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The new pension freedoms checklist

Archive for April, 2015

The new pension freedoms checklist

Wednesday, April 15th, 2015


The new pension freedoms checklist: Four Things You Must Do Before Making Any Decision About Your Savings

The new pension freedoms are great news for savers, with more flexibility and options for retirement now available. However, the freedoms also come with a level of risk, particularly for that first wave of savers looking to exercise their new rights in the next twelve months or so.

The main recommendation for savers is to seek independent financial advice. An adviser will be able to talk you through your options and ensure you get value for money. Whilst you weigh up your decision though, here are four more things to add to your checklist and consider carefully alongside any decision you make about how you’ll receive your pension income.

Make sure you factor in, but don’t overestimate, your state pension

It is important to remember that, alongside your private pension savings, you will also probably benefit from a state pension in your retirement. Where once it might have been tempting to rely on the state pension, now it is more readily expected that your personal savings will be your main source of income in retirement and the state pension a nice ‘bonus’.With this as your model, it’s important to remember the income the state pension will give you when planning for your retirement, but at least equally important to not overestimate the contribution the state will make. Factor a realistic figure into your plans, alongside the income your personal pension will generate.

Don’t underestimate your lifespan

It is very common for retirees to underestimate their own lifespan and, by extension, the amount of money they will need throughout their entire retirement. Whilst it is, of course, a difficult factor to put any sort of prediction on, it is vital that you plan for a long and happy retirement, rather than risk trying to ‘get away’ with having less capital available to you. When planning your retirement income, make sure you’re planning for the long term!

Consider tax carefully

If you are looking at the new pension freedoms with some eagerness then don’t forget: whilst the taxation implications have been reduced, they have not been eradicated entirely.After the first 25% tax free lump sum, withdrawals from your pension will be charged at your normal rate of income tax. If you are still earning an income, or if you make sizeable withdrawals in a tax year, then this could mean you enter the upper tax bracket.Of course, if what you are planning for your pension income requires this level of withdrawal, then it may well be worth that level of taxation, but take care and make sure you have planned for, and are aware of, the taxation implications that your actions will create.

Work out what you want to do with your money, rather than just trying to get the highest amount

Perhaps the most important point of all! Whilst money is important to each of us, ultimately it is merely an enabler. There is no better aid to a happy retirement than clearly planning how you want to spend your money: the things you want to buy, the experiences you want to have, the family you want to help.Once you have planned what you want to do with your retirement, money decisions become much easier. Will accessing your pension through the new pension freedom arrangements help you get to where you want to go in your retirement? More so than any monetary factors, this is arguably the most important question for retirees to attempt to answer.

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

Selling your pension annuity      

Wednesday, April 15th, 2015

pension-clock-red-text-31707942The Budget confirmed that the government is exploring ways to create a market in pension annuities.  

One of the criticisms of the wide-ranging reforms to pensions that take effect on 6 April 2015 is that they only apply to those who have not yet started to draw benefits. As was well-leaked in the run up to the Budget, the Chancellor plans to address this anomaly by allowing people with an existing pension annuity to sell it for cash, which they can then use under the new rules.

A consultation paper issued alongside the Budget highlighted the issues surrounding what seems like a simple idea:

  • The government does not currently believe that your annuity should be sold back to the original insurance provider, in part for consumer protection reasons. You would thus have to sell your annuity to a third party.
  • Individuals will not be able to buy secondhand annuities “owing to the complexity and difficulty in determining a fair price”, according to the paper.
  • Any sale will depend upon the consent of the original annuity provider and, probably, any secondary beneficiaries (e.g. a surviving spouse).
  • It will not be possible to sell annuities held by occupational scheme trustees.
  • Any withdrawal of the sale proceeds, whether as a lump sum or a series of payments, would be fully taxable as income. The purchaser of the annuity would also be treated as receiving taxable income in the two years from April 2016, when sales should begin.

This reform, while in theory welcome, is not without risks. For now, while the outcome of the consultation is awaited, the message is do nothing without taking expert advice.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

A savings tax cut

Thursday, April 9th, 2015

key-stages-imgA new personal savings allowance will come into existence in April 2016.

“Today I introduce a new Personal Savings Allowance that will take 95% of taxpayers out of savings tax altogether”. So said the Chancellor in his Budget speech. While not inaccurate, there was much behind the announcement which went unmentioned.

What the Budget paperwork revealed is that from 2016/17 there will be a new Personal Savings Allowance, set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers (if you are an additional rate taxpayer, the allowance will not apply). The measure was not contained in the Finance Act 2015, so will have to be introduced after the election.

