9 December 2015

New State Pension - Winners and Losers

The "flat rate" State Pension arrives soon for those reaching State Pension age from April 2016. One of the main objectives has been to simplify the current excessively complicated system.  But as usually happens the transition to the new system adds complication instead - and the transition includes most people who are about to retire! As a result there will be plenty of people who will be worse off.

The headline is certainly simple - the new flat rate State Pension gives you £155 per week from your State Pension age if you have at least 35 years of National Insurance contributions.

The complication starts to appear when you consider the additional state pension (SERPS and then State Second Pension - S2P). This was (and still is until April 2016) a significant top-up to the basic State Pension based on earnings and contribution time, and the key thing was that the top-up is index-linked. That top-up is being abandoned.

And if you work for longer than 35 years you will not, in future, increase your State Pension, whereas with the additional State Pension you would have continued to improve your future prospects.

And if you "contracted out" - like most employees - and paid into a separate private or company pension (instead of accruing additional State Pension), the "flat rate" State Pension will most likely have a dip in it for you since there will be a deduction for the time you were contracted out.

If you have less than ten years of NI contributions, under the old system you would receive a small State Pension. But under the new, you will receive nothing.

But you are likely to be a winner if you are a low earner or have been long-term self-employed (without contracting out). Both of those categories could accrue the full new State Pension.

All in all it is impossibly complicated and this short blog cannot do justice to the changes.



25 September 2015

Don't Miss Out on the new Inheritance Tax Allowance

The Summer Budget introduced the extended Inheritance Tax (IHT) allowance which included the family home in the IHT allowance (or "nil rate band"). In the best case, a couple could have an IHT allowance of £1m. See my previous blog on the subject -  Summer Budget - Inheritance Tax 

But some previous planning could mean you lose out.

The extended allowance (the "family home allowance") only applies if the property is left to "direct descendants". But many people have done IHT planning which resulted in changing the ownership of the home from "joint" to "tenants in common", and at the same time changing the Wills to leave half of the property value to a discretionary trust on the first death. 

That may have been good planning at the time, but since the property is not being left to "direct descendants" (even if they are the intended beneficiaries of the trust) the new allowance will not be available.

If you have previously made such arrangements (typically prior to 2007 when other things changed), then it is definitely worth reviewing your estate planning.

11 August 2015

How to make Charities part of your Financial Planning

There's a few reasons why you might not include charitable giving as part of your financial planning: you think the world is perfect already; you think it's someone else's responsibility; you haven't thought about it; or you can't afford it (in which case you are probably not going to be thinking about financial planning anyway!).

Assuming that none of those apply to you then how you can make sure what you give has the maximum effect (for the recipient as well as for you)? I'm mostly talking about registered charities here, although some of this also applies if you are directly supporting someone or something that isn't registered.

1. Give regularly
An occasional coin into a collecting tin in the street is not a bad thing but it's far more effective to give a regular amount by standing order, credit card, or payroll, for example. The charity can plan better and you don't forget! It also makes it easier for you to throw away that junk mail asking for your money if you know you already have a strategy in place.

2. Choose a charity or two that you can take an interest in
You are more motivated to keep in touch if it's something that's close to you. It may be possible to get involved, too.

3. Plan some variety
For example you might choose to support something in the third world plus a UK charity, or a medical charity plus a political issue charity, or a children's charity plus an animal one.

4. Gift Aid your giving
The basic rate tax you have paid on your gift is reclaimed by the charity, adding 25% to your gift. And if you are a higher rate tax payer you will end up paying less tax if you include your Gift-Aided gifts on your tax return. For spouses it may help if the higher taxpayer makes the gifts in their name.

5. Leave to charity in your will
As well as a lump sum benefiting the charity there may be Inheritance Tax advantages for your family / other beneficiaries.

More on the Prime Time Financial website.

5 August 2015

Top Up your State Pension

If you were born before April 1951 (men) or April 1953 (women) and are entitled to the basic State Pension you have the option to increase what you receive by contributing a lump sum. The increase could be between £1 and £25 per week (which is potentially a big proportionate increase).

The "return on your investment" is at a reasonable rate - 5.8% has been cited - so may be well worth considering. And since the State Pension is index-linked and guaranteed for life, and may be inheritable by a spouse, the security level is high.

15 July 2015

Summer Budget 2015 - Pension Tax Relief

As previously announced, the Lifetime Allowance for pensions (which is the maximum value of pension you can hold and still get full tax relief) will be reduced from £1.25m to £1m from April 2016. As has happened in the past, those whose pensions are already over £1m will have protection available. From April 2018, the Lifetime Allowance will actually increase (in line with CPI).

