For thousands of businesses across Britain, the new auto-enrolment regulations will no longer be looming on the distant horizon but already up and running.

With the staggered “staging dates” from the Pensions Regulator having been rolling forward since 2014, it’s likely that the majority of Britain’s SMEs are already auto-enrolling their staff. But that doesn’t mean there aren’t still complexities for employers when it comes to making sure they continue to comply with the rules.

Clearly, this will include the employment of new members of staff – whether casually or full-time – for whom auto-enrolment decisions still need to be made. And with last year’s announcement that the Government spend on enforcing the rules was nearly doubling, from £21.3m to £40.4m, it’s clear the regulators mean business.

So what should employers continue to be looking out for?

1. Check the thresholds: Each year the government will review the earnings thresholds for automatic enrolment so employers need to check these figures on www.thepensionsregulator.gov.uk. This year the earnings trigger for auto-enrolment has stayed the same as it was last tax year (2014/5) at £10,000. But the upper level has increased slightly to £42,325 from £41,865 last year.
2. Don’t forget new members of staff: When taking on new members of staff, remain rigorous about checking eligibility. It’s very important to know what kind of contracts employees have – for example, whether they are self-employed or employed by you. The Pensions Regulator offers only guidance on this, drawing a difference between contracts for or of services. For small companies without large HR departments, it may well be worthwhile to take professional advice on how to identify different types of workers as you continue to take them on.
3. Continue to communicate: As with when companies signed up to auto-enrolment, it’s still imperative to maintain the same levels of communication about the rules with all new staff members as it was when signing up to the new system in the first place. For all new employees, you need to communicate clearly what the auto-enrolment rules are and let them know that they are automatically enrolled if they meet the correct age and earnings criteria, but can opt out if they wish. Also, as with before, if employees don’t meet the criteria – if they’re under 22, don’t work in the UK or earn under £10,000 – they still get the option of signing up to auto-enrolment but it may mean that you as their employer don’t have to make contributions to their pension pot.
4. Don’t forget about your existing staff: If any employees opted out of auto-enrolment when it was first put in place, remember that as their employer it is your duty to re-enrol them every three years – which still gives them the choice to opt out again if they want. Remember that the law places the burden or responsibility firmly on the employer: they cannot be penalised for forgetting the rules, but you certainly can!

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Don’t become complacent with auto-enrolment

Whilst it’s tempting to ignore the latest set of changes and hope for the best, it really is vital to get a handle on what’s changed so that you can make the right choices, if you don’t, your pension fund could be eroded well before the end of your life. So what do you need to consider?

How long are you going to live?

Given that people are living a lot longer these days, a woman’s average life expectancy is 83 and a man’s 79, there is a requirement that the pension fund needs to last a lot longer than it may have preciously. It is an increasingly important question to consider, especially for retirement investors worried about the effect of inflation on their spending power.

The Government will provide a means for everyone to access ‘guidance’ in respect of the options at retirement but this should not replace the advice given by a good Financial Planner who can utilize things such as cash flow modeling tools to help you devise a financial plan in retirement.

Every day there seems to be statistics banded about in the press regarding longevity – 60 is the new 40; there are now 13,350 centurions in the UK compared to 7,740 just 10 years ago.

Advances in medicine, a quality food supply and a culture of healthy living amongst many other trends factor into our ability to outlive the hunter-gatherers of thousands of years ago. People will die earlier than they would like and people probably live a lot longer than they would like but the facts of the matter are people are living longer.

If you live to age 65, the traditional retirement age, what are your chances of living longer? The answer is extremely good. At age 65 you have a 63% chance of living until age 85 and a 42% chance of living until age 90. Added up, your retirement money at age 65 is going to have to last, potentially another 25 years!

How much money do you need to live comfortably in retirement?

Because of inflation risk, the chances of your money sticking around with you are much, much lower. Inflation has been described in the past as the silent assassin and here’s why.

Let’s say you retired at age 65 in 1990, exactly 24 years ago. Nelson Mandela has just been released, Iraq has invaded Kuwait, John Major has replaced Margaret Thatcher and the kids are not permanently in their bedroom on Facebook because the internet doesn’t really exist.

