Category Archives: QROPS Updates

What are QROPS?

A refresher on what a QROPS is and how it works – 

Quite simply, a QROPS is a pension plan that; “Qualifies” with HM Revenue and Customs (HMRC) rules, is officially “Recognised” by HMRC, is “Overseas”, i.e. outside of the UK and is set up in trust as a legal “Pension Scheme”, hence the acronym. A QROPS therefore, can accept a UK pension transfer just like any UK based scheme. The benefits of transferring your fund into a QROPS include increased tax efficiency, flexibility, total investment freedom and large growth opportunities – to name just a few.

For most people, their pension is probably their second most valuable asset after their family home, so benefits really make a big difference, and can dramatically improve life in retirement.

Around 300,000 to 500,000 Britons leave the UK every year to start a new life overseas. The big demand for overseas pension benefits is the key reason behind the birth, development and refinement of QROPS and many thousands of expats have transferred their UK pension into a QROPS since the schemes were launched. Because of the potential benefits to be derived from transferring a UK pension abroad, this demand shows no sign of slowing.

The capacity for QROPS to simplify an individual’s retirement has assisted as well. With a QROPS, it is much easier to switch from out-of-date arrangements, and consolidate a number of pension schemes under one roof.

New Pension ISA

Millions of adults under 40 will be able to use a new Individual Savings Account (Isa) to buy a home or a pension, the chancellor has announced.

The Lifetime Isa will be launched in April 2017, and savers will receive a 25% bonus from the government.

They will be able to put in up to £4,000 a year, with the annual bonus of up to £1,000 paid until the age of 50.

And from April 2017 all savers will be able to put up to £20,000 a year into Isas, up from £15,240 at the moment.

So it will be possible to have both a standard and a Lifetime Isa, subject to the £20,000 limit.

The chancellor said that savers would be able to withdraw money from a Lifetime Isa at any time, and would not pay any tax on it.

Those wanting to use the money to buy a home will be able to do so after just a year; those wanting to use it for retirement will have to wait until the age of 60.

Investors will be able to put their money into either a cash, or a stocks and shares Isa.

Savers who have already taken out a Help to Buy Isa will be able to move their money into a Lifetime Isa.

If they have both types of Isa, they will only be able to use the bonus from one of them to buy a home.

The Help to Buy Isa scheme, which is slightly less generous than the new Isa, is due to end in November 2019.

‘Free top up’

Those using the Lifetime Isa to buy property can spend up to £450,000 on a home, but they have to be first-time buyers.

The government said savers would be allowed to withdraw money in the event of “other life events”, such as a terminal illness.

But those just wanting to take money out for other reasons will not qualify for the bonus. They will also have to pay a 5% charge.

“The Lifetime ISA is a fantastic boost for anyone under 40 who’s fighting the growing cost of getting on the property ladder,” said Hannah Maundrell, editor-in-chief of

“It’s not quite so appealing if you already own a house, as your cash will need to be tied up until you’re 60 to get the free top-up.”

lifetime Isa banner

Pensions Dilemma

For those wanting to save for retirement, the Lifetime Isa raises the issue of whether it is better to save through a traditional pension, or through the Isa system.

Pensions are tax-free when you put the money in, but consumers pay income tax when they take the money out.

Under the Lifetime Isa, money would be put in tax-paid, but would be free of all tax when taken out.

“There is a huge risk that the Lifetime Isa will undermine pension contributions, undoing the hard work to get people saving'”, said Mick McAteer, director of the Financial Inclusion Centre, a think-tank.

Before the Budget, George Osborne had been considering introducing an Isa-style pension to replace traditional pensions, but rejected a change for the time being.

However, some experts believe the Lifestyle Isa has similarities to that idea.

“Philosophically it does seem to be a Pensions Isa, with a nod towards first-time buyers,” said Nigel Barker, a personal tax partner at accountancy firm Deloitte.

“You’re not as locked in as a pension fund; it feels more flexible.”

See original article here.

Budget Warm Up

Chancellor George Osborne has warned the UK has to “act now rather than pay later” ahead of next week’s Budget, with further spending cuts planned.

He said the cuts would be “equivalent to 50p in every £100” of public spending by 2020, which was “not a huge amount in the scheme of things”.

