28 November 2014

Using Pensions to save Inheritance Tax

From April 2015 it will be easier to use a pension as a way of passing assets to beneficiaries on your death. Here's how it could work.

Previously pensions in their various guises provided a limited range of options when the pension's owner died. If an annuity had been purchased, payments may have been set up to continue to a spouse, or "value protection" could have been selected when the annuity was bought which would pass some value on - subject to 55% tax. Similarly if the pension was held in a drawdown plan the remaining value could be passed on to dependants - again subject to 55% tax.

The changes mean that if an individual dies before they are 75, their remaining pension value can be passed on to anyone - not just financial dependants as before, but anyone you nominate - and in addition there will be no tax to pay (including Inheritance Tax). Edit: The same also applies to income from an annuity, provided no payments had been made to the deceased.

If someone dies after 75, the same thing can happen but there will be a tax charge of 45% (initially anyway) if the pension is withdrawn as a lump sum, or it will be taxed as the recipient's income in the normal way if taken as an income, which can be done at any age. If the beneficiary does not need the value of the pension for themselves, they can pass it on to a "successor", facilitating multi-generation estate planning where appropriate.

Overall that means it is possible to use a pension as the vehicle to pass worthwhile value on to your beneficiaries but still keep access for yourself if needed for care costs later in life, for example.

26 November 2014

Financial Advice ... But it's not as bad as some think!

My previous post bemoaned the complexity that clients are faced with when trying to understand the fees and charges presented to them by financial advisers. I concluded that there was room for improvement - especially where standard forms and letters are used without trying to fit to a particular client's situation.

But I'd have to disagree with some commentators (who ought to know better or to do proper research) who find the need to say how bad financial advisers are (money-grabbing at the expense of their clients, and deliberately obscuring key information - is the impression you get of their views).

Two examples are Investors' Chronicle and Which? who complained that financial advisers refused to disclose their fees up front and work in a "murky" world of hidden fees. My response is that they should try phoning Sainsbury's and asking how much their weekly shop is going to cost! The point is, there is nothing to disclose until the adviser and client have agreed what work is going to be done. After that the fees are there for all to see before any commitment is made.

Investors' Chronicle (no doubt with their self-interest in mind) advise* readers to invest in an index fund rather than pay an adviser! Except in specific circumstances that is likely to give a worse result, and almost certainly doesn't match an investor's willingness and ability to take financial risk.

It is always worth checking that a fee to an adviser is worth paying - either because it has a good chance of leaving you better off financially within a reasonable length of time, or because it achieves some other benefit (a mortgage to buy a property, peace of mind and security for your family with life insurance, or saving tax for your estate, for example). But I'd have to say that with so much scope for getting important things wrong, advice is generally worth it.

*unqualified journalists are allowed to give financial advice

17 November 2014

Financial Advice - still room for improvement

I can only sympathise with those who are not involved full time in the financial world, and who find financial products complicated!

I have my own pension plans (as you'd expect), and one was set up some years ago by a local financial advice firm, before I could do it myself. I have not heard from them for years and had forgotten that they were flagged as the financial adviser for that plan - so they have been receiving "trail commission" every year even though I've been managing it myself.

They have just written to offer an ongoing service - presumably because the Financial Conduct Authority is making noises (quite rightly) about advisers needing to provide an ongoing service if they are receiving ongoing remuneration.

The plethora of charges they quote can only be described as confusing, even to someone in the know like me! Their letter quotes product charges which differ from my annual statement, there are new discounts on the charges which are (though it doesn't explicitly say so) conditional on taking the new ongoing advice service, and there's the new ongoing advice service itself which differs between the financial adviser's letter and the product provider's illustration.

They generously add that they will not charge me an initial advice fee for signing me up for the ongoing service. But they leave it up to me to complete three rather complicated forms if I wanted to go ahead.

Part of the problem is historical - older pension products in particular had complicated charging structures and special deals with certain financial advice firms who promised to do their best to push that providers' products (so much for independence). And I fear that we are not out of those woods yet.

But part of the problem is also being unable to see things as clients do. I'm not perfect (I know!) but I do try hard to present things simply and clearly to my clients, and I do (usually) complete forms for my clients, requiring them only to check and sign. 

I'm always glad to hear if someone thinks there is room for improvement, but I do like to think that our letters to clients are generally readable and accurate.

12 November 2014

Using your Pension to Pass your Assets on

Until the latest announcements relating to pensions - George Osborne's comments at the party conference - it was not sensible to use your pension to pass on your assets on your death. That's because on death that pension, if held in a drawdown arrangement, would have been taxed at 55% -which is higher than the 40% of Inheritance Tax for other assets.

But now, or at least from when the announced changes come into force, that 55% tax has been removed and the situation may have reversed. In fact, for some people it may even be good financial planning to put money into a pension even if you don't receive tax relief on those contributions*, specifically as part of your estate planning to pass assets on in a tax-efficient way. And you don't have to wait seven years!

Beneficiaries - who no longer have to be financial dependants - will be taxed on the value they receive as if it were earned income (unless death occurred before 75), so that needs some thought. But with some careful planning - perhaps skipping a generation and passing assets to the grandchildren, or withdrawing over more than one tax year - that tax can be minimised.

Pensions for estate planning - now there's a new concept.

*either because you are over 75 or because you have little or no earned income (or both).

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