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Pensions industry are split over flat-rate relief

The Association of British Insurers (ABI) is putting pressure on George Osbourne to set a flat-rate pensions tax relief system, saying that it would be a massive boost to workers on an average income.

People on low to middle incomes account for most of the population and don’t appear to view saving for retirement as an investment. The ABI wants to introduce a Saver’s Bonus, meaning that all taxpayers are treated the same. Yvonne Braun, ABI’s director of long-term savings policy, said the Saver’s Bonus would “give a massive boost to the average worker’s savings.” Braun added, “A single rate of tax relief would be simpler, fairer and more sustainable for all savers.” It is thought that such a change might encourage low to middle earners to save more.

Currently, high income earners receive either 45% or 40% tax relief, everyone else only gets half that amount or less.

The Pensions and Lifetime Savings Association think, if it goes forward, the flat-rate would be around 25%. They don’t believe it will make much difference to the general population, nor benefit higher rate taxpayers, saying it would “greatly reduce” the attractiveness of contributing. Those who receive 40% relief would loose out by £1500. Average earners on the new 25% rate would only benefit by £500.

Will the Chancellor announce a flat-rate pensions relief in his March 2016 budget? It seems there would be only one clear winner if he does - the Treasury, at a 25% flat-rate, look to make an annual saving of £6bn.

The impact on your pension from the Cyprus bailout?

All eyes have been firmly focused on the unfolding financial crisis involving the less-than-solvent Cypriot banks, and the ramifications for pensioners in this troubled region cannot be taken lightly. Indeed, many of those who had a pension investment plan in this country are now faced with some difficult choices. While it is no surprise the pensioners have been hit hard, it is important to understand why so many had flocked to Cyprus to begin with.

Cyprus - the last pension tax haven?

Simply stated, until recently Cyprus was one of the few tax havens left in Europe. Pensioners could enjoy paying only a 5% tax on their global income if kept under a certain threshold. If we compare this 5% tax rate to the 40% rate within the United Kingdom, it is easy to see why many pensioners moved their money abroad. Both Inheritance Tax and Wealth Tax did not exist in Cyprus. Additionally, should a foreigner claim a tax resident status, no deductions would be incurred on any Cypriot pension plans.

Does UK pensioners in Cyprus get any money left?

Now, this seemingly magical landscape has all but faded. Under the new bailout terms set forth by the ECB, any holdings of more than 100,000 euros will be charged with a flat one-time tax of up to 40%. Thus, many pensioners that hold such values may see their funds dwindle virtually overnight. What is also problematic is that such schemes rarely allowed for quick asset liquidation if the need arose, however this may be irrelevant if we consider that customers are allowed to withdraw a maximum of 300 euros a day in the near future.

Thus, these pension investment schemes may actually serve to greatly reduce overall holdings and it seems that as of yet, no outside protection is being offered. While it may be argued that this controversial bailout and the subsequent tax levies were required, many pensioners will soon feel the bite in this ongoing financial crisis.

Protests against Pension Inequality in Ireland

Irish DB pension holders now have another substantial reason to smile and be optimistic about their pension thanks to the IFG Corporate Pensions firm. The firm has sturdily protested against what they term as “pension apartheid” and insisted on the need to increase the DB members’ pension. This call, if heeded to, will see DB members’ earn a yearly average pension of €64,000 more than their DC counterparts.

Fionan O’Sullivan, the director of the firm explained that DB members deserve the augment because of the current Irish cap of €2.3m. He further elucidated this statement by adding that the cap facilitates a yearly pension disbursement of €115,000 for every individual because of the 20:1factor. DC members on the other hand, have annuity rates of 30:1 to 45:1 which only make them eligible for an annual pension amount which ranges between €51,000 and €76,600 for every individual. Additionally, the preferential tax treatment, which only the DB members enjoy, places them at a much better position compared to the DC scheme members.

