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Auto-enrolment and the 2015 General Election

This is a big year for accountancy and business. There are plenty of factors that will effect out political and economical climate. We are covering two of the big issues being debated daily at the moment and those are auto-enrolment and of course the General Election in May.

Workplace Pensions Automatic Enrolment: What you need to know

As a business owner, by employing even just a single individual you may be obligated to provide a workplace pension for that member of staff. The new pension automatic enrolment scheme is gathering momentum as more are expected to comply, eventually it will be normal practice. The effect of non-compliance could lead to hefty fines and even in some extremes jail time. An automatic enrolment simply means that the staff members who meet the criteria as defined in legislation will be automatically allocated a pension. That does not mean that the employer does not have to action that scheme and have a provider and planned process in place.

Not all businesses are required to do this at the same time so you need to find when your staging date will be. Ideally, you will start the process sooner rather than later since it is inevitable, it would make sense to be prepared. You will need to seek advice and decide on the best pension scheme for your employees and your business moving forward. There are different options so there are choices to be made.

The process generally works by nominating a contact. The Pension Regulator will communicate the needed information and processes to the contact. The contact will also be the one to register new staff members on the pension scheme. So who does this apply to?

The criteria for auto-enrolment is as follows:

  • The employee needs to be aged between 22 and State Pension age
  • They need to earn more than £ 10 000 a year
  • The employee must work in the UK

The best action you can take right now is to go and seek advice from an experienced pension advisor. They will talk you through your options and help you find the right scheme for you and your staff.

Types of Workplace Pensions are:

  • Defined Contribution Pension Schemes
    • This is usually expressed as a fund value and usually depends on the amount that’s been paid in, for how long it’s been paid in and how long the investment has done.
    • When you retire and the markets are not doing well at the time of retirement, you may end up with less than you anticipated, however, the reverse is also true should the markets do well.
  • Because your employer is purchasing the scheme from the provider in bulk, the fees negotiation in terms of managing your fund is usually less.
  • Defined Benefit Pension Schemes
    • These are usually expressed as a percentage
    • What defines the pay-out, depends on your pensionable income and the amount of years you have worked for your employer.

The percentages each party has to pay:

This gets to the core of the fear that most employers are wrestling with – how much will it cost? The fact that it is beneficial and makes sound sense for retirement doesn’t make the outlay any easier to manage with a tight cash flow.

  • The employee:
    • Minimum 0.8% of your ‘qualifying earnings’ rising to 4% by 2018
  • The employer:
    • Minimum 1% of your ‘qualifying earnings’ rising to 3% by 2018
  • The government pays:
    • 2% of your ‘qualifying earnings’ rising to 1% by 2018

The rise is staggered to help small businesses with the financial commitment they are making. To some it will be a testing time but the scheme is designed for ease of integration and it offers employees a securer future.

When will you have access to your pension fund?

The pension fund only becomes available to you when you reach the age of 60 or 65, depending on when you decide to retire. You can take early retirement in some instances at the age of 55, however, it is very seldom that it is recommended as we tend to live far longer than previous generations. The extra five to ten years spent at work may just make a very big difference to an employee’s pension fund.

Tax charge

Bear in mind that if you contribute more than 100% of your salary to a pension, or more than £40 000, whichever is the lowest, you may have to pay a tax charge. Your lifetime allowance is £ 1.25 million. This is not limited to your workplace pensions, this will include all your pension contributions. For most this will not be a huge concern! But you never know – live the dream!

 

What does 2015 hold in store for the UK?

With the 2015 General Elections coming up, it is a well-known fact that David Cameron along with all the other party leaders, will be marketing their way onto our screens, into our newspapers and onto our social media feeds a lot in the coming months.

There is a big question over what this election will bring and there are plenty of theories. But, what this election does have, perhaps more than any that have preceded it, is a hell of a lot of doubt over which way this one is going to swing.

  • Is Ed Miliband really the right face and fit to lead Labour to victory – most doubt it
  • Will Nick Clegg and the Liberal Democrats hold any traction at all after his famous U-turn on tuition fees after joining forces with the Conservatives four years ago?
  • Can Cameron muster enough votes to avoid a coalition, or worse, complete indecision which will signal a loss of faith in his actions to date?
  • Will the UK Independence Party or Scottish National Party draw enough votes to cause a serious upset and even feature in coalition talks – doubtable but can we really say for sure?

The future of British politics has never been more in doubt. As hard as the decision is the importance of each single vote has never been greater. It may well come down to a few votes in the end and one of those could be yours! Make it count, even if you spoil the paper and vote for democracy in a form that is not currently represented in the houses of parliament. This year is the year to vote and who knows what outcome we will have when May is over!


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Queen’s Speech confirms massive pensions overhaul

The Queen’s speech confirmed that pension reform will ‘give individuals the freedom and choice to access their pension as they see fit, with the biggest change to the way people are able to access their pension in almost a century’ (Chowdhury 2014).

