Pensions freedom is now!

Pension FreedomThis article was featured in the July edition of Executive magazine

We now have more control, choice and responsibility over our retirement savings than ever before. But it is important to understand what this means at every step of retirement planning, from saving towards retirement, to taking an income and preserving what’s left for our families.

Freedom and Choice, the government response to previous consultation, is a game changer for defined contribution pension schemes and most personal pension plans. However the new rules do not and were never intended to impact on final salary or defined benefit arrangements. For members in defined contribution and personal pension schemes it will result in more choices at retirement. The new freedoms make pensions look more attractive and will hopefully encourage more of us to save as people envisage being able to use their savings when and for what they wish once they reach age 55. Moreover the new flexibilities move the emphasis on personal choice at retirement rather than during the savings or accumulation phase.

On the other hand the income tax structure and more generous death benefits counter-balance the impulse to take short-term gains by providing a strong reason for people to be more circumspect about how much they take out of their pension, especially if they need their income to last until they no longer need it.

The key changes in relation to accessibility can be broadly summed up in the following headlines:

  • From age 55 an individual can take a tax free cash entitlement from their pension pot and/or income payments at any level.
  • Any income taken will be taxed at the individual’s marginal rate of income tax

Essentially the new rules provide the opportunity for everyone to be able to draw on their pension however they please. Pension companies offering flexi-access will allow plan holders to take as much or as little as they want from their pension whenever they want and however they want to take it.

There are also significant changes on pension death benefits. Previously lump sum benefits on death were taxed at a massive 55% but this has now been scrapped. The new reforms remove tax charges on death benefits where the member dies before age 75, reduce tax charges payable on death benefits paid where the member dies after age 75 and provide the ability for non-dependent beneficiaries to take income from inherited pension funds.

So pensioners will be able to nominate anyone they like to receive any remaining pension funds, and those beneficiaries can in turn nominate further beneficiaries if the fund hasn’t been used up by the time of their death.

Freedom and choice indeed but with that comes increased personal responsibility and a need to ensure a full understanding of the new rules since the wrong decisions could prove costly.

Using Auto Enrolment to engage with employees

Employee Benefits

In the past I’ve talked about pensions auto-enrolment as an opportunity to improve your success with staff engagement. In other words if auto-enrolment has to be done, and it does, then use it to your best advantage to get the most from your staff relations as a means of boosting productivity and profits.

There is an abundance of research which has proven beyond doubt that stress causes a significant loss of output in many businesses from the largest multinationals to the smallest of firms. Indeed some very recent research here in the UK identified that 23 per cent of staff surveyed had at some time called in absent due to a stress related condition. Moreover a closer analysis discovered financial worries as the largest single issue for almost a third.

The research identifies 46 per cent of people worry about their finances, which means every business has a financial stress problem.

Jo Adams, a North Scotland people management specialist said “the research is clear regarding the impact of financial stress.  I believe, organisations are starting to recognise the benefits of improving financial awareness and giving staff tools to manage these issues can lead to improvements in absenteeism, engagement and of course, productivity”.

Financial well-being is usually described along the lines of ‘Being and feeling financially healthy and secure, today and for the future’. Easy to say but when were we ever taught the rudiments of achieving such a state?  In 2013 it was announced that financial education was to form an official part of the English national curriculum, including lessons on the public finances. In Scotland the Curriculum for Excellence recognises the importance of building financial capability in all our young people. But how does that help those of us who have long departed the education system?

The good news is that Financial Well-being is topping the 2015 agenda for the UK’s leading Reward, HR and People leaders and the roll-out of auto-enrolment is a perfect opportunity for employers to make a positive impact on the provision of financial fitness services. Clearly there is a cost to each and every business but using the example of auto-enrolment and the mandatory employer contributions to a pension scheme we have a gilt edged opportunity to educate on the power of future financial independence.

By combining auto-enrolment with a financial well being strategy it is possible for organisations to engage with their staff on a regular basis to help them take much more control of their money and reach their financial goals. For many a generous auto-enrolment offering will go a long way after years of stagnant wages and by presenting the new pension funding requirements in a positive light we can take advantage of a golden opportunity to engage with our people.

So for all business owners it is crucial the pension design and implementation proposition chosen is capable therefore of transforming a financial headache into something that stimulates significant staff engagement and as a result delivers very real increases in productivity and profit.

Freedom and choice in pensions – surely that’s a joke!