He told the BBC’s Andrew Marr Show that the world was “more uncertain” than at any time since the financial crisis.

He said the UK needed to live within its means to withstand economic shocks.

Labour shadow chancellor John McDonnell called for more long-term investment to enable the UK economy to “withstand the global headwinds”.

Mr Osborne warned of cuts to come in his upcoming Budget on 16 March in a BBC interview last month.

‘Stay secure’

Speaking on the Marr Show, Mr Osborne said the world was now “a more difficult and dangerous place” and warned about the state of the global economy.

While Britain was better placed to cope with economic shocks compared with 2008, it was “not immune to what’s going on”, he said.

“My message in this Budget is that the world is a more uncertain place than at any time since the financial crisis and we need to act now so we don’t pay later,” he said.

“That is why I need to find additional savings equivalent to 50p in every £100 the government spends by the end of the decade, because we’ve got to live within our means to stay secure.

“That’s the way we make Britain fit for the future.”

Andrew Marr and George Osborne

The chancellor – whose Budget on Wednesday will be his eighth – said he thought the savings were achievable, but he would not be drawn on where the axe would fall.

He said the government’s plan had enabled it to invest in “the public’s priorities”, such as the NHS, science and education, infrastructure and defence, “while at the same time not spending more than the country can afford”.

Mr Osborne added that he wanted to boost productivity, improve Britain’s schools and infrastructure and make taxes “more competitive”.

The chancellor declined to be drawn on whether fuel duty would be increased – something Tory backbenchers are urging him against.

Woman filling up her carConservative MPs are campaigning against any rise in the price of petrol

But he added: “On fuel duty, we had a manifesto commitment there and we have pencilled in fuel duty plans going forward but what I would say is, every time we can have our economy more competitive, we do.”

Mr Osborne also rejected claims that the most vulnerable people would be hit in the Budget through cuts to disability benefits known as Personal Independence Payments (PIP).

He said the government was “increasing spending on disabled people”, but added that it was right to make sure the system was being “properly managed”.

Also on Marr, Labour’s shadow chancellor John McDonnell called for more long-term investment in the UK economy, specifically in skills, infrastructure and new technology.

He said the chancellor had reduced investment to 1.4% of GDP which was “unacceptable”, saying the OECD has said the figure should be at least 3%.

“What I want to do is to make sure we invest in the long term and then we can withstand the global headwinds,” he added.

He said prosperity needed to be “shared by all”, saying the government’s economic policies had created an “unequal” society.

‘Little wriggle room’

The chancellor has promised to get the books into surplus by 2020.

In his November Autumn Statement, he watered down planned £4.4bn cuts to tax credits and eased back on planned spending cuts to the Home Office and other departments. He was able to do this owing to a combination of better tax receipts and lower interest payments on debt.

BBC political correspondent Eleanor Garnier said: “Only four months ago, when he made the Autumn Statement, Mr Osborne had sounded upbeat about the country’s finances.

“But now, with the size of the British economy much smaller than had been expected, it seems the chancellor has not left himself much wriggle room.”

In his Marr interview, Mr Osborne also warned against the UK leaving the EU, saying it “would create an economic shock” that would “cost jobs” and “damage living standards”.

Leave campaigners say the UK could strike favourable trade deals with the EU after exit, arguing that Britain’s future if better off outside.

Meanwhile, Mr McDonnell said he and the Labour shadow cabinet would be “on the stump” campaigning for a remain vote amid criticism Labour has been quiet in the campaign.

Click Here for Original BBC Article

Chasm between Public and Private Sector Growing

The chasm between public and private-sector pensions is already marked, but the inequality is set to widen.

Final salary pensions – the most generous sort, which pay a retirement income linked to employees’ wages and length of service – are all but extinct for those of working age in the private sector.

But these guaranteed pensions remain a key benefit for public-sector workers and a source of growing envy for everyone else. In the private sector, most schemes have been replaced with so-called “defined contribution” pensions, into which staff save a percentage of their salary, plus a contribution from their employer. But the overall amount saved has fallen dramatically.  The benefits received at retirement depend on stock market performance, and there is no guaranteed level of income.

