How payroll people can help their staff with pensions
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A talk given at the CIPP conference on October 10th about practical ways that payroll specialists can talk bout pensions without getting into trouble
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How payroll people can help their staff with pensions
- 1. The Pension Freedoms “How do you explain them to your staff?” Henry Tapper First Actuarial
- 2. 2 Saving enough to stop work Who should be talking? Help you think about your pensions and savings Not a salesperson Independent
- 3. Tax doesn’t need to be taxing…
- 4. Tax at 0% SalaryTax of £12,360 NI 12% Tax 20% Salary Salary £60,000 Salary Nat’l Ins 12% £60,000 Salary£60,000 Salary NI 12% Tax 20% Tax at 0% Tax 20%Tax at 0% £0 Nat’l Ins 2% What you take home Salary NI of £4,820 Nat’l Ins 0% How tax works on your salary… Income tax Nat Ins £60,000 NI 2% Tax 40% NI 2% Tax 40% Tax 40% Take-home of £42,820 £8,424 £11,850 £46,350
- 5. £100 NI £2Nat’l Ins 2% Tax 20% £60,000 Salary Tax at 0% £0 What you take home Salary Nat’l Ins 0% How tax works on your salary… Income tax Nat Ins £100£100 NI £2 Tax £40 NI £2 Tax £40 NI £2 £58 Nat’l Ins 12% Tax 40% £60,000£8,424 £11,850 £46,350
- 6. £25,000 Pension Tax 20% Tax 20%Tax at 0% Tax at 0% Pension £25,000 Pension £25,000 Pension £0 Nat’l Ins 2% What you take home Pension £25,000 Tax of £2,630 Nat’l Ins 12% Take-home of £22,370 Nat’l Ins 0% Income tax Nat Ins How tax works on your salary…pension… Tax at 0% Tax 40%Tax 20% £8,424 £11,850 £46,350
- 7. • Lots of research • 50% to 75% of your current salary • This is a large range • What is right for you? • Think this through with your partner 7 How much is enough money to stop work?
- 8. Meet Danni aged 45 • Has worked as a financial controller for 5 years • Salary of around £60,000 • Paying 6% into L&G Workplace Plan:
- 9. 9 Holidays Long term care (you or parents) Leisure Heating No mortgage Children finally left home No National Insurance to pay Don’t have to save for retirement Spending might reduce Spending might increase Having enough money to stop work
- 10. Extra holidays £2,500 pa Use house for care £0 Extra Leisure £1,500 pa Extra heating £1,000 pa No mortgage £15,000 pa 2 Children £8,000 pa No NI £5,000 pa No retirement savings £5,000 pa Spending might reduce Spending might increase Danni - £60,000 pa TOTAL £33,000 TOTAL £5,000 TOTAL SAVING = £28,000 TARGET INCOME = £32,000
- 11. How much is enough – Danni?
- 12. What money is Danni building up? Other savings Cash, shares ISAs Other sources Inheritance, buy-to-let, own home State Pension workplace pension Based on contributions from Danni and employer Other pensions State Pension From other employments
- 13. Your Workplace Pension What money are you building up?
- 14. Workplace pension – default fund Default Fund Rule of thumb 1: If investing for long term: Shares in portfolio = “100 less age”%Rule of thumb 1: If investing for long term: Shares in portfolio = “100 less 45”% = 55%
- 15. Workplace Pension – what will Danni will build up? http://www.legalandgeneral.com/workplacebenefits/employees /plan-for-your-future/online-tools/ Use what your workplace pension provider offers you!
- 16. The workplace pension - what will Danni will build up?
- 17. What’s this worth as a pension to Danni? Annual income of £9,310 from 65
- 18. Workplace pension- what can Danni drawdown? Annual income of £32,000 until 73 Annual income of £10,500 if spread over 25 years – but could be more or less
- 19. Workplace pension– what can Danni take as cash? One off lump sum of £188,000 Tax paid: £74,000!!!!
