PRIME business club

Plans to deal with pension shortfalls by encouraging people to work for longer received a dash of cold water today. Three-quarters of us could be too ill to work, Professor Sir Michael Marmot of University College London warns in a new report.

All but the richest Britons suffer years of ill health. People in the richest neighbourhoods in England live seven years longer than in the poorest, and enjoy an extra 17 years of good health.

Even if you exclude the poorest five per cent and the richest five per cent the gap in life expectancy between those in low and high income places is still six years, and in disability-free life expectancy 13 years.

Much more needs to be done to address health inequalities if raising the retirement age to 68 is really to mean people remaining active and working for longer, the report warns.

The report is not the work of some maverick outfit, but the final paper from the Marmot Commission - set up in 2008 at the request of the Secretary of State for Health. The Commission, chaired by Sir Michael Marmot, was tasked with finding the most effective strategies to reducing health inequalities in the country.

Fair Society, Healthy Lives (The Marmot Review)

Coverage at Times Online

Nice picture of marmot (a kind of groundhog) sitting on rock.

Last week the basic state pension went up to £95.25 for a single person and £152.30 for a couple. This isn’t much, and the earliest you can get it is when you reach 65 if you’re a man (so you’d qualify if born on or before 5 April 1959) or 60 if you are a woman (born on or before 5 April 1950).

For these reasons people have been heavily encouraged to top up state provision with some private scheme. And people running their own businesses often invest in that with a view to selling it or some assets to fund retirement.

There’s an interesting article in the Observer about the pros and cons of different ways of saving for your retirement. Basically it’s saying private pension plans are not all they are cracked up to be, particularly because they are typically inflexible about when you can cash them in.

Taking control of investments yourself may be better than leaving it to a pension fund manager. Here’s an extract:

“For many years I have been very anti-pensions,” says Colin Jackson, an independent financial adviser and director at Baronworth. “Yes, you get tax relief on your contributions, which is a great incentive to invest, but when it is time to retire and the market is against you I think the technical term is: ‘You’re stuffed.’ ”

Jackson does have company pensions from over the years but says he is “bitterly disappointed” with their performance. He thinks property is a far better medium- to long-term investment, followed by Isas, with pensions at the bottom of the pile. He also says that people should look beyond residential to consider commercial property.

“Many years ago we decided to buy the building we work in,” he says. “That is now my pension.”

The article estimates that £100,000 invested in property 10 years ago would have turned into just under £221,000 now - even taking into account recent house price falls. Had that £100,000 been put into an average instant access savings account, it would have grown to £129,000 (not inflation adjusted), while it would have shrunk to a shocking £91,646 if it had been invested in an average UK-based equity fund.

More at Observer site

What can you do if you don’t have the money to invest in anything?

Well, working till you drop may be the only option.

If you can manage to keep working beyond state pension age it’s even possible to convert the pension you would have received into a lump sum for when you eventually do retire. You don’t lose out by continuing to work.

Here’s an example from the official Pension Service site, run by the Department for Work and Pensions.

Ahmed decides to put off claiming his weekly State Pension of £105 for three years. When he finally claims his State Pension, if he chooses a lump sum, he will get a lump sum of around £18,000 (before tax) as well as his normal weekly State Pension entitlement.

You can find out how much you could get by putting off claiming your own state pension by phoning the Pension Service’s Forecasting Team on 0845 3000 168

Over half a million women could benefit from changes to the pension bill currently going through Parliament. They will be able to buy back up to 12 years of contributions to fill in gaps in their National Insurance record, enabling them to then qualify to receive the full state pension. Currently only around a third of women reaching state pension age qualify for the whole amount.

Though women only need to have 39 years of contributions at the moment, compared to 44 years for men, the breaks from work many women take to raise children or care for another family member means a pensions shortfall is much more common among women - 90 per cent of men get the full whack.

The proposed changes will affect both men and women who reach state pension age between 5 April 2008 and 5 April 2015, enabling them to plug much bigger gaps in their National Insurance record. The reason for doing this is that the cost of buying the extra entitlement is usually much less than you’d get back from the state over the full length of your retirement.

None of the changes apply to you if you reached pension age (60 for women, 65 for a man) before April 2008. And complicating the calculation of whether you would really be better off is Pension Credit, a separate system that kicks in for those on low incomes.

More on this story from the BBC

The Pensions Service - official information from the government

Pensions Advisory Service - independent non-profit source of information.

Controversial new rules on Capital Gains Tax that will affect anyone planning to sell a small business have finally been clarified.  Tax will be levied on asset sales up a value of £1 million at the rate of 10 per cent, rather than the 18 per cent originally mooted. The higher rate will apply to sales above the £1 million mark.

