Will you be affected by the impending new lifetime allowance limit changes

Thousands of pension savers could be impacted by unless they act swiftly

If you are making high levels of pension contributions you will need to obtain professional financial advice to make sure that you know whether you will be affected by the impending new lifetime allowance (LTA) limit changes. Thousands of pension savers could be impacted by the forthcoming changes unless they act swiftly.

Your total pension savings

You should check what the value of your total pension savings will be as at 6 April 2014. It is also particularly important to bear in mind how much money you have accumulated in any legacy pension schemes from a previous employer, as your current employer will not necessarily know you have one and will therefore not count this towards your total amount.

According to Standard Life, if you’re 10 years from retirement with a current pension fund of £700,000 you could exceed your allowance if your pot grows at 7% a year – even if you don’t pay another penny into it. Yet it’s unlikely you were even aware you had a problem. Of course, growth could be higher or lower depending on your investment performance and we don’t know what the allowance is likely to be in 10 years’ time.

Linked to your final salary

It’s even trickier with some company pension schemes which are linked to your final salary. It’s easy to underestimate just how valuable a final salary pension is – or how it’s tested against the LTA. You could be surprised to learn, for example, that a £25,000 paid-up pension from a previous job already eats up £500,000 of your allowance. Adding in revaluation for leaving up to retirement, at say 3.3% over 10 years, takes the pension up to £34,590 – using up almost £692,000 LTA.

You can save as much as you like towards your pension but there is a limit on the amount of tax relief you can get. The LTA is the maximum amount of pension saving you can build up over your life that will benefit from tax relief. If you build up pension savings worth more than the LTA you’ll pay a tax charge on the excess.

An individual’s entire pension savings

From 6 April 2014 the LTA will reduce from £1.5 million to £1.25 million. It applies to an individual’s entire pension savings (apart from the State Pension). The figure may sound high but many thousands of people could be affected, especially those in final-salary schemes who have built their entitlement through many years’ work.

If your pension savings are worth more than the LTA when you take your benefits, you’ll have to pay the LTA tax charge on the excess unless you have some form of LTA protection. The rate depends on how this excess is paid to you. If the amount over the LTA is paid as a lump sum – the rate is 55%, and paid as pension – the rate is 25%.
Many people had built up pension pots worth more than £1.5 million before 6 April 2006 when the LTA was introduced. LTA protection was introduced so that they didn’t have to pay the LTA tax charge on pension funds built up before this date.

Two ways you can protect yourself
There are two ways you can protect yourself from paying the LTA charge. The most common is to apply for ‘Fixed Protection’, which effectively caps your LTA at £1.5 million.

The scheme, termed by HMRC as Fixed Protection 2014, allows savers with pensions likely to exceed the £1.25 million cap to apply now – before the deadline of 6 April 2014 – for an extension to the limit. Applying for the protection will benefit those near to retirement and wanting to maximise the value of their pot – as well as savers who expect the value of their pension to grow without making any new contributions.

There are a number of restrictions to be aware of. Individuals in defined-contribution pension schemes cannot add new benefits to their existing pot. Pension savers in defined-benefits schemes can only build up benefits in line with inflation on an annual basis. No new pension arrangement may be started, other than to receive a transfer of rights from an existing pension arrangement.

An attractive alternative solution for individuals

The second way to avoid the 55% tax penalty is to apply for ‘Individual Protection’. This option may be an attractive solution for individuals who will not receive any alternative remuneration from their employer if they opt-out of their pension scheme. Savers can apply for this protection from April 6.

It is possible to apply for both Individual Protection and Fixed Protection. This would give you a LTA of £1.5 million (Fixed Protection) and contributions must stop. If you choose to restart contributions in the future, your Fixed Protection would be lost. But you would still benefit from your Individual Protection allowance rather than the standard £1.25 million LTA.

The annual allowance, meaning the amount of pension savings or contributions that can be made in any one year, will also reduce commencing 6 April 2014 from £50,000 to £40,000. The rules for the annual allowance are more complicated than those for the LTA.

In sickness or in wealth

Could you lose thousands from your wages due to sickness?

A new report unveiled by LV= reveals that the average Briton spends almost a year (360 days) off sick. With on average 252 days in a working year, this equates to almost a year and a half of their working life.

Current health of the UK workforce

The first National Sickness Report from LV= looks at the current health of the UK workforce[1], gauges their attitude towards sickness, and looks at how they guard against the impact of long-term absence.