How much more generous are public-sector schemes? Analysis by Tilney Bestinvest, a financial planning firm, shows that on average the income provided by public-sector schemes is five times more generous than a defined contribution pension in the private sector.

Using the NHS pension scheme from 2015 as an example, a fully qualified nurse aged 25, earning £21,692 and joining the pension scheme today, will typically contribute 7.1pc of salary each year to fund their retirement. If they work for 40 years, stay in the same band of earnings throughout and attain 4pc annual increases in pay, they could retire on an annual salary of £45,500 in today’s money.

When they stop working, they will have amassed a pension worth £30,700 a year in today’s money, equating to more than two thirds of their final salary. This income is guaranteed by the state and will also increase each year in line with inflation, protecting its value over time. Taking into account the fact that retirees typically have lower outgoings and pay no National Insurance contributions, this is a significant pension income. So how does that compare with pension provision outside the public services?

Taking into account current annuity rates, if someone wanted to purchase the same level of income for life at the age of 65, they would need a defined contribution pension fund worth £2.2m.  This would involve the nurse contributing 43pc of her gross salary into a pension, assuming her fund grows by 5pc a year excluding charges. Assuming the nurse saved 9pc of her salary throughout her life and achieved 5pc net investment growth a year, she would end up with just over £458,000 in her pension at retirement. This could provide an increasing income of £6,366 a year at age 65 – around a fifth of the final salary pension.

Pension limits: one rule for public and another for private sector. The lifetime pensions limit, against which savings are tested when you take your pension benefits and on certain other key events, allows savers with defined benefit pensions – the vast majority of whom are in the public sector – to build up larger pensions without breaching it. Savers who exceed the lifetime limit, which is reducing from £1.25m to £1m in April, will be charged 55pc tax when they withdraw pension money above this level.  The disparity is created because the limit is calculated differently depending on which type of scheme you are in.

For savers with final salary pensions, the lifetime limit is calculated by multiplying the expected income at retirement by 20. This means someone with a £50,000-a-year pension income would still fall within the new £1m limit and could avoid penal tax.  For savers with defined contribution pensions, the lifetime limit is simply compared with the overall fund value.

But currently low annuity rates mean even large pots of £1m or more buy relatively little annual income. According to Legal & General, the insurer, a £1m pot would buy a 65-year-old man a retirement income starting at just £29,000 a year, assuming the income would rise by a modest 3pc a year and that his spouse would receive a half-share of the pension if he died first.

So are public-sector pensions running on borrowed time? One of the main reasons final salary schemes are rapidly disappearing for staff of private companies is that their workplaces are suffering from a pensions hangover from the Eighties and Nineties. Since life expectancy has risen unexpectedly, young workers are now helping to pay the price for their older colleagues’ longer retirement.

Wages have fallen from 87pc to 83pc of total employment costs over the past decade, according to research by Towers Watson, an actuarial firm. By far the most important explanation for this is increased employer pension contributions, as companies have been forced to plug growing deficits in their final salary pension schemes – which have promised to continue to pay older workers’ generous guaranteed pensions until the day they or their spouses die.

Taxpayers who fund public-sector pensions face the same pressures, but because workers are backed by strong unions and their benefits are protected by special government powers, they remain generous.

But this doesn’t mean that the disproportionately generous pensions public servants enjoy today won’t be scaled back at some point in the future.  In fact, some experts say that this is inevitable.

For example the Intergenerational Foundation, a think tank, has estimated that Britain faces a £1.3 trillion liability for pensions, equivalent to a £45,000 burden per household.  It argues that this is an “unaffordable” cost for younger generations, who are struggling with high housing costs, unemployment and students debts.

For original article, Click Here.

New Pension Limits for the 2015/16 Tax Year

  • You can contribute as much as you earn in a year, up to £40,000 a year
  • You can also use HMRC’s “carry forward rules” to use the past three year’s pension contribution limits – if you haven’t already
  • Once you start drawing from your pension your annual limit reduced to £10,000
  • The lifetime pension limit is reducing from £1.25m to £1m next year


  • Workers earning over £150,000 will have their annual pension allowance gradually reduced to £10,000 until they earn £210,000, at which point they no longer qualify for tax relief on contributions

The Punishing Pension Protection Fund

Savers in their forties and fifties are being “misled” over the safety of their final salary pensions and could suffer a 10 per cent cut to their retirement incomes, a senior official has warned.

