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.

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.

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.

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.)

AUTUMN BUDGET

There was not much excitement in the Chancellor’s Autumn Budget but the removal of Stamp Duty for First Time Buyers on purchases of up to £300,000 (£500,000 in the London area) should help boost the property market. Many tax matters were not changed.

For example, the total that can be put in ISAs (Individual Savings Accounts) each year was not changed. There were some other tweaks in the Budget and here is a brief summary:

The Personal Tax Allowance is increasing from the 6th of April 2018 from £11,500 to £11,850. This

is the amount you can earn before you have to pay any tax. You will pay tax at 20% on earnings

you make above this £11,850 up to a further £34,500. This means that in the tax year 6 April

2018 to 5 April 2019 you would not start paying higher rate tax (40%) until your total earnings

exceeded £46,350 (£11,850 plus £33,500). Those with earnings in excess of £100,000 still face the

progressive loss of their Personal Tax Allowance and those earning over £150,000 will pay the

Additional Rate (45%) on any income they have in excess of £150,000.

Some additional changes were:

• Pension Lifetime Allowance increasing from £1,000,000 to £1,030,000;

• Capital Gains Tax Annual exemption increasing from £11,300 to £11,700;

• The Inheritance Tax nil-rate band will stay at £325,000 but the Residence Nil-Rate Band (the rather complicated allowance for those who, when they die, pass their private residence on to family members) was increased to £125,000. So a couple who die and pass the property they have lived in to their family would not have to pay any Inheritance Tax unless the value of their joint estate exceeded £900,000;

• Those receiving the State Pension will be pleased at the 3% increase in their pension payments. If they also have savings, the Bank Base Rate increase could mean that they also might receive a bit more income from their savings;

One useful allowance that has been continued is the Rent-A-Room scheme whereby you can rent out furnished rooms in the home you live in and make up to £7,500 free of tax. You can let as much of the house as you wish as long as you live there as your residence.

Pension Bits and Pieces

The older of us have often worked in many jobs and often with each job came some sort of pension arrangement.


When approaching age 55 or older, it is worth gathering all of these pieces and working out how you want to use them. Where such bits and pieces go back quite a ways in time, the Government can help you locate them through their free Pension Tracing Service(0345 600 2537). If you are not sure when your State Pension comes into effect, you can find out by searching “Check Your State Pension Age.gov.uk”, and for your State Pension Forecast search “Check Your State Pension.gov.uk”.

 

An Important age – 55!

In today’s financial world reaching 55 carries with it certain opportunities. 55 is the minimum age at which one can take most pension benefits (with the key exception being the State Pension which is no longer age 65 for most people).

It is also the minimum age at which a person can take out a Lifetime Mortgage.

PENSION FREEDOM

You can take your pension benefits from age 55, but be aware that taking the benefits early could restrict how much you could then continue to contribute into a pension.

Contact us for more details.

Also, if you have built up substantial pension benefits over the years, be aware that there is a Pension Lifetime Allowance. Pension savings made in excess of that could result in having to pay charges. Contact us if you have questions about this.

RETIREMENT MENU

Cash please

Those who are 55 and older can now draw out all (!) of their pension fund as cash. So you can ask to have it all as cash (!)   BUT…

Tax! The downside is that with each pension only 25% of the fund can be taken tax-free.

Any amount that you take over and above this tax-free 25% will be taxed as if you had earned it in the Tax Year in which you draw it out. That amount is added to your other income and is taxed accordingly.
Example:
A person aged 55 is earning £20,000 per annum and paying about £1,800 in tax on those earnings. He has a pension fund worth £40,000 and he wants to take it all out. He would get the first £10,000 tax free. The remaining £30,000 would be added to his £20,000 other earnings and he would be taxed

as if he had earned £50,000. This would result in him paying £9,200 in tax instead of £1,800. So he would lose £7,400 of his £30,000 pension to the taxman. A person already earning enough to put him in the higher rate tax bracket (40% tax where the total income exceeds £43,000) could lose 40% of the money he takes out over and above the tax-free amount. In our example of a £40,000 pension fund, he would still get the £10,000 tax-free but lose £12,000 of the remaining £30,000 in tax). Therefore it is important to take tax into account when working out when to take money out of the pension.

(Note: this article refers to personal pensions only; the rules are different for a Final Salary Scheme where the benefit is based on the salary and years of service and some other special types of  pensions.)

Income Options

(Note: all these options assume that you take out the tax-free cash.)

Option 1: Leave the balance invested with the option to take out further funds in the future – either when your need is greater or when your tax position is more advantageous. This is called a Flexi-

Drawdown arrangement as it provides the flexibility for you to draw out whatever sums you want at any time you want them. But remember that once you have drawn out the tax-free element, any other monies you take out will be taxed. Such an arrangement also involves investing your pension fund so you would need to consider both the risk that comes with such investments as well as the provider’s charges for running the pension.

Option 2: Use the balance left over to set up a guaranteed income for life (an “annuity”). The amount of income received would depend on your age – the older you are, the more you would get. The amount of income you would get also depends on your state of health – the worse off you are health-wise, the greater the income you are likely to receive. You can set it up on just your life or so that it covers both you and your spouse/partner. The idea of guaranteed income is attractive but the current annuity rates are quite low so the amount of money you can obtain may be a bit disappointing.

