Are Annuities dead? Take Financial Planning advice first

I read recently from some actuarial tables that a male and female aged 65 in reasonable health could expect to live for around another 25 years or so. It is interesting to note that the differential between men and women (a while ago women would be expected to live for around 3 years longer than a man) has reduced to around a year’s difference. We never know when we will finally meet our maker, however making your money stretch far enough to ensure you enjoy the years of your autumn is paramount.

A possible quarter of a century in retirement is a long time and with the State Pension being equalised in the tax year 2016/2017 at approximately £145.00 a week (£7,540 pa /paid gross but taxable), this amount may well be the minimum you require to make ends meet. (Current level £113.10 maximum 2014/2015). There are some expectations that we will retire later and this has been partly factored into the rise in the State Pension Age in coming years (increasing to 68 between 2024-2026). The minimum age to which you can draw your pension benefits is also increasing to age 57 from 2028. All because we are living longer.

There is also greater knowledge of the need to provide for the costs of Long Term Care and this cannot, and should not, be ignored. You can see that the pressure is on to get these vital retirement income decisions right.

The new flexibility announced in the Budget 2014 was welcome news for many, the main changes occurring in April 2015. Sure, there is going to be a few who blow their pension pots (after paying income tax at their highest marginal rate) on fast cars and holidays, claiming destitution thereafter. You can see the headlines already! However, there are also those that will see the need for an annuity purchase from some or all of their accumulated pension funds to provide them with the future security they desire in their lengthy retirement. This certainty of income offers great security for some, preferring to avoid the volatility of investment markets with their funds. Do I think annuities are dead? Not for some.

Of course, the new flexible Income Drawdown arrangements will become popular, with the option of releasing tax free cash to spend as you will. Thereafter, careful financial planning needs to be undertaken to meet your current needs, taking into account the likely reality that the decisions being made at retirement will be felt for 20+ years ahead. Getting it wrong at the outset could see some returning to work to make ends meet.

HM Treasury have issued a paper called 'Freedom and choice in pensions' on the 19th March 2014 and this goes into great detail on the proposed changes here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/294795/freedom_and_choice_in_pensions_web_210314.pdf

Chapters Financial is not responsible for the content of external websites.

This might appear to be scaremongering, however, many may regret the flexibility introduced and we recommend caution and careful planning to make sure that your pension funds last as long as you do.

No individual advice is provided during the course of this Blog. Speak to the team at Chapters Financial Limited in Guildford or Woking to address your individual needs for what should be the best part of your life....retirement!

Keith Churchouse FPFS, B A Hons
Chartered Financial Planner
Certified Financial Planner
ISO 222222 Personal Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, Number 402899.

The momentum of Pensions Auto-Enrolment in 2014

The beginning of April 2014 saw a significant number of smaller businesses joining into the Auto-Enrolment pension revolution that is sweeping across the UK.

It is clear that the numbers of individuals being Auto-Enrolled into pensions is climbing every day. I received an e-mail on 1 April 2014 (not an April fools) to confirm that the one millionth member had been enrolled within the National Employer Savings Trust (NEST) as an example.

The details of Auto-Enrolment Pensions are nothing new and further details are available on the Chapters Financial website (See Businesses and SMEs section). We have seen the largest employers first being enrolled from October 2012 with many employers with team numbers above 250 being enrolled by early 2014.

Living Longer/ Retiring Later/ State Pension Burden

It is a fact that we are all living longer and that our time in retirement is being extended. The financial burden on State Pensions is ever-increasing and we will see the State Pension age increase from 65 up to a proposed age of around 68 by 2026. We will also see the equalisation of State Pensions being rolled out over the course of the next 18 to 24 months. This should see the State Pension value equalised at approximately £145 a week (£7,540 pa/ paid gross but taxable) for all qualifying recipients post this change (subject to a suitable NI record).

This age increase is also reflected in the minimum age at which pension benefits can be accessed, which is currently 55 years old (having increased from 50 some years ago) and is proposed to increase to age 57 in 2028, as confirmed here: https://www.gov.uk/government/consultations/freedom-and-choice-in-pensions

Staging Dates 2014

The key date for employers in meeting their Auto-Enrolment requirements has been their Staging Date. This is the date to which they must enrol their employees into any new Workplace Pension, if they do not have a qualifying scheme that exempts them from the legislation. In our experience, this means most employers need to make changes to their existing schemes, Defined Benefit (DB) or Defined Contribution (DC), or implement a new pension scheme.

