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.

39 years!

Sovereign Finance enters its 39th year of trading in 2020. With the new Government it looks like it will be a year of changes although BREXIT is likely to still remain the focus of political attention for some time to come. As regards personal finances, our view continues to be Stay Calm and Carry On. We will need to wait and see what changes will be made in tax and personal allowances but they are unlikely to be altered before the new tax year.

TAKING THE BENEFITS – THE RETIREMENT MENU Minimum Age 55

Cash please: You can take a maximum of 25% of the value of your pension funds. For example, if you had a pension with a value of £50,000, you could take £12,500 free of tax. (Note: this applies to personal pensions; the rules are different for Final Salary Schemes where the benefit is based on the salary and years of service.)

All as cash please! In fact you can withdraw the total value of your pensions as cash. The downside is that the amount you take, over and above your 25% tax-free element, is subject to tax as if you earned it in the Tax Year you take out the cash. This can result in a very substantial tax bill so do check out the tax ramifications before acting!

Income please (after you have taken your tax-free cash) Option 1: Take a guaranteed income for life (Lifetime Annuity). Option 2: Take a guaranteed income for life but at a higher level if you have a serious medical condition or problematic 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 of the term so you can then review your options again (Temporary Annuity). Option 4: Transfer your pension fund into a Flexi-Drawdown Pension. You can then leave the money invested at any risk level that suits you and you have the option to withdraw a regular amount of income or take an occasional lump sum. (Note: For all of the income or cash withdrawals listed above, once you have had your tax-free cash, will be taxed as earned income.)

INVESTMENT BOND – A USEFUL FINANCIAL TOOL

If you are willing to take risk with some of your savings, one useful and historically successful tool, is an Investment Bond. Within the wrapper of the Investment Bond your money is invested in funds that invest in stocks and shares and bonds and property, etc.. The Investment Bond has special features. One of the most attractive one is that you can withdraw up to 5% (of the amount you originally invested) in each 12 month period free of tax in the year you withdraw it. It is considered a partial return of capital, i.e. of your original investment. Note: Ultimately there is a tax reckoning when the bond is cashed in but usually tax would only be chargeable on the profits made with the bond if the person concerned is a higher-rate taxpayer when he encashes it. Another feature is that the monies held in an investment bond currently are excluded in the calculations of savings when local authorities work out eligibility for funding nursing home care.

“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.

REMINDER – TAX BANDS IN THE NEW TAX YEAR (2019/20)!

Here are the new Income Tax bands that come into force from the 6th of April:

• Personal Tax Allowance - £12,500

This is the amount that an individual can earn before he pays any tax at all.

• Basic Rate Taxpayer (20%) - £37,500

This is the amount of earnings over the £12,500 that an individual would pay 20% tax on. So you would have to earn in excess of £50,000 before you started paying higher rate tax.

• Higher Rate Taxpayer (40%)

This is the amount over and above the Personal Tax Allowance and the Basic Rate. 40% tax would be charged on earnings from £50,000 to £150,000.

• Above that is the Additional Rate of Tax, i.e. 45%. So earnings over £150,000 would be charged at 45%.

Other tax matters to note are as follows:

Capital Gains Tax Exemption - £12,000

Inheritance Tax Nil-rate Band - £325,000

(unchanged from last year)

Rent-a-room relief - £7,500 per annum

(unchanged from last year)

Pension Lifetime Allowance - £1,055,000

Annual Pension Allowance - £40,000

(subject to earnings)

THE AUTUMN STATEMENT!

There was not much announced in the Chancellor’s October statement that was new, but it is

worth taking note of the key tax changes from the 6th of April 2019.

Personal Tax And Benefits Changing From 6 April 2019

• The Personal Allowance (the amount that you can earn before you have to start paying any tax)increases from £11,500 to £12,500.

• The amount you can earn over and above this Personal Allowance and pay only 20% tax increases

to £37,500. This means that in the new Tax Year you will only pay 40% tax on earnings you make in

excess of £50,000 per annum.

• Earnings you have in the new Tax Year above £150,000 will be subject to 45% tax, the “Additional Tax Rate”. (Note: if you earn £100,000 or more, your entitlement to the £12,500 Personal Allowance will be lost progressively until it is gone completely for those earning £122,000 or more.)

