Annual pension allowance: how to avoid getting caught this year

There has been a startling rise in the number of people who breach the annual pension allowance and who now risk HMRC clawing back tax perks, new figures show.

Between the tax years 2012‑13 and 2014‑15, the most recent for which data is available, there was a 79pc increase in the number of people who saved more in a pension in a single year than the pension allowance rules allow.

This is more evidence that the pension system has become so complicated that the rules are having the perverse effect of discouraging prudent saving for later life.

Pension company Royal London extracted the data on the “annual allowance” from the taxman using a Freedom of Information request.

It found that in 2012‑13, when the annual pension allowance was £50,000, 3,900 people reported that they had saved more than the limit. This rose to 5,800 in 2013‑14 and 7,000 in 2014‑15 – an increase of 79pc.

The true figure for breaches is likely to be far higher as HMRC’s statistics only show people who reported how much they had contributed to a pension.

Many others, particularly those in “defined benefit” pension schemes, will be unaware, because of employers’ contributions and the complicated methods used to calculate the total.

Since 2014‑15 the annual pension allowance has been £40,000 for most people, down from a high of £255,000 as recently as 2010‑11. Ministers have steadily cut the allowance in a bid to save billions of pounds on pension tax incentives.

When you save into a pension, your contribution is topped up by the Government in line with your rate of income tax. So a higher-rate (40pc) taxpayer has to pay in only £60 to make a £100 pension contribution.

But this tax perk is subject to the £40,000 annual contributions allowance and the £1m lifetime limit on pension fund value. If HMRC discovers savings beyond these levels it will reclaim the tax relief it paid out.

Steve Webb, a director at Royal London and former pensions minister, warned that more people would break the limits next year.

Unmarried woman wins right to claim her late long-term partner’s pension

A woman who was denied payments from her long-term partner’s pension because they were not married has won a landmark appeal. Her victory at the Supreme Court could improve the rights of millions of other cohabitees across the UK.

Denise Brewster, 42, challenged a ruling that she was not automatically entitled to a ‘partner’s pension’ as she would have been, were she married to her partner when he died.

Ms Brewster, a lifeguard from Coleraine, Northern Ireland, and her partner Lenny McMullan had lived together for ten years and owned their own home. They had got engaged just two days before Mr McMullan died.

Five Supreme Court justices unanimously ruled she is entitled to receive payments under the pension scheme.

Ms Brewster’s solicitor, Gareth Mitchell of public law firm Deighton Pierce Glynn, said the ruling could affect millions of cohabitees. He said: ‘Denying bereaved cohabitees access to survivor pensions causes huge distress and financial hardship’.

‘Now that around one in six families in the UK are cohabiting families, reform is long overdue.
The decision has significant implications for millions of cohabitees in relation to partner’s pension benefits.
It also lays down the approach to be adopted when considering complaints of discrimination on the grounds of marital status in other areas. This was a decision of the Supreme Court of the UK and it affects the whole of the UK.’

Steve Webb, Director of Policy at Royal London, and ex-pensions minister said: ‘This is a very welcome ruling. It is totally unacceptable for cohabiting couples to be treated as second class citizens.’

‘With more than six million people living together as couples and the numbers rising every year, this is an issue that needs to be addressed as a matter of urgency. We need pension scheme rules which reflect the world we live in today, and not the world of fifty years ago.’

Ms Brewster and Mr McMullan lived together for ten years and got engaged on Christmas Eve 2009, but he died suddenly between Christmas night and the early hours of Boxing Day morning.

He had 15 years’ service with Translink, which delivers Northern Ireland’s public transport services, and had been paying into Northern Ireland’s local government pension scheme.

The scheme automatically allows married partners to obtain a survivor’s pension, but unmarried partners only receive it if they opt in to the scheme.

This involves filling out a form, to be signed by both partners. Ms Brewster had met all the other criteria, but because she and her partner had not completed the form, the scheme (the Northern Ireland Local Government Officers’ Superannuation Committee) refused her the pension.

The High Court in Northern Ireland then allowed her legal challenge against the refusal, after which the Northern Ireland Court of Appeal overturned the decision.

Today, the Supreme Court overturned that decision and ruled in Ms Brewster’s favour.
Helen Mountfield QC, representing Ms Brewster, had asked the Supreme Court to declare that the opt-in nomination rule breached the European Convention on Human Rights.

Younger generations are likely to inherit much more wealth than their predecessors

Younger generations are likely to inherit much more wealth than their predecessors did, both in absolute terms and relative to their other sources of wealth. But within each generation, those who are already well off tend to inherit the most – with implications for inequality and social mobility.
Ranking current pensioners by total lifetime income (excluding inheritance), those in the top 20% have inherited four times as much as the bottom 20% on average. Among younger generations, those with higher incomes are significantly more likely to expect an inheritance than those with lower incomes.
These are among the main findings of new IFS research published today, which looks at the impact of inheritances on inequality across and within different generations.

