By-passing the spouse
Reducing pension allowance
Targeting high earners
Nominating pension benefits
By-passing the spouse
Reducing pension allowance
Targeting high earners
Investors were clearly relieved that the result of the election meant that pro-business policies would be maintained and personal aspiration continue to be encouraged.
There are good reasons to be cheerful. One of the Conservatives’ pre-election promises was that there would be no increase in income tax, National Insurance or VAT during their term in office, and a commitment was also made that the tax-free personal allowance would be increased from the current £10,000 to £12,500 by 2020.
In addition, the higher rate tax threshold, above which 40% income tax becomes payable, is to be increased from its current £42,385 to £50,000, again in the longer-term.
There could also be good news on the inheritance tax front. The Conservatives’ pledge has been to take most people’s homes out of the charge to inheritance tax by increasing the tax-free allowance enjoyed by married couples and civil partners from £650,000 (£325,000 for each partner) to £1 million (£500,000 each).
It is not yet clear how this might be done, but one possibility would be to provide an extra allowance of £350,000 (£175,000 per partner) to set against the value of their home.
The recent dramatic changes to pensions taxation are less likely to be disturbed than if a government of a different hue had come to power, though further restrictions on contributions by higher earners are being mooted and sceptics are already wondering whether the new ability to cascade pension wealth down through the generations, free of inheritance tax, will be permitted to continue indefinitely.
One of the more recent proposals was that people who had already bought pension annuities should be allowed to sell these to a commercial third party in exchange for cash or a more flexible income. This proposal is subject to consultation, but the proponent of the change was Steve Webb, a Lib Dem minister who has been deposed, and there may now be some question as to whether it will go ahead.
As far as investments are concerned, two major issues overhang the UK stock market, namely the UK’s relationship with the EU and the threat to the integrity of the United Kingdom posed by the Scottish Nationalists.
However, there are again some reasons to be cheerful, in that Officials in both Brussels and Berlin have made clear their wish to retain the UK in the EU, and it might be that a new deal for the UK could leave an independent Scotland out in the cold.
The other cloud on the investment horizon is the effect on the corporate and government bond markets of the withdrawal of the “quantitative easing” stimulus provided by central banks in the wake of the financial crisis. The best answer for the fixed interest element in a portfolio could be strategic bond funds, which can switch between market sectors both in the UK and internationally.
Tax on pension withdrawals
Concerns have been raised over the taxation of lump sum pension fund withdrawals over and above the 25% tax-free allowance. Unless the planholder supplies to their pension provider a P45 form obtained from their employer, HM Revenue and Customs will apply emergency coding which will assume that payments of the same magnitude will continue to be made on a regular basis and tax calculated accordingly.
The overpaid tax would usually be reclaimed subsequently through self-assessment or PAYE, but HMRC has now issued a new form P55 which should ensure that repayment is made within 5 working weeks. Despite confusion over the wording of this form, it has been established that it can be used when more than one lump sum withdrawal is made during the course of a year.
Tax on disposal of businesses
Subject to complying with a number of conditions, small business owners who sell their businesses may be entitled to Entrepreneurs’ Relief on any profit made on the sale, which would reduce the capital gains tax charge from a potential 28% to 10%.
If, instead of selling out, the business owner were to transfer the shares in the business within the family – perhaps to a son or daughter – the value would be subject to capital gains tax, but this could be deferred by claiming “holdover relief”, which would permit the profit to avoid tax until such time as the shares might be sold on by the family member, when tax would be payable on the accumulated gains.
If the owner were to die within seven years of making the transfer, Inheritance tax might potentially be payable, but in the case of a sole owner of shares in an unquoted company, 100% ‘business property relief’ should be available.
If so, then provided that the transferee retains the shares until the death of the original owner and provided that the shares still qualify for relief, no inheritance tax would be payable.
The other option would be for the owner to leave the shares to the family member in his or her Will. Again, business property relief should be available to eliminate any charge to inheritance tax; and for the purposes of capital gains tax the value would be re-set at the date of death, with previous gains ignored.
Finally, if instead of transferring shares within the family the owner were to sell the shares and invest the proceeds in a fund or company which qualified for business property relief, for example an investment in the Alternative Investment Market (‘AIM’), this investment would become exempt from inheritance tax after two years.
The Taxation of Pensions Bill lays out the framework for 2015's new flexible era. There are no great surprises. But it still contains several changes from the earlier draft which are worthy of note. Here are ten key points of interest:
55% tax charge on death
Capped drawdown retains £40,000 annual allowance
Capped drawdown transfers
£10,000 reduced annual allowance
Tax free cash recycling
Triviality and small pots
Valuing pre April 2006 pensions in payment
Protected low pension ages
Temporary non-residence rules
You must apply on-line to HMRC for Fixed Protection by 5th April 2014. On-line applications can be made from November 2014 but we understand there has been some delay in receiving acknowledgment from HMRC.
