The Lifetime Allowance: How Low is Too Low?

In March, the Lifetime Allowance (LTA) was cut once again by Chancellor George Osbourne. He has also claimed that by 2018 the LTA will be indexed-linked, adjusting with inflation.[1] The amount of tax-free savings an individual can have in their pension fund upon retirement has been reduced from £1.25 million, for the tax year 2015/16, to £1 million, for the year 2016/17.[2] Any pension savings exceeding the £1 million LTA will be taxed at a rate of 55% on anything taken as a lump sum and at 25% if the excess is taken as an income (such as a scheme pension or annuity).[3]

Given the pressure that Osborne is under to reduce the deficit, it is perhaps reasonable that he would choose to cut the LTA; after all, the cut will save the Treasury around £600 million a year.[4] And there is good reason for the existence of LTA. The Government uses the promise of tax-free pension savings to incentivise the UK to save money for retirement – once no longer earning, they will not be dependent on the state. And, arguably, there can be little point in offering tax relief to pensioners beyond the level required for fairly basic living. This would be a luxury the state cannot afford; more relief simply means greater deficit.

When commenting on the recent cut, Osborne said that the limit for the LTA is so high that, “Fewer than 4% of pension savers currently approaching retirement will be affected”.[5] However, whilst that maybe true for soon-to-be pensioners, the rest of the UK may be less fortunate. As the Pension Advisory Service rightly points out, pensions are a long-term commitment and what may seem a modest accumulation of savings to start with may exceed the LTA by the time benefits are drawn.[6] Furthermore, the LTA applies to total pension savings - anyone who has had more than one job, and consequently more than one pension scheme, should keep this in mind.

The LTA cut will disproportionately affect those with a defined contribution (DC) pension scheme compared to those with a defined benefit (DB) scheme. Typically, those working in the public sector will have a DB scheme; this type of scheme is far easier to monitor, meaning you can stop contributing to or draw from your pension scheme before you hit the LTA limit. However, if you work in the private sector, you are likely to have a DC scheme. Should the investments made by your pension provider be successful and you pension exceeds £1 million, you could be penalised with a 55% tax rate. Although one can monitor how much is contributed to a DC scheme, it is impossible to know how much that pension will ultimately be worth. Thus, the investor pays the cost of poorly performing investments but risks just as much with investments that are successful. £1 million may seem like a vast amount of money but is reasonably easy to achieve. So, the LTA may affect a far higher percentage of the population than just the very richest amongst us.

It is possible that even the most modest savers could hit the LTA if their investments perform well over their lifetime. Consequently many savers will be discouraged from saving, which would risk them being dependant on the state for part or all of their retirement (the problem being further compounded by an ageing population). The £1 million LTA seems low, particularly since the annual allowance is already in place to limit tax relief on pensions. Achieving the right balance between an LTA that helps to reduce the deficit by taxing only those with the largest pension funds, and one that is so low it discourages people from contributing to pension funds altogether, is a challenge. Hopefully, if the LTA is indeed indexed in 2018, this will protect pension savers from an ever decreasing LTA (the new LTA is just 66% of the £1.8m LTA for 2011/12).[7] But in the meantime, everyone, however close to retirement, should keep a close eye on their pension fund.

Mark Howlett
CEO

Telephone: +44 (0)20 7893 3456

Email: contactus [@] broadstone.co.uk

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[1] Pensions Advisory Service, Lifetime Allowance Spotlight April 2015.

[2] Pensions Advisory Service, Lifetime Allowance Spotlight April 2015.

[3] Pensions Advisory Service, Lifetime Allowance Spotlight April 2015.

[4] http://www.theactuary.com/news/2015/03/lifetime-allowance-reduced-to-1million-says-chancellor/

[5] http://www.theactuary.com/news/2015/03/lifetime-allowance-reduced-to-1million-says-chancellor/

[6] Pensions Advisory Service.

[7] http://www.telegraph.co.uk/finance/personalfinance/pensions/11543227/The-death-of-pensions-has-it-begun.html

Try to be Flexible: How SMEs Can Attract Staff

It may once have been true that the most talented individuals would look for employment at large, well-known companies. Substantial budgets allow big organisations to offer higher salaries and broad ranging benefits. However, it is becoming increasingly the case that talented people seek the informal environment and varied workload offered by SMEs. Big salaries have become less important than overall job satisfaction, which is dependent on a myriad factors.

