23/06/15Guidance, Advice or ….?
Since my last blog at the beginning of the month, I’ve noticed that when it comes to pensions-both for the employer and individual there seems to be a mixture of feelings from confusion/put off, dismiss/defiance and embrace/welcome. So I guess this will be a blog of two halves, yet similar…let’s carry on and you’ll hopefully see where I’m coming from!
From an individuals’ perspective, the amount of choice as to what to do with your pension pot has changed dramatically. at the beginning of the 21st century, the decision for the vast majority was when will you put funds into an annuity, not will you. Now, 15 years later, we can not only use an annuity, but also use out right to take what we want from our pension each year and vary it annually, to taking the whole pot as cash. With individuals being able to take benefits from the age of 55, it is incredibly difficult to work out the cause and effect of what we do today and how that will impact us (if at all) later on in life. Consequently the decision is postponed/put off.
I’m also seeing personally and reading about those individuals that want to take their pension pot as cash, without acknowledging the emergency tax that will be applied to the amount taken after the tax free cash element is taken. For example, according to statistics, the average pension pot size is £32,000. The tax free cash element is generally 25% of fund value (in this case,£8,000 and therefore, £24,000 is taxable and will be assumed that you earn this monthly amount every month!
With £24,000 equating to £288,000 for a calendar year, it is easy to see how 45% tax would be charged (as well as the loss of your personal allowance) on some of it (anything over £150,000 and 40% on the majority of it (£31,786-£150,000) and 20% on a bit of it (up to £31,785). On £288,000 a tax bill of £115,742 is created, which is roughly 40%. So cashing in the aforementioned pot of £24,000 could mean £9,600 is removed in tax, leaving you to fill out a P50Z and claim back the tax taken which will be refunded to you….by HMRC.
So we’ve met confused and defiant, how about embrace?
there are more and more individuals discovering ‘Moneywise.co.uk’ as well as seeking out Financial Advice to help them make a decision. I’m seeing more 50yr olds that ever before, who are trying to understand the rules as they stand, so that when it comes to 55, they know the route they want to take-subject to no unforseen events happening.
With Auto Enrolment now rolling out to micro and start up businesses (I had my first letter last week, and there are two of us in the business), more and more employers need to look at the cause and effect of Auto enrollment, if nothing else, the fact that a companies’ salary expense is going up by 1% a year over the next 3 years. Yet I am meeting quite a few who decided to throw away the letter from The Pension Regulator, only to find that the implementation of Auto enrolment is government driven and not a hoax, nor will it disappear if a change of government takes place as all parties have agreed to the policy. Yet, there are some employers who welcome the idea and look to implement it early,using it as a recruitment tool/retention idea.
As I said at the beginning, two different sectors, but common threads nonetheless. Taking either decision on your own can be daunting, because no one website can see you and your circumstances and no amount of website ‘guidance’ and can truly give you the advice needed. You will be able to get to grips with the options, but which option-or options (you can have multiples)-is right for you?
Thanks for reading,