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Auto-enrolment: employers need to be prepared

Archive for November, 2014

Auto-enrolment: employers need to be prepared

Friday, November 28th, 2014

pension-clock-red-text-31707942Under the automatic enrolment rules, all employers will have to enrol most employees into qualifying pension schemes. Employees can opt out if they wish, but it is a criminal offence to induce them to do so.

Four and a half million people have been automatically enrolled, which is around half the expected final total. The National Employment Savings Trust (NEST) recently revealed that around one in ten employees is choosing to opt out. Some pension providers and payroll systems have experienced teething problems, but generally administration appears to be running smoothly. Although, a recent TPR survey found that 20% of small employers and almost half of micro employers do not even know their staging dates.

The regulator has issued a strong warning to smaller employers: “the numbers of times we will need to use our compliance powers will rise.”

TPR recommends starting planning 12 months before your staging date. As TPR said, “Act now, be prepared or risk a financial penalty.”

If you need help in planning for and implementing automatic enrolment, please get in touch to discuss what you have to do.

Auto enrolment is regulated by The Pensions Regulator.

Inflation shrinks again

Friday, November 14th, 2014

20sThe latest data from the Office for National Statistics show that inflation is at a five year low.

The Consumer Price Index (CPI) fell to 1.2% in September, its lowest level since September 2009. A year ago it was 2.7% and in September 2011 the CPI peaked at 5.2%. The latest leg of the decline in inflation is partly due to a drop in food prices (about one tenth of the CPI “shopping basket”) which is running at -1.4% – yes prices are falling by 1.4% year on year thanks to good weather conditions, the supermarket wars and Russia’s decision to stop EU food imports. The recent sharp drop in oil prices has helped, too: transport inflation (15% of the basket) is running at just 0.1%.

Whereas his predecessor as governor of the Bank of England regularly had to write letters to the Chancellor explaining why inflation was running more than 1% above target (i.e. over 3%), Mark Carney is within 0.3% of having to justify inflation that is more than 1% below target. If that happens, Mr Carney will be able to say the UK is by no means unique: Eurozone inflation is just 0.4% and US inflation is 1.7%, both below target.

The low rate of UK inflation poses another problem for Mr Carney: what to do about interest rates. Over the last year the governor has consistently said that rates will rise, although his hints on timing have been somewhat variable. A 1.2% inflation rate eases the pressure on Mr Carney to act sooner rather than later. The Bank of England’s Chief Economist, Mark Haldane, said that in current conditions “somewhere in the middle of next year” was “not a bad bet” in terms of the first rate rise.

All of which means that if you are waiting for bank deposit rates to rise after over five and half years of 0.5% base rates, you probably have at least another six months to go – a situation which seems to have been the case for a considerable while…

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.

Pensions wealth – keeping it in the family

Thursday, November 13th, 2014

pension-clock-red-text-31707942The latest amendments to the Taxation of Pensions Bill firmly position flexible pensions as the estate planning vehicle of choice. Tax relief on contributions without the seven year wait for them to be outside the estate and tax free investment returns were already good reasons to recommend pension funding for client’s and their families.

Now combine these with the new rules where a flexible pension, such as a SIPP, allows pension wealth to cascade down the generations within the pension wrapper and it creates a truly tax-efficient wealth management and inheritance plan with few peers.

This article gives details on the recent amendments and the top 10 issues to consider with clients interested in passing on their accumulated pension wealth.

1. Wealth transfer vehicle
Retaining pension wealth within the pension fund and passing it down to future generations is an extremely tax efficient estate planning solution. It combines Inheritance Tax (IHT) free inheritance with tax free investment returns and, potentially for some beneficiaries, tax free withdrawals.

The new rules will allow holders of flexible pensions (but not members of Defined Benefit plans) to nominate an individual to inherit the remaining pension fund as a ‘nominee’s flexi-access drawdown account’. This can be anyone at any age and is no longer restricted to ‘dependants’. Adult children who have long since flown the nest can now benefit and don’t have to wait until 55 to access the money.

If the original member dies after age 75, any withdrawals will be taxed at the beneficiary’s marginal rate of Income Tax. But if death occurs before age 75, the nominated beneficiary has a pot of money they can access at any time completely tax free. In either case, the funds are outside the beneficiary’s estate for IHT while they remain within the drawdown account and will continue to enjoy tax free growth.

This could see a u-turn in strategy for those clients whose primary concern is maximising what can be passed on. The previous wisdom of stripping out funds and gifting the surplus income to minimise the impact of the 55% tax charge has given way to retaining funds within the pension as a more tax efficient solution.

