Archive for the ‘Annuity’ Category
Pensions–Tax opportunites and traps
The new pension freedom reforms are being accompanied by a flurry of tax changes in April.
Savers could be able to pass on what’s left of their pension pots to loved ones tax-free after death, after the Chancellor announced the scrapping of the 55 per cent tax rate currently applied to funds left to children.
Instead, beneficiaries will either pay tax at their own income tax level – with the money they receive added to their earnings to calculate this – or if the person who dies is under 75 there will be no tax to pay.
The Chancellor also announced in his Autumn 2014 Statement that husbands and wives whose partners die before reaching 75 will get annuity income from their spouse’s pension tax-free. Beneficiaries of ‘joint life’ annuities, or other types that come with death benefits, currently pay income tax on what they receive.
However, over-55s looking to take advantage of new pension freedoms to withdraw big sums from retirement savings need to be wary of landing themselves with big tax bills. Although people will suddenly get unfettered access to their whole pension pot, only 25 per cent of retirement savings will be tax-free while the rest will be taxed as income.
Workers used to usually paying the basic rate of tax through employers might not realise that dipping too freely into their pension pot at retirement could put them into the higher rate tax bracket. If they get it wrong, because they hadn’t checked it or worked it out, they could find themselves suddenly paying out a large amount of tax when cashing in their pension.
People tempted to use their retirement savings to acquire a buy-to-let property are also advised to weigh the tax implications carefully because money shelled out upfront to HMRC could prove a significant drag on returns.
It might also be sensible not to rush into things and to avoid drastic decisions before the May election, which could bring in a new Government that immediately starts tinkering with the pension reforms and tax system.
Although many observers feel that any incoming Government will not want to upset older savers, early in their term, the opportunities for change will still be rife in the coming months.
Your 5 Minute Catch Up
Here’s a quick and easy catch up on some of the news storied we think you might want to read.
Perils of the wrong pension
Making the wrong choice with your pension can be costly. The Daily Mail told the story of a retired solicitor who was concerned about his poor state of health and wanted to secure lifetime income for his wife from his pension fund. But he bought the wrong type of annuity, one that had a guarantee period of ten years. He died only weeks after the ten year guarantee ended – and his widow was left without any income.
44 Financial offer a full retirement planning service to help make sure that you make the right choices when you are retiring.
Cap on pension charges proposed
The government has opened a consultation on an upper limit on pension charges, reports the Daily Telegraph.
Its target is older schemes, often closed to new members, that can have charges of up to 2.1% a year. Modern schemes have charges of under 1%, and the higher charges can cut pension scheme members’ retirement pots by tens of thousands of pounds.
If you have older pensions that you have not checked for some time it may be worth looking at this. Please contact 44 Financial to discuss our Pension Review & Health Check.
Fund costs are falling
Over 85% of investment funds have created new share classes with lower annual fees, according to research cited by the Daily Mail.
Previously, fund managers could pay rebates to the ‘platforms’ on which investors hold their assets out of their management fees, but new ‘clean’ share classes that pay no rebates offer investors lower charges and a better deal overall. Most platforms are in the process of switching to the new lower-cost share classes.
Charges to hit more trusts
The Chancellor’s Autumn statement is likely to include a measure that will raise charges on trusts, predicts the Daily Telegraph. At present, those seeking to avoid inheritance tax can set up a series of trusts and so long as each trust is worth less than £325,000 no tax is paid. But the legislation provides for a 6% periodic charge every ten years on larger trusts, and it is likely this tax rate will be extended to all trusts whose combined value exceeds the £325,000 threshold.
More could save from offset switch
Millions of homeowners could make useful savings by switching to an offset mortgage, says the Independent. At present only about 10% of borrowers have this type of loan, but with savings rates so low the benefit is significant. By merging your saving and mortgage accounts you avoid receiving taxable interest. Instead of earning a taxable 1% on your savings, you reduce the interest you pay on your mortgage by the amount in your savings account. With mortgage rates at 3-4% you will save far more in mortgage interest than you were earning on your savings.