- 20. But don’t be a muppet with your savings Danni! Pension pot 196,500£ Is this after 25% tax free lump sum? Y Gross annual income excluding pension pot -£ Is this the amount you expect to receive for foreseeable future Y Over how many tax years will you take your pension? 1 Scroll to adjust years between 1 and 20 Tax saved by spreading your pension over 1 tax year -£ *tax muppet : (n) - someone who, needlessly, pays more tax than even HMRC expects Find out how much of a tax muppet* you will be when you access your pension? £74,225 £122,275 Tax paid if taken all in one go HMRC pocket Your pocket Average tax rate paid 38% £74,225 £122,275 Tax paid if taken all in one go HMRC pocket Your pocket Average tax rate paid 38% Tax muppetometerTax muppetometer <--Minimal muppet Major muppet --> <--Minimal muppet Major muppet --> 100%100%
- 21. Don’t let the freedoms free you from your cash First Actuarial’s Tax muppetometer Pension pot 196,500£ Is this after 25% tax free lump sum? Y Gross annual income excluding pension pot 11,500£ Is this the amount you expect to receive for foreseeable future Y Over how many tax years will you take your pension? 1 Scroll to adjust years between 1 and 20 Tax saved by spreading your pension over 1 tax year -£ *tax muppet : (n) - someone who, needlessly, pays more tax than even HMRC expects Find out how much of a tax muppet* you will be when you access your pension? £79,400 £117,100 Tax paid if taken all in one go HMRC pocket Your pocket Average tax rate paid 40% £79,400 £117,100 Tax paid if taken all in one go HMRC pocket Your pocket Average tax rate paid 40% Tax muppetometerTax muppetometer <--Minimal muppet Major muppet --> <--Minimal muppet Major muppet --> 100%100%
- 22. Pension pot 196,500£ Is this after 25% tax free lump sum? Y Gross annual income excluding pension pot 11,500£ Is this the amount you expect to receive for foreseeable future Y Over how many tax years will you take your pension? 1 Scroll to adjust years between 1 and 20 Tax saved by spreading your pension over 1 tax year -£ *tax muppet : (n) - someone who, needlessly, pays more tax than even HMRC expects Find out how much of a tax muppet* you will be when you access your pension? £79,400 £117,100 Tax paid if taken all in one go HMRC pocket Your pocket Average tax rate paid 40% £79,400 £117,100 Tax paid if taken all in one go HMRC pocket Your pocket Average tax rate paid 40% Tax muppetometerTax muppetometer <--Minimal muppet Major muppet --> <--Minimal muppet Major muppet --> 100%100% Pension pot 196,500£ Is this after 25% tax free lump sum? Y Gross annual income excluding pension pot 11,500£ Is this the amount you expect to receive for foreseeable future Y Over how many tax years will you take your pension? 4 Scroll to adjust years between 1 and 20 Tax saved by spreading your pension over 4 tax years 27,600£ *tax muppet : (n) - someone who, needlessly, pays more tax than even HMRC expects Find out how much of a tax muppet* you will be when you access your pension? £79,400 £117,100 Tax paid if taken all in one go HMRC pocket Your pocket Average tax rate paid 40% £51,800 £144,700 Tax paid if taken over 4 years HMRC pocket Your pocket Average tax rate paid 26% Tax muppetometerTax muppetometer <--Minimal muppet Major muppet --> <--Minimal muppet Major muppet --> 31%100% Don’t let the freedoms free you from your cash First Actuarial’s Tax muppetometer
- 23. Pension pot 196,500£ Is this after 25% tax free lump sum? Y Gross annual income excluding pension pot 11,500£ Is this the amount you expect to receive for foreseeable future Y Over how many tax years will you take your pension? 4 Scroll to adjust years between 1 and 20 Tax saved by spreading your pension over 4 tax years 27,600£ *tax muppet : (n) - someone who, needlessly, pays more tax than even HMRC expects Find out how much of a tax muppet* you will be when you access your pension? £79,400 £117,100 Tax paid if taken all in one go HMRC pocket Your pocket Average tax rate paid 40% £51,800 £144,700 Tax paid if taken over 4 years HMRC pocket Your pocket Average tax rate paid 26% Tax muppetometerTax muppetometer <--Minimal muppet Major muppet --> <--Minimal muppet Major muppet --> 31%100% Pension pot 196,500£ Is this after 25% tax free lump sum? Y Gross annual income excluding pension pot 11,500£ Is this the amount you expect to receive for foreseeable future Y Over how many tax years will you take your pension? 10 Scroll to adjust years between 1 and 20 Tax saved by spreading your pension over 10 tax years 40,100£ *tax muppet : (n) - someone who, needlessly, pays more tax than even HMRC expects Find out how much of a tax muppet* you will be when you access your pension? £79,400 £117,100 Tax paid if taken all in one go HMRC pocket Your pocket Average tax rate paid 40% £39,300 £157,200 Tax paid if taken over 10 years HMRC pocket Your pocket Average tax rate paid 20% Tax muppetometerTax muppetometer <--Minimal muppet Major muppet --> <--Minimal muppet Major muppet --> 0%100% Don’t let the freedoms free you from your cash First Actuarial’s Tax muppetometer We have used current tax allowances, ignored investment returns and inflation and not tried to predict how HMRC might bend the rules in the future, which they undoubtedly will. Allowing for these might change the numbers a bit, but would also make the model less user friendly although we doubt the underlying messages would change. Namely, spreading your DC pot over a number years will, for most people, mean paying less tax.