2. And it goes on and on…..
The ability to pass on and on pension wealth doesn’t stop there. The nominated beneficiary can nominate their own successor who will take over the fund following their death – unlike the current rules which only permit a lump sum death benefit to be paid from a dependant’s drawdown fund.

This will allow accumulated pension wealth to cascade down the generations, whilst continuing to enjoy the tax freedoms that the pension wrapper will provide.

But this relies on the existing pension arrangement being able to offer the nominees’ and successors’ drawdown accounts. Some schemes may only be geared up to offer a lump sum death benefit which would lose the protection of the pension wrapper for IHT and any income tax payable would be shoehorned into a single tax year.

3. Tax rate determined by age at last death
Each time a pension fund is inherited by a nominee or successor, the tax rate will be reset by the age at death of the last drawdown account holder.

For example Joe, a widower, dies age 82 and nominated his son John to receive his flexi-access drawdown fund. As Joe died after age 75, John is taxable at his marginal rate on any income withdrawals. John sadly dies age 70 and leaves the remaining fund to his daughter Jenny. Jenny can take withdrawals from her successor’s drawdown account tax free as John died before 75.

4. Crystallised or uncrystallised what’s the difference?
Previously, those concerned with passing on their pension wealth to future generations would delay crystallising benefits to avoid a potential 55% tax charge should they die before age 75. This is no longer the case as both crystallised and uncrystallised benefits will have the same death benefit options and tax charges.

5. Testing against the Lifetime Allowance (LTA)
There’s no test where death benefits are paid after age 75 as these funds have already been tested. However, a new benefit crystallisation event is to be created to test uncrystallised funds which are taken as a dependant’s or nominee’s flexi-access drawdown against the deceased’s LTA prior to age 75.

This test doesn’t apply where benefits are taken as an annuity or scheme pension. But this would mean the income becomes taxable and can only be paid to a dependant.

6. Two year unauthorised payment charge has gone
Currently there’s a two year window to pay lump sum death benefits from uncrystallised funds without the payment triggering a potential 55% unauthorised payment tax charge. This tax charge will be removed from April 2015.

7. The new 2 year rule
But as one 2 year rule goes another one crops up in its place. Death benefits will only be tax free for deaths before age 75 if they distribute or the nominee flexi-access account is set up within two years of death.

Failure to designate the funds for drawdown within this two year window will see benefits taxable as income. Where funds are taxed as income they’re not also tested against the lifetime allowance. This could mean those with funds in excess of the LTA may want to weigh up the merits of delaying to see if the tax charge for exceeding the LTA is greater than the potential income tax charge payable by the nominated beneficiary.

8. Reviewing nominations
The new death benefit rules have changed the dynamics for those looking to pass on any remaining pension fund on death. This means revisiting existing death benefit nominations to ensure they continue to meet client’s needs and objectives. It’s also worth discussing whether their existing scheme will even allow their preferred solution.

And under the new rules, the scheme administrator cannot nominate someone for nominee’s drawdown if there’s an existing dependant or an existing nomination in place.

Don’t forget that a nomination doesn’t have to be all or nothing. It’s possible to nominate a number of different beneficiaries and to perhaps skip a generation with some of the fund.

9. Bypass Trust – when you still might want one
It’s worth remembering that each time pension fund is inherited it’s the new owner that has control over the eventual destination of those funds. Not only can they nominate who benefits on their death but, under the new flexibility, they could withdraw the whole fund themselves leaving nothing left to pass on.

This may be an issue where there are children from previous marriages or concerns about a beneficiary’s ability to manage their own financial affairs, either through a lack of capacity or their own reckless spending habits.

Where control is an issue, there are two potential solutions:

  • Nominate a split share of the pension fund, for example, 50% to the spouse with the remaining 50% split equally among the children. This gives all parties their own fund which they can manage themselves and when it’s gone, it’s gone.
  • Pay a lump sum death benefit to a Trust which will put the control into the hands of the member’s chosen trustees. The trustees can determine when and how much to distribute to beneficiaries. Choosing this option means only a lump sum can be paid to the trustees – there’s no option for them to be a drawdown holder.

10. Should I take my tax free cash?
The changes will see many behavioural changes on how benefits are taken. Currently, some pension savers delay taking their tax free cash until 75 to escape the 55% tax charge on crystallised funds. But what now with the 55% tax charge gone and equal treatment between uncrystallised and crystallised funds?

There’s no longer any reason to delay taking tax free cash if it can be gifted and outside the estate after seven years. But if the tax free cash remains in the estate and suffers IHT at 40%, it may be better to leave the cash within the pension fund if the beneficiary is able to draw on it at basic rate or less.

