DEVTOME.COM HOSTING COSTS HAVE BEGUN TO EXCEED 115$ MONTHLY. THE ADMINISTRATION IS NO LONGER ABLE TO HANDLE THE COST WITHOUT ASSISTANCE DUE TO THE RISING COST. THIS HAS BEEN OCCURRING FOR ALMOST A YEAR, BUT WE HAVE BEEN HANDLING IT FROM OUR OWN POCKETS. HOWEVER, WITH LITERALLY NO DONATIONS FOR THE PAST 2+ YEARS IT HAS DEPLETED THE BUDGET IN SHORT ORDER WITH THE INCREASE IN ACTIVITY ON THE SITE IN THE PAST 6 MONTHS. OUR CPU USAGE HAS BECOME TOO HIGH TO REMAIN ON A REASONABLE COSTING PLAN THAT WE COULD MAINTAIN. IF YOU WOULD LIKE TO SUPPORT THE DEVTOME PROJECT AND KEEP THE SITE UP/ALIVE PLEASE DONATE (EVEN IF ITS A SATOSHI) TO OUR DEVCOIN 1M4PCuMXvpWX6LHPkBEf3LJ2z1boZv4EQa OR OUR BTC WALLET 16eqEcqfw4zHUh2znvMcmRzGVwCn7CJLxR TO ALLOW US TO AFFORD THE HOSTING.

THE DEVCOIN AND DEVTOME PROJECTS ARE BOTH VERY IMPORTANT TO THE COMMUNITY. PLEASE CONTRIBUTE TO ITS FURTHER SUCCESS FOR ANOTHER 5 OR MORE YEARS!

Pension Reform in the March 2014 Budget in the UK

The annual government Budget statement of March 2014 included some radical reforms to the treatment of “Defined Contribution” pension schemes ( to use the terminology deployed in the budget statement). This type of pension is more usually known as a “Personal” pension. In this article I shall discuss the changes and their probable impact.

Personal (Defined Contribution) Pensions

Individuals, and often their employer, pay into this type of scheme. The idea is to build up a pot of money which will be turned into an annuity (a regular payment guaranteed for life) on retirement. If you change jobs, you take the pension with you and can continue to pay into it, and can also get a new employer to pay into your personal pension. At least that is the theory. In practice, although you can certainly take the pension with you and continue paying in to it, you will normally have to open a new personal pension each time you change jobs into which your employer will pay their contribution.

Apart from the extra paperwork this generates, I have never regarded this as a bad thing, since these pensions are usually invested with different pension companies and this spreads your risk. You may have a scheme that performs badly and another scheme that performs very well.

Current Arrangements for Personal Pensions

The current arrangements for this type of pension are that a tax free lump sum of up to 25% of the accumulated pot of money can be taken on retirement. The remainder of the money has to be claimed either as an annuity, or via a mechanism known as “drawdown”.

Annuities

An annuity is a regular payment of money, guaranteed for life. There are various different types of annuity – some pay the same amount year after year, some increase each year, according to the inflation rate (the downside being that the payments will have started from a lower level). There are also arrangements for a certain level of payment to continue to a surviving spouse or partner.

The annuity provides security and certainty in retirement, but does have a couple of serious problems

  • The annuity rate – which directly affects the level of payment you will receive for the rest of your life – fluctuates on a daily basis. The rate on the day you purchase your annuity is fixed for life, and thus it is possible to be unlucky and lock into a very poor deal.
  • Annuity rates have been falling dramatically over the last 2 decades, as can be seen from the following chart

annuity.jpg

If you had retired in 1990 with a pension pot of £100,000 you could have looked forward to a retirement income of around £16,000 per annum. The figures are approximate because the exact amounts on offer depend on the specific annuity company.

Looking at the chart we can see that someone retiring now can expect only around £5,000 per annum for their £100,000 pot of cash. It is a drastic difference. I personally know of people who have delayed their retirement because of low annuity rates, and when they did eventually retire ended up on a lower pension than they would have had if they had retired years before – despite having paid in to their pension scheme during the intervening years. This leads me to conclude that the annuity system is BROKEN.

Drawdown

This is an alternative system to the annuity system that has gained popularity in recent years (due to the dismal rates offered on annuities).

In a drawdown scheme, you are not fixing a payment for life; instead you are taking an income from the money invested, but the remainder remains invested in the pension scheme. The amount of income you take from the pot is to some extent up to you, but there is a maximum amount you can take, unless you are very well off and can demonstrate an alternative reliable source of income worth at least £20,000 (prior to the March budget).

This limit to what you can take in drawdown is related to something known as the “GAD” rate. GAD stands for Government Actuarial Department, and the GAD rate is a lookup table based on age that sets the maximum percentage of your pension pot that can be withdrawn in any one year 1).

Without going in to too many details, the level of income you can receive in a drawdown scheme is not the absolute GAD rate, but some multiple of it depending on current government policy. That rate is currently 120% of the GAD rate, but this is subject to change, and anyone in a drawdown scheme has their maximum income reassessed on a 3 year basis (or more frequently for older pensioners). This means you are susceptible to government policy changes in regard to the GAD rate.

In my mind, drawdown is infinitely preferable to an annuity (based on current annuity rates) and certainly avoids the pitfall of getting a bad deal on the day of retirement. But the connection to the GAD rate is still an issue, and fails to take account of individual circumstances. The level of income that can be currently obtained (prior to the March 2014 budget) is up to 50% higher than could be obtained via an annuity – but annuity rates are so low at the moment that this is hardly an endorsement.

