BT – Your tactics are questionable to say the least.

/0 Comments/in /by

We have all seen and heard news about the power companies bleating on about how they are only passing on increased costs, and that their margins are slimmer than a cigarette paper, as they whack up their prices yet again and somehow make record profits every year (even after the board’s bonuses). Plenty has been written and spoken about the tactics and smokescreens of NPower, E.on, British Gas & cronies. However a recent further example of stealth billing put my back up recently, and which seems just so typical of how British companies treat consumers nowadays, that I thought I’d share it with you – if only to get it off my chest.

My business numbers are with BT.  I received what looked like an innocuous piece of junk mail a few weeks ago – a single, colourful sheet of paper from BT , (printed on one side with a really small font).  Fortunately I read it before binning it. The letter said they were going to start billing me “a small charge” of £122.88 +VAT per year (£147.46) for each of my listings in the classified section of the phone book. To keep my existing (formerly free) listing I “didn’t need to do anything”, as they will just automatically add the charge to my bill every quarter.  Stealth billing rule #1 – get in under the radar by giving minimal information in a low-key chatty manner, then take the money via a DD that’s in place.

I didn’t want to pay for any phone book entries as I don’t believe anyone uses the classified book much anymore (it’s not really even Yellow Pages any more), so I called to cancel. But on ringing BT and stating my intent I was surprised to immediately be offered a much cheaper deal of less than half the quoted price “because I was a BT customer”. Isn’t everyone? I asked.  “Well… er, some non-BT customers choose to advertise in the BT classified book”. Hmm I’m not so sure about that. Either way, they knew all along of course that I was a BT customer (they wrote to me after all), and, if they truly had a two-tier pricing structure, they should have offered me the lower price in the first place.  Stealth billing rule #2:, if the first attempt doesn’t work and the customer cottons on, make up some cock and bull story about discounting it and have another bash at making some money that way.

Now if BT has a cheaper price for its customers, will they charge that cheaper price to all those customers (presumably the vast majority) who ignored the little one-off flyer (or simply didn’t care) and did nothing?  I think we all know the answer to that one. Hardly treating customers equally is it? Stealth billing rule #3: Don’t worry about people paying different prices for the same service. It’s OK if the quiet majority get shafted. 

There’s a theme here that’s pertinent to us IFAs. We are constantly nagged and reminded by the FCA to treat customers fairly and be seen to do so by publishing our various fees and charges for every situation and explaining them at length (ad nauseum some might say) to clients, and the FCA will, on a visit, check this area most carefully. Any routine discounting of fees for example is something they don’t like at all – it’s against the fairness principle to charge different fees for the same service. But while they’re micro-managing little IFA outfits like me, the OFT is happy for BT and other giants to just go ahead and make money from consumers by any method they can get away with.

There just seems a palpable lack of integrity in the major consumer markets nowadays, with senior executives aiming at maximisation of short to medium-term profit rather than the long-term.

The BT thing doesn’t constitute much more expense to even a small business, but to BT of course an extra £122 for every line entry in the classified section of every directory in the land adds up to a nice little earner. And of course what BT , the high street banks (they’ve been at it for years – they don’t need a DD they just dip into the punter’s account……but I digress) and some other major British businesses are doing isn’t illegal. They check with their legal advisers and ensure their sales processes fit within the relevant legislation and their T&Cs ( which they can more or less amend unilaterally anyway). They rely on the letter of the law, never the spirit of it, and push the boundaries wherever they think it worth the risk.

For me it just demonstrates UK big business’ growing contempt for the customer. They know that the typical UK consumer is trusting and accepting, and they are taking more advantage of that than ever before. For them, it’s not about fair prices or providing a good service for customers any more (if it ever was), it’s about exploitation.  

Pensions – The Lifetime Allowance cut April 6th 2014

/0 Comments/in , /by

Don’t snooze or you might lose. (OK I know pension rules are a tad dull but read on it’s important.)

The Lifetime Allowance is being tinkered with again! A year ago it was announced that the pensions lifetime allowance will drop at the end of the (current) tax year 2013-14 from £1.5million to £1.25 million. Remember, if you exceed the allowance, the excess is liable to be taxed at 55%.