• The Individual Savings Account (ISA) contribution limit will remain the same at £20,000. This includes the total of all payments in the year to any ISA.

• The Capital Gains Tax allowance increases from £11,700 to £12,000.

• The Inheritance Tax Allowance nil-rate band remains the same at £325,000. For those married or in a civil-partnership each can claim this allowance, so effectively, their joint estate would have to be worth more than £650,000 before Inheritance Tax would have to be paid. However, for those with residential property that they are leaving to direct descendants there is also the additional “Residence Nil-Rate Band” which increases in the new Tax Year from £125,000 to £150,000. This is a rather complicated calculation and you should take tax advice regarding it. The Inheritance Tax rate remains at 40%.

• The Pension Lifetime Allowance will increase from £1,030,000 to £1,055,000.

• We understand that the Rent-A-Room relief will continue at the level of £7,500 per annum so those
renting up to two rooms in their own home can earn up to this amount without a tax liability.

“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.)

NEW TAX ALLOWANCES

Here are the new tax allowances effective from 6 April 2018:

• Personal Tax Allowance (the amount you can earn before paying any tax at all) goes up to £11,850 per year;

• Basic Rate Tax Band goes up to £34,500 per year (so a person would have to earn in excess of £11,850 plus £34,500, i.e. £46,350, before they would start having to pay 40% tax);

• Capital Gains Tax (the amount of profit you can make on a transaction such as sale of shares before you have to pay tax) goes up to £11,700;

• Inheritance Tax nil-rate band (the amount that an estate has to be valued at before an Inheritance Tax/Death Duty has to be paid) stays at £325,000 but the extra allowance, which can be achieved by leaving the main residence to direct descendants, goes up to £125,000;

• The ISA (Individual Savings Account) limit remains at £20,000;

• Rent-a-Room Scheme tax allowance remains at £7,500 per annum (this is from the letting out of furnished accommodation in your home).

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.

PENSIONS UNDER THE GUN

The Government, as it comes under pressure to make savings, continues to eye the tax advantages that pensions have – particularly as regards the tax-free cash that can be taken out. If you are looking to take your pension benefits, you might want to look to do that sooner rather than later. The same is true if you are looking to top-up your pension. Depending on your income currently you (or your company on your behalf) can put up to £40,000 per annum into your pension and get tax relief on it. For a basic rate taxpayer that means by contributing £32,000 he can get £8,000 from the Government to boost it up to the £40,000. A 40% taxpayer could end up with the £8,000 from the Government to boost it up to £40,000 and also get a further £8,000 in tax relief. It is worth reviewing your pension

planning. We can assist.

BUY-TO LET SLOWING DOWN

The Government’s actions of increasing the Stamp Duty on buying a second property, and also making letting less attractive tax-wise, has slowed the property market down. Those looking to start or continue letting need to become familiar with the new rules so as to make sure the activity remains profitable.

A NEW TAX YEAR!

As we thaw out from a remarkable period of cold weather, we move into the new

Tax Year with some uncertainties. Interest rates have started an upward move although

the Chairman of the Bank of England has promised that these would be small and far apart.

Brexit still is the focus of most of the Government’s attention when there are a number

of other areas that should be dealt with. Nevertheless, personal financial matters to be

addressed are pretty much the same as they have been for quite a while, i.e. getting the

best possible mortgage rate, while also making savings – using pensions or ISAs and

ensuring those savings make as good a return as possible.

Pension Freedoms

The majority of pensions now basically consist of a pot of money. The current rules allow a person aged 55 or older to take 25% of the value of this pot tax-free. The rest can be used to set up an income for life or to draw down lump sums when needed. Any of these remaining funds that are taken out or turned into income are taxable. They are treated the same way as any other earned income in the year they are taken.

While the majority of people we see have the relatively simple type of pension described above, there are some complications with older pensions where there are certain guaranteed benefits built into the plan. It is worth having such plans looked at by a professional to ensure you are not missing out.

There are also many people who still will be able to benefit from better pension schemes termed

“defined benefit or final salary pensions” as they guarantee an income based on years of service and salary. We are available for assistance with such matters. Just give us a ring.