In a stark warning, the head of the government’s pensions lifeboat said five in six final salary schemes had fallen into the red and faced a struggle to pay savers a full pension.

Alan Rubenstein, chief executive of the Pensions Protection Fund (PPF), said that many of the 11 million people with a supposedly guaranteed, inflation-linked pension were being led to believe their pension was safe, when “for many that isn’t the case”.

Savers who tried to cash in their final salary pots early, by using the new pension freedoms due in April, face losing up to 40 per cent of the value of the pension they’ve built up, he said.

The comments, in an interview with The Telegraph, represented the most overt warning from a government-backed organsiation since the crisis in the early 2000s when thousands of workers faced the loss of their pensions as companies collapsed with deficits in their schemes.

Mr Rubenstein, whose organisation was set up in the wake of that scandal to rescue final salary plans when they fail, said: “It is misleading to allow people to expect promised pensions when in fact there is only money enough to pay about 60 per cent of those pensions [should they be cashed in today] and where nothing is being done about the shortfall.”

Final salary pensions are typically worth a maximum two-thirds of a worker’s wages on retirement depending on their years of service, with payouts rising with inflation and half going to a spouse on death.

The pensions are more generous than schemes where the size of the pot is linked to the stock market.

George Osborne’s pension freedoms will arrive as the health of final salary pensions is deteriorating dramatically. Around 5,000 pension schemes face a funding shortfall of at least £300 billion, the largest since 2012, figures show. Low interest rates and the fears over Greece’s exit from the eurozone have conspired to increase funding costs for firms that offer final salary pensions.

A customer seeking to transfer their entitlements out so they can cash in the pension would typically get just £6 for every £10 in their name, Mr Rubenstein said, because schemes were so far in deficit.

If the company behind the pension was unable to meet its promises, it would have to be taken over by the protection fund. In such cases, most members are given 90 per cent of their predicted retirement payments each year. Wealthier savers stand to lose more as annual payouts are capped at approximately £30,000.

Those already retired will be protected, leaving those in their forties and fifties, who will claim benefits in future years, most at risk.

It is unclear how many schemes would fail, Mr Rubenstein said, because companies were hiding the scale of the problem.

“We should be having this conversation now, rather than leaving people under the impression they will have a pension as promised,” he said.

Mr Rubenstein added that while pension schemes with large holes in their finances were required to have “recovery plans”, some were unlikely to work, having been stretched over a nine-year period on average. Recovery plans are easily derailed if returns fall below expectations. Many companies were “travelling in hope”, he said.

Stephen Soper, chief executive of The Pensions Regulator, which oversees the funds, said:

“We are prepared to work with [struggling schemes] to try to deliver a solution that balances the interests of the members, PPF and employer.”

Many final salary schemes have closed as a result of long-term funding problems, with just 8 per cent open to new members, according to the National Association of Pension Funds.

The gap between the money held in such schemes and the pensions they have pledged to pay is widening dramatically.

While such pensions hold £1,200bn of investments, the most conservative valuation of their pension promises is closer to £1,500bn. This £300bn gulf has grown from almost nothing in just 12 months (see graph, below).

The shortfall highlighted in this data, however, is not the real extent of the gap. The £300bn figure is based of the reduced pensions that workers would be paid if their scheme collapsed and had to be taken over by the PPF.

In broad terms, if your scheme fails – in most cases because your current or former employer goes bust – the PPF will step in, paying 90pc of promised pensions up to an annual cap of £30,000. For most workers the cap is high enough to mean they receive 90pc of their promised income. But for higher earners, with big pension entitlements, the cap can inflict a brutal loss of retirement income (see repot, below).

The gap between pension schemes’ investments and the value of actual promises made to pensioners is therefore far higher than the £300bn that would deliver the PPF level of payouts. One independent estimate, by Citigroup, put the real gap at £850bn.

Even figures from the Pensions Regulator, the body charged with monitoring schemes’ solvency, suggest that if schemes had to pay all their pensions as promised today, they would be 45pc short.

It is possible that shortfalls could shrink in time if investment returns grew and companies contributed more. Mr Rubenstein said: “You shouldn’t be scared by one month’s numbers. But companies need realistic recovery plans. Many are on life support at the moment, kept alive by cheap loans.”

