Q. I am approaching retirement and I have modest pension savings. I had intended to purchase an annuity from the insurer who administers my personal pension, however I saw a newspaper headline recently that suggested annuity rates can vary significantly between insurers. Is this correct and, if so, what can I do to ensure that I achieve value for money?
A. You are correct that annuity rates – i.e. the amount of pension you are able to secure with a given amount of pension savings – can vary significantly from one provider to another.
I suspect that the newspaper headline to which you refer was discussing a recent comparison of annuity rates undertaken by the Association of British Insurers. That exercise compared annuity rates from 26 insurers and highlighted significant variations in the amount of pension provided.
For example, the ABI discovered that a healthy 65 year-old with pension savings of £18,000 would receive between £840 and £1,100, depending upon the insurer from whom they purchased their annuity, meaning that such an individual could increase their pension income by as much as 31% by selecting the most generous provider.
The ABI’s survey serves to demonstrate the value of seeking appropriate advice prior to retirement, to ensure that you obtain the annuity that is most appropriate for you. I recommend therefore that you seek advice from a chartered financial planner, who specialises in at retirement planning, who will consider all of the annuity options available to you and recommend the most appropriate that meets you circumstances and priorities.
Q. I am a doctor and a member of the NHS Pension Scheme. I received a letter from my HR department recently advising me that both the annual and the lifetime allowances are set to be reduced and that I should consider my position. In particular, the letter warned that I may wish to take advice as to whether I might incur a significant tax charge as a consequence of the reduction to the annual and lifetime allowances. However I wonder if you are able to offer any assistance in the first instance?
A. Yes. You are correct that the lifetime allowance (“LTA”) – the maximum amount of savings a person can accrue in a pension scheme in a tax-efficient manner over their lifetime – is set to reduce from £1.5m to £1.25m. The annual allowance (“AA”) – the maximum amount of savings a person can accrue in a pension scheme in a tax-efficient manner in any given year – is set to reduce also, from £50,000 to £40,000. The reductions, announced in last year’s Autumn Statement, will take effect on 6 April 2014.
Whilst these limits may seem generous, it is anticipated that a great many more people will exceed either or both of the LTA and AA. The reductions are likely to affect those people who remain members of a defined benefit pension scheme, in particular.
For example, the reduced LTA of £1.25m equates to an annual pension of £62,500 (assuming that no tax-free cash lump sum is taken at retirement). This equates to an annual pension of just £46,875 if a 25% tax-free lump sum is taken. I expect therefore that a number of doctors (as well as other professionals and high-earners) are likely to be affected by the reductions to the LTA and the AA.
There are a number of steps that you may be able to take in order to mitigate the impact of the forthcoming reductions. For example, if you have pension savings of more than £1.25m at 5 April 2014 you will be able to apply for individual protection, provided that you do not already benefit from either primary protection or enhanced protection (which were available when similar changes to the legislation governing the taxation of pensions were introduced). Individual protection will enable a saver to benefit from a personalised LTA, up to £1.5m, thus protecting tax-relieved savings accrued up to that date. Additional investment growth or contributions may boost your fund beyond your personal lifetime allowance, but you would have the flexibility to make further contributions in the future in the event that your fund decreases in value.
Alternatively, it might be appropriate for you to apply for fixed protection, thus retaining the current LTA of £1.5m. However, in doing so, you would be prohibited from making any further pension contributions (and, therefore, you would have to opt out of active membership of the NHS Pension Scheme so as not to accrue further benefits). Other options that you may need to consider – depending upon your personal circumstances – include cancelling added years contracts and/or 24 hour retirement.
The deadline for applying for fixed protection has been set at 6 April 2014. The deadline for applying for individual protection, which is as yet unknown, is likely to be much later (as a person applying for individual protection will need to know the level of their pension benefits as at 5 April 2014). It is anticipated that the deadline for applying for individual protection will be 5 April 2017 (although we must await the conclusion of the consultation before this is confirmed).
Therefore, I would urge you to seek advice from a chartered financial planner, who specialises in retirement planning, as soon as possible. I recommend also that you ensure that your adviser is familiar with the NHS Pension Scheme and advising members of that scheme. It is important that you seek assistance sooner rather than later, so that you have the time to assess all of your options – including whether it is necessary to apply for a form of protection and, if so, which form of protection is most appropriate. I would urge you not to fall into the trap of assuming that you will not be impacted by the changes as, in my opinion, a great many people in your position will benefit from obtaining appropriate advice.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
