View Full Version : The Pensions Bill Amendments 2014
There are a few suggested amendments to the new Pensions Bill. They are not particularly contentious although these ones will have particular relevance to more senior, or older and/or retired military families and widows (prescient in light of the recent hassle experienced by ForPen at the hands of Soldier Magazine and RAF News).
The amendments of course, still have to be considered and although some clauses have been argued over, these particular ones have still not been. The detail may be interesting to older members here as it seems there is scope to apply for additional state pension benefits for spouses between 1975 and 2010.
The Pensions Bill as brought from the House of Lords on 12 March 2014. - Echelon Wealthcare (http://www.echelonwealthcare.co.uk/the-pensions-bill-as-brought-from-the-house-of-lords-on-12-march-2014/)
F.O.D
18th Mar 2014, 20:57
Thanks for the info Al,
I actually wrote to Steve Webb (through my MP) about 18 months ago on this very subject. Given that wives suddenly had to make 5 more years of National Insurance contributions to get a full pension under the new single tier pension scheme (35 years NI rather than 30), I thought it was a bit unfair on Mrs F.O.D, who has loyally followed me around Europe for 10 of my 30 years in the RAF. Clearly, I can't have been alone in flagging this up and am pleasantly surprised that HM Govt is actually considering fixing it for Service families who were overseas prior to 2010.
F.O.D
F.O.D
You never know, your letter may have been the one that sowed the seed.
Steve Webb is getting a mixed press these days but he seems to be well meaning and fair. I did think it strange that the Commons didn't push the vote catching military aspect though. Either way, it could make quite a difference. As you say, your wife followed you in the service of the country, and in doing so she gave up the chance of a steady career and independent retirement benefits.
I've just read Steve Webb's response to their Lordships. Having said he is fair minded, his response to one Labour suggestion received short thrift. It was suggested to him that workers might aggregate more than one low paid, part time job (someone holding down part time cleaning/shop jobs on the patch maybe?), in order to accrue national insurance contributions (NIC) to qualify for the full basic state pension.
Some jobs don't pay enough to accrue NIC and since to qualify for the new flat rate state pension workers now need a 35 year NIC record, the amendment would have allowed people to combine several part time jobs to reach the NIC threshold. In the crudest of terms, yesterday's news about helping with childcare costs needs to be paid somehow - long after Webb is retired - caviar today jam tomorrow?
Webb suggested that although there was evidence that out of a "50 year average working life", people could afford to spend "15 years" working in jobs that didn’t accrue NIC. In itself, bizarre, given the auto enrollment pensions adverts we seem to hear every two minutes (you do if you listen to Talksport) and the fact many workers spend far longer than 15 years with this working pattern anyway.
Aside from his subtle confirmation everyone will be working until at least aged 70 unless they nail retirement provision, there was also a bit of a bunfight over pension charges. The moral of the story is though, a career or an overseas posting is absolutely vital for your OH's state pension - every little helps! But apart from that and the bit about the state quietly shedding its responsibility for retirement, it seems that F.O.D's law got through..
We are on the home straight of the Pensions Bill. It has been all the way through this House and their lordships’ House, and we have come back to it today to deal with amendments that, with one exception, make it a better Bill. I am grateful to my noble Friends Lord Freud and Lord Bates who, from the ministerial Benches, took the Bill through another place. I am also grateful to all my colleagues who have contributed to the Bill, and to peers on both sides of the House of Lords who have made insightful contributions and improved the Bill in a number of ways.
We have made a number of amendments in response to concerns raised by noble Lords, so I emphasise that our decision to ask this House to disagree with their amendment 1 is exceptional. Indeed, that is the only amendment with which we are asking the House to disagree, so I hope that we will be seen to have taken a constructive approach and that we have sought to improve the Bill on a cross-party basis wherever possible. For reasons that I will explain, however, we ask the House to disagree with this amendment.
I will keep an eye on it and hopefully, over the next 12 months as the regulations evolve, offer one or two letter templates to help partners register/clawback/claim the new entitlement.
New £15,000 combined ISA, new pensioner bond, access to Defined Contribution pension funds not just prized open, but blasted completely apart. Blimey. I feel a little faint.
VinRouge
19th Mar 2014, 13:48
AlR,
rumours abound that the tax haul from pensions withdrawls could be quite substantial.
As rosy as it was made out by Osborne? 15K per annum investible in shares is pretty sweet though!
38K total for the family including chillibubs
Unprecedented. I never thought, as I used to dig in all over the place, that one day, I'd be staring at my TV completely and totally gobsmacked at pension news on budget day. Yes, raising the annual ISA limit to be raised to £15000 and savings and investment ISAs fused. Good news, very good news!
Good news too, for someone with £10k in a pension is that they can simply take it as cash, no tax - no questions asked, perfect for (typically) 'wives of' in their late 40s and 50s who want tax relief, simplicity and no tax. All the way up to £30,000 access too, under triviality rules, with some tax. That's such good news for some clients, really good news.