Actuary Henry Tapper, of consultant First Actuarial, said: “There is no silver bullet. There is no obvious factor that will induce growth. The only guarantee is what the PPF would pay if it had to take over your pension.”

The PPF expects to bail out twice the value of pensions in the coming year as in the previous one. This increase is not due to a rise in insolvencies, but to the growth of the shortfalls in the funds that fail.

Pilot’s pension cut from £47,000 to £26,500

The Pension Protection Fund, the lifeboat scheme for savers in stricken salary-linked pensions schemes, is able to guarantee most people 90pc of their promised pension.

But for bigger pensions the scheme has a cap. The most you can receive is £36,000 per year – less if you retire before you are 65.

The pension scheme of Monarch Airlines is currently being taken over by the PPF following a restructuring of the company. There was not enough money in the fund to meet all the pension promises made in earlier years. While most staff’s pension will fall below the cap, meaning they will get 90pc of their entitlements, some high-earning pilots will see drastic cuts.

One Monarch pilot, 51, who did not want to be named, planned to use his generous promised pension of £47,000 per year to help his children and pay off his mortgage. But he and his wife have been forced to rethink their plans because under the PPF they will get a maximum of £26,500. “I’m still in a state of shock,” he said. “It’s like a grieving process. There’s this sense of injustice. My pension is something I’ve paid into over the years and it’s something I was promised. I was paying around £1,000 a month from my salary, excluding the company contribution, and I’ve always regarded my pension as deferred pay. It wouldn’t be so bad if I was in a position to do something about it, but for me the time available is short.”

See The Telegraph for original article.

Osbourne Tinkering Too Much?

Five out of six of Britain’s “final salary” pension schemes do not have enough money to pay the pensions promised to workers, according to the latest official analysis of the £1.3 trillion sector. The difficulties faced by these schemes are worsening thanks to an array of factors – many of them related to tax and other legislative changes introduced in recent years.

If – as previously thought likely – George Osborne cuts pension tax relief for higher earners in his March 16 Budget, those schemes which remain open for employees to build up further benefits will “shut overnight”, according to Britain’s foremost pensions body, the Pensions and Lifetime Savings Association.

Mr Osborne is this weekend reported to have pulled back from such action, following angry protests by MPs. But experts say the damage is done: a pension system famously referred to as “the social security miracle of the Western world” is set to sink.

Final salary pensions pay a retirement income linked to workers’ wages. For decades they were the norm, and Britain’s comparatively high level of pension saving is due almost entirely to the billions still locked away in these schemes.

But they are moving inexorably into the red, increasingly unlikely to be able to pay the retirement incomes promised to members. As it stands, of the total 5,945 schemes more than 4,900 are in deficit. If these pension schemes were required to fund their collective pension promises today, most would fail.

A dwindling number of schemes still allow workers to build up benefits.  In 2010 roughly half of schemes were “open” to further saving.

Today the proportion is nearer one in five, according to the Pensions and Lifetime Savings Association (PLSA – previously known as the National Association of Pension Funds). These schemes would shut at once were higher-rate tax relief to be scrapped, the PLSA said.

Helen Forrest Hall, a final salary specialist at the organization, told Telegraph Money: “It would be virtually impossible to allow new benefits to accrue if tax relief were cut, because would be less going into the scheme – but the same promises would still be required to be met.”

In a PLSA poll of its members it emerged that 86pc of pension schemes said they would stop taking new contributions if the Chancellor changed pension tax relief. Even if these schemes were to close, their problems would not be wholly solved.

“The assumption is that if you stop allowing employees to build further benefits you would be protected,” Ms Forrest Hall said. “In fact other problems would emerge. Pension schemes could face cashflow issues, for example.”

These could arise because most “open” schemes pay current pensioners with some of the contributions from those still in work. If the contributions dried up, the scheme might have to sell assets – shares and other investments – to raise cash.

This could come at inopportune times in the market. Pensions lawyer Martin Jenkins of solicitors Irwin Mitchell LLP is more apocalyptic. “In the past, final salary pensions were without doubt a good thing for all employees from the factory floor to the boardroom. The problem companies faced was how to finance the benefits.