As you may be aware, the majority of employers in the UK are not large and therefore it is anticipated that a far higher number of employers will need to meet their Auto-Enrolment requirements during the course of 2014/2015.

What needs to be considered?

Requirements may include arranging a scheme, assessing the workforce for their eligibility, implementing notifications to the staff, reporting to The Pensions Regulator and implementing the scheme at the correct date with contributions and the relevant data for employees to be able to consider their options once they are opted into the scheme.

As the burden of this legislation comes to bear on many SME’s over the course of the next 12 months we are finding that many employers are contacting us to secure our services going forward to ensure that they meet their obligations. It is from our experience of arranging these types of schemes that we know it is important that the process is started some six months out to ensure compliance with the new requirements. The Pensions Regulator has made it very clear that they will take action against employers who do not meet their requirements and details of their enforcement options are here: http://www.thepensionsregulator.gov.uk/employers/what-happens-if-i-dont-comply.aspx#s10310

Real Benefits

I have no doubt that this framework for pension savings will bear significant fruit in future years in protecting retirement benefits for those people retiring in the future. It is also interesting and encouraging to note that the opt-out rate for employees seems to be very low, running at an average of around 10.8% as noted by the publication, Professional Pensions, here: http://www.professionalpensions.com/professional-pensions/news/2309949/five-surprising-facts-from-the-dwp-s-auto-enrolment-evaluation

Chapters Financial Limited is not responsible for the content of external webpages.

If you would like advice and guidance on implementing your Pensions Auto-Enrolment scheme and to manage its implications and costs to your business then please do not hesitate to contact the team at Chapters Financial at our Guildford or Woking offices. 

No individual advice is provided during the course of this blog.

Keith Churchouse FPFS
Director
Chartered Financial Planner
ISO 22222 Personal Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

Enjoy your ‘income’ gap year

Following the Budget of 2014, many changes are proposed to the way that pension benefits can be drawn. Of course much of the devil lies in the detail and it will be interesting to see how the legislation is detailed, the way that providers interpret the documentation and also the way they apply this to their schemes.

There is a view that there will be some who will decide that they will take their pension benefits in the form of tax-free cash, with the balance being drawn as a lump sum which will of course be taxable and very helpful to the Treasury.

Many financial planners have been using cash flow modelling for some years and this can have its benefits if applied correctly. I do wonder whether financial planners will be the ones that will need to guide individuals in the way that pension benefits can be bought and also to detail the concern that this fund needs to last the balance of their life rather than for a short term period whilst they enjoy themselves on pastimes that are possibly not affordable.

One thought that springs to mind is that we may see the proliferation of ‘gap years’. These could be years whereby individuals leave work and create a year where they receive no income from other sources and draw pension benefits in that year trying to take lump sums from pension schemes either taxed at nil rate or taxed at basic rate possibly rather than higher rate had they drawn all of their benefits in one year.

This might be a creative way of reducing the tax take on the pension benefits going forward.

Obviously time will tell how this legislation will manifest itself, although it is good that the Chancellor has proposed that individuals who are drawing retirement benefits receive face-to-face advice. We look forward to being involved in providing advice to our clients and enquirers.

If you would like to know more about the way that pension benefits can be drawn then please do not hesitate to contact the team at Chapters Financial.

No individual pension/ financial advice is provided during the course of this blog.

Keith Churchouse FPFS
Director
Chartered Financial Planner
ISO 22222 Personal Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

Any Rabbits in there Chancellor?

The annual 'Groundhog day' of the Chancellor proudly posing in front of his Number 11 Residence with his team has come and gone as we know. The annual heckle from the camera-clicking tabloid journalists was louder this year in anticipation of pre-election give-aways with the chirp of 'any rabbits in there Chancellor?', referring to his red Budget box and the possible trick of magic-ing wealth from austerity.

This year, 2014, he really did 'pull the rabbit from the hat' with the furthest reaching changes to the way pension benefits can be drawn during my lifetime. Indeed, I think with a few strokes of his ink pen, some of the pension exams studied over many years become obsolete over the course of the next 12 months when the full effect of these changes will come to fruition. Please do not think I am being negative about the far greater flexibility being encouraged, far from it, I think financial planning and retirement planning will boom over the next decade because of these changes. However, I do have some cautionary concerns that there will be spend, spend, spend with the ultimate consequence that they will be reliant on the state. Sure, basic State Pension benefits are increasing in the next 2 years to a level of approximately £145 per week, but this is unlikely to meet the living needs of many.

