated. Research from Scottish Widows showed that only 15% of people fully understand the current pension tax system. People in ‘net pay’ arrangements have the least understanding with many unaware of any tax relief applying at all. Moving all schemes and products to operate on a ‘Relief At Source’ type basis would make relief more visible and a re-branding of tax relief to say a ‘Government Incentive’ could assist in more effective promotion and increased appreciation.

A simple message that applies to everyone. With ISAs, it doesn’t matter who you are, there is a simple annual allowance that applies to everyone, every year. In pensions, the complex interaction between annual allowances, lifetime allowances and tapers, prevent Government, employers and the pensions industry from effectively promoting a simple message which applies universally.

The system should encourage people to behave responsibly at retirement. The current tax arrangements act as a braking mechanism which prevent people taking all of their pension pot early and spending it too quickly. When people spend their pension pots too quickly it places additional pressure on taxpayers to sustain them in later retirement and therefore any new system needs to consider an appropriate braking mechanism.

Provide assurance against double taxation. Individuals will be wary of saving through a vehicle where they could bare tax on the same money more than once. This could be the case at an individual level where an individual’s marginal rate of tax changes between the stages of accumulation and retirement. A carefully designed system will address this potential issue. There is also a concern that a future Government could be forced to tax retirement savings in times of economic necessity, although this could be addressed by assuring savers that in such extreme circumstances, pension assets would be no more at risk from taxation than any other form of savings.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The basic state pension will rise by nearly 3% next April.

The Autumn Statement confirmed that the basic state pension will rise by £3.35 a week to £119.30 a week from next April. The increase of 2.9% is the result of the ‘triple lock’, which requires the basic state pension to increase each April by the greater of inflation (as measured by the Consumer Prices Index – CPI), earnings growth and 2.5%. However, other existing state pensions (such as the State Second Pension) will be unchanged next year because their increases are linked to the CPI, which fell by 0.1% in the year to September.

The Chancellor also announced the rate for the new single tier pension, which will apply if you reach state pension age after 5 April 2016. At £155.65 a week, it is slightly higher than had been expected and 2.9% above the notional figure for 2015/16. The new pension will also be subject to the ‘triple lock’, although how long that will continue is a moot point. In a recent hastily withdrawn report, the Government Actuary’s Department said that the triple lock has already added £6bn a year to the welfare bill, compared with the cost of a simple earnings link.

To put the newly increased single tier state pension into context, from next April it will represent less than two thirds of what somebody working a 35-hour week on the new National Living Wage will earn. No wonder the government remains anxious to encourage private pension provision.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The Autumn Statement revealed more evidence that the government is counting the cost of tax relief on pension contributions. 

When auto-enrolment into workplace pensions started in October 2012, the legislative intention was that the level of contributions as a percentage of qualifying earnings (those between £5,824 and £42,385 in 2015/16) should rise from the current minimum total of 2% to 5% from October 2017 and then 8% from October 2018. In his Autumn Statement, the Chancellor pushed out both increase dates by six months “to help businesses with the administration of this important boost to (the) nation’s savings”.

There had been no clamour for an April alignment from business groups – the greater concern has been the impact of the huge increase in the number of employers registering in the next year. The real reason for Mr Osborne’s administrative simplification was to be found in the Autumn Statement ‘scorecard’ which showed the deferral would save the Exchequer nearly £850m in employer and employee tax relief over the two tax years involved.

Auto-enrolment has always been a double-edged sword for the Treasury: while it should mean less state support for the retired in the long term, the immediate impact is negative because of the rise in pension contributions and hence tax relief.  Already the process has brought over five million people into workplace pensions. As the government’s decision on the future of pension taxation has been deferred until the March 2016 Budget, this latest tweak could be seen as a pre-emptive grab of future benefits. Whether or not that proves to be the case, the argument for maximising your pension contributions before the Chancellor’s next set piece has been reinforced.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of tax relief depends on your individual circumstances. Tax laws can change.

Pension flexibility means not having to buy an annuity, but how long will your pension fund have to last?

The Office for National Statistics (ONS) website has a calculator that estimates how long your pension will need to last (https://visual.ons.gov.uk/how-long-will-my-pension-need-to-last/).

For example, the calculator says that for someone who is 50 years-old now, life expectancy is 86 years for a man and 89 years for a woman, but there is a 25% chance of the man living until age 95, the woman to age 98, and 12.3% chance of the man living to 100, 18.9 % for the woman.

Viewed another way, there is a one in four chance that a 50 year-old man’s  pension fund will have to last for at least 28 years rather than his life expectancy-based 19 years. It is at this stage you may be wondering why nobody has invented a simple investment that is designed to last as long as you do, however long that is. In fact, the product does exist – an annuity.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.