TAX-FREE SAVINGS ACCOUNTS

The ISA (Individual Savings Account) is the most commonly used tax-free savings plan. From the

6th of April 2017 the limit that one can put into ISAs in this tax year is £20,000. There are various ISA choices which one can use but the total in the year cannot exceed the £20,000.

YOUR ISA MENU

A. The “old fashioned” simple ISA – can be invested in cash or stocks and shares. Good for anyone.

B. Junior ISA – only for those under 18. Anyone can pay into it for the person concerned,  e.g. grandparents. The maximum annual contribution is £4,080.

C. Help to Buy ISA – Only of real use for someone looking to save specifically to buy their first property. Anyone over 16 can start one, but the bonus from the Government is only added when the person actually buys their first property. If monies are taken from the Help to Buy ISA for other than purchasing the person’s own first home, no Government bonus is added to the monies withdrawn. The maximum that can be saved in the Help to Buy ISA is £1200 initially and £200 per month thereafter up to a maximum of £12,000. The Government bonus added is 25% up to a maximum of £3000.

D. Innovative Finance ISA – High risk. You lend your money through websites regulated by the FCA (Financial Conduct Authority). These are known as peer-to-peer lending platforms or “crowd-lending”. The expected return is approximately double the rates offered by Cash ISA providers. For more information go to MoneySavingExpert.com – “Peer to Peer Lending”

E. The new Lifetime ISA (Lisa) launched 6 April 2017. This is only available for those aged 18 to 40. It is complicated but generally it would suit someone saving for buying their first property or as an alternative to a pension – particularly for someone who is self-employed. The maximum you can put in is £4,000 per annum. The Government will add a 25% bonus each year. The Lisa can be invested in cash, or stocks and shares. Note: The 25% Government bonus is added annually to what you put in, but monies cannot be withdrawn before age 60 unless it is being used for buying a first home. After age 60 it can be used for any purpose. Withdrawals for any purpose other than the home purchase before age 60 are subject to a 25% penalty. The Government will only add its annual 25% bonus for monies put into the Lisa up to age 50.

Note:

Lisa's are not yet broadly available as many providers consider them too complicated. Search the Internet if you want to know what choices there are.

ENJOYING ACCESS TO ONE’S PENSION SAVINGS

Over the last couple of years we have assisted many clients to access their pensions – either for lump sums to help family members or other projects, or to set up a regular income to supplement their current income.

The minimum age for accessing pension benefits currently is 55. Most people will be able to take 25% of the pension fund value as a tax-free cash lump sum. You can also access more of the pension but money taken this way is taxable and may affect your ability to add money to a pension in the future. Please contact us if you wish to find out what options are available to you with your pensions.

WELCOME TO THE NEW TAX YEAR!

TAX NOTES FOR 2017/18 from the Budget

Personal Allowance £11,500 (reduced for those with incomes over £100,000)

20% Rate Tax Band £33,500 (adding in the Personal Allowance of £11,500 means that your income would need to be in excess of £45,000 before the 40% tax rate would start to be charged)

Annual ISA Allowance £20,000 (up from £15,400 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 incomes over £100,000)

Rent-A-Room Allowance £7,000 per annum tax free (same as last year)

National Living Wage £7.50 per hour (up from £7.20 per hour last year)

INHERITANCE TAX CHANGES

Announced last year, from April 2017 there will be additional Inheritance Tax relief for those passing

residential property down to their children. This will be in addition to the £325,000 Inheritance

Tax relief for each individual. This will be an extra £100,000 in 2017/18 and will increase over the

coming years until it reaches £175,000 in 2020/21. While this is good news for many, the details

are rather complex so it is worth some study. It is called the Residence Nil Rate Band (RNRB). Go to

www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band for more information.

PENSION FACTS

If you pay into a personal pension, for every £100.00 you put in, the Government adds £25.00. And, if you are a higher rate taxpayer, you will get a further £25.00 off your tax bill. This makes saving by means of pensions a very attractive option – particularly for those paying higher rates of tax. If you are a higher rate taxpayer, however, do be advised that the Government is seriously considering reducing pension tax relief for higher earners.

It would be a good time to look and see about maximising your pension contributions. You can pay up to £40,000 each year into a pension (subject to your earnings) and may also be able to catch up pension payments from the last 3 years if you have not paid the maximum in each of those earlier years.