If ever anyone was worried about personal pensions right now, this budget is one of the most unprecedented in history. Especially as his mutterings over public sectot pensions 30 minutes before was ominious. Definitely a vote winner, but what about when pension savings have all been spent?
The radical nature of it also means that from April the flexible drawdown minimum income requirement will reduce from £20,000 to £12,000, bringing it easily into Flt Lt/ Sqn Ldr territory. That means so many more people can take their entire pots as cash, at far lower tax rates too.
The maximum income a person in income drawdown can take will rise from 120% of GAD to 150% too. I'm so pleased that annuities have, effectively, been killed off. I'm seeing 6 clients later today - if you're reading this, apologies in advance if I appear distracted..
rumours abound that the tax haul from pensions withdrawls could be quite substantial.
Vin,
Yes, but taxed at someone's marginal rate and not the punitive high rates we have seen. I imagine that the tax revenue will be higher because of the novelty value but just trusting savers NOT to blow an entire pot on a mid life crisis Porsche will be a challenge. I can see this one not lasting for ever..
PS: Putting it like that, yes, put in family perspective, 38k per annum will be very good news for you. You just watch for the Inheritance Tax threshold to plummet in a few years to make up for it..
Once a stockbroker..
A quick look reveals, shares down Aviva -3.6%, Legal & General -6%, Prudential -2.2%, Standard Life -2.2% on scrapping of compulsary annuities. Stand by for next big miss-selling scandal too - clients taking all their money from pensions and then living 30 years in poverty.
You really wouldn't want to be a shareholder in an assurance company that specialises in annuities, and looking at your intra-day actuals, after a budget like that.
http://www.echelonwealthcare.co.uk/site/wp-content/uploads/image.jpg
VinRouge
19th Mar 2014, 16:16
AlR,
A pretty big ticking off from the government then to the insurance industry... the days of milking people for negative return looks as if they are over....
How milliband can argue that cameron and co are looking after the banks and the rich when they have freed pensions customers from annuities i dont know...
it appears to me there is possibly going to be a pretty big flood of cash from psonal pensions into savings, i bet gideon is banking on that cash being invested in uk industries to help the reecovery.
very clever and very conservative!
You mean.. just in time for next year's General Election? Yes, and UKIP will be feeling pretty sick.
And yes - I'm pleased that the annuity market has been, effectively, sunk. I feel for those who have annuitised recently though. There has to be a line drawn somewhere but as the g'ment concurrently laid into them for ripping folk off, it would have also known what it was about to announce.
The Old Fat One
19th Mar 2014, 16:30
Stand by for next big miss-selling scandal too - clients taking all their money from pensions and then living 30 years in poverty.
I think most of the educated and knowing (and I stress educated) middle classes are way too smart & informed, to fall down this pit. This is long overdue empowerment of people who have worked hard and been savvy. Without doubt there will be a growing number of pension-less poor people facing and old age of poverty and a commensurate ever-growing burden on the diminishing youth, but today's announcements will make no noticeable difference to that particular problem.
Excellent posts btw AL R...thanks for all the info you give us here on pprune.
stablelad
19th Mar 2014, 16:51
Al R
I too am gobsmacked, but that's probably because I haven't properly grasped what they are saying.
Does this mean that those of us who have retired from the mob and have a LTA of say £750K, could now take some or all of that money as a cash payout, whilst paying a ?% back to the Govt in tax?
Our pension would then be cut in line with the % taken out?
Regards stablelad
Wander00
19th Mar 2014, 17:51
day late and a dollar short for many............................
Chugalug2
19th Mar 2014, 20:33
This should get all the cognoscenti sniggering, but what the hell? Al, is there a possibility that market forces might force a move in annuity rates on the basis that suddenly there will be a big drop in demand for them? In other words, can competition produce the same kind of changes that airline seat prices showed following liberalisation?
All right, I heard that! You boy, at the back, name?
Stablelad,
No, today's earthquake bomb only related to Defined Contribution (DC) pensions - not Final Salary ones. Osborne made a very brief mention of them, when he said that he would continue to maximise value for the tax payer. Doesn't sound too hot. If you had a DC pension fund of £750k though, in theory you could take it when and how you liked, taxed merely at your Marginal Rate.
It's going to make AVCs pointless, personal pensions a bit of a no brainer and transferring out of AFPS a much more seductive proposition.
Chuggers,
How are you?! Well, I hope.
An annuity, however good the rate, will never be able to compete with someone having their pension parked in a cash account, that's the problem. In principle market forces and supply and demand could go head to head with the freedoms of hard cash vs the restrictions of an annuity but thats like two bald men fighting over a brush and comb. Rates are determined, not by market forces, but by fear and greed - demographics (fesr) and provider profits (greed).
You could take it one stage further than that even - life companies do good business from income drawdown rather than annuity. It's almost as if drawdown is dead, we can forget about annuities completely. If drawdown is dead, what of the life companies? Let's assume that someone takes their £250k pension fund, what do they then do with it - give it back to the life company but with 20/40% less?