Planned Changes

The budget speech was delivered at lunchtime today, and I had the radio on in the background to monitor what was being announced while I got on with my work. When the Chancellor made the announcement of the proposed pension changes, the significance of the changes stopped me in my tracks.

The first headline grabbing statement was “There will be no requirement to purchase an annuity”. Well, as described above, this is already the situation today as a drawdown scheme can be entered into. However, this statement was enough to get my attention and listen to the rest of what George Osbourne (the Chancellor of the Exchequer) had to say.

The next comments were far more interesting. The cap on income in a drawdown scheme is to be raised immediately to 150% of the GAD rate, and abolished entirely from next year. The suggestion is that people who are prudent enough to put money aside for their retirement during their working years are also prudent enough to manage this fund of money for themselves in retirement. Restrictions based on GAD rates should not be required – individuals can sort out their own affairs according to their own particular circumstances.2)

The final statement in regard to pensions related to the removal of funds from the pension scheme entirely. There is today a facility for removing 25% of the fund value on retirement, tax free, and these arrangements are not changing. As things are today, people not wishing to enter in an annuity or a drawdown scheme can withdraw their cash from the pension entirely, but there is a punitive 55% tax rate on doing so. As a consequence I have never heard of anyone doing this.

The reform in the budget stated that “withdrawal of funds from a pension scheme will be charged at the individual’s marginal tax rate”. Also there is a facility for withdrawing the money bit by bit, every year as needed, rather than all in one go. This means that reasonable withdrawals (up to about £40,000 per year currently) are only going to attract basic rate tax (the first £10000 will be free of tax because of your personal allowance, and the other £30,000 at the basic rate, currently 20%).

Impacts and Discussion

These reforms of personal pensions are really significant, and will have a big impact for many people (such as myself). I have for several years now known about the options of annuity or drawdown, and neither has been particularly appealing. This new option to withdraw as much money from the pension pot, as I see fit over time, and invest it in the way that I want is an absolute godsend. Part of that investment I make is likely to be in peer to peer lending lending schemes. These schemes will be regulated by the government as of April 2014 3). I have been investing small amounts of money into these schemes for a couple of years now, and know them to be a safe investment. Even with the current historic low bank base rate (0.5%) it is currently possible to achieve 5.7% return after fees (this return is taxable of course). This is a higher rate than is offered by annuities today (income on which is also taxable), and that is before interest rates start to rise (as they are predicted to do from next year or the year after). With peer to peer lending you also have immediate access to your money should you need it (subject to a nominal fee).

I have put all the information about my personal pensions into a large spreadsheet and the result is that I will be able to retire 5 years earlier than I had been expecting to be able to with the previous rules. As you can imagine I am quite happy about this, and I will not be alone.

There is a political argument going as to whether this reform is very clever on the part of the government, or very misguided. The opposition parties are saying that many people will blow their pension pot very quickly and become reliant on state hand-outs later on. This is, after all, the reason that annuities and drawdown have restirictions in place – to ensure that you don’t use up your money too quickly. The government rejects this, saying that people who are prudent enough to save for their retirement are also prudent enough to manage their finances sensibly in retirement. I would like to think that I fall into this category. But I do suspect that there will be some people who do spend their way through their retirement savings too quickly.

The government commissioned the Treasury to predict the effect of this change on tax receipts. Their predictions are shown below.

treasuryincome.jpg

As you can see, there is a significant short term benefit, and any downside is a long way down the track (after 2031) and even then the reduced level of tax receipts is quite small. So on this basis the government has improved tax revenues at the same time as freeing people from the shackles of the annuities and drawdown schemes. A very clever trick indeed - if you believe the Treasury calculations. I think there is a very real argument that many tax payers, such as myself, will retire earlier than they might otherwise have expected to. I do not know if the Treasury considered this in their planning – possibly they did, because although tax receipts will reduce from people who are retiring, there can be benefits in reduced unemployment and welfare costs.

But I think the cleverest trick of all, is that this will be a vote winner. There is a general election in the UK scheduled for 14 months time (May 2015). All the polls suggest that the government is in trouble. 4) The government is currently a coalition of the Conservative and Liberal Democrat parties, but Labour are out in the lead in the polls. There is also every possibility in the event of a hung parliament that the Liberal Democrats might form a coalition with the Labour party rather than the Conservatives (who are the drivers of this pension reform). The relationship between the Liberal Democrats and the Conservatives has been somewhat strained recently.

Although I am naturally a Conservative voter, I have not been at all happy with this Conservative government, particularly in regard to their pro European stance and the way they have hit middle income households with huge tax rises recently. If you had asked me only last week who I was going to vote for in the next election the answer would have been “UKIP and there is nothing on earth which would persuade me to vote Conservative again”. I will have to eat my words. This pension reform is so significant, and so personally advantageous to me that I have to vote for the party that will definitely make it happen. Although the legislation should be in place by the time of the next General Election, it will be new legislation, and I fear that if the Labour party are returned to power, then this reform might be repealed.


Politics | United Kingdom


QR Code
QR Code pension_reform_in_the_march_2014_budget_in_the_uk (generated for current page)
 

Advertise with Anonymous Ads