£140 Pension

[Bulletguy]

Opened up a thread on this as people are posting under the Incapacity Benefits thread. Also I think this is an issue which concerns many on the forum.

 

Have to admit i'm not totally clear on the details myself so i'll start the ball rolling.

 

My Normal Retirement date is September 2015. Will I qualify or not? What are the parameters involved ie, the 'cut off' points where some will miss out?

[Klyne]

I don't think anyone is quite sure how it will operate just yet. My concern would be if it had any affect on SERP's or the Second State Pension. There seems to be some logic getting rid of the means testing providing nobody would be worse off. The trouble is those that are currently qualify for Pension Credit would suffer if other benefits like heating allowance and free TV license were amalgamated as a way of paying for everyone getting £140 a week.

 

David

[malc d]

I don't think they have really decided anything yet. I think it was simply announced to divert attention to all the other stuff going on at the moment.

 

Normal political tactic.

 

 

 

 

 

[josie gibblebucket]

http://uk.wrs.yahoo.com/_ylt=A03uv8c6d8hMVTgB4IlLBQx.;_ylu=X3oDMTByazUxbmZ2BHNlYwNzcgRwb3MDMwRjb2xvA2lyZAR2dGlkAw--/SIG=13c89plqd/EXP=1288292538/**http%3a//www.thisismoney.co.uk/pensions/article.html%3fin_article_id=517163%26in_page_id=6

 

This might explain it

[flicka]

Trying to 2nd guess or read between the lines, at this time is virtually impossible.

 

Although I have taken early retirement, I am not due my State pension until February 2014, so if it is the Gvernment's intent to introduce the new scheme AFTER the next election (May 2015) I will miss out. (but BG may qualify, dependant on how long it takes the next Government to implement)

 

Another area where clarification is needed:-

Where you have a married couple where one 1/2 qualifies & the other doesn't (?)

Life goes on & I have never held my breath waiting for any Government to do me a favour, would have been dead long ago.

[CliveH]

As an IFA I obviously read all about this with interest. If it comes to pass - it will be a great improvement and should be cheaper to run despite the overall increase in payments because the means benefit testing that takes place now is so complex and costly.

 

Current basic State Pension is £97.65 a week for a single person and £156.15 for a couple.

 

So if each individual will now get £140 then that is a vast improvement for a couple, married or otherwise if the combined weekly sum becomes £280. Full details will not be known until the publication of Green Paper later this year. So we do need to be a bit careful in what we assume is going to happen.

 

But perhaps the most important things mooted are those that have not yet been fully discussed in the mainstream media. Two things spring to mind from the financial planning viewpoint.

 

1) - With a flat rate of £140 a week guaranteed with no means testing/Minimum Income Guarantee complexity so much beloved of dear old Gordon (because it took an army of civil servants to administer :-D) it will means that people will be able to say "If I get £140 a week from the OAP, and I estimate I will need £240 a week, then I need a pension/savings fund that will give me another £100 a week to top up the State OAP.

 

Doing this today with the myriad of complex rules is all but impossible because for many, any pension income you save for yourself simply offsets £ for £ a pension benefit that is currently means tested.

 

In other words, if you are eligible for a state pension top up under the Minimum Income Guarantee (MIG) of say, £10 a week, but you have a private pension that gives you, say £7 a week, then all that happens is your MIG is reduced to £3 a week.

 

In contrast, someone who has no pension still gets the £10 MIG. So why would anyone want to plan for their own retirement via a pension if all they are doing is substituting one of their own £'s for a £ they are eligible for from the State system?

 

The fundamental problem is that currently, the complexity and the means testing of the State pension scheme undermines private savings. Currently about half of pensioners end up being eligible for means tested benefit and their private pensions are penalised and some may see their whole private pension effectively taken away.

 

So a flat rate £140 a week per individual with no complex means testing would be a good thing as it is a distinct increase and a significant improvement IF individuals can be confident that this £140 will NOT be reduced £ for £ by any personal provision they make.

 

2) Depending upon the terms of the reforms there could be a significant benefit is contracting out of the Second State Pension (SERPS as it was previously known). The Second State Pension (S2P) enables individual to get a higher OAP based upon the amount of NIC's paid.