I think we'll see some very interesting product innovation; folk, generally, are poorly informed - there will be billions out there, just sloshing around in either crappy savings accounts or expensive investments. We live in interesting times.
stablelad
20th Mar 2014, 09:42
Thank you for the reply Al, it makes more sense now!
The Old Fat One
20th Mar 2014, 10:13
Hey Al R,
Do you mind if I put you on the spot? We could go PM or even, I'll contact you thru' your website, but for now I'm sure this would be of interest to the wider community.
Her indoors has a significant DCS pot and she is 55 in 21 months. I note (and agree) your point re product innovation, but as things stand, as of today...what would you do with a significant pot?
Without insight and not as advice, my first instincts would be to make sure that the funds Mr TOFU are invested in, are as low volatility and as safe in terms of investment returns as she feels they need to be. She has grown the fund, what she needs to do now is ensure she doesn't expose it to volatility or the potential of loss in sight of the finishing line.
Assuming that you are both joined at the hip for life, the exercise would then be one of working out cash flow modeling for both of you, taking into account cash flow and some one off needs and then some reverse engineering to determine the best way and the best tax wrappers in order to achieve that.
If Mrs TOFU is inclined towards low volatility funds, maybe even parking in cash if the objective has been secured, then make sure that she has considered whether or not to place her money into a passive fund. The passive vs active debate is a hot topic right now, and although the jury is still out, why would you need or want to be in an expensive active fund when you don't have to be. The a some seriously shocking passive funds out there mind. I am in London next week for another 2 day seminar on them - unless you're an investment wonk, it would be hell on earth.
Also, have her ensure that the actual personal pension fund provider that she is with offers her the flexibility to achieve what she needs it to achieve for her. If she doesn't take much from it, it is still going to be there for the long term if she is only 55, so is it a cheap one, or an expensive one? The pension wrapper itself is a filing cabinet, somewhere to simply deposit and arrange investments. Do you need or want Aldi, or is the rather pricy Waitrose the order of the day? Cheap is not always best, but for Mrs TOFU, it might be.
Finally, think big - work out the bigger picture.. work out your cash flow - think of the pension funds that you both have as money held by an employer who pays you. Since yesterday of course, you have far more choice in how that happens. Consider absolutely EVERYTHING - are you going to swim with dolphins for the next 3 years, then sail around the world followed by a period of calm, are you going to do the house up, take a part time job or buy a new car every 3 years? Paint a picture of what life over the next 25 years is going to be like, and over time, from that, extract backwards and identify the financial tactics required to achieve that.
Finally, finally right now.. think principles of defence (no, not offensive spirit, mutual support, logistics, interlocking arcs, good communications - you can take the boy out of the Regt, but you can't etc). Rather, have you got in place protection to cover you in the event the worse happens? The last thing you will want is for an accident to happen and your lifetime's hard work go on medical care and domestic ongoing help and rehab.
Look upon this phase as a 30 year plan - planning now is more complicated than it would have been when you were 25 - then, you were 'just' accumulating. Now, you also have to decumulate as well. And what about Inheritance Tax - what are your thoughts on that?(rhetorical). Lots to think about. You have time, and 2 years is about as short a time scale that you need.
The Old Fat One
20th Mar 2014, 10:59
Massive thank you for this. I'm going to take my time to digest it and read it through several times.
PS I'm aircrew offensive spirit = cheap whisky ;)
Chugalug2
20th Mar 2014, 15:02
Al, I can but echo TOFU's praise and thanks that he heaped upon you and yes quite well thanks, hope the same goes for you, though I suspect that Osborne's bombshell is going to keep you mighty busy for quite a while.
So annuities dead, draw-down going that way too, so where from here? Rhetorical question I guess as events dear boy will point the way. Mrs Chug was about to get one annuity from three separate pension plans, but I think this a sit on your hands moment, while we consider what to do about all the flashing lights and loud klaxons that have suddenly erupted. As you say, interesting times!
Bon chance mon ami!
Thomas coupling
20th Mar 2014, 16:09
AlR:
Not only knowledgeable but eloquent too :D An excellent service.:ok:
May I put something to you for scrutiny so that (myself and) others may benefit.
Scenario, based on recent budget results:
In theory, I pay £20,000 cash lump sum into my pension fund.
HMG adds 20% to said fund which is approx £5100. Fund now worth £25100.
I claim back (via a cheque from HMRC - if I ask them to do it this way, rather than via PAYE coding) my extra higher tax relief of 20% which is another £5100.
With that money, I put it back into my pension fund @ 20% tax relief which is: £1200 approx. I then claim the higher tax relief on this @ £1200 by cheque.
The £1200 goes into the fund...dah di dah HMG adds £300 and I claim back the extra higher relief of £300 and put this into the fund.
