PENSION CHANGES COMING ON 6TH OF APRIL

The State Pension consists of two parts. There is the Basic State Pension which everyone is entitled to, whether they are employed or self-employed. The other part is only for those who are employed on a PAYE basis. It is now called the State 2nd Pension but used to be called SERPS (the State Earnings Related Pension Scheme). When you hit State Retirement Age, any entitlement you have built up with the State 2nd Pension is added to your Basic State Pension. In 1988 the Government gave people who were employed an option. Instead of building up an extra entitlement to the State 2nd Pension/SERPS, each year the Government would pay an amount annually into their personal pension plan. This was called “Contracting Out”- by which was meant that people chose to contract out of the State 2nd Pension year by year. Many people did “Contract Out”. The monies that the Government paid out to these people went into their personal pension and were called “Protected Rights” as some strings were attached to those monies. The Government has now changed their mind and, as of 6 April 2012, people no longer have the choice to “contract out”. The monies that have been paid into their pensions will remain there and all strings are being removed so that those monies are no longer referred to as “Protected Rights” and they will be treated like any other money in a pension. If you have any questions on this, please feel free to ring. Remember that this only ever affected those who were employed, as the self-employed were never part of this.

Use your Cash ISA allowance

Cash savings almost always will do better in a Cash ISA. Generally the interest rates are better and, of course, you get the interest free of tax. Since you can arrange to have immediate access to the cash in an ISA, it makes virtually no sense not to have as much of your cash in possible in Cash ISAs. In this tax year (2011/2012) each individual can put £5,340 into a Cash ISA. After the 6th of April this maximum rises to £5,640. This ISA allowance cannot be carried forward into another tax year. If you do not use your 2011/12 ISA allowance, you have lost it. Aim for an interest rate of between 2.5% and 3.0%. Note: You also have your Stocks and Shares ISA allowance, which is available for you to use if you are willing to take the risk.

Pensions implications

The Autumn Statement from the chancellor of the Exchequer George Osborne, contained only a few measures relating to pensions and retirement, with the UK’s projected £33bn overspend and the resulting extension of the government’s austerity measures offering little room for manoeuvre, particularly in terms of positive news.

On the plus side, the full basic state pension will rise to £107.45 a week in April 2012. However, the state pension age will increase to 67 between April 2026 and April 2028. Research by PWC suggests this increase in the state pension age will cost a 50-year-old £80 per month if they have to fill in these missing two years themselves while a 35-year-old would have to save an additional £35 a month to retire at the same time. This delay in the state pension age is expected to save around £60bn in today’s prices between 2026/27 and 2035/36.

Osborne also introduced a new scheme to help finance infrastructure investment in the UK that may indirectly affect a number of retirees. He is aiming to raise £20bn from UK pension funds to invest in infrastructure projects with a view to boosting the economy.

UK pensions funds have, to date, been reluctant investors in infrastructure, in spite of the long-term, index-linked income stream available on some of these projects. Principally this has been down to a lack of expertise in the asset class. A number of commentators have suggested that, if successful, this infrastructure-spending plan should provide an effective economic stimulus.

Transferring pensions – Transfer or not?

Most people switch jobs several times during their working life; however, when you change employers, it is worth thinking about the pension pot that you have accrued. You might wish to consider combining your pensions into one pot. It is easier to keep an eye on fund performance if your pensions are all under one umbrella; moreover, a single pension pot will incur less paperwork and administration, and could also generate lower costs and better overall performance. Sounds like a no-brainer? In theory yes, however, there are some important issues to consider before taking the plunge.

Most occupational pension schemes and private schemes can be transferred, but there are restrictions and potential pitfalls. It is not usually worth transferring final-salary or public-sector pension schemes; the benefits are too good to lose. You should only transfer if you have actually left a company: if your current employer contributes to your existing occupational pension scheme, you should not switch. Also it is worth noting that the money in your pension can only be transferred from one pension scheme to another (until you have retired), and not every new pension scheme accepts inward transfers. If your pension pot is very small, it may not be worthwhile switching: you will have to pay charges when you transfer, and some providers impose harsh penalties if you leave their scheme. And, if you are relatively close to retirement, you might not have sufficient time to recover the costs incurred by transferring.

According to the Pensions Advisory Service, the Department of Work & Pensions (DWP) is set to publish a consultation paper examining the consolidation of small pension pots. Possible approaches could see your pension pot moving with you when you change your employer; alternatively, when you change your job, your pension pot could be left behind and – unless you decide to opt out – the cash would automatically be transferred to a central aggregator fund. The DWP believes the changes would increase the visibility of pensions saving: instead of seeing several small figures, each individual would be able to view one larger, consolidated figure.

Transferring and aggregating your pension pots might generate significant long-term benefits; however, any decision to do so should be taken for the right reasons. Tread carefully and, above all, take expert advice before making an irreversible decision. We are well placed to help you with this.