Monthly Archives: March 2014

Beware Pensions Flexibility Pitfalls

Following the news last week that we would all have freedom to access our full pension pots at retirement, the media quickly began talking about sports cars and luxury holidays. The problem with the way in which the new pension rules were presented, was that the ‘take the full pot at retirement’ option seemed to be the only one which was being discussed.

The media seemed to miss the fact that for many people an annuity or income drawdown will still be the best way to go, especially for those with low levels of other pension income. While we welcome the new flexibility and simplicity being introduced into the pensions landscape, it does come with several health warnings, namely:

– The risk that people ‘take the full pot at retirement’ and spend all of the money. Clearly this will leave them with a lower income for the rest of their lives.

– The risk that people ‘take the full pot at retirement’ and don’t spend the money. All the saver would have done here is transferred capital out of a tax efficient environment, into a taxable one and paid a large chunk of income tax in the process.Hardly prudent financial management.

– The risk that people will ‘take the full pot at retirement’ and purchase a buy to let property. This particular option seems to be a favourite in the media at the moment, however it does come with some notable flaws. First of all, income tax will need to be paid on the full pension fund (minus the 25% tax free cash), which for many will push them into the higher (40%) rate tax band. A property will then need to be purchased which will incur stamp duty and many other costs, and finally income from property is taxable.

There are many other pitfalls to be aware of when planning your retirement. If you would like advice on suitable options for you, please contact us here.

Why A Holistic View On Retirement Planning Is EVEN More Important Than Ever

It was only a couple of months ago now that I penned an article for this blog on the importance of taking a holistic view on retirement planning. I predicted possible increases to the minimum age at which pension benefits could be drawn on and it would seem that my premonitions have come true.

While it was not widely publicised in the aftermath of the budget speech, contained within the consultation document was the revaluation that the minimum age at which pension assets can be drawn upon is set to rise to 57 (from 55 currently) in 2018. This age will then be linked to increases in the state pension age which, in turn, is linked to life expectancy.

While the reforms announced in the budget certainly provide far greater flexibility to prospective retirees and will, no doubt, increase the attractiveness of a pension as a retirement planning tool, for those of us who wish to retire early, there could start to be problems.

The minimum pension age has always been fixed (in a manner of speaking)  and has only changed as the result of a budget or policy initiative. That has all changed now, with the minimum pension age set to be linked to our seemingly ever-increasing life expectancy.

For those who still dream of a retirement before their 60th birthday, it will be more important than ever before to take a holistic view on retirement planning, and make use of the newly increased ISA allowance and other savings vehicles in order to provide accessible funds when they are required.

The need for high quality financial planning advice both at and during retirement will be greater than ever to ensure that accumulated pension and retirement funds will provide sufficient income for life. With greater flexibility comes greater risk, and the chancellor yesterday placed the responsibility on individual pension savers to ensure that they provide for themselves in retirement.

If you would like to find out how the pension changes announced in the budget might impact on your retirement planning, please get in touch to request your discovery meeting, provided at our expense.

Budget 2014: The Sting In the Tail

While I commented yesterday that the budget seemed to be almost entirely positive from a financial planning perspective, there was one small sting in the tail which became apparent as we analysed the budget document itself as well as the various accompanying consultation documents.

The paper states that the government intends to increase the minimum age at which pension benefits can be taken from 55 to 57. The minimum pension age will then be increased in line with the state pension age, which, in turn, will be linked to average life expectancy.

As I alluded to in my blog a few months ago, it will become more important to take a holistic view on retirement planning to ensure that these new restrictions don’t get in the way of your retirement dreams.

While I don’t want to take anything away from yesterdays budget, which was, by all accounts revolutionary from a financial planning perspective, it is the smaller (and in some cases more important) details like this that won’t be included in the BBC news coverage!

Budget 2014: NS&I Pensioner Bonds

The chancellor today announced that from January 2015 National Savings and Investments will offer a ‘pensioner bond‘ that will pay a market leading rate of interest to savers over the age of 65.

While the exact interest rates offered will be detailed nearer the time, the government has given an indicative rate of 2.8% on a 1 year bond and 4% on a 3 year bond.

