As the song goes “I got bills, I gotta pay, so I’m gon’ work, work, work every day.” At some point however, people may want or need to give up going to work every day. Even younger people need to think about how they will pay their bills if they are unable to work for any reason.
If you are intending to give up work permanently, it is absolutely crucial to plan ahead. One option is to save into a pension. If you choose this route, it is important to understand your annual and lifetime allowances. It’s also important to be clear on what will happen if you exceed them.
The following explanation applies to defined contributions pensions. Defined benefits schemes may have different rules.
It also applies to the time before you start to make any sort of withdrawal(s) from your pension pot. Once you start withdrawing money, you may trigger different rules
The Annual Allowance
As its name suggests this is the amount you can save towards your pension each year. Generally speaking you can save an amount equal to your earnings, up to a maximum of £40,000.
If you put in more than you earn, then you will only get tax relief to the amount of your qualifying earnings. For example, if you earn £10K pa and put all of this towards your pension along with £5K from another source, you will only get tax relief on the initial £10K. Alternatively if you earn £45K pa and put all of it towards a pension, you will only get tax relief on the initial £40K.
There are different rules for those who are not in paid employment. At current time, those not in work can receive tax relief on pension contributions up to the value of £2,880. They can pay in more than this, but will not receive tax relief on these extra contributions.
The Money Purchase Annual Allowance (MPAA)
Starting this tax year, making withdrawals from pensions can result in your annual allowance being reduced to £10K pa. This is a complicated matter, and therefore it is a good idea to seek professional financial advice on the implications. It is, however, worth being aware of this. If you plan to make withdrawals from your pension fund, it is strongly advisable to check how this could affect your annual allowance.
The Lifetime Allowance
This is the amount of pension contributions on which you can receive tax relief over your lifetime. For most people it is currently £1.25 million and will reduce to £1 million in April next year.
If you are currently asking yourself “how can I save money on my pension pot”, then one possible solution might be to ring-fence your lifetime allowance. This is known as individual protection.
As with the MPAA, the rules around this are complicated, so again it would be wise to seek professional financial advice. They also depend on the type of pension arrangements you have, i.e. defined contributions or defined benefits. If you do have substantial pension savings, however, it could be worth looking into this.
Pensions and Tax
You may also be asking yourself “what tax will I owe on my pension pot?” The answer here is also likely to be, it depends.
If you take any funds over your lifetime allowance as a lump sum, you will be taxed at 55%. If you used funds over your lifetime allowance to generate a regular retirement income, you will be taxed at 25%.
This is in addition to any tax which is due on the income itself. Income from pensions is taxed in the same way as income from employment. Those who have reached state pension age are, however, exempt from paying national insurance contributions, even if they continue to work.
The value of investments and any income from them can fall as well as rise. You may not get back the amount originally invested.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
Most people start families in their 20s or 30s and this is also the first time they think about family protection, life insurance and making sure that their loved ones are taken care of if they die.
Once this life cover is purchased, it is common to forget all about it and only review it every couple of years when a review of ones finances is due.
Decades later, when your circumstances have changed and your family has grown up, it might be tempting to question whether a life insurance policy is necessary at all.
However, cancelling a policy might involve hidden costs. This blog post is a quick guide to the possible pitfalls of cancelling your policy.
If your children are over the age of 18 or a substantial part of the mortgage is paid off, there might be little reason to keep your policy.
It seems rather obvious to say, but if you cancel your policy the first thing you will lose is the cover it offers.
If you need to take out a future policy for any reason, you will find it far more expensive in terms of monthly payments than the original agreement.
Some policies are designed to pay for the cost of schooling and university education of children if a parent dies, but this might seem redundant if your children are now grown up and have left home.
You might also find that you still need a life insurance policy as grandchildren could become dependents and the financial future of your partner might be in jeopardy if you pass away.
It might be that if you died over the age of 50, your partner could still be several years away from retirement age, and may therefore be dependent on an additional source of income that a policy could provide.
What are the savings?
If you cancel your life insurance policy you will save the cost of the monthly contributions and in today’s economic climate this could well be ready cash you can’t do without.
However, whilst you might be making savings to your financial plan in the short term, the financial risks to your family dramatically increase if you were to unexpectedly pass away.
Life insurance in many ways is a far wiser investment for families with less disposable cash than others, as the financial pressures on wealthier families in the event of bereavement will be lesser.
Lower Insurance Premiums
Cancelling a policy outright is not the only option open to policyholders facing financial difficulties.
It might also be possible to agree with your policy provider to pay a reduced contribution (see ‘Other Options’ 3rd sub heading) in return for a lower level of cover for a period of time until your financial situation improves.
Most UK life insurance policies have no charge for cancellation, but if you do cancel and then re-apply for cover, the increased cost of a new policy will act as an unofficial penalty.
Protecting My Family
One possible way of spreading the costs of life insurance is to look at the cover both you and your partner have.
When you initially took out life insurance cover, you might have decided with your partner to take out a joint policy. Normally they cost less than two separate policies and are a lot easier to set up.
However, if you have two separate policies, it might be worth exploring whether taking out joint cover is more cost effective.
Much of this will depend on the age and relative health of both policyholders, but the good news is that nearly all over 50s are accepted on to new life insurance policies, (see ‘Guaranteed Acceptance’) without the inconvenience of a medical.