There are countless advantages of working for an SME. Firstly, there are fewer employees and so staff members are able to build rewarding relationships, thus forming solid, more productive teams. A Great Place to Work, a global human resources firm, studied successful workplaces for 30 years and reported that “investing in a high-trust workplace culture yields distinct, tangible business benefits” including attracting “better quality job applicants”.[1] Furthermore, most employees will have the opportunity to work closely with senior management, so work is more likely to get noticed and ideas are more likely to be heard. The environment of an SME is generally less formal and bureaucratic and the work more varied; this keeps employees engaged and drives productivity.

The best employees are most likely to be career-focused people. As such, you will need to show them that you can offer promotion possibilities that come with additional perks along with additional responsibilities. SMEs typically have fewer employees than larger companies and so there is more opportunity to demonstrate creativity and skill. Let potential recruits know that there is room within your SME to develop and flourish and that their efforts will be rewarded with appropriate promotion.

SMEs that are recruiting must focus on projecting the message that their work environment is more progressive and desirable than that of a larger company. A company website is an excellent shop window: photographs and website content (blog posts, for example) should reflect the flexible, exciting environment you can offer as an SME. Optimise your use of social media to connect with younger talent and extol the benefits of working for an SME.

Attaining a better work/life balance has become a high priority for most employees and SMEs are best placed to offer desirable flexible working hours. According to recruitment agency Robert Half, 29% of HR executives found that work flexibility was the main motivator for staff members.[2] The offer of split-shifts, customised hours or telecommuting will appeal to potential workers, particularly those with young families.

An excellent benefit scheme is a way for SMEs to attract high-calibre employees. In their most recent annual trends survey, MetLife reported that in 2014, employees who claimed to be very satisfied with their workplace benefits were almost four times more likely to be very satisfied with their jobs.[3] Similarly, a study by Bupa last year found that 42% of SME workers felt that workplace benefits were the most important consideration when choosing a job.[4] This is good news for SMEs who may often find it easier to make changes to their benefit schemes compared with larger organisations and so are able to integrate features that will appeal to new recruits.

Flexible benefit plans allow employees to select the additional benefits that best suit their lives, such as increased pension contributions, childcare vouchers, subsidised training, and access to mentoring, company cars and entertainment incentives. Healthcare is one workplace benefit that is increasingly in demand as it offers real value to employees.

Attracting the best recruits may seem like a daunting task for some SMEs. But, in actuality, SMEs are more than able to attract staff by capitalising on those aspects of their work environment that separate them from large organisations. Flexibility is of primary importance in the battle for human capital so don’t underestimate the power of a flexible benefit package, not only to motivate existing employees but also to attract new recruits.

Mark Howlett
CEO

Telephone: +44 (0)20 7893 3456

Email: contactus [@] broadstone.co.uk

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[1] http://www.greatplacetowork.com/our-approach/what-are-the-benefits-great-workplaces

[2] http://www.roberthalf.co.uk/how-to-attract-the-best-talent

[3] https://benefittrends.metlife.com/benefits-impact

[4] http://www.bupa.com/media-centre/press-releases/uk/flexibility-key-to-retention-and-happiness-in-uk-smes/

A Fond Farewell to Webb

Following the disastrous result for the Liberal Democrats in the General Election last week, several excellent MPs have lost their parliamentary seats, including the Pensions Minister Steve Webb. The fact that we are losing, arguably, the best minister to emerge from the coalition, is gloomy indeed. The reforms implemented by Steve Webb, the Minister for State Pensions,[1] have made the current pensions system far fairer and have allowed people far more financial freedoms. Despite receiving over 18,000 votes, Webb lost his seat in Thornbury & Yate to Conservative candidate Luke Hall. In a recent message on Facebook, Webb thanked his supporters for their backing and expressed his gratitude at having the opportunity to serve 18 years in Parliament. One of the sad truths of the way we assemble governments in the UK is that elections sometimes result in worthy and dedicated ministers being cast out; Steve Webb is an example of this in action.