Final result is:
£20,000 front loaded and voila we see £33,000 in the fund. A return of 65% TAX FREE.
THEN.........(when I retire / over the age of 55)....I take it ALL out of the fund i.a.w. the new regime, some of which is completely tax free and the rest at my then current tax rate, say 20%.
65% front ended return and 20% back ended.
[And this is before I actually work my SIPP to maximise returns].
Please please tell me this is merely a pigment of my constipation and I will wake up shortly :rolleyes: :ugh:
Isn't that called "Recycling"?
RPSM09208020 - Member Pages: Member benefits: Unauthorised member payments: What is the recycling rule and how does it operate? (http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm09208020.htm)
Thomas,
Be careful. Any benefit paid by the state (taxable or non taxable) is not treated as ‘Relevant earnings’ for the purposes of further Pension Tax Relief. My advice would be to change your name, deactivate your PPRuNe account immediately, alter your appearance and leave the country - HMRC got massive new powers yesterday!
Recycling or churning is a particularly fine line to walk. HMRC doesn’t want to stop people growing pension benefits and using tax relief, and it offers a lot of latitude. But you have to play by its rules and observe what it wants. If you plan it right, if you document it right, if you demonstrate that your circumstances legally and fairly, fall into the spirit of the guidance, you’ll be ok. Doing that isn't too hard.
If though, you simply take your pcls and chuck it into a pension, then wait for a letter from HMRC to land on your doormat. I have done a number of sizeable contributions for clients this past month and the documentation is squared away and the justification is all there for if HMRC ever raises an inquisitive eyebrow.
Chuggers,
If Mrs C has three pots, they may be collectively large enough to allow her to take the money as she sees fit, or, possibly more likely (?), if they are modest sums, she still has a new ability to draw the money in an incredibly tax efficient way.
The Finance Act 2014 (FA14) makes reference to orphan pots that may be drawn down in one go if they are small enough (now, under FA14, the pot can be as large/small - whichever way you look at it - as £10,000). The issue which still isn’t clear is whether or not those small separate pots (up to a maximum of three) can be used irrespective of other pension wealth (ie; Mrs Chuggers may have £500,000 in one pension and 3 x £9,999 pots). The technical departments of the pension providers have all been posting slightly conflicting opinion today and npo one really knows. There isn't really a consensus opinion yet that has got any validity, so I’m waiting for the dust to settle.
There is also the new revised guidance surrounding Triviality which, under FA14, now allows clients to draw far more flexibly from a pot of up to £30,000. The question about which the jury is still out, is, if someone has £29,999 and also 3 x £9,999 would they have the option of drawing the 3 x £9,999s before turning to Triviality?
The battlelines into which tax wrapper you use are much more blurred now. A year or so ago, the conundrum may have been something as simple as ‘ISA or pension’. And whilst they both have uniquely beneficial features still, the difference is not as great. The ability to take your personal pension fund as you like and taxed at your marginal rate, if you have income as low as £12,000 is a complete game changer.
Previously, this flexible way of drawing income applied to anyone who had £20,000 guaranteed annual income and with some clients, the extraction of wealth in retirement revolved around getting that figure. But even then, the taxation was punitive. Now though, the ability to take income in retirement almost as you would take income from an investment, is open to those with (AFPS) annual income as low as £12,000.
It means that a SNCO/WO or Flt Lt or Sqn Ldr who had the choice of pension Vs ISA, and who chose ISA because although it didn’t give the tax relief, it offered unfettered access, now has to ask him/herself – why wouldn’t I want a pension which can be drawn from 55 (going up to 57 in 15 years time or so) AND get the 40% help AND possibly get my child benefit back.
Pensions just became hugely more attractive for high rate taxpayers now, who will be basic rate taxpayers in retirement. A year or so ago, we were talking about pensions as if they were dead. Now, it looks as if GAD, Drawdown as we knew it, trivial commutation etc will be abolished next year.
So assuming that you take your tax free cash, the remainder of a crystalised pot then acts broadly similarly to an investment. Look on a pension fund a little like you would an ISA, but with slightly different tax treatment.. maybe even a VCT. Withdrawals are taxed at your marginal rate but but with no tax deferred and there will be a further tax assessment on death - but it looks like no IHT attached.
Growth is nearly tax free and as I said yesterday, I would guess in pension companies all over the land, new product designers are rushing to get something ready quickly for those who are currently in capped drawdown who qualify for flex drawdown in a few days time.
Ed Milliband could divert an earthbound meteor, cure AIDS, solve global warming, consign famine to history, create a Middle Eastern love in and go paddling off Beachy Head and stub his toe on the wing of MH370.. and he'd still be treated like an idiot. What happened yesterday was unprecedented - a revolution in how we should be regarding retirement - it is not too strong to describe it in those terms. Most people reading this messageboard will be impacted because they'll have at least £12,000 from AFPS and should be beating a path to their banker, broker or adviser.
