Pensions in the news…
The pensions tax system’s radical overhaul
A radical overhaul of the pensions tax system came into force on 6th April 2006 which was known as A-Day. The changes were intended to encourage pensions saving by simplifying the previous pensions tax legislation and to allow considerable freedom of the way tax free contributions could be invested. Amongst other changes a lifetime allowance was introduced for the size of a pension fund that could be accumulated tax free by an individual. This ‘lifetime allowance’ was set at £1.6m for 2006-2008.
Are pensions unsustainable?
Clearly there is an unsustainable model in the long run with DB schemes in that medical science means that pension liabilities could escalate at an unknown rate as people live longer. Over the years sponsoring employers have tried various ways to mitigate their liabilities. The obvious way is increased contributions from the employer and requiring members to increase contributions too. Members have to agree to increased contributions or reductions in their benefits and some might say why would they? The answer is simple, the sponsoring employer does not have bottomless pockets and to force the employer to pay more and more will eventually result in the employer going under and the member losing their job and ceasing to accrue future pension rights.
Switching to ‘Defined Contribution’ pension schemes
Other ways include switching to Defined Contribution schemes (DC) which make no promise on the final level of pension and it is linked mainly to contribution levels, investment performance and annuity rates. Some schemes have closed schemes to new members, some have reduced the accrual rate whilst others changed the definition of ‘final salary’ by switching to career averages. Another way is to just increase the retirement age as has been done with the state scheme. These can all be unpopular measures, especially for those that are closest to retirement.
The change to public sector pensions
In April 2011 the Government changed the basis of annual pension increases for public sector pensions from using the Retail Prices Index (RPI) to the Consumer Prices Index (CPI). The public sector has traditionally had the most generous DB pension schemes and this was always seen as one of the major draws to the public sector along with job security. The CPI has traditionally been a lower figure than the RPI and this lead to wide scale protests by public sector employees.
Early pension release schemes and scams
To compound the misery of many struggling in a difficult financial climate many early pension release schemes have sprung up in recent years promising to unlock pension benefits early and provide tax-free cash. These are mainly scams and can result in all the pension being lost or a very small payment to the pensioner after large fees charged by these firms, a resulting tax charge of up to 55% of the payment amount and possible additional HMRC penalties are taken into account. The FSA issued a further warning about such scams on 25th February 2012.
As a further attempt to get us all to save more for our retirement, auto-enrolment has been introduced for larger firms from October 2012 with smaller firms following at later dates. Employers will be automatically required to enrol employees on a pension scheme and make contributions to that scheme.
Now that pensions issues have become news and Pandora’s box has been opened it is unlikely that they will ever be as unnoticed as they used to be.
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