Long-term illnesses affecting working Britons

According to the figures, 131 million days are lost per year due to sickness absences, equivalent to six per worker in the UK, and over 13 million of these were lost due to stress and depression[2]. The research, conducted among full-time workers, reveals that stress and depression are two of the most common long-term illnesses affecting working Britons today. Workers who have suffered from stress or depression during their working lives say they took an average of two and a half months (81 days) off to recover.

The report reveals that more than a third (36%) of workers do not receive sick pay cover from their employer. This means that more than 7.8 million workers would only qualify for Statutory Sick Pay of £86.70 per week if they fell ill.

Average amount of time off to recover

Assuming the average UK wage is £26,664[3], an employee suffering from stress and depression who only receives Statutory Sick Pay could lose up to £4,671[4] – that’s a sixth of their salary (18%) – if they took the average amount of time off to recover.

Whilst the average amount of time someone has off with stress is 81 days, over 650,000 (2.9%) UK workers have been off with stress for more than a year during their career. Indeed, in the last three years 1 in 50 (435,800) workers have been off sick for more than a year. Of those workers who have been off sick, more than half (57%) underestimated how long they would take to recover when they fell ill.

It’s not just stress that could leave working Britons feeling the financial pinch, however. Other serious ailments, such as a bad back, could cost a worker in excess of £3,000 in lost wages.

Bridging the gap– the back-up plan

When asked about their company’s sick pay policy, more than half (52%) of workers admitted to being in the dark as to what they would be entitled to and a quarter (26%) admitted they didn’t know how they would manage to make ends meet if they were sick and without their regular income. Over a third (35%) of respondents said that they would dip into their savings to bridge an income gap. However, a quarter (23%) said their savings would run dry after just two months, and only one in ten said they have enough put by to support themselves for more than a year.

None of us are invincible

Whilst no one wants to think about getting ill, unfortunately none of us are invincible and the reality is that some people will need to be off work for a large chunk of time. When we buy a car, a washing machine or even a phone, we resign ourselves to the fact that at some point it might break down; however, far too few of us have a back-up plan in place that would protect our income if we found ourselves unable to work.

Source:
1. According to the Office for National Statistics ‘Labour Market Statistics’ (September 2013), there are 21,790,000 Britons in full-time employment
2. According to the Office for National Statistics Sickness Absence in the Labour Market 2012
3. According to the Office for National Statistics
4. According to the research conducted by OnePoll on behalf of LV= in September 2013, on average a worker ill with stress/depression will not return to work for an average of 81 days. Based on the fact that Statutory Sick Pay (SSP) of £86.70 per week is payable from the 4th consecutive day of absence average and would therefore be paid for 77 days or 11 weeks an employee would receive £953.70 whilst they were off. The average UK salary is £26,664 which works out at £73.05 per day, so over 77 days an employee would receive £5,625. An employee on SSP would receive £4,671 less during the time they were on unpaid sick leave. All other calculations and statistics based on the research conducted by OnePoll on behalf of LV= in September 2013.

Different types of annuity

Choosing the right option for you

In the UK, there are basically two types of annuity:

  • pension annuities (compulsory purchase)
  • purchased life annuities (voluntary purchase)

All annuities share the following characteristics:

  • they pay a level of guaranteed income
  • they turn a lump sum into a stream of future income
  • lifetime annuities guarantee to pay an income for as long as you are alive, no matter how long you live
  • when you die, payments stop, unless you have chosen a joint-life annuity, a guaranteed payment period or a value protected (money back) annuity

Tailoring the income to meet your personal circumstances
Annuities have a number of important and valuable options that allow you to tailor the income to meet your personal circumstances.

Single or joint
As you approach retirement, you’ll need to decide how you want to take an income from your pension fund. One key thing to decide is whether you want an income just for yourself (individual) or one that would continue to pay out to a partner or dependant if you were to die (joint). Your choice of income could make a big difference to you and a partner or dependant, so it’s important to consider your options.

Fixed-term annuities
If you need an income in retirement, but are unwilling to commit to an annuity for the rest of your life, you can use all, or part, of your pension fund to buy an annuity for a set number of years. These are called ‘fixed-term annuities’.

Fixed or increasing annuities
If you’re buying an annuity to provide you with a retirement income, one of the key choices you must make is whether to opt for an annuity that provides a fixed pension income or one that increases each year. You’ll initially get more with a fixed retirement income than with an increasing one, but its buying power will go down over time.

Investment-linked annuities
With an investment-linked annuity, your pension income varies to reflect changes in the value of investments, such as stocks and shares. This means you can benefit from stock market growth after your retirement. There’s also a risk that the value of your income could fall, but most investment-linked annuities limit this risk.