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June 1, 2018
The 2014/15 financial year is in full swing, and UK businesses are looking forward to even more changes to come – including landmark reform of the pension system for employers and individuals. With a marked improvement in both weather and economic outlook, many are enjoying the benefits of a more confident market.
The early part of 2014 was filled with cautious rumours of an economic recovery, later confirmed by the Government and published figures. The National Institute of Economic and Social Research (NIESR) reported that the economy may already be larger than pre-crisis levels, with predictions that GDP will grow by 2.9% this year.
Jonathan Portes, director at NIESR, said: ‘The end of the great recession, it is an important moment. The British economy is very close to being bigger than it has ever been. Symbolically, that matters, and it comes at a time when growth is entrenched’.
Inflation has also been in the news, having fallen to 1.9% in January – below the Bank of England (BoE) target of 2%. It has been suggested that a long period of low inflation could mean that average earnings will rise faster than the cost of living, which has also not happened since the financial crisis.
These reports seem to have bolstered faith in the city, although experts warn that growth is still contingent on consumer spending and that corporate investment needs to increase in order to secure long-term economic improvement.
But in contrast Mr Portes warned: ‘But as far as individuals are concerned what really matters is how rich we are – per capita GDP – and that’s well below the level of 2008 and won’t get back to its previous level for a couple of years. Take home pay is about 6% lower than it was back then and won’t get back to its previous 2008 peak before, we reckon, another three or four years’.
The BoE has again quelled rumours that interest rates are due to rise this year, despite predictions by the Confederation of British Industry (CBI). Rates are currently expected to increase by 0.25 percentage points in the first quarter of 2015.
Another factor contributing to the economic upturn is the surge in self employment. 4.5m people are now self employed in the UK. Concerns have been raised that this increase could be the real driving force behind the recent fall in unemployment figures, which the Coalition Government has been keen to promote in recent months.
The single-tier State Pension will be brought in on 6 April 2016, and will affect people who reach State Pension Age from that point onwards. Those who already receive a pension or those who reach pension age before this date will be treated according to existing rules.
Single-tier pensions will replace the basic State Pension and Second State Pension with a flat-rate pension that is set above the basic level of means-tested support. It will also replace additions such as the Category D pension and the Age Addition. The Savings Credit element of Pension Credit will also be closed to anyone coming of State Pension Age after the start date.
The new system will require 35 qualifying years of national insurance contributions (NICs) or credits if individuals are to receive the full amount. Those with fewer than 35 qualifying years but more than the minimum qualifying period will receive a proportionally smaller single-tier amount. Transitional arrangements will be put in place to take into account the NIC records of individuals before the implementation date.
HMRC says the single-tier pension will make it easier for people to understand what they need to save for their retirement. It will also support the introduction of automatic enrolment into workplace pensions.
Auto-enrolment has been phased in over a number of years, following ongoing concerns that individuals are not saving enough into their personal pensions. Auto-enrolment requires most UK employers to automatically enrol eligible workers into a qualifying pension scheme and to pay a minimum contribution into the fund.
But as the phased introduction of pensions auto-enrolment continues, recent research has suggested that more than 80% of employers are facing increased costs as a result of the new regime. These figures imply that while some of the increased costs are accounted for by employer contributions, preparing data and dealing with administration are also proving to be significant cost factors.
The state-backed provider National Employment Savings Trust (NEST) said there is a significant improvement in living standards among households with a retirement income of at least £15,000 per year, and that those whose state and personal pension funds are likely to be less than this amount should consider increase their pension contributions.
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‘Securing the recovery is like making it through the qualifying rounds of the World Cup – it’s a real achievement but not the end goal. The prize in the economy is sustained and prolonged growth’.
Mark Carney, Governor of the Bank of England
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June 1, 2018