MSE News: Budget 2012: Single state pension plan confirmed

dunstonh

Tancred wrote: »

True, but unlimited drawdowns are only possible if you have a very big pot. Most people won't be able to do this.

I was actually referring to capped drawdown which is available to nearly everyone.

Anyway, this independent approach is already happening, with many people opting out of a pension altogether and investing in ISAs etc to build up a pot to invest. It's about flexibility and giving people the right to invest their money in the best way possible. In the USA there is already a lot more freedom to do this, but here as always there are roadblocks.

Pensions and ISAs have virtually the same investment options. If you put the same investment into both then you get an identical return. The only difference is the tax and maturity. Because of that, the pension will provide a higher income than the ISA (even if the pension is taxed). The pension tax wrapper is not perfect and has some limitations but it should not be ignored. If you stop thinking of pension as a product and start looking at it as a tax wrapper then it can become more attractive as an option.

Property is not a tax wrapper. It is an asset class. It is subject to investment risk. It is subject to shortfall risk. It is single sector. Tax on it is heavy (income tax on income, capital gains tax on gains and inheritance tax on death). As an asset class it has advantages and disadvantages. It is also influence by external policies. For the last 30 or even 40 years (as the changes were happening pre Thatcher), it has gone through a boom period fuelled by ever increasing easier to get credit and relatively cheap credit. Credit that is not so easy to get nowadays. Anyone expecting returns from property to be similar to the past decades is likely to end up disappointed.

atush

Originally Posted by Tancred
What the government should do is allow people to withdraw ALL of their private pension pots tax free and let them invest it into rental property instead of some poxy low return annuity.
Yes, that would do wonders for housing affordability for all the young people priced out of owning a home.

Not to mention all those young renters will have doddery old landlords who don't keep up with maintenance issues.

peterg1965

So, is the proposal that EVERYONE, was has built up 30 years NI, regardless of whether they have been contracted out along the way, will get the new Flat Rate Pension of £150 pw (or whatever the exact figures turns out to be)?

The way I read it, someone like me with a Public Sector FS pension will simply have to pay an increased level of NI contributions whilst I am still in work, is this a correct assumption?

Southend1

Southend1 wrote: »

So I see contracting out will come to an end as part of the changes. I am I the final salary section of USS. So I will pay higher NICs. But will they also increase my USS contribution rate? I'm not sure if somehow some of the contracted out NICs ended up in USS?

Just wondering if I should have started a separate thread for this question? I'll leave it here for a bit in case any of the regular experts on here see it, if not will start a thread. Thanks in advance to anyone who can answer this

hugheskevi

But will they also increase my USS contribution rate? I'm not sure if somehow some of the contracted out NICs ended up in USS?

The contracted-out rebate (which is an additional 3.4 percentage points for employer National Insurance payments on employee earnings over about £7,500) goes to the employer.

The employer has the responsibility to fund the scheme, and in many cases the employer may hypothecate the contracted-out rebate to the pension fund but there is no requirement to do so.

So there is no direct link that would lead to a higher member contribution rate.

However, due to the abolition of contracting-out, the employer will face a higher NICs bill.

The employer needs to respond to that - they could just bear the cost, they could reduce generosity of the pension scheme, they could increase member contributions, they could reduce wages (or more likely, have lower wage increases compared to what they would have been) and so forth.

So indirectly you would expect the employee to, one way or another, bear the extra costs of the employer having to pay higher employer NICs as well as the direct increase in their own employee National Insurance payments of 1.4% on earnings between about £7,500 and £40,000 (although things such as Minimum Wage may affect the adjustment).

Southend1

hugheskevi wrote: »

The contracted-out rebate (which is an additional 3.4 percentage points for employer National Insurance payments on employee earnings over about £7,500) goes to the employer.

The employer has the responsibility to fund the scheme, and in many cases the employer may hypothecate the contracted-out rebate to the pension fund but there is no requirement to do so.

So there is no direct link that would lead to a higher member contribution rate.

However, due to the abolition of contracting-out, the employer will face a higher NICs bill.

The employer needs to respond to that - they could just bear the cost, they could reduce generosity of the pension scheme, they could increase member contributions, they could reduce wages (or more likely, have lower wage increases compared to what they would have been) and so forth.

