Woodruff Financial Planning blog

If you are an employer, you will probably have heard about the NEST pension scheme, which will go live in October 2012.  These proposals are expected to go into force, although some review may take place under the new Government (there is a review underway at present, which is due to report back in September 2010).

Under the new rules, employers will have greater responsibilities to provide workplace access to pensions for their employees.

1. You will be required to enrol your employees into a scheme which meets the new standards
2. There will be a minimum contribution amount for employers and employees (see below)

NEST is designed to be:

• low cost
• open to any employer that wants to use it to meet the new duties
• an online pension scheme that’s easy to use
• easy for you and your workers to understand
• run in members’ interests by NEST Corporation

When will your company be expected to comply with the new rules?
The scheme is coming into effect in stages according to the size of employers from 2012 over a number of years.  The largest companies will be expected to set schemes up first, with the smallest coming in the following years.  The Pensions Regulator will give you one year’s notice of when your new legal duties come into effect. It will also write to you three months in advance to remind you that your duties are due to take effect and that you need to have a scheme in place.  Click here for a list of when companies will be expected to set up NEST schemes.

What are the minimum contributions?
There will be a gradual increase in the amounts that you must pay in to your employees’ accounts:

You will also be responsible for deducting employees’ contributions from their net pay, and to pay this money to the NEST scheme.

Here are the main details of the emergency budget, announced today.  We have commented on the implications to your personal finances.

• VAT – rises to 20%
  From January 4th 2011; this will increase the cost of goods;
• Income tax – raising the personal allowance by £1,000 from April
  A gain of up to £170 per year.  Higher rate income tax payers will not benefit from this change.

• Capital gains tax rises – to 28% for higher earners
  Basic rate earners remain at 18%; no return to taper relief or indexation relief.  This does help to keep things simple;
• Tax credits – reducing benefits to those earning over £40,000
  The government seeks to apply these to ‘those with most need.’
• Employer’s National Insurance – threshold to rise
  This means employers will pay slightly less tax

• Corporation tax – reduced
  Large companies cut from 28% to 24% over 4 years, and small companies to 20%
• Bank levy
  No details as yet, although France & Germany agree to follow suit;

• £30 billion reduction in spending by Government departments
• Capital expenditure on Government to remain level
  This should help businesses and employers to retain contracts and work;
• Public sector wages – 2 year pay freeze for those earning over £21,000
  Those below this amount will receive a £250 pay rise each year.
• Public sector pensions – A review into costs and benefits
  These were set to double in cost over 5 years.
• Pensions – phasing out the compulsory retirement age
  This will help with flexible retirement planning, a real necessity to modern lives.
• Pensions – bringing forward the proposed raising of the retirement age
  We will have to retire later than many expected, claiming our State pension later;
• Pensions – no forced annuity purchase at age 75
  This is a good move, since it will promote more flexibility with pensions planning.  Details are set to follow.
• State Pensions – rising in line with earnings, or 2.5% from April 2011
• Child benefit – frozen for 3 years
  The Government has kept the benefit open to all, but reduced the benefit in real terms.
• Disability living allowance – medical required
  It will be harder to claim this benefit
• Housing benefit – lower limits
  There will be restrictions on the amounts payable
• Alcohol and cigarettes – no changes
• Incentives for new business set ups outside of the South East
  1st 10 employees will save on Employer’s National Insurance

OK, so it’s early days for the new Government, but we thought you might find it useful to have a run down of the likely proposed changes to your finances from the new regime.  Please bear in mind that much of this is speculation at this point!

Emergency budget
There will be a budget within 50 days.

Income tax
It seems that the Liberal Democrat pledge to increase the income tax threshold to £10,000 will stay.  This means no-one will pay tax below £10,000 earnings.  There is no indication yet as to when this would be introduced,

National Insurance
The Labour policy to raise National Insurance by 1% will be scrapped.

Married couples
There has been talk of a tax break for married couples and civil partners worth around £150 per year.

Inheritance tax
The Tory policy to increase the threshold to £1 million looks to be put on ice.

VAT
Neither party has ruled out an increase in VAT.  An increase to around 20% seems likely.

Capital Gains Tax
It seems likely that this will rise from the current rate of 18%, potentially nearer to 25-30%.  This would hit investors hard.  otherwise, there could be a proposal to create bands of capital gains tax, similar to income tax.  This would complicate the system.

Abolition of pensions higher rate relief
This was a Liberal Democrat policy, and looks quite likely to happen.  This would mean that higher rate income tax payers would lose the additional benefit of making pension contributions, and would be restricted to the same benefits that basic rate tax payers get.

