Tag Archive | "retirement"

Are pension rules set to change in the March Budget?

Contractor accountants may be concerned to learn that George Osborne is considering changing tax relief on pension contributions when he delivers the March Budget.

He has various options available to him. If he cut the relief on all contributions to 20%, taxpayers who pay the higher 40% rate would lose £20 for each £100 they invested and those paying the 50% top rate would lose £30 per £100 invested. On top of that, pensions are subject to tax so a taxpayer might have to pay tax at 40% or even 50% on their pension when they retire.

If this happened, a lot of people in defined benefit schemes might have to file a tax return because the pension benefits could not be determined as easily as they can with a defined contribution scheme.

PwC’s head of pensions, Raj Mody, explained that if tax relief on pensions was reduced, those people who pay a higher rate of tax could be better off if they received cash and paid income tax on it at the time.

The Chancellor is also considering reducing the annual allowance of £50,000. PwC says this would be easier to implement and people would still have an incentive to invest money in a pension fund.

Another option would be to reduce the tax-free lump sum people are entitled to on retirement. Those approaching retirement would then pay more tax than they expected on their pension pot.

Mody did warn that there have already been various changes to pensions in recent years and the public may lose trust completely if the Government implements further amendments.

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Why don’t accountants plan for their own retirement?

Although they are good at giving financial advice to others, chartered accountants seem to be surprising lethargic when it comes to planning for their own retirement.

Kath Haines, the chief executive of the Chartered Accountants’ Benevolent Association, said their members are often ill-prepared for the changes that come with retirement.

As well as financial considerations, accountants may also find it challenging to decide how to spend their time and cope with the impact retirement has on their relationships. One of the participants in the CABA research admitted spending more time planning an annual holiday than retirement, a situation which led Haines to conclude that retirement catches accountants unaware.

Contractor accountants have less opportunity to ease themselves gently into retirement because there are few opportunities for part-time and temporary work. Haines pointed out that it would be better if they could transition towards retirement by reducing their working hours gradually. Contractor accountants and small practitioners may also have problems retiring due to problems selling their business or succession planning.

CABA is reviewing its services with the aim of providing more support to accountants needing help and guidance preparing for their retirement.

Meanwhile, the Organisation for Economic Co-operation and Development has suggested that the coalition should be encouraging employees to delay retirement in order to boost tax take.

The latest economic forecast summary from the OECD says that if the effective retirement age was increased, it would lessen some of the fiscal pressures.

Under current rules, if a person continues working after retirement age, their state pension payments rise by 1% for every five weeks deferment. If someone delays retirement by a year, they can take the 10.4% deferment as a lump sum payment with interest.

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Smallest firms could get more time to prepare for pensions auto-enrolment

Smaller firms may be pleased to learn that the government is considering giving them more time to get ready for automatically enrolling their employees in pension schemes.

The Pensions Regulator last week issued guidance for employers that says smaller firms sharing PAYE schemes with other like businesses will see their staging dates deferred by up to 23 months.

The new alterations are expected to be written into legislation prior to the Pensions Bill becoming law and will cover firms with less than 10 employees who are included in a larger PAYE scheme which has in excess of 239 members.

A business fitting the above description would have until the first of January 2016 to implement auto-enrolment.

The Pensions Regulator has also launched some interactive tools to explain the new regulations. As from October next year, employers and recruitment businesses will be required to auto-enrol workers after they have completed 12 weeks service. Employees then have the option of opting out if they do not want to participate in the scheme their employer has chosen. This new duty is to be phased in over several years, starting with larger organisations.

The interactive tools will help businesses establish their staging date, help them understand which employees need to be enrolled and how to enrol them, and what level of contribution is required for each eligible employee.

The REC still has concerns that auto-enrolment will create challenges for recruiters due to high levels of turnover amongst temps and the expectation that a lot of agency workers will opt-out of the pension scheme they have been enrolled in.

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Employers may still be able to make compulsory retirements

Research by the Employment Law Advisory Services has discovered that more than 50% of SMEs, including accountants for contractors, are not prepared for the abolition of the default retirement age.

From the 1st of October this year, employers will not be allowed to make workers retire when they reach the age of 65.

The majority of firms are aware that the rule is about to change but a lot of them are still struggling with the application of the rules. Peter Mooney, the head of employment law at ELAS, said many firms haven’t thought through how they will be affected by the new law.

