Budget 2018: pension changes

Chancellor Phillip Hammond is today expected to launch a consultation into introducing Collective Defined Contribution (CDC) pensions, following the Royal Mail's pledge to offer CDC to its staff once the rules are in place.

How does a Collective Defined Contribution Scheme work?

Pension scheme members pool their pots and invest collectively.   The fund aims to give members a certain level of pension annually although there are no guarantees.  

What are the pros and cons of Combined Defined Contribution Schemes?

• Pooling funds enables investing in a wider spread of funds from risky to less risky.  CHECK.  Some riskier funds MAY produce higher returns but others won't.  On balance, the complete portfolio MIGHT produce a bigger pension pot.  But as the old saying goes, you have to speculate to accumulate but you need to ask yourself can you afford to take the risk and end up with less?  Beware of mis-selling.  We've heard of claims being made that people stand to make 50% bigger pension pots than with individual defined contribution.

• You can already hold risk seeking assets long term while paying low charges.

• With CDCs charges should be lower because there's less administration but this may make little difference overall if the fund does badly.

• Different generations saving within the same CDC may have different priorities.  Older savers may want safer savings while younger ones may feel they have more time to recover from risky investments that do badly.

What's the difference between individual and collective defined contribution schemes?

• Both individual and combined defined contribution schemes allow savers to pay into riskier investments which may or may not produce higher yields.

• Both allow investment long term and pay low charges.

• There's likely to be more flexibility of choice in where money is invested with an individual DC scheme.  Combined schemes may have to impose penalties on people who want to switch around where there money is invested. 

What will consultation look into?

The government will need to find out if there is a demand among employers and staff to have combined schemes.  It will also need to develop a framework that produces the same transparency, fairness and rules as already exist in current individual schemes. 

The Chancellor was also expected to announce an investigation into how defined contribution schemes could be used to invest in growing companies.  The government may change rules for work based schemes enabling higher charges for fees to cater for the extra work involved in investing in riskier companies.  These are work based schemes where staff are automatically enrolled unless they choose to opt out. 

The Chancellor today announced a cut in the amount of top-ups it will give to people to encourage them to save for their pensions.  These top-ups come from tax refunds.  CHECK This change will come into effect on DATE. 

Pension tax relief rules mean that when people put earned income into a pension, the government will top that up with the tax they would have paid.  Currently, the government will top up someone's pension fund up to £8,000 a year.  To get this maximum sum, you would have to put in £32,000 into that fund in a single tax year.  Check those figures work for higher rate tax payers.

This £40,000 pension tax relief will be cut back CHECK WHEN

top ups allow people o save up to £40,000 a year  into a pension or pensions.  It is made up of earned income and the tax you would have paid on it.  So If you've got £32,000 you can save it in a pension and the Government will top that up by £8,000.  - or all their earnings if that's under £40,000 - into a pension and the Government will top this up with tax back.  CHECK. The saver will eventually have to pay tax but only when the pension is drawn down.  At that point, the saver has to pay income tax on three quarters of that income.  

Those earning over £150,000 fall under different rules and the very highest earners are only allowed to pay in £10,000 a year. 

For those in defined benefit schemes, there is a tax charge if the increase in benefits from one year to the next has a value of over the pension annual allowance, based on a standard formula.

If you go over your annual allowance, you will pay a tax chage to recoup the tax relief that's been paid out. 

It's unlikely to affect private sector workers WHY???? but estimates say 100,000s of public sector staff will be caught _ WHY?? because of their defined benefits????

Is it likely to affect swelf-employed as well as wealthy savers. 

what about number of years people can carry forward unused alowances

Will there be an age related allowance that rises towards retirement. 

Currently, to claim the maximum tax relief, you would have to pay £32,000 into a pension fund or funds