Finally.. you gotta smile. We have been told for the best part of a year that pension liberation predators are stalking our pensions – now we know why they were clamped down on – hey, George was the biggest liberator of all. To what end, and to what effect though? Hmm.
Thomas coupling
20th Mar 2014, 19:58
Many thanks - even though you may have just pi**ed on my chips!
Q: Does recycling/churning ONLY relate to pcls?
What if I contribute the lump sum from my investments?
If you're employed and if the investments are funded out of income, then yes. If you're a gentleman of leisure and if your income is derived from (for instance) Dividends or CGT, then HMRC will look on that differently.
Main classifications of relevant earnings here:
RPSM05101150 - Technical pages: contributions and tax relief: member contributions: entitlement to tax relief: relevant UK earnings (http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm05101150.htm)
Thomas.. you've been warned! :eek:
Did you spot this? Budget gives HMRC power to raid your bank account ? like Wonga ? Telegraph Blogs (http://blogs.telegraph.co.uk/technology/willardfoxton2/100012871/did-you-spot-this-budget-gives-hmrc-power-to-raid-your-bank-account-like-wonga/)
Sketretal
21st Mar 2014, 20:21
Thomas - your chips haven't really been p###ed on at all - you just need to "do the math" better...
You put in £20000.
Tax man grosses it up to £25000 (the first 20%)
You get your next 20% back via cheque as before. Put this £5000 in your pocket.
You now have a fund worth £25000 which actually only cost you £15000 thanks to your refund... that's a 67% return!! No matter how much you recycle it will still come out at 67%
One aspect thing of the orphan pot aspect is that someone with income to support it, could make a tax grossed single contribution of £9,999 and then take the lot back out a few days later with no tax implication. Three small similarly sized pots are allowed. 20% growth overnight, and then you get your money back. You have to ask yourself, why would older people consider an ISA when that might be worth taking advice on?
Steve Webb yesterday:
In addition, we will create a new ‘defined ambition’ framework for workplace pensions, enabling new forms of risk sharing between employers and employees.
Defined Ambition (DA) models will affect Defined Benefit (DB) schemes, which could finally start to dissapear completely. The death knell for public sector DB pensions has not yet been rolled out or even chimed, but someone in government will almost certainly be looking around for the brasso just in case it's needed.
Webb's love for collective defined contribution schemes, a la Dutch model, is well known (it is if you're a pension geek). I can't see how DA proposals can support the rape 'n pillage approach announced by Osborne. If the new concept of DA risk is that it is shared intergenerationally, might it be that either the new DC guidance is changed again, possibly in the life of the next Parliament?
Going back to my earlier point, even if DB public sector schemes do survive, Webb has to make AFPS more affordable. So it might be that he focuses on various discretionary benefits, such as the existing statutory indexation (to put it in context, CPI/RPI bunfight will look like handbags at dawn by comparison), spouse's benefits and an automatic transfer of benefits once you've handed your 1250 (in old money) back and yet more changes to theage that you can take benefits.
I wouldn't be surprised to see an AFPS preserved pension date of a year or two later in life - Webb is already referring to 70 or a 50 year working life as the new average more and more. We are being conditionally, subliminally. After the flash bang of this week and whilst we are used to absolutely nothing now being off the table, what better time to unsheath the velvet blade - whilst we're all still be treated for concussion?
As I write, I realise how clever he is. There is stuff in there that the life insurance companies will gratefully buy into because the effective scrapping of annuities has trashed their share prices this week (not the same as pension fund values being hit). Webb has potentially blown away their previous resistance because they now, somehow, have to face up to the new reality of replacing annuity income.
If the state does hand over the accumulated DB pot to be converted into a new DA, or collective DC scheme where the member shoulders some of the risk, they will have the lost income restored because they'll now be looking after the old DB liability and the state will have shifted its DB liability, brilliant!!!
Ascoteer
22nd Mar 2014, 09:09
Thanks for all this info, Al.
So, having accrued as a late AFPS 75 entrant (soon switching to AFPS15 having signed a 2 year extension) am I right in saying this has no immediate impact to me? Well, until I start contributing through a different employer?
If you're 40 or so, then yes - your new civvy pension will change (benefits from 57 for instance).
But this budget affects everyone. Even a 70 year old who annuitised last week and who now must be distraught. Just the other week we had (still do have) the issue of lifetime allowance protection, then along came partners state pension entitlement (the raison d'etre of this thread) and now, changes to the entire pension landscape.
Forgive the gratuitous link to my blog but this is a very fluid picture still. In the first instance, make sure you've at least considered earmarking or staking a claim for your allowances (ISA, pension etc) for this year. Once they've gone they've gone - the benefits of the pension in particular is potentially now far greater than it was a few days ago.