Houses of parliament westminster women sexism politicsThe auto enrolment band wagon rolls on and the latest statistics tell us that so far there has been a favourable response from workforces nationwide. Opt out rates are much lower than predicted and clearly this is good news in relation to the Governments original intention in building a self supporting culture in retirement.

So all is well, or is it? Based on the fact much of the cost of promoting self-sufficiency in retirement has been landed on the employers’ doorstep it is not surprising the number of business owner firms planning far enough ahead remains still very disappointing. Recent surveys continue to demonstrate that many employers are burying their heads in the sand and hoping the issue will go away. A poll last month revealed that 49% of SMEs and micro-employers understand little or nothing about the pension changes with 67% having no idea even of their staging date.

Here at Calvert Financial Solutions we continue to progress clients to a position of safety at a cost that satisfies an agreed budget using all the phasing and postponement tools available where appropriate. It’s important now that we continue to adopt a pro-active stance in helping clients get to grips with the auto enrolment challenge.

On 21st July 2014 the Government gave a green light to the radical rewriting of the pension rule book. The Government response to the Freedom and choice in pensions‘ consultation delivers on the Chancellor’s Budget promise of much more pension flexibility and provides further detail on some of the changes in store from next April. This promise of pension freedom is set to encourage more clients to look in earnest once again at pension planning as a key component of a robust long term financial plan.

We believe that we should provide our Clients with a level of service and support that creates immediate auto enrolment solutions for their business, whilst also providing a structure that will assist their future growth and development.

Based in Inverness, our regional strength tends to lie in North Scotland and the Highlands and Islands, although we have clients throughout the UK. Our locality has been a decisive factor for many of our client firms and this is reflected in the strength and delivery of our services and accessible design and implementation support functions.

For auto enrolment specifically what can you expect from CFS? By working closely with you and understanding your workforce and your needs we will:

  • Deliver a communications plan for your workforce
  • Assess your workforce and estimate costs for you the employer
  • Select the right pension scheme for you and your workers
  • Arrange employee presentations to enable your workforce to understand what will happen and when
  • Arrange for a face to face appointment with employees and give individual advice
  • Arrange regular reviews to ensure that you the employer remain within the legislation requirements and avoid large penalties from the PR

Auto-Enrolment FAQ for small businesses

FAQ-auto-enrolmentThere are still many business owners asking me what the pensions Automatic Enrolment legislation means for them. So for those who need a whistle stop tour of the main headlines I have produced a FAQ below.

Back in 2006 the Department of Work and Pensions’ research estimated that around 7 million people were not saving enough for their retirement needs.

To increase private provision for low/medium earners the Pension Act 2008 introduced workplace pension reforms effective from October 2012. These pension reforms mean that, eventually, all employers will have to offer a qualifying workplace pension scheme to their workers and that all eligible workers must be automatically enrolled into the chosen scheme.

To understand what is required of employers here are the most frequently asked questions.

What is Auto Enrolment?

It’s the process where an eligible employee is automatically enrolled into their company’s qualifying pension scheme without any action on their part. Under new Government legislation, this is a legal requirement for all UK employers.

Why is Auto Enrolment happening?

A large number of the working population in the UK are not saving enough for retirement or taking advantage of private pension schemes that may be on offer. We are living longer and have an increasing proportion of people of retirement age compared to those of working age. Auto enrolment is a part of a Government initiative to increase private retirement savings.

When is it happening

Auto enrolment began in October 2012. However, to help businesses prepare for the administration changes and costs of auto enrolment, it has been introduced in stages. The larger employers started to auto enrol their employees in 2012 while medium to smaller employers are being phased in over the next 4 years. By February 2018, all employers will have enrolled their employees into a qualifying scheme.

Is everyone being enrolled into a workplace pension?

Employers will have to auto enrol any eligible employee. An eligible employee is anyone aged between 22 and state pension age whose earnings are over the income tax personal allowance (£9,440 a year from 2013/14). There are different rules for staff outside these age and earnings ranges and employers will be required to ‘assess’ the whole workforce and know how and when to act in every circumstance.

How much will have to be paid into the qualifying scheme?

The total minimum contribution will eventually be 8% with the employer having to contribute at least 3%. The difference between what the employer must pay and the overall minimum contribution is made up by the employee plus some tax relief from the Government.

Where will the contributions be invested?

The scheme will need to have a default investment fund available as agreed with the pension provider. This will be used to auto enrol new employees and for those who don’t want to make an alternative investment choice if the scheme offers one.

What if the employer already offer a scheme?

