Finance Matters

Posts Tagged ‘Pensions News’

As part of its plans to simplify the tax system the Government may start taxing State Pensions before they are paid out.

Pensioners whose taxable income, including their State Pension, exceeds their tax-free personal allowance, still have to pay income tax, although it is estimated that only 40 per cent of pensioners realise that their State Pension is taxable.

Out of the 12 million pensioners in Britain, around 5.6 million have income above the tax-free threshold, and therefore have to pay tax, which is claimed through their tax code.

Just before people reach state pension age they are required to give details of their income to HMRC on a Pension Coding form in order to ensure they are paying the right amount of tax.

Bringing the state pension inside the pay-as-you-earn system (PAYE) tax system would bring it in line with pensions from private providers, which are already paid net of tax.

It is expected to reduce the need for pensioner to fill out self-assessment forms and reduce errors.

However the move has been attacked by pension and consumer groups, and opposition MPs, with the proposal being labelled the ‘granny tax 2′ and concern that it would increase administrative costs.

Director of the Office of Tax Simplification, John Whiting, has admitted that it could cause cash-flow issues for some pensioners, although they would be no worse off over time.

It has also been revealed that the Government is devising a new type of guaranteed pension which would help to replace final salary schemes.

Many employers have been forced to close final salary schemes because they are too expensive.

It is therefore talking to major employers over the creation of ‘defined ambition’ pensions which would share the risks between employer and employee but provide a measure of certainty over the income received on retirement.

New research by Prudential shows that one in six people retiring this year will rely solely on their state pension because they have no workplace pension to supplement their income.

The Prudential’s ‘Class of 2012’ survey into the retirement plans of nearly 10,000 people highlighted that women are more than twice as likely as men to have only their state pension to live on when they retire.

Twenty per cent of women retiring in 2012 will have no pension provision other than their state pension, compared with just eight per cent of men.

The state pension will account for a third of total retirement income for the average retiree, the study found, with the other two-thirds coming from private savings, investments or private pensions.

With the current state pension for a single person increasing to £107.45 on 6 April, the Prudential said it is a “weak safety net” for people to rely on.

Retirees in the Midlands rely most heavily on the state pension, with just 60 per cent of their overall retirement income coming from other sources.

In contrast the state pension accounts for just 28 per cent of the overall retirement income for people living in Scotland, with other sources making up 72 per cent of their retirement income.

Vince Smith-Hughes, a retirement income expert at Prudential, said: “If people want to maintain their standard of living in retirement it is important that they start to save as much as possible as early as possible, and the vast majority should join company pension schemes where possible.”

Meanwhile, changes to the Pension Credit come into force this month, with many pensioners finding that the planned increase in state pension will be almost wiped out by a fall in the means-tested element of pension credit.

The threshold has been raised for this benefit, which was designed to help those with a modest amount of savings.

The government revealed today that automatic enrolment rates for the tax year to April 2013 will be aligned with tax and National Insurance thresholds to make implementation simple for firms.

Auto-enrolment is being phased in from 1 October, starting with the largest firms, and should be in full effect by the middle of 2017.

It will mean that workers will be automatically enrolled into their employer’s qualifying pension scheme without the worker having to take any action.

Following today’s publication of the Government’s response to a consultation on the earnings threshold, Minister for Pensions Steve Webb said:

“The overwhelming response to our consultation was the call to align the automatic enrolment trigger with existing payroll thresholds.

“This will help firms make a success of these reforms, as they will be able to better understand who is eligible to be enrolled.

“These changes strike the right balance between getting as many people into workplace pension saving as possible and ensuring that we do not enrol some people who would not financially benefit from saving.”

Earlier this week the government announced higher earnings thresholds for automatic enrolment into pension schemes.

Minimum contributions will be payable on earnings between £5,564 and £42,475.

When the automatic enrolment policy was first announced in 2008, contributions were expected to apply to earnings between £5,035 and £33,500.

The earnings band has now been increased in line with growth in average earnings since that date.

The point at which staff and employers are obliged to make contributions has also been increased, to earnings of £8,105, compared with £7,475 previously.

Auto-enrolment is being introduced to increase the number of people saving for their retirement.

It has been estimated that around seven million people are either saving too little for their retirement or are saving nothing at all.

However, the National Association of Pension Funds (NAPF) has warned that auto-enrolment will mean that workers who change jobs several times could accumulate several small pension pots.

The NAPF is calling on the Government to help savers with small pension pots which are can be expensive to administer and may not offer the best value for money for savers.

It wants the Government to establish a framework for ‘Super Trusts’ which will allow workers to consolidate their pension provision.

Changes announced in today’s budget mean that four million pensioners will be worse off.

The budget included controversial proposals to lower the income tax allowance for people over 65 to £9,205 from April.

This will bring pensioners in line with the general population.

The over 65s currently benefit from a more generous tax-free allowance of £10,500, which will be frozen for existing pensioners.

The move will raise around £1 billion annually for the Government and will help to offset the increase in tax-free allowance from £8,105 to £9,205 for the under 65s.

The change has been called a ‘granny tax’ and has caused outrage among campaigners for the elderly.

Dr Ros Altmann, the Director-General of Saga said: ‘This is an outrageous assault on decent middle-class pensioners.

‘This Budget contains an enormous stealth tax for older people. Over the next five years, pensioners with an income of between £10,000 and £24,000 will be paying an extra £3 billion in tax while richer pensioners are left unaffected.

The termination of age-related personal allowances was recommended by the Office for Tax Simplification.

It will eliminate the need for 150,000 pensioners a year to fill out self-assessment tax returns as a result of the separate allowances.

The Chancellor also announced plans to scrap the second state pension, creating a single tier pension as part of a wider simplification of the tax system.

The means-tested second state pension is considered too complex.

The single tier pension, which will be contributions based, is expected to be about £140 per week, while the current full basic state pension will increase from £102.15 to £107.45 a week from April.

The Chancellor also revealed that the state pension age will rise automatically in line with increased in longevity.

Supermarket retailer Tesco has increased its pension age by two years to 67 for the 170,000 employees who contribute to the company’s scheme.

Tesco employees will still be able to retire from the age of 55 at a reduced pension rate, but they will only receive a full pension if they work until 67.

The retailer has also decided to use the consumer prices index (CPI) to measure inflation, rather than the retail prices index (RPI).

The government recently linked public-sector pensions to the CPI rather than the RPI.

As the CPI rises more slowly than the RIP, the annual inflation-linked pension increase will cost less but could mean employees will be thousands of pounds worse off during their retirement.

However the cost savings Tesco will gain from the changes will allow it to keep its defined benefit scheme open when many companies have closed theirs.

Tesco said it believed it was one of only four FTSE 100 companies which still provide a defined benefit pension scheme for their employees.

The changes to Tesco’s pension scheme will take effect from June 1.

The latest official figures from the Office for National Statistics show that the average retirement age for both men and women has risen steadily over the past ten years.

The average retirement age for men reached 64.6 years in 2010, while the average retirement age for woman increased to 62.3 years.

The age at which men stop working is now in line with the state pension for the first time in 26 years.

Joanne Segars, chief executive of the National Association of Pension Funds, warned that many people may be unable to afford to retire when they wish because of inadequate savings and pensions.

“We need to get more people saving for their retirement, and to encourage them to start as early as possible.

The state pension is also in need of urgent reform and we need a much simpler and more generous system,” she said.