The Annual Allowance limits how much you can contribute to pensions in a year. That is currently £40,000. For higher earners (over £150k including pension contributions AND over £110k excluding pension contributions) the Annual Allowance will be reduced progressively.

For the self-employed (who don't necessarily know their earnings until the end of the year) that could cause problems and result in a surprise Annual Allowance tax charge. Overall it may be worth putting as much in as possible in the current tax year - particularly if you are a higher earner.

There will be a consultation on a wider reform of pensions tax relief. More changes to confuse everyone!

Pension tax is complicated. Taking professional advice makes sense,

14 July 2015

Summer Budget 2015 - Dividend Taxation

This was not a change we saw coming! Dividends received on shares that you own outside of a tax wrapper like an ISA are currently received with a "tax credit" of 10%. That means that for basic rate taxpayers there is no further tax to pay (higher / additional rate taxpayers have more to pay).

From April 2016 that tax credit will be abolished and there will be a dividend tax allowance of £5,000 per year. New rates of tax will apply if you have dividend income over that - 7.5% for basic rate taxpayers, 32.5% / 38.1% for higher / additional rate taxpayers.

Whether an individual will be better or worse off will depend on the amount of dividends received. For investors, the Chancellor said that you would need more than £140,000 in shares (or funds) before being over the allowance. If income is needed there could be other ways of generating it more tax efficiently. But the key point must be to reinforce the good practice of protecting investments within a tax wrapper like an ISA as far as possible.

The bigger issue is for small companies where the business owners (often husband and wife) pay themselves a minimal salary but the bulk of their income comes as dividends. Dividend income between £5,000 and £43,000 (the new higher rate threshold) will be taxed at 7.5%, and 32.5% above £43,000. That negates the advantage of not having to pay National Insurance.

13 July 2015

Summer Budget 2015 - Inheritance Tax

One tax change George Osborne had been unable to make in coalition was to Inheritance Tax (IHT). The Budget puts that right. There is now a "Main residence nil rate band" - otherwise known as the "family home allowance". 

This is NOT a million pound IHT allowance, but is an additional allowance of £100,000 per person (initially) on top of the current £325,000 allowance. The additional allowance will only apply to a property which had been the deceased's main residence at some point. In addition it will only apply if the property is left to children or grandchildren - although there will be some protection if the property is sold from now, for example to downsize or move into residential care.

Eventually, and in certain circumstances, it will be possible to have assets to the value of £1m passed on within the IHT allowance. But that won't apply until 2020, and only if both of a couple are able to fully use their allowances, and only if the total estate value is less then £2m. For many people it would be risky to rely on, and existing IHT mitigation approaches should still be considered.

Rather than the complications of an additional allowance which only applies to certain assets, it would have been easier to have had the main allowance extended (instead of fixing it to 2021). However, my job as an adviser is to apply the rules effectively for my clients, not to make them!

18 June 2015

Pensions versus ISAs - Where should you put your money?

The playing field is changing - for those over 55 it is now generally possible to withdraw some (or all) of your pension money (since April 2015). That will depend on the details of your pension and what the provider will offer ... although careful thought is needed to make sure you are not shooting yourself in the foot!

It has always been possible to withdraw from an ISA (or NISA), and at any age. So where should you put your savings?

Pensions and ISAs differ on the tax breaks available. Pensions enjoy tax relief on contributions made - that means the pension (and here we are talking "defined contribution") will have the value boosted by having the tax relief added. That also means that there is a higher value to grow.

On the other hand, while there is no tax relief when putting money into an ISA, you do get tax help when you take money out - there is no income tax or capital gains tax to worry about. Whereas with a pension, your income or withdrawals are taxed as though they were earned income - although you do generally get 25% of the pension fund value free of tax.

Standard Life (who, it must be said, have a pensions bias) have crunched the numbers though, and have concluded that in the majority of cases over 55's would be better off putting money into a pension. And that is reinforced if there's a chance you will want to pass the pension on untouched to your beneficiaries on death.

There are limits to what you can contribute though, so taking advice is a wise move to maximise the benefits.

23 April 2015

Equity Release Rates Falling

Whether you are a saver or a borrower will decide whether falling rates is a good or bad thing. In this case Equity Release rates refers to the lending rate on a lifetime mortgage which older people might use to raise capital on their house.

While these rates will always be higher than a standard mortgage (because the lender doesn't know when they will get their money back) lower rates have got to be a good thing. They have moved lower across the board since the beginning of 2015 as it becomes a bigger and more competitive market. In fact, 2014 was a record year for equity release providers.

