More and more UK adults are adopting a gradual approach to retirement. In this blog, we will analyse findings from a 2022 study conducted by Smart Pension to gain an insight into changing attitudes towards retirement in the UK.
Thinking About Retirement
Since the introduction of auto-enrolment in October 2012, many workers automatically save into a pension without consciously having to make the decision to do so. This has helped to get a lot more people saving for retirement.
However, it’s still important for us to actively think about our pension and to try to maximise contributions where possible, as our pension pot will need to last us a significant length of time.
Lack of Understanding Surrounding Retirement Options
According to Smart Pension’s 2022 study, 29% of UK adults don’t have a clear understanding of the options available to them in retirement.
This figure is down from 39% in their 2021 survey, reflecting positive change in terms of how we understand our retirement options.
However, there is still a significant gap in our nation’s pension knowledge that needs to be filled.
Retirement as a Gradual Process
Smart Pension also found that retirement is now seen as more of a gradual thing, with 47% of UK respondents seeing retirement as a transition rather than a one-off event.
This makes sense, given that going from working, especially under full-time hours, to not working at all, can be an enormous lifestyle change that could seem jarring. Therefore, more and more people are reducing their working hours as a way to gradually phase in retirement.
Concerns in Retirement
The above image illustrates Smart Pension’s findings on respondents concerns about retirement.
In 2021, the biggest concern of UK respondents was having to limit their lifestyle in retirement, whereas in 2022, being able to afford daily living costs was the biggest concern. This demonstrates the impact that the continued cost-of-living crisis is having on the UK population.
Another interesting point in these findings is that in 2021, being able to afford healthcare costs in retirement was at the bottom of the list of concerns at number five, whereas in 2022, this concern leapt up to third place.
Given that we are a nation with a free national healthcare system, this is somewhat troubling, as it may link to our increasing uncertainty surrounding the future of the NHS, with many being forced to seek private treatment due to lengthy waiting times.
Supplementing Income
18% of respondents plan to supplement their pension with continued employment. Perhaps one reason behind this comes down to that earlier finding, where many are worried that they won’t have enough income in retirement to cover day-to-day living costs.
We can access most private pensions from age 55, meaning that there isn’t really a set retirement age; you can keep working for as long as you like whilst also drawing on your pension.
However, if you do continue to work whilst drawing a pension, you will lose more of your pension in tax. This is because income from your pension is treated the same as any other income, meaning that once you have used up your personal allowance, the rest of your income will be taxed in the relevant band.
The personal allowance is £12,570, so if you work whilst drawing from your pension, and the total income is below this level, you will not be taxed.
It’s worth noting here that you can’t start claiming your State Pension until you reach the State Pension age.
If you are considering phasing your retirement but aren’t sure of the best way to take your pension, or if you aren’t completely sure about the different retirement options available to you, you may wish to talk to a financial adviser. We offer confidential, personalised pensions advice if you wish to contact us at office@redstarwealth.co.uk or by ringing 01253 486346.
by Red Star Wealth
According to LLC Partner and former pensions minister, Steve Webb, hundreds of thousands of women pensioners who have shared their personal allowance with their husband could face unexpected tax bills.
Marriage Allowance
With Marriage Allowance, you can transfer up to £1,260 of your personal allowance to your spouse or civil partner. Your personal allowance is the amount of income you can earn without paying any income tax, and it is currently set at £12,570.
In order to benefit from Marriage Allowance, one person must be paying the basic rate of tax (applied to earnings between £12,571 and £50,270) and the other must not be paying income tax (as they earn below £12,570).
The lower earner then shares part of their personal allowance with the higher earner to reduce their spouse or civil partner’s tax burden. Marriage Allowance can reduce the higher earner’s tax by up to £252 in the 2023/24 tax year.
You can use HMRC’s free online service to see whether you could reduce your annual tax bill from Marriage Allowance, and if so, by how much.
