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Pension death benefits – you can take it or leave it!

Archive for September, 2014

Pension death benefits – you can take it or leave it!

Monday, September 29th, 2014

pension-clock-red-text-31707942Those looking to pass on their pension fund on their death have received a boost as the Government have confirmed they’re following through on their promise to scrap the current 55% tax charge on death. This means the tax system will no longer penalise those who draw sensibly on their pension fund, making pensions a very attractive means of transferring wealth. Note that these changes apply only to defined contribution plans such as personal pensions; they don’t apply to defined benefit (final salary) pension plans.

What’s changing?

Your age at death will still determine how your pension death benefits are treated. The age 75 threshold remains, but with some very welcome amendments.

  • Death before 75 – On death of the pension policyholder their beneficiaries can take their remaining pension fund tax free, at any time, whether in instalments, or as a one-off lump sum. This will apply whether benefits have been drawn from the fund by the deceased or not, which means those in Income Drawdown will see their potential tax charge on death cut from 55% to zero overnight. Using the fund to provide beneficiaries with a sustainable stream of income allows it to potentially grow tax free, while remaining outside their estate for Inheritance Tax.
  • Death after 75 – Pension savers will be able to nominate who ‘inherits’ their remaining pension fund. This fund can then be taken under the new pension flexibility and will be taxed at the beneficiary’s marginal Income Tax rate as they draw income from it. Alternatively, they’ll be able to take it as a lump sum less a 45% tax charge.

What does this mean for advice?

Funding

Taken with all the other pension changes coming in April 2015, this creates a genuine incentive to save, knowing that family members can benefit from the remaining fund. It means that a pension will become a family savings plan, enabling one generation to support the next.

Drawing an income

The current 55% tax charge on death acts as a penalty for scheme members who take a sustainable income from their pension pot. The only way to delay this charge at present is for a surviving dependant (e.g. a spouse) to continue taking an income from the fund.

The new rules will mean that beneficiaries other than dependants may now benefit from the remaining fund, without suffering a 55% penalty.

Death before age 75 offers the option of a tax free lump sum. But it also allows the fund to remain within the pension wrapper which the beneficiaries would have flexible access to. Nominating a loved one to take over the flexible pension pot will also be a popular choice when death occurs after this age.

Making instructions known

It will become even more important that death benefit instructions mirror the scheme member’s wishes. A nomination or expression of wish will help to guide the scheme trustees in their decision making. You wouldn’t knowingly entrust what happens to your home or other assets on death to a stranger. If there are no instructions in place, you’re relying on the pension scheme trustees to second guess your intentions. And with such wholesale changes to the death benefit rules to come, you should revisit existing nominations soon.

All eyes on 3rd December

It’s worth stressing that more detail is awaited, particularly on the operational elements of how the new rules will work in practice. The next step is to see the full details in the Autumn Statement on 3rd December. We’ll provide updates on the final pieces of the pensions reform jigsaw, as it all starts to slot into place. Watch this space.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

With thanks to Standard Life technical department.

Corporate Bond fund risks – a consumer note from the FSA

Monday, September 15th, 2014

20sThe industry regulator has issued a puzzling statement about corporate bond funds.

In late July, the Financial Conduct Authority (FCA) published “some important considerations” for existing and potential investors in corporate bond funds. Quite what prompted the FCA to do so was not made clear: the Sterling Corporate Bond fund sector has been the worst seller in terms of net retail sales for six of the last twelve months according to the Investment Management Association.