Many more people are going to be affected by this than the Government suggests – a major pensions company estimates 360,000+.  Who  should care? Well, for starters anyone with aggregate pensions  (including final salary) currently valued at more than £1.25 million who hasn’t any existing protection from HMRC.  But also anyone in danger of getting close to that limit in the years to come (don’t expect Government to put it back up again anytime soon). The graph below shows the LTA since inception in 6/4/2006 (“A-day”) and perhaps suggests a trend (source = Standard Life):

Pensions Lifetime Allowance LTA chart

Lifetime allowance 2006 to date

Who’s in danger of falling foul of the latest rule change then? Well, of course it depends on how much aggregate pensions you have now, what your current funding level is and how long to go until your likely retirement date – but some simple maths produces the following table as a guide for members of money purchase schemes (i.e.  group personal pensions, occupational money purchase schemes, executive plans, RACs (S226s), S32s, i.e. anything not final salary) as follows:

Fund level now (without further contributions) to achieve £1.25 million
Years to Retirement Fund now growing at 4% Fund now growing at 6%
3 £1,111,245 £1,049,524
5 £1,027,409 £934,073
7 £949,897 £831,321
10 £844,455 £697,993

And that’s assuming you make no more contributions to any plan!

Likewise for those lucky enough to have a defined benefit (final salary) pension (the calculation is 20x the annual benefit, so £62,500 per year is where it max’s out):

(Deferred) Annual Final Salary Pension level now to achieve £1.25 million
Years to Retirement Pension revaluing at 3% p.a. Pension revaluing at 4% p.a.
3 £57,196 £55,562
5 £53,913 £51,370
7 £50,818 £47,495
10 £46,506 £42,223

The table above assumes you’re no longer an active member of the scheme / adding years!

Don’t forget to aggregate your money purchase and final salary pots together.

What to do?

There are two new options to lock into the current higher allowance:

“Fixed protection 2014” allows clients to lock into the old £1.5m allowance beyond 2014. The down-side is that pension savings have to stop after 5 April 2014. You must apply for this by 5 April 2014.

“Individual protection” is only available to clients with pension savings worth more than £1.25m on 5 April 2014. It gives a personal allowance equal to that benefit value on 5 April 2014 (i.e. up to £1.5m), and importantly it doesn’t mean giving up on pension saving. You must apply for this by 5 April 2017.

It’s a complicated issue though and might require regular monitoring of all your pension accounts.  There are many potential angles to this and not all are obvious. For example, maybe you think you’re a marginal case? Well perhaps de-risking your pension investments works for you – e.g.  if  a steady lower risk, lower return portfolio probably keeps you below the limit, but a higher risk approach (always assuming it does achieve higher returns)  is likely to take you over it – in which case do you really want to take risk chasing higher returns  when the Government stands to get most of the benefit? Just one example of things to think about.

The simple message is get to advice from a good independent pensions adviser   …………..(hmmm… Oh! Hello …… ) if you are in any way concerned about this. We can look at various scenarios and discuss solutions and the alternatives which suit your particular circumstances and give you the best results when you do actually retire.

Remaining invested in Pensions beyond age 75

/0 Comments/in , /by

Following changes in 2011, Pensions legislation no longer requires you to buy a lifetime annuity, or take any pension commencement lump sum (PCLS), at age 75. However, for those who remain invested in pensions via drawdown plans or uncrystallised pension policies, and are approaching that magic age of 75, this presents two key decisions:

  • Taxation of lump sum death benefits after age 75. From that point onwards a 55% tax charge will apply to any lump sum death benefit paid from pension savings, whether untouched or in drawdown (this was the main reason why a client of mine recently crystallised his benefits).
  • Lifetime Allowance test at age 75. Pension savings that clients have built up which are not providing a lifetime annuity or scheme pension will be tested against a client’s available Lifetime Allowance at 75. Once the test has been carried out there will be no further Lifetime Allowance test on the value of those savings.

This may well influence your choices as to how much, and when, you decide on taking income from your remaining pension savings.

Whilst pension legislation now allows pension policy holders freedom from enforced annuity purchase at age 75, not all of the pension policies in which those people’s savings are currently held actually allow this flexibility. Many older, legacy, pension products were designed with systems and policy terms that reflect the old restrictions that applied to earlier the legislation, and in many cases those terms will not be updated and will still dictate what clients can do with those policies.