Unexpected Tax Bills
Once you opt in to the system of Marriage Allowance, the transfer of your personal allowance happens automatically every year unless cancelled. If you wish to cancel Marriage Allowance you can do so here.
Previously, many could hand over 10% of their personal allowance at no cost to themselves. However, big cash increases in the value of the State Pension, combined with the freezing of the income tax threshold, means many more of these individuals will now be liable to pay tax.
Why are Women Pensioners Disproportionately Affected?
Government figures suggest around 2.1 million couples benefitted from Marriage Allowance in 2020/21, with over 1/3 of these estimated to be pensioner couples. In most of these cases, the wife is the non-taxpayer who is sharing her personal allowance with her husband.
In many working-age couples, the lower earner may be earning little or no taxable income if they are a stay-at-home partner, whereas with many pensioner couples, the lower earner will be close to the tax threshold due to the State Pension.
“This is yet another unwelcome by-product of the year-on-year freeze in the value of the tax allowance. Hundreds of thousands of women have signed over part of their tax-free allowance in order to reduce their husband’s tax bill. But as the state pension rises, many of these women may now find they end up with an unexpected tax bill. We could see marriage allowance mayhem as hundreds of thousands of couples have to decide whether to carry on with this arrangement or cancel it, to avoid low-income pensioners being dragged into the tax net. The sooner the freeze on tax allowance comes to an end, the better”
by Red Star Wealth
Relevant Life Insurance is a type of life insurance policy tailored towards Directors of Limited Companies who wish to cover themselves or an employee. So, let’s have a look at how it works and the tax benefits that come with it.
Who is Relevant Life Insurance For?
Relevant Life Insurance is an insurance policy for Directors of Limited Companies who want to provide life insurance for an employee and don’t have enough employees to qualify for a group policy.
Relevant Life Insurance is a single-life policy; it covers one employee per policy. For example, you, as the Company Director, could choose to cover yourself through this insurance and pay for it through the company.
Just like with traditional life insurance policies, the price of premiums will depend on the level of cover and the age, health and lifestyle of the employee in question.
If the insured employee dies whilst employed by the company, a cash lump sum will be paid out. You are usually allowed to cover up to 30 times your annual renumeration, but it depends on your age and on your policy. Many policies will also pay-out if the insured person is diagnosed with a terminal illness with less than 12 months to live.
Relevant Life Insurance policies can be taken out by limited companies, charities and partnerships but sole traders are currently unable to access this type of policy.
Relevant Life Insurance vs Group Life Insurance
Relevant Life Insurance essentially acts as a death in service benefit for smaller businesses instead of taking out a group life scheme.
It’s best suited to companies which are too small to consider these group protection schemes or who only want to provide cover to one employee, such as to the Director. Group schemes often work out cheaper for larger groups so if your company is smaller, you may not qualify for this or it may work out too expensive.
Tax Efficiency: Corporation Tax, Income Tax and National Insurance
As Director of a Limited Company, you will not pay for a Relevant Life Insurance policy out of your own pocket. Instead, it is paid for by the company and so is classed as a tax-deductible business expense. Therefore, it is subtracted from company profits, in turn reducing your corporation tax liability.
Relevant Life Insurance is not classed as a P11D benefit in kind, meaning that Directors don’t have to pay extra income tax or make national insurance contributions on the value of the premiums. Premiums therefore qualify for income tax relief, national insurance relief and corporation tax relief. According to Legal and General, this means you could see your premiums reduced by up to 49% of a typical life insurance policy as a higher rate taxpayer, or up to 40% as a basic rate taxpayer.
No Impact to the Pensions Lifetime Limit
If you build up pension savings more than the lifetime allowance (currently set at £1,073,100*) you incur a tax charge.
Unlike with group schemes, Relevant Life Insurance does not fall under pensions legislation so it does not count towards the pension lifetime allowance. Therefore, this type of policy may be helpful for high earning directors or other employees who have reached, or are likely to reach, their lifetime allowance.