Don't forget, and I don't think this is a political statement, the Government, irrespective of their persuasion, is strapped for cash. Cash is generated from tax, tax is charged on pension output (excluding tax free cash), and if many release this early without the caution of stretching the yield across their lifetime, the 'tax take ' could well be quicker. It should also be noted that this new strategy is a bit of a cash-flow gamble for the Treasury. The normal system of 'Annuitising' pension income is achieved by purchasing Gilts. With the need/ preference for annuity purchase now seemingly being removed, the need for Gilt purchases will fall, reducing cash-flow to the Government. It is reported the next weekend that four of the larger Annuity providers had suspended annuity business (Prudential, Aviva, Friends Life and Royal London) and I am sure others will follow. One could argue that the Government us switching their Gilt 'loan' cash-flow for straight non-repayable tax income. The cash-flow effects will be very interesting, possibly fuelling the economy....and clearly the Government.

As a final note, it was good to see that the Chancellor proposes that those reaching retirement for private pension schemes should receive financial planning advice before drawing pension benefits over the age of 55 and we would very much agree with this.

If you would like to consider your retirement benefits and the way these can be used to meet your needs, both now and into the future, then please speak to the team at Chapters Financial in Woking or Guildford.

No individual pension/ financial advice is provided during the course of this blog.

Keith Churchouse FPFS
Director
Chartered Financial Planner
ISO 22222 Personal Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

The end of the tax year looms

We are now just under one month away from the end of the tax year 2013/14. 

The last 18 months has seen a transition in financial services after the implementation of the now replaced Financial Services Authority (now the Financial Conduct Authority) Retail Distribution Review (RDR). We have seen the distribution of financial advice changing across the High Streets (and other locations) of the UK and many clients no longer receive financial advice service from organisations, such as their retail banks. With this in mind, it is very easy to forget or not be prompted to note the end of the tax year and some of the allowances that are available to individuals in the UK and it is normally sensible they try and use these allowances before they are lost.

Good examples of this would be the ISA allowance and also the Capital Gains tax allowance in this tax year.

ISA 2013/2014

As a reminder, the maximum ISA allowance in this tax year is £11,520 (to a Stocks and Shares ISA) or alternatively you can split the investment with £5,760 going into a deposit ISA and £5,760 going into a Stocks and Shares ISA.

The new allowance in the new tax year 2014/15 is £11,880 and in our experience many clients try and use the ISA allowance early in the new tax year, which starts on 6 April 2014, to allow their investments to grow on a tax efficient basis over the coming months.

Capital Gains Tax 

It is also important to remember that where available individuals have a Capital Gains tax allowance of £10,900 and if this gain can be used prudently during the tax year, it would be sensible to do so. The new Capital Gains tax allowance for this tax year 2014/15 is £11,000.

Trust Allowances 

For some Trusts this Capital Gains tax allowance is also available, but at half the level noted above for individuals.

I am sure that we will see much more press in the coming weeks, with regards to using these allowances as we approach the end of the tax year and if you would like advice with regards to these arrangements then please contact the team at Chapters Financial who will be able to guide you and implement where appropriate these opportunities.

No individual pension/ financial advice is provided during the course of this blog.

Keith Churchouse FPFS
Director
Chartered Financial Planner
ISO 22222 Personal Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

Pensions Lifetime Allowance/ Don’t Delay

Many clients have enquired recently about planned HMRC changes to pension allowances at the beginning of the new tax year, starting 06 April 2014. We have detailed the points of these significant changes in our recent Newsletters and because they are so topical, have confirmed the outline of these again in this Blog. 

 

I have detailed below some generic notes on the subject of HMRC’s change to the pensions Lifetime Allowance due to occur at the end of this tax year, 05th April 2014. 

 

As you may know, the Lifetime Allowance (LTA) reduces from £1.5M to £1.25M on 06/04/14. Excess pension/benefits over the LTA is taxed at 55% if taken as a lump sum or 25% (plus normal income tax) if taken as income. Hence if you do have an excess – protection will only reduce the size of this excess.

 

Anyone effected by these limits should consider the HMRC changes in legislation carefully to see if you wish to continue to accrue pension benefits into the future (possibly accepting the future tax charges on the amounts you accumulate into the future) or leave the scheme (possibly losing employer contributions if they are being made and possibly Death-in-Service benefits). 