The new regime comes into effect from the 6th of April this year.

What is Capital Gains Tax?

If you sell an asset for more than you paid for it, capital gains tax (CGT) may possibly apply. An asset is a resource such property, shares, a piece of equipment or your entire business. It is not the raw material or stock used in the normal day-to-day transactions of most businesses, which are not subject to this tax.

CGT is really aimed at gains made by investing, so if this is central to your business you will need to look into the subject thoroughly.

For most small businesses CGT is most likely to become an issue at the exit stage if you decide to sell your business as a going concern or close down and sell off (or give away) major assets.

The Chancellor’s original proposals made three months ago were highly controversial, and were greeted by frantic lobbying by business groups.

Among the various counter proposals were schemes to reduce the rate or exempt altogether those selling a business to retire.  But the government has decided against those, instead opting for a two-tier system where the lower rate is available to anyone selling assets up to the £1 million threshold.

Business owners will have a £1 million lifetime capital gains allowance that will be taxed at 10 per cent - this means you can claim relief for gains made on multiple occasions up to a cumulative total of £1 million.

The government may have decided against confining the lower rate only to those retiring because it wants to encourage people to sell or hand their businesses on to family members as going concerns. Having to wait until retirement to get the tax concession might have discouraged this.

Report in the Independent

The Chancellor’s statement to the House of Commons

Reaction from Federation of Small Businesses

The winner of PRIME’s Christmas rock quiz is Mrs Hilary Weeks, who lives near Dursley in Gloucestershire. She wins £100 in M & S vouchers, plus a bumper bundle of PRIME rock.

There were two answers that some people managed to get wrong. It’s the Rolling Stones who take their own snooker table on tour, watch cricket and demand a private running area for Mick to keep fit in. More rock-star contract riders here

And if you are standard-rate tax payer, £128 is credited to your Personal Pension fund for every £100 that you contribute.

If you haven’t thought about your pension arrangements yet, PRIME’s advice is to go and talk to an independent financial adviser who is familiar with self-employment issues. You can find a list of IFAs by region and speciality here.

Happy Christmas!

The winner of PRIME’s November draw is Mr Robert Finch from Manchester. He wins a £100 in M & S vouchers, plus a bumper bundle of PRIME rock.

PRIME is holding a final prize draw in the run up to Christmas. To enter, just answer the seven quick questions in our “rock quiz”. We are again giving again £100 in M & S vouchers, plus sticks of rock with PRIME written through it! And maybe a Christmas card.

Enter here.

On another subject, if you haven’t thought about your pension arrangements yet, PRIME’s advice is to go and talk to an independent financial adviser who is familiar with self-employment issues. You can find a list of IFAs by region and speciality here.

Just in case you think we might be trying to sneak in a mention of the subject few self-employed people seem to want to think about - pensions, we are.

The winner of PRIME’s October’s draw is Mrs C Rutter from Kirkcudbright, Dumfries and Galloway, Scotland. She wins a £100 in M & S vouchers, plus a bumper bundle of PRIME rock.

PRIME is holding two more prize draws in the run up to Christmas. To enter the November one, just answer the seven quick questions in our “rock quiz”. We are again giving again £100 in M & S vouchers, plus sticks of rock with PRIME written through it!

Enter here.

On another subject, if you haven’t thought about your pension arrangements yet, PRIME’s advice is to go and talk to an independent financial adviser who is familiar with self-employment issues. You can find a list of IFAs by region and speciality here.

Just in case you think we might be trying to sneak in a mention of the subject few self-employed people seem to want to think about - pensions, we are.

If you are planning to use the sale of your business to fund your retirement, there’s some good news on the way. Changes to capital gains tax expected to be announced by the Chancellor should see you retain all of the money you make up to an expected threshold of £100,000.

The details have not yet been fully worked out, but The Daily Telegraph is reporting that the decision has been made to make the change. Under the government’s previous plans the owners of small UK businesses wishing to retire were faced with stiff tax bills brought in recently to stop abuses by big private equity companies.

The relaxation in the rules - which may well only apply to business owners over the age of 50, follows a campaign against the unfair way capital gains tax would hitting ordinary small business owners with no connection to the private equity sector.

Details of the new scheme are still sketchy, but the Daily Telegraph is reporting that the first £100,000 made on a business sale are likely to be exempt, and thereafter the gain will be taxed at 18 per cent.

To prevent this concession being abused by big City firms, it is likely to be available only a one-off basis to individuals setting up a ‘retirement relief fund’ - details to be announced.

