Your Money Queries – 17th June

Q. I am approaching retirement and expect to save a considerable amount in the next five years in order to boost my pension. I read an article recently that stated that the lifetime allowance is set to be reduced and, if that is correct, I suspect that my pension savings may exceed the lifetime allowance. Is this correct and, if so, is there anything I can do to protect my position?

A. 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 – is set to reduce from £1.5m to £1.25m. The reduction to the LTA, announced in last year’s Autumn Statement, will take effect on 6 April 2014.

HMRC has launched a consultation which sets out its plans for the introduction of both “individual protection” and “fixed protection” for those people who are affected by the reduction of the LTA.

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. Furthermore, those in valuable defined benefit schemes may wish to remain a member of such schemes, continuing to accrue benefits, thus making individual protection attractive to them.

Alternatively, in applying for fixed protection, a person will be able to retain the current LTA of £1.5m but will be prohibited from making any further pension contributions.

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).

The form of protection that is most appropriate for you will depend upon a person’s individual circumstances. It is possible that some people may be advised to apply for both fixed protection and individual protection in the first instance, in order to give themselves greater flexibility at a later date.

Therefore, if you think that you may be affected by the reduction to the LTA, I recommend that you seek assistance from a chartered financial planner, who specialises in retirement planning, as soon as possible. It is important that you seek assistance sooner rather than later, so that you have the time to assess 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 leaving it until the last minute, only to find that it is too late to make an appropriate assessment and submit an application for protection.

Q. I am a professional in my mid-thirties. I recently read a newspaper article which stated that savings levels amongst the UK workforce are at “an all time low”. This got me thinking about my own savings and retirement plans which, I have to confess, are all but none existent. Please can you advise how much I ought to be saving each month and how much I ought to contribute to my pension?

A. You are correct that a recent study (conducted by one of the country’s largest insurers) highlighted that savings levels in the UK have hit an all time low. This has been blamed upon a “perfect storm” of an ageing population, high levels of both national and household indebtedness, a prolonged economic malaise, high house prices relative to wages and a lack of consumer confidence.

The report suggests that more than half of those people who “could and should” be making financial provision for their old age are failing so to do at a sufficient level. It demonstrated that, amongst those people aged over 30 and earning at least £10,000 per year, private savings combined with the state pension will provide an average income of £11,400 (compared to an expected retirement income of more than £25,000).
There is no definitive answer to the question of how much you should set aside in accessible savings or retirement savings. However, a good “rule of thumb” is to have the equivalent of at least three months net salary in some form of instant access savings vehicle (although I accept that this is not always achievable). Similarly, in terms of retirement provision, you ought to save as much as you can afford comfortably. Some people suggest that a person should aim to contribute 10-15% of their salary for the whole of their working life, whilst others recommend halving the age at which you start contributing to your pension and making a percentage pension contribution equivalent to that figure (i.e. if you started saving into a pension at age 35, you would make a pension contribution of 17.5% of your gross salary).

However, each person’s individual financial circumstances are unique and I have too little information to provide you with definitive advice. How much you can and should save and/or contribute to your pension depends upon a number of factors. These include (but are not limited to) your salary, your lifestyle, whether you own your own house, your marital status, your aspirations for life, your intended retirement age, whether you have any expectations of inheritance, your career aspirations and your desired level of income in retirement.

I recommend therefore that you seek advice from a chartered financial planner, who specialises in retirement planning. They will conduct a thorough review of your financial circumstances and will be able to advise you of a suitable strategy to achieve your financial aspirations.

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.

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