Lecture 8 - Pensions Part 2

Question 1

Personal pension plans

Answer 1

Schemes that attract identical tax relief to occupational schemes

Insurance companies seeking personal pensions must apply to HRMC for approval

Savers become members of the pension scheme

Question 2

Self invested personal pensions

Answer 2

Personal pension scheme for individuals who want to manage their own fund

Provides wider investment choices and can hold most asset classes except your personal property

Historical unpopular due to high charges

Question 3

Pension crisis

Answer 3

Individuals - am I going to have a reasonable retirement

Companies - cannot afford to meet obligations entered into when these issues were not apparent

Governments - cannot make the country’s books balance

Question 4

Why do we have a pension crisis

Answer 4

Increasing age of the population

Moving from defined benefit to defined contribution schemes leading to lower pension entitlements

Poor performance of stock markets

Inflation

Both contributing to lower annuity rates

Tax changes

The size of a pension deficit is difficult to calculate (asset vs liabilities of fund)

Question 5

Pension crisis - individuals

Answer 5

Estimated that 12-15 million people of working age do not save enough for their retirement

Main focus of any pension reform has to be encouraging people to save from an earlier age (power of compounding)

Question 6

How much will I save

Answer 6

Difficult to predict what sort of pension somebody would have at the end, it depends on:

Success of investments
Changes to people’s earnings
Age at which they decide to retire
Charge levied by the pension provider, which is taken automatically each year from the pot

Question 7

Pensions crisis - companies

Answer 7

Downturn in stock markets in early 2000s and slower growth thereafter

Closure of defined benefits and other good pension schemes by large companies

Pension scandals, Robert maxwell raided £400 million from the company’s pension funds

Question 8

The pensions act 2004

Answer 8

Abolished the OPRA which was replaced with the pension regulator, with wider powers to intervene of it own volition
New powers for the PR to intervene where employers were under-resourced to support the pension scheme
New notification requirements
The establishment of the pension protection fund to provide benefits for members where a pension scheme had gone down with insufficient resources to fund scheme benefits and no employer to make good the underfunding
Abolition of the minimum funding requirement and its replacement with scheme-specific funding requirements
Modification of the protections for existing pension scheme benefits

Question 9

The pension protection fund

Answer 9

Created in the pensions act 2004

Provides a safeguard for members of DB pension schemes (90% of full pension for existing workers and 100% for pensioners)
At risk schemes are under the assessment of the PPF as to whether the ppf will absorb their assets and take on responsibility for meeting current and future liabilities
Or else companies may be required to contribute more to avoid shortfalls

Question 10

Pension crisis - government

Answer 10

The uk governments state pension funds are ‘underfunded’

An ageing society is linked with higher public spending e.g. Healthcare and pensions

Lack of private savings by individuals

Taxes paid by the working population are insufficient to fund pension and related payments

Question 11

The turner commission

Answer 11

In late 200, the uk government set up a pension commission

• investigate the issues over how to provide pensions in future
• review the levels of both occupational and personal pension savings
• make policy recommendations

Question 12

The turner report

Answer 12

Identified the need for 3 measures and published its key findings in November 2005:

Improving state pension
Increasing state pension age
Automatically enrolling employees into a national work-based pension scheme

Led to improvements in state pension from April 2010 onwards

Question 13

Uk government response

Answer 13

State pension

• number of years for NICs proposed is reduced to 35 years, compared to the planned 44 for men and 39 for women
• higher and flat rate state pension system

State pension age

• rise to 67, compared to 65 historically with effect for all staff starting in 2012
• encouraging pension savings particularly for low income households with poor access to pensions

Question 14

Automatic enrolment

Answer 14

New law means that every employer must automatically enroll workers into a workplace pension scheme:
Either their current pension scheme or the national employment savings trust (NEST)
It has been gradually introduced over six years:

• from Oct 2012, largest businesses > 250 staff
• from 2017, smallest and new employers
• self employed and those who are non-eligible individuals can join the scheme on their own account

Question 15

Eligible employees

Answer 15

In order to be eligible for auto enrolment, employees must:

• be between 22 and the state pension age
• earn over £10,000 a year
• work in the uk

Some employees might not be eligible to be auto-enrolled but companies will still need to make minimum pension contributions if they decided to join their workplace pension scheme

Question 16

Auto enrolment criteria

Answer 16

Must be a minimum of 0.8% contribution from the employee, 1% from the employer and 0.2% tax relief is paid by the government

There is an option to voluntarily opt in, or opt out for those self-employed people working for the company, or those who are ineligible to join, but they will miss out on the contribution their employer puts into the pension

Question 17

Example of 2012 vs 2018 contribution

Answer 17

From 2018 on:
4% employee
3% employer
1% tax relief

Question 18

2015-16

Answer 18

6 ways you can take your pension pot, usually with 25% of the pot tax free

• leave your whole pot untouched
• guaranteed income (annuity)
• adjustable income
• take cash in chunks
  -take your whole pot in one go
  Mix your options

Question 19

Leave your whole pot untouched

Answer 19

Leave it until you need it

• do not pay tax while the money stays in your pot
• money left in your pot can be passed on tax free if you die before the age of 75
• your provider may charger you extra fees if you do not take your money at the selected retirement age
• you and your employer can continue to pay in, but there may be restrictions
• usually pay tax if savings in your pension pot go above the annual allowance, currently £40,000 per annum

Question 20

Guaranteed income - annuity

Answer 20

You get a fixed income for life or for a set number of years
Can take 35% of your pot as tax-free can and buy an annuity with the other 75%
You pay tax on your annuity income

Question 21

Adjustable income - you decide how much to take out and when

Answer 21

Get 25% of your pot as a single, tax free lump sum
Other 75% is invested to give you regular, taxable income
You can adjust the income you take in and when you take it
Need to be involved in choosing and managing your investments - value of pot can go up or down
Not all pension providers offers this option

Question 22

Take cash in chunks

Answer 22

Can take smaller sums of money until you run out
Your 25% tax free amount is not paid in one lump sum - you get it over time

• you decide how much to take and when to take it
• your 25% tax-free amount is not paid in one lump sum
• each time you take a chunk of money 25% is tax free and the rest is taxable
• some pension providers charge a fee to cash out

Question 23

Take pot in one go

Answer 23

You can cash in your entire pot, 25% is tax free and the rest is taxable
You pay tax when you take money from your pot because when you pay into your pension you get tax relief on your contributions

Question 24

Mix your options

Answer 24

Need a bigger pot

• mix the pension options, some to get an adjustable income, and some to buy an annuity.
• not all providers offer all the options

Question 25

When I die

Answer 25

You can leave pension pot to dependants if you die before the age of 75, pot can be passed on tax free
If you die after 75, you can still bequeath your pot to your dependants. If they want the whole pot as a lump sum, they will have to pay 45% tax, instead of 55% previously

Question 26

How big a pot van I have

Answer 26

2016, maximum you can have in a pension pot will be £1 million, reduced from £1.25 million
Figure will rise with inflation
Have to pay 55% tax on any withdrawals
The annual allowance for pensions savings remains at £40,000

Question 27

Problems in uk pension reform

Answer 27

Political life spam
30-50 years for a pension plan vs election every five years
Loss of business for private pension providers
Cost to small firms
Increase in pensions, savings means a decline in current consumption

Question 28

Is there really a pensions crisis

Answer 28

Your pension pot tends to be the most valuable asset aside from other main sources of retirement income - savings, investments, and the family home

Uk housing stick has tripled in value over last 10 years

Number of pensioners expected to experience future poverty falls to 1 in 10 once these assets are accounted for