If you reach state pension age on or after 6th April 2016 then you will come under the rules for the new state pension. Here is a quick guide to what that means in practice.
Out with the old and in with the New State Pension – What exactly changes?
Under current rules the state pension is divided into two parts. These are the basic state pension and the additional state pension.
The basic state pension is calculated based on your national insurance record. The additional state pension is calculated based on your earnings.
It is currently possible to opt out of making payments towards the additional state pension. This is known as “contracting out”.
The new state pension will combine both the basic and additional state pensions. This single-tier pension system will only be based on your national insurance record. As a result, it will cease to be possible to opt out of making payments towards the additional state pension. Therefore those who are currently doing so may see their national insurance contributions being increased.
Will I qualify for the State Pension?
You will need 35 years of National Insurance contributions to qualify for the full new state pension. As a rule of thumb, you will need at least 10 years of NI contributions to qualify for any pension under the new rules.
There are, however, some exceptions to this. These are particularly likely to apply to married women or widows who chose to pay NI at a lower rate. If you are in this situation it is particularly worth checking whether you could qualify for the new state pension.
Those with more than the qualifying threshold but less than the maximum can expect to receive a partial new state pension. For example someone with 15 years of NI contributions will receive 15/35 of a full new state pension. Someone with 25 years will receive 25/35 of a new state pension and so on.
It should be noted that the gov.uk website has a pension calculator which anyone can use. At current time it is still being updated to reflect the changes caused by the new state pension. It can still, however, offer users a ballpark idea of where they stand.
Take steps to deal with a shortfall in your pension
Under current rules, you can buy extra credits for the state pension. This option only applies to those who reach state pension age before 6th April 2016. In other words you need to reach state pension age before the new state pension scheme starts. You may choose to defer receiving your pension until after the new state pension scheme is launched. Even so, however, your claim for a pension will still be treated under the old rules.
For those who will be treated under the new rules, there is another option. This is to volunteer to pay “Class 3” National Insurance Contributions. Basically these are used to fill gaps in your NI record. For example if you went to work or study abroad for a while, this time might be “missing” from your NI history. Ideally you should look at this option in the context of your overall financial plans, including your retirement plans. In particular you should check if increasing your state pension might reduce your entitlement to other benefits.
You can also look at the option of deferring your state pension. Each year you defer adds 5.8% to the value of your state pension. While this is a considerable reduction from the 10.4% on offer at the moment, it may still be useful.
One Final Point…
Remember you have to apply for pensions (both state and private). You should be contacted about this a few months before your retirement. If you are not, then you need to be proactive and contact your provider(s) yourself.
Apple Pay has now arrived in the UK. Paypal has now outgrown eBay. Visa Europe is said to be in talks to be bought back by its larger sibling Visa Inc. In short, digital payment systems are big business in every sense of the phrase.
Notwithstanding this, cash is still very much a part of life around the world. Is it, however, headed the way of the penny farthing bicycle?
Certainly there has been a push against cash in recent times. A UK MP has already suggested paying benefits on restricted-use payment cards.
The Danish government is considering allowing retailers to refuse to accept cash for payment. Meanwhile the French government has lowered the amount vendors are legally allowed to accept in cash for any single transaction.
Let’s look at three areas which concern us all and see where cash stands against digital payment methods.
From morning coffee to supermarket shopping and paying utility bills, there are all sorts of everyday purchases people make time after time. Some of these purchases are now impossible to make with cash. If you get your supermarket shopping online, then you need to pay online.
Some of these purchases penalize those who want (or need) to pay with cash. For example, pay-as-you-go utilities are notoriously more expensive than other tariffs.
Of course, there are still plenty of purchases where it is possible to pay with cash. In fact in the face-to-face environment, there are some places which essentially penalize people for paying by other means. Some retailers (generally smaller ones) put surcharges or other fees on card payments. Others insist on a minimum transaction amount before they will accept card payments. Some retailers only accept cash. The march of the payment cards, however, continues and shows no sign of slowing.
Cash is essentially an anonymous payment method. This makes it an attractive target for thieves. The means by which people can be relieved of their cash vary from subtle pickpocketing to brutal mugging and armed robbery. As with all violent crimes, the victims can experience lasting psychological shock and/or physical injury or even death.
Digital payment methods (such as payment cards) can be traced back to their owner. This reduces their attractiveness to traditional thieves. They can, however, become a target for fraudsters. Fraudsters aim to gain access to online bank accounts and digital payment methods to use them for their own purposes. If they succeed, the consequences for their victim can range from mild inconvenience to full-scale ID theft.
So the question becomes: “Overall, is online banking safer than using cash?”
Arguably the answer is yes. Online banking does not have the same physical security risks as cash does. It does have some risks, but the banks and payment companies have been working hard to reduce these. For example banks have introduced card readers for some transactions. Payment companies have introduced chip cards and schemes such as Verified by Visa.
Individuals can also take steps to protect themselves by running security software on internet-linked devices. This includes phones and tablets as well as computers.
The anonymity of cash is an issue for national security as much as personal security.
To begin with, “cash-in-hand” transactions have become strongly associated with tax evasion. Given that it is tax revenue which funds the police and armed forces, its loss could quite reasonably be considered a security issue.
Similarly cash provides a straightforward method for under-the-counter transactions to take place. For example, shoplifted goods can be sold face to face for cash. Admittedly they can also be sold online, via portals such as Gumtree and eBay, but that does at least create some element of traceability.