David Cameron recently announced that Ros Altmann, a high-profile campaigner on pensions issues has been appointed pensions minister. Altmann is a City banker by training and previously worked as a director of Saga. Whilst her appointment has been widely welcomed by the pensions industry, only time will tell whether Altmann will have the same impact on the pensions system as Webb did.
During Webb’s time in the Department for Work and Pensions we have witnessed seismic change in the country’s pension system. Despite there being 10.3 million people over the age of 65 in the UK, a figure that has risen 80% since 1951, many of us are not saving enough money to see us through retirement.[2] In order to address this fact the Department for Work and Pensions introduced auto-enrolment.[3] Enrolling employees automatically into affordable and attractive workplace pensions may be a challenge of administration for employers, but auto-enrolment addresses a far greater problem. An ageing population means that more and more of us will be reliant for longer and longer on money saved from past employment. Therefore it is vital that employers honour the legal obligations inherent to auto-enrolment. If needed, there are many means by which employers can seek advice as to how to manage auto-enrolment and make the necessary payments.

Webb spearheaded several radical changes to pension policy. Now, those over 55 with a defined contribution (DC) pension policy are able to spend their pension pots should they wish to, rather than having to wait until their official retirement age. Although these new freedoms have led to concerns that many pensioners will blow their pension pots on “Lamborghinis”, it seems unlikely that those who have diligently saved their money in a pension fund would blow it all at once simply because they can. Indeed, research from Prudential Plc at the time the pension reforms were introduced suggested that only 2% of over 55s were thinking of making large purchases with their pension pots.[4]

It is more likely that pensioners will chose one of the other available options and either take out a small amount of money from their pension each year or buy an annuity. These freedoms signified Webb’s faith in the ability of the UK population to act responsibly. This faith is rarely seen in government ministers.[5] Rachel Reeves, the Labour Shadow Minister for Work and Pensions, expressed fears that some pensioners may be at risk of being ripped off by fraudsters or “forced to pay excessive fees”.[6] And she warned that pension providers were unprepared for the bombardment of people asking for advice on what to do with their pensions.[7] In contrast, when confronted with think-tank proposals to implement default retirement systems for DC pensions savers, Webb rejected them as unnecessary, adding that “There is no inconsistency between helping people do something they would not otherwise do – like building up pension savings – and then recognising that everyone is different and people should be free to do what they like with [their pension].”[8]

Webb is also responsible for the newly implemented 0.75% cap on pension charges. This cap will end the over the top charges enforced by pension providers and initiate a ban to hidden costs. This will make a huge difference to the individual and the UK as a whole: an employee with a pension pot of £30, 000 could benefit by £1,600 with a saving scheme that charged 0.75% compared to one that charged 1.5%.[9] In addition, the government estimates that an extra £195 million of pension contributions will turn into pension savings over the next 10 years.[10] In summary, the benefits are clear: not only are employees automatically enrolled into pension schemes, but their money is protected from excessive charges, and finally, their pension is handed back to them to invest or save or spend upon their retirement.

It is evident that Webb was passionate about the importance of pensions. During his time in Parliament he certainly made a string of bold and decisive moves; but the reforms put in place clearly show that he understood the nuances of pension policy.  Even though Webb is no longer the Minister for State and Pensions, he will be remembered as having an extremely positive impact on the UK pensions industry and is sure to be a very tough act for Altmann to follow.

Mark Howlett
CEO

Telephone: +44 (0)20 7893 3456

Email: contactus [@] broadstone.co.uk

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[1] https://www.gov.uk/government/ministers

[2] Population ageing: statistics house of commons library

[3] https://www.gov.uk/government/policies/helping-people-save-more-for-their-retirement-through-workplace-pensions

[4] http://www.cityam.com/213081/pension-changes-april-2015-five-things-you-need-know

[5] Gov https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/332714/pensions_response_online.pdf

[6] http://citywire.co.uk/new-model-adviser/news/labour-calls-for-pensions-cooling-off-period-to-stop-scams/a808009

[7] http://www.theweek.co.uk/budget-2015/62997/pension-changes-will-they-come-back-to-bite-britain

[8] http://www.ipe.com/countries/uk/uk-minister-dismisses-auto-protection-as-politicians-clash-on-paternalism/10006953.article

[9] http://www.theguardian.com/money/2015/mar/02/fca-pension-fees-charges-cap-criticism

[10] https://www.gov.uk/government/news/an-end-to-rip-off-pension-charges-webb