 

If you think it appropriate you could/can contract out of SERPS/S2P. So obviously if they are going to introduce a flat rate of £140 a week regardless, people may as well contract out.

 

Because those individuals that do will still receive rebates from their NIC's into their Pension Plans and if they are ultimately going to receive a universal State Pension benefit then these rebates could be free money!

8-) 8-) :-D :-D B-)

[malc d]

If it is true that the £140 only applies to 'new' pensioners, they will still need to maintain the same army of public sector workers to continue administration of the pensions for 'existing' pensioners.

 

So for some years there will surely be a huge increase in costs.

 

 

 

:-(

[CliveH]

Good point Malcolm - but from what I see - it will apply across the board, to current pensioners as well as new.

 

However, there are certain wordings that seem to question this "happy" assumption. One that I saw from a spokesperson from the DWP is this:-

 

"We will be bringing forward proposals for reform later this year. Our aim will be a simple decent state pension for future pensioners which is easy to understand, efficient to deliver and affordable."

 

Obviously the key words are "for future pensioners" - this vague statement needs clearing up - but the view of most is that if it is introduced - it has to be via a level playing field for all. Not sure that getting rid of all the pen pushers monitoring the means testing will be sufficient to pay for it tho'?

 

Sad thing is that before 1997 the then Shadow Chancellor, Gordon Brown told the Labour Party Conference that he wanted to end the means test for the elderly. However, in the 13 years he was at either No. 11 or No. 10, means testing for the elderly actually increased dramatically.

 

Fair play to the Coalition if they really do intend to get to grips with the expensive administration and inadequacies of the State Pension.

 

This latest from one of the “Pinks” just 10 min ago re a query SAGA flagged up:-

 

“Saga receives assurances that SERPs or S2P will not be cut back

 

28 October 2010 | By Tom Selby

 

People who are in line to receive more than £140 a week through a combination of SERPs or S2P and the basic state pension will still receive higher payouts under the proposed reforms, according to Saga.

 

The group says it has received assurances from Government that those who may have accrued large sums through SERPs or S2P will not be unfairly penalised by the introduction of a flat-rate state pension

 

Saga says: “We are assured that if existing state pension entitlement would be over £140 a week, then you will still get the higher amount, so SERPS or S2P will not just be cut back to £140. Lots of people were worried about that thinking their SERPS would be reduced, but that is not the case apparently.”

 

The group says it has also been told that those who contracted-out of the state second pension or Serps will not receive the entire universal £140 per week from the state. Instead they will receive their contracted out pension which will be topped up by the state.

 

Around £100 will come from the basic state pension and then the additional pension will be added on to that, the firm says. If the amount is more than £140, the pensioner will receive that amount. If it is less, the pensioner will be topped up to £140. Only those with a full 30 year National Insurance record will qualify for the universal pension, the firm understands.

 

This follows predictions from senior industry figures that Government would seek to limit state benefits to those who had been contracted-out of S2P.

 

A DWP spokeswoman would not comment until the consultation process begins later this year.”

……………………………………………

So it does seem that until we get into the Consultation Process we will not have much of an idea as to how this change will take place.

 

[flicka]

Thanks for a detailed (as possible at this stage) couple of posts, Clive

 

Confirms my earlier thought, "Trying to 2nd guess or read between the lines, at this time is virtually impossible. "

 

Will see WHAT the Green Paper reveals.

[enodreven]

Hi,

 

I Totally agree with flicka, thanks Clive really helpful and well constructed information

 

flicka - 2010-10-28 3:43 PM

 

Thanks for a detailed (as possible at this stage) couple of posts, Clive

 

Confirms my earlier thought, "Trying to 2nd guess or read between the lines, at this time is virtually impossible. "

 

Will see WHAT the Green Paper reveals.

[Bulletguy]

I find the figures a bit odd which nobody seems to have picked up on.

 

If you are a couple the increase is hugely significant....£124. But the increase for single people amounts to little more than one third of that figure at just £43.

 

Is there some sort of obscure hidden agenda behind all this I wonder? Previously people on State pensions were better off as a single person than a couple with a differential of just £59 between the two. But it's not necessarily everyones choice to be single.