- 24. Request a State Pension Statement Go to: https://www.gov.uk/check-state-pension You will need one of:
- 25. State Pension – what has Danni built up The earliest you can get your State Pension is 1 December 2039 when you’ll be 67, Your estimate is £159.55 a week Your estimate is based on the current law. The amount shown is not a guarantee and is based on… Breakdown Amount based on your latest National Insurance record (5 April 2016) £85.32 a week which is £369.72 a month, £4,436.64 a year Amount you may get if you continue to contribute £159.55 a week which is £694 a month, or £8,325 a year Likely to increase before I get to 67 – I’m going to plan for 68
- 26. Disclaimers and warnings • This material has been prepared by First Actuarial LLP (FA) who take full responsibility for it • FA are not financial advisers but are regulated by the Institute and Faculty of Actuaries in respect of a range of investment business activities. • Any figures in this presentation are illustrations only and are designed to explain how various investments including pensions and ISAs operate. • The content of this presentation is designed to provide you with helpful information regarding retirement planning issues and nothing in it should be regarded as providing you with any specific advice or recommendations. • If you require specific advice or help regarding your financial planning, please contact an Appropriately Qualified Financial Adviser. First Actuarial LLP is a limited liability partnership registered in England & Wales. Number OC348086. Registered address: First Actuarial LLP, Mayesbrook House, Lawnswood Business Park, Leeds, LS16 6QY
- 27. Any questions??
Notas del editor
- Several reasons why we are running these sessions: Part of relaunch of AHC pension and PSE We believe in IFE and want our staff to benefit from it We want our staff to see the sort of thing we are doing for our clients We want feedback as to the style/content and what else you would find useful
- Many of you will know us by now For those who don’t, my name is <> and I work for First Actuarial. Read the first bullet “I’m someone who can think about your savings and hopefully help you make better financial decision (or our use your own words). Then ask “and How am I able to do this? Because….I’m independent from Unilever and Trustees Because I am not an IFA/salesperson – no vested interest in your course of action, other than that you make better decisions And because I spend a lot of my time presenting on financial topics to people just like you, and the feedback we get is that these sessions are really helpful Anyway, enough about me. Let’s get started. Click to bring menu back up
- In this section we are going to focus on the main sources of income for people in your scheme split broadly into pensions and non pensions: Considering pensions first: [CLICK] CPP (2008 Section). You have all built up some benefits and will continue to build up benefits until your retirement. Hopefully, you know roughly how the pension in CPP (2008 Section) works – we’ll talk through an example benefit statement in a moment. AVCs – there are various different AVC scheme within Centrica. More on those shortly. Again, we’ll talk you through some example statements and show you how to find the information you need. State Pensions – There are two main types of state pension. We will explain how to get an estimate of your total state pensions for inclusion on page 6 of your pension planner. Other pensions – with previous employers We’ll then look at the other types of savings available [CLICK] – again initially focussing on the share schemes run in Centrica (Sharesave and the SIP) but also discussing ISAs, buy to let and your own home and will discuss some of the key advantages and disadvantages of each.
