Pensions And The Cost Of Living Crisis
With energy bills rising faster than a Saturn V, fuel prices seemingly out of control and food prices showing the kind of rises not seen for many a year, people are, understandably, looking to see how they can save money at every opportunity.
One way would be to reduce or stop paying pension contributions, but that would be very short-sighted and merely deferring today’s crisis for a much bigger one further down the line.
That said, there is a simple way for employers to help staff (and one that regular readers of my output will know that I have been banging on about for what feels like an eternity) which is Salary Exchange.
Adopting Salary Exchange as the default method of paying contributions (so it does not force people to use it if they really don’t want to, but maximises the take-up with existing staff) saves employers, and employees alike, National Insurance. And, in case you have forgotten, National Insurance rates in 2022/23 are rising by 1.25% to assist with the shortfalls in NHS and associated care.
Every employee (excluding non-taxpayers and those over State Pension Age) can increase their annual take home pay by £132.50 per £1,000 of salary exchanged for a pension contribution while employers will save £150.50 on the same exchange amount.
Putting the above another way, an employee on a salary of £30,000 (which is also their pensionable earnings) would have an extra £16.56 in their take home pay in 2022/23 when compared to a non-Salary Exchange basis and the employer would save £225.75. Assuming there are 30 members of staff all earning the same and contributing the same to the pension, the annual saving would be £6,772.50.
Salary Exchange is an option that still needs to be sold rather than employees buying into it of their own accord. The main objections, that are still prevalent in spite of their being vastly out of date, are effects on mortgage lending and State Benefits.
Looking at mortgages first, following the financial crisis of 2008/9 the Bank Of England ordered mortgage lenders to assess borrowers based on their ability to service a loan, as opposed to the previous way of simply offering a multiple of gross salary. In practical terms, lenders will give a loan based on a percentage of net income (35% is not uncommon) and Salary Exchange increases net income, so borrowing ability should increase.
As regards State Benefits, there are some which are affected e.g. maternity pay. However, the objection always used to be that Salary Exchange would reduce the State Pension.
That was true when there was an earnings related element to the State Pension (such as SERPS or State Second Pension) but the State Pension has been flat rate since 2016. This means that it is only the fact that you have paid National Insurance which is relevant, not how much National Insurance you have paid. So, a person on £250,000 a year for every year of their working life (at least 35 years) will receive exactly the same State Pension amount as someone who has earned £25,000 a year, everything else being the same.
We can assist in presenting on and implementing Salary Exchange for pension schemes. We do charge a fee but that is tailored to the size of client and potential savings. We would not charge more than the 1st year saving and our fees are one-off so NI savings in subsequent years are retained in full.
Author: Peter Murphy, Benefits Adviser
pmurphy@richmondhousecs.co.uk
Tel: 01438 345777
Is My Pension Enough?
For most of us there comes a time when our working life comes to an end and we start a new stage of our lives, retirement.
This is a time that many of us look forward to, and hope that we have fully prepared for the type of lifestyle we would like to have, such as having enough income to cover the bills and live a comfortable lifestyle, or to be able to travel to all those places we could not when we were working.
The question is, is there enough in the retirement pot to facilitate all our plans. It’s a big question. Could the funds run out before you do?
State Pension
Pensions are typically the preferred way to save for your retirement income. In addition to any arrangements you make yourself you can look forward to the state pension. This is currently funded by National Insurance contributions and relies on more people working and contributing than people not working. With the population living longer this could become a problem in the future.
Latest projections from the Office for National Statistics show that the number of people over State Pension age in the UK is expected to grow by a third between 2017 and 2042, from 12.4 million in 2017 to 16.9 million in 2042.
Under the current law, the State Pension age is due to increase to 68 between 2044 and 2046. Following a recent review, the government has announced plans to bring this timetable forward. The State Pension age would therefore increase to 68 between 2037 and 2039.
So, what can you do about securing an income when you need it and that will last for your lifetime.
Annuities
You are able to buy and annuity which would provide you with an income for your lifetime. The income you receive would depend on a number of things including the amount you have to buy the annuity with, your health and your age.
Annuities can be on an increasing basis so that the income payment keeps up with the cost of living. You could have a fixed term annuity that would pay you an income for usually five to ten years and at the end of the term you could take the remainder of the funds as cash or purchase another product.
Both of these options offer the reassurance of a guaranteed income for life, but on the downside the annuity rate offered could be low and therefore the income would be reduced. Once set up they are inflexible and therefore, if you wanted a lump sum from your pension fund for additional costs, this would not be possible.
Pension Drawdown
This is a more flexible arrangement that allows you to access the funds in your pension as and when you please. As the pension funds would remain invested, you are normally still subject to the vagaries of the markets and will see the value of the plan rise and fall. This can be concerning when you are relying on these funds to last for your lifetime.
You need to carefully plan how much you draw from the plan to ensure the funds don’t run out and leave you short of income. On the upside I do sometimes find that people are not taking enough and are set to leave a nice inheritance for someone.
Drawdown has become a popular option as people like to be in control of the money they have saved. It can also offer the flexibility of spending more in the earlier part of retirement whilst you are fit and able.
This type of arrangement needs careful management to ensure the funds are likely to last. By taking into account assumed future growth and inflation rates a plan can be drawn up to make sure the income withdrawal is not excessive or more positively gives you the confidence to take more. This must be kept under review, ideally every 6 months to make sure you stay on track. The value of the plan will inevitably fluctuate and your own situation could change.
