This piece first appeared in Saga Magazine in Month 2011
The text here may not be identical to the published text  

Money News

Ex-pats' pensions, Annuity freedom, Inflation U-turn

ANNUITY FREEDOM
Government plans to relax the strict rules about what we do with our retirement fund will mainly help those with a pension of at least £20,000 a year. People with less than that in guaranteed retirement income who are under the age of 77 will be more restricted in what they can do.

From April one regime will apply to everyone from the age of 55 – when access to a pension fund can begin. Under the new rules no-one will have to buy an annuity – an income for life at any age. Instead they can put their money into what is called a ‘drawdown’ plan and can take income from it. People with less than £20,000 a year of guaranteed pension income will be subject to what is called ‘capped drawdown’ and will only be able to take out an annual amount roughly equal to the flat single person annuity they could buy with their fund. For the minority lucky enough to have that much guaranteed retirement income life is much freer. The £20,000 a year can be made up of the state pension, any pension paid by an employer, and an annuity. Those with that much will be able to put any further pension funds into an unlimited drawdown plan. They will be able to take any amount out of their plan – the whole lot if they want. Any withdrawals though are taxed as income. So large sums are likely to be at least partly taxed at 40% and very large sums at 50%.

All drawdown plans carry annual charges – anything from 0.5% to 2% a year of your money. So for the vast majority the best choice will still be to buy an annuity, either one that lasts all your life or one that is time limited which allows a rethink every five or ten years.  If there is money left in your pension fund when you die you can leave it tax free to charity. If you leave it to your heirs it will be taxed at a flat rate of 55% but will not be subject to inheritance tax as well.

PENSIONS MINISTER SUPPORTED UNFREEZING.
Seven years ago when he was an Opposition spokesman on social security, the Pensions Minister Steve Webb MP asked Parliament to extend the annual inflation increase (uprating) of the state pension to people living in Australia, Canada, South Africa, New Zealand and a hundred other countries around the world where pensions are frozen.

About 550,000 British people who worked and paid National Insurance contributions in the UK get lower pensions because they live abroad in countries where the UK pension is not uprated each year. As a result their pensions are frozen at the rate when it was first paid to them abroad. Many ex-pats live on state pension paid at the same rate they got when the reached pension age in the 1980s or 1990s, less than half the current pension.

They see that as deeply unfair – not least because the pension is uprated in about fifty countries including the European Union and the USA. Successive Governments have baulked at the £540 million cost of paying them their full pensions from now on. But in 2004 Steve Webb tabled an amendment to a Pensions Bill so that “all state retirement pensions in payment to pensioners living outside the United Kingdom shall be subject to annual uprating by the same percentage rate as is applied to such pensions payable to pensioners living in the United Kingdom”. His amendment would have only cost around £20 million a year because it would have uprated pensions in future but would not have raised them to the full rate at once. Even this modest amendment was not voted on – Steve Webb withdrew it after some blandishments by the then Labour Minister Chris Pond.

On Labour’s side in 2004 was backbench Conservative MP George Osborne, now Chancellor, who observed. “If the system worked in the way that most people think, it would not matter where a person lived, because they would have built up an entitlement. Sadly, that is not so. Sometimes logic in government runs into the buffers of cost.” And Pensions Minister Steve Webb’s office told Saga Magazine “People who are considering emigrating abroad should always consider the impact the move could have on their future State Pension entitlement.”

INFLATION U-TURN
Most company pension schemes will not be changing the way they increase pensions each year after a U-turn by the Coalition Government. In June the Government announced that public sector pensions would in future be increased by the Consumer Prices Index rather than the Retail Prices Index. That will cut the increase in 2011 from 4.6% to just 3.1% costing someone with a £10,000 pension £150. That may not sound much. But over the next twenty years it could mean a pension which is around 19% less than it would have been. Those changes to all the major public sector schemes will go ahead from April.

But the Government has decided not to extend the change to all company pension schemes. Every company scheme is governed by its own trust deed – the legal document that sets out its rules. And about two thirds of these deeds specify that the RPI is used to increase pensions in payment. The other third simply refer to the Government’s official measure of inflation. From 2011 that official measure will be changed from the RPI to the CPI. That will change the rate used by those schemes. But it will not affect the two out of three schemes that specify the RPI in the Trust Deed.

The Government considered extending the change to those schemes too either by forcing a retrospective change in the Trust Deed or at least giving schemes the power to make such a change themselves. But in an announcement before Christmas the Government said it had decided not to make either of these controversial changes in the law. So in future some company schemes will use the CPI and others the RPI to raise pensions.

But the effect on those that change to CPI will be less than it is in the public sector. That is because the annual increase in company pensions is now capped at 2.5%. That would limit the effect of moving from RPI to CPI from a reduction of 19% over 20 years to one of 9%.

Further information
Frozen pensions debate in 2004 http://goo.gl/IHmtc
Annuity plans
http://goo.gl/kmjpO

 


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