You have saved up £300,000 for your retirement and need the money to last for the rest of your life. For that money to keep pace with inflation, it would need to grow to £651,570 today, never mind any withdrawals that are necessary in the meantime. In other terms, anything that cost you £1 in 1990 costs £2.17 today. The values of everything, notably housing and fuel, have risen and fallen over those intervening years, but that’s the aggregate of all costs.

Now imagine yourself retiring today at 65. Is £300,000 a reasonable target? If you assume that you’ll live another 20 years, expect your purchasing power to drop by half as the prices will double. Again, this is irrespective of any spending you do and assumes “normal” historical inflation on average.

Can you work out the figures?

There are plenty of fancy calculators online to help you estimate a safe retirement withdrawal rate but the bottom line is that your investments are going to need some risk exposure to ensure inflation adjusted returns.

It is important to gain independent financial advice to discuss all of the risks and all of your options. Many Financial Planners have access to cash flow modeling tools that provide a valuable resource to help understand the impact of how your portfolio copes with varying levels of expenditure.

The new pension rules allow a great deal more flexibility but also requires a degree of control. Seek advice before rushing in to any decisions, go armed with as many questions as you can and make sure you have some clear objectives that you want to achieve before you ask for professional advice.

Image: Pension via Shutterstock

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Make sure you ask the right questions when planning for your retirement

Added to the introduction and growth of the work place pension regime, retirement planning has once again been thrown into the spotlight and left lots of people in the dark.

For anyone approaching retirement, it’s a given that professional independent advice should be sought, but in lieu of this and in a nutshell, this is what you need to know…

From April 2015, pension savers will be given total freedom over how they withdraw pension money.

In the meantime, temporary measures have been put in place to ease the strain on those seeking a retirement income.

As it stood if you put money into defined contribution currently you had a number of options to access the money after age 55 including:

1. If you have less than £18,000 in total pension savings, the entire lump sum can be taken as cash, as a trivial pension. Of this, 25pc is tax-free; the remainder attracts income tax at the individual’s marginal rate.

If you have small pension pots of less than £2,000, you can take up to two of these as cash lump sums, again subject to income tax.

2. The second option, used by the vast majority of pensioners, is to buy an annuity, providing a guaranteed income that lasts until death. Enhanced and impaired life annuities are available for those people with health issues.

3. The third option is to leave the pension invested and take an income from the fund, in the form of income drawdown, subject to certain limits, called capped drawdown. If you could demonstrate that you had £20,000 of guaranteed pension income from other sources (for example, the state pension, final salary pensions or another annuity), the amount that could be taken from the fund was not limited and could be withdrawn, called flexible drawdown. This withdrawal is subject to tax at the marginal rate.

As the meerkat would say…..simples.

What’s changed?

From March 27, the Government introduced arrangements to give savers greater access to their pensions. This means:

• People whose total pension savings amount to £30,000 – rather than £18,000 – will be able to take the entirety as cash, trivial pension, taxed at marginal rates.

• Savers with larger amounts in pension savings will be able to take up to three pensions worth £10,000 each as cash, rather than two worth £2,000.

• Savers who use capped income drawdown will be able to take larger sums as income, as the maximum income calculation has increased by 25%.

• An individual will need just £12,000 of secured pension income from other sources to make unlimited withdrawals through flexible drawdown.

But can you buy a Lamborghini?

In April 2015, people will be able to access the entirety of their pension at any time after age 55, subject to income tax at marginal rate. This will include 25% as a tax-free lump sum with the remainder being taxed at marginal rate.

For example this would mean someone with a £200,000 pension could take £50,000 tax-free and then withdraw the remaining £150,000 to spend or invest as they saw fit.

The £150,000 would be treated as income for that tax year, pushing the individual into the additional rate tax band for the year.

An alternative will be to take the money in annual lump sums. From April 2015, there will be no cap on the amount of money that savers can withdraw from this arrangement, so income can be varied to stay within the basic rate tax or even nil-rate threshold for the year if desired.