These new bonds will prove very attractive to savers who wish to take an income from their deposit based funds as well as those looking for a safe home for a cash ’emergency fund’.

Assuming that these proposed interest rates keep up with the increasing base rate, they will be very attractive indeed.

Budget 2014: The Biggest Pension Reforms In 100 Years

Commentary before the budget announcement earlier today had suggested that we were in for a surprise and boy did we get one. The chancellor announced the biggest and most wide ranging set of pension reforms in over 100 years!

The measures are designed to make pension withdrawal far more flexible, reduce previously punitive tax rates on pensions and hand back more responsibility to savers to be in control of their own income in retirement.

The main changes announced today include:

The ability to take 25% tax free cash as usual and then take the remainder of a pension pot as cash which will be taxed at an individuals marginal rate.

A reduction in the flexible drawdown limit to £12,000 meaning that far more people will have unfettered access to their pension savings.

An increase in the capped drawdown GAD rate, meaning people in drawdown plans will be able to take a higher income each year.

The ability to take pension pots under £10,000 in cash. This facility can be used on up to 3 pension pots, giving a total of £30,000 which can be taken in a cash lump sum.

A review into the current 55% tax rate on crystallised pension benefits on death.

There are also some other areas which are being consulted on, most notably the intention for the government to prevent people in public sector pension schemes being able to transfer their benefits into an alternative plan.

We will be following developments in this area closely and will be providing further updates as the situation develops.

Budget 2014: Income Tax Changes

As expected, the chancellor has announced that the ‘personal allowance’ (the amount of tax free income an individual can earn before paying income tax) will increase to £10,500. This will remove further low earnings from income tax altogether.

In addition there will also be a small increase to the 40% tax band to £41,865. This will start to relieve the pressure on middle earners who have found themselves paying 40% tax for the first time over the past couple of years.

These changes were largely expected and have been rumoured for some time. The previous rules that reduced the personal allowance for those with incomes of £100,000 or more remains in place, and detailed planning will still be required for those with incomes of just over this amount.

Budget 2014: Your ISA is now NISA

The chancellor has just completed his budget speech and one of the key announcements was a reform to the ISA rules to make ISA savings simpler and more flexible. The government has decided to replace the ISA with the New ISA or NISA as it is referred to in the budget document. I wonder if this name will stick!

This change is positive in all senses and will surely encourage savings in the UK.

The changes in summary:

  • The ISA allowance will increase to £15,000 per annum from July this year.
  • The stocks and shares and cash limits will be merged into one.
  • Transfers will be permitted from stocks and shares ISA’s into cash ISA’s for the first time.
  • The junior ISA limit will increase to £4000 per annum.

All in all this simplification is great news for UK savers and investors and can do nothing to harm savings culture in the UK. When considered in tandem with the pension reforms announced today, it will be more important then ever to take a holistic view on retirement planning, as i alluded to in my blog a couple of months ago.

Budget 2014 – As It Happened

1:32pm – We are just analysing the details but the chancellor also announced that the 55% tax on pension savings taken as a lump sum will be reduced to fall in line with income tax rates.

1:30pm – These announcements would seem to spell the end of the ‘default’ option of purchasing an annuity with your pension pot on retirement. This is probably the most significant change to the pension and retirement savings landscape in a generation.

1:29pm – Budget announcement over – All in all an impressive package of measures for savers and investments. Im struggling to see where the point of attack from the other side of the house is!

1:26pm – HUGE pension tax changes. Flexible drawdown limit reduced to £12,000, capped drawdown limit increased to 150% of GAD, £10k small pot limit and advice provided for retirement. Too much to detail here. Further analysis later.

1:21pm – Big news – A new single ISA will merge the stocks and shares and cash ISA’s and the limit will increase to £15,000 per annum. Great news for savers and investors!

1:18pm – The personal allowance will rise to £10,500 in April 2015 as expected. We are still waiting for the big surprise!

1:16pm – Tobacco duty will continue to rise at 2% above inflation, 1p off a pint of beer, duty on whisky and other spirits has been frozen.