With thanks to Standard Life Technical Department for the detail

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

A £50,000 Higher Rate tax threshold?

Wednesday, November 12th, 2014

Mr Cameron’s promise of a £50,000 starting point for higher rate tax is not all that it seems.

The Prime Minister ended the Conservative Party Conference with a pledge to increase the higher rate threshold – the starting level of income at which 40% tax is payable – to £50,000 “in the next Parliament”.  At present, the threshold is £41,865 (made up of a £10,000 personal allowance plus a £31,865 basic rate band). Although it sounded generous, the reality was rather different:

  • “In the next Parliament” could mean in 2020/21, as governments now have fixed five year terms and the next one does not start work until 2015/16.
  • The 2015/16 threshold has already been set at £42,285 – a 1% increase over this year’s level.
  • A rise from £42,285 in 2015/16 to £50,000 in 2020/21 would be equivalent to annual increases of 3.4%, which sounds rather less impressive, especially if you consider that 2% of that is the expected inflation rate.
  • The threshold at the start of the current Parliament in 2010/11 was £43,875, unchanged from the previous tax year.
  • Had the 2010/11 threshold figure been increased in line with inflation, as measured by the Consumer Price Index, it would be over £50,500 next tax year, as the graph below shows.
  • For most earners the benefit of the increased threshold would be offset by a corresponding increase in the limit for full rate National Insurance Contributions (NICs), which currently matches the higher rate threshold. Thus, if you are an employee, you would save 20% in tax, but then pay an extra 10% in NICs. Graph

 As ever, waiting for politicians to reduce your tax bill will probably prove less reliable than making sure your own personal tax planning is up to scratch.

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


A volatile month on the markets

Monday, November 10th, 2014

October gave investors a turbulent time. Or was it just a passing squall?

“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” So said Mark Twain many years before the 1987 stock market crash, which occurred during the October of that year.

October 2014 was certainly a dangerous month to speculate, but then – as Mark Twain was implying – speculation is hazardous at any time. Anecdotal reports suggest that some hedge funds suffered large losses as their ‘bets’ turned sour. There was certainly plenty to unsettle investors:

  1. Ebola suddenly appeared on investors’ radar, hitting travel-related companies.
  1. The IMF cut its forecast for global economic growth.
  1. Fears that the Eurozone crisis could re-emerge prompted yields on 10 year Greek Government bonds to jump up to 9%.
  1. The month marked the end of the Federal Reserve’s bond-buying programme of quantitative easing (QE).
  1. China reported economic growth in the third quarter had reached a five year low.
  1. The oil price, which had dropped below $100 a barrel in September, kept on falling, reaching the low $80s by the middle of the month.

However, there was a lot of glass-half-empty about the market’s concerns:

  1. Ebola is almost entirely confined to three West African countries, not on many travellers’ itineraries.
  1. The IMF growth forecast cuts were only 0.1% (to 3.3%) for the current year and 0.2% (to 3.8%) for 2015.
  1. The Eurozone scare quickly disappeared and Greek bond yields retraced much of their rise.
  1. The Fed confirmed the end of QE on 29 October, but kept to its mantra that interest rates would remain low “for a considerable time.”
  1. China’s growth was still running at an annual 7.3%, a rate most countries would envy.
  1. Falling oil prices had as much to do with increased supply (from US shale deposits) than reduced demand and are an effective tax cut for consumers in most Western economies.

By the end of the month the markets had largely regained their composure. So in the end, October was – as Mark Twain wryly indicated – just another month.

 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.


The Pension Bank Account – a practial reality?

Monday, November 10th, 2014

pension-clock-red-text-31707942The press was full of ‘pension bank account’ stories in October. Will it be that simple?

The Taxation of Pensions Bill, which will put most of the Budget 2014 pension changes into law, was published in mid-October. It contained few surprises, not least because it had been issued in draft in August, along with detailed explanatory notes. Nevertheless, the Treasury pumped out a press release and the media duly splashed the (old) news.

