Archive for the ‘Legislation’ 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.
Govt eases rules on auto-enrolment?
The second response in the government’s consultation on auto-enrolment was issued late last week.
In the second round of consultations the government propose that employers can ignore certain groups of workers in their assessment. These are:
- Employees who are already contributing to pension savings.
- Employees who are just about to leave.
- Employees who have given notice of their retirement.
- Employees who have cancelled pension membership after being contract joined.
Although it does seem at times with auto enrolment that we are building an aeroplane in the sky these recent suggestions are pragmatic and welcome. If nothing else it shows that the government are listening (and not to your mobile phone calls for a change!) and are prepared to alter the regulations to make them more workable for employers.
The ministry mandarins are working on the proposals as we speak and we’ll have to see what they deliver.
Meanwhile, where this leaves many of the small employers who are facing the daunting task of dealing with auto-enrolment with no advice is debatable.
Steve Clark
Auto Enrolment– Unexpected stats on opt-outs
Never ones to rest on their gold plated laurels those busy 
bees at the Department for Work and Pensions have been busy putting together their latest report on automatic enrolment into workplace pension schemes.
The Automatic Enrolment Evaluation Report 2013 shows the breakdown, by different factors, of private sector employees eligible for automatic enrolment savings into a workplace pensions.
The report breaks down the data by industry, employer size earnings and age. The key points from the results are:
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There is certainly a buzz in the energy sector where those employed in the Energy and Water industry have the highest participation rate at 63% in 2012.
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It’s taking longer to sow the seeds and hook new savers in the Agriculture and Fishing industry with a participation rate of just 18%.
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Employers with between 250 and 4,999 employees have the highest participation rate at 53%
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Those earnings over £40,000 have the highest participation rate at 74%.
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Understandably, those earning less than £10,000 have a 32% rate.
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In terms of age employees aged between 22 and 29 have the lowest levels of participation at 24% compared to those aged 40 to 49 and 50 to 64 which have a rate of 50%.
From a personal viewpoint I’m surprised that the opt-out rate has been so low. It’ll be interesting to see how this figure moves as smaller and smaller employers come under the new rules. My suspicion at the moment is that inertia is propping up the figures. In other words, people are just not capable of getting around to getting the opt-out notice, completing it and getting it back to their employer within a month.
As time goes on I suspect that the coffee tables of the nation will harbour more than a few opt-out notices whose destiny is to keep last Christmas’s Radio Times company! But then perhaps I am just an old cynic.
Whether those modest pension savings will ever be enough to live on is a completely different matter.
Steve Clark
Everything you need to know about pensions
Thanks to the legal bods at DLA Piper for putting together their excellent Pensions News publication.
The October 2013 version just landed. It’s got everything in there you could possibly need (or want) to know. From Auto Enrolment to Pension Liberation and updates of what has been happening with The Pensions Regulator, HMRC, DWP and The Treasury it’s got something for everyone.
If you’ve got any involvement in your organisation’s pension planning there is something in there for you. If you read nothing else this month – read this!
Click here for to go to Pensions News.
Steve Clark
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.