Scrapping compulsory annuities at age 75
There seems to be a commitment to scrap the current requirement to take an annuity at age 75.  This should allow those with complex affairs to better manage their retirement incomes.

Other cuts
£6 billion of cuts to public services have already been announced, but this is small change compared to the budget deficit.  Therefore expect other cuts to public services.  One such change is a review into public sector pensions, so this should mean reductions in future benefits for public sector workers (while preserving accrued rights).

This post is designed to do 2 things.  Firstly, we’ll give you a brief overview of the tax relief regime for pension contributions. Secondly, we’ll give some commentary as to where this is going politically.

How does pension tax relief work?
The tax relief on pensions is one of the things that makes them so attractive.  In short, if you make personal contributions to a registered pension scheme, the Government will give you some of your income tax back.

For for every £100 gross pension contribution, you only actually pay £80 net (out of your bank account or wages).  The Government tops up the other 20% (based on the current income tax rate).  Therefore, for a £100 per month contribution from your wages, your pension fund will actually receive £125 – an uplift of 25%.  Now what other investment can guarantee this kind of growth on day one?  This tax relief is a big reason why pensions are a good way to save for the long-term (although there are some restrictions on them as well).

Higher rate income tax payers
For higher rate income tax payers, you pay income tax at 40%.  You can reclaim the further 20% tax (the difference between the higher and basic rates).  Therefore, for your £100 gross contribution, you would pay in £80 net from your account or wages, and then reclaim the remaining £20 through your tax return.  Thus, if you pay in £100 from your wages, £125 goes into your pension pot, and you get £25 back as well through your tax return.

All this adds up to a significant benefit for all savers, but particularly higher rate tax payers.

Limits
You are allowed to pay in up 100% of your earned income, or £3,600pa gross, whichever is the greater.  This means that low earners or non-earners (including children) can pay into a pension plan, and event receive contributions from a third party (say a partner or parent), and still claim tax relief.

From April 2010 the maximum allowed to be paid into a pension plan and still attract tax relief is £255,000.

Political changes
Obviously, we are nearing an election and have a massive public deficit.  Therefore, the Government is trying to do 2 things: to demonstrate a clear difference between themselves and the Opposition; and to reduce the burden on the public finances of a benefit which seems to be delivered to those who least need it – i.e. higher earners.

The Government recently announced it would introduce a new income tax rate for earners over £150,000 at 50%, effective from April 2011.  This would have increased the tax relief payable to such earners, so they also brought in complicated measures to stop this.  The restrictions apply to all contributions for such high earners, including those made by employers, and they are also seeking to stop people from making massive contributions this tax year to pre-empt the changes next year (the anti-forestalling measures).  For more information see this link to the Pensions Advisory Service website.  The measures will reduce the tax relief available to earners over £150,000 so that relief will be tapered away to that payable to basic rate tax payers for contributions for earners over £180,000.  If you earn over £150,000 and you already make significant contributions to your pension, you will not be penalised so long as you can demonstrate a pattern in your pension contributions of no more than £20,000pa; those looking to pay in extra in the short-term will be penalised.

Clear?  That’s what we thought!  The easy answer is to seek guidance from us if you think you may be caught in the new rules.

Pension tax relief in figures
Let’s look at some of the sums involved, courtesy of a recent article in the Economist and another in Citywire.

• The current tax relief regime costs £28.4 billion, or 2% of GDP
• 25% of this figure goes to the richest 1% of the working population
• Abolishing tax relief on higher rate contributions could save the state £10 billion per year.

These are significant figures, and we actually do think that some reform of pension tax relief is needed, although we could not support the proposed changes.  These changes are far too complex and probably will not have the results that the Government want.  We can see that many high earners, already disenchanted with pensions, will be put off pensions altogether.  This may result in less take up of pensions, and less roll-out to the lower paid workforce in general.  Of course, many higher earners also retain professional advisers, which will see them look to alternative arrangements (such as EFRBs) to obtain an advantage.

We would prefer to see a simplfied system of tax relief on pensions.  Why not apply a level rate applicable to all earners, with a top limit on contributions?  This seems the fairest way, and does not discriminate against basic rate tax payers.  We realise that many people (including some clients) would not support this, but we see it as strange to give the biggest benefits to those who can most afford them.  Why not simply offer everyone the same level of tax relief, and those who save more will get a greater benefit?

See our pensions section of our website.

