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.

A NEW RETIREMENT MENU FOR PERSONAL PENSIONS!

RETIREMENT MENU

Minimum age 55

(Note: different rules apply to Final Salary/Defined Benefit Pensions and some other schemes)

Cash please

You can have it all as cash but only 25% of it tax-free. You will be taxed on whatever else you take out in the same way as if you had earned it in that Tax Year.

Income please Option 1: You can still get an income guaranteed for life (Annuity -see further

notes below)

Option 2: If you have health issues you may be entitled to a higher guaranteed income for life (Enhanced Annuity)

Option 3: Draw an income from your pension fund itself (Drawdown)

Option 4: Use a guaranteed fund to protect your investment but still be able to take an income (Guarantees).

State Pension please  The State Pension is increasing but the State Pension age is also going please up. To find out when you will receive your State Pension go to www.gov.uk/calculate-state-pension.

“Side Dishes”

You may have other sources of income to help in retirement. This might be investment income, or rental income from an investment property or income from letting out one or more rooms in your home  (Rent-A-Room scheme allows you to earn up to £7500 tax-free).

More on Annuities 

There are a variety of annuities available. The general concept is that you use all or some of your pension fund to buy a guaranteed income for life or for a specified period. The older you are, the more income you will get for your money. The guaranteed income can be for the person with the pension and a spouse or partner – to go on for as long as the last survivor is alive. The annuity can provide a level income or an increasing income. There are also annuities which are linked to investments so they can go up or down.

More exotic dishes

The pension rules are different for other types of pensions. If yours is not a personal pension, do feel free to contact us for guidance.

A BUDGET WITH PROMISE AND PROMISES!

The Chancellor’s March Budget was aimed primarily at helping UK businesses increase their production but it also includes a number of new measures affecting savings and pensions – some effective immediately and some promised for April 2015.

Pension Changes

The most revolutionary announcements relate to personal pensions. With immediate

effect those who are aged 60 and over can cash-in small pension pots – up to 3 different

pots and to a maximum of £10,000 in each pot. 25% of the pot can be taken as tax-free

cash with the balance being taxed as if it were earned income. The Chancellor has also

increased the “Triviality” limit whereby a pension fund of up to £30,000 can be taken as

cash (25% tax free) if that is the only pension benefit a person has. The promise is that by

April 2015 this freedom to access the money in your pension pot will apply to the whole

pension for those aged 55 and over. Here again 25% of what you take out will be tax-free

and the balance will be treated as earned income.

The Chancellor wants to enable everyone to be able to access their pension savings at any

time after age 55 and without having to purchase an annuity – although an annuity may

well still be the best choice for many. With immediate effect he is increasing the level of

income a person with an Income Drawdown Pension can take each year. Those who have

a guaranteed pension income of at least £12,000 will be able to access all of the money in

their pension fund.

Income Please

Income please


After you have taken your tax-free cash

Option 1 Take a guaranteed income for life (Annuity).

Option 2 Receive a higher guaranteed income for life due to an adverse medical condition or medical history or history of smoking (Enhanced Annuity).

Option 3 Take a fixed income for a period of time (usually 5 years) and have a guaranteed amount left at the end so you can then review your options (Temporary Annuity).

Option 4 Get an income which can possibly increase depending on the underlying investments (Investment Based Annuity).

Option 5 Leave your monies invested with the option to draw an income from the fund itself (Drawdown). There are two possibilities here.

The first is called Capped Drawdown. With this one the maximum you can take is based on your age and the value of the pension fund. The second is called Flexible Drawdown. This allows you to take out as much as you want from your pension fund – but only if you already have a guaranteed pension income of at least £20,000 per annum (this can be made up of the State Pension and Private Pension income but cannot be made up of other earned income or investment income).

TAKE ADVANTAGE OF THE VALUE IN YOUR PROPERTY

As more and more older people need to take advantage of the value in their residential properties to help supplement income or for home improvements, the Equity Release market is growing. With the increased competition there is more choice and better interest rates. If you are in a position where you may need to consider this, we will be pleased to assist in researching the options for you without cost or obligation. Just give us a ring on 01342 313302 or email us. Note: the minimum age for Equity Release is usually 55. In the case of a married couple, the younger of the two would have to be at least 55 years of age.