For some it might mean that annuity purchase becomes the only income solution available at 75, whether the pension savings are in drawdown or not. For others it could even mean a worse-case scenario, as  recently reported in a case in the Daily Telegraph, that a client could lose all options to be provided with authorised benefits from pension savings, resulting in a 55% tax charge being applied to the total capital value of those savings that were paid after age 75.

If you are unaware of what flexibility, or limitations, exist with your existing pension products and you are near to age 75, you might struggle to have enough time to consider alternatives that could provide continuing solutions that align with your preferred retirement income plans. If this sounds like you, i.e. approaching 75, and still with an older drawdown scheme or perhaps uncrystallised pension plans, you should consider an urgent review of the choices available to you from your existing products, to help ensure your longer term retirement income plans are to be achieved without potentially significant change.

-Source: Skandia

Business Protection Solutions

/0 Comments/in , , /by

Many people think that the term “business protection” is just one generic type of cover that can be shoehorned into just about any business arrangement. This is quite wrong.

All businesses are different, and should have a business protection solution that fits their needs. This paragraphs below set out basic information on the four key types of cover a business should consider:  Key Person Cover, Share Protection Cover, Relevant Life Plan and Business Loan Protection. They can be set up separately or combined; usually a small discount can be achieved if more than one type of cover is taken out at the same time.

The manner in which the four types of cover should be applied to different types of business, i.e. limited company/Limited partnership, standard partnership and sole trader, will vary somewhat , as will the proper use of trusts and any side agreements where appropriate. This is a skilled area where an experienced insurance intermediary earns his keep.

Businesses should not go it alone in setting up their cover, and whilst it is common for banks to provide cover to businesses particularly where business loans are concerned, bear in mind that the terms obtained from your bankers are rarely as competitive as can be found through an independent intermediary, so if you feel you have a choice, (i.e. your friendly bank hasn’t got a gun to your head!) get a second quote by calling us on 0845 013 6525 (might as well get a sales pitch in!).

The general rule regarding tax relief on premiums, or potential taxation of benefits, is if tax relief is obtained on premiums the benefits are liable to be taxable, and if no tax relief is obtained on premiums then benefits are likely to be tax-free. The exception to this principle would be the Relevant Life plan where premiums may be treated as a business expense for tax purposes in the majority of cases (so long as the “wholly and exclusively” rule is considered to be met) and any policy proceeds should be free of tax in the hands of the beneficiaries.

We recommend that the business checks their tax position on their proposed business protection (usually through its accountant) with the local Inspector of taxes, to gain comfort and confirmation.

Key Person Protection

This is designed to pay the policy proceeds directly to the business on the death or critical illness of the key person, which can be used to help replace that key person, cover the loss of profits that may occur or repay a loan. The policy proceeds would help a business to continue trading through a difficult time.

Share Ownership Protection

Designed to provide the surviving shareholders / partners with the funds to purchase the deceased’s or critically ill partner’s/director’s/member’s share of the business. The policy would be under trust and would also require a cross option agreement to be put in place, which gives the survivors the right to purchase (and can also give the deceased’s representatives the right to force the sale). The cross option agreement therefore necessarily requires an agreed method of valuation of the business to be appended. The business can select a simple calculation (e.g. a multiple of average profits over the past n years), design it from scratch or otherwise take advice from their IFAs or accountants.

This type of cover is relevant to practically all business organisations. Whilst the paperwork and business valuation side of things may seem a little daunting, a good intermediary will help you by careful fact-finding and design of the right plan structure for your business, and implement it along with completion of all of the relevant trust forms. Your accountant should also probably be involved if only to confirm understandings as to likely future tax treatment under certain scenarios.

Relevant Life Plan

This is a tax efficient single life Death in Service benefit for employees or directors of a business. The policy proceeds are paid to the Trustees (employer) and the benefit is written under Trust for the life assureds beneficiaries. Typically there is tax relief on premiums and no tax on proceeds making this a very popular type of plan amongst small businesses which do not have group life policies, or as additional cover for directors and senior management for firms which do. Critical illness cover is not available under this type of plan.

