PENSIONS NEWSLETTER Automatic enrolment key points employee perspective Employers have now been dealing with the Workplace Pension Reforms (automatic enrolment) for 12 months. To date, those employers who have had to adhere to the legislation are the very largest employers in the UK. We are now entering a period where employers with less than 1,000 employees are required to adhere to the legislation which means a considerably greater number of employers are affected, so what does this all mean? In short every employer in the UK at a predetermined date is required to assess all their employees and, where applicable automatically enrol “eligible” employees into a pension scheme which meets certain criteria. For those employees who do not meet the “eligible” criteria they will have to be offered membership to the pension scheme which, in some cases, will also require the employer to contribute. To be an “eligible” employee, you generally have to be: aged between 22 and state pension age, work in the UK and earn over £786 per month. If this is the case your employer will have to ensure that you are either already in a pension scheme or enrol you automatically into one which meets certain criteria. In the majority of cases, this means that you are required to contribute to the pension, however should you not wish to, you will have the opportunity to optout of the pension within the first 30 days of being automatically enrolled. Irrespective of age or earnings your employer will write to you to advise you what is happening and what options you have.
Small Pension Pots The small pot rules came into effect on 6 April 2012 and were introduced to help those with small pension pots that they would normally have had to convert into an annuity. Purchasing an annuity with a pension fund worth less than £2,000 is often not possible and where it is possible it is unlikely to represent a worthwhile benefit to the individual. The lump sum option via the small pots option offers a helpful alternative. An individual can “cash” in up to two small pension pots, however, to take advantage of the rules an individual must be at least 60. Current rules stipulate that the type of pension has to be either a personal pension, stakeholder pension, FSAVC or a section 226 contract. The lump sum payment will include 25% of the fund paid tax free. The remainder will be added to the individual’s income and will be subject to tax at their marginal rate. Basic rate tax will be deducted but those entitled to a refund can use the HM Revenue and Customs form P53 to do so.
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Kudos - Pensions Newsletter
Gilts - A safe haven? Typically, but not exclusively gilts will form part of an individual’s pensions investment as they near retirement, through a Lifestyling profile or as a selected investment. Historically gilts have been perceived to be a safe asset class. However, given the historically low interest rate environment we find ourselves in and the risk aversion seen as a result of Central Bank buying (Quantitative Easing) and the European Debt Crisis, gilt yields have been pushed down close to record low levels and can be seen as a relatively expensive asset class at this time. In other words, positive returns are less likely than we would have previously anticipated from gilts. While we have started to see the yields on 10-year gilts rise as a result over US tapering, this has resulted in a capital loss for those invested in gilts this year. Therefore, at this point in time, gilts cannot be seen as offering a risk free rate of return and as a safe haven, especially for those approaching retirement.
Kudos INVESTMENT Market Overview • Markets rebound as US holds back on tapering its asset purchase programme • Signs of a rebound in Emerging Markets, although longer term returns should remain strong • Corporate debt remains favourable over sovereign bonds with outperformance continuing • Interest rates to remain at record lows beyond 2014 • Volatility in markets continues to highlight the need for regular and thorough investment reviews Markets during the third quarter of the year were dominated by the continued fall-out following the statement made by US Federal Reserve (Fed) Chairman Ben Bernanke in May and June that ‘tapering’, or the reduction of quantitative easing, could start later in the year, the Fed decided on 18th September not to reduce its monthly purchases yet. More recently, disappointing jobs data in the US now suggests that cuts will not start until 2014 at the earliest. Both bond and equity markets have rallied as a result. We remain positive on the outlook for equity markets given improving economic data and indeed the outlook for corporate debt remains positive with attractive yields and low default rates a feature of these at present. We think the fundamentals remain supportive of risk assets in the medium to long term. The US economy continues to grow and recover following the credit crisis of 2008/9. In Europe, the worst of the recession is over and in China latest activity and business confidence data suggests a relatively soft landing for the economy. However, there are some short-term risks which could cause volatility for risk assets, namely; fiscal negotiations in the US European bailout agreements being renegotiated following the German elections and ongoing Middle East tensions where the situation remains fluid.
If you would like further information on any of these articles please contact firstname.lastname@example.org 8 Queen’s Terrace, Aberdeen, AB10 1XL Tel: 01224 652100 - Fax: 01224 652101 - www.kifs.co.uk Kudos Independent Financial Services is authorised and regulated by the Financial Conduct Authority. The information provided herein is Kudos’s overview of markets currently and should not be regarded as being a personal recommendation.
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