George Osborne's Spending Review was always going to be controversial. The Chancellor, having warned us of the 'hard road ahead', presented a four-year package of spending cuts aimed at restoring 'sanity to our public finances and stability to our economy'. What does it mean for your finances, and in particular, your pension plans? Independent financial adviser Kate Scrace reviews the major changes that were announced in October 2010...
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The Spending Review confirmed what most of us feared - government departments will be reduced by an average of 19% and most departments will be hit, most significantly perhaps, the Department of Work & Pensions. The public sector pension system is set to undergo reform and households with one or more higher-rate tax payers will no longer receive child benefit. Universal benefits for the retired, however – free bus passes, TV licences and winter fuel allowances – have been retained.
The Confederation of British Industry has said that the spending cuts 'though painful, are essential to balance the UK's books and build future prosperity'. However, on the other side of the coin, the review has instigated concerns that the measures will stifle the UK's economic recovery.
Word is that around 490,000 public sector workers will lose their jobs. The squeeze on spending, coupled with increased unemployment, could certainly renew negativity amongst consumers and private-sector businesses and put the UK's fragile recovery at real risk
Checking up on your retirement plans...
The coalition government has committed to addressing around 80% if the financial deficit through spending cuts rather than tax increases. However, the recent Spending Review will still have tax planning implications for many investors.
The most obvious change is for pensions, with the Government equalising the State retirement age for men and women from 2018. It will then rise to 66 by 2020, four years ahead of the previous plans. The age for private pensions remain 55 – up from 50 earlier this year – but any private pension will have to supplement the State pension for longer.
This puts greater emphasis on not only the need to plan ahead, but to start that planning as early as possible. Most of us dream of life without work – making that a reality (short of winning the lottery!) can be achieved through careful planning and sharp focus.
An attempt to encourage us to make provision towards our own retirement is The Chancellor confirming that the National Employment Savings Trust (NEST) will proceed. This will mean that employees are automatically enrolled into workplace pension schemes, if an alternative qualifying scheme isn't already available, starts as planned in 2012.
For public sector schemes, the government is to raise the amount payable by employees by around 3%. Ironically, this all comes on top of changes to the pension rules announced prior to the spending review, which decrease the annual contribution limit from £255,000 to £50,000 next April.
The lifetime limit on money that can be built up in a pension fund has also been cut from £1.8m to £1.5m and the penalties for exceeding these limits remain onerous. Investors need to carefully monitor contributions to ensure investment growth does not push them towards the maximum lifetime limit on pension funding.
For the time being, high earners will continue to be paid tax relief on pension savings at their highest marginal rate (up to 50%). The Government is still consulting on plans by the previous administration to reduce the tax relief available on pension contributions for people earning more than £150,000.
The good news, amongst the doom and gloom, is that the majority of tax incentives all remain. The Government has said that ISAs are safe – with contribution limits rising by £480 to £10,680 for the 2011/12 tax year – and indeed is considering a form of 'Junior ISAs' to replace the Child Trust Fund.
More than ever, investors need to ensure their financial affairs are appropriately structured, tax efficient and maximise their potential for a real growth. With tax on the increase and government incentives on the decline, keeping hold of what we have earned and making provision to look after our own future seems more pressing that in years gone by. Seeking out professional, independent advice is a key ingredient to effective planning.
About the author
Kate Scrace is a Financial Planner at Global Financial Limited, a chartered IFA practice based in Sussex founded in 1963. With 13 years' experience in the financial service profession, Kate is appropriately qualified and suitably authorised to give financial advice. You can contact her on Tel: 01403 331505 or at email@example.com for an initial consultation, offered without cost or obligation.
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