26 March 2013

How to Satisfy Auto-Enrolment Requirements

Employers are progressively being drawn into the Auto-Enrolment pension net. If you are a small business employer how are you going to satisfy the requirements? Should contributions be at the 7%, 8% or 9% level?
One of the key things about Auto-Enrolment is that employers must set up a pension scheme and then make contributions to their employees' pensions. There are actually five ways of satisfying this requirement and all employers must choose one of them (or more than one - employees can be grouped into different categories). Depending on your workforce and pay structure, the costs to you and the benefits to employees will vary between them.
Warning: This doesn't make for easy reading but if you run a business, either you have to get into this for yourself or you need to get an adviser to advise you.
1. Certify on a "Relevant Quality Requirement" basis
- pension contributions must be at least 8% of qualifying earnings (3% from employer)
- "qualifying earnings" is a band (similar in principle to National Insurance)
2. Certify on an "Alternative Quality Requirement" basis - "Tier 1"
- pension contributions must be at least 9% of pensionable earnings (4% from employer)
- "pensionable earnings" must be at least basic pay
- this could be the most expensive option, but it is fairly simple
3. Certify on an "Alternative Quality Requirement" basis - "Tier 2"
- pension contributions must be at least 8% of pensionable earnings (3% from the employer)
- "pensionable earnings" must be at least the basic pay of the worker, and must be at least 85% of total pay of those being certified in that way.
4. Certify on an "Alternative Quality Requirement" basis - "Tier 3"
- pension contributions must be at least 7% of pensionable earnings (3% from the employer)
- "pensionable earnings" in this case is all earnings, including bonuses, etc.
5. Entitlement Check
- Rather than certifying, the employer could check each contribution against an 8% level applied to a qualifying earnings band
- This might be the best way if you have an existing scheme which is not being changed, and scheme rules don't guarantee that individual payments will satisfy the requirements

21 March 2013

Avoid Pension Liberation Schemes

Yesterday's Budget missed the opportunity to clamp down on "pension liberation schemes" and protect people from massive tax charges. These schemes may sound attractive but there is a potential 55% tax charge if HMRC find out what you've done.
What is pension liberation?
Pension liberation companies will phone people up and tell them that they can access their pension fund at any age (one called a client of mine while I was visiting the other day!). In fact pensions legislation means you normally have to be at least 55 before you can take benefits, and then 75% of the value must normally be taken in the form of an income, with 25% available as a tax-free cash sum.
The pension liberation companies typically charge between 10% and 30% of the fund value, and usually mean the individual agrees to transfer their existing funds overseas. But if HMRC find out that the full fund has been taken before age 55, then they will impose an "unauthorised payment charge" of 55%. So all of the risk falls on the individual, not the companies running the schemes.
So what should you do?
By all means take the tax-free lump sum early (but after 55) but you should normally leave the rest invested to provide an income in future. As ever, there may be other ways to achieve your goals. Talk to an adviser to explore them!
Mr T has a pension fund worth £50,000 and his age 49. A pension liberation company suggests he can access his full fund. The company will charge him £17,500 to arrange this. HMRC find out, and impose a 55% unauthorised payment charge on Mr T, so that is £27,500. After the pension liberation charges and HMRC tax charges, Mr T is left with £5,000.
If Mr T had left his pension fund to grow until age 55 and he achieves an investment return of 5% a year after charges, his pension fund will be worth £67,000. At this point he could have accessed a tax-free lump sum of £16,750.
(Source: MGM Advantage)

19 March 2013

Using Trusts to Improve Financial Planning

I come across two basic attitudes to trusts when talking to clients. Either a trust is the answer to everything, or they are seen as too complicated to think about. Neither is actually correct - but they certainly have their uses.
A trust enables "somebody" - the trust - to own something, where that "somebody" is not a person or a company. Assets, such as money, investments, or property, can be gifted to the trust in order to bring about some financial planning benefit. Very often this is to save Inheritance Tax (IHT) or to ensure that assets are used in the way which the person making the gift (called the "settlor") intends.
So here are some ways in which trusts can be used:
1. To make money available to children - such as for house purchase - while protecting from a possible future divorce
2. To remove money from your estate to avoid IHT but allow it to "revert" to you in case it's needed for care costs in later life
3. To put money aside for future family events but avoiding IHT - a wedding (or golden wedding), or a world cruise later in retirement for instance
4. To provide for (grand)childrens' school fees
5. To make money available to the surviving spouse but without increasing their IHT problem if their assets are above the transferable "nil rate band" (or simply to avoid having to keep the records which are required to claim the transferable nil rate band)
Plenty of other opportunities exist, too. It certainly can be a useful planning tool, although both legal and financial advice should be sought.

6 March 2013

Liberate some wealth!

It seems to me that there really is no point living in poverty in an expensive house which you own but cannot benefit from. Other people might feel they want to help out the family, make a big purchase, make some home improvements, etc..
What we are talking about here is raising some money by using the value in your house - Equity Release - and it's a growing and very valid area of financial planning in retirement.
Equity Release is a fully regulated area of financial advice, with advice being given by advisers with a specialist qualification, and companies who operate in this market are mostly members of the trade organisation – the Equity Release Council (previously SHIP) – who have their own requirements to be followed by members.

It shouldn’t be the first thing to consider – moving into a smaller house may give a better result, and leave your family with more of a legacy, for example. And you have to bear in mind that raising a sum of money may have an impact on state benefits.

The most common appoach is a Lifetime Mortgage which is a loan secured against your house. You do not have to pay interest each month typically, because it gets rolled up, thereby increasing the loan. It is paid back after you die or move out when the house must be sold. This reduces the value of what you would otherwise pass on to family.

Depending on your age, with a Lifetime Mortgage, for instance, you may be able to borrow between 20% and 50% of the value of your house. If you want an income, you would take it a bit at a time rather than as a lump sum, so that the outstanding loan doesn’t grow so fast. There could be Inheritance Tax benefits as well.

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