The FCA spelt out three risk factors for investors to consider:

  • Liquidity This was probably the FCA’s reason for issuing the statement. The popularity of corporate bond funds has been accompanied by concerns about shrinking bond market liquidity. On both sides of the Atlantic, regulatory pressures have forced investments banks to cut back or withdraw completely from bond trading activities. This has not caused any major problems to date, but in the US the Federal Reserve, among others, has expressed concern about what might happen if a sudden rush of sellers finds no buyers. The FCA notes that “in very extreme market conditions fund managers could become unable to sell sufficient quantities of bond holdings to fulfil redemption orders, leaving investors unable to sell fund units.”
  • Interest rate risk “…as interest rates rise, bond prices fall,” said the FCA. This is basic investment mathematics, but it would have helped if the FCA had explained that not all ‘interest rates’ are the same. A rise in base rates (see “Interest rate hokey cokey”) will not necessarily mean a fall in corporate bond prices. Markets always try to anticipate events, so by the time the Bank of England does eventually dispense with a 0.5% base rate, prices will almost certainly have allowed for the rise (and possibly several more to come afterwards).
  • Defaults If the number of companies defaulting on their bond payments increases or appears likely to do so, then corporate bond values and hence corporate bond fund prices will fall. Defaults are currently at historically low levels, thanks to low interest rates and plenty of cash looking for a home. If interest rates rise across the board, the default picture could become less rosy.

This trio of risks is well understood by bond fund managers, although naturally they have different views on their potential impact.  This feeds through to the way in which their funds are managed. To quote the FCA again, “…it is essential to perform due diligence on individual funds to assess whether their investment strategies meet your requirements.”

Let us know if you think you may be affected.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Offshore = Outlaw?

Wednesday, September 10th, 2014

OffshoreHMRC’s never-ending battle against tax evasion takes another turn.  

In April, HMRC announced a new proposal to counter offshore tax avoidance. To brighten the summer days for accountants, four months later HMRC issued a consultation paper fleshing out their ideas.

HMRC want to introduce a new ‘strict liability summary criminal offence’ of failing to declare taxable income and gains arising offshore. The ‘strict liability’ aspect is causing some controversy in accounting and legal circles. Translated from legalese ‘strict liability’ will mean that to win a case, it will only be necessary for HMRC to prove the (non-)taxpayer has failed to declare offshore income and gains. This is much easier than the burden of proof under the current law, which requires HMRC not only to demonstrate a failure to declare, but also to show that this was done with the intention of evading tax. In other words, the Court must assess the defendant’s state of mind, which has allowed scope for pleas of ignorance to be successful.

There are currently very few ‘strict liability’ offences in tax law, and none covering direct taxes, so the plans are a clear ratcheting up of the HMRC armory. A major concern expressed by some tax experts has been that criminal prosecutions could occur because the taxpayer failed to understand this complex area of tax law. The paper suggests financial penalties could be as high as 200% of the tax involved and, in the most serious cases, there could also be a custodial sentence of up to six months.

At present HMRC are offering penalty-light disclosure facilities covering several offshore jurisdictions, but these will come to an end in 2016. At the same time, HMRC will begin to receive new information about overseas accounts. 2106 therefore looks a likely start date for the new offence.

If you need to get your tax affairs in order and come clean on any offshore dealings, it makes no sense to delay: it is always best for you to find HMRC before they find you.

Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Taking pension protection – Yes or No

Monday, September 8th, 2014

pension-clock-red-text-31707942You can now opt for Individual Protection 2014 to protect your pension benefits. But should you?

The lifetime allowance (LTA) effectively sets the maximum tax-efficient value of all your pension benefits. In its first iteration, in April 2006, the standard LTA was set at £1.5m. It then gradually rose to £1.8m before being cut twice: to £1.5m in April 2012 and £1.25m two years later. Accompanying the LTA’s introduction and each cut, various ‘protections’ were made available to help those people who found thevalue of their benefits was – or might become – greater than the new allowance.

The 2014 reduction came with two different types of protection. The first, Fixed Protection 2014, had to be claimed before 6 April 2014 and basically fixed your LTA at a minimum of £1.5m, provided no more contributions were made or benefit accrued after the end of 2013/14. The second, Individual Protection (IP 2014), was legislated for in the Finance Act 2014 and HMRC only started accepting applications in August.

You are eligible to apply for IP 2014 if, on 5 April 2014:

  • The value of all your pension benefits exceeded £1.25m; and
  • You did not have primary protection (a 2006 protection option) in force.

If you opt for IP 2014, your personal LTA will become the greater of:

  • The value of all your pension benefits as at 5 April 2014 (subject to a maximum of £1.5m); and
  • The amount of the standard LTA at the time you draw benefits.