In his explications, the IFG Corporate Pensions director used the example of a DB scheme employee who makes an average of €200,000 at the time he retires. Such an individual qualifies for a pension amount which is half his retirement salary. This coupled with a 150% lump sum unfortunately subjects a pension holder for a double taxation since the approximate national value is €2.3m.

He contrasted this with a private sector individual who has an investment of a life annuity of €100,000 per year. Such an individual would automatically fall within the over-cap bracket if the payment indexation is circa €4,000,000 and the lump sum similar to his employed counterpart (€300,000). This would make him pay an extra of 41% tax, which equates to over €800,000.

If the private individual tried to enjoy the pension benefits of a senior civil who has a DB scheme, he would unfortunately meet heavy tax penalties. In fact, he would give up his lump sum and surrender an investment to meet the full penalties. The director termed this as “very inequitable”.

More Bonds than Shares in Pension Funds

For the first time since the mid-seventies, pension funds now hold more of their assets in bonds investment than shares.

2012 saw pension funds increase their average holdings in bonds and similar fixed-interest investments to 39% from 2011’s 33%, with a huge drop from an average of 42% in shares in 2011 to 35% by the end of last year, says the latest figures from the National Association of Pension Funds’ (NAPF) annual survey of company pensions. The remaining 26% of pension fund investments for 2012 consisted of private equity, property and other types of alternative assets.

This represents a significant shift in pension fund investments, with equally significant consequences for anyone currently receiving a pension or about to start shortly. According to the NAPF the last time funds had less shares than bonds was 1975. By way of comparison, only in 2007 pension fund shares investment was 55%, almost double that of the 29% in bonds investment.

Unfortunately, as result of this disproportionate dip in shares investments, pension funds have not seen as much benefit from the stock market’s stunning rally in the New Year as could otherwise have been the case. This has resulted in a large discrepancy between the recent defined contribution schemes and ‘gold plated’ final salary pensions. The NAPF’s annual survey indicates defined contribution schemes were worth less than a quarter of final salary pensions, only £20,150 per member in contrast to the comparatively rather handsome £88,500 per member for the final salary pensions—gold plated indeed!

This recent pension fund hunger for bond investments is also making problems for pension scheme managers, both forcing the yields of government bonds to record lows and decreasing the supply of government bonds, increasing pension scheme deficits in turn.

As a result of this imbalance, companies are also now withholding final salary pension schemes for new contracts: only 13% now open to new staff from 33% in 2011. A powerful shift towards defined contribution plans seems underway.

Pensioners could receive up to a fifth more income

The Chancellor’s Autumn Statement for 2012 which was announced last week, included changes to both the amount of tax relief available when saving for a pension and an increase to the amount available under income drawdown plans. The Statement also announced the rate of increase to the basic State Pension for next year.

With effect from 6 April 2014 the Lifetime Allowance limit will reduce from £1.5 million to £1.25 million. This is the value of pension provision an individual can save for over their lifetime without attracting tax penalties. In addition to this, the annual tax free allowance will be reduced from £50,000 to £40,000. This is the amount an individual and their employer can pay into a pension pot before attracting tax.
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The Purple Book by the Pension Protection Fund

This week saw the publication of the latest edition of The Purple Book. This book is published jointly by the Pension Protection Fund (PPF) and the Pensions Regulator and monitors the risks faced by private sector pension schemes in the UK, particularly defined benefit schemes. Such schemes are also known as final salary schemes as the pay-out depends on the scheme member’s final salary at retirement.

The book seeks to highlight trends in pension fund investment, such as scheme funding and asset allocation, as this plays a large part into whether or not UK pension schemes are on target to meet their pension liabilities.

The book, now in its seventh edition, is important as fluctuations in such risks will have a direct impact on the PPF. The PPF was established to protect the members of eligible UK pension schemes when such schemes find themselves insolvent.

The Purple Book 2012 itself takes into account 6,316 schemes, representing approximately 12 million members.

