Pension freedoms what could they mean to you?

With the biggest pension reforms in a lifetime rapidly approaching on 6 April, are you ready for how these reforms could potentially affect you, whether now or in the future? The wide media coverage that followed the 2014 Budget announcements talked of pensions in the future being used as bank accounts and new pension freedoms leading to long waiting lists for Lamborghinis.
The changes to the pension tax rules were initially announced in the 2014 Budget to give individuals greater flexibility to access their Defined Contribution (DC) pension savings. They were subsequently confirmed in the Taxation of Pensions Bill published on 14 October last year and will take effect from 6 April 2015, which some commentators are calling ‘Pension Freedom Day’.

However, according to Standard Life, nearly half of adults aged 50 to 65 are indifferent to the upcoming pension reforms, and almost one in five are confused about what it all means and how the changes could affect them. If you’re aged 55 or over from
6 April 2015, you should immediately be able to take advantage of this increased flexibility, but obtaining professional advice is essential to make sure you get an informed analysis of your particular situation.

Tax-free cash from your pension on retirement 
If applicable to your particular situation, from 6 April there will be the option to withdraw up to 25% of the fund as tax-free cash from your pension on retirement or at anytime from age 55 whether retired or not. This can either be taken all at once or you could make a series of withdrawals and have a portion of it paid tax-free.

In this instance, someone with a pension worth £100,000 could withdraw £25,000 cash tax-free in one lump sum and have subsequent withdrawals taxed as income, or alternatively make a series of withdrawals over time and receive 25% of each withdrawal tax-free.
If this person withdrew five lump-sum withdrawals of £20,000 they would receive £5,000 tax-free with each withdrawal, equating to £25,000 tax-free cash overall. Withdrawals of £1,000 a month would receive £250 of each payment tax-free, with the remainder taxed as income. Although this example would enable the person to manage their tax liability, it is not available if they use their pension fund to purchase an annuity.

Withdrawing your pension
If you are aged 55 and over from 6 April 2015 you’ll have the freedom to decide how you choose to withdraw your pension, in excess of any tax-free cash. However, if you choose to take an Uncrystallised Funds Pension Lump Sum(s) (UFPLS) it wouldn’t be ‘in excess of any tax-free cash.’ The choices will be to take the entire fund as cash in one single go, withdrawing differing lump sum amounts when you choose or taking a regular income utilising income drawdown where you are able to withdraw directly from your pension fund. The last two options would mean that your pension remains invested. Alternatively, you could purchase an annuity to secure an income for the rest of your life.

Depending on your particular situation, if you withdraw your pension in stages rather than all at the same time, this may enable you to manage your tax liability, as any withdrawals in excess of the tax-free amount will be taxed as income at your marginal rate.

There will be three primary options for you to consider in terms of taking benefits for the first time on or after 6 April 2015. If you are not in capped drawdown prior to 6 April 2015 it will not be an option to move into capped drawdown after this date. Capped drawdown is the current form of drawdown that allows you to draw an income from your pension subject to an annual limit.

Maximum value of pension savings
The Annual Allowance is the maximum value of pension savings on which you receive tax relief each year. The Annual Allowance is £40,000 for the 2014/15 tax year. Your pension contributions after 6 April 2015 will still be subject to this and other specific contribution rules. Contributions to DC pension savings could also be restricted to £10,000 if you make any withdrawals from a DC pension in addition to any tax-free cash after 6 April 2015 via the flexi access drawdown route. In the event that you have already entered flexible drawdown before 6 April 2015 you will also be able to make contributions of up to £10,000 a year, something not currently allowed.

The £10,000 reduced allowance also applies to any withdrawal of a UFPLS which wouldn’t be ‘in addition to any tax-free cash’.

If you were to have a pension worth £10,000 or less and took it as a ‘small pot’, the reduced £10,000 annual allowance will not apply. You could take pensions as small pots up to three times from personal pensions and unlimited times from occupational ones. The reduced annual allowance will also not apply if you enter capped drawdown before 6 April 2015 and your withdrawals thereafter remain within the maximum GAD income current drawdown limit, even if you move more funds into the same plan. Other scenarios where the reduced annual allowance does not apply are if you withdraw your pension as a lifetime annuity (excluding flexible annuities) or a scheme pension (except when fewer than 12 people are entitled to one under that scheme).

