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March Newsletter 2011

Welcome to our Spring Newsletter, we hope that the first couple of months of 2011 have been good for you.

This newsletter focuses on some of the forthcoming changes to pensions and how they are likely to affect you and the decisions you make.

So, whether you are an employer or employee, soon to reach retirement or some way off, it is important that you are aware of these changes so that you can plan ahead.

In this issue:

NEST – What will your requirements as an employer be and when

We had some very interesting results from our online survey last December regarding employee benefits, including the following snapshot relating to employee pension schemes:

Of those who responded to the survey:-

  • 7.1%  were unaware of the NEST regulations
  • 42.9%  currently do not provide any employee benefits (including a pension)
  • 23.8%  are not considering providing any benefits in the future
  • Only 16.7% currently provide a compulsory pension scheme

We therefore thought it would be appropriate to give a reminder of some of the key points of the new regulations.

Do I use my existing scheme or NEST?

From 2012 (or later for smaller companies) you’ll have to decide whether to automatically enrol eligible employees into your own company pension scheme (if it qualifies) or NEST (National Employment Savings Trust). You could choose one solution for one set of employees and another for a different set of employees.

Which solution is most suitable for your business depends on many things. Simple, quick and efficient administration will be paramount – collecting the right contributions at the right time and applying them promptly will be crucial in running a successful scheme. Pension providers offer various flexible solutions to help meet this need and have extensive experience in this area.

How much will this cost me?

The next thing to decide is how much you want to contribute and how you’ll accommodate the additional cost.

Although the details aren’t finalised yet, it’s certainly worthwhile starting to look at pensions reform and discuss new responsibilities and decisions sooner rather than later.

The total minimum pension contribution that needs to be paid into a scheme is 8% of qualifying earnings, with at least 3% being contributed by the employer. Qualifying earnings is different from how most employers currently calculate pensionable earnings, so please let us know if you require further information regarding this.

If you already offer your workforce a pension scheme then your new responsibilities may mean a much higher membership take-up. By looking at the impact in advance it may lessen the workload in 2012.

Who is Eligible?

Under pensions reform the minimum contribution requirements apply to those who:

  • are jobholders aged between at least 22 and under state pension age, or
  • are other jobholders aged at least 16 but less than 75 who have opted in to an auto-enrolment scheme, and
  • meet the above criteria and who are already active members of a qualifying scheme

If you haven’t already considered how NEST may impact your business it’s important to address this matter sooner rather than later.  Contact us for a no obligation review of your current scheme (where we can establish whether it is a ‘qualifying scheme’), or to discuss the most suitable solution for you going forward.

Hot off the Press … European Court Ruling

The European Court of Justice ruled this week that insurers cannot price products based on gender from December 21, 2012. The move will mean that providers will radically have to change the way they price annuities, life insurance, and health insurance.

This ruling is a seismic event which will fundamentally reshape the retirement landscape. It is now imperative that individuals shop around with their pension fund at retirement; if they do not they risk ending up with a homogenised standard–issue annuity which could present a poor deal.

The ruling could have repercussions for all consumers.  Prices are likely to go up across the board as insurance companies try to build in the new risk. Women currently pay less than men for life insurance, but pay more for income protection. It is very unlikely premiums will meet in the middle because there will be huge costs to the industry of re-pricing and updating their systems so everyone will end up paying the higher rate!

We aim to keep you informed of developments as they unfold over the coming months.

Removal of annuity requirement at 75

Britons could soon enjoy greater financial flexibility in retirement thanks to draft legislation released by the UK Treasury.

From 6 April 2011, individuals will no longer be forced to buy an annuity with the proceeds of their personal pension scheme at any age. Instead, they will continue to have the options to save it or move to a drawdown (unsecured pension) arrangement in which their pension is left invested and money is taken directly from that pot.

The increase in flexibility will end a compulsory purchase system which was introduced by the previous government. Increasing life expectancy and the fact that older people are working longer, coupled with the current environment of low interest rates and therefore poor annuity rates was making their original 75-year cut-off appear a little draconian. That cut off has now been reset to 77 to give time for this legislation to be finalised.

The National Association of Pension Funds (NAPF) welcomed the additional flexibility, though they do believe that the new rules will most likely benefit those with larger pension pots. Indeed, many people are still likely to choose an annuity simply to fix their income expectations and enable them to plan. More fundamentally, however, the NAPF warned that most people are simply not saving enough into their pension schemes. They have therefore urged the government to do more to encourage and support strong occupational pension schemes and “creative, flexible” ways for individuals to save for their retirement in the first place.

As this is such a complex area it is important to consider your options in detail before you actually come to the age where you wish to take benefits from your pension. If you want to know more about this and how it may affect you please contact us.

Make the most of contributing to pensions

From April 2011 tax free contributions of £50,000 per tax year will apply to everyone irrespective of their earnings.

This annual allowance amount applies every year including the year in which benefits come into payment.

Previously the limit was the lower of earnings or £255,000. This new limit is a significant reduction for high earners that is targeted to affect an estimated 100,000 pension savers, 80% of whom will have incomes over £100,000.

Contributions made by or on behalf of individuals that are in excess of £50,000 will trigger an annual allowance charge.  This charge effectively removes tax relief on the pension contributions that are in excess of the annual allowance.

Windfall?

However before 6 April 2011 the Annual Allowance charge is not applied in any year in which an individual takes the full benefits of his or her pension fund.   This new provision means that there is a potential windfall for individuals aged 55 or over by April 2011.  Please contact us if you wish to discuss this opportunity in more detail.

Both employee and employer contributions will be taken into account in determining whether the annual allowance has been exceeded.  Accordingly notwithstanding the fact that an individual does not contribute to his pension fund, his employer may well be doing so and so he may still be affected by the new limit.  If the employer makes contributions in excess of the available annual allowance then a tax charge will be due by the employee on the value of the contribution at their marginal rate.

Individuals will receive tax relief at their highest tax band rate (i.e. 20%, 40% or 50%) on all personal contributions within the annual allowance.

Roll over of annual allowance

From April 6th 2011, any unused amount of annual allowance can be carried forward for up to three tax years.  This provision operates with effect from 2008/2009 but assumes that the annual allowance was only £50,000 in those earlier tax years. However this provision is only available if an individual was a member of a registered pension scheme in the tax year from which the relief is to be carried forward.

If you are affected by the new pension contribution amounts we would be pleased to discuss your options to ensure that you do not miss out on any contribution opportunities.

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