Inheritances are going to be more important for younger generations …

Between 2002–03 and 2012–13, the wealth of elderly households (those in which all members are 80 or older) increased by 45%, mostly as a result of higher homeownership and rising house prices. 72% of these households now expect to leave an inheritance, up from 60% a decade ago, with a particularly sharp increase in the proportion expecting to leave a large inheritance.
Younger generations look much more likely to inherit than their predecessors. Of those born in the 1970s, 75% have received or expect to receive an inheritance, compared with 61% of those born in the 1950s and less than 40% of those born in the 1930s.

… and are likely to benefit those who are already well off the most.

Future inheritances are likely to be highly unequal. Even excluding the super-rich (for whom we do not have reliable data), Institute for Fiscal Studies and the richest 10% hold 40% of the wealth. Hence a ‘lucky half’ of younger generations look likely to get the vast majority of inherited wealth.

The largest inheritances tend to go to those who are already well off. Among current pensioners, more than half of those with families well enough off to leave them more than £250,000 in inheritance have lifetime incomes (excluding inheritances) in the top 20% of the population.

Among younger generations, higher-income individuals are more likely to expect an inheritance. Looking at those born in the 1970s, 9 in 10 of the top-income fifth have received or expect to receive an inheritance, compared with 6 in 10 of the lowest-income fifth.

But both low- and high-income households in younger generations are more likely to inherit something than their predecessors. In fact, the lowest-income fifth of those born in the 1970s are more likely to have received or expect to receive an inheritance than the highest-income fifth of those born in the 1930s.

Andrew Hood, an author of the briefing note and a Senior Research Economist at IFS, said:
“The wealth of younger generations looks set to depend more on who their parents are than was the case for older generations. Today’s elderly have much more wealth to leave to their children than their predecessors did, primarily as the result of higher homeownership rates and rising house prices. At the same time, today’s young adults will find it harder to accumulate wealth of their own than previous generations did, due to the sharp fall in homeownership for that group, the dramatic decline of defined benefit pensions in the private sector and the stagnation in their incomes.”

Over £9.2bn accessed through pension freedoms

Savers have accessed a total of £9.2bn through pension freedoms since the reforms were announced, with around £1.6bn taken from pension pots in the last three months.

Figures published by HM Revenue & Customs show a total of 516,000 payments were made from pension pots between April 2015 and March 2016, and over one million payments were made between April 2016 and the end of last year.

The number of individuals accessing their pension on a quarterly basis has almost doubled from 84,000 in the three months to June 2015 to 162,000 as at the end of 2016.

The data from HMRC covers “flexible payments” from pensions, which include full or partial withdrawals, flexible drawdown and buying a flexible annuity.

The Treasury says guidance service Pension Wise has had over 3.7 million visits to the website and carried out over 100,000 appointments since pension freedoms was introduced in April 2015.

Treasury economic secretary Simon Kirby says: “Giving people freedom over what they do with their hard-earned savings, whether it’s buying an annuity or taking a cash lump sum, is the right thing to do.

Grandparents miss out on pension perk for childcare help

The state pension perk worth £4.5k in retirement: 100,000 grandparents helping to raise children are urged to claim benefit
Only 1,300 or 1% of eligible grandparents are using little-known pension perk
This is costing them 1/35th of the full state pension or £231 per year
Over a 20-year retirement this amounts to a loss of more than £4,500
Ex-Pensions Minister Steve Webb uncovered poor take-up via an FOI request
He is urging the Government and HMRC to do more to alert parents and grandparents about the scheme

Around 100,000 grandparents taking on childcare duties could be unwittingly losing credits towards a state pension worth thousands of pounds, new research reveals.
Just over 1 per cent of working age grandparents who are eligible for the little-known pension perk are currently taking advantage of it, according to new estimates.
Ex-Pensions Minister Steve Webb is urging the Government and HMRC to do more to alert parents and grandparents of under-12s who qualify and encourage them to apply for the scheme. Webb, now policy director at Royal London, recently uncovered the poor take-up levels via a Freedom Of Information request to HMRC.

The recipient must still be of working age, but otherwise the process involves the parent filling in and submitting a form.
‘A grandparent who gives up work to look after the grandchild would otherwise be losing out on valuable state pension rights,’ said Webb.

‘If a working age grandparent misses out on one year of state pension rights because they are spending time with a grandchild instead of doing paid work, this would cost them 1/35th of the full rate of the state pension or £231 per year. Over a 20-year retirement this would be a loss of over £4,500.’