Lamborghini today, Lada tomorrow? - Echelon Wealthcare (http://www.echelonwealthcare.co.uk/lamborghini-today-tomorrow/)
Taxed2Death
1st Apr 2014, 20:08
Hi Al R,
Thank you for your excellent and informative posts on this site. Whilst I am conscious that you cannot offer advice, I would appreciate your thoughts on my “cunning plan” outlined below:
I am on the Professional Aviator (PA) Spine and AFPS 05, earning around £74K with 5 years to go to retirement at 55.
Scenario 1: If I see it out to 55, my pension on retirement should be around £35K. 12 years later, when I reach 67, this should rise to around £40K when the state pension kicks in. Shortfall between ages 55-67 of around £60K.
Scenario 2: Following the next SDSR, the gov’t turns my ac into beer cans and I am made redundant in ~2017. My initial EDP’s should be around £24K, rising to £25K when I reach 55 and £33K at 65. With the state pension at 67 bumping this up to £38K. Shortfall between ages 53-67 of around £168K!!
I also have ~10K in an FSAVC, contributed prior to joining the PA spine.
How much “headroom” do I have available to contribute to a DC pension during my last 5 years of service? Given the new pension flexibility outlined in the budget, I would plan to draw this money out in annual lumps to partly fill the shortfalls outlined above to top-up my pension income.
Does this sound like a reasonable plan and, if so, what sort of DC pension should I be looking at, a SIP, Stake Holder or resuming the FSAVC? In addition, would it improve my available headroom if I can start the pension before 5 Apr 14?
It may well be that I need to come to you for advice on a formal basis, however it would be helpful to first know if my plan is feasible or a non-starter.
Many thanks for your help,
T2D
PS: If my plan works, I may have to change my PPrune user name!
If being able to transfer out responsibly, rationally, fairly and in light of all the facts is the fair and right thing to do and allow, let it be fair for all. But it won't be - because although the government is minded to allow the transferring out of funded defined benefit schemes, it won't extend that ability to unfunded schemes, such as AFPS.
This isn't about the rights and wrongs of the suitability of specific advice, it's pure and simply subordinating the rights of servicemen to say, policemen or nurses in a similar scheme and The Treasury. Never let it be said anymore, that AFPS is still a 'free' scheme. It comes at a price, and that price is restriction and fewer options.
The default setting is always to do nothing, not to transfer - and rightly so. But there are plenty of people who do stand to be potentially advantaged by leaving deferred membership of AFPS. Also, if you're in retirement, your annual pension contribution allowance is going to drop to £10,000 per annum, from £40,000.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/332674/21_July_pensions_final_WMS__C_.pdf
https://www.gov.uk/government/news/pension-reforms-eight-things-you-should-know
Al R,
"Also, if you're in retirement, your annual pension contribution allowance is going to drop to £10,000 per annum, from £40,000."
When was that announced Al, and when is that going to start?
Onceapilot
21st Jul 2014, 18:39
IMO, the Service pension will suffer badly here from future disparity and IMPOSSIBLE interchangeability with other pensions. How can they reduce the value AND reduce the flexibility at the same time!? Beats me who would want to join!:uhoh:
OAP
LFFC,
It could be bought in at any time. Realistically, it'll be confirmed in Autumn and introduced next April (don't hold me to that!).
Otherwise, those who have made large singular contributions in this tax year will be penalised. It's to prevent retirees 'churning' pension income - a much more seductive and simpler thing to do post budget.
OAP,
The issue is, what real, adjusted value is 'free' membership of a so called non contributory final salary pension scheme if anyone else in the funded public sector or anyone who has a deferred funded final salary scheme, can take benefits at 55 with so much more flexibility.. and not 60/65 or so?
It puts it into context.
This, from the Observer overnight explains why advice surrounding transferring out of DB schemes is so risky - because there are cowboys out there quite happy to take the money and run (I dread to think how many ex mil ex pats are now sitting on absolute shockers of bought out pensions in Dhofar, Limassol, Kowloon etc).
It isn't always bad advice though, transferring out isn't always wrong - prescriptively and dogmatically telling people what is best for them without going through the exacting detail is, in my eyes, just as bad as churning business at a client's expense and to his/her detriment. But the default option has to be 'non!' at outset.
Pension transfers: could you be due compensation? | Money Observer (http://www.moneyobserver.com/news/21-07-2014/pension-transfers-could-you-be-due-compensation)
No one likes compensation cowboys and their radio ads, unless you're a compensation cowboy or an ad salesman. But if you were poorly advised by a company trading under the auspices of the UK regulatory authority, and if you were poorly advised, it might be that they're going to be sending you a letter!
Either way, it might just be worth dropping them a line with your current address..
LFFC,
Further to your last, the new guidance will aply from April 15 - confirmed. It was decided that reducing the annual allowance from to £10,000 would reduce the risk of people recycling tax-free lump sum and reinvesting it into a new pension to receive fresh tax relief. Poor excuse really, the state wants money in the system sloshing about, simple.
The nice part is that (typically) low tax paying spouses/civil partners will be exempt - the new limit will only apply if an individual accesses a defined contribution pension worth more than £10,000. Therefore, anyone can make withdrawals from three small personal pots and unlimited small occupational pots worth less than £10,000 without being subject to the £10,000 annual allowance on further contributions. Perfect if you have time to plan ahead.
