MAXIMISING YOUR STATE PENSION

In order to get the maximum State Pension you need to have paid National Insurance premiums (or received credits when raising children, for example) for a certain number of years. The new State Pension which came into force in April 2016 requires 35 years of National Insurance credits. Those who have had years credited from before 2016 will need to consult HMRC to find out what is required for them. Where there is a shortfall it is possible in some cases to make additional payments which will increase what will be received at State Pension Age. The changes in the State Pension Age has also affected the requirements. This can be of particular relevance to low earners generally, and women who have had breaks in their employment record. Recently we had two women clients who only found out that they were falling short of their National Insurance requirements because they consulted HMRC. By making these additional payments they were able to substantially increase the State Pension they will receive. One found it successful to consult www.gov.uk/personal-tax-account. We also suggest using the State Pension Forecast site – www.nidirect.gov.uk/articles/check-your-state-pension.
Note: Some good news about State Pensions – they have a guaranteed increase of 3.9% from April 2020. Under current rules the State Pension is increased by what is called the “triple lock”, which is the highest of the three indices – earnings growth, price inflation or 2.5% per annum.

PASSING PENSIONS DOWN THE GENERATIONS

Having sent that letter to nominate your beneficiaries, it is worth looking further at the range of options that may be available with the new Flexi-Access Drawdown Pension schemes (and older style pensions can be transferred to the new Flexi-Access pensions) which provide more choices of how you can choose to pass the money on when you die. The majority of older pensions will simply pay out a lump sum to the named beneficiary(s). This lump sum is tax-free if the person concerned is younger than 75 when he dies. If they are 75 or over when they pass away, the lump sum is taxed as if the beneficiary had earned it as income. This can result in a substantial tax charge.

If your pension is a new style Flexi-Access Drawdown, or if you transfer your existing pension to one, you can nominate anyone you want as a beneficiary, regardless of whether they are family or not. It is also possible to pass the pension, or part of it, to a beneficiary as a pension, as opposed to just a cash lump sum. Thus a person could pass his pension as a pension to a child or even grandchild and the child or grandchild would be able to access it immediately regardless of their age. And the pension benefit could be passed down the generations even further.

This opportunity won’t be of use to everyone, but it can have substantial income tax and inheritance
tax benefits so it is important to know what your options are. If you have a question on this, please
contact your pension provider or contact us.

MONEY PURCHASE PENSIONS

With Money Purchase / Defined Contribution pensions (those that the majority of people have now where the value of the pension is based on the value of the fund(s) in which it is invested) there are more choices. It is worth finding out what you can do so you can make the choice that best suits your wishes. The first thing to do in all cases is to work out who you want the money to go to and write a letter to the pension provider to this effect, and keep a copy of the letter in your files.

You can always change this at any time by writing a new letter to cancel the old one and lay out new beneficiaries.

FINAL SALARY PENSIONS

Final Salary/Defined Benefit pensions (those based on the number of years worked and the salary)
usually only allow for a pension after your death to be paid to a dependant. If your wishes are different to that you should make contact with the pension provider and discuss the matter.

WHAT HAPPENS TO YOUR PENSION WHEN YOU DIE?

There are a few points about dealing with pensions in the event of a death that we want to explain in case they may apply to you or someone you know. We have had a few cases recently where an understanding of pension options on death was vital to achieving the best results. It is worth avoiding future problems by taking a bit of time now to make sure you have the best possible arrangements.

The first point about pensions and death benefits is to ensure that the value of your pensions pass to the people that you want to have them, and also that they are done in the most tax-efficient way. Nominating beneficiaries for pensions can usually be done by simply writing to your pension providers and putting in writing what your wishes are in this regard. If you do not do that, you run the risk of the money ending up where you did not want it to go, perhaps even, the Government! It is important to understand, however, that if you nominate beneficiaries, it does not guarantee that the pension scheme administrators will pay the pension to them. The pension trustees/administrators have a responsibility to look into the deceased’s situation and have a right to use their discretion. However, they normally would act according to the deceased’s written wishes unless there is a good reason not to.