An annuity can still be purchased to provide a guaranteed income for life. So, you could buy a Lamborghini if you really wanted to, but it might be a good idea to seek some independent financial advice before you do.

Seek financial advice with a qualified expert through Unbiased.co.uk and Pick-A.org. Look for “chartered financial planner” status. If you want to contact me direct, take a look at www.millbankfs.co.uk

Simples.

Image: pension plan via Shutterstock

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Pensions snapshot: What you need to know

Even if you already offer pension arrangements for your workers, you may not have a qualifying scheme in place and you’ll still have some new obligations to meet too.

Why is Auto Enrolment relevant to me and why do I have to do it?

As an employer you’ll be legally obliged to automatically enrol your employees into a workplace pension, rather than them actively choosing to join your scheme; and If they don’t want to be in, they must actively opt out.

How will it affect my current business processes?

In addition to your regular payroll and pension processes, there are additional tasks you’ll need to do to make sure your workers are enrolled and you remain compliant with the new legislation.

As an employer, you will be required to:

1. Assess the eligibility of your workforce
2. Review your current workplace pension arrangements
3. Communicate information to your employees
4. Facilitate opting out requests and refunds
5. Keep accurate & up-to-date records
6. These responsibilities may cost you time, money and added strain on your resources.

It is important to get clear guidance on your needs and requirements. Larger employers may have a Human Resource Department that is fully able to meet the extra demands of what Auto Enrolment brings. Other, smaller employers may need much more help and assistance when it comes to arranging a work place pension for their employers.

There are a number of providers in the market place that can provide help to employers ranging from help with your payroll requirements to companies that are able to provide a full end to end package.

Who do I need to put into a pension scheme?

There are a number of things to consider when determining which of your workers will be eligible for automatic enrolment.

You must automatically enrol employees who are:

• between 22 and state pension age;
• earning over £9,440 each year;
• working in the UK.

Employees that don’t meet the criteria above may also be able to opt in to a pension scheme and you will be obliged to enrol if they ask to be, however, the rules and requirements on contributions will be different and you may not need to make an employers contribution for those people.

As you can see, assessing the eligibility of your workforce will be time consuming and possibly quite confusing depending on the number of employees you have. Find out what category each of your workers will fall into here.

When will I need to act?
Each employer will be given a date from which the changes will have to be in place. This is known as your auto enrolment ‘staging date’.

Your staging date will be broadly based on the number of people you have in your PAYE scheme. As a small or medium business, your staging date is likely to be between 2014 and 2016.

The pension’s regulator will contact you 6 to 12 months before your staging date. If you’d like to know when Auto Enrolment is likely to affect your business, take a look at The Pensions Regulator’s staging timeline.

Where do I start?
The first things you should do to start your preparation are:
1. Find out your staging date to see how much time you have to prepare (preparation should start around 18 months prior to your staging date)
2. Familiarise yourself with the legisaltion and what you’ll need to do in the run up to your staging date.
3. Get ready to communicate with your workers.
4. Track and monitor your progress.
5. Make sure you’re fully trained on the new legislation and understand how to stay compliant. View our range of training options to see how we can help.
6. Review your current software and admin processes. Are they manual? Will you be compliant? Will you have the time?

5 Key Points to Note:
➢ If you are a UK employer, auto enrolment will affect you;
➢ You will need to ‘enrol’ certain employees into a pension scheme;
➢ This will start from your staging date although you can postpone if necessary;
➢ You must communicate the changes to your employees that have been affected.

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Does Automatic Enrolment affect me?

The Regulators corporate plan that was published on the 21st May revealed that the spend on enforcing the auto enrolment regulations would increase by 90 per cent going from £21.3m last year to £40.4m this year.

Due in part to the increasing numbers of employers that will have to take up auto enrolment this year, this sends out a clear message that employers need to get their house in order or they could face stiff penalties.

Unfortunately, meeting the regulations is not just about making a pension scheme available to your employees. It encompasses much more meaning that at the end of the day, for employers, automatic enrolment is not really about pensions; it’s about business planning.

There are many challenges that that have to be met and changes may have to be made to human resource processes and maybe even to the contracts offered for employment.