Business Loan Protection

This is designed to pay off any outstanding loans the business may have should a main shareholder, director, partner or other key individual suffer a critical illness (if selected) or die. It shares many things in common with the more general Key Man protection, but is likely to be of a fixed term in line with the loan. If you think your business is going to regularly roll over its finance then it might be prudent to take out cover over the longer term, rather than take out a new policy every few years, which would be cheaper in the long term and avoid the risk of high future premium costs if the insured’s health should decline in future.

Business Protection is relevant to just about every form of business organisation, from the sole trader to a FTSE 100 plc.

When Good Investment Advice isn’t Obvious

/0 Comments/in /by

I have just been appointed by a client to manage their investments and pensions. On reviewing their existing holdings, the risk looks a little high compared to where the client has indicated they would like to be, but not outrageously so.

I find myself however faced with a ticklish situation: Equities have risen significantly this year, with the UK and USA indices close to record highs. As a result of course, of late the client’s existing portfolio has done pretty well. What I now see happening is that I should reorganise the portfolio into a lower risk, more defensive position (more appropriate to the client’s risk assessment, and which in turn will hopefully help lock in the recent gains). I believe we are probably going to see a correction soon in those equity markets which have surged – then UK and USA being prime examples. So, perhaps in a year’s time, the portfolio may be little further ahead than it is now. I may have done an exemplary job in maintaining the value in a tricky market, but how does that look to the client? Good gains under the first guy, but  it flat-lined as a result of my ministrations over the next year perhaps? Possibly.

It’s not always about making profits, sometimes it’s about avoiding loss. So long as the client is reasonably aware of the factors involved, then they should appreciate the value one’s advice adds.  Hence the importance of communicating with clients and being able to demonstrate the value added, by e.g. comparison to benchmarks.

The message? For the client, judge your adviser over the medium term at least, and ask him about reasonable expectations from your portfolio. If you are no more of a risk taker than “middle of the road”, then don’t expect double digit returns too often (if at all!).  For the adviser – remember to manage your clients’ expectations for their investments.

Investment management isn’t just about finding the best returns, it’s about mitigating risk too. If you have seen great returns of late, but consider yourself a cautious investor, then now might be a good time to contact your adviser to re-open the discussion about the level of risk in your holdings.

 

March 2013 Budget – what it means for you

/0 Comments/in , , /by

I am indebted to Standard Life’s Technical Department for the following advice following today’s Budget:

Good news for drawdown users – and GAD rate overhaul means more to come

A 20% hike in pension drawdown limits has been confirmed. And there’s an added bonus, with the barrier to transferring protected pre-April 2011 drawdown cases removed and an overhaul of the GAD drawdown rates.

Alastair Black, Head of Income Solutions at Standard Life, comments:

“Standard Life has been leading the campaign for more flexibility around drawdown limits. We welcome the move back to 120%. And lifting the transfer ban is good for customers too. But we’re particularly delighted that the Government has answered our calls to get drawdown rates back to reality.”

Higher income limit

  • The existing income limit will simply go up by 20% from the start of the client’s next drawdown year after 25 March 2013. It’ll happen automatically – there’s no need for a formal income review.
  • This means some clients will have a year’s wait for the income hike. But advisers may be able to help give an immediate income boost, and supercharge the 20% increase when it does come, by triggering a review of the existing limit in the interim.

Transfer barrier lifted

  • Until now, anyone transferring a pre-April 2011 drawdown pot with a protected 120% income limit dropped down to the 100% limit from the start of their new drawdown year. This created a real barrier to these transfers, effectively trapping many clients with their existing drawdown provider.
  • The existing 120% income limit will now continue after a transfer until the scheduled 5 yearly review date, creating a level playing field for clients and their advisers. And this change is backdated – it applies to any transfers of protected pre-April 2011 drawdown funds made in a drawdown year starting after 25 March 2012.

Review of GAD rates

  • GAD drawdown rates are supposed to mirror market annuity rates. But they don’t – increasing the pain for drawdown users in recent years.
  • A review of the table has been kicked-off to get the rates back on track, potentially further boosting drawdown income limits from later this year.