“RETIREMENT” PLANNING

A majority of the work we are doing currently concerns “retirement”. It is not a word we care to use
as it implies a person will give up useful work and do little or nothing. We prefer to view it as a change of operating basis – of being able to move away from what one has had to do to make money, to other activities which one simply wants to do. Of course, there still does need to be adequate money available which is the reason why you should plan for this changeover.

Pensions are the source of income in later years for most people. They start with the new State Pension which currently pays £168.80 per week for those who have put in at least 35 years of work (and paid National Insurance in those years or were credited with years – for example, when raising children).

For the employed there are also occupational or workplace pensions. While the days of the best company pensions have faded into the past, they can still provide an excellent source of income in retirement with both the employer and employee having contributed. The self-employed need to establish their own pensions and make adequate payments if they are going to have their pension providing a reasonable amount of income. With people moving jobs more frequently there is often a number of smaller pensions from one’s work history. The main advantages of pensions is that you receive tax relief on what you invest into it (up to an annual maximum amount). For the Basic Rate taxpayer for example, the £1.00 they put into their pension will get 25p more added by the Government so it turns £1.00 to £1.25 overnight without risk. And a Higher Rate taxpayer gets even more tax relief.

PENSION OPTIONS

If you have pensions and need advice about your options, do give us a ring. There are a number of points to consider.

MAXIMUM PENSION ALLOWANCE

While the rules are more complex for high earners, for most people with a personal pension plan, the maximum they can contribute to their pension is £40,000 per year or the amount of their annual taxable earnings, if less. Contact us if you want to find out what your maximum contribution would be.

There is also a maximum Pension Lifetime Allowance. The Government has put a limit on how much you can build up in your pension over your lifetime. This currently amounts to £1,055,000 and is intended to increase each year in line with the rate of inflation. For those with pensions related to their salary and years of service, there is a formula which gives an equivalent value that can be built up.

PENSION TIPS

If you are employed, do take advantage of the Workplace Pension your employer is required to offer – even if you will be working only a few years. Currently you are required to contribute 5% of your pay and your employer must contribute a further 3%. The Government also adds an additional amount in the way of a tax rebate. For a person paying the 20% basic rate of tax, for every £4.00 they put into their pension, they end up with approximately £8.00 in their pension pot. In other words they have doubled their money – not a bad deal! For a person paying higher rate tax, the return is even better. The Workplace Pension is, effectively, a pay increase and should not be ignored.

Besides being a pot of money to use from age 55 onwards, a pension policy also provides a useful source of life assurance. Should you die before you take your pension benefit, the value will be paid to whomever you have nominated as the beneficiary. If your death is before age 75, the beneficiary will receive the value of your pension fund free of all taxes. If you die age 75 or older, the beneficiary will receive the pension fund value subject to the beneficiary’s level of tax. Note: do remember to fill out a Nomination of Beneficiary form for any pension you have so that the money goes to whoever you really want it to go to!

Do keep in mind your options from age 55 (currently): 25% of the pension fund is available as tax-free cash; the balance is available as an annuity (guaranteed income) or can be left invested with the option to take an income from it whenever you choose. The annuity can be a lifetime annuity which pays out as long as you live, or a fixed term annuity which pays an income for a fixed number of years and then provides a guaranteed lump sum at the end of that term. Note: the income from an annuity will be taxed in the same way as if you had earned the income. And if you leave it invested, any money you withdraw from it subsequently, whether as occasional lump sums or a regular income, will also be treated as earned income and taxed accordingly.

UNDERSTANDING YOUR STATE PENSION

The State Pension Age is the age at which you can start drawing your State Pension. While the State Pension is not a fortune, it is still a useful guaranteed income and worth playing for. To get the maximum under the current rules you will need to have worked, and paid National Insurance, for 35 years. To help with your planning in this regard use the State Pension Forecast facility the Government provides. This will tell you when you can expect to receive your State Pension, how much it is likely to be and what you can do to catch up any missed years.

Go to www.nidirect.gov.uk/article/check-your-state-pension.