There is inevitably a time factor involved with this and it is important to consult with employees, financial advisers and professional legal advisers. So the sooner employers start the better.

Until now, it’s been up to workers to decide whether they want to join their employer’s pension scheme. But by 2018 all employers will have automatically enrolled their eligible workers into a workplace pension scheme unless the worker opts out.

In my May column I highlighted the many issues that have to be tackled, but it is a good idea to re-iterate a few of the most important points.

1. Identifying who is, and who isn’t, a worker.

The problem is there are no hard and fast rules, only guidance from the Pensions Regulator.

This makes a distinction between a contract for services (generally, self employed) and a contract of services (generally employed).

It is important to know the difference as employers have to identify what type of contracts their workers have.

Advisers can help employers to start identifying worker types but if there are any doubts or grey areas, legal advice will be needed.

2. Contractual enrolment.

Some employers already enroll workers into their Pension scheme using the contract of employment.

This can still be done with automatic enrolment but employers need to make sure that the contractual route does not clash with the automatic enrolment rules.

For example, employers might have to operate two processes, one for contractual enrolment, and one for automatic enrolment. Contracts of employment may have to be changed to cater for this, and that needs legal advice.

This issue highlights the importance of everybody, from financial advisers, accountants, human resources and solicitors working together to deliver a more holistic automatic enrolment solution for the employer. It is not really about pensions!

3. Who will be automatically enrolled?

Whether working full time or part time, an employee will have to be enrolled in a workplace pension scheme if they:

* are not already in a suitable workplace pension scheme;

* are at least 22 years old, but under State Pension Age;

* earn more than £10,000 a year (tax year 2014-15), and

* work in the UK.

As long as they meet these criteria they will also be covered if they are on a short-term contract, or an agency pays their wages, or they are away on maternity, adoption or carers’ leave.

They can opt out of your employer’s workplace pension scheme after they have been enrolled. But if they do, they’ll lose out on the employer’s contribution to the pension, as well as the government’s contribution in the form of tax relief.

If they decide to opt out within a month of being enrolled, any payments you’ve made into your pension pot during this time will be refunded to them.

After the first month, they can still opt out at any time, but any payments made will stay in your pension pot for retirement rather than be refunded.

They can re-join the employer’s workplace pension scheme at a later date if you want to. And you, as employer must by law re-enroll them back into the scheme approximately every three years, as long as they still meet the eligibility criteria.

There is a minimum total amount that has to be contributed by the employee, employer, and the government in the form of tax relief. This total minimum contribution is currently set at 2 per cent of your earnings (0.8 per cent from employee, 1 per cent from your employer, and 0.2 per cent as tax relief). In 2017 and 2018, the percentage of earnings that it is based on will increase.

The minimum contribution applies to anything earned over £5,772 (in the tax year 2014-15) up to a limit of £41,865. This includes overtime and bonus payments. So if earning £18,000 a year, employee contribution would be a percentage of £12,228 (the difference between £5,772 and £18,000).

4. Increases in the minimum contribution

The total minimum contribution is currently set at 2 per cent of earnings (0.8 per cent from employee, 1 per cent from employer, and 0.2% as tax relief). From October 2017, it will increase as follows:

• October 2017 to September 2018: 5 per cent of your earnings (2.4 per cent from employee, 2 per cent from your employer, and 0.6 per cent as tax relief)
• From October 2018 onwards: 8 per cent of your earnings (4 per cent from employee, 3 per cent from your employer, and 1 per cent as tax relief)

The increase in the enforcement budget at The Pension Regulator has got to ensure that employers take the auto enrolment duties seriously. No stretch of sand will be deep enough for you to bury your head into without consequences.

Read more:
90% increase in budget to enforce auto enrolment

This is a huge increase in numbers compared with the first 14 months of inception, when around 3,000 of the UK’s largest employers reached their staging date.

A survey of IFAs carried out by financial research organisation Defaqto, on behalf of Now: Pensions, at the start of this year hinted at the problems that could lie ahead.