Findings of the book show that the funding ratio of UK pension schemes (scheme assets divided by scheme liabilities) worsened in the year to 31 March 2012. In addition the number of schemes open to new members continues to fall.

This publication comes in the wake of the recent announcement from the Financial Services Authority (FSA) that the projected rate of investment returns firms use for projections of pension plans are to be reduced.

The current rates of 5%, 7% and 9% are to be cut down to a more realistic projection rate of 2%, 5% and 8%.

This mitigates the risk of pension plan customers being provided with potentially misleading information as the old rates were much less likely to be borne out in reality, especially in today’s economic climate.

The new rates will come into effect from April 2014.

Almost half of all self-employed people have no pension

As auto enrolment begins for most of the employed people in the United Kingdom, new research from international financial services company, Prudential, has found that 46% of all self-employed people in the country, almost 1.5 million people in total, have no private pension provision.

This worrying lack of interest in pension investment from the self-employed was also reflected in the fact that 50% of those asked admitted that they intend to rely on the state pension, currently set at just £107.45 per week, as their sole source of income for the duration of their retirement.

Additionally, 20% of self-employed people have plans to sell their business as a means of funding their retirement and almost the same number admit they do not intend to retire at all.

Historically, pensions have been seen as a way for the self-employed to take money from their business, without the need to pay tax or national insurance contributions. However, these findings demonstate a worrying change of priorities.

Prudential’s findings also examined the reason for this lack of pension investment amongst small business owners and the self-employed. Of the 46% of people without private pension provision, more than half said that they simply could not afford to invest in their retirement.

Additionally, many said they were making provisions for retirement in other ways, such as by putting their money into an ISA, because they found pensions to be restrictive.

“It’s sometimes hard for self-employed workers to distinguish between their business and personal finances. Pensions offer huge tax advantages,” explained Stan Russell, a representative from Prudential.

However, Russell reiterated the importance for self-employed people to address their need to plan for the future.

“Business owners who have not made any retirement provision should seek advice from a financial adviser,” he said.

Survey finds that almost half of the workforce have never reviewed their pension

According to a survey conducted by Baring Asset Management, pension investment remains worryingly low down on many working adults’ list of priorities. While the vast majority of those who participated in the survey admitted that it was their own responsibility to monitor and understand how their pension fund was invested, 45% of workers admitted they have never reviewed their pension plans.

Additionally, 38% of people asked said they had never made a change to their pension based on their risk profile and over 1/3 of respondents said they had simply chosen their pension provider’s default option.

Furthermore, less than half of those surveyed listed trained financial experts, such as accountants or independent financial advisors, as their preferred choice for pension-related advice and 23% of people admitted they were more likely to just speak to family or friends if they needed help.

The findings are a cause of concern according to Baring Asset Management’s chief investment officer, Marino Valensise, who expressed a belief that it is “more important than ever” to speak to financial advisors, given the economic problems we are facing.

“Millions of people may be exposed to poor asset allocation and inappropriate levels of risk due to a refusal to review their pension investments regularly and with the correct levels of advice,” Valensise said.

“It is good that the majority of people see it as their personal responsibility to monitor and understand their pensions [but] they need to follow this up and make sure they are speaking with their financial advisers.”

Infrastructure Debt Fund for Pension Schemes Planned

A group of fund managers, lawyers and bankers led by law firm Pinsent Mason and the Redington consultancy have planned to bring a new pension investment platform to the market in a bid to improve yields. The group is in talks with a number of pension schemes and already has commitments up to £500 million to invest in this new platform.
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Ros Altman Predicts the Death Spiral for Pensions

According to the leading economist, Ros Altman, the policy of quantitative easing floated by The Bank of England, has spelt doom for several salaried pension schemes in the United Kingdom. Even while the bank has not extended its QE programme, its policy that forces long-term interest rates lower are likely to cause some serious problems for hordes of pension investment schemes that are being floated by several firms.
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