Jeff Salway: High risks of pocketing pension pots

Lionel Barts musical Oliver. Picture: Kobal

Just 6 per cent of Scots are setting aside enough cash to achieve the income they’re hoping for when they retire, Aegon’s latest Readiness Report reveals today.

While the average adult wants a retirement income of £40,000 a year, the average annual pension income they’re likely to have will fall just short of £21,000 on average, it found. The Edinburgh-based insurer’s report comes as anxiety grows over a radical pensions shake-up set out in the Budget in March and coming into force next April. The changes will allow savers aged 55 and over to take their entire defined contribution (DC, or money purchase) pension pot as a cash lump sum, including 25 per cent tax-free. The remainder will be taxed at their marginal rate, rather than the current 55 per cent charge.

Scheme members will also have the freedom to take cash from their pension in small lump sums and get the first 25 per cent of each slice tax-free. But fears are mounting that the overhaul – including a “guaranteed guidance’ service” – is being rushed through by the government, with potentially disastrous consequences for savers.

Just 26 per cent of Scots feel more positive about pensions following the announcement of the reforms, according to Aegon.

And while Hargreaves Lansdown has estimated that up to 200,000 people will take advantage of the new rules to take their entire pension pot as cash next year, Aegon found most people don’t know how much they have saved. It revealed 55 per cent of people admit to never having checked how their retirement savings are performing.

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“Why not take an interest in the funds you have?” asked Graeme Mitchell, managing director at Lowland Financial in Galashiels. “They play a big part in determining the income you get in retirement and with investment funds coming in and out of favour it’s always worth checking.”

Apathy, a fear of the unknown and a widespread distrust of financial services are all part of the problem, he added.

But the blame also lies with pension providers, who are accused of making it too difficult for people to review and understand their pension plans. The “wake-up” packs sent out by providers to customers nearing retirement are often more than 20 pages long and replete with jargon-filled small print.

Some pension firms deliberately make it hard for customers to accurately decipher their plan information, claimed Carl Melvin, director of Affluent Financial Planning in Paisley.

“Providers have little interest in making their communications clear unless they are confident that their pension plans have delivered excellent value – poor performance and high charges are not what they want to highlight to customers,” he said.

“Perhaps all statements from pension provider should be made to meet the plain English campaign requirements.”

Working out what those documents tell you about your pension is vital, however. Failure to do so could allow your pension provider to get away with charging over the odds for poor investment performance.

“It is always worth a check-up as many things can (and probably will) have changed,” said Mitchell. “Regular servicing of your pensions and investments can check everything is still suitable and prevent bigger potential problems in the future.”

Look at the amount you pay in and the fees you’re being charged, said Mitchell. “If you’re earning more than you used to but your pension contributions haven’t kept pace you’re less likely to sustain your lifestyle in retirement,” he pointed out.

The reforms taking effect in April are the perfect excuse to look under the bonnet of your pension plan/s.

“The new rules are great, but options can cause confusion,” said Melvin. “People will either switch off because it’s all too difficult/complex or, worse, they will make their own bad decisions with no redress available when they realise that they have a bad outcome.”

The overhaul offers new opportunities too, however. “The changes permit so much greater flexibility and frankly a way to make money because of the tax treatment,” said Mitchell. “If you don’t review the pension – and specifically you don’t use an adviser – you don’t get to hear about these ideas or options.”

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How to get your tax return right

1 Don’t miss the deadline

If your return is late, you fail to pay your tax on time or there are errors in your submission you could be subject to a range of potentially expensive HMRC penalties that can be difficult to mitigate. But there are simple steps you can take to avoid penalties. For instance, it’s very useful to make a note of the deadlines. You must submit your tax return by 31 January following the tax year in question. This is also the deadline for the payment of any tax liabilities. There is now an immediate penalty of £100 if you miss the 31 January deadline even if you do not owe any tax and information suggests that this is the most commonly applied HMRC penalty. In addition if you fail to pay your tax on time you will be faced with additional penalties, starting with a 5 per cent surcharge if the tax payment is 30 days late.

2 Keep your records up-to-date

Accurate records are essential. Gather together your information throughout the year and do not leave it to the last minute. Relevant information will include a copy of your P60 and P11d; your bank statements; details of any child benefit received and any income received from investments and property.

3 Include all sources of income

In particular, make sure you include all income available to HMRC from a third-party source, such as interest from offshore bank accounts. If you are UK-domiciled and UK-resident you need to include all income and gains generated overseas. EBay trading is becoming an area of interest for HMRC. Personal possessions can be sold tax free on eBay but buying items that are later sold at a profit is taxable trading. It is understood that HMRC now uses a search tool to identify high volume eBay traders.

4 The buck stops with you

It is important to remember that responsibility for the completion and submission of your tax return ultimately rests with you. If it is being prepared by a third party it is important that you keep tabs on progress to ensure that the return is completed on time and that you have sufficient time to ensure that any liability arising is with HMRC by 31 January.

• Liz Ritchie is a partner at Mazars in Scotland

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