 

To provide some protection from this situation, HMRC currently offer: 

• Fixed Protection (before 05 April 2014)
• Individual Protection (for those who have accumulated benefits in excess of £1.25M on 05/04/2014) in the new tax year (2014/2015). 

I have detailed the headlines of both below.  

1. Fixed Protection 2014/ Important 

• Must be applied for before 5th April 2014 ( This can be achieved online at the HMRC website)
• Maintains your LTA at 1.5m
• Will be lost if accrue any pension after 6th April 2014 – for example continued accrual in a final salary pension scheme or making any future pension contributions (including being Auto-Enrolled unless you opt out within 1 month)
• You must inform HMRC if you accrue benefits and hence give up your protection, within 90 days of knowing that you continue to accumulate benefits. The fine is £300 as an initial charge and £60 per day afterwards if HMRC are not informed.   

If you are in any doubt that this Fixed Protection may be advantageous then we would normally suggest that you apply for it now directly to HMRC.

 

However, if you then decide to stay in your pension scheme/continue to accumulate benefits you must notify HMRC in writing within 90 days or face a fine (noted above).  

 

For Final Salary Pension Schemes:  

 

The LTA accrual rate is 20X pension accrual + Cash

 

2. Individual Protection 2014/ From the new tax year 

• Only available if you have benefits at above £1.25M at 05/04/2014
• Still only HMRC proposals and cannot be applied for before 6th April 2014 (needs to be achieved before April 2017). Forms likely to be available by Mid/Late summer.
• Maintains your LTA at the value of your pension at 5th April 2014 up to a maximum of £1.5M.
• You can continue to accrue pension benefits after 6th April 2014 without losing this protection.
• Benefits above the Individual Fixed Protection amount you secure will still be charged at an equivalent tax charge of 55% when paid.

3. Annual Allowance Limit Reduction 

In addition to these changes, you will be aware that the Annual Allowance (AA/ the maximum contribution/benefit accrual that is allowed to be made into a pension for you from all sources in a year) is falling from £50,000 Gross in this tax year to £40,000 from the new tax year.

Any amount paid into a pension for you in excess of the new limit of £40,000 gross in the new tax year will be charged to tax at your highest marginal income tax rate.

For Final Salary Pension Schemes:

The AA accrual rate is 16X pension accrual (+ cash if your scheme gives you a separate lump sum in addition to your pension)

4. Summary

If you would like guidance and advice on these pension legislation changes, then please contact the team at Chapters Financial at either our Guildford (01483 578800) or Woking (01483 330800) offices.

 

No individual pension/ financial advice is provided during the course of this blog.

 

Keith Churchouse FPFS

Director

Chartered Financial Planner

ISO 22222 Personal Financial Planner

 

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

Directors....are you ready?

I read an article through Reuters News Agency recently that confirmed the UK had overtaken Japan as the 2nd largest global pensions market. It is good to see that many of us clearly take saving for our retirement seriously. Hopefully with the continued introduction of the mandatory employer Auto-Enrolment/ Workplace Pension roll out for the next 2 years, we will see this pension’s savings market increase still further. Taking this further, having seen larger employers now enrolled, many SME's are seeing their Staging Dates coming in 2014 and Chapters Financial are certainly seeing a higher level of enquiries on this topic. We have certainly experienced the process and note that advice to reach implementation is vital to achieve the required objectives, from choosing a scheme, to setting up the paperwork to reporting the required notifications to The Pensions Regulator. Starting the process early is important, scheme implementation does take time to prepare, present and finalise (you have been warned!). 

The maximum contribution to pensions per individual in the tax year is falling from £50,000 in this tax year 2013/2014 to £40,000 from 06th April 2014 (from all sources/ Gross contributions). These dates and sums might well be of interest to directors and business managers who are looking to offset business profits as they approach their company’s trading year end. For many limited companies, this might be 31st March, which closely ties in with the end of the tax year. 

It is important to check the 'Pension Input Period' (PIP for short) of the pension you make your contribution to BEFORE making a large contribution. If the PIP period ends after the end of the tax year, you may find that your contribution is restricted to £40,000, rather than the current level of £50,000. 

If you would like guidance and advice on making pension contributions from your business, either by choice for directors, or through mandatory requirements for Auto-Enrolment, then please contact the team at Chapters Financial at either our Guildford (01483 578800) or Woking (01483 330800) offices. 

No individual pension/ financial advice is provided during the course of this blog. 

Keith Churchouse FPFS
Director
Chartered Financial Planner
ISO 22222 Personal Financial Planner 

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.