The emphasis in the press coverage was, to quote the Treasury release “Under the new tax rules, individuals will have the flexibility of taking a series of lump sums from their pension fund, with 25% of each payment tax free and 75% taxed at their marginal rate, without having to enter into a drawdown policy.” It was this reform which prompted the talk of using pensions as bank accounts.  However, things may not be quite that simple in practice:

  • The new rules do not apply to final salary pension schemes, which may only provide a scheme pension and a pension commencement lump sum.
  • It is already possible to make this type of 25% tax free/75% taxable withdrawal under the flexible drawdown provisions introduced in 2011. This has not proved very popular.
  • The new rules are meant to come into effect on 6 April 2015, but they are not mandatory, so some pension providers may choose not to offer them. It seems likely that many occupational money purchase schemes will avoid any changes, as they were never designed to make payments out – that was the job of the annuity provider. Similarly many insurance companies may not be willing to offer flexibility on older generations of pension plan – just as some do not currently offer drawdown.
  • The short timescale has been criticised by the pensions industry. Systems and administrative changes can only be finalised once the Bill has become law and that will be perilously close to April, making it difficult for providers to bring in the changes from day one.
  • If you are able to take a large lump from your pension, the tax consequences could be most unwelcome. For example, drawing out £100,000 would mean adding £75,000 to your taxable income – enough to guarantee you pay at least some higher rate tax, regardless of your income, and quite possibly sufficient to mean the loss of all or part of your personal allowance. No wonder the Treasury expects to increase tax revenue as a result of the reforms.
  • Ironically another of the pension reforms, reducing the tax on lump sum death benefits, could mean you are best advised to leave your pension untouched and draw monies from elsewhere.

The new pension tax regime will present many opportunities and pitfalls, not all of which are immediately apparent.  Do make sure you ask for our advice before taking any action.

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

Pensions, death and tax

Tuesday, November 4th, 2014

pension-clock-red-text-31707942The Chancellor has outlined his plans for the tax treatment of pension death benefits.

It was therefore a surprise when the Chancellor made an announcement on pension death benefits in his speech to the Conservative Party conference at the end of September. The Treasury duly issued out a press release, but its contents were far from clear, suggesting that the whole process had been rushed. The intended position for payments of lump death benefits made after 5 April 2015 appears to be as follows:The treatment of death benefits was one of the key aspects of the planned pension reforms which was left unresolved after the initial post-Budget consultation process. The Treasury had said that this was “a complex area and any changes have the potential for unforeseen and unintended consequences” and promised to “confirm its intention at Autumn Statement 2014”.

  • If you die before age 75 with a money purchase pension fund which is uncrystallised (i.e. untouched) or in drawdown, the fund can be paid “to anyone as a lump sum completely tax free”. Currently a 55% tax charge applies to funds in drawdown, but uncrystallised funds are untaxed.
  • On death on or after age 75, it will be possible to pass the remaining fund (uncrystallised or in drawdown) “to any beneficiary who will then be able to draw down on it at their marginal rate of income tax.” The Treasury says “beneficiaries will also have the option of receiving the pension as a lump sum payment, subject to a tax charge of 45%.” However, this would seem to be an interim measure for 2015/16 only as the Treasury states that “The Government intends to also make lump-sum payments subject to tax at the marginal rate (not a flat rate charge of 45%). It will engage with pension industry in order to put this regime in place for 2016-17.” At present all lump sum death benefits arising on or after age 75 are subject to 55% tax.

These proposals only apply to uncrystallised money purchase funds and drawdown funds: they not apply to defined benefit pension schemes, scheme pensions or most types of annuity. On the face of it, their end result is likely to be that pensions will play an even greater part in your estate planning. But given the confusing nature of the announcement, for now it is very much a case of watch this space.

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


Monday, November 3rd, 2014

interestThe USA continues to edge towards higher interest rates.

The USA’s central bank, the Federal Reserve, issues a statement after each of the meetings it holds to consider interest rates, although unlike it UK counterpart, it usually convenes only eight times a year rather than every month. Those statements, in a convoluted language that has become known as “Fedspeak”, are poured over by professionals investors looking for clues about the Fed’s future actions.

So it was that in September there was much debate about whether the minutes would drop the oft-repeated phrase “considerable time” when referring to how long the current 0%-0.25% range of interest rates would be maintained. Some Fed-watchers thought that the bank would abandon those two comforting words, not least because October marks the final $15bn purchase in the Fed’s quantitative easing (QE) programme. In the event, the Fed stuck to its “considerable time” mantra.

However, that was not quite the end of the story. Alongside each statement the Fed also produces a set of projections for future interest rates and these suggested that by the end of 2015 the short term interest rate would be 1.375%, 0.25% higher than the previous (June) projection. The corollary was that once that “considerable time” had passed, there would be a faster than expected rise in rates.

That prospect was one of the factors leading to a volatile second half of September for the investment markets. As happened last year with the “taper tantrum”, markets can become very jittery on the slightest hints that the era of loose money is coming to an end. The fact that the central banks will only tighten monetary policy once they are convinced their economies are recovering sufficiently strongly to cope seems to be ignored.

If the gyrations of the last few weeks have given you pause for thought, do talk to us before taking any action. Selling on the basis of “Fedspeak” translations is dangerous: the words could change at October’s meeting…

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.