 

The proposed payment gap between married couple and single is quite staggeringly huge having more than doubled the differential.

 

[malc d]

Bulletguy - 2010-10-28 7:44 PM

 

I find the figures a bit odd which nobody seems to have picked up on.

 

If you are a couple the increase is hugely significant....£124. But the increase for single people amounts to little more than one third of that figure at just £43.

 

Is there some sort of obscure hidden agenda behind all this I wonder? Previously people on State pensions were better off as a single person than a couple with a differential of just £59 between the two. But it's not necessarily everyones choice to be single.

 

The proposed payment gap between married couple and single is quite staggeringly huge having more than doubled the differential.

 

 

I'm not sure what your point is.

 

As I understand it the 'agenda' is to simplify pensions by paying everyone £140.

 

So what is the differential that you are referring to ?

 

 

 

 

[602]

If it is true that the £140 only applies to 'new' pensioners, they will still need to maintain the same army of public sector workers to continue administration of the pensions for 'existing' pensioners.

 

Hi,

 

Does that mean I will have to pay more tax out of my pension so that another pensioner can have more? But hey, why change a winning formula?

 

602

[Bulletguy]

malc d - 2010-10-28 8:37 PM

 

I'm not sure what your point is.

 

As I understand it the 'agenda' is to simplify pensions by paying everyone £140.

 

So what is the differential that you are referring to ?

Current being £97.65 for a single person, £156,15 for a couple gives a differential between the two figures of £58.50.

 

Under the proposed £140 each, the gap widens that differential from £58.50 of a married couple to £123.85......quite a significant jump. Whereas the differential for a single person only amounts in real terms to £42.35. So a couple will gain by almost THREE times that of a single person.

 

As I said in my previous post, not everyone is necessarily single by choice so it does seem rather divisive. I can understand what they mean by Pensions 'apartheid'.

 

 

 

[CliveH]

Picking up the broader picture here a bit now. I think this idea of £140 basic state pension could be a facet within a broader plan to get us all to save more for retirement seeing as the last lot in Government decimated the savings culture via stealth taxes and means testing of retirement benefits.

 

It was also announced a while back that a new compulsary employers pension scheme was to be introduced. Now I do not have a problem with this having studied what the Australians did and how well this worked. And they just followed (to a degree) what the USA and Canada had done.

 

The common denominator was that those countries enhanced the tax efficiency for savers whereas dear old Gordon added further tax burdens such that not many bother to save as we as a nation, once did.

 

Now as a financial planner I often recommend salary sacrifice to people in an employers occupational scheme. It works like this:-

 

Example A: Employee paying pension contribution

 

Annual salary

£30,000

 

Total pay for tax/NI purposes

£30,000

 

Tax payable*

£4,705

 

NI payable*

£2,670.80

 

Employee pension contribution

£1,200.00 (net) or £1,500.00 (gross)

 

Employee take-home pay

£21,424.20

 

Example B: Employee sacrificing pension contribution

 

Annual Salary

£30,000

 

Salary sacrifice

£1,500

 

Total pay for tax/NI purposes

£28,500

 

Tax payable*

£4,405

 

NI payable*

£2,505.80

 

Increase in Employer pension contribution

 

£1,692 (includes an employer NI saving of £192)

 

Employee take-home pay

£21,589.20

 

*Based on tax year 2010-2011

 

In this example the employee’s take home pay has increased by the £165 saving in employee NI. :-D

 

So whilst this concept of salary sacrifice is quite legal and is unlikely to change, it does mean that many more people are asking their employers to set up salary sacrifice schemes because as the examples show, it can actually increase the take home pay of the individual whilst increasing the amount of money paid into the pension scheme, simply by getting your employer to pay the contributions rather than the individual. The NIC savings from both the employer and the employee can then be redirected into the pension or the pay-packet.

 

There is a feeling that in conjunction with the £140 State OAP proposal, the compulsory employee contributions into a pension as mooted may be a way of marginalising the obvious benefits of salary sacrifice. Especially as from April 2011, employee NI contributions are due to increase by 1 percent of pay, >:-( which will further increase the savings available from salary sacrifice arrangements.