And do remember that you can delay taking your State Pension. Those still working on a significant salary when they reach their State Pension age, could minimise tax by postponing taking their State Pension until their income decreases. For each year you delay taking your State Pension, the amount you receive when you do start taking it will have increased by 5.8% for each year you have postponed it. Generally, however, most people are probably best advised to take their State Pension as soon as they are entitled to do so.

OPENING THE CAGE!

The last several years has seen the arrival of many new options for those who had not been able to obtain a mortgage due to their age. Standard residential mortgage lenders generally now allow borrowing up to age 70 for those who are relying on earned income – whether employed or self-employed. For those who have guaranteed income into retirement such as pensions and investment or rental income, it is possible to borrow up to age 85 or even 90.

THE MIDDLE ROAD FOR PENSIONS!

For the last few years those with personal pensions have found that they have a wide freedom of choice as to how they can take their pension benefits from age 55.

The new Flexi-Drawdown Pension arrangement allows you to keep your pension fund invested indefinitely and still have the option of taking out money from the pension at any time – whether that means taking it all at once, or monthly, or annually, or just bit by bit as needed. By leaving it invested in this way there is a chance of making a good return on your pension investment so that it lasts longer (although the value of the fund can go down as well as up, so it could also shorten the time the pension fund lasts).

The traditional way of taking pension income – the Lifetime Annuity, is also still available. In this way you can secure an income for life by exchanging some or all of your pension fund for a guaranteed income for life with a fixed rate of return. This provides the certainty of income for those who need that sort of certainty, but does mean that the lump sum used to “buy” the annuity is gone forever. There is a middle road option which not everyone is aware of. This is the “Fixed Term Annuity”.

This arrangement guarantees an income for a period of time – usually 5 years – with a guaranteed lump sum at the end of the fixed term. This provides the certainty of income for the fixed period which, for example, might be needed to cover a shortfall of income until one’s State Pension comes into payment. Additionally it guarantees a fixed lump sum on maturity. At that point you have the chance of making your choice all over again – whether that choice is to put the lump sum in a Flexi-Drawdown pension or purchase a Lifetime Annuity, or even purchase another Fixed Term Annuity. So this middle way provides some of each – guaranteed (!) – some income and some lump sum.

All of these choices have their advantages and disadvantages and so it is important to choose the one that best matches your income and investment needs. We can assist you to choose the option that best suits your situation.

A CASH LUMP SUM!

Under the new rules you can, in principle, take all of your pension fund out as cash. The downside to this option is that only 25% of what you take would be free of tax and so you could end up paying up to 45% tax on some or all of the rest that you take out as cash. If you are tempted to take large amounts out as cash, do get someone to help you crunch the numbers as to how much tax you will have to pay. Having saved the money carefully in the pension over all those years, it does not make sense to waste it now. And if you splurge now on the Ferrari, it could mean you would have little left for your future needs. So this Pension Freedom does not provide freedom from taxation, but it does allow a great deal of flexibility for managing how you take it out!

FREEDOM TO TAKE YOUR PENSION BENEFIT IN A VARIETY OF WAYS !

In the past you had very little choice in how you could use your pension savings. You were allowed to take 25% of the pension fund as tax-free cash, but the rest had to be used to purchase an annuity so as to secure an income for life. You would buy an income for life with your pension funds. The older you were, the more income you would be able to buy with your pension fund. (Do make sure you understand what an annuity is as it still can be a useful pension option. We would be happy to help explain what it is.)

AGE FREEDOM!

Previously pensions generally had a minimum age of 60 or 65 for taking the benefits. The current pension regulations allow individuals to take any or all of their pension benefits from age 55. There are some exceptions so it is worth checking with your pension provider. Do remember that you do not have to retire in order to be able to access your pension benefits. For those who are in their 40s or younger, we also need to sound a warning that this minimum pension age of 55 is likely to increase in the future as the State Pension Age increases.

“FREEDOM” NOT TO HAVE ONE!

The first “Freedom” one has is not to have any pension at all! If you are self-employed, you do not have to contribute to a pension (other than the State Pension) and even if you are employed, you can opt out of the company’s Workplace Pension. Clearly, however, there is not much value in a "Freedom” which means you have very little to live on in retirement.