The employer may already offer employees a scheme, but it will need to meet certain criteria to be suitable for auto enrolment. All types of schemes must have the means to auto enrol eligible employees. If the employer doesn’t currently offer any scheme or their current scheme does not meet the criteria then they can either change the current scheme to fit the criteria or set up a new scheme.

The DWP published a progress report in December 2013 on the success or otherwise of auto enrolment. It announced that so far over 2 million individuals had been auto enrolled with less than 10% deciding to opt-out – workers can decide whether to remain in the pension scheme or not. The data also suggests that many small to medium sized businesses are still not certain of their roles and responsibilities and are at risk of non-compliance. Since it can take up to 18 months to design and implement an effective auto enrolment pension solution business owners need to take action early.

First Auto Enrolment Non-compliance Notices Issued by Pension Regulator

The Pension RegulatorThis year some 38,000 businesses are scheduled to automatically enrol their staff into a qualifying workplace pension scheme (QWPS) with 32,000 employing between 50 and 250 employees set to go from the beginning of the new fiscal year in April 2014.

Much has been said in connection with the low opt out rates experienced by larger employers to date – workers are permitted to back out of the scheme if they wish within the first month – but is this really such a surprise?

Only just a few years ago research showed that for the majority of employees saving for retirement was less of a priority than holidays, home improvements, going out, saving for a rainy day, the car, shoes and clothes. A recent survey undertaken on behalf of NEST (National Employers Savings Trust) suggests that auto enrolment activity has pushed pensions right up the list of consumers’ priorities. Is this because during recessionary times people feel more vulnerable for their future? Or is it just that we all understand that life is short and we need a plan.

Whatever the reason it is clear that the idea of saving for a future income including a pension now resonates with the UK public more than ever. The recent Budget announced massive reforms around pension accessibility which will only accelerate this shift of opinion.

The responsibility of setting in place qualifying workplace pension schemes has been landed on employers and some cracks are beginning to appear. The Pensions Regulator (TPR) investigated more than 500 suspected breaches of auto-enrolment (AE) legislation in just 6 months and 590 in total since October 2012.

As a result the regulator took action under its compliance and enforcement policy in 134 instances to 29 January 2014. The most serious of the compliance notices issued related to companies who had failed to establish a scheme and complete registration.

In addition, TPR delivered 28 instructions to companies at risk of non-compliance prior to January 2014 and 101 warning letters were issued for minor alleged record keeping or staff communication breaches.

The latest figures come as a concern rises over employers failing to meet their AE duties due to the anticipated industry capacity crunch in the coming months.

Budget 2014: Pension changes mean more control over your money

George Osborne Budget 2014The Chancellor has announced a radical reform of pension rules which will mean that anyone over the age of 55 will be able to take their entire pension pot as cash.

From April 2015 anyone who is aged 55 or over will be able to take their entire pension fund as cash – although only the first 25% will be tax-free – in a move will allow individuals to have access to their own cash, unlike the current system which requires an annuity to be taken out.

Clearly not unintentional this will be a massive boost to current automatic enrolment activity which is already achieving great success with opt out rates much lower than anticipated.

As part of the communications programme for newly installed workplace pension schemes I deliver each week on average two or three workforce educational events. By far and away the biggest question asked at the Q&A sessions is ‘how and when do I get maximum cash from my fund?’. At last it will now be possible to respond with an answer they want to hear.

Mr Osborne said:

“Most people still have little option but to take out an annuity, even though annuity rates have fallen by a half over the last 15 years. The tax rules around these pensions are a manifestation of a patronising view that pensioners can’t be trusted with their own pension pots. I reject that.

“People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances. And that’s precisely what we will now do. Trust the people.”

I couldn’t agree more although it will be crucial that individuals understand the full implications and make informed, thought through decisions.

The Chancellor also announced that the income requirement for flexible drawdown has been cut from £20,000 to £12,000 and the capped drawdown limit has been raised from 120% to 150%. This will make available this highly effective planning tool to a much wider audience for the first time.

Whilst its good news for investors it is a huge blow to annuity providers who at one stage had £3.2 billion knocked off their stock value in less than one hour yesterday. It may not be the death knell for annuities but it will demand a shake-up in their thinking.

Elgin Lunch and Learn Review

Elgin MuseumI was running another seminar on Auto-enrolment for small businesses in conjunction with Business Gateway and Moray Council in Elgin recently and felt it was a useful day for all involved including myself.  

I delivered an update on the current pension reforms specifically around the impact on SME employers of pension auto enrolment. Whilst most business owners are now aware of the legislation many are still unsure as to when it will actually affect them, however it was good to hear many delegates now embracing the idea and initiating action.