OTHER OPTIONS FOR INCOME IN RETIREMENT

While pensions are traditionally the way most people will provide for themselves in their later years, they are not the only option. Many people have greater faith in property and will build up a portfolio of residential investment properties producing a net rental income and the possibility of an increase in the property values. Mortgages for Buy-To-Lets have become very competitive and still can be done on an interest-only basis in order to maximise the income produced. Please contact us if you require any further information about Buy-To-Let mortgages. Other savings such as Individual Savings Accounts and stocks and shares generally can also provide an income in retirement. The return on cash investments is not very good currently but has been better in the past. The income from shares in the way of dividends can provide a very useful source of retirement income, for those who understand the risks and are willing to take them. Pretty much a last resort for income or a lump sum in retirement are Equity Release Plans. They are available from age 55 (note: for a couple the qualifying age is determined by the younger of the two). Interest rates and costs for these options have been going down, so they are worth reviewing if needed. We would be happy to provide quotes and clarify the options for you.

Getting the most out of your Pensions

From age 55 onwards you can take benefits from private pensions, although the State Pension will not start until you reach your 60s. Note: to get the date for when your State Pension will start, go on line and google “State Pension Age Calculator” and follow the simple steps. There are a number of ways you can take your private pension benefits and you should take advice to ensure you understand all your choices and to work out what would be best for you. Your financial circumstances, age, and state of health will all need to be taken into account to work out what Tax Free Cash you might want to take and how and when you may want to draw an income. Research has shown that unexpected changes can occur early in retirement with 31% of retirees within the first five years of retirement experiencing worsening health, 10% being diagnosed with a serious illness and 26% needing to help family members financially. These are all points that should be discussed in working out how to best use your pension assets. We would be pleased to use our experience and expertise to assist you.

COMPULSORY WORKPLACE PENSION

This problem of lack of saving towards retirement is not a new discovery and the Government has sought to help address this with a compulsory workplace pension for all who are employed. This was established as a legal requirement in October 2012 but will take about 5 years to roll out to reach all employers. They have started with the larger employees and between now and 2017 all employers will have to set up a company pension scheme and this will include mandatory contributions by both employers and employees to the employees’ pensions. In many cases employers already have a company pension which can be adapted to the requirements of the Compulsory Enrolment legislation. If a company does not have a pension scheme, it will need to make its own arrangements. The requirements are very precise and employers will need to allow adequate time and resources for putting them in place. It is recommended that an employer starts dealing with this 12 months before their “Staging Date” – the date at which they are required to have the Workplace Pension up and running. Note: an employer can find out when it’s Staging Date is by going on-line to: www.thepensionsregulator.gov.uk/employers

Advance Warning

Some significant changes in financial services are to come into effect at the end of 2012. The Financial Services Authority will be replaced by two(!) new regulators – the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). Along with this change are requirements for higher standards for financial advisers and a move away from commission being paid for investment advice to advisers charging fees. Firms of advisers also need to decide whether they will provide advice from the whole market and qualify thereby as "independent" or will work with a specified set of suppliers and then be termed as providing "restricted advice". We will continue to provide independent advice. Contact us on 01342 313302.

Pensions – Looking For A Better Income

INCOME PLEASE – (after you have taken your tax-free cash)


Option 1: Take a guaranteed income for life (Annuity).

Option 2: Receive a higher guaranteed income for life due to an adverse medical condition or medical history or history of smoking (Enhanced Annuity).

Option 3: Take a fixed income for a period of time (usually 5 years) and have a guaranteed amount left at the end so you can then review your options (Temporary Annuity).

Option 4: Get an income which can possibly increase depending on the underlying investments (Investment Based Annuity).

Option 5: Leave your monies invested with the option to draw an income from the fund itself (Drawdown). There are two possibilities here. The first is called Capped Drawdown. With this one the maximum you can take is based on your age and the value of the pension fund. The second is called Flexible Drawdown. This allows you to take out as much as you want from your pension fund – but only if you already have a guaranteed pension income of at least £20,000 per annum (this can be made up of the State Pension and Private Pension income, but cannot be made up of other earned income or investment income.)