You will not lose IP 2014 if contributions are made or further benefits accrued. However, this will only be the case if the value of your pension fund(s) fall, as their 5 April 2014 value will normally be the upper limit of your LTA.

If you have no existing protection and are eligible for IP14, then it is worth claiming – even if you are now using income drawdown – because your LTA will rise above the standard £1.25m. If you have one of the two fixed protections or enhanced protection, the decision becomes more marginal and you should take advice.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Interest rate hokey cokey

Friday, September 5th, 2014

interestInterest rates will surely rise but the question is when? The answer seems to depend on the day of the week.

Last month offered a number of conflicting answers:

  1. The Bank of England’s Quarterly Inflation Report  This was generally seen as suggesting that the first rate rise would be in the early part of next year. The Bank halved its forecast for earnings growth to 1.25%, which hardly suggests wage-driven inflation is around the corner. On the same day the Office for National Statistics said earnings (including bonuses) had fallen by 0.2% year on year. 
  1. Mark Carney’s Sunday Times interview  At the end of the week the Inflation Report was issued, the Sunday Times published an interview with the Bank of England’s Governor, Mark Carney. This produced the headline “Carney: rate hike before pay recovers,” which looked slightly at odds with the tone of the Inflation Report. 
  1. July inflation numbers  These came out two days after Mr Carney’s weekend press comments and once again tilted expectations towards a rise in the first quarter of 2015. Consumer Price Index (CPI) annual inflation fell to 1.6%, 0.3% below June’s figure and 0.2% less than consensus forecasts. The previous month had seen an unexpected increase, which July’s dip suggested was a blip, possibly due to the timing of summer sales. 
  1. Monetary Policy Committee Minutes  A day after the good news on inflation, the release of minutes from the Bank of England’s August meeting of the Monetary Policy Committee (MPC) showed two of the nine members voting for an immediate rate increase. It was the first time in over three years that there had not been complete agreement on holding a 0.5% base rate.

The will-they-won’t-they show returns in November, with the next Inflation Report. In the meantime, it would appear that the foreign exchange markets have decided UK interest rates will stay on hold until the New Year: in August the pound fell further against the dollar, leaving it about six cents down from its start of July  peak for 2014.

It’s still too tight to call, but savers may be able to see some light on the interest rate horizon soon.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Qeuro?

Friday, September 5th, 2014

eurozone-mapCould the Eurozone start what the US is about to stop?

The European Central Bank (ECB) has an inflation target of “below, but close to, 2% over the medium term.”

As of August 2014, annual inflation across the Eurozone was just 0.3%. Inflation has not been above 1% since September 2013 and, with a few minor blips, has been heading down relentlessly since a 3% peak in November 2011. The decline has been accompanied by next to no economic growth: figures released in August showed that no growth during the second quarter of 2014 in the economies of the three largest Eurozone constituents – Germany (-0.2%), France (0.0%) and Italy (-0.2%). For the Eurozone as a whole, the reading was zero, thanks to growth in Spain and the Netherlands.

There is now concern inside and outside the ECB that the Eurozone could suffer deflation (falling prices) and a miserable economic experience similar to that of Japan with its ‘lost decade(s)’. The ECB cannot cut interest rates any more – they are already negative for banks placing cash with the central bank. Mario Draghi, the ECB President, has now started to hint that the next step could be quantitative easing (QE). This would probably involve the ECB buying Eurozone Government bonds, echoing similar (and much earlier) action from the US Federal Reserve and Bank of England. If it happens, the ECB’s first round of QE could come on the heels of the end of the Fed’s bond-buying program, currently scheduled for October. The Bank of England stopped buying bonds in November 2012, although it still holds £375bn of Government stock.

At this late stage there are doubts about whether QE will work in the Eurozone. Medium term interest rates are already very low and the possibility of QE has pushed yields on 10 year German Government bonds below 1%. Nevertheless, the mere prospect of QE gave an August boost to Eurozone share values.

It will be worth keeping an eye on developments in our European neighbourhood.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.