It found that 55 per cent of the 264 consultants and advisers surveyed had concerns about their ability to service organisations that were due to stage between April and June 2014. In fact 17 per cent said they had no intentions of advising on auto-enrolment, of which 27 per cent considered the administrative burden too onerous.

However, the volume of employers hitting their staging date at the same time is only part of the issue. The fact that many are thought to have left their auto-enrolment planning till late will only serve to compound the problem.

Many also lack the knowledge they need to make informed decisions about choosing the best auto enrolment solution for their employees, according to 89 per cent of the IFAs surveyed by Defaqto.

It is with this in mind that Financial Advisers have got a very strong role to play. Becoming ‘workplace pension friendly’ is not really about the selection of the end pension scheme. It’s all about the compliance and fulfilling your duties.

Employers want to comply with the regulations and make the installation and communication processes as simple as possible.

The choice of the end scheme is secondary, it’s important but it’s secondary. For an employer, this is about compliance.

Therefore what are the things that an employer needs to bear in mind.

Up until February 2018, employers will need to automatically enroll all of their “jobholders” in a workplace pension scheme. Minimum employer contribution levels will also apply. Jobholders may choose to opt out of the scheme, though.

1. Employers should identify the date when they must start auto-enrolment. The largest employers started from 1 October 2012, with smaller and new businesses phased in over the next four years.

2. Employers should check in advance whether their existing pension scheme meets the minimum requirements for auto-enrolment. This includes minimum contribution levels (for defined contribution schemes) or benefit levels (for defined benefit schemes). Also, the jobholder must not be required to provide any information or to express a choice (for example, about the investment of contributions) in order to become an active member.

3. Employers should identify their jobholders and establish which of them are not already enrolled in a compliant scheme. Jobholders include employees, temporary workers, directors employed under a service contract and agency workers (who are considered to be employed by whoever is responsible for paying them). They must have a minimum level of earnings (set at the income tax threshold) to qualify. Jobholders aged between 22 and state pension age who are not already members of a compliant scheme will need to be automatically enrolled in one.

4. If any jobholders are not already enrolled in a compliant scheme, employers should consider what scheme to use to meet the auto-enrolment requirements.

5. Employers will need to check that they are satisfying the requirements in respect of minimum contribution levels for their employees. For auto-enrolment purposes, contributions are based on a definition of earnings which includes salary, wages, commission, bonuses and overtime. Contributions are only paid in respect of earnings in a defined band (currently £5,668 to £41,475). Contributions to an existing scheme may be based on a different definition of earnings, so company payroll systems may need to be updated.

6. There will be an optional waiting period of up to three months before an employee needs to be automatically enrolled into a workplace pension. Workers can, however, opt in during the waiting period.

7. Employers should also put processes in place to identify auto-enrolment triggers for existing employees and new joiners (eg when they turn 22 or reach the minimum level of earnings).

8. Individuals can opt out of scheme membership, within one month of becoming a scheme member or receiving enrolment information. If they do so, all contributions must be refunded. Someone who has opted out can apply to re-enroll, but only once in a 12-month period. Automatic re-enrolment will apply every three years, although employers will have some flexibility about when re-enrolment should take place.

9. Employers will need to communicate with staff about auto-enrolment and explain that they have the right to opt out if they wish. Employers must also report to the Pensions Regulator to confirm that they have complied with their auto-enrolment obligations.

Employers cannot encourage jobholders to opt out of auto-enrolment nor can they encourage candidates to do so during the recruitment process – penalties will apply. Employers should bear this in mind when communicating with their workforce about the new requirements.

Don’t stick your head in the sand hoping that this is going to go away because it is here to stay. Help is available with many advisers, providers and payroll companies offering guidance through the workplace pension maze so don’t be afraid of picking the phone up and asking for help.

Read more:
Auto-Enrolment: What employers need to know

In 1971, only 13 per cent of the population was older than 65. By the middle of 2006 this had risen to 16 per cent, with 7.9 million people over the age of 65 according to the Office of National Statistics.

Consistent with population, life expectancy is increasing. A man who is age 65 could expect, on average, to live for a further 20 years, while a woman could expect to live another 23 years. For men this represents a 47 per cent increase in life expectancy since 1981, while for women the increase is 28 per cent.