The new allowance applies to savings income, which is primarily interest from deposits and fixed interest securities : it does not cover dividends or rental income. At best, the new allowance will reduce the relative appeal of a cash ISA, which also offers tax-free interest, but generally with more restrictions and less choice than other savings accounts. This may explain why the Chancellor announced a relaxation in the rules for cash ISAs, probably effective from autumn 2015. This will allow cash ISA savers to withdraw and replace money within the same tax year without it counting towards their annual subscription.

These changes to savings tax mean that a review of how and where you hold cash and investments may well be necessary. For example, there is little point in placing cash rather than investment funds in an ISA if you can receive all your deposit interest tax-free anyway.

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 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.  

Further help to buy from the government

Tuesday, April 7th, 2015

A Help to Buy ISA will be launched in the autumn, aimed at helping first time buyers get onto the housing ladder.   

One of the rabbits which did not escape from Mr Osborne’s hat before the Budget was the announcement of a new Help to Buy ISA for first time buyers. The main features of the new ISA are planned as follows:

  • It will be available to any potential first time buyer, aged 16 or over, probably from autumn 2015.
  • The format will be that of a cash ISA, so anyone who chooses the Help to Buy ISA will usually not be able to contribute to another cash ISA in the same tax year.
  • The maximum contributions will be an initial £1,000 and £200 a month.
  • The government will pay a tax-free bonus of 25% of accumulated savings, provided that the proceeds are used to buy a first home. The maximum bonus will be £3,000 (on £12,000 of savings) and the minimum £400 (on £1,600 of savings).
  • A couple may each have their own Help to Buy ISA and use them both for the same property purchase.
  • The maximum property value will be £450,000 in London and £250,000 elsewhere.
  • There is no need to use the ISA fund to fund a home purchase, but the bonus will not apply in other circumstances.

The new ISA has had a mixed reception. On the one hand there is the view that anything which helps first time buyers to build up a deposit is good news. Others note that it will take four and a half years of saving at the maximum rate permitted to reach point at which the full bonus is available. By then average house prices will probably have moved up by much more than £3,000.

The value of tax reliefs depends on your individual circumstances. Tax laws can change.

Pension tax: a post-election change – whoever wins

Thursday, April 2nd, 2015

pension-clock-red-text-31707942The lifetime allowance (LTA) is a key component of the pension tax rules. It effectively sets the normal maximum value of retirement/death benefits, beyond which a tax charge of up to 55% may apply. When the current ‘simplified’ (sic) pension tax rules started life in April 2006, the LTA was set at £1.5m, with increases to £1.8m scheduled through to 2010/11.

However, after 2010/11 there were no more LTA increases. Instead there were cuts in 2012 (to £1.5m) and 2014 (to the current £1.25m). The Chancellor announced a third LTA reduction in the Budget, taking the allowance down to £1m in 2016/17. Two years later, the LTA will become index-linked, albeit to the CPI rather than the RPI or earnings. As the graph below shows, had the original £1.5m had been RPI-linked from the start, by April 2016 it would have been around double the actual level.

LTA graph

There will be another set of transitional protection rules covering the cut, details of which are awaited. If your retirement funds are likely to be worth – or already are worth – over £1m, you will need to consider taking advantage of these.

Although the change is not legislated for in the Finance Act which has just received a rushed Royal Assent, there is little chance of the £1m limit not becoming a reality. The Shadow Chancellor, Ed Balls, announced in February just such a cut as part of a set of pension tax increases to finance a reduction in student tuition fees from £9,000 to £6,000 a year.

While £1m may sound more than adequate for a pension pot, considering current annuity rates, at age 65 it will only buy you an index linked pension of about £2,750 a month before tax. Therefore you may need to review your retirement planning…

Transferring Child Trust Funds to Junior ISAs

Wednesday, April 1st, 2015

key-stages-imgThe long-awaited facility to transfer Child’s Trust Funds to Junior ISAs arrives next week.

From 6 April 2015 it will be possible for parents to transfer their children’s Child Trust Fund (CTF) account into a Junior ISA (JISA).

While the subscription limits remain unchanged and are the same amount for both of the products, the ability to transfer an existing CTF to a JISA will provide a wider investment choice, possible higher interest rates on cash accounts and, in some cases, lower fund management charges.

It also means that the JISA will automatically turn into an adult ISA when the child attains age 18.


This comes as good news and it appears that a number of providers have already contacted parents to notify them that they will soon be able to take advantage of this change.

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.