Thereafter, it changes a little. Anyone currently in flexible drawdown (ie; with no annual allowance and who have secured a £20,000 a year minimum income, in other words, most military career officers/WOs etc) will also be subject to the new £10,000 limit in April 2015. For individuals in capped drawdown though, the new £10,000 annual allowance will only apply when a saver withdraws more than their capped amount. The government said it would be 'unfair' to apply the £10,000 annual allowance to this group who did not know they would be subject to the rule when they entered capped drawdown.
It's going to be carnage. Savers won't have a clue and pension providers will struggle to establish what level of annual allowance applies in some cases, if there are pots all over the place.
On another note, it seems that savers with money in all DB schemes including AFPS but with only a small fund will be allowed flexibility in how they draw it. This might help those who served only a few years and who find themselves in aged financial misery and unable to access their money in a way that will help them most. That can only be a good thing - there's not much dignity in having a 'gold plated' pension when you have to cuddle a kettle to keep warm.
F.O.D
22nd Jul 2014, 13:05
Al R
I am unsure if this proposed new limit of £10,000 for pension contributions will apply to my colleagues and I who left the military some time ago and are pursuing second careers with Defined Contribution (DC) pension schemes. I understood it was designed to stop people churning the 25% tax free lump from a DC scheme payout straight back into a new pension to attract another lump of tax relief. I understood that if you had not taken any benefits out of the DC pension, you would still have the £40,000 annual limit on contributions (as long as you stay within the LTA of £1.25 million).
Do you have a source document for this £10,000 limit or do we have to wait for the Autumn statement from The Chancellor?
Anyway, thanks as always for the excellent advice
Fod,
No, if you're growing wealth still, it won't - it applies just to those taking it out, or drawing down - just retirees. If you are still growing it, it might be worth checking out the legislation which is going to involve establishing a number of small pots.
News is still trickling out about the changes. For instance and on another note, the incremental increases given to retirees deferring state pension payments will be almost halved to 5.5% for anyone reaching state pension age after 2016.
The new rate will be 1/9th of 1% for each week the pension is not claimed - in other words, a 1% increase for every nine weeks of deferral or just under 6% increase for each year. Therefore, if you defer for one year after 2016, you'll have to live 19 years to benefit from the decision (compared to 10 years, currently). It still might be appealing to some who are in good health, earning well etc.
More to come out I'm sure, in the meantime here you go..
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/332714/pensions_response_online.pdf
http://www.parliament.uk/documents/commons-vote-office/July-2014/21%20July/Treasury-Pensions.pdf
F.O.D
22nd Jul 2014, 18:47
Thanks again for the info Al,
It looks like Financial Advisers are going to be very busy for the next couple of years with all these huge changes. As yet, it doesn't look as if if many pension providers have got a developed strategy. Mind you, when I spoke to my MP about the implications of some of the changes, her eyes glazed over and she referred me to the Pensions Minister!!
Steve Webb is ok, he knows what he's talking about.
I've always suggested that the tweaks around the edges of AFPS 15 are red herrings, that it is only going to be affordable or viable as long as the Discount Rate (DR) stays within set parameters. The White Paper declared that new public sector schemes (ie; AFPS15) would be subject to change or modification if the cost cap was breached. And that's linked to the DR. If costs move below or above the cap, scheme benefits may be amended to alter the overall cost of the scheme or the level of member contributions may be altered.
AFPS is an unfunded scheme which means the money is found behind the Treasury sofa on a rolling yearly basis. Some funded DB/FS schemes though, need to look at reducing the shortfall in other ways if the DR falls and the cap is breached. The Civil Service scheme is a funded pension scheme and it looks like it has declared a cut in its DR and a breach of cost cap. The cost cap for the CS scheme was set at 18.5% and had a margin of +/- 2%.
It has crept up to 21.1% which means the money has to be found from somewhere other than the government. The solution? Well, it looks like members have got to put more money into their notional pots by increasing contributions. Hands up if you've ever had an endowment red warning letter, suggesting your shortfall may be addressed, everything will be fine and you won't lose money.. if you increase your contributions. AFPS DR has yet to be declared (as far as I am aware). When it does and if the cap is breached, what then happens?
Finally, and in more good news, when I am 100, 18.3% of GDP will be spent on healthcare and wiping chicken soup from my and my cohorts slobbering jowls and when I'm 70, 33% of us (you?!) will be paying higher rate tax. The tax tail should never wag the investment dog but be aware of as many tax breaks that you can grab and think long term. If you are going to be a HR tax payer for the rest of your days, what can you do now to mitigate tax liability?
http://resources.civilservice.gov.uk/wp-content/uploads/2011/08/PCSPS-2012-valuation-Final-Report-Final-22072014.pdf
Willard Whyte
2nd Aug 2014, 20:15
So, I'm in my late forties and have been drawing my mil pension for 2 yrs, simultaneously building up a (final salary) pension pot in a new job which I'd like/intend to remain in for another ~15 years - maybe as many as 20. Currently contributing £15K pa, (salary sacrifice + company contribution together totalling £8K, my voluntary contribution of £7K pa); am I 'safe' tax wise, or do I have to cut back on the voluntary contributions? Or can I increase them at will, within reason, for that matter?
