Pensions 'v' other savings

dunstonh

These are some of the key points about pensions after 2006.   The proposals are still being discussed and final figures may/will be different.  However, some of the points will answer your questions (death/terminal illness). It will give a background of where things are heading before i can paste in some product specific info.

PART 1

The 2004 Budget, announced on 17 March 2004, confirmed that proposals for pensions simplification would be implemented. The proposals were first outlined in the consultation paper of 17 December 2002 and further information was given in a second consultation issued on 10 December 2003. The headline has stayed the same throughout - one set of tax rules for all types of pension, with an individual lifetime limit for all.

The lifetime allowance
The main feature of the simplified regime is a single lifetime allowance for every individual on the amount of tax-privileged pension they are able to have. The Government will set this at £1.5 million initially and this will increase as follows: £1.6m in 2007/08, £1.65m in 2008/09, £1.75m in 2009/10 and £1.8m in 2010/11. Gordon Brown announced in his Budget 2004 speech that the lifetime allowance is to be reviewed every five years.
Funds will be tested against the lifetime allowance when funds are vested. Benefits from a defined benefit scheme will be given a capital value based on a factor of £20 of fund value for each £1 of pension (20:1), assuming the pension increases by the Retail Prices Index (RPI) and includes dependants’ pensions of no more than the member’s pension. Pensions already in payment will be valued at 25:1 to reflect the fact that most people would have taken tax-free cash; drawdown
arrangements will apply this factor to the maximum GAD rate determined at the last triennial review.

The annual allowance
There will be an annual limit of inflows to an individual’s pension funds. Any inflows above the annual allowance will be subject to a 40% tax charge. The annual allowance will be set at £215,000 in 2006/07. This will increase by £10,000 each year so that in 2010/11 it will be £255,000. The allowance will be applied to contributions to defined contribution schemes and increases in accrued benefits in defined benefit schemes and it is expected that it will also be reviewed every five years.
The annual allowance will not apply in the tax year where benefits are taken in full, either on retirement or death. This will aid some employees who receive an enhancement of pension rights in cases of redundancy, ill health or early retirement that may otherwise have been penalised.
The annual allowance takes account of all contributions to defined contribution schemes and all increases in the value of defined benefit schemes. Each £1 of pension increase will be counted as £10 of contribution. Therefore annual increases in the benefit in a defined benefit scheme of more than £21,500 will be caught. The following would not be included:
• An individual’s contributions in excess of 100% of earnings (as no tax relief is given).
• Age-related rebates to contracted-out money purchase and personal pension schemes.
• Funds transferred to a UK scheme from an overseas scheme (as long as the scheme is
recognised and regulated as a pension scheme in the country where it is established).
• Additional voluntary contributions used to buy added years (though the increase in the value
of the pension rights will be measured).
• A pension credit granted on a divorce, except where it is in respect of a non-registered scheme
• Contributions by an insurer in respect of a pre 6 April 2001 waiver of premium arrangement.
• Contributions made to a non-registered scheme.

dunstonh

Part 2

Contributions and tax relief
Relevant UK individuals who are active members of registered pension schemes will be entitled to tax relief.  An individual is a relevant UK individual if they under 75 and:
(a) they have relevant UK earnings chargeable to income tax for that year,
(b) they are resident in the UK at some time during that year,
(c) they were resident in the UK both when they became a member of the pension scheme and at some time during the previous five tax years, or
(d) they or their spouse have, for the tax year, general earnings from overseas Crown employment subject to UK tax. They may make unlimited contributions but tax relief will be limited to the higher of £3,600 and 100% of earnings. Tax relief on an employer contribution is unlimited in most cases.  Where contributions exceed the annual allowance the excess will be taxed at 40%.

Pension age
The minimum age for taking benefits will increase from age 50 to age 55 by 2010; pension schemes will decide how to make this change. Some protection will be provided to members of occupational schemes with existing contractual rights to take benefits after age 50 in cases such as redundancy.
For those who currently have an agreed lower retirement date, such as professional sportspeople,
benefits can be taken before age 55 but a reduced lifetime allowance will be applied (2.5% reduction for each year before age 55). Until 2010, the 2.5% reduction will apply for each year before 50. This reduction will not apply to those in the current armed forces, police and fire services pension schemes. However new schemes for these professions (which will adopt the age 55 rule) are expected to be in place before 2010. All benefits will have to be vested by age 75 either by an annuity or by Alternatively Secured Income (ASI).