In contrast, lump sum payments under a group policy do contribute to the lifetime allowance and payments to the estate exceeding this limit would face tax charges of 55%.
Avoiding Inheritance Tax
If taking out a Relevant Life Insurance policy, you should establish a specialist trust to pay the benefit into.
This helps to avoid potential tax issues with the claim as the pay-out will not enter the company’s or the deceased’s estate, keeping it free from inheritance tax and avoiding probate delays.
*This figure is expected to be increased to £1.8m in the budget on March 15, 2023
If you have any questions regarding Relevant Life Insurance, or would like a quotation, please contact Red Star Wealth’s Managing Director Kristen Cunliffe via email kristen@redstarwealth.co.uk and she will be happy to help
by Red Star Wealth
Last Friday, on 22nd September 2022, Kwasi Kwarteng, the Chancellor of the Exchequer, announced in his mini-budget statement a set of economic policies which have been the subject of much discussion. Read on for an overview of some of the changes he’s made.
National Insurance and the Health and Social Care Levy
Since 6th April 2022, workers and employees have been paying an extra 1.25% National Insurance, taking the rate up to 13.25%. This increase was due to be replaced by the Health and Social Care Levy (a 1.25% levy on top of a 12% National Insurance rate).
Details of the Health and Social Care Levy were announced by Boris Johnson on 7th September 2021 and it was to be introduced by April 2023. The levy was for increased health care spending to deal with the backlog of patients awaiting treatment on the NHS.
Some of the levy was to be channelled into the social care system due to our ageing population, effects from the pandemic, staff shortages and lack of government spending.
The levy was to be calculated the same as National Insurance but would’ve also been paid by those at state pension age.
The levy was expected to raise around £13billion for health and social care. Despite cancelling the proposed levy, the Chancellor has claimed that funding for health and social care services will remain at the same level as if the levy was actually in place. I guess we will have to see…
The good news is that Kwarteng, along with cancelling the levy, is reversing the 1.25% rise in national insurance come 6th November 2022. The aim of this is to reduce workers’ and businesses’ tax burden and encourage growth to stimulate the economy.
Income Tax
As well as the decrease in income tax, Kwarteng announced some changes to income tax. The basic rate of income tax will decrease from 20% to 19% as of April 2023 (a year earlier than planned). Additionally, the additional rate of tax (set at 45% and applied to incomes above £150,000) is to be abolished.
In the short term, it seems as though most people will be paying less tax. However, former chancellor Rishi Sunak announced in 2021 that the personal allowance and higher rate threshold would be frozen from the 2022-23 tax year until the 2025-26 tax year.
This freeze will essentially offset the tax reduction announced by Kwarteng for most ordinary people.
It is the high earners who will fare the best. The rich, as always, seem to be getting richer. Abolishing the additional rate of income tax means that the highest earners, including millionaires, are in the same tax band as anyone earning over £50,271.
Corporation Tax
The Chancellor has cancelled the proposed rise in Corporation Tax. The tax was to increase to 25% starting April 2023 for firms which make over £250,000 profit. However, this will now be remaining at 19% for all firms, regardless of their profit.
Stamp Duty Land Tax (SDLT)
The 0% SDLT band has been doubled from £125,000 to £250,000. The idea is that cutting SDLT will promote residential property investment and spending on household goods.
The threshold before paying SDLT has also been increased for first-time buyers from £300,000 to £425,000, making it easier to get your foot on the housing ladder. The average house price for first-time buyers in the UK in 2021 was around £264,000, but if you’re spending more than this, the increased threshold is certainly handy.
Universal Credit
Households on universal credit may find it more difficult to claim. Those earning less than the equivalent of around 15 hours a week at National Living Wage will have to regularly meet with their work coach. If failing to do so, they risk a reduction in their benefits
There have certainly been mixed reactions to Kwarteng’s mini-budget, but how you feel about it is entirely up to you.