Businesses employing older workers could have to pay for expensive healthcare and death-in-service benefits and adjustments for disabilities, access requirements and risk assessments may need revising to suit the ageing workforce.

However, age campaigners claim that employers may be able to make compulsory retirements to keep costs down, after a recent ruling in the European Court of Justice.

The case concerned a German state prosecutor, Gerhard Fuchs, who was forced to retire when he reached 65. He was employed by the German state of Hessen, and compulsory retirement was part of a cost-saving policy. The ECJ ruled in the employer’s favour saying the need to keep costs down could be seen as justification for a compulsory retirement age.

Chris Ball, from The Age and Employment Network, explained that although the government has abolished the default retirement age, the ECJ has provided employers with “wriggle room” to justify compulsory retirements.

He went on to say that the ruling appears to mean that a compulsory retirement age can be justified in order to promote a younger workforce. Controversially, it also suggests it is legal to retire older member of staff to stop possible disputes about employees’ fitness to continue working once they reach a certain age. This could throw the door open for employers to retire older workers off early.

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Red tape is still stopping businesses grow

Small enterprises, including accountants for contractors, in the UK say that one of the most onerous and complex issues they face is still excessive red tape.

According to a recent survey by the FSB, 27% of UK businesses think increased regulation makes it hard to expand and 33% believe regulation provides the biggest obstacle to growth.

The coalition has placed a three year moratorium on new domestic regulations for micro businesses. But the FSB has expressed disappointment that some large regulations are not covered by this moratorium. Of particular concern are regulations which increase the administrative and organisational burdens on small firms, such as extending paternity rights and removing the default retirement age.

The Home Office recently invited businesses to tell the coalition what it should do to reduce bureaucracy and boost business growth. The Red Tape Challenge website has been set up to give everybody the opportunity to contribute their opinions and suggestions on the subject of bureaucracy.

One problem that we face in the UK is that even if we scrap certain domestic regulations; we can do nothing about the legislation drawn up in Brussels. So even though micro firms are exempt from our government’s regulations during the moratorium, they still have to comply with edicts drawn up in the EU. However, the government does admit that it may have enforced some EU regulations beyond the minimum legal requirement.

Reducing bureaucracy is going to be a long process. The Red Tape Challenge is open until April 2013 and will look at more than 21,000 active rules and regulations.

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Don’t rely on your home to fund your retirement

The government wants to see the housing market depressed in order to make it easier for first time buyers to buy a property.

Experts have already predicted that house prices will fall this year by between 6% and 10% and homeowners are being warned that they should not expect to fund their retirement by releasing home equity.

Councils and property developers will be encouraged to construct more homes, which will depress the market and help first-time buyers.

On Monday, Grant Shapps, the housing minister, said that property should be regarded as somewhere to live rather than an investment. He wants to see a rational housing market where property prices rose by less than salaries. If property values were to fall in real terms this would benefit the millions of young people who are currently unable to afford to buy, he added.

Shapps pointed out that it was crazy for housing to be so unaffordable and that past scenarios whereby house prices boomed over a short period of time was unhelpful.

This may seem hypocritical coming from a man who is thought of as an astute property speculator. He profited by £250,000 on one property deal and his current five-bedroomed home would realise over £1 million if sold.

Whilst it might benefit first-time buyers to have a rational housing market, homeowners who were relying on home equity to fund their retirement will not welcome the move. They have already seen their pension funds severely eroded by the economic crisis.

Homeowners now have to remain in their properties for longer than ever, according to new figures from the CML. They now spend nearly double the length of time in their current home before putting it up for sale compared to the beginning of the recession. In 2007, people stayed about 11 years in a property; now it is 21.5 years.

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Rainy day savings are making a comeback

The recession has fuelled an increase in rainy day savings, according to Jonathan Davis, an economist at Jonathan Davis Wealth Management.

In fact a recent survey from Mintel found that around 43% of Britons have prioritised saving for a rainy day this year, up from just 15% last year.

Davis said the credit crisis was a wake-up call for a lot of people, who realised that for the last ten years they have based their life on debt.

This is a little like closing the stable door after the horse has bolted but it is still encouraging that people are now looking to give themselves a financial cushion in case of a disaster such as redundancy. Savers should have a reserve fund equal to at least six months average spending, to get them through unforeseen difficulties, advised Davis.

Although rainy day saving may be on the increase, few people are saving for their retirement and this is of paramount importance, the expert added.