But Webb discovered from his FOI request that this perk, officially called the ‘Specified Adult Childcare Credit’, is so obscure that just 1,298 grandparents or other qualifying family members signed up in the year to September 2016.

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The addition of Origo Options to the Cash Retirement Account makes the proposition even more compelling.

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The best investor in the world loves cash


The best investor in the world loves cash


How hated is cash? Maybe you thought it was just the academics and the financial authoritarians that are trying to get rid of it. No. It’s investors too. There are some investors who hate cash so much they’re willing to lend money to a public company at negative interest rates.

Seriously. I’m not making this up. Here’s the story from Christopher Whittall in yesterday’s The Wall Street Journal. It’s two European companies reacting to the European Central Bank’s new corporate bond buying programme. The Wall Street Journal reports (emphasis added is mine) that:

Investors are now paying for the privilege of lending their money to companies, a fresh sign of how aggressive central-bank policy is upending conventional patterns in finance.

German consumer-products company Henkel AG and French drug maker Sanofi SA each sold no-interest bonds at a premium to their face value Tuesday. That means investors are paying more for the bonds than they will get back when the bonds mature in the next few years.

A number of governments already have been able to issue bonds at negative yields this year. But it is a rare feat for companies, which also ask investors to bear credit risk.

Madness, I repeat. Pure madness. It’s one thing to prefer the liquidity of government bonds. You can buy and sell easily over the short term. You’re not likely to hold to maturity. It’s a safe port of call for your cash in a financial storm.

But no sane investor would bear credit risk by loaning money to a publicly traded enterprise in exchange for nothing. The only explanation is that some bond investors believe that the European Central Bank will expand its bond buying programme to include even more corporate bonds. They’re speculating on price appreciation, not investing for yield.

That does make sense. But it’s still a special kind of central bank-induced distortion in behaviour. What kind of a world do we live in when the incentives are all designed for speculators? A speculative world. That’s the one.

There were $5.56 billion worth of negative yielding government and corporate bonds at the beginning of 2016, according to data from Bank of America Merrill Lynch. That was about 14% of the total global fixed income market. Now it’s closer to $13.5 trillion and nearly one-third of the entire fixed income market. There were $46.5 billion worth of negative yielding European corporate bonds at the beginning of this year. There are now over $500 billion, as companies rush to lock in the… er… highly favourable borrowing costs.

Investors shouldn’t chase negative yield corporate bonds

Why not just hold cash? Well, cash doesn’t earn a yield either. And if you’re paying a fee to a fund manager or investment advisor on money you’ve given to him to grow, you certainly don’t want him to pay you in cash. Why would you pay for someone to put your money in cash? You can do that yourself for free.

You’re in good company if you’re a cash hoarder. The world’s greatest investor thinks cash gives you “optionality”. Warren Buffett’s Berkshire Hathaway has $70 billion in cash. That’s a lot of money stuffed under the mattress. Why does Buffett like cash?

Buffett views cash as a call option with no expiration date, according to his biographer Alice Schroeder. It’s an option on every asset class. And there’s no strike price. You can read more about it in this useful blog post from Jesse Felder (hat tip Barron’s).

The investment case for cash is strong. It means you can buy assets when they’re on sale (below book value). Unless there’s rampant inflation, the cost of holding cash is the return you don’t get by being fully invested in some other asset class.

You can’t hold your Sipp money in fixed-rate bonds, savers told


Holding cash should be about the simplest investment you can make but new rules are expected to cause headaches for pension savers who seek modest returns.

Fixed-term cash deposits allow savers in self-invested personal pensions (Sipps) to earn a better rate of interest on their money in return for locking up their cash for longer periods.

These fixed-rate bonds are typically held for periods of up to five years, with the best offering rates of around 2pc.

But because of a quirk in new requirements imposed by the City watchdog, some Sipp firms are being forced to classify these basic accounts as esoteric “non-standard” assets.

As a result, some providers, including Royal London, are blocking savers from holding savings bonds with a duration of more than 30 days in their Sipp.

From next week Sipp firms will have to hold millions of pounds more in reserve to protect customers’ savings, with the level set according to the proportion of basic and more exotic investments being held.

How Sipps work – the pros and cons of pensions DIY investing
An unintended consequence of the regulator’s well-intentioned move is that people who want a safe home for their pension cash are being frustrated.

Despite their simplicity, cash bonds are being deemed non-standard assets by many firms to comply with the rules, which state that assets must be able to be sold within 30 days to be considered simple.

However, more sophisticated Sipp products – often referred to as “full Sipps” – will not block cash bonds or less liquid assets such as property. But these Sipps are typically more expensive and available only through financial advisers.