The speech discussed the overhaul of the pension system as well as legislation to introduce new CDC rules. Individuals will be able to withdraw money from their defined contributions pot after the age of 55 as and when they wish and only pay their marginal rate of tax. Withdrawals can be structured to reduce tax charges. Annuity’s need no longer be bought but are still one of many options available.

In the short term it is likely to deliver the government a sizable lump sum in tax revenue as pensioners pull out their money fast. This will look nice on paper ahead of election year as I have mentioned in a previous post on the budget. But, in the long term these changes are likely to cost the government. So, this is a victory because it does look good doesn’t it? A nice cash influx for the government in the short-term and a clear pitch for the over 60s vote come 2015 – it’s a win win! Why wasn’t this great reform brought about earlier? A cynical person would say because the general election is next year – duh!

What it does do is empower individuals to make their own choices – there is no question that pensioners will have control of their money. So, whatever age we are right now we have a greater freedom of choice and a greater level of independence ahead of us now.

The new ‘CDC scheme would see worker’s savings pooled with those of thousands of others, rather than being run individually, and smooth the risk to employers of running multiple pensions’ (Gillbe 2014).

This will give people far greater certainty with their investments and general consensus is that long with increased security they could also be better value. It’s hard to say if this will equate to greater return but either way they will supply a safer and therefore more beneficial outcome.

In one sentence what this means is: pensions just became a viable investment. We have seen plenty of people lose out to private companies squandering their money. We have seen the retirement age move further and further away from us and we have seen governments tax us, control our money and plunge us into a debt centred society. We now have a glimmer of home – so invest your money wisely and make the most of your new powers. At least when we are able to retire we might have something decent put away for the occasion!

 

Ruth Gillbe (2014), ‘Queen’s Speech confirms commitment to annuity overhaul and CDC. Accountancy Age. Available online: http://www.accountancyage.com/financial-director/news/2348482/queen-s-speech-confirms-commitment-to-annuity-overhaul-and-cdc

Chas Roy-Chowdhury (2014), ‘Queen’s Speech Statement: ‘Pensions Tax Changes Put People in Control of Their Money’. ACCA: The Global Body for Professional Accountants. Available online: http://www.accaglobal.com/gb/en/discover/news/2014/06/queens-statement2014.html


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Pensions – What did Osborne say again?

 

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Was it just me or did anyone else lose Osborne when he was carrying on about pensions and annuities. In fact, here were his exact words, they make a little more sense when you catch every word:

‘The tax rules around these pensions are a manifestation of a patronising view that pensioners can’t be trusted with their own pension pots.

I reject that.

People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances.

And that’s precisely what we will now do. Trust the people.

Some changes will take effect from next week.

We will:

-cut the income requirement for flexible drawdown from £20,000 to £12,000

-raise the capped drawdown limit from 120% to 150%

-increase the size of the lump sum small pot five-fold to £10,000

-and almost double the total pension savings you can take as a lump sum to £30,000

All of these changes will come into effect on 27 March.

These measures alone would amount to a radical change.

But they are only a step in the fundamental reform of the taxation of defined contribution pensions I want to see.

I am announcing today that we will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots.

Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want.

No caps. No drawdown limits.

Let me be clear. No one will have to buy an annuity.’

(For full budget speech see: Gov.uk – https://www.gov.uk/government/speeches/chancellor-george-osbornes-budget-2014-speech)

 

So this is reform – real reform. Annuities existed to help retirees navigate how they would invest/live off their retirement income. They were compulsory so that pensioners were able to live off a weekly wage and enable their saved money to support them until their death. The annuity is dependent on a cash-lump sum premium in exchange for this regular income/money management service. To many they are a final insult from the state to be forced to buy an annuity with the majority of their pension. They were designed to make sure that retirees were not tempted to spend their pensions frivolously and live on a paltry weekly income for the remaining years of their life. They prevent relatives negotiating money from vulnerable pensioners. Let’s be honest though – they also give insurance companies massive profits – profits made from worker’s pensions.

So when Osborne states that pensioners will be able to release all of their money without having to buy an annuity or be restricted by drawdown limits, he has introduced a giant change – a freedom. How this freedom is used is very much up to the individual and I agree that if we work all our lives to accrue savings we should be able to spend them on our future in any way we see fit. Of course, this money will be taxed.

More good news on the tax front. The rate of tax on pension income will fall from 55% to marginal income tax rates if the whole pension pot is withdrawn. Here is where the big benefit to Osborne lies. The government anticipates that the number of people withdrawing pension income will rise steeply now that the 55% tax disincentive has gone. The government stands to make around £320m in 2015/16 from those withdrawals. A nice flow of revenue back to the state rather than to the insurance companies from cash lump sums for annuities.

It has been called the most significant change to pensions for 50 years and only time will tell whether this is a good move or a misguided one. You can be sure of one thing – there will be lots of new and promising investment opportunities set up to wow pensioners’ who have big chunks of money to invest.

