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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 Money.co.uk.

“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.

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UK Final Salaries vs US Final Salaries

SUMMARY

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.

DETAILS

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