Form of retirement benefit
Up to 25% of a pension fund (up to the lifetime allowance) can be taken as tax-free cash. This would allow schemes that currently do not provide cash, for example free standing AVC schemes, to do so. Whether tax-free cash is to be made available from contracted-out benefits is still to be determined. This issue is not part of the tax simplification issue; the Department for Work and Pensions (DWP) will be providing more information on this in due course.  The remaining fund must provide an income in one of the following ways:
• Secured benefits - a guaranteed income (annuity purchase or scheme pension).
• Alternatively Secured Income – this option was introduced to meet the needs of religious
groups that are against the pooling of mortality risk.
• Unsecured benefits – a non-guaranteed income (new form of drawdown).
The income from unsecured benefits was subject to a minimum of £1 under the proposals but the Finance Bill has confirmed there is now no minimum. The maximum is equal to 120% of the annual income available from a level, single-life annuity on the open market, reviewed at least every five years. Alternatively part of the designated drawdown fund can be used to purchase a term-certain annuity (not exceeding 5 years). The income from ASI will be subject to a maximum of 70% of the amount available on the open market, with no minimum, and will be reviewed annually.

dunstonh

Part 3

Trivial commutation
The initial proposal was that individuals were able to commute small pension funds where they did not (in total) exceed 1% (£15,000) of the lifetime allowance and where the commutations occurred within a single 12-month period, between the member’s 60th and 75th birthday. This has been changed in the Finance Bill so that total pension entitlement from all schemes, vested and unvested,
must be less than 1% of the lifetime allowance for triviality to be available. Up to 25% of the fund can be taken as tax-free cash with the remaining fund taxed as income.

Ill health
All schemes can provide benefits early on incapacity, and where the member’s expectation of life is less than one year, benefits can be fully commuted. There will be no income tax liability on the benefits commuted if within the lifetime allowance.

Death benefits
Lump sum death benefits of up to the lifetime allowance will be paid out tax free. Where the lifetime allowance is exceeded a recovery charge of 55% will be levied on the excess fund where this is taken as a lump sum. Where the excess benefits are paid as a pension there is no recovery charge.  When death occurs during drawdown the whole of the remaining fund can be paid out less 35% tax. The death benefits from an annuity that gives value protection (before age 75) will be
calculated as the purchase price less instalments less 35% tax.

Pensions and divorce
The lifetime allowance will be affected in different ways depending on whether the pension sharing order was created before or after A-day. New pension credits after A-day will count against the recipient’s lifetime allowance. For pension sharing orders in place at A-day, when calculating the value of a member’s pre A-day pension rights, the value of any pension allocated to a spouse on divorce will be ignored for the purposes of both spouses’ lifetime allowances.

Investment
After A-day all pension schemes will be permitted to invest in all types of investments including residential property. Any non-commercial use of an asset (for example, where the member lives rent free in a house owned by the pension scheme) will be regarded as a benefit in kind on the member and taxed accordingly.
Holdings of shares in the sponsoring employer will be restricted to 5% of the fund value. Loans of up to 50% of the fund value can be made but only to employers. Investments made before A-day will not be affected by these changes. Scheme borrowing will be restricted to 50% of the scheme’s assets subject to DWP requirements, which may be more restrictive. There will no longer be an Inland Revenue requirement for a pensioneer trustee.

Unapproved schemes/non-registered schemes
In the future, funded and unfunded unapproved retirement benefit schemes (FURBS and UURBS) will be non-registered pension schemes and will receive none of the existing tax advantages.  Benefits will be taxable but there will be some protection for existing schemes:
• Where an employee has paid tax on their employer’s contributions to a FURBS, contributions can continue to be made and an adjustment will be made to the tax-free element of any lump sum benefit finally paid out.
• An existing UURBS may be rolled into a registered scheme within 3 months of A-day without affecting the annual allowance.
From A-day, these schemes will be known as employer-financed retirement benefits schemes.  Schemes currently approved will be able to opt out of the new regime at A-day. There will be a 40% tax charge on the assets immediately before opting out and benefits taken will be liable to tax and National Insurance.

paul666

That's fantastic DD.