With rising standards of living and improved healthcare, these trends are expected to increase. By 2020, official projections suggest that a 65-year-old man will live, on average, until he is 87 and a woman until she is 90.

The statistics are an average across the entire population of the UK. There is therefore a significant probability that any one individual will live considerably longer than this. Figures from Watson Wyatt, suggest that there is nearly a 50 per cent probability that a woman on the brink of retirement at 65 today could live until she is 90 and a 10 per cent probability that she will live to 100. For men, the equivalent probabilities are 35 per cent and 3 per cent respectively. Someone who reaches 100 having retired at 65 will, if they went to university and / or took time out to have children, spend almost as much time in retirement as they did in full time work.

The problem is, as individuals, how can we afford to spend all this time in retirement?

Throughout the length of their retirement, people will incur significant costs. This will include a wide range of expenses from household expenditure, leisure and recreational pursuits such as holidays and eating out to health and care costs. Most people look forward to retirement as a period of relaxation and enjoyment, an opportunity to do the things that they never had the time for during their working lives. Yet most do not have an accurate idea about how much money they will need to sustain their lifestyle throughout retirement, especially with the increasing chance of reaching advanced ages.

From the first year of retirement to subsequent years, potentially 25 or 30 years on, the costs could soar. The question is by how much?

Even though it is easy to pose the question ‘How much money is needed to sustain a standard of living through the length of retirement?’ there is no universal answer. People spend different amounts due to varying reasons such as lifestyle, circumstances, income levels and their individual length of retirement. Additionally life may be very different in 20 years time due to medical, scientific and technological improvements, all of which will impact how people will want to spend their money in retirement.

Figures from the Centre for Economics and Business Research suggest that the cost of retirement for a retiree in a typical sized household who went on to live until they were 100 would be £708,500. Even if the retiree were to live alone, the cost of retirement would still be more than £600,000. To place this in context, given information on typical household incomes, a typical household would need to have worked for 30 years to earn the same amount of gross income as they will spend over their retirement years.

Another scenario is to consider the cost of retirement where someone who retired aged 65 reaches the average life expectancy. According to Interim Life Tables published by the Office for National Statistics, someone who is 65 in 2006 could expect to live until they were 85 if they were male and 88 if they were female. The cost of retirement for someone in a typical sized household living to these ages is estimated to be £412,700 and £471,000. The difference between these figures, the result of living for only 3 more years, further emphasizes the cost of retirement.

When thinking about income requirements over time, the impact of inflation on the real value of money in the future cannot be ignored. The higher the rate of inflation and the longer the period, the greater the impact. The above figures have assumed an inflation rate broadly consistent with the Bank of England target at a little over 2%. If, however, inflation were to be twice this at 4.6% then the cost of retirement would increase to £1.3 million. Even if inflation is just 50% higher at 3.4%, the cost of retirement will rise to £1 million.

Whilst people are now more active throughout their retirement than they were previously people in the early years of retirement are particularly active and their spending habits reflect this. For people between the ages of 65 and 75, more than 40% of spending is on recreation and culture, transport and at hotels and restaurants. It may also reflect that people spend money enjoying the early stages of retirement without fully taking into account how long they may live for.

By the latter years of retirement, spending patterns change considerably. The cost of retirement is determined by spending on housing, fuel and power and food and drink. Collectively these are expected to account for more than 45% of a 95 year old’s budget. Spending on health also becomes a much more important element of spend for people of this age. It is estimated to account for twice as high a share of spending for a 95 year old as for a 65 year old.

People are living longer, healthier lives. This is great news but only if people have the finances in place to really enjoy their post-career years. With more and more people reaching 90 and beyond, and with 90 becoming the new 70 in terms of healthy ageing, it has never been more necessary for the industry and individuals to understand the true cost of modern retirement.

So what are some of the practical ways that people can take to improve their financial well being in later life?