More information? Please give me a call to discuss a review of your drawdown plan.


Pension allowances cut – but there’s still room for manoeuvre

It’s no surprise. From tax year 2014/15, the pension annual allowance drops to £40,000 with the lifetime allowance cut to £1.25M. But despite the rumours, there’s no change to pension tax relief. And the 2% of the population affected by these cuts have time to plan for them.

David Downie, Standard Life’s Technical Manager, comments:

“These cuts create a clear call to action for financial advice. Those HNW clients affected should use the advance notice to review their pension funding and start considering other saving vehicles for the future.”

Annual allowance

  • The drop to £40,000 applies to pension saving for the 2014/15 tax year. But many will see their contribution limits cut in a matter of weeks rather than in a year’s time.
  • This is because the annual allowance test isn’t based on payments made in the tax year – it’s what’s paid in the pension input period (PIP) ending in the tax year that matters. So any PIP starting after 6th April 2013 suffers the reduced £40,000 allowance.
  • Carry forward continues, but the new £40,000 allowance will soon start to eat into what can be paid. Payments for 2015/16 will have carry forward based on £50,000, £50,000 and £40,000.
  • Make the most of the current rules while you can. Think carry forward from 2009/10 onwards based on a £50k allowance, 50% tax relief on payments made this tax year and protecting against the reduced LTA.

Lifetime allowance

  • The standard LTA will drop from the current £1.5M to £1.25M from 6 April 2014. But there will be two new options to lock into a higher LTA before then.
  • Fixed protection 2014 gives a continued £1.5M LTA – but at the cost of giving up future ‘benefit accrual’ after 5 April 2014. There will also be an individual protection option, expected to give a personal LTA equal to the 2014 fund value for those with funds between £1.25M and £1.5M – without the need to stop pension saving. It’s expected that this will be available alongside the new fixed protection 2014 as a safety net.
  • Consider using the new tax year, and what’s left of this one, for a final funding boost before locking into the higher allowance. And start thinking about alternatives to pensions for the future.
  • But don’t throw the baby out with the bathwater. Giving up on pensions could mean missing out on employer pension payments. So if there’s no compensation for leaving a company pension scheme, staying in for 45% of something might be better than 100% of nothing.

More information? Happy to discuss – please give me a call.


“All systems go” for flat rate State Pension from 2016 – but further blow for DB

The new flat rate State Pension of £144 a week will start from April 2016, a year earlier than originally planned. Details will be confirmed in the Pensions Bill.

Jamie Jenkins, Head of Workplace Strategy at Standard Life says:

” A simpler State Pension will make it easier for people to see exactly what they will get from the State when they stop working. This greater clarity will make it easier for them to set targets for their own retirement savings, to top up the State Pension. And making it easier to plan for the future has to be a good thing.”

But related changes to DB schemes aren’t such positive news:

  • 2016 is confirmed as the end date for DB contracting out. This will see both employer and employee NI going up, futher increasing the cost burden of maintaining benefits at current levels.
  • Employers will have a controversial new power to unilaterally reduce benefits to compensate, but this might simply be the final nail in the coffin for some.
  • And the scrapping of the proposed relief from smoothing returns is another blow for beleaguered employer sponsors.


Family tax breaks – find out what’s on offer for you and their families

The sandwich generation is being squeezed from both sides. They may be spending more time (and money) supporting elderly parents. And they may be facing a peak in costs if they have young children. If one parent is at home, household income is likely to be lower. Or with both parents working, there will be childcare costs to fund.

In February 2013, Standard Life’s annual survey on financial efficiency showed that more women than men were setting a budget, selling things online they no longer needed, or making the most of loyalty cards. But when it came to making the most of tax breaks (e.g. with an ISA or pension) more men than women were taking action.

Measures which support families in saving more overall are therefore welcomed. 2013 has seen a variety of government measures which affect families in this position, both in today’s Budget and also earlier in the year.

Childcare changes in 2015

Working families struggling to meet childcare costs will get a welcome £1,200 a year boost from the Government. The new scheme will open up tax relieved childcare for the 2 million families who are unable to access the current employer linked scheme.