Pensions – Looking For A Better Income

ALL AS CASH PLEASE!


If you are aged 60 or older and the total value of all your pensions is less than £18,000, you can take it all as cash. 25% is tax-free and the balance is taxed as if it were income you had earned in that tax year. If you cannot take advantage of that option, but have a couple of very small pension pots (£2,000 or less), you can do the same with them – up to two such small pots per person.

Pensions – Looking For A Better Income

CASH PLEASE


You can have a maximum of 25% of the value of your pension funds (This refers to personal pension; the rules are different for a Final Salary Scheme where the benefit is based on the salary and years of service.). So, if your pension funds total up to £20,000, you can get £5,000 as tax-free cash. If they are worth £100,000, you can have £25,000 tax free.

Pension changes

There is no doubting that the pension system has been in need of change for a while. The current retirement age was set before the dramatic increase in life expectancy we have experienced. Medical advances mean retirement, which previously lasted only a few years, can now last nearer 20. Indeed, it is widely reported that the state system is overwhelmed but few people have made an effort to obtain alternative cover. As a result, the UK pension system is undergoing various reforms aimed at addressing these issues and building a retirement system suitable for the future.

Most recently, we have seen plans to increase the retirement age . Women are already being brought in line with men through an increase in retirement age to 65, after which both will be raised from 65 to 66, then to 67 and, ultimately to 68. Personal Accounts - to which employers, employees and the Government will all contribute – are being launched from 2012 to address the alternative provision issues. Pension benefits are once again linked to average earnings and a new approach to the second state pension system (SP2) ended ‘contracting out’ from 6 April 2012 .

Personal Accounts will probably be the most wide-ranging reform, and are scheduled to start towards the end of 2012. Employees will be enrolled automatically in the scheme (unless their employer runs an exempt alternative) and minimum contributions have been set. It is at least a start in the process of bringing our pension system up to date.

CAN I GET MORE THAN THE BASIC STATE PENSION?

In addition to the Basic State Pension, people who are, or have been, employed on a PAYE basis and earning above a set level, may be entitled to additional State Pension Benefits. This does not apply to the Self-Employed. Your Pension Forecast will also give you an idea of how much additional State Pension you may qualify for based on your employment history. This additional State Pension has been called by different names over the years, including the State Earnings Related Pension Scheme (SERPS) and most recently the State 2^nd Pension.

STATE PENSION – WILL I GET IT?

How do you qualify for it? The amount of basic State Pension you are entitled to is based on your National Insurance contributions record over your working life from age 16 until State Pension age. A minimum amount of contributions and/or credits is required to make a year count as a “qualifying year” towards your overall contributions record. The rules are a bit complex but the new rules basically require that a man or woman needs to have built up 30 qualifying years or more before their State Retirement Age to qualify for the full basic State Pension. Normally a qualifying year is one in which you have paid the full required National Insurance payments for your employment or self-employment. In some cases, however, you can build up qualifying year “credits” without having to have paid National Insurance payments, e.g. those getting Child Benefit or caring for someone who is sick or disabled, or those who are ill or unemployed.


So the obvious questions are “When will I get it?” and “How much will I get?” To find out when you will get it, you can go on-line to www.direct.gov.uk/en/pensionsandretirementplanning and go to “Calculating Your State Pension Age”. You input your date of birth and you will find out what your State Retirement Age will be. Unfortunately the previous retirement ages of 60 for women and 65 for men are changing – for the worse.

STATE PENSION – WORTH KNOWING ABOUT!

There is much discussion in the media about people having to work longer because they will not have built up an adequate pension. We do see this failure to make adequate provision on virtually a daily basis. Sometimes it is because the person’s income will just not stretch to it and in other cases, people simply prefer not to worry about saving for the long term. In any case there is at least one area where virtually everyone who works can rely on as regards a pension income – the State Pension. It may not be huge but it is still worth having! Many people lack information about the State Pension and how it might affect them, so we decided to cover the basic points here.