- <Presenters are going to have to work out when the clicks are and get used tot hem as too many to describe below. Tax and NI blocks come up separately, then the £30K salary arrives, then it pauses above the NI blocks, then the tax blocks, then finally the take-home blocks before finale is to show take home of £23,663. Note I have ignored the 1.4% rebate on earnings between LEL and PT – in fact NI bill would be around £30 lower but this considered not worth it. On salary Earnings are sliced into different bands for income tax Personal allowance (nil tax) Next 31,865 (basic rate income tax 20%) Next 58,115 (higher rate income tax 40%) Earnings are sliced into different bands for NI (slightly different from tax) First £7,985 (up to £153 per week -nil) Next £33,904 (between £153 and £805 per week - 10.6%) Rest 2% A passing observation here is that despite increasing the personal allowance materially over last 5 years, as NI threshold has not kept up. They were broadly similar in 2007 at around £5,000. But people who earn £10,000 are not completely out of the tax system, only people who earn less than £8,000. OK, so let’s see what happens to your headline salary of £30,000. Conclusion is you pay NICs and tax and take-home is around £23.6K
- This shows the end point of the previous slide and then brings in an extra £50. This is so we go through the same process and get to £34 take-home for basic rate taxpayer. Equivalent figure for higher rate taxpayer is £29.
- <Presenters are going to have to work out when the clicks are and get used tot hem as too many to describe below. Here the title changes to say pension, and next click removes NI This is big learning point for most people – no NI on pensions – yippee. One of reasons don’t need 100% of salary post retirement. Clicks do same as salary to get post tax pension of £26K.
- Throughout this brief talk we will refer to the amounts of pension that you have built up, or expect to build up It is easy to get confused about all of these pension figures as they could all be payable at different times and therefore have a different value to you. For example, a pension of £15,000 pa payable now may be very attractive to you and you will have a clear idea what that can buy you. A pension of £15,000 pa payable in 20 years will be less attractive (due to inflation) and it won’t be immediately obvious whether this is enough to buy you a car or a pushbike! It is therefore really important to make sure that everything you consider and write down is always in today’s terms. If you keep all of the figures in today’s terms you can make an easy comparison between your total income in today’s terms and what things cost today. This will give you an idea as to what you will be able to afford. So, if you were going to retire today what proportion of your salary would you need to live. There is a lot of research that has been done in this area that shows a figure of between 50% and 75% of salary is needed. The lower your salary the higher the proportion needed as the cost of basic things, such as food, takes up a large part of your income. The higher the salary, the lower the proportion needed as the basics take up less of your income. However, the answer varies from person to person depending on things such as lifestyle and what you want to do in your retirement. You will therefore have to work out what percentage of your pension you need It is a good idea, if you have a partner, to think about this with them and look at your needs (and later on your expected income) together.
- The first question you may ask is why do you not need exactly the same amount of income before and after retirement. We set out some of the reasons here. [CLICK] Firstly some reasons why it might reduce: [CLICK] Mortgages are usually designed to finish at or before retirement Your children may (just may) have stopped being your responsibility You are at retirement and so no longer have to save for retirement Once you retire you stop paying NI (Or if you work past State Pension Age you no longer have to pay NI) [CLICK] And then some reasons why (unfortunately) it might increase [CLICK] You may have more or different reasons [CLICK]. The planner on page 3 allows you to enter your current monthly income and then to make adjustments (both positive and negative) to it to estimate your needs after retirement. You could also do this another way as a check – try and work out everything that you will need to spend when you are retired. This may take a lot longer to (hopefully) give you the same answer. At the end of this stage you have a target income in mind and it is all set out in terms of today’s money. So, for Karen, imagine she is paying £500 a month for her mortgage (6K), spends say £250 a month on kids (3K), paying 7% to UUKPF (£2K) and around 3K NIcs. So £30K becomes around £16K. But Karen fancies a few more holidays when she gives up work – say £4K pa, a few more day trips and weekends away (2K), so here target is £22K (70%).