Business owners are still getting to grips with the details of this legislation but  awareness amongst business owners is a lot higher than it was this time last year.


The feedback was again good and I’ll be providing all those in attendance with our Auto Enrolment Initial Assessment report which confirms what employers need to do and by when.

So thanks once again to Business Gateway and Moray Council for having me along and thanks to all those who came.


Top 5 reasons to pay into a pension this tax year

tax_yearAs we approach the end of the tax year it’s a good idea to remind ourselves of all the good reasons to invest into a pension plan, here’s our current Top 5.

1. Get personal tax relief at top rates
  • For individuals who are higher or additional rate tax payers this year, but are uncertain of their income levels next year, a pension contribution now will enjoy tax relief at their highest marginal rate. This has a positive impact on employees whose remuneration can fluctuate year on year perhaps through bonus payments, or self-employed clients who have had a good year this year, but are not predicting repeating it in the next. Adapting the carry forward and ‘Pension’s Input Period’  rules provides the opportunity for some to pay up to £240,000 tax efficiently in 2013/14.
  • For example, an additional rate taxpayer this year, who feared their income may dip to below £150,000 next year, could potentially save an extra £5,000 on their tax bill if they had scope to pay £100,000 now.

2. Pay employer contributions before corporation tax relief drops further

  • Corporation tax rates are falling, expecting to reach 20% by 2015. Business owners who are considering boosting pension provision for key staff over the coming years should consider bringing forward those plans to benefit from tax relief at the higher rates. Payments should be made before the end of the current business year, while rates are at their highest.
  • For the current financial year the main rate is 23%. This drops to 21% for the new financial year starting 1st April 2014.

3. Sweep-up unused allowance from 2010/11

  • Use it or lose it – unused pension annual allowance from 2010/11 tax year must be used this current tax year. The annual allowance still available is £50,000 so for a 40% taxpayer, this could mean a missed opportunity to save up to this amount at a net cost of only £30,000.

4. Make the most of the £50,000 pension allowance

  • The annual allowance drops to £40,000 from the new tax year.  But the ‘Pension’s Input Period’ rules mean that some clients are paying towards this limit already.
  • Carry forward for the three previous years back to 2010/11 will still be based on a £50,000 allowance. But over time, the new £40,000 allowance will come into the calculation and dilute what can be paid. Up to £200,000 can be paid to pensions for this tax year without triggering an annual allowance tax charge. By 2017/18, this will drop to £160,000 – if the allowance stays at £40,000.

5. Avoid the child benefit tax charge

  • An individual pension contribution can ensure that the value of child benefit is saved for the family, rather than being lost to the new child benefit tax charge. And it might be as simple as redirecting existing pension saving from the lower earning partner to the other.
  • The child benefit, worth £2,449 to a family with three children, is cancelled out by the tax charge if the taxable income of the highest earner exceeds £60,000. There’s no tax charge if the highest earner has income of £50,000 or less. As a pension contribution reduces income for this purpose, the tax charge can be avoided.

Staff engagement through pensions auto enrolment

Staff EngagementThis is the third in a series of articles on Pensions Auto Enrolment and most employers will be aware by now that the government have introduced new laws aimed at getting people to save for their retirement. Workers not already in a pension scheme are now being automatically enrolled into one – but can choose to opt out.

This is the first time compulsion has been used to resolve the income in retirement shortfall issue and business owners could be forgiven if you were to regard it as just another costly headache for small enterprise. However, since you can’t get out of it perhaps a better way of viewing the legislation would be that it is an ideal opportunity to connect with your staff and show them how much you value the work that they do.

For many employers it will be a chance to re-visit existing pension arrangements, check on their efficiency level and re-market them in a positive light to the members. Businesses setting a scheme in place for the first time should use the occasion to engage with their staff and demonstrate how rewarding a workplace pension can be.

A good quality pension scheme is highly regarded and in most employee benefit surveys sits only just behind basic remuneration on the list of ‘would like to have’. Used effectively it will aid in the recruitment of quality individuals and improve retention. That is why it is so important that employers use this opportunity to install a plan that provides value for money. Opt out rates were anticipated to be around 25% but so far there has been an over-whelming response from the workforce with opt outs averaging less than 10%.

At a time where most of us feel we are working harder for less it is key that all employers get the best out of their most important asset – their people. A successful business needs motivated, accomplished people as they drive for profitability and success. Staff engagement and a sense of well being is a pre-requisite.

Effective communication is vital and will be the means to ensuring a positive outcome – business leaders must make certain they take maximum advantage.