“Now, if tax relief is reduced, the burden switches the other way. Employees will struggle to see whether it is even worth saving into the scheme.”

‘Uncertainty is killing off the best workplace pensions’

Mr Jenkins points out that many final salary pension schemes are far larger than the businesses whose employees they were set up to serve. “In some cases even the shortfalls within the pension funds are larger than the sponsoring employers,” he said. “Even without a loss of higher-rate tax relief, too much is happening too fast. It’s like cars changing lanes at breakneck speed.”

The National Insurance hit

Final salary pension schemes are foundering mainly because pensioners are living longer than expected, and because in recent year’s investment returns have been low.

But the schemes face a raft of other pressures, including fallout from tax changes already introduced. From April 6, for example, pension schemes will lose a tax break worth roughly 3pc.

This is going because “contracting out” – whereby a worker’s company pension scheme took on the responsibility to provide the equivalent to the second state pension – is being abolished. Irwin Mitchell calculates that for every employee earning £40,000, the change will cost an extra £1,162 per year.

Other tax changes have added hugely to schemes’ workload. In July 2015 George Osborne took aim at top earners, limiting the extent to which they could save each year on a sliding scale. The basic annual limit for most taxpayers’ pension contributions is £40,000.

For 45pc taxpayers the annual maximum that can be saved into a pension falls to £10,000 once their income reaches £210,000. In practice, preventing employees from breaching this becomes complex and costly for the schemes.

Visit The Telegraph for the original article.

UK Final Salaries vs US Final Salaries


UK pensions ARE in crisis, caused by our reliance on final salary pensions, which have become too expensive.

A UK final salary scheme now costs three times as much as a US scheme!

Corporate UK cannot afford the pension promises it has made and its profits and competitiveness are at risk.

Instead of building up surpluses while schemes were young, they relied too heavily on continuing high equity returns, even as the membership profile aged. Increasing numbers of pensioners are causing a drain on the funds, but the surpluses of the past have disappeared.

Everyone is looking for someone to blame. The actuaries, Government, employers, trustees. The truth is that they are all partly responsible. Each of the parties has had a hand in using up the surpluses.

  • The Inland Revenue decided to tax any surplus above 105% funding, so there was no incentive to let the surpluses build up
  • Employers used pension funds to hide the costs of industrial restructuring
  • Employers took contribution holidays, instead of building up surpluses in the good times
  • Successive Governments heaped huge extra costs on schemes over the years (Not just removal of ACT relief, costing £5billion a year, also index-linking, costing an extra 20%, spouse cover, an extra 20%, early retirement, an extra 30%, plus costs of MFR, SRI, OPRA, compliance, complex tax regulations etc. etc.)
  • Members asked for benefit enhancements
  • Members and employers introduced lower retirement ages
  • Increased longevity
The effects of this crisis will be felt by everyone, not just companies and scheme members. Local authorities will need to raise council taxes to fund their pension liabilities and public sector pensions will be a big drain on public finances.

To cap it all, despite reams of pension law, members’ pension rights are not protected. When schemes wind up, solvent private sector employers need only pay less than half of what they had promised and members of insolvent schemes may receive nothing at all. This cannot continue.

State pension spending is forecast to stay around 5% for the next 50 years, so Government thinks we are OK. We are not.

In other countries, there is a more generous State pension. In the UK, we have tried to shift the costs of funding pensions onto the private sector, but this means our companies are at a severe competitive disadvantage relative to the rest of the world.

We have been very short-sighted. We need to address this NOW.

The risk is that future generations of pensioners will not have enough to live on, meaning more poverty, less consumption and lower growth in the economy.

The Green Paper proposals have not grasped the scale of the pensions crisis, or the fact that we must manage the move away from final salary schemes urgently and sensibly. The debate should start immediately. The problems will not go away.


Pensions are in trouble, yet there is an air of complacency in recent Government publications which is deeply disturbing. The start of the 21st Century is a watershed for UK pension provision. Until recently, we were generally considered the best pensioned country in Europe – primarily due to good final salary schemes. We had built up a strong retirement savings culture, and most people aspired to have a good employer’s scheme to rely on. Suddenly, we are realising that perhaps these pension ‘promises’ have become unaffordable, particularly for private companies. Even in the public sector, Council taxes will soon have to rise sharply, to pay for local authority pensions, and spending on other public sector pensions will soar. This is not sustainable.