Beneficiary pension payments
From 6 April 2015 the current 55% tax charge on lump sums paid from your pension funds if you die before age 75 will be abolished. The tax rules will also be changed to allow joint life annuities to be paid to any beneficiary.

If you die after age 75, your beneficiaries have the options of taking the entire pension fund as cash in one go, subject to 45% tax, or receive a regular income through income drawdown or an annuity. This income will be subject to Income Tax at their marginal rate, and if they receive periodical lump sums through income drawdown, these will be treated as income, so subject to Income Tax at their marginal rate.

Even if you die prematurely before April 2015, your beneficiaries could still take advantage of the new rules if they wait until 6 April 2015 to take benefits.

Making unlimited withdrawals
Anyone with a Defined Benefit (DB) pension, such as a final salary pension, will be able to make unlimited withdrawals. But in order to do so they will have to transfer to a DC pension such as a Self-Invested Personal Pension (SIPP).

As you could lose very valuable benefits this is rarely a suitable course of action and you will be required to receive professional financial advice first. It will also no longer be possible to transfer from most public sector pension schemes.

The age at which you can draw your pension is set to increase. Currently it is 55, and will increase to 57 from 2028 and remain ten years below the State Pension age and then increase in line with it thereafter. This will not apply to Public Sector Pension Schemes for Firefighters, Police and Armed Forces.

You will be unaffected by the changes if you have already retired and are receiving an annuity income from all of your pensions. If you are in capped or flexible income drawdown you should be able to benefit from the new rules.



Make writing your will your top 2014 New Year resolution

As much as we might not want to think about it, we are all going to die one day. Most of us know that we should write a will, but most of us never get round to it. Do you fall into this category? If the answer is ‘yes’, as the New Year approaches make writing your will your top 2014 resolution.

Writing a will gives you peace of mind that your wishes will be respected after you die and, by making those wishes clear, you can save your loved ones any additional stress at what is likely to be a very difficult time. Not writing your will could have serious consequences for those you leave behind. If you die without getting your financial affairs in order, your money, personal belongings and even your home could go to the person you least want to have them, and your loved ones could lose out.

Get your financial 
affairs in order

  • Specify exactly how you want to divide up your assets, including any property, savings, business interests, personal effects and even pets – known in legal terms as your ‘estate’
  • Appoint a guardian to care for your children as well as making specific financial provisions to help them do so (otherwise, it will be up to the courts to decide who looks after any children under 18 who are left without a parent)
  • Use your will to save tax and potentially reduce or eliminate the amount of inheritance tax that may need to be paid on your estate
Protect your assets for future generations and give yourself peace of mind that your affairs are in order

How will your estate 
be shared out?
In England or Wales (some areas of the law and legal procedures are different in Scotland), if you die without a valid will, laws known as the Rules of Intestacy will determine how your estate is shared out. Importantly, only spouses or registered civil partners and certain blood relatives can inherit under these rules – unmarried partners who are not in a civil partnership cannot benefit, nor can relations by marriage or close friends, even if there are no qualifying blood relatives (in which case your estate will pass to the Crown).

A difficult financial position
Not having a will can mean lengthy delays in distributing your assets, in some cases years, which could leave your nearest and dearest in a difficult financial position, depending on your situation.

Family lives are often now more complicated, with more couples divorcing and second marriages and second families on the rise. In such cases, it is even more important to have a suitable will in place.

It is also essential you remember to review your will, especially when life changes occur. 
Life events such as a second marriage will revoke any previous wills, and a divorce will cancel any benefit to a former spouse, unless the will specifically states that divorce should 
not affect the entitlement.

Reduce a potential tax burden
Currently, if you leave behind an estate worth more than £325,000 (2013/14 tax year), inheritance tax (IHT) is levied at 40 per cent on anything above this threshold. If this is likely to apply to you, writing a will could help you reduce the potential tax burden on your beneficiaries.

It makes sense for a married couple to write their wills in conjunction with each other as, usually, the IHT is only an issue on the second death. Careful planning on the first death can, however, sometimes reduce the total eventual tax liability

This is because bequests between spouses are exempt from IHT and so it is easily possible to avoid any tax liability at that stage. The issue is delayed rather than avoided altogether, so the will of the first to die should be written with that in mind.

