The Taxation of Pensions Bill – What’s important? The new stuff coming in 2015

Following the new revisions, Pensions will become more and more important in estate planning as well as retirement planning. Here is a summary of the main points, some of which were not so clear when the new flexible rules first hit the news:

  1. Capped drawdown retains the £40,000 annual allowance

Anyone already in capped drawdown before 6 April 2015 can continue to make contributions up to the £40,000 annual allowance. Provided full flexibility isn’t required at outset, an account holder can access capped drawdown whilst continuing to make significant contributions.

Accessing the new flexibility, or designating new funds for drawdown through a separate arrangement will cause the annual allowance to be cut to £10,000 (but designating new funds for drawdown within an existing capped drawdown plan which is a single arrangement, will not disturb the £40,000 limit.)

*Tactical Planning point. Capped Drawdown will no longer be an option after April 2015, when all new drawdown plans will qualify as “flexible” regardless of withdrawal levels. Investors wishing to carry on a drawdown arrangement yet take advantage of the £40,000 limit would need to enter into a drawdown arrangement (and make a crystallisation event – e.g. a small withdrawal of tax free cash) prior to April 2015, to be able keep that level of annual contribution allowance.

2) Capped drawdown to capped drawdown transfers

Where someone transfers their capped drawdown fund to a new provider they can retain their £40,000 annual allowance. If they wish to access the new flexibility following transfer they can notify the receiving scheme that the funds are to be deemed ‘newly designated’, i.e. be classed as flexi-access, which would then see their annual allowance cut to £10,000.

3) 55% tax charge on death

The Bill carries through on the promise to scrap the 55% tax charge on lump sum withdrawals following death in drawdown post 75 and on crystallised funds. The tax charge has been cut to 45% and now only applies to lump sum payments where death occurs after the age of 75. The charge will also be levied on value protected annuities and pension protection lump sums from DB schemes.

4) Anti-Tax free cash recycling

Rules exist to prevent someone from taking tax free cash from their pension and making a fresh pension contribution which attracts tax relief. The original draft Bill amended the current 1% of lifetime allowance figure (used to measure the amount of tax free cash paid within a 12 month period) to £10,000. This is now been cut further to £7,500.

5) Triviality and small pots

Further relaxation has been given to the payments under triviality and small pots rules. The minimum age under which such pensions can be taken as a lump sum is being reduced from 60 to 55 (or earlier if under ill-health rules).

6) Temporary non-residence rules

Rules already exist to prevent someone becoming temporarily non-UK resident and drawing their pension benefits in large chunks to escape UK tax.  For example, currently someone in flexible drawdown drawing the benefits while non-UK resident and then returning to the UK may be subject to UK income tax if they return to the UK within 5 tax years.

The Bill expands the rules to include the new flexible income options and now also includes ‘flexible annuity’ and ‘money purchase scheme pensions’. And imposes a tax charge on the return to the UK within 5 years where withdrawals while non-resident have exceeded £100,000.

New Pensions Rules – Budget 2014, or “Look what they’ve gone and done now….”

In case you missed the content of the Budget here’s a handy link to a concise, printable document which sets out the facts and figures: March 2014 Budget Summary

I’m still shaking my head over the proposals to allow all people in money purchase pensions (non-final salary) to have unlimited (“flexible”) drawdown on their pension pots at retirement age, regardless of size of fund and without any necessity for a level of guaranteed income from another source. The sentiments below will no doubt be at odds with many with an interest in the subject. Certainly the media and various industry pundits appear mostly in favour of this new found relaxation of the rules.  Many people approaching retirement are now looking forward to planning what they will do with their fund, and financial advisers are looking forward to more cash investments to advise upon. There is no doubt that this will bring opportunity to many, but I’m wary. This all sounds like a bit iffy to me.

The main justification offered by the Chancellor for the proposed relaxation of pension rules announced last week is that “people who have been responsible enough to save all their lives for their retirement will be responsible with their money in retirement, and should have the freedom of choice”.  Sorry, I simply do not buy that. I think there are some likely adverse socio-economic effects, which could be on a wider scale than predicted. I have a number of concerns:

A huge number of working people in the UK (millions, literally) aren’t currently saving in a pension, but soon will be (shoe-horned into one via Auto-Enrolment (“AE”) regulations.)Many of this category of pension saver would not have saved in a pension otherwise, will have a smaller pension pot than average at retirement age, and, being reluctant savers, are more likely than most (in my opinion) to spend the cash quickly when given access to it. AE is a fine idea which compels those not saving for their own retirement to at least take some modest steps towards doing so, and so helps improves income in retirement. In my opinion, to then offer such pension savers the whole fund back as a potential lump sum undoes a lot of the good that AE brings.

For other pension savers, the temptation to strip out large chunks will be great for a variety of reasons. Who, in their sixties, hasn’t got a son, daughter or grandchild who is struggling financially? Maybe they cannot get on the housing ladder , or need some other important financial assistance. How many wouldn’t consider making a loan or gift from this pot of gold which is now accessible from the Bank of Mum and Dad?  The tendency in this country is for parents to assist their offspring far beyond age 21, some with an amazing capacity for selfless acts. That money isn’t going to end up looking after the parents in old their age after all.