Savers may not be so happy to learn that the Bank of England has forecast that inflation is going to stay above its 2% target well into next year. Currently the CPI is standing at an annual rate of 3.1%, meaning a basic rate taxpayer needs a savings account that pays at least 3.8% in order to protect the value of their investment.

Now could well be the time for contractors to sit down with their contractor accountant and take a good look at incomings and outgoings and decide how to maximise your assets.

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Female contractor accountants should start saving now

One expert is advising women to make financial provision for their own retirement rather than depending on their partner for support.

Tony McPhail, from Hargreaves Lansdown, says that women should have an extra incentive to save money for their retirement as they are more likely to suffer financial hardship in old age.

Women tend to live longer than men and because many women take career breaks to have children, they end up with less retirement savings rights. Add to that the fact that husbands often save in a pension scheme that dies with them, leaving the widow without an income, and it is easy to see why women need to take more of a forward thinking approach to retirement.

McPhail made his comments after a survey by Prudential revealed that more than 1 in 4 employed women (28%) aged 40 and above plan to survive on their husband’s pension after they’ve left work.

However, there is growing concern that the majority of people will not have saved anywhere near enough money during their employment to enable them to enjoy their retirement. A recent survey from Aviva found that every adult will need to save on average £10,300 a year in order to retire comfortably.

The senior policy adviser for the National Association of Pension Funds, James Walsh, said that we are facing a pensions crisis in the UK and the sooner people start planning for their retirement, the better. In fact the UK is in the unenviable position of having the largest per person pensions gap in all of Europe, followed by Germany, the Republic of Ireland, France, Spain and Russia.

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Pension apathy in the UK

Out of the UK’s 17 million strong workforce, nearly half of them haven’t even reviewed their pension plans, according to new data released recently by asset manager Barings. Contractor accountants might want to consider whether their clients fall into this bracket!

ISM Research conducted the poll on Barings’ behalf and found that 48 per cent of those interviewed had never reviewed their pension plan. 21 per cent of respondents admitted to reviewing their plan sometime in the previous year.

The survey, gathered information from 1,478 workers, weighing the answers by population, found that a full one third of the people who answered that they had indeed reviewed their pension plan couldn’t recall if they had chosen the default contribution option or not contributions.

Nearly 20 per cent of respondents that had no knowledge of where their pension funds were invested were either at the age of 55 or older.

Barings conducted similar research last year, and in a comparison of the findings, more UK workers are making their own investment decisions than in 2009, but there was also a 43 per cent increase in the amount of people neglecting to review their plans as well.

Marino Valensise, chief investment officer for Barings, stated that it was concerning to see so many people, including limited company contractors, have either a reduced interest – or no interest at all – in planning financially for their elder years.

Mr Valensise also commented on the responsibilities of the investment industry, calling for an improvement to the methods in which pension advice is given in order to ensure people have a more through understanding of risk levels and the kind of return they can expect from their investments.

In related news, the Fair Investment Company’s head of investment and pension research, George Ladds, recently recommended younger members of Britain’s workforce should consider retirement planning that includes investing in ISAs by contributing at least £50 on a monthly basis from age 30 and afterwards.

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Calls for the simplification of contractor pensions

Hargreaves Lansdown, the FTSE 250 investment company, partially backs the coalition’s proposals to change tax relief on pensions but suggests that further adjustments could make the system simpler.

Reducing the annual allowance to about £40,000 and reinstating marginal rate tax relief were definitely a lot better than Labour’s idea of restricting tax relief to high earners.

However, by restricting 50% tax payers to pension tax relief of just 40%, the coalition risks undermining the positive impact of the reform. Hargreaves Lansdown suggests that it would be a better idea to have a lower annual allowance but with full marginal rate tax relief. On average, individuals only contribute about £2,020 a year to their personal pension so an annual allowance of £35,000 for example is still more than enough for the majority of investors.

The Association of British Insurers says that the allowance should not fall below £35,000. Earlier this year the Treasury launched a consultation on tax relief for pension contributions. The ABI argued that the allowance should be £45,000, i.e. the top of the Treasury’s suggested range.

The ACCA is concerned that the changes will do more harm than good. The Assocaition would like to see a low allowance for people who are just starting their first job and a larger allowance for people aged over 50.

The secret to success here must be simplicity or else the government runs the risk of investor confusion. It has already been revealed recently that the majority of people nearing retirement age are not financially prepared for the consequences of retirement and any changes to the current pensions regime must be simple for the investor to understand and the taxman to implement.

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