 

The main disadvantages of salary sacrifice are linked to all those benefits that depend upon what your salary is. Therefore if you become ill, your sick pay will be based upon the lower salary amount. Similarly, if you die, then your death in service benefit is based upon a multiple of salary and if you have lowered your salary then this death benefit for your family will be lower. However, as the pension “pot” in money purchase schemes is usually returned to your beneficiaries, the fact that more has been paid into the scheme via salary sacrifice will help offset this.

 

One final point, much is being made of the means testing of child benefit – guess what we financial planners are looking at recommending! – reducing your salary via salary sacrifice so that a) you get more paid into your pension and possibly more take home pay, and b) in some cases by reducing your salary you could lower your salary enough so as to make yourself eligible for child benefit if applicable.8-)

 

Look! – I don’t make the rules – I just apply them. *-)

 

 

 

 

 

 

[flicka]

Hi Clive

But this would be detrimental if applied to a "Final Salary Scheme" as you would lower your final Salary (?)

Or am I misunderstanding it. :'(

 

Or do you / can you switch back just before the final year (?)

[Bulletguy]

CliveH - 2010-10-29 8:35 AM

 

I think this idea of £140 basic state pension could be a facet within a broader plan to get us all to save more for retirement seeing as the last lot in Government decimated the savings culture via stealth taxes and means testing of retirement benefits.

I doubt very much that a change of Government will make one scrap of difference in stealth taxes. Personally I think we will see a lot more creeping in now....not less!

 

There was never really a savings culture in the first place. The irresponsibilty of individuals and Banks and Credit loan companies who openly encouraged 'have it now pay later', saw to that. That culture initially began during the Thatcherite years with 20 year old city traders running riot. Remember the fiasco of Barings Bank?

 

 

 

CliveH - 2010-10-29 8:35 AM

 

One final point, much is being made of the means testing of child benefit – guess what we financial planners are looking at recommending! – reducing your salary via salary sacrifice so that a) you get more paid into your pension and possibly more take home pay, and b) in some cases by reducing your salary you could lower your salary enough so as to make yourself eligible for child benefit if applicable.8-)

If on £44k p.a. I think that's what many will do. After all what's a drop of £1k?

 

I think the figure is set far too high anyway. Why anyone earning that sort of salary should need state funded assistance to bring up a child is quite beyond me.

 

 

[CliveH]

Hi! - Nice w/e away in the c'van - shame the sun is shining now I am back at the desk - but that seems to be the way of it of late.

 

Flicka

 

Salary sacrifice and final salary schemes - Salary sacrifice can work here as long as your extra contribution is via "Added Years" OR, you can a) opt out of salary sacrifice in the last few years so that your "added years" are applied to the highest salary possible or b) you can use the Inland Revenue definition of "Final Salary" which is not your final salary at all but the highest average consecutive three years over the last ten working years. So you could retire at age 65 and define your Final Salary are the average of your salary when you were aged 53,54 and 55 - only one of the three years needs to be within the last 10 years so as you can see - you can go back 12 years. And if you sacrifice huge chunks of salary in the last ten years of your working life, what you earned on average 12, 11 and 10 years ago will be the figure that defines your Final Salary.

 

What is more, that figure is "dynamised" forward as well to take into account inflation.

 

Only problem we have in advising on this is that many pension scheme trustees are ignorant of the overriding HMR&C rules as they are only trained up on the specific rules of their own scheme. But once it is pointed out to them that an individual can apply to have HMR&C rules supersede the scheme rules you would be amazed at how many people then want to to the same! (Then again perhaps you wouldn't be!)

 

It is more complicated with a FS scheme but not impossible. Simplest way is to sacrifice income that is not superanuable under the scheme rules. For example many pension schemes only "pension" your basic salary, not bonus or P11D benefits for example. Therefore why just pay tax and NIC on these benefits when you could sacrifice some into a scheme, and get the same take home pay but a better pension in the longer term?

 

One scheme that is often used for salary sacrifice when a Final Salary scheme exists is what is known as a "Top Hat" scheme that sits on top of the main scheme but mirrors the main scheme benefits, but accrues benefits on a money purchase basis.

