The need for financial advisers is a must for pensioners nowdays. An estimated £185 million pensioners paid unwittingly for taxes after withdrawing their entire pension pots. Without guidance, pensioners paid the equivalent of income tax from their life savings.
The legal loophole has robbed more than a million workers, according to UK circular Express.co.uk’s Anil Dawar.
Dawar said about 1.5 million low-paid and part-time workers have lost hundred-millions of pounds without knowledge of tax relief.
Think-tank Chase de Vere exposed the gap regarding workplace pension schemes. Apparently, “net pay” schemes use gross wages as measurements for employees’ contributions, which is a huge advantage for anyone earning over £10600 yearly.
Those below the income tax threshold do not enjoy the same benefits. However, they are informed of their new pension freedoms. Chase de Vere researchers call on the Department for Work and Pensions to ‘plug’ the legal loophole allowing the UK’s septuagenarians to avoid a tax drain on their pensions.
Chase de Verese Analyst Sean McSweeney said:
“We suspect this will come as a huge shock, and not only to part-time employees but many employers too.
“The lesson is clear – for employees, do not assume you will automatically get tax relief if you pay into a pension.
“This affects a small number of people at the moment but, if the tax threshold does rise, we could start to see a significant number of people beginning to ask the question ‘Where is the 20 per cent tax relief I have been told I am getting?’.”
Ethnic minority workers, women and employees in the services sector may not qualify for automatic pension savings according to a report.
A new electronic system had involved more than five million people enrolled, allowing them to receive pension contributions from their employer. However, about more than five million individuals in addition are ineligible to join.
Majority of the 4.8 million individuals do not earn about £10,000 annually, excluding them from the scheme.
Automatic Enrolment, which began in October 2012, places a small portion of an employee’s pay into a saving’s pot for pensions. If they’re aged 22 or earning at least £10,000 a year, they’re automatically enrolled in the scheme.
Employers and the government adds a little extra through tax relief.
Meanwhile, pensions analysts say these savings, together with the state pension, is insufficient for an adequate pension income. The government itself had advised individuals to go further when saving for their retirement.
The auto enrolment syste, while widely considered a success, had excluded 32 per cent of women and 16 per cent of male workers. Ethnic minority groups with lower income than £10,000 were also ineligible for the system.
The Pensions Policy Institute said almost as many individuals are ineligible to
We know that this blog cannot stop discussing the new pension freedom laws introduced last April. Plenty of pensioners had withdrawn their pensions albeit high taxes. Some have spent it on luxury, others, reinvested to make them grow faster.
However, due to the expensive professional services of financial advisers, plenty of pensioners could be misinformed and may just make the single, most expensive mistake that could cost them their pension growth.
Ordinary savers have swapped their savings for an income for life. The income is only modest, however, as rates had gone down post-financial crisis. However, annuities are safety nets that made sure you never made a mistake of using and losing your pensions in the process.
While the concept for losing your fortune in pension is simple (investing them in poor performing stocks losing you money over time), the risk of getting your savings de-valued still exists. You could lose money from the price fall and your pensions de-valued, losing the number of shares or funds owned once the prices recover.
According to official results from a test case by Hargreaves-Lansdown, a fund of a 65-year-old retiree could lose value by choosing drawdown and leaving his money to grow, only to risk his funds to an unstable stock market.
Unqualified Financial Advisers not qualified to clear pension transfers as per the pensions freedoms law is the root cause of plenty of pension freedoms block. Some pension providers have blocked the passage of defined benefit pensions also known as final salary schemes because they refuse to consult with a financial adviser.
Pensioners complain about the high prices of getting financial advice. Despite the implementation of new rules, the FCA expects to have an annual increase of 9000 to 15000 in DB-to-DC transfers.
Anyone with a pension of £30,000 or more with defined guaranteed benefit requires financial advice. If less than the amount, advice is not needed and access and transfer is available immediately.
However, despite financial advice being mandatory, the larger problem of giving financial advisers proper permissions to allow transfers places the effectiveness of the new pension laws in question.
According to Age Partnership Commercial Director Dan Baines, advisers who are not informed of the changes are the problem.
‘We have become aware because there are customers who have tried to crystallise their pension and been told by the ceding scheme that the adviser lacks the permission or qualification to write the kind of business, particularly when it comes to safeguarded benefits,’ said Baines.
The rational thing to do with the new pension freedoms is to save it and let it grow bigger for yourself and your family. This is the mantra of a small group of over-55s intending to spend their money for productive purposes.
Many observers feared that majority retirees may spend their pension collections on vacations, house improvements and even luxury purchases including Lamborghinis and other lavish items. About 9 per cent of Pensions and Investments Firm Zurich’s clients have accessed their accounts, signifying that many will not want to pay out large amounts of tax rates for lump sums and possible “wrong choices”.
Zurich’s survey indicates that the people less-likely affected by the high tax rates did not withdraw their taxes and instead let their money grow further. With 91 per cent of their clients not accessing their pension pots, about 35% of the pensioners looked at their options.
Around 54 per cent have yet to make a decision and 34 per cent intend to keep their pensions invested and spent for other assets including cash saving before using their long-term pots. Eighteen per cent said they would run out of money due to the high taxes if they draw their funds down from the pension fund.
According to Zurich UK Life’s Chief Executive Gary Shaughnessy, savers might be missing out on some opportunities if they have yet to explore their options. If they engage early with their freedoms, savers could have better, informed decisions regarding their pensions.