1:15pm – Good news for bingo fans – Bingo duty reduced to 10%!

1:14pm – Fuel duty frozen once again. Gambling duty increased.

1:13pm – “We want to help hard working people keep more of what they earn and more of what they save”. I think this could be the personal finance part!

1:08pm – The seed enterprise investment scheme or ‘SEIS’ will be made a permanent feature of the UK investment landscape. This scheme allows individuals to invest in small start up businesses and receive valuable tax relief.

1:05pm – An additional £140m for repairs to flood defences and £200m for repairs to roads following the harsh winter.

1:03pm – As already announced, the ‘help-to-buy’ mortgage and housing scheme will be extended until 2020.

1:02pm – From next year passengers on long haul flights will pay a lower rate of air passenger duty. For those of us lucky enough to have a private jet, taxes will rise!

12:59pm – Stamp duty will now be 15% for all residential properties worth over £500,000 purchased through a “corporate envelope”. This change takes effect from midnight tonight.

12:57pm – Confirmation that inheritance tax will not apply to the estates of military personnel who die in service.

12:56pm – Fines from LIBOR manipulation will continue to be directed towards military and emergency charities.

12:54pm – It is worth noting that this does not impact the widely accepted tax mitigation schemes such as conventional trusts, ISA’s and pensions etc.

12:53pm – Government is renewing its commitment to tackling tax avoidance schemes and the number of registered tax avoidance schemes has fallen by 50%. People using sophisticated or controversial tax avoidance schemes will be required to pay tax up front.

12:48pm – Growth is forecast to be around 2.5% for each of the next 5 years. This type of consistent growth would be good news for the UK economy.

12:46pm – Mr Osborne is now doing the PR for his new 12-sided £1 coin.

12:42pm – Some rather scary budget deficit numbers being banded around. Just as a reminder, the budget deficit is the amount the UK overspends each year, not to be confused with our national debt which stands at something close to £1.4 trillion.

12:41pm – The OBR has reduced its forecast for the budget deficit in every year covered. 18/19 is predicted to show a small budget surplus.

12:39pm – “No major economy growing faster than the UK”. Can you imagine having heard that a year ago?

12:35pm – “Hard working people will keep more of what they save”. Definitely seems to be a hint of some sort of reduction in savings taxes –  capital gains tax perhaps?

12:34pm – Apparently if you are “a maker, a doer or a saver, this budget will be for you”.

12:30pm – Mr Osborne has ‘taken the stand’. “The economy is recovering faster than expected”

12:27pm – The chancellor is just about to make his annual announcement and if the BBC news coverage is anything to go by he has a “surprise” for us. We will be live blogging throughout the budget announcement with updates on the key announcements and will be providing detailed analysis and reaction throughout the day.

Budget 2014: Uncertainty Remains

In contrast to the previous 2 budgets, with one hour to go until the budget speech, there is still a high degree of speculation about what Mr Osborne’s red box might contain.

There is talk of a higher than expected personal allowance and some significant changes to pensions tax allowances.

We will be watching the budget announcement as it happens and will be providing updates and analysis throughout the day. Stay tuned for more.

5 Days To Go!

In 5 days time George Osborne will deliver his 5th budget as chancellor of the exchequer. If the leaks and predictions are anything to go by (which they seem to be if the past two years are anything to go by) then this budget could have significant impacts from a financial planning perspective.

We are all too aware of the fragile state of the economic recovery and as such we expect this budget to be “cost neutral”. That is, any tax cuts or spending increases, will have to be paid for from increased takings elsewhere.

There is speculation that the chancellor may announce yet another increase to the state pension age (as I alluded to in my previous blog), as well as making yet further reductions to the annual or lifetime pensions allowances.

Add in the fact that there could well be a significant change to income tax legislation, and a reform of the capital gains tax rules, and we have a budget that anyone who is interested in financial planning will want to keep a close eye on.

We will be watching the budget and blogging live as it happens. We will also be preparing a short guide to the major announcements and providing specific advice to clients over the coming months.

If you would like to find out how the budget will impact on your finances, please get in touch to arrange your discovery meeting, provided at our expense,