Tax task forces get tough
HMRC’s tax task forces, set up to track down tax avoidance in specific sectors, are hitting their targets, reports the Daily Mail. In the first half of 2013 they collected an additional £32 million and are on target to bring in over £90 million for the full year. Restaurants, landlords and owners of second homes are among their targets.
Parents shell out more than ever
Young adults are getting an unprecedented level of financial support from their parents, reports the Daily Mail.
Over 70% of home leavers get some help, and nationally parents fork out £44 billion a year, or an average of £1,125 a year per child. But 25-29 year olds get even more, an average of £2,599 a year. The biggest items of support are property (£11 billion), cars (£4 billion) and weddings (£4 billion), but the biggest change in recent years has been the rise in the number of parents helping adult children with their living expenses – rent and bills.
Lenders target accidental landlords
Mortgage lenders are targeting ‘accidental landlords’ who they think should be paying higher interest rates, reports the Daily Telegraph.
Homeowners who have been unable to sell, have moved and rented out their homes have become landlords by accident rather than by choice. They should have informed their lenders and converted from residential to buy-to-let mortgages, but hundreds of thousands have not done so. Often the lender’s buy-to-let interest rate will be as much as 2% above the residential rate.
Mortgage brokers say people whose properties are worth more than their loans can usually re-mortgage to a more favourable rate if their own lender’s but-to-let rate is high, but that those in negative equity are trapped and have to accept their existing lender’s terms.
Building your pension with a SIPP
The Sunday Telegraph recently ran a 2-page feature on building your own pension using a SIPP (Self Invested Personal Pension).
Since most people’s retirement will last 20 or 30 years, an increasingly popular alternative to annuities is to draw an income from a pension pot that remains invested in assets like shares and fixed interest bonds. Experts said that most personal pension schemes will end up offering much the same investment options as SIPPs – shares and funds – with only a small minority choosing to buy assets such as commercial property.
Contact us if you would like more information about your pension investment options.
Steve Clark
How to beat the system with an annuity
The answer unfortunately is quite simple – live to 116!
The Daily Telegraph worked out that if Jiroemon Kimura, the world’s oldest man who died at the age of 116 in June, had taken out an annuity when he retired, he would have got back £2.1 million from an inflation-linked annuity. However, he would have only paid £460,000 for the annuity.
That shows how well you do when you ‘beat the actuaries’ – but most of us won’t, or not by enough to match Mr Kimura. The actuaries now say someone aged 65 today will live to age 86. Too often we still meet people at retirement who refuse to concede that they will live that long in retirement. Failing to do so risks a real shortfall in income, spending power or both.
As the Daily Telegraph says, the new pattern for a lot of people is for a retirement pension to be topped up with part-time work. Like Mr Kimura, who went on helping on his son’s farm up to the age of 90.
For those that want to maximise their income and choices when they want to stop working we offer the 44 Financial Annuity Service. It’s like sat-nav for your retirement. We’ll guide you through the pensions maze and make sure you make the best decisions for your circumstances. Call us on 0116 380 0133 for an initial chat – at our expense.
Steve Clark
Delaying your annuity can be costly
Delaying buying your annuity with a pension pot could prove costly, warns the Daily Telegraph.
It’s true that annuity rates rise with age, so a 67-year-old in good health gets about 5% more income from an annuity than a 65-year-old. But if at age 65 you defer buying an annuity for two years, you would have to live to the age of 106 before the higher income you get at age 67 would make up for the two years’ worth of income you never had.
Converting your ‘pension pot’ into lifetime income is one of the trickiest decisions people face. It’s vital to get advice – there are many more options than you may think.
At 44 Financial Ltd we specialise in helping those that are at retirement choose the right product and maximise the income they receive. We can ensure that you get the best rate by shopping around on your behalf.
If you need any help please call us on 0116 380 0133.
Steve Clark
Image courtesy of Flickr – Images of Money