 

Bulletguy

 

As for Barings – well yes Nick Leeson took them to the cleaners. But as for individual savers – Gordon was a far bigger crook in my view in that he introduced the tax on growth within funded pensions whilst increasing the Public Sector and its non funded pension bill that we all have to pay for.

 

Barings was guilty of the bad management of one individual. Whereas we are all suffering from bad management BY one individual.

 

I hardly think what Nick Leeson did to Barings did had anything remotely LIKE the negative effect on peoples pension funds that Gordon’s stealth tax has.

 

Gordon’s Stealth Tax on funded pensions is estimated to take between £5Billion and £8Billion a year.

 

Nick Leeson lost Barings £200M* – still a tidy sum but it pails into insignificance to the theft from peoples pension funds year on year, on year.

 

* (Leeson did not steal this sum – he lost it due to incompetence that his managers mistook for brilliance – perhaps he would have done better in politics?)

 

[CliveH]

Here is the link to the HMRC page that outlines what you can do within a final salary scheme if your best earning years are “mid career” or simply outside of the usual “Final Salary” definition. Mid career earnings can be higher than final salary earnings for a number of reasons, including salary sacrifice in the last few working years.

 

http://www.hmrc.gov.uk/manuals/psimanual/part06/psi6.4.42.htm

 

PSI6.4.42 - Total Benefits On Retirement At Normal Retirement Age: Pensionable Remuneration and Final Remuneration - Earnings which Peak in Mid-Career

 

(This archived guidance relates to HMRC discretionary practice before the 6th April 2006. For current guidance on Registered Pension Schemes see the Registered Pension Schemes Manual)

 

The terms of PSI6.4.15(b) are very wide. If a 3 year averaging basis is used it enables earnings beginning as far back as 13 years before NRD to be used. If a longer averaging period is used then even earlier earnings can be taken into account. The definition is thus intended to help those whose earnings peak in mid-career and who otherwise would not benefit from the normal "best year in the last five" basis.

 

........................

 

Interestingly - 13 years before NRD (Normal retirement date) is mentioned - but I thought that one of the three consecutive years had to be within the past ten. So that would mean that if year ten was one of the years then years 11, and 12 would be the other two.

 

So if HMR&C are saying 13 years prior to NRD then maybe those three years can just be "adjacent" to the last 10.

 

This seems odd to me and nor what my reference books tell me. So I will need to check it out.

 

And if you joined a scheme after April 6th 2006 then a different set of definitions apply. 8-)

 

(I shouldn't moan - all this complexity keeps me busy and pays the bills (lol) )

 

[Bulletguy]

CliveH - 2010-11-01 3:41 PM

 

Bulletguy

 

As for Barings – well yes Nick Leeson took them to the cleaners. But as for individual savers – Gordon was a far bigger crook in my view in that he introduced the tax on growth within funded pensions whilst increasing the Public Sector and its non funded pension bill that we all have to pay for.

 

Nick Leeson lost Barings £200M* – still a tidy sum but it pails into insignificance to the theft from peoples pension funds year on year, on year.

 

* (Leeson did not steal this sum – he lost it due to incompetence that his managers mistook for brilliance – perhaps he would have done better in politics?)

 

I think you will find the figure was actually FOUR times this at over £800M.

 

The oldest merchant Bank brought to it's knees by a young kid from a council estate who left school with a D grade in A level math. Not bad going eh?

 

I'm not so sure it was simply 'incompetent management'. More like excessive greed by senior management who chose to turn a blind eye whilst Leeson fattened up their accounts with whacking bonuses. My view is they were as guilty as he was, if not more, and should have been thrown into prison and stripped of all their ill gotten gains. Leeson was simply the 'fall guy' for the fat and greedy bankers.

 

Very little has changed. I see the same scenario going on today, albeit on a much smaller scale.

 

 

[CliveH]

Well what actually happened is still bit of a grey area but most agree that by the end of 1992, his account's losses exceeded £2 million, which ballooned to £208 million by the end of 1994. What he was doing was hanging onto trades that should have been offloaded that day. Done properly the sums are huge but the risk is relatively low. Obviously the longer you hang onto those trades hoping the markets move in a more favourable direction before you offload increases the risk substantially. Leeson was good at this - or perhaps "lucky" would be a better description.

