The most radical changes to private

news: The most radical changes to private

The most radical changes to private and state pensions for decades

PENSIONS REMAIN a hot topic in the UK and will continue to do so as “A” day moves closer (April 6, 2006) and the British government continues to struggle with the pensions crisis.

Work until you are 67

The latest report on the UK pensions crisis concludes that British workers will need to work until they are 67 in the future. This latest research was carried out by the Institute for Public Policy Research (IPPR), described by The Telegraph as “Tony Blair’s favourite think tank”.

The IPPR surveyed workers aged between 25 and 55 and discovered that, in spite of statistical evidence to show that longevity is increasing, most do not realise that they will live longer than their parents and need to take these longer retirement years into account. They do not appreciate that they will have to work longer in order to help finance the rising numbers of retired people. The majority consider their right to retire at 65 as sacred and are hostile to the idea of working longer.

As a result, the report urges the government to announce that the retirement age will rise in order to give a clear signal to the current workforce that we will need to work longer and ensure the overall settlement is affordable over the long run.

The report also makes it clear that raising the pension age is vital if the pension system is to remain sustainable and cope with an ageing population.

New pension lump sum

incentives will not be cash free

The government responded to the IPPR report by saying that it had no plans to increase the state pension age. The Minister for Pension Reform, Stephen Timms, said that they simply wanted people to consider deferring their pension and receive either a lump sum or a higher income from their pension in return.

The government is using these cash rewards, available from next April, to encourage people to either work longer or defer starting to draw their pension. They initially seemed an interesting proposition because many people presumed they would be tax free, in the same way cash lump sums taken out of occupational pensions are tax free.

The Finance Bill, however, says otherwise. These new cash incentives will be taxed…which does make them somewhat less of an attractive incentive.

New SIPP regulations

regarding property looking

popular already

Out of the various new pension rules and regulations coming in next April, the fact that Self-Invested Personal Pensions (SIPPs) will be able to invest in property is considered the most exciting element.

The latest research shows that almost four in 10 current SIPP investors are likely to consider such property purchase next year. Eighty-five per cent of these intend to buy UK property. Of the overseas destinations, Spain and France are the most popular, though some respondents were looking further afield. Thus 12.3 billion euros will pour into Britain’s housing market once the new rules come into play, with 2.2 billion euros spent in overseas markets – 47 per cent of these intending to buy property plan to increase their pension contributions for this purpose and 75 per cent planning to borrow within the SIPP to finance the purchase.

Hargreaves Lansdown, who carried out the survey, commented: “The implications for the property market are intriguing. Possibly, pension funds will take up the slack in the market, keep prices buoyant and make it even harder for first-time buyers to join the game; possibly the arrival of pension funds will simply defer and intensify the price crash, which some believe will inevitably arrive sooner or later.”

Wealthy Britons also have

concerns about their

retirement income

Tulip Financial Research has published research that shows that the average income of baby boomer high net worth individuals is expected to fall by 35 per cent in retirement. According to Tulip’s research, half the UK’s wealthiest individuals are already retired and, together with those still working, they own more than 700 billion pounds in liquid assets.

Those still working currently have an average annual income of 98,000 pounds (plus average liquid assets of one million pounds), but they are worried that this income will fall to 64,000 pounds once they have retired, which will severely strain family financial commitments.

This 35 per cent fall in income is far greater than the fall experienced by those who have already retired (they only lost 13 per cent of their income). The collapse in contributions to personal pensions is the main reason for this difference.

Pension savers advised to act before “A” day

A recent article in The Times urged UK savers to consider the new pension rules now and to take action where necessary: Thousands of savers will be worse off in retirement unless they prepare for the biggest shake up in pensions for nearly a century.

The article explains that while the new regime has been welcomed, there will be some losers. For example, it is possible to get more tax free cash under the current system, but it may be possible to protect your future cash as long as you do so before A day.

Likewise, the new regime introduces a limit on the maximum value of a retirement fund, called a lifetime allowance. This will be 1.5 million pounds in 2006 and anything above this limit will be liable to 55 per cent tax. There are ways to escape this tax, but to take full advantage, this needs to be done before April 6 next year.

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By Bill Blevins,

Financial Correspondent,

Blevins Franks