Has QE affected your pension? Don't worry! If you're in the Bank of England pension scheme that is. Only in Britain could this happen, I admire the brazen way increases are still linked to RPI. It's a little like the unpublished and incredibly generous MEP additional pension scheme that we pay nearly £170m into each year.
Bank of England pension scheme 'unaffected by QE' | 3 November 2014 | Stock Market Wire (http://www.stockmarketwire.com/article/4915897/Bank-of-England-pension-scheme-unaffected-by-QE.html)
(I don't really love it of course, and I know this is probably better suited for Jet Blast but I have a button on my iPad that brings me straight here and there are weirdos who post there.)
Willard,
I'm not sure I get your question, none of us are 'safe' tax wise these days!
But the chances are, and you probably know this, that you'll be a HR tax payer until you die. In other words, unless your mil pension is paid free of tax, you’ll pay tax on that, you'll continue to get an annual tax code and you'll continue to pay tax on any income you earn over your personal allowance (the standard personal allowance for you, for 2014/15 is £10,000). Income includes things like pensions in payment. New legislation makes it so important for so many servicemen (typically, with wives and partners who don't pay taxes) to consider building up small pots of their own as well/instead. New legislation makes passing on a defined contribution personal pension so much easier as well.
Willard Whyte
4th Nov 2014, 11:45
I'm getting old. I forgot what I meant, and what I wrote makes no sense to me!
I think I may have been referring to this:
"Also, if you're in retirement, your annual pension contribution allowance is going to drop to £10,000 per annum, from £40,000."
Does "in retirement" refer to state pension age, or whether one is drawing a pension?
The point I'm making/question asking is that
1. I am drawing a Mil pension (i.e. in retirement, although not at state pension age)
2. Contributing >£10K per annum to the pension fund of my current job, consisting of:
a/ £4400 Salary Sacrifice
b/ £6600 Employer Contribution
c/ £5900 Voluntary Contribution
a + b are part of the final salary pension
c is a defined contribution amount, but once I retire is incorporated into the same pension pay out as a + b.
Are there any tax implications I should address before Apr '15, such as reducing my contributions to a maximum of £10K, and, if so, could/would the capped figure exclude my employers contributions?
Aware of course that I will more than likely be in the HR tax bracket when I retire, but still feel it's worth avoiding paying 40% tax (and 2% NI) on £10K+ to get to that 'happy' place to begin with!
Neither! You could be retired and not drawing benefits from a pension. If you want a quick personal information only steer about your personal circumstances, don't hesitate to message me.
(Deep breath)
The annual allowance for pension contributions is going down to £10,000 if the saver has made use of the new pensions flexibility. To remind you, savers can access their pension funds at retirement at their marginal tax rate from next year, down from the current 55% tax. The reason it has been reduced to £10,000 has been to prevent savers recycling their tax-free lump sum and reinvesting it into a new pension to receive tax relief again, and it'll only apply if an individual accesses a defined contribution pension worth more than £10,000. Your new pension is DC by the sounds of it and you'll have more than the required £10,000.
I also mentioned non tax paying partners; they can make withdrawals from three small personal pots and unlimited small occupational pots worth less than £10,000 without being subject to the £10,000 annual allowance on further contributions. On the surface of it, why wouldn't anyone without existing pension provision want to benefit from 20% uplift on contributions of up to £2,880 per annum without being taxed on the flipside? Again, on the surface of it, that might appeal to higher rate taxpayers without the need for capital sums, who have lots of savings in cash accounts.
Those who are currently in flexible drawdown with no annual allowance, who have had to secure a £20,000 a year minimum income, will also be subject to the new £10,000 limit in April 2015. That is going to affect anyone from the rank of long serving NCO upwards. One anomaly that could remain (and the Treasury shows no signs of stamping down on it) is that despite the £10,000 annual allowance being introduced, a non tax paying individual over 55 and already taking benefits from a personal pension, can invest the maximum contribution of £2,880 and still receive tax relief at source, grossing the contribution up to £3,600.
Then, and this is the nice bit, after taking all the benefits under the new flexible drawdown rules each year as a non-taxpayer, they can then reinvest £2,880 in the next tax year, and would benefit from £720 tax relief. This is why the (usually) husband, wage earning partner saving blindly in his name isn't always the best thing. Bequeathing an untouched personal pension too, dying before age 75 has also become a far more attractive proposition. Not for the person dying of course. As always, that's the theory.. it may not be the best thing for everyone and their circumstances.