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15 Dec 2015

3 impacts of the Autumn Statement on staff retirement savings

The Autumn Statement revealed surprisingly few changes to the world of pensions, which will be of welcome relief to those approaching retirement. However there were still a number of items that will have an impact on those saving for their retired years and to employers wishing to support their pension scheme members.

Saving for retirement plan and pensions

1. Impact on retiring pension scheme members' State Pension

The basic state pension will rise to £119.30 a week from April 2016, which will be the biggest real terms increase to the state pension in 15 years. The 'triple-lock' will continue to be applied to the state pension, meaning it will rise each April to match the highest out of inflation or 2.5%. After the increase, the full state pension will be worth £1,125 a year more in cash terms than five years ago. It is projected that the full state pension will increase by £1,770 by the end of this parliament.

The new flat-rate state pension will be set at £155.65 a week for those reaching state pension age after 6 April 2016.

Despite the increases to the State Pension and the introduction of the new flat rate amount, many over 50s will not know if they will be better or worse off under the new state pension, and even fewer will know how to boost their pension before they finally claim it. People who contracted out of the top-up State Second Pension (S2P) and State Earnings Related Pension Schemes (SERPS) over the years will be likely to get less than the new flat rate. 

In order to help the over 50s properly plan for retirement it is crucial that they are directed towards retirement guidance and planning at an early stage in order that they fully understand how much income they are likely to have in their retired years. In addition, it is only once individuals are aware of exactly what they are entitled to that they can effectively put measures in place to build their pension funds to a point where they can fund the retirement they aspire to.

2. Rises to the auto enrolment contribution level delayed

Rises to the auto-enrolment minimum contribution rate have been pushed back by six months, so that the first rate rise of 2% will be introduced in April 2018, to bring total minimum contributions to 5%. It will then rise to 3% for employers in April 2019 and total minimum contribution to 8%.

Whilst the delays ease the pension costs burden on employers, this will mean less is put into employees’ pension savings, which will have a significant impact on those further away from retirement. The working people of today will have to save a lot more to guarantee themselves a decent retirement and early education and guidance is essential to ensuring individuals can save sufficiently for their retired years.

Online tools allow individuals to input their pension savings, along with their State Pension entitlements and other savings into a personalised dashboard. Members also enter their expected expenditure in retirement and this allows for a detailed income versus expenditure analysis. Individuals then have a visual reference of any pension savings gaps at an early stage, enabling them to take any remedial action that is required, such as tailoring their investments accordingly.

3. Pensions tax relief announcement due in April

The widely anticipated overhaul of pensions tax relief is to be delayed until the next Budget in April 2016. Currently the government rebates all tax on pension contributions, whether you pay at the 20%, 40% or 45% rate. This is to encourage everyone to save more for retirement but means a higher tax incentive for those that earn more.  From next April, if you earn between £150,000 and £210,000 your annual allowance for pension contributions is set to be tapered from £40,000 to £10,000.

It is important for any members who are close to retirement who this might apply to, to obtain advice on the best way to maximise their contributions before any changes take place.

Conclusion

Whilst this Autumn Statement held no real surprises, it is still as important as ever that members are directed towards retirement guidance and planning at an early stage in order that they fully understand all of the options available to them. Only by being aware of the effects of longevity; investment risk and capital preservation and looking at the pros and cons of each retirement income option against these risks can members truly weigh up which solution or blend of solutions are correct for their particular circumstances.

This article was provided by Punter Southall.

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