‘Ah’, you say, ‘but they can invest that money in something other than an annuity now’. Well, yes but you could pretty much do that under SIPP drawdown anyway, apart from investing in residential property. SIPP drawdown was not an exclusive club at all, but it did require financial advice under strenuous compliance to ensure it was suitable to the client. How much depth of advice can be given under this “free financial advice for all retirees” being bandied about I wonder?

Consider also the more sinister effects of the proposed changes. For example, there will be instances where avaricious no-good kids will be looking at mum or dad’s pension and counting the days to retirement, when they can bully a serious chunk of cash from them. Not very likely? I’ve seen it with equity release in the past with children making unsubtle enquiries “on behalf of their parents”, and this will be a much easier way for them to try and raise some quick cash.

Some will call these regulatory changes a great opportunity, a freedom to carve up one’s pension any way you choose, and something that people want. But the whole idea of a pension is to provide an income for life, that is what separates it from other types of saving. It’s not a rainy day savings plan, it’s a rest of your life savings plan. Common sense suggests that many people who will retire under the new proposed regime will not be capable of managing their financial affairs suitably, and would have been financially better off with a compulsory annuity, or even capped income drawdown if they fit the suitability criteria.

More generally, let’s face it, we don’t know how long we will live, people have never had this much access to pensions before, and simply being in a pension plan half your life doesn’t make you super-sensible with money. The fact that so many people accept poor annuity offers from their pension providers at the point of retiring, rather than look to the open market, is a good example of how financially savvy people aren’t when left to their own devices.

“… But we’re going to get everyone financial advice for free at retirement”. How does that work then? I don’t know financial advisers who work for free. Someone will pick up the cost so who will it be? The retiree ultimately. I suspect. And how good will that advice be?

No-one was lobbying government for this per se. There has been a recent upswell of criticism of the annuity industry (most of it well-founded) but that could be sorted out, even if a little more regulation or legislation was needed.  So why now?

Contrary to the political spin, I believe the proposed relaxation of rules on pensions is likely to see many retirees releasing money from their pensions relatively quickly, who would be better advised not to do so. If that happens then it will raise tax revenues for a few years in the shorter term, maybe even plug an income gap for government that is no doubt sorely needed. But it would be a short-term injection. Will everyone blow their pension funds and then throw themselves on the mercy of the State for a basic income for the rest of their lives? No, but some will, at least, and perhaps quite a few.  The Chancellor claims that the proposed new flat-rate State pension with no means testing would be an adequate safety net. At around £7,000 per year I have my doubts. Moreover, I also have severe doubts as to whether the State can maintain that level of flat-rate State pension in real terms over the long term. Of course the current mob in power will have moved on or retired by then (on their generous State-funded final salary pensions).

This is scary stuff folks. I know everyone thinks it’s great, a brave message from pensions minister Steve Webb, but I don’t think the British working public are ready for it yet. By all means extend flexible drawdown, and by all means reform the annuity industry. But let’s not completely throw caution to the wind eh? Because the country cannot afford to keep getting things like this wrong. All eyes will as usual be on the next generation to fund State pensions and other benefits, and let’s face it, with an ageing population and an unfunded State pension, they’re already going to have to pay for enough as it is.

Pensions – The Lifetime Allowance cut April 6th 2014

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

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

March 2013 Budget – what it means for you

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

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)

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.

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

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.

2012 Budget

The main things to be concerned about in the March 21st 2012 Budget are:

  • From April 2013, the 50% additional rate of income tax will be cut to 45% and to 37.5% from 42.5% for dividends.
  • The personal income tax allowance will rise to £8,105 from April 2012 and to £9,205 from April 2013. There will also be a freeze on existing age-related allowances from 6 April 2013.
  • The basic rate tax limit reduces from £35,000 to £34,370 for 2012/2013 and £32,245 for 2013/2014.
  • The State Pension will reform into a single tier pension for future pensioners and future increases in State Pension Age will take account of increases in longevity.
  • The main rate of corporation tax will be cut to 24% from next month. By 2014 it will fall to 22%.
  • Qualifying policy investments will be restricted to an annual premium limit of £3,600 from 6 April 2013, with transitional rules applying from 21 March 2012.
  • The capital gains tax exemption remains frozen for 2012/2013 at £10,600.
  • On the inheritance tax front, the Government is consulting on a range of topics. They include increasing the exempt amount that someone living permanently in the UK can transfer to a spouse or civil partner living permanently outside the UK.

A good concise summary of everything can be downloaded here:  budget 2012

 

Tax Year-end Planning: ISA allowances in 2012/13

ISAs and JISAs current and new allowances 2011/12 and 2012/13: Current ISA allowance is 10,680 and will be £11,280 after April 5th. You can invest £21,960 right now for both tax years – please call 0845 013 6525 for details. Don’t forget JISAs are now available to all children born after January 2, 2011, or before September 1, 2002 who are aged under 18. Allowance is £3,600 p.a., so £7,200 can be invested in aggregate over next couple of weeks