Equity Release is a big step to take, but for many people it will be the best way of ensuring financial security in retirement. Advice is definitely recommended, so let me know if we can help.

20 April 2015

Cashing in a Pension Plan

Since 6th April 2015 it has been possible to withdraw an entire pension plan given certain conditions. That is not necessarily the best thing for anyone to do and it is worth getting professional advice before doing so. One of the reasons for that is to fully consider the tax implications, since 75% of the value is generally taxable as though you had earned it, and there may be more tax-efficient ways to achieve your objectives.

But if you do decide to go ahead and withdraw a pension you may initially pay more tax than you should do. That's because the pension provider may tax you at the emergency rate (in the absence of a P45 which you get when you leave a job). You would eventually get a tax refund, but possible not until later in the tax year (or even the next one).

You can now request that HMRC give you a tax refund more quickly by completing:
- a P50Z form - if you have no other income
- a P53Z form - if you do have other income
- a P55 form - if your pension withdrawal doesn't take all of the pension out

Search for those forms at www.hmrc.gov.uk.

27 March 2015

Investment Trust "dividend heroes"

Investment Trusts are one of the types of investment fund which I recommend when appropriate for clients. (Other types include Unit Trusts, OEICs, and Exchange Traded Funds). They are the oldest type of fund investment, many having started in the 19th century.

The Association of Investment Companies has put together a list of "dividend heroes" which are investment trusts which have increased their dividends for at least 20 years. The investment trust structure gives the managers the ability to "smooth" the return of dividends, holding back a bit in the good years to make up the  gap in the not so good years.

There are 16 investment trusts on the list, while more than half of that list have increased their dividends every year for more than 40 years. The most "heroic" are Bankers Investment Trust, City of London Investment Trust, and Alliance Trust, which have all increased for 48 years. They are a mix of UK and global equity funds.

While taking dividends is only one way of taking an income from an investment it is certainly an impressive achievement.

24 February 2015

Should I ... Start a Pension Income before April 2015?

In April, pension rules change, and it will be possible to withdraw money from your pension plan "like a bank account". In practice that will depend on what your pension provider offers, but let's assume you can do it and that you have good reason to want to do it.

But there's a problem. If you use the new flexibilities then your ability to make further contributions to your pension are limited. In fact the Annual Allowance (which limits how much you can add to your pension in a year) comes down to £10,000.

If you want to withdraw a bit in the near future, but still have the ability to make sizeable contributions from earned income - perhaps from a redundancy payment, or because you are selling a business - you could be painfully limited.

But there's a solution. If you move your pension (or part of it) into a "capped drawdown" arrangement before April (that's under the current drawdown rules) and take some benefit such as the tax-free lump sum, then you have locked into the old drawdown regime for the time being, and that leaves you with the original Annual Allowance of £40,000 (provided you don't exceed the cap on income taken).

I would recommend taking professional advice when making changes to your pension arrangements.

16 February 2015

Why your house cannot be your pension

Often someone will say - "my house is going to be my pension" - normally someone who hasn't thought about a pension soon enough!

But here's some reasons why that is unlikely to be the best thing:

1. You need somewhere to live, as well as having an income.
You can certainly down-size to a smaller house or rent, and then use the capital left to live off, but it's not always easy to live in a much smaller space, or in a cheaper area of the country.

2. You are reliant on house price movements
House prices have generally increased in recent years, but the falls of the 1980's still bring painful memories to many. And you don't want a fall just before you need to sell.

3. Equity Release plans are available, but they don't make financial sense too young
Since interest on a lifetime mortgage is added to the loan, you don't want to arrange it too soon. In fact the provider of the plan will limit the amount you can raise, the younger you are.

15 January 2015

Pension Wise - new Government service

The Budget 2014 introduced the idea of a "guidance guarantee" being available to those who were at the point of retiring. What that service is to look like (from April 2015) is now clearer.

It will be offered by The Pensions Advisory Service by phone, or Citizens Advice Bureau in person. They are expected to provide up to 45 minutes of guidance (not "advice" since that can only be given by regulated financial advisers), and that will include getting information about the enquirer's pensions and other financial circumstances, and then identifying what options are available and providing relevant information.

That's quite a tall order for 45 minutes, especially on the phone, and especially for unqualified staff (although they will have to have "sufficient expertise"). And who's paying for all this given that it's a free service to recipients? The answer is that there will be a levy on regulated financial services firms (us).

Still, hopefully it will demonstrate the value of going to a real financial adviser who can give personal advice and arrange financial solutions. And while we cannot offer a free service, we are currently offering a free "pension check".

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