Successive Chancellors have chased their tails looking for pension simplification only to add to the mishmash of confused rules that govern the system.
Pension changes come like buses – in groups of two or three after gaps of expectant waiting.
After a flurry of upheavals in the past 12 months, it’s time to take stock of where the nation stands with pensions.
The government has finally halted the madness of pension musical chairs by surrendering early access to retirement savings is a reform too far – so here’s a recap of where we are after the changes of April 6.
Annual pension contribution limit
The amount a saver can put in to a pension fund in any tax year is slashed from £255,000 to £50,000 – the cut is immense but the bonus points are savers pick up tax relief on contributions at the highest rate they pay income tax and can carry forward three year’s of unused contributions.
The Labour government implemented this change mainly as a tax avoidance strategy to stop high earners ploughing their money in to a pension to avoid paying income tax on earnings above £100,000.
Scrapping annuity rules
Retirees no longer have to switch their money in to an annuity at the age of 75 years old to avoid massive tax penalties.
Flexible income drawdown
Drawdown lets anyone over 55 years old access some or all of their pension fund, providing they can prove they have independent means that gives them an income of £20,000 a year or more
Tax cuts on pension funds
Drawdown schemes left to beneficiaries on death pay tax at 55%, but no inheritance tax on drawdown funds.
Flat rate state pension
A standard one-size-suits-all state pension of £140 a week and the scrapping of means-tested pension credits.
Default retirement age scrapped
The default retirement age (DRA) was set at 65 years old – but the restriction is removed so individuals can decide whether to give up or continuing working to whatever age they wish.
Lifetime allowance decreases
The lifetime allowance (LTA) will gradually slip back from £1.8 million to the 2006 level of £1.5 million.
The aim of these changes is to shift the responsibility of saving for retirement to the individual during their working life – and in return relaxes the rules on accessing the money in a pension fund.
The other buzz word of the moment is lifetime savings. The government wants everyone to start saving more money earlier to finance their retirement.
The likelihood is some linked pension and savings hybrid will emerge that will lock pension funds until the age of 55 while still allowing access to other savings along the way – like having a supercharged ISA running alongside a pension.
What’s next for pensions?
The next key date is October 2012, when the National Employment Savings Trust or NEST workplace pension is launched.
The plan is to simplify retirement saving for around 7 million workers by making employers automatically enrolment everyone on their payroll in to a company pension or a NEST scheme. Companies will have to contribute at least 3% of eligible earnings in to the fund while employees will pay in 4%. To incentivise saving, the government will top up the fund with another 1% of tax relief, making a total contribution of 8% of eligible earnings.
Paying in to a NEST is phased in between October 2012 and 2017, depending on the size of the employer’s workforce. Some employees can opt out of NEST under certain circumstances.
A statement from Mark Hoban, financial secretary to the Treasury, seems to have drawn a line in the sand over further pension reform for the government.
In announcing early access proposals would be put on the back-burner he clearly said that further radical pension reform would have to wait until the results of NEST performance were assessed, so this pushed anything other than running repairs to the system back for up to five years.
Other options to finance retirement
The age-old problem that besets older people is they are “asset rich and cash poor”.
The value of the assets accumulated during someone’s lifetime can add up to a sizeable sum of money – especially with roaring house price inflation stoking the fire.
The standard retirement plan was to buy a house, pay off the mortgage before retirement and then give up work with a pension to fund a modest lifestyle.
Now, equity release is the alternative solution as that strategy fails, retirement goalposts move and inflation increases house prices but is also a double-edged sword that also blunts interest on savings.
Equity release, sometimes called a lifetime mortgage, is a way of extracting some of the cash locked in to a home for spending. Generally the schemes work by giving the homeowner a loan with any interest and capital repayments rolled until they die or enter long-term care.
Then, a final reckoning repays the loan and any excess is paid in to the homeowner’s estate or invested to pay for care.
What’s the best way to save for retirement?
Choosing from the huge range of saving and investment options on the market comes down to a simple strategy:
- Benchmark current savings, investments and other assets to make an educated guess about the likely income available for retirement
- Look at personal retirement goals, like what age to give up work, where to live and ongoing expenses, like food, utilities, transport, entertainment and holidays etc
- Take professional, regulated advice from an independent consultant who can demonstrate experience in retirement planning.
- Ignore products and look at goals and how to reach them – then align goals with products that match those targets.
Review savings performance regularly – no less than every two years to make sure products and strategies are in tune with any changes in pension rules
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