Today, I met with a new client.  He is approaching 60 and has been running professional practice for some years.  He is now considering retirement.

We started off by discussing his pensions, and other assets, as well has his income sources for the future.  However, it quickly became clear to me that what he really needs at the moment is to know if he can be confident to retire; after all, this is a big decision.  Once he gives up his professional practice, his income will be limited, although he can always work as a consultant.

What we spoke to him about was the concept of comprehensive financial planning.

We will begin by analysing his future goals, income, expenses, assets etc, and then put these all together to work out whether he can be confident to retire now, or whether he will need to work for a few more years to build up more resources.  This is a big decision, so needs to be taken with his eyes wide open.  Out philosophy is that it is better to know the real value of your money and assets so that you can enter retirement confident that you can be financially secure; if this is not the case, then we can start to work on what will achive your goals.

We will be able to paint a picture of his retirement as if he had retired yesterday.  If his resources are not enough, we can start to look at other options by examining different scenarios, such as retiring later, spending less money, working part time, downsizing his home etc.  After all, these decisions need some careful planning.

Once this has been done, we can agree a strategy to best meet his needs, and this will result in some major changes to his current financial situation: taking pension income, amending investments to focus on income rather than capital growth, and possibly the sale of his home.  We will work closely with his accountant as there will be other issues raised by the exit from his business.

We find this a rewarding process in that we are actually helping the client to realise his ambition to retire on enough income to achieve his future desired lifestyle.  from the client’s point of view, this is not about financial products, but more about financial planning to give him the confidence to stop accumulating and start spending.

See out Financial Navigation service for more details.

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We think that these type of funds are outdated since they are difficult to understand for consumers, and are also difficult to value.

Get your free investment or pension portfolio review: http://bit.ly/4NEFvG.

We are offering a trial to allow you to investigate the basic performance of your pension or investment portfolio. Contact us to give us the details of your investment funds, and we will produce a basic analysis of your portfolio to give you an idea of how it is doing.

Providers are offering pension Annuities according to postcode. Make sure you shop around. http://viigo.im/25sW

Yesterday (via Twitter) I listened to an excellent podcast on pensions and divorce by a Solicitor at Colchester firm Fisher Jones Greenwood.  This prompted me to write today’s Financial Planning Blog.

If you are going through a divorce pensions are likely to be one of your largest assets, so it is right to split these assets as part of the divorce settlement.  Often one party will have a larger pension pot than the other, so as part of the divorce it is possible to split the pensions so the other side can have a proportion of these funds in their own name.

Of course, this will prompt the need for advice for both sides. If you are losing pension rights you will need advice as to how best achieve the split for your interests.  Also, you will probably need to work on making up those lost pensions as this will affect your future income. 

If you are receiving pension rights from your spouse on divorce then you will also need advice, particularly if you have never needed to manage this money in the past.  You will also need to discuss which of the options are best for you before the divorce is agreed.

We have experience of managing pension sharing orders for both sides, and as Certified Financial Planners we are qualified to show you how the pensions (lost or gained) can affect your future lifestyle.

We have produced a factsheet on the pension options open to you on divorce.  This explains the main options open to you on divorce, and why you should take advice both from your solicitor, but also from a qualified financial adviser.

If you are reading this, then you probably have a sizable amount invested in investments or pensions.  Most people do some research when they set up their investments (and this applies to most advisers too!).  However, many (most) investments are rarely reviewed.

If you think about it, if you have many thousands of pounds invested you really should be keeping a strategic eye on this money (after all your financial security depends on it).  If you bought a car for £20,000 wouldn’t you get it serviced each year? The alternative is to expect something to go wrong in the future, probably when you most need that money.  Well, your investments or pensions could/should end up being much more valuable than you car, but when was the last time you reviewed them?

What should you look to review with your investments?

• You should be able to know the rough value of your holdings at any point
• You should understand the level of risk you are prepared to take, and the likely positive and negative outcomes this may generate;
• Where your money is invested, and what this means for you;
• When to make strategic changes to your portfolio;
• Know when to switch out of funds;
• Know what the investment and income outlook is for your investment.

We don’t think you need to look at things daily, but you should look at things at least annually.  Failure to do so could mean that you end up taking more risk than you meant to, and could end up leaving you with a nasty shock at a later date.

If you have an adviser, ask yourself how often they sit down with you and explain all of the above to you.  If the answer is that they do not, then perhaps you should think about changing your adviser!

How do we help clients with this?
We offer our Portfolio Management Service, which aims to help clients manage risks with their money, and to maximise returns on their investments.