From 2015 they will get 20% tax relief on savings used to purchase childcare vouchers up to a maximum of £6,000 for each child under 5 years old. And the savings could even be recycled into a pension contribution which could help to reduce the tax charge on child benefit – see below.

Keeping child benefit

A pension contribution is more than a tax efficient way of saving for retirement – it can also help to retain child benefit.

Child benefit is worth £1,752 every year for a family with 2 children. This is at threat if either parent has annual income in excess of £50,000. It will be lost altogether if this figures rises above £60,000. A pension contribution is one way to keep child benefit in the family. For example, for an individual on income of £60,000, a pension contribution will reduce this figure to £50,000 at a net cost of only £6,000 – and they’ll get the child benefit back.

Child Trust Funds and Junior ISAs

Following consultation announced in today’s budget, legislation is likely to be introduced in Finance Bill 2014 to allow existing Child Trust Funds to transfer into Junior ISAs (JISAs).

The maximum contribution that can be made to JISAs is £3,600 every year from birth to 18 and is a valuable allowance. If maximised, it could grow to around £85,000 (assuming growth of 3% a year) over the 18 years. And the child would be entitled to their fund at 18. Too much too soon? Certainly in the view of some parents. While it would be useful towards university costs, it could end up being used less wisely.

The lack of control over hard earned savings could be a worry for many parents, who may prefer to provide for their children’s future using an investment in trust.


Anti-avoidance – general measures and IHT specifics

The much heralded General Anti-Avoidance Rule (GAAR) will be introduced in Finance Bill 2013. It will cover a wide range of taxes, such as income tax, capital gains tax, inheritance tax (IHT) and corporation tax. It will add to existing measures against tax avoidance and focuses on marketed tax avoidance schemes.

Specific legislation will be brought in to counter some specialist IHT avoidance schemes.

  • Only a debt that’s repaid out of the estate by the executors will be allowed as a deduction from the estate.
  • If assets that attract IHT reliefs such as Business Property Relief or Woodlands Relief are bought with the borrowed money, any relief will be only be given on the repaid amount of the debt.

Source: Standard Life Technical

Pension Planning matters for tax year-end April 5th 2013

/0 Comments/in , /by
My thanks to Skandia for the following summary, which embodies several of my previous blog subjects where the advice remains relevant:

It seems that this tax year, like so many others, has seen significant changes announced in relation to the ability of clients to build up private pension savings to deliver part of their future retirement income. The Chancellor’s Autumn Statement signalled a reduction in the Annual and Lifetime Allowances but only applying from the start of the 2014/15 tax year. This will create, for some clients, a shorter term focus of how they can maximise their private pension savings before change takes effect.

Some key areas for focus as this tax year end approaches are:

Carry Forward of Unused Annual Allowances

Clients with an unused Annual Allowance from pension input periods ending in the 2009/10 tax year will lose that entitlement at the end of this tax year. Funding of the current year’s Annual Allowance of £50,000 is a pre-requisite to use this opportunity as is the need to ensure the contributions are applied to a pension input period that will end in this tax year.

Additional Rate Tax relief

For clients currently liable to additional rate income tax at 50%, the use of pension contributions to reduce that liability to at least the higher rate threshold is something that must be considered. The Chancellor has previously signalled that additional rate tax would reduce to 45% next tax year so extra funding now will increase the tax efficiency of the pension savings made by 5% compared to contributions made next tax year.

Clients with adjusted net income of over £100,000

Funding pension contributions personally, or through the use of salary sacrifice, to help reduce an individual’s income below £100,000 will enable those individuals to regain their personal allowance which would otherwise be fully lost if income exceeds £116,210. The effective rate of tax relief on the income band between £100,000 and £116,210 is 60% !!!!

Regaining Child Benefit

Clients eligible for Child Benefit will see that benefit reduce or be wiped out if their adjusted net income exceeds £50,000. Funding pension contributions to reduce the income below that threshold will regain the Child Benefit for this tax year and afford ongoing planning opportunities when a full year of the Child Benefit changes takes effect from the start of the 2013/14 tax year. See my earlier blog on the subject for more details.

