Tag Archives: Tom McPhail

The Collapse of Private Pensions

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According to data published by the Office for National Statistics today, membership of private pensions (as opposed to the National Insurance funded state pension) has hit a new low; just 35% of men and 32% of women aged between 16 and 64 were active members of a private pension in 2011/12.

Membership of Defined Benefit pensions has declined from 46% of employees in 1997 to just 28% in 2012, almost exclusively now in the public sector.

Participation rates of employees varies dramatically between public and private sectors, with 85% of men and 81% of women in the public sector, compared to 36% and 26% respectively in the private sector.

Hargreaves Lansdown comment, Tom McPhail, Head of Pensions Research ‘These figures illustrate dramatically how important it is that auto-enrolment succeeds over the next 5 years. It is vital that nothing is done to jeopardise this project and that everything possible is done to encourage people to stay enrolled in their workplace pensions. Recent calls for reform of pension taxation or for small businesses to be exempt from auto-enrolment should be postponed or ignored until the foundations of a savings culture have been properly laid.’

Separately, the ONS has reported average contribution rates as 19.2% of payroll for Defined Benefits schemes and just 9.4% for Defined Contribution arrangements.

Tom McPhail: ‘The inevitable consequence of this level of pension funding is that millions of people will have to work on into their 70s because they won’t be able to afford to retire earlier. All defined contribution members should be shown what their contributions are likely to buy for them in the way of a retirement income, this pension projection should be updated regularly and members should be encouraged to engage with their retirement planning. 9.4% as an average is simply not enough. Investors should aim to be contributing at least 12% of their income towards their retirement. For a more personal estimate, they should use an online pension calculator.’

Many pension calculators are available on the internet, this is one example http://www.hl.co.uk/pensions/interactive-calculators/pension-calculator

What do you think? Do you have a pension?

Tax year end: last minute pension planning tips

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  • Investors are urged not to forget the ‘forgotten’ allowances
  • Falling annual allowance emphasises the importance of making hay while the sun shines
  • 50% tax relief is only available until 5th April
  • Bed and Sipp
Use your earnings related pension contribution allowance. For the past three years, we have seen a steady erosion in pension contribution allowances, with both the annual and lifetime allowances being cut. Both the Liberal Democrats and Labour have threatened to go further and limit the rates of tax relief available on pension contributions. If you have spare capital which you are looking to invest for your retirement, then it makes sense to get on and do it before 6 April.
Tom McPhail, Head of Pensions Research “Pensions are sometimes the forgotten allowance at this time of year when attention tends to be focused on ISAs, but with retirement saving tax breaks coming under increasing pressure from the Chancellor, wise investors will make hay while the sun shines. If you don’t use the allowances now, you may not get the chance next year.”
Non-earner’s pensions
It makes sense to share household retirement savings to take full advantage of the tax free personal allowance in retirement. Non-earners can contribute up to £3,600 a year to a pension and enjoy tax relief on their contributions. With personal allowances set to rise to £9,440 in 2013/14, a couple in retirement could enjoy a household income of nearly £19,000 a year without having to pay any tax – but only if they have shared their pension saving equally between them.
It is also possible to make pension contributions for your children – an effective way to give them a head start on their own retirement saving, as well as reducing a potential inheritance tax bill.
Bed and Sipp
Use existing investments to make a pension contribution. Even if you don’t have cash available to invest in a pension, you can potentially use other investments.
For example: Peter has some shares which he bought 10 years ago for £10,000. Today they are worth £15,000. He sells the shares, realising a gain of £5,000, which falls within his Capital Gains Tax allowance of £10,600. He invests the proceeds in his pension and immediately repurchases the share portfolio within his Sipp. As well as having now sheltered his investment within a pension for tax purposes, he also benefits from immediate tax relief of £3,750 which is added to his pension. If he is a higher rate taxpayer Peter can claim a further £3,750 after the end of the tax year.
Take advantage of the 50% tax rate.
For the (un)lucky few who pay 50% income tax, it makes sense to invest in a pension before the end of the tax year. Any contributions made from 6 April onwards will only be eligible for relief at 45%. If using carry forward as well, this could mean up to an additional £10,000 in tax relief.
Carry forward unused relief to boost contributions. If you have the capital to spare, then provided you also have the earnings to justify the contribution, it is possible to carry forward unused pension tax relief from up to 3 years ago. This means it is possible to make a pension contribution of up to £200,000, which for a 50% tax payer could then result in up to £100,000 of tax relief.
Plan ahead for flexible drawdown.
You’re not allowed to make any pension contributions in the same tax year in which you start flexible drawdown. So anyone planning on using flexible drawdown may want to top up their pension with any final contributions before 6th April – any contributions after that date could mean having to wait up to another 12 months before getting full access to their pension funds.