We advise caution and urge people to get legit advice and spend time looking for the right investment for them. It may be property, shares, premium bonds, high interest bank accounts, annuities, land…whatever it is make sure you do not get ripped off. It is not pensioners’ who can’t be trusted with their own pension pots it is the capitalist society that surrounds them and wishes to profit from people’s savings. Get good advice and protect your hard earned cash!

For further advice on pensions see a good pensions adviser – one who is accredited and qualified.


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What do we think about the 2014 budget then?

Firstly, we had good news in the fact that the economy is recovering at a faster rate than was previously expected. Yes, it is still in recovery but there is room for optimism here it seems. The UK is growing at a faster rate than other economies including Germany, Japan and the US. Hooray! Of course if the economies surrounding the UK, particularly the Eurozone, are recovering at a slower pace then high commodity prices will make the UK’s outlook sensibly cautious at best.

Then came the expected announcement that the £1 coin will be replaced in three years’ time with a more technologically advanced version to reduce its vulnerability to forgery. It will be cutting edge science blended with historical inspiration to keep it current and yet nostalgic. I wonder if vending and car park machines will need to be altered or has someone thought about that? I have a suggestion – reduce parking costs to 50p a pop! My budget speech would be far more news worthy!

TAX

Now we are into the serious stuff, although it has to be said there wasn’t a lot of it! HMRC are to be given even greater powers to collect debt from the bank accounts of those who can afford tax but refuse to pay it. Transferring profits between companies within groups to avoid tax will be banned.

The misuse of enterprise investment schemes and venture capital trusts will also be prevented from happening. There is an awful lot of monitoring going to have to take place to enforce all of the above. Has the number of civil servants doubled in size or are folk just going to become more honest with the dawn of the new tax year?

BUSINESS TAX

Corporation tax will fall to 21% in a few weeks and will drop to 20% next year. The business rate discounts and enhanced capital allowances for enterprise zones will be extended for another three years. High street stores will receive £1,000 off their rates and there will be an Employment Allowance for every business in the country which will provide £2,000 cash back on jobs.

 

The Annual Investment Allowance will be doubled in April – making it £500,000 and this will run until the end of 2015. That will enable 99.8% of businesses to qualify for a 100% investment allowance.

PERSONAL ALLOWANCE

The expected rise to £10,500 of personal tax allowance has been honoured. This will come in effect next year and from April 6 2014 it will climb to £10,000. The higher rate threshold is also rising from £41,450 to £41,865 in April and will reach £42,285 next year.

MANUFACTURING

It seems like the right decisions have been made for keeping manufacturing jobs in the UK which is what counts right now. The £7 billion package introduced to cut energy bills for British manufacturers will reduce production costs and even the playing field. It includes a cap on the Carbon Price Support rate at £18 per tonne for Co2 from 2016-17 until 2020. The current compensation scheme for energy intensive industries will also be extended for another four years to 2019-20.  Manufacturing lives to fight another day in the UK!

DUTIES

No rise on fuel duty. Thank goodness! It is costly enough as it stands thank you very much. Bingo duty will also be halved to 10%. However, duty on fixed-odds betting terminals rises by 25%. Tabacco duty has also risen by 2% – no surprises there. Beer duty will fall by 1p so the pint is safe (don’t think that is the only measure needed to save local pubs though) and duty is frozen on Scottish Whiskey and cider. We now know what to drink if inclined to toast the budget speech!

PENSIONS

I was a little lost when watching Osborne glide through what sounded like massive reform to the pension system. This is how it pans out. The guaranteed income requirement for flexible pension drawdown will be cut from £20,000 to £12,000, while the capped drawdown limit will be raised to 150% from 120% of the GAD rate. The size of qualifying small pension pot will be increased to £10,000 and the total pension savings that can be converted into a cash lump sum will be almost doubled to £30,000.

The reform comes in the way that pensions are withdrawn. Osborne has handed the powers back to pensioner’s to control their own finances. He plans to remove all tax restrictions on how pension pots are accessed and stresses that they will be offered free, impartial advice on how to best convert defined contributions into a retirement income. The message is that it is their money so they should be able to use it and manage it as they see fit.

SAVINGS

Premium bonds cap on contributions will raise from £30,000 to £40,000 this June and this will increase to £50,000 next year. Great I had no idea where I was going to put that £10,000 I had stuffed under the mattress!  

 

There will be up to 10 million new, taxable Pensioner Bonds that offer expected rates of 2.8% for a one year bond and 4% for a three year bond. Up to £10,000 can be invested in each bond.

The annual ISAs allowance will be increased to £15,000 with Junior ISA limits being increased to £4,000. This is great news for savers – if only we all had something to save!

CONCLUSION

So, that was the budget – at least the main areas. Nothing overly offensive or surprising but I am sure Labour and the Conservatives will thrash out all the arguments they can about each insignificant point. At the end of the day, we are happy enough with the budget speech, just a little bit less childish disruption in the House of Commons and more straight talking decision making would be appreciated. They all manipulate the English language quite well to try and disguise something bad as something good so we remain informed but ultimately weary of what lies ahead!