PENSION INCOME OPTIONS

If you have reached the magic age of 55, you can draw your pension benefits from a private pension in a number of different ways. These include the following:

• you can use all the pension fund to buy an income guaranteed for life (annuity);

• you can take 25% of the pension fund and use the remainder to buy an annuity;

• you can take 25% of the fund tax-free and leave the remainder invested with the option to draw

out a regular income or lump sums as you wish;

• you can cash in the whole pension, receiving 25% free of tax, and the remainder taxed as if you had earned it in that tax year.

Note: Other than the 25% you can take tax-free, all other income or lump sums you take will be subject to tax, so it is very important to take advice on the tax you have to pay.

There are pros and cons for all of these choices. Do give us a ring if you would like to go over your options.

FREEDOMS AND REPONSIBILITIES

The new pension legislation provides the freedom to access your pension savings from age 55.

However, first you have to have saved up some pension savings to have access to (!) and secondly you need to exercise responsibility and judgement as to how you apply these freedoms to your own personal situation.

If you are approaching age 55 and have pensions and are looking to work how to use them, here are six useful steps to take:

1. Check what the value of each of your pension pots is;

2. Gather information and speak to experts so that you understand your options. Ensure you understand the risks involved and establish your own attitude towards investment risks; (Note: there are some pension funds that come with guarantees.)

3. Work out how long the money needs to last. Even if it is not the most pleasant of subjects, it does mean you need to give some thought to your life expectancy;

4. Work out what your expenses will be in retirement;

5. Understand the tax implications of taking income or lump sums out of your pension;

6. Shop around for the best deals or take on a professional adviser who can do this for you.

The Government has established free sources of guidance to help you with the above. The help

can be on-line (www. pensionwise.gov.uk), face-to-face at a Citizens Advice Bureau, or over the phone, The Pensions Advisory Service. Once you have had “guidance” you may wish to have “advice” and that is where we would come in. We can provide impartial advice based on our extensive expertise and knowledge of the subject.

LESS PROTECTION

Cash held in banks and Building Societies have been protected by the Government through the FSCS (Financial Services Compensation Scheme) for up to £85,000 for each banking group.

From the end of the year, however, the level of this protection will be reduced to £75,000. This is a reflection of the increase in the value of the pound against the euro. The underlying European legislation stipulates protection in euros - 100,000 euros. There is a five yearly review. In 2010 the value of 100,000 euros was £85,000. When the review was done earlier this year, 100,000 euros were determined to be worth £75,000, hence the need for the change. If you have arranged your finances based on the £85,000 rule, you will need to review your deposits and bring them down to the new £75,000 level which is the maximum protection in case the banking institution

the money is with goes under.

PERSONAL SAVING ALLOWANCE

From April 2016 the Government is introducing a Personal Savings Allowance which will exempt

the first £1,000 of savings income from tax for basic rate taxpayers and the first £500 for higher

rate taxpayers. This is in addition to the other allowances. From that same date there will no

longer be the automatic deduction of 20% income tax by banks and building societies on non-ISA

savings. From April 2016 there is also a new £5,000 dividend allowance for those who receive

dividend income.

HELP TO BUY ISA’s

The Chancellor has announced that their Help to Buy ISA will be available from the 1st of

December 2015. This can enable First Time Buyers to obtain a Government bonus of up to £3000

if they save up to £12,000 in the Help to Buy ISA. Note: the level of contribution will be limited to a £1000 one-off donation initially and then a maximum of £200 per month thereafter.

THE COST OF DYING – INHERITANCE TAX

The concept that a Government should be able to tax people when they die goes back many centuries as even Julius Caesar had a form of death tax.

However, it really surfaced in the UK in 1796 when “death taxes” were used to finance the war against Napoleon Bonaparte. We have been subject to one form or another of a tax on death since then.

Currently those who die and leave an estate are taxed at 40% on the value of the estate, i.e. the total value of all that a person owns, in excess of £325,000. If they leave their estate to a spouse or civil partner, there is no tax chargeable at that point. When the surviving spouse or civil partner dies, their £325,000 allowance can be added to their partner’s unused £325,000 Inheritance Tax Allowance. Thus tax is only then due on the amount of the estate in excess of £650,000.

The headlines from the July Budget was that the Chancellor would be protecting a family’s estate for up to £1,000,000. While that is good long range news, the facts are as follows:

• The current allowance (nil-rate band) of £325,000 is being frozen at £325,000 for the next two years.

• The increased allowance will only be phased in from April 2017 starting with an extra £100,000. That means it will not be until 2021 when the headline promised £1,000,000 provision would become available.

• The extra allowance will only be available to use in relation to residential property being passed on to children and their direct descendants.

MORE PENSION CHANGES

The Government has announced its intention to further review pensions and how they are treated tax-wise, and they are starting to crack down on pension benefits for the higher earners.

These restrictions on what higher earners can put into their pensions will come into effect from next April. While the annual maximum amount of pension contribution most people can put into their pension will remain at £40,000, those earning in excess of £150,000 will have this reduced on a sliding scale. Those earning in excess of £210,000 will have a maximum pension contribution allowance each year of only £10,000. The Government is also introducing a reduction in the pension Lifetime Allowance (the maximum one can accumulate in pension over his lifetime) from a total of £1.25 million down to £1 million from 6 April 2016.

The Government also announced it will be delaying its plans for setting up a market to allow individuals the freedom to sell their annuities. They have put back the planned starting date until 2017 to allow further studies to be done. There are further changes as to how pensions are taxed on death. Please contact us if you have any questions on these changes as they are somewhat complicated. Note: It is a very good idea to complete a letter of instruction to lodge with your pension provider to specify to whom you want the money paid in the event of your death.