It is fair to say that the more you are able to accumulate in your retirement savings the more options you will have when it comes to retirement. Saving more in the early years carries the benefit of the funds being invested for a longer period and benefiting from growth.
There is no one way that’s right when considering how to arrange your income. We are all different, have different plans and concerns. I would always recommend speaking to an adviser who can explore all the alternatives and help you find the plan that works for you and provides the type of retirement you have worked for.
Proposed new timetable for State Pension age increases – GOV.UK (www.gov.uk)
Author: Kristina Bailey, Financial Planner
kbailey@richmondhousewm.co.uk
What does ‘Next of Kin’ mean and do they have any legal rights?
Who is my next of kin?
There can be confusion around the phrase ‘next of kin’, with many assuming there is someone who automatically becomes your next of kin and has the legal right to make decisions for you if you cannot make them for yourself. However, this is not the case. Next of kin has no real legal definition or standing.
The only exception to this is with children under the age of 18, when a parent or legal guardian may make decisions for or on behalf of a child.
You can, however, give the title of ‘next of kin’ to anyone you wish. It does not have to be a relative.
Next of kin and medical care
In health and social care situations, next of kin is often used to identify an emergency contact, or a close friend or relative to update about your condition or treatment. The term usually means your nearest blood relative, and most people assume it refers to their spouse or civil partner.
Being identified as your next of kin does not, however, give anyone the right to make decisions about your care, or to give or refuse consent to treatment on your behalf. At the most, your next of kin will be updated on your progress and asked for their thoughts on your care. This is contradictory to a common belief that your family members can make decisions on your behalf if anything were to happen to you.
Next of kin and financial matters
Remember, there is no legal basis for next of kin, so neither your spouse, civil partner, long-term partner, nor child, have any legal right to make decisions about your property and financial affairs, even if you view them as your next of kin. No-one who you identify in this way should sign any documents for you or give any instructions about your bank accounts or investments.
Can I appoint someone to make decisions for me when I lack capacity?
There are several ways you can ensure people you trust will be able to make decisions for you if you lack capacity, and that they take your wishes and feelings into account. The options available include:
Lasting powers of attorney (LPAs)
Lasting powers of attorney (LPAs) are documents that allow you to appoint a person or people who you trust to make decisions for you. LPAs can be created for financial decisions and health and welfare decisions.
Once the LPA forms have been completed, signed by all parties, and registered with the Office of the Public Guardian, you have attorneys in place who are legally authorised to make certain decisions for you.
Attorneys who act under LPAs have several duties and responsibilities, as well as legal rights. They must always act in your best interests and support you to make as many of your own decisions as you can. The Office of the Public Guardian supervises attorneys and can take action if there are concerns.
Court of Protection
If a person lacks capacity and has not made an LPA, it may be necessary to ask the Court of Protection to appoint a Deputy to make decisions for them.
Being next of kin does not automatically mean you would be the person the Court appoints as Deputy. A Deputy can be a family member but could also be a professional, such as a solicitor or accountant, or even a local authority.
Source: https://www.thegazette.co.uk/all-notices/content/104016 What legal rights does your next of kin have? By Sofia Tayton
Author: Beth Mills, Will Writer and Trainee Financial Planner
bmills@richmondhousewm.co.uk
Tel: 01438 342430
Register your trust!
There is now a requirement for trusts to register with the Trustee Registration Service (TRS) so you need to know if your trust will be caught by the new regulations. The TRS has been operating for some time now but has so far only registered “taxable trusts”. If your trust falls under rules for reporting “non-taxable” trusts and systems, this went live on 1/9/2021, it will need to be registered by 1/9/2022.
The responsibility on trustees is not inconsiderable. Trustees must:
- Appoint a “lead trustee” to act
- Gather in a huge amount of information about the trust, trustees, beneficiaries etc. Any inaccuracies will make it difficult to register your trust
- Apply for an “institutional” Government Gateway ID. This is a multi-layered exercise & you cannot use any existing Government Gateway IDs, tax reference numbers etc.
- Finally, trustees can access the register to “claim a trust” but even then, this is by no means straightforward. All of this must be done on-line & needs to be done separately for each trust
For legal & compliance reasons we will not be able to get directly involved in the process of completing this registration. We will, of course, help compile the data you need; help you understand the process of how you get into the register etc.
This leaves you with the following options:
- Complete this exercise yourself taking what support we can offer you in terms of gathering information etc.
- Seek support from a specialist firm of accountants or solicitors. NB you will need to check on fees as they will tend to charge an hourly rate & this is a time-consuming exercise.
- Or use a third-party provider. This will only require you to check the information you are sent and then just sign the contract. The typical fee for this is about £300 (inclusive of VAT) per trust.
If you do wish to register your own trust you should first have a look at the HMRC manual https://www.gov.uk/guidance/register-a-trust-as-a-trustee
Once your trust is registered you will still be responsible for keeping the information held up to date & in-line with a position that may be subject to change. More information is available on request.
Plenty to think about and not a lot of time to act! Please ask your advisor if you think you may need to undertake this exercise.
Author: Wendy Devlin DipCii, CEFA, CeMAP (MP and ER)
Head of Advisory Services
wdevlin@richmondhousewm.co.uk