So indirectly you would expect the employee to, one way or another, bear the extra costs of the employer having to pay higher employer NICs as well as the direct increase in their own employee National Insurance payments of 1.4% on earnings between about £7,500 and £40,000 (although things such as Minimum Wage may affect the adjustment).

Thanks for the reply. I suspected I would end up with less money in my pocket somehow in addition to the extra employee NICs. I'll just have to wait and see exactly how this will play out.

I'm guessing this will be another nail in the coffin of DB pension schemes. Pretty soon retirement will just be for the rich and the average joe like me will be working til we drop. I will keep paying into my work pension while it still exists but I'm not 100% convinced i will ever see anything back out of it before I die!

jamesd

Southend1, it's just guesswork but you wouldn't end up paying any more, the pension scheme would get less (no NI rebated into it) and the pension scheme would have to pay out less, because it wouldn't have the obligation to pay the additional state pension portion of the income, which would instead come from the state pension.

So in theory nothing has to change except the title used for the way the same amount of money ends up being paid to you. Though the state pension age might be higher or lower than your work scheme pension age so there might be some delay in getting that portion of the money.

Unless for some reason you're actually paying reduced NICs instead of them going into the pension scheme. In that case the NICs should go up and the scheme should have the same to pay out (no additional state pension to replace because it isn't getting paid the money to do that) while you end up with the higher state pension.

Southend1

jamesd wrote: »

Southend1, it's just guesswork but you wouldn't end up paying any more, the pension scheme would get less (no NI rebated into it) and the pension scheme would have to pay out less, because it wouldn't have the obligation to pay the additional state pension portion of the income, which would instead come from the state pension.

So in theory nothing has to change except the title used for the way the same amount of money ends up being paid to you. Though the state pension age might be higher or lower than your work scheme pension age so there might be some delay in getting that portion of the money.

Unless for some reason you're actually paying reduced NICs instead of them going into the pension scheme. In that case the NICs should go up and the scheme should have the same to pay out (no additional state pension to replace because it isn't getting paid the money to do that) while you end up with the higher state pension.

My understanding was that currently I pay lower NICs as does my employer. The employer may or may not be using their saving to help fund the pension scheme. But I won't be entitled to any state second pension for the years that I am contracted out.

I'm not sure how I came to believe this, probably it was explained in the scheme booklet I was given when I joined. But maybe I am wrong?

hugheskevi

My understanding was that currently I pay lower NICs as does my employer.

Correct.

But I won't be entitled to any state second pension for the years that I am contracted out.

True (subject to a few points of finer detail about how lower and middle-earners actually do accrue some State Second Pension while contracted-out).

But the situation jamesd outlines is one where the employer decides to respond to the abolition of contracting-out by restructuring their scheme to be less generous, reducing benefits by the value of the contracted-out rebate. So in that situation you would then be paying the same employee contribution to the pension scheme as you do now, but get less out of it when you retire as the benefits are less generous.

It is further assumed that you would benefit from the new State scheme by getting a higher State Pension than if you had been contracted-out, and the gain from that is equal to the loss you face in your private scheme from the restructuring.

Hence, in that scenario you only pay higher employee National Insurance contributions, and end up getting the same or slightly higher overall pension (State and private pension combined).

But there are lots of points of detail which can complicate it - the employer may not want to restructure their pension scheme, the employee may already have more than £140 per week State Pension as they spent most of their life contracted-in before joining a contracted-out scheme late in their working life and hence don't benefit from the new arrangements, and so on.

Until we see the detail, this is speculative, suffice to say, your employer will respond the the loss in National Insurance rebates in one of a variety of ways, and based on the way they choose to do so and your personal State Pension accrued, you could end up better-off, worse-off or no-change.

Southend1

Thanks hugheskevi and jamesd. My bet is that I will end up worse off in some way. There doesn't seem to be a year go by where there are no changes to pension rules and I've not once so far known a change in my favour! I think my plan will be to pay off the mortgage and assume I will then still have to work part time from age 65 until I am no longer able to do so. At that point hopefully there will still be something of the NHS left to look after me!! If I do end up with any pension (work or state) that will just be a bonus- perhaps I will be able to turn the heating on every once in a while!!