Category: Savings

Pension freedom – not as “free” as you think

14th July 2015

The new pensions freedom of choice has given people far greater power over how they spend, save or invest their retirement funds in future. This has led to many questions and misconceptions arising.

Whilst you should be able to draw the full value of your pension fund as a lump sum (but beware of the income tax pitfalls), you may not be able to do so in stages via what is known as drawdown. This is because many older pension plans are set up on old IT systems and they simply do not have the capability to facilitate stage payments.  Although these changes have been brought in due to new legislation, it does not force pension companies to pay funds from existing plans in this way. You may therefore be required to transfer to a new plan that will facilitate all of the new pension freedoms.

Whichever route you take you should take advice. The Government has promised that everyone will have access to free “guidance” via the Pension Wise service to help you understand what your choices are. However, it is important to be aware that this service will provide only general guidance and not personal advice. You should therefore seek personal financial advice from a regulated independent financial adviser. You will have to pay for that advice, but it will be money well spent.

Everyone’s individual situation is different but you should remember that a pension is designed to provide an income for you in retirement. With people living longer than ever, you could be retired for many years and you need to consider how you will survive if you spend your entire pension fund now.

There is already evidence of high pressure telephone sale techniques and scams targeting the over 55s promising high investment returns. It is important that you deal with a regulated independent financial adviser and remember that if an investment sounds too good to be true, it normally is!

In summary, these changes will give pension investors and retirees much greater choice and flexibility, making pensions an even more attractive choice for saving than ever before. However, you should be careful that you don’t fall foul of any of the pitfalls mentioned above.


All content is for general guidance only. It provides an outline, and may not include points which are important in your case. You should not rely on this blog without taking individual advice based on the full facts of your case. The information given was correct at the time of publication.


 

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Understanding the impact of changes to company pension schemes

28th June 2011

According to the Mayan Calendar the world will come to an abrupt end on 21 December 2012!

If this prediction is correct, then employers will not have to worry about the changes which will take effect from October 2012 brought in by the recent Pensions Act. From 2012 all employers will be required automatically to enrol eligible staff into a pension scheme and contribute towards their retirement pension. This will be gradually introduced over a four year period, until all of the UK`s 1.3 million affected employers are included.

Employers will not have the option to opt out, but employees will. However those that do will be automatically re-enrolled after three years. All employers who do not have a qualifying workplace pension scheme will have to enrol staff into the National Employment Savings Trust (NEST) which is being launched as a low-cost pensions vehicle.

The minimum contribution levels will increase over a phase-in period, but eventually a minimum of 8% of an employee’s qualifying earnings must be paid into a pension. This is made up of a minimum of 3% employer contributions and a 5% employee contribution, of which 1% comes in the form of tax relief.

What should businesses be doing?

  • Find out their own implementation date
  • Consider current position
  • Evaluate cost projections
  • Review existing/new contracts of employment
  • Consider future salary increases as compared with increasing pension contributions
  • Put in place a good communications strategy to keep staff informed
  • Work with their financial adviser.

My advice to employers is to analyse any existing pension scheme arrangements and current contribution levels and calculate the potential future increased costs now so that any changes can be planned for.  This then needs to be effectively communicated and managed within the organisation to minimise any negative employee reactions.

What do you think about the new regulations?  Have you already embraced the changes or are you waiting until the last minute?

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ISAs - the transfer of tax breaks

26th January 2015

The Chancellor announced in the Autumn Statement that ISAs will be able to be passed on death to a surviving spouse or civil partner without losing the tax breaks. This has made this tax-wrapper even more valuable and should prompt married couples (and registered civil partners) to review their Wills or risk missing out.

The change is subject to legislation being finalised, but The Treasury has outlined the new rules. The surviving spouse will be given an additional one-off ISA allowance, equal to the value of the deceased's ISA holdings. This enables the assets which were in a spouse's ISA to continue to be sheltered into an ISA in their survivor’s name.

How it will work - an example

  1. An investor holds £60,000 of ISA savings and investments and dies on 07 January 2015.
  2. For the period from the date of death up to the distribution following the grant of probate, the benefits of the ISA tax wrapper are lost and the £60,000 becomes subject to income tax on any interest or dividend income generated, or capital gains tax where gains are made.
  3. Following probate, the value represented by the ISA passes to the surviving spouse.
  4. With effect from 06 April 2015, the survivor has a one off opportunity to shelter the £60,000 (in this example) into an ISA in his/her name in addition to his/her own £15,240 ISA allowance, giving a combined allowance of £75,240. This could be subscribed to a new ISA or to an existing ISA.

Will this save inheritance tax?

No, this change does not save inheritance tax.

The value of ISAs are subject to inheritance tax on death (with one main exception - where ISA investments qualify for business property relief, such as qualifying AIM shares that have been held for a two year period.)

However transfers of any assets between spouses on death are usually IHT free (provided the surviving spouse is UK domiciled). The change intends that the tax advantages of an ISA can be passed on to the surviving spouse, and there is no need give inheritance tax exemption as no such tax usually arises in these circumstances.

What might investors do now?

This change is just one of a raft of new rules introduced this year which may make ISAs more appealing to investors.

In order to benefit from this new tax break, it might be wise for couples to consider their Wills to ensure any ISAs are indeed left to each other.


All content is for general guidance only. It provides an outline, and may not include points which are important in your case. You should not rely on this blog without taking individual advice based on the full facts of your case. The information given was correct at the time of publication.


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