Government says this isn’t a crisis, but companies are suddenly having to find huge amounts of money to shore up their pension schemes, which is hitting profits and share prices. It is no wonder companies are closing their schemes and switching to money purchase arrangements. In addition, thousands of workers, like those at ASW, are finding that, after saving all their working lives in a scheme which was fully funded on Government measures and was supposed to offer them a ‘guaranteed’ pension, our laws don’t protect them and they may get no pension. In addition, with Government policies to increase reliance on means-testing plus scandals, mis-selling and high charges people are becoming frightened of putting money into pensions altogether. Confidence has collapsed.

What’s gone wrong?

Problems have been building for years, but pension fund surpluses, high equity returns and over-optimistic actuarial assumptions made our system appear affordable. Legislators, employers, consultants and members seemed to expect that pension funds would always be in surplus, and everyone tried to get their hands on this pool of assets. Instead of letting surpluses build up when schemes were young, to pay for pensions of increasing numbers of retired members over time and cushion against equity declines like we’ve recently experienced, the surpluses have been raided and whittled away.

So what has happened to these surpluses?

Successive Governments have heaped huge extra costs on pension schemes over the years. The Inland Revenue even decided to tax the surpluses, which discouraged employers from building them up. Everyone talks about Gordon Brown’s 1997 removal of ACT relief costing £36billion, but the Tories imposed huge burdens too. MFR, compliance, complex regulations, index-linking, the list goes on. Many of these changes were actually designed to protect members, but have ended up making our schemes increasingly unaffordable. These extra costs mean that the average UK final salary scheme is now three times more expensive to UK companies than in the US.

But, it’s not all Government’s fault. Over-optimistic investment and longevity assumptions allowed employers to take contribution holidays, so funding has been inadequate. In addition, employers used pension funds as a cheap source of industrial restructuring, hiding the costs of labour force reductions in early retirement packages. This caused a knock-on effect of encouraging people to expect to retire at younger ages and, as they are also living longer, pensions must be paid for much longer than anyone predicted, so again costs have risen.

Government complacency is based on official forecasts suggesting public spending on pensions to 2050 will remain around 5% of GDP, even though pensioner numbers will rise by 40%! Most other European countries expect spending to rise sharply to around 12% of GDP by then. Partly, this is because our State pension is lower than anywhere else – but that is not exactly something to be proud of. The fact that the State will be spending so much less on pensions means two things. Firstly, many more older people will be living in relative poverty, which will mean less spending in the economy. Secondly, we have shifted much of the costs of pensions onto companies or individuals, who will need to pay much more for pensions in future, thus sapping the competitive strength of our companies.

This is worrying from a long term growth perspective. Relying on final salary schemes to fund the costs of supporting older people, when our competitors are funding most of this centrally will be a significant drain on UK firms, who will not be competing on level terms. Past private sector pension promises will detract from future profits and reduce growth. Not only this, but pension funds are becoming more mature and will no longer be buying equities in the same proportions as before. The market is losing its marginal buyers and, with the problems in life assurance companies too, it is hard to see the supply/demand balance being favourable for UK equities. If the equity market performance is depressed, companies may find it harder to raise capital and growth prospects will again be hit.

What is the answer to all this? Firstly, we need to recognise what is happening. Then we must adapt policies and expectations to match reality. As long as we fail to recognise that we are moving to a DC environment and to manage that change effectively, we will not be starting to address the pension problems of the future. Final salary schemes cannot survive into the future, employers cannot afford to underwrite these open-ended liabilities any more and we must all learn to plan our future finances without relying on employers to do this for us. Gradual and flexible retirement will be essential to improve living standards at older ages, and will also improve growth prospects for the economy as a whole. The pensions problems will not go away and much needs to be done to sustain a secure future for the older members of our society. Let’s hope policymakers realise this soon.

Original article – Click Here

Pension Freedom Changes

What the government calls “pension freedoms” will be in place from Easter Monday. But anyone nearing retirement would do well to note the drawbacks, as well as the advantages.

