In 2010, in recognition that the real value of the basic State Pension had fallen over many years, the Coalition Government promised an increase in the UK State Pension annually in line with the highest of:
Inflation (increases in prices),
increases in average earnings between May and July each year, or
5%.
It applies to the new State Pension for post April 2016 pensioners, and the basic State Pension for older pensioners (but not to other elements of the old State Pension system).
The pensions minister at the time made it clear that the triple lock was part of a package of reforms including the rise in State Pension age – so while people would have to wait longer for their pension in the future, once in payment it would be increased.
In reality though, this doesn’t mean that over the course of retirement pensioners have become better off. Often, other sources of income diminish … private pensions and savings can be drained over time and money spent in retirement cannot be replaced as easily as it can when people are working, and many people face bereavement and a big drop in income when their partner dies.
Although the State Pension is the most important element of retirement income for most pensioners, the average payment in Great Britain is still less than £9,000 a year (a pretty basic amount) and some receive much less. As a consequence, more than 2 million pensioners live in poverty.
On 7 September this year, after calls to change or suspend the triple lock were made, the Government announced that the triple lock will be suspended for one year. However, they have confirmed that the state pension will still rise next year by 2.5% or in line with inflation.
So why has the link with increases in average earnings been dropped?
Average wage growth is estimated to be abnormally high for this year. In fact in the three months to July 2021 it was a whopping 8.3%. Lockdown caused a drop in average earnings, followed by a post-pandemic rise in average earnings. This has prompted policymakers to look at the formula being used this year in particular, especially in the context of the impact of COVID 19 on public finances. If the triple lock had been kept this year it would have seen the state pension increasing by 8% … a rise I’m sure that would have been welcomed by many.
The government feels this increase to the State Pension would be disproportionate when compared to the increases in previous years:
Year State Pension increase
April 2011/12 4.6%
April 2012/13 5.2%
April 2013/14 2.5%
April 2014/15 2.7%
April 2015/16 2.5%
April 2016/17 2.9%
April 2017/18 2.5%
April 2018/19 3.0%
April 2019/20 2.6%
April 2020/21 3.9%
April 2021/22 2.5%
Source: House of Commons Library, February 2021
Unfortunately, I can’t help but think it may be asking a lot of people to believe that the scaling back of the triple lock will only be temporary, rather than permanent. This is especially true when we know that some of the prominent voices arguing for a suspension of the triple lock in response to the pandemic, are the same people who have called for its abolition in the past. Let’s remember, this Government declined to step in and save the free TV licence for over-75s (another manifesto commitment) … this hardly helps to build trust with our retired population!
How to combat this and stop relying on State Pension Increases …
Make the most of your savings. Don’t leave excessive amounts on deposit earning less than 1% pa. The impact of inflation will erode the buying power of your money over time. There are other options available to you to enjoy a better retirement without spending the capital you have worked hard over your lifetime to create.
There is a tax efficient way of providing an income when you live in Spain that puts YOU in control … a Spanish Compliant Investment.
Spanish Compliant Investment
This type of investment is specifically tailored for those living in Spain who want either capital growth and/or income in a tax efficient way. It offers you the opportunity to pay less tax, making sure your hard-earned cash works for you not the tax man! To explain in relation to what’s available to residents of the UK, it is the nearest thing to an ISA for those living in Spain. The detail of this solution is too far reaching to include in this article, but I list below a broad outline of some of the benefits which make this a fantastic tax efficient alternative for those who don’t want the hassle and tax implications of rental property:
tax free growth whilst the money is invested.
tax efficient withdrawals/income at a time that suits you, whether it’s monthly, quarterly, annually or adhoc. When a withdrawal is made only the growth is taxed. This provides the benefit of tax deferral and can often lead to significant savings, particularly when you consider that part of any withdrawal is also deemed return of your own capital and is not taxed at all.
You are in control of how much income you take and when.
No Spanish inheritance tax paid on a joint life policy on first death, irrespective of the inheritance tax allowances at the time.
No need to wait for Wills to be processed on death and all the bureaucracy that comes with it in respect of either probate or the Hacienda. Proceeds from a Spanish Compliant Investment are paid out immediately and directly to your named beneficiaries, which makes life a lot easier for your loved ones in the event of your death.
If held in joint names, it would automatically continue in the name of the survivor on first death, so no issues with change of ownership or being forced to fully encash.
Wealth Tax can be reduced by up to 80% (dependant on what other income you have).
Flexible enough to change as your needs change.
Avoids the need to be reported on the Modelo 720 as this is done automatically by the provider for all their clients on one return.
At Speed Financial Solutions, our focus is to ensure that our clients are able to enjoy life knowing that they are set up in the most tax efficient way for their particular circumstances. If you are considering alternatives to rental income please contact admin@speedfinancialsolutions.com
Speed Financial Solutions are a highly qualified financial services provider looking after clients throughout Spain and the UK. We provide a discreet and comprehensive service to individuals, and our service is tailored to suit your needs taking advantage of tactical opportunities as they arise in respect of your pension planning. We seek innovative solutions for our clients and employ our skills, based on many years of experience, to apply tax legislation to your advantage. Our relationships are built on trust and mutual respect. We are ready to answer your questions, giving you the confidence you want when dealing with a sensitive issue such as discussing your pensions, investments and savings.
Our Principal, Andrea Speed, is a qualified Discretionary Investment Manager specialising in Investment and Risk, Taxation and Trusts, and a qualified Pension Specialist. Andrea is also a Fellow of the Chartered Insurance Institute (CII), which is the world’s largest professional body for insurance and financial services in the world.
Fellowship is the highest qualification awarded by the CII (Level 7) and is universally regarded as the premier qualification. It is a major achievement in the financial industry and demonstrates the acquisition of skills and knowledge at the highest of levels. Along with a Fellowship, Andrea is a CII Chartered Financial Planner.
Please take a look at our website – www.speedfinancialsolutions.com
For further information contact us on Tel 951 315 271 or 951 318 529
We are happy to discuss your own situation in more detail. One of our advisers would be pleased to spend some time with you either in your home or at our office to review your current savings, investments and pensions, so do call to make an appointment. Our Financial Review is completely free of charge and without obligation. Follow us on Facebook for regular updates.
The contents published are not recommendations or decision aids for your investment decisions and they do not constitute any type of advice. We are not tax advisers and independent tax advice should always be sought.
Andrea J Speed FPFS (DM), M.A.
Principal, Fellow and Chartered Financial Planner
Speed Financial Solutions
30 September 2021
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