Money News

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.”

ANNUITY FREEDOM
Tough rules that force most people with a personal pension to buy an annuity at the age of 77 (raised recently from 75) are to be scrapped. From April the same rules will apply to those over 77 as to younger people. The treasury estimates that only 50,000 people will benefit now and 12,000 a year in future.

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.

CHEQUE REPLACEMENT
Vouchers could replace cheques from 2018 under plans being considered by some banks. The UK Payments Council (which is run by all the main High Street banks) announced in December 2009 that it intended to close down the cheque clearing system by 31 October 2018. But it promised then – and reiterated a year later – that cheques would not be scrapped unless there was an alternative in place that was widely available and acceptable to cheque users.

The final decision will be made in 2016. One of the alternatives being considered is to replace cheques with vouchers that would be remarkably like cheques but the person making the payment would need to know the sort code and account number of the person being paid. The voucher would be sent in the post and the person who got it would send it or take it to their bank. The bank would then arrange the payment using the electronic clearing system which would normally be instant. 

Vouchers like this are already used in some European countries which have got rid of cheques. In some the form, already filled in, is sent out with bills. In others payments can be made through ATM cash machines. Although we write around five million cheques every working day – and even by 2018 that number is expected to be around two million a day – the banks seem determined to make the change and we may all have to learn to say ‘the voucher’s in the post’.

TV LICENCE

If you are 75 then the household you live in can get a free television licence. Even if you are not the current licence holder you can get the licence transferred to your name and get free TV for the whole household – however many sets there are. If you are 74 and the licence runs out you can apply for a short-term licence to cover the household up to your 75^th birthday. If you have more than one property then the free licence only applies one address.

Further information
Frozen pensions debate in 2004 http://goo.gl/IHmtc
Annuity plans http://goo.gl/kmjpO
TV licence call 0300 790 6131 or http://goo.gl/62nls

e-mail Paul Lewis on paul@paullewis.co.uk