 

On 16 January 1995, Leeson placed a short straddle in the Singapore and Tokyo stock exchanges, which is essentially betting that the Japanese stock market would not move significantly overnight. However, the Kobe earthquake hit early in the morning on 17 January, sending Asian markets, and Leeson's trading positions, into a tailspin. Leeson attempted to recoup his losses by making a series of increasingly risky new trades this time betting that the Nikkei Stock Average would make a rapid recovery. However, the recovery failed to materialize.

 

Leeson left a note reading "I'm Sorry" and fled Singapore on 23 February. Losses eventually reached £827 million (US$1.4 billion), twice the bank's available trading capital. After a failed bailout attempt, Barings was declared insolvent on 26 February.

 

So whilst Lesson started the rot - it is "possible" that but for the Kobe earthquake which amplified by several orders of magnitude the dire situation that Lesson had put Barings in, - he could have got it all back - but he was a crook and the managers in charge of "oversight" of him and his department were shockingly inept.

 

But the losses attributable to Leesons actions was in the region of £200M - it was the Kobe eathquake that caused the Japanese market to fall against "normal" expectations that caused Barings demise. If that earthquake had happened, the £200M deficit would quite possibly have been wiped out or at least significantly reduced.

 

Not condoning what he did - far from it! - but in the big scheme of things - £200M would normally not bring a bank down.

 

In fact only a couple of years ago a French "Rogue Trader" took Soc Gen. for 5Billion Euro's.

 

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3242996.ece

 

And they are still trading. No natural disaster synergy - thank goodness :-S

 

[CliveH]

Fourth para from last - last sentence should read :-

 

"If that earthquake had NOT happened, the £200M deficit would quite possibly have been wiped out or at least significantly reduced."

[flicka]

Great info Clive, thanks for the clarification.

Just wish, I had been aware prior to taking early retirement last year.

:-( :-( :-(

 

[602]

Hi,

 

Something similar ....

 

If a woman (or her husband?) takes time off work to look after her young child. they recieve credits towards their pension. Its been like that for years. But not long enough for my wife to have got those credits, so she is paying taxes on her pension to provide benefit to others, but which she is not entitled to.

 

Perhaps someone can explain that better, and say why the same won't happen with pensions?

 

602

[CliveH]

Hi 602

 

Happy to try to help but sadly not sure exactly what you mean?

 

Specifically (Upper case for ease of answering only - not "shouting") :-

………………………

Something similar ....

 

If a woman (or her husband?) takes time off work to look after her young child. they receive credits towards their pension. (YES THIS IS THE NORM)

 

Its been like that for years. But not long enough for my wife to have got those credits, so she is paying taxes on her pension (IS SHE IN RECEIPT OF PENSION INCOME AND A) IS IT JUST THE STATE PENSION YOU ARE TALKING ABOUT OR HER PRIVATE/COMPANY PENSION - OR B) HAS SHE NOT TAKEN ANY BENEFITS YET AND YOU ARE TALKING ABOUT GORDONS STEALTH TAX ON FUNDED PENSIONS?) to provide benefit to others, but which she is not entitled to.

 

WE PAY TAXES TO PROVIDE A WIDE RANGE OF STATE BENEFITS - IT IS VERY DIFFICULT TO SEPARATE OUT THOSE WE FEEL "HAPPY" PAYING FOR AND THOSE WE DO NOT - EVEN IF OUR PERSONAL CIRCUMSTANCES ARE SUCH THAT WE NEVER GET ANY BENEFIT IN ONE PARTICULAR AREA.

 

FOR EXAMPLE - I HAVE NEVER CLAIMED ANY SICKNESS BENEFIT OR UNEMPLOYMENT BENEFIT BUT I STILL HAPPILY PAY TAXES FOR THOSE THAT HAVE NOT BEEN AS FORTUNATE AS ME. I WORK ON THE "THERE BUT FOR THE GRACE OF GOD GO I" PRINCIPLE.

 

Perhaps someone can explain that better, and say why the same won't happen with pensions?

 

WHAT PENSION ARE YOU THINKING ABOUT? - STATE/COMPANY/PRIVATE?

 

R

 

Clive