People depending on investments to fund old age are facing another year of Brexit uncertainty, after a mixed period for UK markets in 2019.
A decisive election result cleared our path to leaving the European Union, but with trade deals yet to be struck with either the EU or the US our future fortunes are still not assured.
The newly re-elected government now has a majority that gives it the opportunity to solve major issues affecting retirement finances and health – the social care crisis leaving many elderly people with basic needs unmet, and a pension tax fiasco causing a shortage of doctors in the NHS.
Looking ahead: People depending on investments to fund old age are facing another year of Brexit uncertainty
The Government also continues to face calls to fix pension problems that disadvantage low paid workers and parents who fall foul of confusing child benefit rules.
Both the above penalise younger generations of women, who are still saving into pensions.
Meanwhile, their older counterparts, women in their 50s and 60s who saw the speeding up of state pension age and say it was poorly communicated, intend to keep up their campaign for compensation despite the loss of a landmark court case at the end of 2019.
We delve into some of the issues in greater depth below. It’s worth finding out more about these pension matters and how they might alter your plans for old age. Here’s what you need to know:
1. Pension investors: Brexit comeback for UK markets?
Last year, many pundits said the UK market was undervalued and might be heading for big gains in the year of Brexit.
It turned out Brexit got postponed until early 2020, the UK is still unloved by international investors, and a full market comeback is yet to materialise.
At the time of writing in late December, UK markets are up on the year and that will have helped to boost pension funds.
Looking ahead to 2020, market experts believe the UK is cheap and poised to rebound – read our investing outlook here.
Many pension savers depend on stock market investments, though to different degrees according to your age and where your savings are stashed.
Younger people who are still investing for retirement can ride out periods of underperformance, and pick up shares on the cheap.
Older workers getting close to stopping work, and retirees who invested their pots in income drawdown schemes after the pension freedom reforms in 2015, have more to worry about. We look at how to protect your retirement income in troubled times here.
Pension investments: Brexit got postponed until early 2020, the UK is still unloved by international investors, and a full market comeback is yet to materialise
Meanwhile, those already drawing a final salary pension get guaranteed payouts and can ignore market turbulence, as can those who bought an annuity offering similarly guaranteed payments for life.
Anyone with a final salary pension who is yet to retire should also be fine, as long as the employer meant to fund it doesn’t go out of business.
Even then, the Pension Protection Fund will save most of your money.
But for those yet to retire who would like to buy an annuity, rates remain at rock bottom and will stay there unless interest rates start to recover.
2. Social care: Fresh bid to achieve consensus over who pays the bills
The Conservative manifesto offered a ‘guarantee’ that no one needing care will have to sell their home to pay for it.
Now returned to power, the Tories aim to make an urgent attempt to build a cross-party consensus with this as a condition.
While a deal is being sorted out, they will earmark an extra £1billion of funding every year for more social care staff, better infrastructure, technology and facilities.
This follows years of drift, when they failed to bring forward a promised social care plan to replace their much-panned idea to introduce a £100,000 ‘floor’ on personal contributions.
How is care paid for at present?
Under the current system someone’s assets – including the family home – is depleted down to £23,250 if they need to go into a care home.
If you need care in your own home, your assets must be depleted to a level set by your local council, which cannot be lower than £23,250, but your home is excluded from this means test.
There have been many previous attempts at reaching a cross-party deal, by introducing a cost ‘ceiling’ to avoid some families facing catastrophic bills, for example.
All have foundered, with proposals designed by government-backed experts ending up ignored or dropped.
It is currently unclear how the Tories’ plan to ringfence people’s properties, which currently have to be sold to cover bills if you need to go into a care home, might work in practice.
Everyone seems to agree people should contribute something towards their care in old age, while avoiding a health lottery where some end up facing outsize costs.
But there is no consensus that wealthy home owners should be massively subsidised by other taxpayers who might be struggling financially.
Meanwhile, a dwindling number of elderly people are receiving financial support towards long term care, despite an overall jump in spending and in requests for help to local councils.
‘Social care funding: Time to end a national scandal’, published by the House of Lords’ economic affairs committee last year, said some 1.4million people had an unmet care need in 2018, and the number of elderly and working age adults requiring help was increasing rapidly.
It called for the launch of universal free personal care.
Insurer AIG surveyed the public last summer on how they would prefer to pay bills for support as their health declined.
A contingency fund option, where people would fund care needs by saving into a special fund that could be bequeathed to loved ones if it wasn’t used, proved the most popular.
New bid for consensus plan: Conservative manifesto offered a ‘guarantee’ that no one needing care will have to sell their home to pay for it.
3. Pension tax relief: Fix for doctors could spark radical reform for all
The Government has just come out with a one-year fix for the so-called ‘taper problem’, which sees doctors turn down shifts for fear of shock pension tax bills, and it has promised urgent talks with the medical profession to solve the matter.
But it has fallen short of saying it will abolish the taper, which pension experts believe is the only viable remedy.