A number of people plan to use other sources of income in their later years such as renting out property or down-sizing to recover value from their own property. We would advise all our clients to use pensions to provide at least part of the income they will need in retirement. If you are unsure of why this is a good idea, do take advice.

PENSION FREEDOM?

It is now 3 years since the Government launched changes to pension regulations which they called “Pension Freedom”.

Essentially they made changes which gave more choices as to how you can use your pension savings when you reach pensionable age. It is worth knowing your options if you are 55 or older or approaching age 55. We can use our experience and expertise to help if you have questions.

The choices we examine here primarily relate to personal pensions, also called “Money Purchase” and “Defined Contribution” pensions. If you have a Final Salary Pension (also known as a Defined Benefit Plan), you will need to seek advice from your pension provider as the rules are often different from scheme to scheme.

COMING OF AGE!

It is time to look at the advantages that come with reaching the larger numbers of years of age!

Age 55 – A Magic Age of Pension Freedom

Reaching age 55 is a milestone and with that milestone comes access to your private pension benefits. Here some key points for the 55er’s amongst us to be aware of:

• You don’t have to retire to take your pension benefits. You can continue to work and even continue to pay into a pension.

• You don’t have to take all of the benefits at one go – you can take the tax-free cash and leave the rest to build up. You can then draw out additional amounts whenever you wish (note: whatever you draw out over and above your tax-free amount is taxable). • You can take all of the benefits immediately if you want to (but there can be significant taxes to pay!).
• At any time from age 55 onwards you can take the benefits. • Previously you had to take out a lifetime annuity with all of your pension except the tax-free cash element. That is no longer true although you still have the option to use some or all of your pension fund to buy a lifetime annuity (which will give you a guaranteed income for life) – see section on annuities in this newsletter.
• If you do not need the pension benefits, you can create a very tax-effective life assurance arrangement by just leaving it invested and nominating who you would want to receive it. You can change your mind about the beneficiary at any time.

• For those lucky few who have what are called “final salary” pensions, the options above generally will not apply but the income you will enjoy will probably more than make up for it.

• Warning – this access to the magic circle of your pension funds will not always be pegged at age 55. As the Government increases the State Pension age in the future, they are committed to also increasing this minimum pension age.

(Note: these are only approximate levels of borrowing. In some cases it may be possible to borrow somewhat more than what is shown above and in other cases, the borrowing that is possible may be less. Interest rates vary depending on the lenders and the level of borrowing. Usually they are fixed for the term of the mortgage and vary from 3.9% upwards. In the case of a couple the borrowing will be calculated on the age of the younger. The Lifetime Mortgage has to be the only mortgage on the property.)

PENSIONS USED AS LIFE ASSURANCE OR INHERITANCE PLANNING

The new Flexi Pension Plan rules have opened up new opportunities for pension plans to help with life assurance and passing the pension down to beneficiaries in a tax-efficient way. If you have a personal pension plan (these rules generally do not apply to Final Salary/Defined Benefit Pensions), you can nominate anyone you want to be the beneficiary. If you die before age 75, the value in the pension can pass to the beneficiary with no tax at all (!). If you die after age 75, it still passes to the beneficiary but would be taxed at the beneficiary’s tax rate. The beneficiary can also opt to set up his own flexi-pension with the monies and would be able to take money out when he chose, or even leave it to a beneficiary of their choosing.

WORKPLACE PENSIONS/AUTO-ENROLMENT

Those with a pension in their workplace will have an enforced increase to their pension contributions

from the 6th of April. Instead of both the individual and the company putting 1% of their salary into

the employee’s pension, it increases to 3% by the employee and a minimum of 2% by the employer. Someone earning £20,000 could find his monthly contribution going up from £14.00 or so per month to £40.00 per month. While that may not be a welcome extra cost, do remember that the increase also means more from the employer and, taking into account the additional amount the Government has to put in, that £40.00 per month taken from the employee would end up with them getting £83.00 in their pension – over 100% return on their money. Not bad!!