Could I just ask one question?

Contributions and tax relief
...
(a) they have relevant UK earnings chargeable to income tax for that year,
What kind of income does this cover? is it only income that, say, has been subject to NI or could it include, as it seems to suggest, that it could include dividend or rental income (on which income tax is charged)

Is this different from the current situation?

dunstonh

That's fantastic DD.  :)

Could I just ask one question?

Contributions and tax relief
...
(a) they have relevant UK earnings chargeable to income tax for that year,
What kind of income does this cover? is it only income that, say, has been subject to NI or could it include, as it seems to suggest, that it could include dividend or rental income (on which income tax is charged)

Is this different from the current situation?

No different from the current situation. I will add "as far as i know" just in case something has been changed since i last looked.

paul666

Thank you DD.

TC60

This is my first attempt on this site, which I must add I have found extremely interesting. Now I am looking for a bit of advice. I have reached the grand age of 60 but I am still working full time.

I am also receiving a couple of very small pensions plus my state pension. My total income is below £30,000.
I now looking to place some money from income to enhance my lifestyle when I do finally give up work. I have all the ISA's covered, I have instant savings accounts and premium bonds. Would it be worthwhile taking out a Stakeholder pension, thinking of it as being more tax efficient? I do have an occupational pension running with my employer.

Any thoughts would be gratefully received.

dunstonh

It can be something to consider. I just prepared an annual report for one that commenced a year ago. £2808 cheque and now valued at £4099. The plan is to take it to 75. If she doesnt make it, her husband gets the full capital value paid to him.

Darryl

I currently have £7000 of savings split between an ISA and a high interest savings account (both procured with advice from this site).    

From my very vague knowledge of savings and pensions, the advantages that I can see this gives me is:

1) if some crisis occurs and I really need that money now (and I mean a real emergency like having to pay for life-saving treatment in th US...) I can get at the money, it's not tied up in a pension.

2) If get told I have 12 months to live in at the age of 40 I can spend my savings on making that last 12 months the best ever, rather than losing it all in a pension.

... (I have also worked on fixed-term contracts for all of my working life and never stay with one organisation for more than a couple of years and I imagine having lots of little 'pots' of money would be a nightmare).

I read the stuff about 'pension v ISA'. etc, but was wondering if there are any other options out there for people like me who like low risk (stuffing it under the matress won't work - the house might burn down...).

KG

I can't help but feel that the responses you've had so far have focused too much on pensions, when in fact your questions were more to do with saving for different reasons (including retirement).

I also have 30+ years until (suggested) retirement. I've also had lots of contract jobs in the past (and still work in a sector where job security isn't a recognised term).

As a consequence of these contract jobs I have several 'pension pots' which, to be frank, don't bother me at all. I review their performance every year, knowing that if I wanted to move them I could. But, if they are still in little pots when I retire, I'll just have several forms of income instead of one. I don't consider this to be a problem.

I've also though about 'emergency' situations (like job loss, illness etc)

For job loss scenarios  >:(, I have built up an emergency savings pot (in cash ISAs) that equals 6 times our minimum monthly expenses (mortgage, energy bills, food, etc; but excluding gym, mobile bills, etc)

For critical illness, 12 months-to-live scenarios  :o , I have taken out income protection insurance that will pay out 2/3rds of my current monthly income (index linked) until I reach age 65. I feel that if I get told I'll have no more that 12 months to live, I'll use the emergency fund to cover the initial crisis costs/alcohol budget, and then have the income protection cover. (I also got the income protection cover with full commission refund via a broker, like a true MSE...)

For the 'no critical illness, carry on working until I retire' scenario  :D, I currently invest in a SIPP (self invested personal pension). My current employer doesn't offer a decent pension, so I direct my own investment decisions. Like you, I am also fed up with the sales-spin type info you generally see relating to pensions. But, I do like the fact that the Government pays a load of cash into my pension fund too, so that's why I prefer this over alternatives such as ISAs.

Hope this helps.

Darryl.

dunstonh

As for the savings / pensions debate. First port of call the cash-isa's - safest,

Bah! not that old chestnut again. ;D

That may suit your risk profile but there are loads of people who would be daft wasting their ISA allowance on a cash isa and would find the MAXI ISA more appropriate.