Also exempt are gifts to charities. Any money you leave to charity is not taxed, and if you leave more than 10 per cent of your estate to charity, any IHT payable on the remainder will be charged at a reduced rate of 36 per cent.

The Financial Conduct Authority does not regulate Taxation & Trust advice or Will Writing.

Are you making the most of your finances?

During this period of austerity, why pay more tax than you need to? Sensible tax planning is an essential tool in making the most of your finances. Keeping your tax bill to a minimum is not a matter of aggressive or complex tax schemes, but rather of identifying which of the many tax reliefs and allowances specifically granted by law are available to you.

Here are some ways to help you keep hold of more of your hard-earned money:

Check your tax code
If applicable, look at your pay slip or ask your tax office for a coding notice. This details your allowances and any deductions due to state benefits or taxable employee benefits. If you’re not sure it’s accurate, query it. Errors will affect how much you pay and may result in a large tax demand if you’re paying too little. You may be paying too much if, say, you change jobs and your correct tax code isn’t used – or if you have more than one job. You can claim back overpaid tax for up to four years.

Maximise personal allowances
Ensure that you are making the most of your individual tax-free personal allowance (PA), which for 2013/14 is £9,440 for those aged under 
65, or the age-related allowances which are worth up to £10,660 assuming your maximum income doesn’t exceed £26,100, after which your PA would reduce by £1 for each £2 earned above this figure, until it reached £9,440.
If your spouse or registered civil partner has little or no income, consider transferring income (or income-producing assets) to them to ensure that they are able to make full use of their PA. Care should be taken to avoid falling foul of the settlements legislation governing ‘income shifting’. Any transfer must be an outright gift with ‘no strings attached’.

Make the most of your Individual Savings Account (ISA) allowance
Up to £11,520 can be invested in an ISA this tax year, of which up to £5,760 can be invested in a Cash ISA. Most income accrues tax-free, although the tax credit on UK dividend income cannot be recovered.

All investments held in ISAs are free of CGT. And don’t forget, the new Junior ISA (JISA), for those aged under 18 who do not have a Child Trust Fund account, allows investment of up to £3,720 in 2013/14. 16 to 17-year-olds can also invest up to £5,760 in an adult Cash ISA, even if they already have a JISA.

Use your capital gains tax (CGT) allowance
Make the most of your CGT exemption limit each year (£10,900 in 2013/14). It may be possible to transfer assets to a spouse or registered civil partner, or hold them in joint names prior to any sale to make full use of exemptions. Individuals with a particularly large gain may want to realise it gradually to take full advantage of more than one tax year’s allowance. (You should only consider spreading a disposal of, for example, shares if you will not be putting your gain at risk in the meantime.)

Use your occupational pension scheme
Opting out of your occupational pension scheme could mean that you are missing out on valuable pension contributions from your employer. If you are offered a pension scheme by your employer, then it is worth considering joining. If your employer makes a contribution to your pension, this is like receiving additional pay. Some employers may even be willing to match the contributions that you make, doubling the amount saved towards your retirement.

Get a tax boost for your pension contributions
If you’re a UK taxpayer, in the current 2013/14 tax year you’ll receive tax relief on pension contributions of up to 100 per cent of your earnings or a £50,000 annual allowance, whichever is lower. For example, 
if you earn £60,000 and want to put that amount in your pension scheme in a single year, you’ll only get tax relief on £50,000. Any contributions you make over this limit will be subject to Income Tax at the highest rate you pay. However, you can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years. The annual allowance is reducing from £50,000 to 
£40,000 in the tax year 2014/15.

Non-taxpayer? Don’t pay tax at source on your savings
As a non-taxpayer, you can pay too much tax on your savings, as tax on interest is deducted at source. If this has happened, complete an R40 Tax Repayment Form for each year you’ve paid too much. A form R85 from your building society or bank will stop future interest being taxed. Often non-taxpayers fail either to elect to have interest paid gross or to reclaim any overpayment from HMRC. This could result in you paying unnecessary tax and reduces the value of your savings.

Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested.