Tax Year-End: Capped Drawdown plans have one big advantage over their Flexible new friends, but will disappear April 5th 2015

In all the hype over the new pensions rules and flexibility beginning next April, it is easy to miss the rules concerning contribution allowances whilst in drawdown.

There can be reasons and/or advantages to an individual in running a drawdown arrangement and taking income from it whilst simultaneously making contributions (or keeping the option to make future contributions). Care needs to be taken not to fall foul of rules prohibiting the recycling of tax-free cash.

Existing capped drawdown plans which are maintained within their GAD withdrawal limits will retain the annual allowance for further contributions of £40,000, whereas an active flexible plan will have a reduced allowance of £10,000 after April 5th 2015. However, capped Drawdown will no longer be an option after April 2015, when all new drawdown plans will qualify as “flexible” regardless of withdrawal levels. After April 5th, as soon as a “trigger” event occurs, such as taking income or cashing in a small pension in its entirety, the new reduced annual allowance of £10,000 applies.

So, investors wishing to carry on an active drawdown arrangement yet take advantage of the £40,000 contributions limit in future, who do not currently have such a plan,  would need to quickly set up a plan (and make a crystallisation event – e.g. a small withdrawal of tax free cash) prior to April 2015, to be able keep that greater level of annual contribution allowance.

To maintain the £40,000 limit going forward, capped drawdown members must not exceed their GAD income limits in any tax year. To do so creates an event which triggers the smaller contributions allowance going forward.

This is an area where financial advice is essential – in fact drawdown plan providers will generally only deal with you through an adviser(!)

Most new drawdown plans are initiated via a transfer of existing pension money from one or more other pension plans, but in view of the rapidly closing window (realistically you’d need to get a new application in by around March 20th at the very latest),  for a capped plan I would suggest the time for that is already past. However, if you have a reasonable cash lump sum which you can contribute now, then it may still be possible to find a capped drawdown provider and set the account up with instant crystallisation.

NB the above is a brief summary only – we will advise on pertinent rules as appropriate. If you think this sounds suitable for you, we’re happy to advise further – just give us a call on 0345 013 6525 to discuss.

Tax Year-End: Do you want to make more than £40,000 pension contributions this year? – Carry Forward!

The annual allowance for pension contributions in 2014-15 is £40,000, which is the gross equivalent and includes all contributions from all sources (i.e. incl. employer contributions). Unused allowances from the previous three years may be carried forward and used in the current tax year.  (You need to have been a member of any UK pension scheme in a given tax year to qualify for the contribution allowance in that year).

Carry forward of pension annual allowances can have its intricacies, but basically you must first use the current year’s and then work backwards. All of the tax relief obtained is applied against current year’s income. The annual allowance was £50,000 in each of 2011-12, 2012-13 and 2013-14 (so potentially an individual could pay up to £190,000 into pensions in the current tax year).

Please give me a call if you are interested in any last minute lump sums into pensions.

Tax Year-End: ISA Allowances

OK they’re apparently “NISAs” following the latest upgrades, but I’m sticking to the old name for now.

This is pretty straight-forward stuff. You must use your ISA allowance in its tax year, or else it is lost. You must be over 16 for a cash ISA, or over 18 for “Stocks and Shares” ISAs (typically unit trusts or similar mutual funds).

The allowances are:

  • 2014-15 (up to)£15,000 each
  • 2015-16:(up to) £15,240 each

From 2014-15, you can invest any proportion into cash or Stocks and Shares – e.g. you can now invest £15,000 into just a cash ISA, or  £15,000 into Stocks and Shares ISA, or anything in between.

A married couple could invest £60,480 across both tax years. Most of the larger ISA providers will facilitate a double payment now – (they just hold next year’s part of the payment for a week or two and the invest it for you on April 6th).

(Junior ISAs apply for younger people, which have lower allowances than for adults – see  earlier posts).

made-it

Made It!

If you leave it to the last minute and are having difficulty with your provider, or you’d like to set up a new ISA account this year, please give me a call. We have last minute facilities with most of the big platforms (Fidelity, Old Mutual, Cofunds etc.) where we can get your application in. And don’t forget we offer an investment advice service – customised portfolios built around your preferences. Our on-going fee for this service is just 0.5% per year.

Tax Year-End: Avoiding the 60% tax band!

For those of you earning over £100,000 this tax year, remember that for every £2 of income earned over £100,000 an individual loses £1 of their personal allowance until they have no allowance left.

This makes the effective rate of tax 60% on income between £100,000 and £120,000 for 2014/15. (40% tax on the £2 (80p) plus 40% tax on the lost £1 allowance (40p) = £1.20 tax on £2).

So when your income is over £120,000 all the personal allowance is lost as this is double the personal allowance.

The measure of £100,000 is the ‘adjusted net income’. Broadly, this is total taxable income less certain deductions e.g. gift aid donations and gross personal pension contributions.

The Plan

You can get your adjusted net income back down below the £100,000 if you can make a lump sum pension contribution of a suitable size:

  • Identify total income for personal allowance purposes i.e. adjusted net income
  • Calculate excess over £100,000 limit
  • Calculate contribution to reduce adjusted net income to £100,000
  • Make the personal pension contribution in the tax year in which the personal allowance is lost.

Example

Mr Savvy has income of £110,000 so has lost some of his personal allowance. A personal pension contribution of £8,000 net, £10,000 gross is made.

pension-graphic

So, the contribution has the dual impact of increasing the amount of tax free income through the reclaimed allowance as well as pushing out the basic rate band.

For a resulting net spend of £4,000 Mr Savvy has reduced his tax bill by £6,000 and generated a £10,000 into his pension pot.

The contribution of £10,000 has saved £4,000 in tax and received relief in the pension of £2,000 – an effective rate of tax relief of 60%!

The Chancellor’s Autumn Statement – the Taxy bits

A summary of the main UK tax changes announced December 3rd 2014. For info on the changes affecting inheritance and pensions, please see The Chancellor’s Autumn Statement – the Sexy bits blog.

Personal Allowance – Income Tax

The personal allowance will be increased to £10,600 in 2015-16, £100 more than previously stated. The higher rate (40%) threshold will be £42,385.

ISA changes

From April 2015 the ISA allowance will rise to £15,240, following the substantial rise last summer to £15,000.

Junior ISA and CTF raised to £4,080 p.a.

Non-Domicile Basis of Taxation – Charges to Increase

Non-Doms not Dum-dums

Non-Doms not Dum-dums

Non-doms (a phrase which always makes me think of the Easter Island talking head in “Night at the Museum”) who choose to use the remittance basis and have been resident for at least 7 of the past 9 years, currently pay a charge of £30,000, rising to £50,000 once resident for 12 out of 14 years. This latter amount will increase to £60,000 (from £50,000) in 2014/15, and a new charge of £90,000 will be brought in for those who’ve been resident 17 of the last 20 years in the UK.

The Government will also consult on making the choice to pay the remittance basis charge stick for a minimum of 3 years, so that non-doms are not easily able to swap the basis on which they’re taxed from one year to another.

Non-doms might consider using offshore bonds to help mitigate their taxation, since offshore bonds are not taxed until a chargeable gain arises, and hence controlling chargeable gains can control the tax.

Stamp Duty – changes to rates 

Stamp duty will now cost less to the average house buyer. The Chancellor has introduced (with immediate effect) a banded system whereby you pay across all relevant bands, not just the highest applicable to your property. They are revised as follows:

Purchase price of property (£)
 
New rates paid on the part of the property price within each tax band
Tax Within the band
0 – 125,000
0%
    Nil
125,001 – 250,000
2%
£2,500
250,001 – 925,000
5%
£33,750
925,001 – 1,500,000
10%
£57,500
1,500,001 and over
12%
£ ++++

The magic value is £937,500. Below that there is less duty to pay than previously, and above that there is more.

Interaction of Flexible Pensions and Means testing of Govt. Pension Credit

The treatment of existing pensions, both crystallised and uncrystallised, is now slightly more favourable when means-testing state benefits. The notional income factor to be applied to such benefits is now based on 100% of an equivalent annuity rather than 150%, the previously factor. However, if the income actually being drawn is greater than this, it will be the higher figure that is taken into account.

The Chancellor’s Autumn Statement – the Sexy bits

OK so there wasn’t anything that really made the eyes roll this time around, but there were some pleasant confirmations and a relaxation on ISA inheritance: (see also separate blog “The Chancellor’s Autumn Statement – the Taxy bits” for the more routine stuff)…

smug pension kid

Daddy has a really nice pension!

Flexible Pensions and Death Benefits confirmed.

These changes will  have an increasing influence on the direction of estate planning, as their repercussions become more widely accepted.

On death before age 75, any death benefit will be paid tax free provided it is within the Lifetime Allowance (LTA). Thus there is no longer a distinction between “crystallised” and uncrystallised” pots for pre-75 death benefits.

On death at 75 and later, the remaining fund forms death benefits which are taxable on the recipient at his / her income tax rate, when they draw the funds.

Any individual beneficiary of a flexible pension can choose to keep their inherited pension pot in the drawdown wrapper and decide when (or if) they draw down on it. Inheritable Pensions! This IMHO puts pensions at the forefront of inheritance planning going forward.

Inheritability of ISAs

Previously, upon death of a married account holder, their  ISA money would no longer carry ISA status in the hands of the inheriting spouse / civil partner. It now does, so the surviving spouse has the benefit of continuance of that tax-free savings wrapper . This only applies to spouses (spice?) or civil partners however, other beneficiaries will receive the money without ISA status.

Whilst inheriting ISA funds from your spouse is free of inheritance tax (because of the spouse exemption) it is still going to be taxable as part of the estate on second death. So there can be instances where individuals (who are near to or already over age 55) can find it to their advantage to use a personal pension contract to receive their ISA funds:

  • You need earnings to qualify for tax relief on the contributions (although you can contribute a small sum without earnings – £2,880 p.a. net).
  • you can still withdraw the funds from the pension (if 55 or above)
  • you (usually) end up with more cash net of tax
  • the death benefits are the whole fund is payable tax free on death pre-75
  • the death benefits can be directed into a discretionary trust if you prefer (spouse bypass trust)

Single Lifetime IHT Settlement nil rate band

This idea has been dropped (sigh of relief there). The idea of just a single IHT nil rate band for lifetime settlements, i.e. allowing only £325,000 to be gifted in one’s lifetime and allocated across all relevant property trusts they created, has been axed. For the time being at least, the £325k rate will re-set every seven years as before. However there is still likely to be a simplification of periodic and exit IHT tax charges on trusts, to stop people taking advantage of the rule in “Rysaffe” where multiple trusts reduce the overall tax bill.

Changes to intestacy Rules: Inheritance tax and trustees’ powers act 2014

In May the Inheritance and Trustees’ Powers Act 2014 received Royal Assent. The Act contains important revisions to the intestacy rules in England and Wales, and took effect on 1st October 2014. (Statutory instrument SI 2014 No 2039)

The most significant changes cover two common situations where someone dies without a valid will.

1) Leaves a surviving spouse/civil partner but no issue (children, grandchildren, etc)
OLD RULES: Under the current rules the spouse/civil partner is entitled to:

• personal chattels (car, jewellery, etc);
• £450,000 outright; and
• A life interest (a right to income only) in half the residue.

The other half of the residue passes to parents, failing them brothers and sisters and, failing them, their issue. They will also receive the capital from the life interest when the surviving spouse or civil partner dies.

NEW RULES: The new rules will instead pass absolutely everything to the surviving spouse/civil partner.

2. Leaves a surviving spouse/civil partner and issue
OLD RULES: Under the current rules the spouse/civil partner is entitled to:

• personal chattels (car, jewellery, etc);
• £250,000 outright; and
• A life interest in half the residue.

The other half of the residue passes to the child/children (under trust if under 18), with the remaining value of life interest half being paid on the surviving spouse or civil partner’s death.

NEW RULES:The new rules will give the surviving spouse/civil partner half of the residue outright, rather than wrapped in a trust. The children thus lose their reversionary interest.

These new rules will only apply in England and Wales; Northern Ireland and Scotland have their own intestacy rules, although history suggests Northern Ireland will soon copy the English reforms.

However, as we all know, there is no excuse for not having a properly drafted and up-to-date will.

Wills - we all need 'em

We all need one. Without a valid will, your estate probably won’t be distributed in anything like the manner you would wish, and its omission may well cost your estate more in taxes.

The Taxation of Pensions Bill – What’s important? The new stuff coming in 2015

Following the new revisions, Pensions will become more and more important in estate planning as well as retirement planning. Here is a summary of the main points, some of which were not so clear when the new flexible rules first hit the news:

  1. Capped drawdown retains the £40,000 annual allowance

Anyone already in capped drawdown before 6 April 2015 can continue to make contributions up to the £40,000 annual allowance. Provided full flexibility isn’t required at outset, an account holder can access capped drawdown whilst continuing to make significant contributions.

Accessing the new flexibility, or designating new funds for drawdown through a separate arrangement will cause the annual allowance to be cut to £10,000 (but designating new funds for drawdown within an existing capped drawdown plan which is a single arrangement, will not disturb the £40,000 limit.)

*Tactical Planning point. Capped Drawdown will no longer be an option after April 2015, when all new drawdown plans will qualify as “flexible” regardless of withdrawal levels. Investors wishing to carry on a drawdown arrangement yet take advantage of the £40,000 limit would need to enter into a drawdown arrangement (and make a crystallisation event – e.g. a small withdrawal of tax free cash) prior to April 2015, to be able keep that level of annual contribution allowance.

2) Capped drawdown to capped drawdown transfers

Where someone transfers their capped drawdown fund to a new provider they can retain their £40,000 annual allowance. If they wish to access the new flexibility following transfer they can notify the receiving scheme that the funds are to be deemed ‘newly designated’, i.e. be classed as flexi-access, which would then see their annual allowance cut to £10,000.

3) 55% tax charge on death

The Bill carries through on the promise to scrap the 55% tax charge on lump sum withdrawals following death in drawdown post 75 and on crystallised funds. The tax charge has been cut to 45% and now only applies to lump sum payments where death occurs after the age of 75. The charge will also be levied on value protected annuities and pension protection lump sums from DB schemes.

4) Anti-Tax free cash recycling

Rules exist to prevent someone from taking tax free cash from their pension and making a fresh pension contribution which attracts tax relief. The original draft Bill amended the current 1% of lifetime allowance figure (used to measure the amount of tax free cash paid within a 12 month period) to £10,000. This is now been cut further to £7,500.

5) Triviality and small pots

Further relaxation has been given to the payments under triviality and small pots rules. The minimum age under which such pensions can be taken as a lump sum is being reduced from 60 to 55 (or earlier if under ill-health rules).

6) Temporary non-residence rules

Rules already exist to prevent someone becoming temporarily non-UK resident and drawing their pension benefits in large chunks to escape UK tax.  For example, currently someone in flexible drawdown drawing the benefits while non-UK resident and then returning to the UK may be subject to UK income tax if they return to the UK within 5 tax years.

The Bill expands the rules to include the new flexible income options and now also includes ‘flexible annuity’ and ‘money purchase scheme pensions’. And imposes a tax charge on the return to the UK within 5 years where withdrawals while non-resident have exceeded £100,000.

Flexible Drawdown from April 2015 – it’s Confirmed

In the March 2014 Budget the government promised much greater flexibility for DC (Defined Contribution) pension holders withdrawing their benefits. The consultation period which followed is now over and government has today confirmed the new flexibility and the main rules. These are confirmed as follows:

  • The new DC flexibility will commence from April 2015.
  • The guidance guarantee will be delivered by a range of independent providers, including TPAS and MAS.
  • A reduced £10,000 Annual Allowance (for new pension contributions) will apply after a client commences flexible drawdown, to help counter potential abuse. N.B. – this only applies to drawing down flexible benefits – taking a secured income (annuity) or only taking tax free cash will not trigger the limited Annual Allowance.
  • Defined Benefit (Final Salary) transfers will still be permitted provided professional advice has been given.
  • Tax-free cash remains at 25%.
  • The rate of tax on undrawn drawdown accounts at death will be reduced from the current 55% – with the new rate to be confirmed in the Chancellors Autumn Statement.
  • The minimum pension age is going to increase to 57 from 2028.

This is good news for those favouring flexibility of pension withdrawal. It is interesting that an Annual Allowance for further pension contributions will continue, albeit at a reduced level, and this will be helpful in designing strategies for retirees. This annual allowance will be afforded to those already on flexible drawdown under the previous rules – where previously no further contributions could be made after commencing flexible drawdown.

So, people of pension age will be able to access their DC pension pot, and take what they want, when they want it. The key will be to use this new flexibility sensibly to meet a client’s financial needs tax efficiently – and that is where good professional advice comes into its own. Please call us to discuss your retirement planning needs – 0845 013 6525.

Stay posted for more on this radical shake-up of UK pensions regulations!

Floodgates

Careful now.