“Recycling” unused income withdrawals

Clients under 75 who wish to improve the overall structure of their existing retirement savings at no effective cost can do so by creating uncrystallised funds from an existing drawdown fund. This takes more prominence for clients who started in capped drawdown on or after 6 April 2006 as this will enable additional designations to take place at suitable times to boost existing drawdown income. This is most beneficial to clients with pension income years starting on or just after 26 March 2013 due to the recently announced 20% uplift to the base income calculation. For those with no ongoing relevant earnings the annual recycle contribution threshold is £3,600. You should take advice in this area as direct recycling is against pension regulations, and you must be able to demonstrate suitable other income, so this may not be available to everybody. 

Clients considering applying for Flexible Drawdown in 2013/14 tax year

For clients in this segment the current tax year represents the last chance to make contributions to registered pension schemes before applying for Flexible Drawdown. Discussions may need to take place if they are active members of a defined benefit scheme as to when they will need to opt-out of that scheme to cease accruing benefits in order to meet the eligibility requirements for Flexible Drawdown.

Gifting income using ‘normal expenditure rules’ from Capped and Flexible Drawdown arrangements

Using this planning can mitigate, to some degree, the 55% tax charge that would otherwise apply if a lump sum payment was made to beneficiaries on an individual’s death. One use of such gifting could be to boost, or start, pension arrangements for children or grandchildren, ensuring that future growth is in the hands of the beneficiary at the earliest possible time.

The time for action this tax year will be shorter

It will be important where such planning is being considered to know what the requirements are of the drawdown provider in making income payments before the end of the tax year.

Impact of Retail Distribution Review on tax-year end

Unlike other years, being in a post-RDR world now creates other issues to be considered when providing advice on these retirement planning opportunities… Questions you and your adviser may need to consider are:

  • How will you wish to pay for this advice and any ongoing service proposition the adviser provides?
  • Can it be facilitated from your existing pension arrangement where an additional investment is being made?
  • If it can, is there an impact on pre R-Day adviser remuneration you have been receiving that may need to be included in a new agreement to be put in place between yourself and your adviser?
  • If it can’t be facilitated in the existing product, is a separate arrangement needed or will you pay any fees direct to the adviser (and will there be any improved terms applied to the existing contract as a result of no commission being paid?)

Your adviser will need to be able to advise you as to what application process is required, especially where additional investments are being made to a contract, to ensure that all relevant paperwork is with the provider in time for tax-year end. This year especially, you will need to ensure that decisions to make any pension contribution are not left until the last minute as it may not then be possible to prepare additional paperwork to enable the provider to accept the contribution in time, resulting in your missing out on tax relief that would otherwise be available.

Budget Day

The Government has announced that Budget Day will be 20 March 2013. For anyone who may be concerned that the Chancellor will deliver currently unknown ‘surprises’ in the Budget that might affect current planning, ensuring contributions are made and accepted by 19 March will give the best chance of ensuring they benefit from current pension rules. The RDR considerations highlighted above will apply equally where Pre-Budget action is being considered.

Summary

As always, with tax-year end approaching, activity with appropriate clients will increase the nearer the day approaches. With the Easter break falling at the end of March the last working week before tax year end will be shortened.

The time for action this tax year will be shorter in practice if clients are to benefit from the opportunities that exist to use pension savings as a tax efficient means of boosting future retirement income.

Source: Skandia – Adrian Walker – March 2013

On the Verge of Losing Child Benefit ? – try Salary Sacrifice (a.k.a. Salary Exchange)

/0 Comments/in , /by

Child Benefit, which has for years been non-means-tested, is worth £20.30  a week (£1055.60 p.a.) for a first child and £13.40 (£696.80 p.a.) for each additional child. From January 2013, those who earn over £60,000 will see their child benefit payments removed, and those who earn between £50,000 and £60,000 will see the benefit reduced on a sliding scale.

Now, the test is based on taxable rather than gross income, so that would mean a person earning £60,000 could opt to “sacrifice” £10,000 per annum and receive that as a pension contribution instead. A big ask for the majority, but for some it is do-able and will stop them losing this cash benefit.

Within the amount sacrificed (I prefer the term “exchanged” as it embodies the fact you’re getting something else instead) you can also include certain other benefits, such as child care vouchers ( a tax free benefit, with monthly tax free maximum benefit £243) or even gifts to charity via GiftAid.