Meanwhile, the NHS is to foot pension tax bills run up by doctors, to avoid a staffing shortage which it is feared could spark a winter crisis in the health service, and threaten patient care by causing longer waiting lists and delays to operations.
What is the taper?
The problem revolves around a controversial reform to the annual allowance, which is the amount most people can put in a pension and get tax relief – including their own and their employer’s contributions, and tax relief from the Government – and is currently £40,000.
‘The taper’ was introduced by former Chancellor George Osborne in the 2016/2017 tax year.
It means the annual allowance is gradually reduced from £40,000 to £10,000 for those whose total income, including any growth in their ‘pension rights’ over the year, is between £150,000 and £210,000.
However, tax charges can kick in if your income is over £110,000 a year because of the way pension rights are calculated, and these are especially difficult for workers to keep track of in salary-related schemes like the NHS one.
High earning doctors who work unpredictable overtime shifts to reduce waiting lists find it hard to work out how close they are to the £110,000 threshold.
This temporary solution has provoked outrage among financial experts, who are calling on the Government to reform the system for all higher earners rather than give doctors a special deal.
That could reopen the issue of a radical overhaul of the pension tax relief system for everyone, not just the best-paid workers.
The Government now has a comfortable majority, and if strapped for cash it may be tempted to dust off George Osborne’s old plans, shelved just ahead of the Brexit referendum, to axe pension tax relief and introduce a Pension Isa.
Introducing a Pension Isa would mean savers no longer receive tax relief on contributions to a pension.
Instead it would pay out tax free in retirement, providing a future Government didn’t slap penalties back on later.
The other option that could be on the table is a new flat rate of tax relief on contributions, probably of between 25 per cent and 33 per cent.
This would see lower earners taxed at the basic rate of 20 per cent get an extra Government boost to their pots at the outset – and see the value of their pensions rise as a result – while those on 40 or 45 per cent wouldn’t get back their full whack of tax any longer.
Either plan would abolish for good the principle that the money people put towards old age saving is not taxed no matter how much they earn – an idea that originated in the Finance Act of 1921.
4. Tax loophole: New look at fixing issue penalising the low paid
A separate pension tax relief problem, this time affecting low paid people, is also facing the Government.
In their manifesto, the Conservatives promised a ‘comprehensive review’ of a loophole which sees workers, mostly women, earning between £10,000 and £12,500 lose pension top-ups automatically paid to the better off.
This was a victory for the party’s former Pensions Minister Ros Altmann, who has campaigned vigorously on the issue, and comes despite a Treasury Minister saying last year that solving it was not ‘cost-effective’.
We have repeatedly highlighted the scandal since spring 2018, and pointed out at this time last year that the Government would find itself under growing pressure unless it addressed the unfairness of penalising the worst off workers, while the rich get their full whack of pension cash.
Short-term fix: The NHS is to foot pension tax bills run up by doctors, to avoid a staffing shortage
Lady Altmann and the Net Pay Action Group are now pushing a solution which involves HMRC identifying which workers are losing out at the end of each tax year.
The taxman would then issue refunds via the existing P800 system, or let people offset the refund against a liability in a self-assessment return.
‘I do hope Ministers will act rapidly,’ says Altmann. ‘The lowest-paid are surely those who need the most help with their pensions and a “one-nation” approach must at the very least ensure the low earners are no longer penalised just by virtue of the way their pension scheme is administered.’
5. Child benefit: Government’s own tax gurus say system is ‘unreasonable’
This is Money is campaigning against the unfairness of parents ending up with a smaller state pension because of innocent paperwork errors.
Parents – mostly mums – can end up tens of thousands of pounds worse off in retirement due to losing valuable credits.
We have made progress on one front, with HMRC now waiving the usual time restrictions on correcting records in cases where the ‘wrong’ partner’s name is put down on a child benefit form, if the delay is ‘reasonable in the circumstances’.
One couple managed to convince HMRC their delay was ‘reasonable’ because they made an innocent mistake in being unaware his filling in the form could result in her losing huge sums in state pension in old age.
Meanwhile, damning consumer research by HMRC revealed how parents are confused – and gutted – to discover child benefit errors can hit their state pension.
It confirmed people are almost entirely in the dark about the link.
And parents said they didn’t see the point in filling in the form if one of them was a higher earner, and so they weren’t entitled to get child benefit payments.
The Government’s own tax gurus, in the Office of Tax Simplification, issued a stinging report in October saying it was ‘unreasonable’ for parents to lose state pension over child benefit errors they can’t later correct.
They said people ‘can easily disadvantage themselves’ under a system that ‘appears illogical’ and ‘is inherently confusing’, and told the Government to find a way to restore state pension credits to parents who have lost them.
The OTS, an offshoot of the Treasury that provides independent expertise on tax issues, also called on the Government to fix the pension tax anomaly affecting low earners mentioned above.
TOP SIPPS FOR DIY PENSION INVESTORS
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