Q. I recently completed my self assessment tax return, with the assistance of my accountant. During our meeting, he advised me that I need to seek advice regarding my retirement planning, as the rules regarding the taxation of pensions are set to change. Unfortunately, he stated that he is not an expert on pensions and suggested that I seek advice from such an expert. Can you tell me what these changes are and where I ought to turn for such advice, please?
A. Certainly.
With effect from 6 April 2014, both the Lifetime Allowance (the maximum amount a person can save into a registered pension scheme in their lifetime) and the Annual Allowance (the maximum amount a person can save into a registered pension scheme in any given year) are set to reduce.
The Lifetime Allowance, which as recently as April 2012 was £1.8m, is set to be reduced from £1.5m to £1.25m. Similarly, the Annual Allowance, which was £255,000 until 6 April 2011, will be reduced from its current level of £50,000 to £40,000.
Whilst these figures still may appear to be high, a surprising number of people are likely to be affected by the changes. As well as impacting high earners who are able to make significant contributions to a defined contribution pension, they will impact also modest earners who remain members of a defied benefit pension scheme. For example, a number of mid-level local government employees, NHS staff and university lecturers, amongst others, are likely to be affected by the changes, as well as those higher rate tax payers who are members of a private sector final salary scheme.
However, if you may be affected by the forthcoming reductions to the Lifetime Allowance and/or the Annual Allowance, there are measures that you can take in order to avoid a punitive tax charge and to maximise your retirement planning opportunities. If you think that you may be affected by the forthcoming changes, I recommend that you to seek assistance from a chartered financial planner, who specialises in retirement planning, as a matter of urgency.
Q. I read an article recently that said the Bank of England will raise interest rates once the UK unemployment rate falls to 7%. With the recent reduction to the unemployment rate, I am concerned that interest rates are likely to increase in the short-term. My wife and I are struggling to make ends meet in light of the protracted downturn and any rise in interest rates would make it even harder to balance my family’s finances. Do you think such a rise in interest rates is likely?
A. It is almost impossible to say with any certainty when the Bank of England will raise interest rates, which have remained at an historic low for almost five years now. However, it is not accurate to say that interest rates will rise once the UK unemployment reaches 7%.
Mark Carney, the Governor of the Bank of England, issued forward guidance in August of last year, stating that (subject to certain caveats) the Bank of England’s Monetary Policy Committee (which sets the Bank’s base rate) would not consider increasing interest rates until the UK unemployment rate fell to 7% (though such an increase to interest rates would not be automatic at that time). Mr Carney also stated that he did not expect unemployment to fall to this level until 2016.
As you note, the UK unemployment rate fell by 0.3% to 7.4% in the three months to October 2013 which has prompted many people to suggest that interest rates will fall in the near term. However, inflation – another key consideration for the Bank of England – is falling also and reached the Bank’s target of 2% in December. Inflation is expected to stay at or around the Bank’s 2% target in the medium-term, which means a key source of pressure to increase rates is likely to be abated.
Many commentators have suggested that Mr Carney and the MPC will announce, as part of their February inflation report, that the unemployment rate threshold they have set before which they will not consider an interest rate hike ought to be reduced to 6.5% or even lower. This would reflect the Bank’s concerns that, whilst the economic outlet and house prices in London and the South East may be improving, much of the rest of the UK is struggling with high levels of debt, low wage growth and decreasing levels of disposable income.
When speaking to a House of Lords committee in December, Mr Carney stated that “…it is welcome that the economy is growing again, but a return to growth is not yet a return to normality… the recovery has some way to run before it would be appropriate to consider adjusting the exceptional level of monetary stimulus that we continue to provide the economy”. I expect therefore that the Bank of England will continue its “low rates for longer” stance for the medium-term.
Q. I caught sight of a newspaper headline recently that seemed to suggest that the NHS is going to start providing financial advice. Is this correct?
A. No.
I suspect that the article you saw was referring to a report published by the cross-party think-tank, Demos. This suggested that, amongst other things, the Government ought to introduce financial health-checks for hospital patients.
Demos recommended that the NHS ought to provide a financial counselling service to patients following a diagnosis of cancer or another serious illness. It recommended that such a service should become a standard part of the follow-up care. A similar scheme was introduced in Wales last year, aimed at mitigating the estimated £570 per month loss suffered by an average patient following the diagnosis of cancer or another serious illness.
The report recommended also that the government and the insurance industry ought to collaborate to introduce a form of income protection “auto-enrolment”, similar to that which is being rolled out to increase pension saving, as part of a range of measures designed to tackle the rising costs of cancer and critical illness.
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