In 2012/2013 the Basic State Pension payment for those who qualify is up to £107.45 per week. This payment goes up annually in line with inflation. This may not sound a great deal, but to get a similar pension income from a personal pension you would need to have saved up over £100,000. It is worth having! You might be interested to know that the concept of a UK State Pension did not come about until 1908. At that time you needed to be 70 or over and you would receive £31.50 per year!

PENSION NOTES!

1. The usual minimum age to take pension benefits is 55 – male or female.


2. Normally you can take up to 25% of your pension fund as Tax Free Cash.

3. You do not have to retire in order to be able to take your pension benefits.

4. If the total of your pension funds is less than £18,000, from age 60 you can take it all as cash (25% Tax Free and the balance taxed as earned income).

5. If you have a couple of very small pension pots (less than £2000 in each pot), from age 60 you can take those as cash (25% Tax Free and the rest taxed as income).

6. You have various options when you take your pension benefits including:

a) An enhanced annuity if you have serious medical issues;

b) Taking your Tax Free Cash and leaving the balance invested until later with the option to draw income each year;

c) Taking an annuity that guarantees an income for as long as you live – level or increasing.

We can help advise on all of your choices so as to customise your pension benefits to meet your circumstances. Give us a ring on 01342 313302.

FIDDLING WITH THE ODDS

Please note that 2012 may be a good time for men in their 60s to take their annuities as some European legislation is changing the odds come the end of the year. The statistics have always shown that women, on average, live longer then men and annuity rates have reflected this. In December of this year, however, the European Court of Justice in its wisdom has dictated that both sexes must be treated equally in the matter of insurances. As regards annuities, this is likely to mean that men will get slightly worse annuities and women slightly better ones. So for those men who are in their mid to late 60s or older, it is probably a good time to get their annuity.

No more compulsory purchase

Britons are set to enjoy greater financial flexibility during retirement under draft legislation released by the UK Treasury ahead of the 2011 Finance Bill. From 6 April 2011, individuals will no longer be forced to buy an annuity by the age of 75 with the money that they have saved in their personal pension scheme. Instead, they will have the additional option of continuing to save or moving to a drawdown arrangement in which their pension pot is left invested and money is drawn out. Nevertheless, the measures include restrictions, notably the amount of money that can be withdrawn from a personal pension scheme at any one time. This will be limited to 100% of the equivalent single-person annuity that could have been bought with the funds in their pension pot. This restriction is intended to prevent individuals from withdrawing and spending all the money in their pension scheme and then calling on the state to support them. However, individuals can withdraw more than this amount if they can prove that they receive pension income of at least £20,000 per year. In this case, they can take out as much as they like. The increase in flexibility will end a rigid system in which individuals are forced to buy an annuity by the age of 75, even when annuity rates are particularly poor. An increase in life expectancy and an environment in which older people work for longer have made the 75-year cut-off appear progressively more unrealistic and draconian. Treasury figures show that 450,000 individuals bought an annuity in 2009, while 200,000 people are in income drawdown arrangements. According to Treasury figures based on data from the Financial Services Authority (FSA), approximately 50,000 people who are currently in drawdown arrangements could benefit from flexible drawdown, while an additional 12,000 people could access flexible drawdown. The National Association of Pension Funds (NAPF) has welcomed the additional flexibility, but also believes that the new rules are most likely to benefit those with large pension pots and multiple income streams. Many people are still likely to choose to purchase an annuity, which will provide a fixed income over their remaining lifetime. Moreover, NAPF warned that most people are simply not saving enough into their pension schemes, and urged the government to do more to encourage and support strong occupational pension schemes and “creative, flexible” ways for individuals to save for their retirement.

PENSIONS – RINGING THE CHANGES

While we are still awaiting final approval of the Finance Bill, the writing on the wall looks in pretty permanent ink. 75 will cease to be the age for compulsory annuities. Those reaching 75 years of age will be able to maintain their pension options, including Drawdown. Maximum pension payments will be limited to £50,000 from 6 April next year. However, it will be possible for a person to pay up to a further £50,000 for each of the past three years – if he has not already contributed that much over those three years. Taking into account some of the other fine print, in fact, a person who had made no pension contributions in the previous 3 years could conceivably contribute up to £250,000 early in the next Tax Year.