The Lifetime Allowance
At present we can all have £1.5M of value in a registered pension scheme. This is known as the Lifetime Allowance. As soon as you crystallise benefits from a pension and go over the Lifetime Allowance you lose the current entitlement to a tax free lump sum on that part and all benefits in excess incur a Lifetime Allowance tax Charge of 55%.
From 6th April 2014 the Lifetime Allowance reduces to £1.25M. It is possible to apply for Fixed Protection 2014 prior to that date which means that providing that you make no further contributions to a pension and do not create a new pension arrangement then you can retain a personal Lifetime Allowance at the £1.5M level.
Pension Credits and HMRC’s Stance with Fixed Protection
HMRC’s stance with regards to Pension Sharing Orders and Fixed Protection is that if a Pension Sharing Order is implemented in a new arrangement after 6th April 2014 this will break the Fixed Protection and you would revert to a £1.25M Lifetime Allowance. However, providing the Pension Credit is received by an existing arrangement after 6th April 2014 then Fixed Protection can remain in place.
Where a Defined Benefits pension scheme allows the Pension Credit member to become a member of the Defined Benefits scheme in their own right, receipt of the Credit after 6th April 2014 could also result in the creation of a new arrangement and the loss of Fixed Protection. If you are in this position you should aim to conclude matters in good time or be left with a conundrum in the new tax year; either apply the Credit to the Defined Benefits plan to enjoy the higher, known income but minus a Lifetime Allowance Charge or transfer the Credit to an existing money purchase arrangement and retain Fixed Protection.
It should be kept in mind that negotiations taking place today could well result in the Pension Credit being received after 6th April 2014.
Action Needed Prior to 6th April 2014
Many occupational pension schemes insist on the Pension Credit being transferred to a different plan. It is imperative that where your pension funds will be close to £1.25M after the divorce that you have an existing arrangement that is suitable for receiving the Pension Credit by the end of the current tax year. You also have to apply for Fixed Protection 2014 prior to the 6th April 2014 deadline.
Consequences of Losing Fixed Protection 2014
The consequences to a higher rate tax payer of not applying for or losing Fixed Protection 2014 on the £250,000 between £1.25M and £1.5M are as follows:
Accessing under the Lifetime Allowance (such as using Flexible Drawdown)
Accessing over the Lifetime Allowance Charge
Planning ahead in good time could therefore save £62,500 in tax. The tax saving may be greater than this if the pension holder has some of their basic rate tax band remaining.
A Suitable Existing Arrangement
Even where you have no suitable pension plan currently you can put one in place ahead of time. People with no earned income can make a pension contribution of up to £3,600 gross each tax year. The sum you invest to create the new plan should be sufficiently small to minimise the amount of your pension expected to be over the Lifetime Allowance in the future. However, you also need to be mindful that pension plans suitable for pension funds of this size, such as those that allow Flexible Drawdown, have minimum contribution levels.
As a Pension Specialist, Divorce Specialist and Chartered Financial Planner I would be happy to provide further information or advice if you are effected by this.
The changing face of retirement
Some retirements facts
The case for delaying buying an annuity
Although life expectancy is increasing, many people still expect to retire in their sixties, resulting in longer periods in retirement. The longer people spend in retirement the more likely it is that their financial needs will change. It makes perfect sense to consider if it is right for you to commit to a particular annuity shape until your requirements have stabilised.
Annuity rates have recently shown a slight short term improvement which could continue. It would probably be optimistic to rely on this for a number of reasons including gender equality, improving mortality, the growth of specialist enhanced annuities and imminent changes to EU legislation. However, of more significance is the fact that if you can afford to wait a few years before annuitising, you will be older and this may result in better rates.
You may benefit from enhanced annuity rates at a later date. It has been estimated that up to 60% of people could qualify for an enhanced annuity. The older you are, the more likely this will apply, and it may be worth waiting until it does.
You may want, or need, to keep working. The Office of National Statistics (ONS) figures show that 12% of men and 11.6% of women are still employed at age 65, mostly in part-time roles. This might enable you to take an initially lower level of pension income, which in turn could preserve pension savings to purchase a higher annuity income later.
|You may want to manage your income tax bill. Pension income, whether from an annuity or a drawdown plan, is subject to tax. However the latter allows a choice of exactly how much to withdraw in a given tax year.|
You may want to maximise death benefits for family and friends. An annuity can be set up to provide a pension to a spouse or financial dependent, but this comes at the cost of a lower initial income. A drawdown plan can provide a lump sum, subject to 55% tax on crystallised benefits, to anyone nominated. This can be particularly advantageous if you are unmarried or do not have children.
You may want to keep saving, and benefit from the tax relief applicable to savings in a pension plan. Especially as funds can be accessed at any time after age 55 if required.
Given the 20-30 year investment horizon applicable to those with average life expectancy, you may want to continue investing for growth. This is most likely to be appropriate if you have other assets which could replace any losses that may be incurred.
The conventional annuity is still very likely to be the appropriate solution if you want to take the maximum level of guaranteed retirement income. The above factors cannot be ignored and all of your options should be carefully considered before making such an important decision.