Greg Kingston of Suffolk Life, which offers full Sipps, said his firm’s customers would not be hit, but warned that other providers could add extra charges or not allow the investment at all. He said non-standard assets had been tarred by association with failed investments such as certain exotic overseas property schemes.

“This example of simple cash deposits shows that non-standard investments come in many different forms and can be perfectly normal and acceptable – standard in everything other than name,” he said.

Ordinary cash savings bonds are not allowed in Sipps – you need a special kind suitable for pensions.

Although historically low, fixed rates offer a decent boost compared with a standard Sipp instant-access account, where rates are languishing at around 0.5pc or lower following the Bank of England rate cut to 0.25pc earlier this month.

Pensioners’ annuity income plunges by 37pc in eight years

Yahoo finance


Brexit has added to the pains of those savers wanting to buy income in the form of annuities, with the referendum outcome pressing down payout rates by almost 4pc.
Since the referendum, more than a dozen negative rate adjustments have been announced, and a standard terms annuity now offers an income of just £4,890 on a fund of £100,000, according to Hargreaves Lansdown.
But that was small beside the longer-term decline : payouts are down 37pc since 2008.
Annuity payouts reflect returns on government bonds, or gilts, which have been depressed in the years since the financial crisis as investors have piled into the bonds and driven down their yields.
Eight years ago, a 65 year old with a £100,000 pot could have bought an income of £7,855.
Just six months ago in January, a 60 year old could get a better deal than a 65 year old can today: then, a £100,000 could have bought an income of £4,930. That means they would have received five extra years of income compared to what a 65 year old would get today.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, said: “Annuity rates are disappearing off the bottom of the chart. There is no certainty whether or when rates will go back up again.
“It is also important to note that in recent years, anyone who decided to delay buying an annuity may well be worse off today.”
He suggested that anyone planning to buy an annuity shouldn’t delay because rates today are lower than the past.
“For many investors a mix and match strategy , putting some of their pension into an annuity and leaving some invested, may well be the best approach,” he said.
Providers such as Legal & General, Standard Life and Retirement Advantage have all cut annuity rates since the referendum result was announced.
Those hoping to take a pension lump sum right now have been urged to wait , as market volatility could see them take their pension at a time when the pot value is temporarily down.
Kate Smith, head of pensions at asset manager Aegon, explained that gilt yields, corporate bond rates and life expectancy are the factors driving down annuity rates. Low gilt and bond rates reduce the level of predictable income annuity insurers can produce.
And the increasing life expectancy of annuitants means providers are likely to pay less per year.
She said: “The stock market has recovered a great deal since the depths of the financial crisis, and some pensions savers and drawdown investors will have done well out of the bounce in equity markets.” However, she added that retirees have had to contest with either the prospect of either market uncertainty if they leave their money invested, or the certainty of a low annuity rate.
Ms Smith urged people to hold off making decisions about buying an annuity to avoid locking into a lower income.
Or, where possible, they could consider putting off retirement and continuing to save in case annuity rates bounce back.
She said: “If they need a retirement income now they could consider opting for draw-down, which allows people to keep their money invested in the markets and take an income.



Paul Lewis Money

Money in best buy cash savings accounts would have produced a higher return than a FTSE100 shares tracker over a majority of investment periods since 1995.

That is the shock finding of new research using best-buy cash data which has never been available before.

The results challenge the traditional view that putting money in a savings account is the poor relation of investing in shares.

The analysis also found that since 1995 investments in funds that track the FTSE 100 would have lost money up to a third of the time over investment periods from one to eleven years. Cash in a savings account always ends up higher than it started.

The new research compared returns from a simple tracker fund – which follows or ‘tracks’ the FTSE100 index of shares in our biggest hundred companies – with cash that is moved each year into a best buy one year deposit account with a bank or building society – sometimes called a ‘one year bond’. The tracker has dividends reinvested and the cash is reinvested each year with the interest earned.

It found that money put into this ‘active cash’ beat the total returns on the tracker in 57% of the 192 five year periods beginning each month from 1 January 1995 to the present. The tracker won in just 43% of periods. For some longer time periods the result were even more marked. For example, for investments made over the 84 fourteen year periods from 1995 cash beat shares 96% of the time.

The research was done by financial journalist and presenter of Radio 4’s Money Box programme Paul Lewis. He gained access to best-buy cash data back to 1995 from the financial information publisher MoneyFacts. Data back to 1995 has never been made available since it first appeared in the monthly MoneyFacts magazine. He says this data makes the research unique.

“This analysis of the new data shows that people who prefer the safety of cash can make returns that beat those on tracker funds in a majority of time periods.