Archive: Aug 2017

  1. LISA savers face losing their £1,000 bonus

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    The Lifetime ISA (LISA) which launched in April 2017 enables savers to subscribe up to £4,000 a year and receive a government bonus of 25% of the money saved every year until age 50.

    Anyone from 18 to 39 is able to open a LISA and the funds are accessible, penalty-free and tax-free, either at retirement from age 60, when you buy your first home valued at £450,000 or less or if diagnosed with a terminal illness.

    For the first year only the government bonus will be paid annually (i.e. at the end of the first year) but will be paid monthly thereafter.

    However, for those who invest the maximum of £4,000 in the first year and then buy a house before that 12-month bonus arrives, they will lose the £1,000 bonus – you must keep the LISA for 12 months to attract the bonus.

    An interesting point is that existing savers with a help-to-buy ISA can transfer this to a LISA and get a full 25% bonus on the transfer!

    While the introduction of these new savings products had initially been welcomed, the detailed rules are in fact quite complicated and could result in costly consequences for savers. With this in mind, for the LISA it may still be worth opening the account but just being aware that a bonus may not be earned in the first year if an early house purchase takes place. And, for the help-to-buy ISA, it may be advisable for individuals to wait until near the end of the tax year before they transfer it to a LISA.

  2. The effect of raising the female state pension age

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    The Institute for Fiscal Studies (IFS) has issued a working paper examining “the effect of raising the female state pension age on income, poverty and deprivation”. It offers a variety of interesting and sometimes counter-intuitive insights to the reform, which was originally set in train by the Pensions Act 1995. For example:

    • Between 2010/11 and 2015/2016, the SPA for women rose from age 60 to 63, resulting in 1.1m fewer women receiving a state pension and government providing £4.2bn a year less through state pensions and other benefits. Affected households receive about £74 a week less in state pensions and other state benefits because of this change.
    • The change has also increased women’s employment rates substantially in the 60-62 age range, boosting the gross earnings of these women by £2½bn in total. Across all 60-62 year old women (including those not in paid work) this is equivalent to an average of £44 per week. This – and the fact that employee national insurance contributions are paid up to the (now higher) state pension age – boosted government revenues by £0.9 billion in 2015/16. Thus, the total gain for the Exchequer from the rise in SPA was £5.1bn a year.
    • Income poverty among 60-62 year old women is up sharply (by 6.4% compared to a pre-reform poverty rate among women of this age of 14.8%). However, the IFS found no evidence of any change in measures of material deprivation (ie people saying that they cannot afford a range of important items).
    • The reform to women’s SPA has correspondingly increased the age that single men can claim Pension Credit. 25% of men at these affected ages are single, and are, on average, poorer than those men who are in couples. The reform reduced benefit incomes of single men aged 60 to 62 by an average of £21 per week (from a pre-reform average of £89).

    The £5.1bn annual savings are a reminder of why increases in SPA can be expected to continue.

  3. The Government should keep its hands off our pensions!

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    The Government should remove the £1m lifetime allowance and keep it’s hands off our Pensions!

    Changes in pensions legislation have had more impact than anything else I have experienced as a financial planner. The most significant development was the sweeping changes to pensions announced in the Labour government’s 2004 budget, which came into effect on 6 April 2006 and became known as “pensions simplification”.

    The aim was to encourage retirement planning by simplifying the previous eight tax regimes into one single regime for all individual and occupational pensions.

    ‘A foolish piece of legislation’

    One of the most important changes (and one which many people thought would not affect them) was the introduction for the first time of a £1.5m “lifetime allowance”. It meant that all personal and occupational pension benefits that exceeded this limit would be hit with a 55 per cent tax charge.

    Since 2010, successive governments, in their attempts to tighten the Treasury’s coffers, have reduced the lifetime allowance to its current cap of £1m.

    Protections have been put into place for investors with funds that transition these limits but, 11 years since its introduction, an allowance which originally affected only a small proportion of retirees is now affecting many.

    Since the introduction of the lifetime allowance in 2006, the FTSE All-Share index is up 91 per cent, so anyone with a little more than £500,000 in a pension then may now be experiencing its impact.

    The lifetime allowance is, in my opinion, a foolish piece of legislation which only penalises those who are sensible and have made good provision for their retirement. It is a penalty on the prudent.

    There seems little benefit to anyone – other than the Treasury – of the lifetime allowance, particularly since the introduction of the annual allowance (a £40,000 cap on annual pension contributions).

    One hopes that in the fullness of time it will be removed, but let’s not hold our breath.

    Double standards depending on the type of pension

    A 65-year-old retiring with a £1m personal pension fund can purchase an annuity in today’s market of £32,000 per year indexing with inflation, or £28,000 a year when you include a 50 per cent spouse’s pension for someone the same age.

    Their defined-benefits counterparts, on the other hand, would need a pension of £50,000 per year to hit the £1m mark, with the 20-times multiplier to calculate their equivalent lifetime allowance value.

    This is particularly unfair when cash-equivalent transfer values are obtained from defined benefits schemes and the cash value is far higher than the 20-times multiple. The cash values being offered can often be as high as 40 times, effectively doubling the lifetime allowance.

    It is a clear two-tier system.

    Tax-deferred, not tax-free

    When planning for your retirement, you need to consider government intervention as a risk. New policies have affected pensions numerous times over the years, most notably through the equalisation of male and female state retirement ages, the increasing of the state retirement age, and the increase of the minimum retirement age for personal pensions.

    With the UK running a £69bn annual deficit and the country’s debt at about £1.6trn and rising, ask yourself this: if the Government wanted to slow down this debt growth, how might it do it?

    One answer is to increase taxation. So, while today, you might receive 20 per cent or 40 per cent or 45 per cent tax relief, you may find the taxation of your pension is higher during your long retirement in the future.

    Pensions are tax-deferred retirement schemes, not tax-free. A healthy balance between ISAs and pensions tends to be the only safe conclusion.

    If you have any questions please do not hesitate to contact us at the office on 01793 771093