Option 3: Take a short-term guaranteed income (a “temporary annuity”). This pays out a guaranteed level of income for a fixed number of years and then pays out a guaranteed sum on maturity – which can then be used again in Option 1 and 2 above or to repeat this Option 3 for a further term of years.

News

It is still early days but there is a surprising resilience in the property and financial markets

following the BREXIT vote. Residential property prices have remained reasonably stable

and mortgage rates remain at the lowest levels on record.

Pensions and taking the benefits from them, however, remain a complicated area. To help understand

the options here follows: A New Retirement Menu for Personal Pensions. We know that the subject

of pensions is confusing to most people, so do feel free to contact us with your questions. Do note

that the “Retirement Menu”  relates to Personal Pensions only. The regulations for Final

Salary Pensions where the benefit is linked to years of service and salary are different.


Menu to follow ......

STRIVING TO MEET EXPECTATIONS

By survey what our clients value, and why they continue to come back to us, is our independent and unbiased advice on financial matters and mortgages, utilising our extensive knowledge and know-how gained over the last 35 plus years.

Here are a few recent client comments:

“Thank you so much for being super quick and efficient and guiding us through this. I have already recommended your services to 2 of my friends and am sure we will have some more work coming your way in the near future.”  – Mr RW and Ms NF of Kent

“Many thanks for all your patience, guidance and expertise in arranging this for us, your help is much appreciated.”  – Mr & Mrs PL of Redhill, Surrey

“Usual thanks and best wishes for excellent service.” – Mr IB of Leeds

“As ever your advice is clear and constructive; we will certainly come back to you as and when we decide to take the next step.”   – Mr & Mrs AM of Uckfield, East Sussex

 

THE NEW STATE PENSION

From the 6th of April 2016 the new State Pension came into effect. In order to make it as fair as possible, those who have been building up State Pension benefits before that date will have a

“Foundation Amount” calculated. This basically represents the value of the State Pension benefits

built up under the old rules. To that will be added the benefit built up from the 6th of April 2016 up to their normal State Retirement Age.

As would be expected, there are some winners and some losers in this change-over. The best thing to

do is to request a State Pension Forecast – www.gov.uk/state-pension-statement. Their telephone number is 0345 3000168. This will confirm what your State Retirement Age is and also whether you have any “holes” in your National Insurance payment record which you may be able to fill.

HELP WITH FINDING LOST PENSIONS

Commonly people have accumulated various pension entitlements over the years and many have lost track of them. The Government provides a Pension Tracing Service which will help you locate any of your past pension benefits. For details of how to use this Tracing Service (which is free), google Pension Tracing Service or ring them on 0800 1223104.

TAX NOTES for 2016/17

Personal Allowance      £11,000 (reduced for those with incomes over £100,000)

20% Rate Tax Band     £32,000 (adding in the personal allowance of £11,000 means

                                            that your income would need to be in excess of £43,000

                                            before the 40% rate starts to be charged)
Dividend Income Nil

Rate Band                   £5,000

Personal Savings

Allowance                   £1,000 (basic rate taxpayer), £500 (higher rate taxpayer)

ISA Allowance             £15,240 (same as last year)

Lifetime Pension

Allowance                   £1 million

Inheritance Tax Nil

Rate Band                   £325,000 (same as last year)

Annual Pension

Allowance                   £40,000 (reduced for those with income in excess of £150,000)

Rent-A-Room

Allowance                   £7,000 per annum - tax free (up from £4,250 last year)

State Pension              New Single Tier State Pension comes into effect

PENSION “FREEDOMS” – AND DANGERS!

As predicted 2015 was a Year of the Pension with many people taking the opportunity to access the money they had in their pensions.

The Government hastened to get out warnings about consequences of doing this unwisely. Not the least of these was that the person could run out of money in retirement! An important warning in this regard was issued by Department for Works and Pensions. They issued a factsheet confirming that if people “spend, transfer or give away any money taken from a pension pot” they could be considered to have “deliberately deprived themselves of that money” to secure or increase benefits. This could mean a person later on being ineligible for State benefits that he might otherwise have had. For further information on this, visit the Department for Works and Pensions website and search on “Pension flexibilities and DWP benefits.”

Improving your State Pension!

If you don’t qualify for any basic State Pension or you qualify for less than the full amount based on

your own contributions, you may be able to make a payment to top it up by 6 years and/or you might

be able to qualify for more through your spouse or civil partner’s National Insurance contributions.

Contact the Department of Work and Pensions for help on this – 0345 3000168.

Note: The above information is extracted from the Department for Work and Pensions pamphlet DWPO23

Extra State Pension!

You can choose to get extra State Pension if you put off claiming your State Pension for 5 weeks or more.

When you do claim, you will get a higher weekly State Pension for the rest of your life. The amount of extra State Pension you get works out at 1% for every 5 weeks you have put off your claim (about 10.4% for a full year). If you intend to work past State Pension age, this is worth considering.

SOME TIPS ABOUT MAKING THE MOST OF YOUR STATE PENSION

The State Pension is a regular payment you may get when you reach State Pension Age. The payment will increase each year. It is based on the National Insurance contributions which you paid, you were treated as having paid, or were credited to you during your working life.

To find out when you would receive your State Pension and how much it might be go to: www.gov.uk/state-pension