- The first question you may ask is why do you not need exactly the same amount of income before and after retirement. We set out some of the reasons here. [CLICK] Firstly some reasons why it might reduce: [CLICK] Mortgages are usually designed to finish at or before retirement Your children may (just may) have stopped being your responsibility You are at retirement and so no longer have to save for retirement Once you retire you stop paying NI (Or if you work past State Pension Age you no longer have to pay NI) [CLICK] And then some reasons why (unfortunately) it might increase [CLICK] You may have more or different reasons [CLICK]. The planner on page 3 allows you to enter your current monthly income and then to make adjustments (both positive and negative) to it to estimate your needs after retirement. You could also do this another way as a check – try and work out everything that you will need to spend when you are retired. This may take a lot longer to (hopefully) give you the same answer. At the end of this stage you have a target income in mind and it is all set out in terms of today’s money. So, for Karen, imagine she is paying £500 a month for her mortgage (6K), spends say £250 a month on kids (3K), paying 7% to UUKPF (£2K) and around 3K NIcs. So £30K becomes around £16K. But Karen fancies a few more holidays when she gives up work – say £4K pa, a few more day trips and weekends away (2K), so here target is £22K (70%).
- In this section we are going to focus on the main sources of income for people in your scheme split broadly into pensions and non pensions: Considering pensions first: [CLICK] CPP (2008 Section). You have all built up some benefits and will continue to build up benefits until your retirement. Hopefully, you know roughly how the pension in CPP (2008 Section) works – we’ll talk through an example benefit statement in a moment. AVCs – there are various different AVC scheme within Centrica. More on those shortly. Again, we’ll talk you through some example statements and show you how to find the information you need. State Pensions – There are two main types of state pension. We will explain how to get an estimate of your total state pensions for inclusion on page 6 of your pension planner. Other pensions – with previous employers We’ll then look at the other types of savings available [CLICK] – again initially focussing on the share schemes run in Centrica (Sharesave and the SIP) but also discussing ISAs, buy to let and your own home and will discuss some of the key advantages and disadvantages of each.
- Say hello tp First Actuarial’s tax muppetometer. Explain inputs Step 1: Enter your defined contribution pension details in the orange boxes below… £200,000 after tax free lump sum. Regular income of around £8,000 a year (ie state pension plus some savings income) The tax muppetometer is showing you’d be a bit of a tax muppet to take it all one go (a 100% muppet in fact). Best cancel the Lamborghini test drive…and instead drive the slider to spread your pension pot over a few more years to see how much tax you could save…
- Say hello tp First Actuarial’s tax muppetometer. Explain inputs Step 1: Enter your defined contribution pension details in the orange boxes below… £200,000 after tax free lump sum. Regular income of around £8,000 a year (ie state pension plus some savings income) The tax muppetometer is showing you’d be a bit of a tax muppet to take it all one go (a 100% muppet in fact). Best cancel the Lamborghini test drive…and instead drive the slider to spread your pension pot over a few more years to see how much tax you could save…
- Step 2: For example, spreading it over just 4 years will save you a whopping £29,000. Avoiding being a tax muppet isn’t that hard is it? But even in the 4 year scenario you are still being a bit of a tax muppet (42% of one in fact). So see if you do even better…
- Step 2: For example, spreading it over just 4 years will save you a whopping £29,000. Avoiding being a tax muppet isn’t that hard is it? But even in the 4 year scenario you are still being a bit of a tax muppet (42% of one in fact). So see if you do even better…
- If you, or your other half, have worked most of your life and expect to clock up at least 30 years, then use the full basic state pension in the planner (ie £6,204). If employment record is more complicated, to find out about state benefits built up to date (ie how many years you have got in the system and any S2P, fill in a BR19) Example coming up for Danni 10 YEARS FOR NEW STATE PENSION
- This is a form BR19. The key information that it contains is: The amount of total state pension that you have built up by the date shown However, it also breaks up the amount of state pension into the Basic State Pension and any Additional State Pension built up. The statement also tells you the amount of qualifying service that you have built up towards the Basic State Pension If you think that the service you have done and the service you will do by the date you retire will be around 30 years or more then you need to put in the planner on page 9 the full (current) Basic State Pension plus the amount of any Additional State Pension showed on this form. This may be the closest you get to being a professional footballer – when you pension is quoted as weekly amount. Remember it also needs to be turned into an annual figure by multiplying by 52 Finally, when are you going to get it in Karen’s case when she is 68