EBS

There has been widespread speculation regarding the State Pension following reports in one national newspaper. Just in case you missed it, these are the key points of the story:

• The source of this story is a national newspaper. Whilst nothing has been denied by Government, there is no official source, though Vince Cable has been quoted extensively. Some speculators are suggesting that this was a controlled leak to gauge public reaction…
• The basic state pension will be increased to £140pw (currently £97.65 though with a minimum income guarantee of £132.60pw and £198.45 for couples).
• This increased pension will replace entitlement to all other state pensions including SERPS, S2P and pensions credit.
• The new pension would be based on years of UK residence rather than NI contributions/credits. This would significantly benefit women & carers.
• The new benefit will only apply to new pensioners after the implementation date , it will not apply to current pensioners. 2015 is the earliest likely implementation date.

What these proposals would do is simplify the state pension entitlement process and EBS would welcome any change which eliminates any disincentive to save for retirement.

There are though many issues to consider:

• How will this be paid for? It is well-documented that the UK cannot afford the current level of State Pension provision and whilst there would be savings to be made through a simplified process, these would take many years to appear, especially as existing pensioners would remain on their current entitlements.
• What happens to those individuals who have accumulated a greater entitlement than £140pw – particularly by buying additional credits? Will they maintain their greater entitlement or is this a ‘for better or for worse’ change. If the cost is to be met through simplifying the process it might be fair to assume the latter.
• How will UK residence be determined?
• Is there an added incentive to contract-out of S2P as presumably any private pension funds will accumulate in addition to the State provision?

As is often the case, more questions than answers, but EBS remains on hand to handle any questions which employees may have and will be monitoring developments.

EBS strongly recommends that every employee secures an up to date state pension forecast (BR19) which is available from www.direct.gov.uk.

Following its review of Labour’s anti-forestalling proposals, the Government recently published its proposals on how tax-relief should be granted on pension contributions:

• The annual allowance which can be paid into an approved pension scheme and attract income tax relief at the marginal rate is to be £50,000pa. This is a significant reduction from the current limit (£255,000) but exceeds Labour’s proposal of £20,000 and industry speculation of £30-40,000. It also permits income tax relief of up to 50%.
• The lifetime allowance is to be reduced by £300,000 to £1.5M. This is the maximum retirement fund any individual can accumulate within approved pension schemes or plans.
• These allowances will be frozen until at least 2015/16.
• No changes have been announced regarding the 25% Pension Commencement Lump Sum – more commonly referred to as ‘tax-free cash’ – available on retirement.
• Members of defined benefit – or ‘final salary’ – schemes will have a ‘contribution level” determined by multiplying their annual increase in accrued benefit by a factor of 16.  This is greater than initial recommendations of 10 but less than than media speculation of up to 20.  Any increase in pension entitlement of more than £3,125pa  would give rise to an income tax charge at the recipients marginal rate of tax which would be collected via self-assessment.
• To prevent penalising employees who receive a significant increase in pensions accrual due to promotion or redundancy which exceeds the annual allowance, any unused allowance from the previous three years will be available to offset against the excess.
• Ongoing consultation is considering whether to allow the pension scheme to pay the tax on the individual’s behalf or for the member to have their pension reduced rather than pay the explicit income tax charge. EBS will be monitoring developments.
• Finally, the paper commented that legislation will be introduced to ensure that Employee Benefit Trusts and Funded Employer-Financed Retirement Benefit Schemes are ‘less attractive than other forms of remuneration’.

EBS can deliver one-to-one employee clinics or group presentations outlining these changes and any potential impact on employees to ensure that your top people are kept well-informed and made aware of their retirement planning options. These can also cover income tax restrictions on six-figure earners.

Contact EBS for more details or for testimonials on our work so far..

Download our Budget Summary guide here