  • Taking money out of your pension could still land you with a large tax bill.
  • From next year, a new limit on the total size of a pension pot could mean your income from an annuity will be less than you expect.
  • Many in the industry fear a new wave of fraud.
  • It will soon become harder to qualify for a full state pension.
  • Without proper advice, the changes could make it easier to run out of money before you die.

1. Who is affected by the changes?

The big change affects 4.5 million people with Defined Contribution (DC) schemes.

With this type of scheme your monthly pension savings go into a big pot, which will eventually be used to buy an income for your retirement. You can now access that pot freely from the age of 55 (57 from 2028), taking out as much as you like, subject to tax.

Some people with Defined Benefit (DB) pensions – which promise a particular annual income – will be able to swap them for DC schemes.

2. How much tax will I have to pay?

You can take 25% of your pension pot as a tax-free lump sum. Or you can take out smaller amounts, of which the first 25% will be tax free on each occasion.

But you will have to pay income tax on the amount you withdraw over and above the 25% tax-free allowance.

If that amount, added to the rest of your income, exceeds £42,386 (2015-16), for example, you will pay tax at 40% or more.

If the amount exceeds £100,000, you will begin to lose your personal allowance, resulting in an even higher tax charge.

3. What tax will I have to pay if I buy a pension income?

If you buy an annuity (an income for life), or you take income drawdown (leaving your pension pot invested), you will only pay tax on the income.

Anyone with total income below £10,600 in 2015-16 will not pay anything.

4. How easy is it to pass on a pension to my dependants?

The new rules make it easier. If you die before the age of 75, the pension pot can be passed on tax free.

If you die after 75, and your descendants want the whole pot as a lump sum, they will have to pay 45% tax, instead of 55% previously.

However, the government is considering whether to reduce this to an individual’s income tax rate – known as the marginal rate – from April 2016.

Those who draw down income from an inherited pot will, in any case, pay tax at their marginal rate.


5. Are annuities still a good idea?

The pension changes mean that many people who would have bought an annuity, will not now do so.

Income drawdown is a more flexible option for many. In fact it has not been compulsory to buy an annuity since April 2011.

Nevertheless, for many people, annuities will still be the best option – or a mixture of an annuity and drawdown.

6. Can I sell an annuity if I have already bought one?

In the Budget of March 2015, the chancellor said he would make this possible, and the government will now carry out a consultation. This could allow you to swap your annuity for cash, from April 2016.

However, no one knows how much demand there will be for second-hand annuities. Many suspect that those selling their annuities will find it hard to get a good price.

7. What if I am in a Defined Benefit (DB) scheme – can I move to a DC scheme?

In theory you can – if your employer allows it. Transferring to a DC scheme means you could get your money out more easily, and pass it on to descendants. But again, you may not get the best value.

DB schemes usually offer inflation proofing, and the ability to pass some of the income on to a spouse.

They also have a particular advantage if you are getting close to the maximum amount you are allowed to have in a pension pot (see below).

8. What are the new rules on how much you can save in a pension?

From 6 April 2016, the maximum you can have in a pension pot will be £1m, reduced from £1.25m. This figure will rise with inflation from April 2018. The government says the change will only affect wealthy people.

But a 60 year-old spending all their £1m pension pot on an inflation-linked annuity could – according to current annuity rates – expect a maximum annual income of around £27,000. You can have a larger pension pot if you wish, but you will pay 55% tax on any withdrawals.

However, anyone in a DB scheme will be treated more generously.

Such schemes have a notional capital value, calculated by multiplying the annual income by 20. So if the scheme pays an income of £10,000 a year, the notional value of the pension pot is £200,000.

Given that the maximum pot will now be £1m, members of DB schemes can therefore expect annual incomes of up to £50,000.

The annual allowance for pensions savings remains at £40,000.

9. Is the state pension changing?

Yes. From 6 April 2016. The additional state pension and part of pension credit is being abolished, to be replaced with a single-tier state pension. The rate will rise from £113 a week to around £155, but the precise amount will be set towards the end of 2015.

However, most people will not qualify for the full pension, as their schemes were contracted out of the second state pension, and they paid lower National Insurance (NI) contributions as a result. To qualify for the full pension, you will now need 35 years of NI contributions, instead of 30 previously.

 Information originally from BBC