Background to the campaign

PRIME is holding three prize draws in the run up to Christmas. To enter just answer the seven quick questions in our October “rock quiz”. We are giving away £100 in M & S vouchers each month beween now and Christmas, plus a bumper bundle of PRIME rock!

Enter here.

On another subject, if you haven’t thought about your pension arrangements yet PRIME’s advice is to go and talk to an independent financial adviser who is familiar with self-employment issues.  You can find a list of IFAs by region and speciality here.

Just in case you think we might be trying to sneak in a mention of the subject few self-employed people seem to want to think about - pensions, we are.

This Daily Telegraph article warns against relying on politician’s promises to give you an adequate income in retirement. Unless you’re happy with amounts like £84.25 a week - currently the full basic state pension, or perhaps £109.45 a week if you qualify for full Pension Credit, you will need to make your own arrangements. But at the moment many self- employed aren’t doing enough to ensure their future

Read on…

PRIME has published “Financing an active retirement”, a free guide to pensions for self-employed people over 50. The 32-page printed guide is being distributed free via libraries and Citizen’s Advice Bureaux. You can also download the PDF version immediately from here.

PRIME is concerned that of the 12.5 million self-employed people in the UK, less than half are putting enough money aside to give them an adequate income for their retirement.

As people nowadays are living longer, they need more money to provide for those extra years. Men who make it to 65 are now living on for an average of 20 years, while women can expect to go on for another 22 if they reach 65.

Woman are particularly likely to experience a pensions shortfall, as many have gaps in their contribution record which reduce their state pension. And lower female salary levels typically translate into lower pensions from any company pensions schemes they may have belonged to.

“The self-employed need to bite the bullet and make proper pension arrangements”, says Laurie South, Chief Executive of PRIME. “People think that they can retire comfortably by selling their business, but they may be disappointed.

“In our expereience the owners of many small businesses find that their businesses are not as saleable as they thought. The problem is that they - the owner-operator, are often also the chief asset. Without them the business is worth little.”

PRIME believes the wisest approach is to treat providing for your retirement as a business expense from the outset. For many individuals this will mean making contributions to a personal pension scheme while they are running their business. So it will be competing with other priorities - but it may still be worth doing.

You can download our pension booklet here. For a printed paper copy email us at prime@ace.org.uk

Only a third of the self-employed in Ireland are contributing to a pension - a very similar figure to in the UK. A study by Bank of Ireland Life suggests the reason may be lack of awareness of the tax incentives available rather than an inability to pay. Over 70% of those polled confessed ignorance of the considerable tax incentives.

Brian Sullivan of the Bank of Ireland said: “The biggest worries facing the self-employed include managing their time and finances, the day-to-day running of their business, developing their product or service, and most importantly, getting a steady stream of sales. When you factor in all these concerns, quite often pension provision can fall to the bottom of the pile.

“Furthermore, many business owners see their business as their pension and so don’t take out separate cover. However, few stop to think of the dangers inherent in relying on your business as your pension.”

Britons who pay extra National Insurance contributions to make up for gaps in their contributions record may be wasting their money. Legislation currently making its way through the parliament could mean these voluntary payments are worthless for anyone planning to retire AFTER 2010, when the changes are likely to come into effect.

But for those planning to retire BEFORE 2010 making the extra payments may still be good value, yielding many times their cost in greater income after retirement. The complexity arises because the UK’s state pension system is in transition from a contributions-based to a rights-based system.

Under current pension rules, women need to have made NI contributions for 39 of a possible 44 working years to get the full basic state pension. Men need to have contributed 44 of a possible 49 years. Women are particularly likely to have gaps in their contribution record.

It costs £392 of Class 3 contributions to make up one year of basic state pension entitlement. For that money, a woman retiring at 60 and living until the average life expectancy of 80-years-old will receive £3,012 back through her pension.

So each September HM Revenue & Customs sends out “deficiency letters” warning that these gaps will mean less money in retirement, and urging people to make voluntary Class 3 NI contributions to make up the shortfall.

But now pensions experts are warning that the letters are wrong for those retiring after 2010 - because the voluntary payments won’t boost their income in retirement at all if the proposed pensions changes go through as expected.

Read more

A still-interesting article from Newsweek back in January 2006 about what’s happening  around the world as countries try to adapt to their ageing workforce.

For example, Finland has introduced “bonus pensions” for people working until 68, giving them a financial incentive to continue working—and paying taxes. According to Newsweek, the employment rate among those 60 to 64 has already doubled.

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