Pensions – Make Your Minds Up

In September 7, 2014
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Following the last budget, which saw the biggest Pension reform in the last 8 years, Pensions Minister, Steve Webb, is now calling for the lifetime allowance on Pensions to be scrapped. This follows two successive tax years where the Government has reduced the amount an individual can save in a Pension during their lifetime.

When you contribute to a Pension, HMRC tops up that contribution with Basic Rate Tax Relief. If you are a higher rate tax payer, you claim the extra Tax Relief via your tax return. Webb is suggesting that all who save into a Pension should receive a flat 30% Tax Relief, with no upper lifetime limit. This would encourage higher earners to save more into their Pensions, as they would not be penalised for accumulating large Pension pots, as well as encouraging lower earners because the extra 10% relief they would receive is just like a 10% guaranteed overnight Investment return.

Webb’s proposals tie in well with the Government’s ambition for people to save more for their retirement. They also make a lot of sense. Steve Webb is one of those rare MPs who uses common sense – looking at what is best for the majority not the minority. He says that introducing a flat rate tax with no upper savings limit will see “five times as many winners than losers, what’s not to like?” However, it seems that any Pension change made of late is short-lived, so who knows what the future holds.

Personal Pensions vs Company Pensions vs Other Retirement Planning

Whilst the Government make its mind up, if it ever does, this question has not gone away, and it needs and deserves some attention as a reminder before we go further. This is generic advice only and no one should act upon generic advice without first discussing their personal circumstances with their own trusted Financial Planner. That said, let’s look at the reality of Pensions and Retirement Planning.

Generally speaking, for anyone paying into a Personal Pension from their own bank account, after their earnings have already suffered Income Tax and National Insurance, have certainly got the raw end of the deal. They can claim back the Income Tax, but not the National Insurance contributions. There are so many better choices that they could and should consider, which would fall into the camp of other Retirement Planning, in a range of other style of investment strategies such as NISA’s or Property. But just like all things in life, it is never a great idea to put all your eggs in one basket.

If however, you are lucky enough to have a personal pension via your employer who will also contribute to your pension and allow your pension contributions to be paid out of your salary before tax and National Insurance is applied. Then that is a very different proposal, and certainly we would not suggest that you turn down free money from your employer.

If you are really lucky, then you may have an employer who still runs an active Defined Contribution Scheme, often referred to as a Final Salary Scheme. By and large, these are fantastic value for the employee, but cost an awful lot of money to the employer, which is why the numbers of these schemes have been decimated in the last 10 years, with even the public sector version of these now coming under increasing pressure for change. The truth is, with an ageing population and longer life expectancy; our country cannot afford to keep funding these schemes. There is not a bottomless pit of money, unless the taxpayer ends up continually footing the bill.

One day we might see the final demise of the public sector Final Salary Pension and those poor souls affected in the years to come will probably look back with hindsight and say “I wish I had seen this coming and planned for my future security years ago”. Of course, there are those that take a much more sensible and proactive path and will be planning now rather than waiting until the problem is dropped on their lap.

If you are concerned about this or any other area of planning and would like to speak with a Consultant, then please contact us on 01489 877547 to book a no obligation Initial Consultation.

 

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Jasmine has been a qualified Financial Planner since 2008. She has also been a member of the Society of Will Writers since 2012. She is passionate about helping Clients build their wealth and achieve the financial lifestyle they desire. Her areas of expertise are that of Savings, Investments, Pensions and Retirement Planning.

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