Salary Exchange should in any event be the contribution method of choice for the vast majority of people paying into company plans. If you have a company plan at work, but salary exchange isn’t offered, please get in touch and I’ll be happy to explain how it works and how it should be set up.

The New Gender Directive on Annuities and Insurance Contracts

/0 Comments/in , /by

European Bureaucrats keep coming up with daft ideas which somehow, after years of solemn deliberation and noses (and front trotters) in troughs, get passed into laws and imposed on us sensible Brits. The reasoning within the Gender Directive is that it is somehow inappropriate to treat men differently to women and vice versa.  So even though we typically live for differing terms, are exposed to differing risks in our daily lives and suffer differing illnesses along the way, we can no longer be treated differently in insurance related contracts becuase of “gender equality”. It’s a bit like a Frenchman saying there is “now no difference between men and women”  – Yeah right! (unless he’s referring to Eastern bloc Olympic athletes from the 70’s perhaps) “Vive le Difference” I say, but nevertheless we’re stuck with this latest bit of Euromerde.

What you need to know:

From 21 December 2012, it will not normally be lawful to offer customers different insurance rates for males and females. This means that annuities and life and health insurance will generally need to be written on unisex terms.

This means that we expect annuity rates for men to worsen somewhat as they move closer to the existing level for women (women typically live longer than men so men’s annuity rates have traditionally been better). This will apply to open market options on personal pensions and occupational defined benefit, but not to Scheme Pensions (annuities obtained on the member’s behalf through occupational schemes).

For life insurance, expect to see womens premium rates worsen, with maybe some initial improvement in mens rates (women, living longer, have traditionally received better rates).

Finally, for health insurance like income protection, where claims may be made long-term where the insured cannot work due to accident, injury or illness, men’s rates will worsen somewhat as they approach womens rates (we men are healthier, but die younger).

The reason for the current differentials in rates is simply because of the differences in lifespans and claims experience, all duly noted by actuaries with decades of data and experience. It is entirely fair to charge more to insure a male white-collar worker’s life than the equivalent woman, because he represents a higher risk to the insurer simply because he is a man. Now we have legislation which seeks to put an end to this “injustice”.

This only affects contracts written from December 21, 2012, so if you wish to effect a contract such as some life cover or an annuity or income protection, and will benefit from the old-style pricing, there is a window of opportunity for the next few months. 

Perhaps Brussels, having concluded their work on legislating against human biology, should now legislate the weather. How about all European states enjoying more sunshine days in the year must into a common fund to pay for the holidays of inhabitants of the cooler, wetter countries. What do you mean, they want to tax our fresh drinking water? Windermere will do nicely will it ?  OK sorry I mentioned it.     

Euro Piggies

Europhobic gag

Pension contribution opportunities in 2013-13 and 2013-14 for 50% taxpayers

/0 Comments/in , /by

From 6 April 2013/14 the additional rate of tax will fall from its current rate of 50% down to 45%. This rate cut will be to the benefit of over 300,000 individuals in the UK.
As you know tax relief on pensions is still available at an individual’s marginal rate – the budget did not change that. Despite the speculation, Government resisted pressure to reduce tax relief available either via a reduction in the annual allowance or by scrapping additional rate tax relief in its entirety. So this makes the 2012/13 tax year an important one for pension contributions for additional rate taxpayers.

If you pay tax at the 50% rate you can make the maximum gross contribution (annual allowance) of £50,000 with a net effective cost of only £25,000. Once the tax rate cut comes in in 2013-14 the marginal relief falls to 45%, giving the same contribution a net effective cost of £27,500. The story becomes more compelling if you have unused annual allowance from up to three previous tax years that can be carried forward. It is feasible that a 50% rate taxpayer could make a £200,000 contribution to their pension in 2012/13 at a net effective cost of £100,000 but once the tax rate falls to 45% the net effective cost would be £110,000.

Tax relief position 2012/13 – 50% tax rate

Even if you cannot use previous years allowances and were not planning to use the full allowance, additional rate taxpayers may be well advised to top-up to the maximum contribution in 202-13 by making in effect an advance payment on 2013-14, to fully mitigate tax at the 50% additional rate.

If this sounds interesting please call me to explore this topic further.