Lecture 8 - Pensions Part 2 Flashcards
Personal pension plans
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
Self invested personal pensions
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
Pension crisis
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
Why do we have a pension crisis
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)
Pension crisis - individuals
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)
How much will I save
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
Pensions crisis - companies
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
The pensions act 2004
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
The pension protection fund
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
Pension crisis - government
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
The turner commission
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
The turner report
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
Uk government response
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
Automatic enrolment
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
Eligible employees
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
Auto enrolment criteria
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
Example of 2012 vs 2018 contribution
From 2018 on:
4% employee
3% employer
1% tax relief
2015-16
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
Leave your whole pot untouched
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
Guaranteed income - annuity
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
Adjustable income - you decide how much to take out and when
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
Take cash in chunks
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
Take pot in one go
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
Mix your options
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