Get real about your retirement needs
Faced with increasing life expectancy, people recognize the need to save more for retirement. However, people often fail to take action. On average, people expect to spend over 18 years in retirement but think that their retirement savings will run out roughly halfway through their retirement. Crucially, this means that retirement savings may be used up before the possible onset of frail retirement. While 54% of people cited poor health as a concern in retirement, the costs of funding potential medical and long-term care seems to go largely unaddressed in people’s plans.

The aspirations of active retirement, such as extensive travel and holidays, and the possibility of having to fund unforeseen costs, such as long-term care, may see overall retirement outgoings increase for many people. People need to recognise these costs, and make a realistic assessment of how much money they will need to live on in retirement.

Put your savings priorities in order
Nearly half (48%) of people have never saved for retirement. Affordability is a factor with many individuals claiming that they simply cannot afford to save for retirement and 26 per cent believing that the global economic downturn has had an impact on their ability to save for retirement. However, many individuals do not prioritise retirement savings highly enough against other financial goals: when asked if for one year they could only afford to save for one option, 43 per cent of people would rather save for a holiday than save for retirement.

Households need to work out a realistic budget and make sure that long-term financial planning,
including the need to save for retirement, isn’t overlooked against what might seem like more pressing financial needs. Ring-fencing even a small amount of monthly income towards retirement planning can help to make a major difference in the future.

Be aware of how major life events affect saving for retirement
Nine-in-ten households claimed that life events and unforeseen financial shocks, such as periods of unemployment, had impacted on their ability to save for retirement. This impact is likely to last for around four years, increasing to seven years among those in their 50s. Helping households to maintain retirement savings will involve making them more resilient against financial shocks.

Households need to ensure that they have access to some emergency savings & investments
as well as appropriate insurance to deal with periods of unemployment and long-term illness, which may stop them working. In the absence of emergency savings and insurance, many households may be required to raid their long-term savings, which were intended for retirement.

Plan for the future
On average, there is a causal link between having a financial plan in place and saving more for retirement: 44 per cent say they saved more for retirement after they put a financial plan in place. Any type of financial planning for retirement, including informal ways such as using online planning tools, encourages people to save more for retirement.

Developing an informal financial plan, for example writing a ‘to do’ list or using online financial planning tools, is a good starting point and a valuable stepping stone, especially for younger savers who typically start saving before they start planning financially for retirement. Ideally people should look to draw up a detailed written plan, which they review regularly, with input from professional financial advisers, in order to maximise the benefits of financial planning.

Use professional advice to improve your savings position
Looking at respondents with average incomes, those who use professional financial advice when planning for their retirement have the greatest levels of retirement and other savings. Those who had put a financial plan in place with a professional adviser had so far accumulated £127,000 in retirement savings compared to £61,000 among those who had not used a financial adviser. 59 per cent of those who had put a financial plan in place with help from a professional adviser found that they had increased the amount they save for retirement as a result. Developing a financial plan with a professional financial adviser can help to ensure that all retirement needs are identified and that comprehensive financial plans are put in place.

Read more:
Longevity – who wants to live forever?

What happens to your business if you or one of your Directors falls ill or dies? It’s not the most cheery topic, but if the answer is that your business couldn’t function, couldn’t service its debts and couldn’t pay salaries, including yours, then it’s worth taking the time to consider your options.

If you haven’t comprehensively protected your business, then you’re not alone. Recent research conducted by Legal & General has found that UK businesses currently have a £1.35 trillion shortfall in business protection needs, with the level of underinsurance rising by 18% in four years.

The research found there had been a reduction in Key Person Protection of just over £21 billion and a significant increase in the Shareholder Protection Gap of over £255 billion. The largest factor to account for the increase in the protection gap was the growth in the number of limited companies and partnerships without cover, which now stands at 1.3 million, up 100,000 from 2008.

The study also found that 31% of business owners surveyed take assessing and managing business risk very seriously to ensure that they have an appropriate level of insurance cover. Yet 50% say that whilst business risk is important, they don’t always feel the need to be insured for everything, with 30% of business owners saying they didn’t have any insurance cover in place in the event of a key person within the business dying or becoming terminally or critically ill. This was because they either hadn’t considered it, hadn’t got round to it or because they were too busy to even evaluate it.

Unfortunately, these statistics and the fact that thousands of businesses are in the same position as you is of little comfort if you find your business in the difficult and often highly emotive situation of losing a key person.

What will protect your business?

Key Person Protection (KPP) will help safeguard your business against the financial effects of death, terminal illness and critical illness of a key person. It is designed to provide a financial buffer in the event of a key person becoming permanently or temporarily unable to make their normal contribution to the business. Proceeds would typically be used to replace lost profits or to fund finding and hiring a replacement for the key person.

The sum assured under a key person cover policy should reflect the loss of profits that are expected to occur on the key person’s death. A simple method is to take the key person’s salary and multiply it by a factor of up to ten but this is likely to be imprecise. Other methods are based on multiples of business profits.

The purpose of key person cover is to ensure that funds are made available to a business on the death or serious illness of the key person. How this protection works will depend on the type of business structure you operate within:

If you have a Limited Company: For companies, it is the company itself who should be the applicant for the cover, on the life of the key employee or director. The company would own the policy and pay all premiums. A trust is not required. An authorised official of the company, such as the managing director or company secretary, would make the applicant’s declaration.

If you have a Limited Liability Partnership (LLP) or Scottish Partnership: These are legal entities in their own right and can therefore take out policies on the lives of key individuals in the same way as companies.

If you are part of a Partnership: Under English Law, Partnerships do not have a separate legal entity and cannot effect a life policy. If a Partnership has a key employee, who is not a partner, a Key Person Policy can be taken out jointly by all the partners or, where this is not feasible, by one or two partners authorised to act on behalf of the Partnership. The policy would need to be held under trust for all partners for the time being, to accommodate any future changes in the partnership.

If you’re a sole trader: Sole Traders may take out a policy on the life of a key employee.

Whatever type of organisation you are, the cost of Key Person Protection (KPP) is often an important consideration, so don’t forget to find out if you are eligible for tax relief on the premiums.

Do you qualify for tax relief on KPP premiums?

If certain criteria are met under the Anderson Rules, it is possible for a business to receive tax relief on premiums under a Key Person Policy.

The relief is obtained by treating the premiums as an allowable business expense, which means that they can be offset against business profits for corporation tax purposes.

The taxation treatment of any policy proceeds (i.e. payment of life cover or critical illness benefit) will often depend on whether the premiums were tax deductible. Usually, if tax relief has been allowed on the premiums then any proceeds received are treated as trading receipts and charged to corporation tax.

Conversely, if premiums are not tax deductible then any proceeds are typically free of tax. If a business is eligible for tax relief on premiums, it cannot elect to waive this right in order to receive tax-free benefits.

A business should always ask its local Inspector of Taxes to confirm the likely tax treatment of any proposed key person cover before proceeding, as The Anderson Rules are not actually ‘Rules’ at all, but a set of principles that formed part of a statement made in 1944 by Sir John Anderson, Chancellor of the Exchequer. The principles form the basis on which a local Inspector of Taxes will decide whether key person cover premiums qualify as an allowable business expense.

There are three conditions that have to be met:
1. The sole relationship between the business and the key person must be that of employer and employee. Relief will not be allowed if the key person has a significant stake in the business.
2. The life policy is intended to meet loss of profits resulting from the loss of the key person’s services.
3. The policy is a short-term assurance (although ‘short-term’ is not defined, most tax inspectors will allow relief for terms of up to five years).

Making a final decision

If you are struggling with the concept or cost of Key Person Protection, you may want to consider:

1. Your business is your livelihood, if you don’t protect it no-one else will and you could lose it.
2. It’s not just you that would be affected by any downturn in your company, it would be your employees, your family and your suppliers too.
3. What’s the real cost to you of having business protection? Evaluate it properly and do a cost:benefit analysis. Is it worth not having business protection?
4. There are professionals that can help you make the best decision for you and your company. Find a Chartered Financial Planner that you trust and stat there.

Key Person Protection shouldn’t be an emotional decision, it should be a pragmatic one. The risks to any business without it are clear.

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