Don’t Fall Into The Pension Tax Trap

Posted on April 14, 2014 by - Budget, Pensions, Taxation

I have been having numerous conversations with clients’ in the weeks since the budget who are proposing to withdraw their entire pension fund as cash (as per the new budget announcements) and simply invest the proceeds in the bank or another form of taxable investment.

While I did write about this very topic a few weeks ago, I thought it sensible to mention it again so that people are aware of the consequences of such actions. As such I have prepared a simple worked example to compare the difference between withdrawing a 100k pension fund as one lump sum in cash and investing this in the bank and taking the income gradually from the pension over a number of years. This example is for illustrative purposes only and should not be construed as advice to act. If you are unsure about your own pension provision, you should seek advice from a chartered financial planner.

For the purpose of this exercise I am making a few assumptions:

– The client has £20k per annum in other retirement income from final salary and state pensions.

– The client would like to take a further 10k per year of income to make a total of £30k

 

Option 1 – Take the whole pension as cash on retirement

£25,000 will be paid tax free

£75,000 will be subject to income tax as follows

£21,865 @ 20% = £4373 tax

£53,135 @ 40% = £21,254 tax

The client would receive £74,373 in cash and pay £25,627 in tax

Any income that the money generated would possibly be subject to further income tax or capital gains tax.

 

Option 2 – Take the tax free lump sum and then £10k per annum as required

£25,000 will be paid tax free

£10,000 per annum will be taxed at £20% = £2000 tax

The total tax paid on the original £75,000 remaining fund will only be £15,000

The client would receive £85,000 – a difference of £10,627!

Of course the money would also continue to be invested in a tax efficient environment and could well make substantial further gains over the time period in question.

The above is clearly a very simple example, however it illustrates the taxation implications of taking large pension pots in one lump sum.

 

The point I am trying to make is that the full withdrawal of a pension fund will generally be very tax inefficient and should only really be considered if the fund is very small or there are specific spending plans for the money.

If you would like to find out more about the options available to you at retirement please get in touch to request your discovery meeting.

 

Total Clarity On Advice Charges

Posted on April 10, 2014 by - News

On Monday the FCA (Financial Conduct Authority) published a ‘thematic review’ paper on ‘being clear about adviser charges and services’. The paper made for interesting reading, with the rather shocking finding that 73% of the 113 firms it investigated failed to provide the required information about the cost of their advice and the services that they provide.

I would like to discuss three of the findings in particular:

– 58% of firms failed to give clients clear upfront generic information on how much their advice might cost.

– 50% of firms failed to give clients clear confirmation on how much advice would cost them as individuals.

– 34% of firms failed to give clients a clear explanation of the service they offer in return for an ongoing fee and/or their right to cancel this service.

At Buckingham Gate we believe in being completely upfront  and open about our charges and services. You can view our service packages, along with ‘generic information on how much our advice might cost’ on our services and fees page.

Following an initial discovery meeting, which we provide at our expense and with no obligation on the part of the client, we will write to each client individually to detail the scope of the advice and service to be provided as well as the specific fee required to engage our services. This gives clients ‘clear confirmation of how much advice will cost them as individuals’.

Finally, we offer a range of ongoing service packages, designed to suit different types of clients, who each have unique needs. You can see the details of our service packages here.

We believe that our fees offer clients genuine value for money, which is why we send out a ‘value of advice’ statement each year. This shows, in pounds and pence terms, the tangible value that clients receive in return for their financial planning fee. In addition, many clients tell us that the intangible benefits of our service, such as increased financial security and peace of mind, far outweigh the monetary gains.

If you would like to find out how we could help you with your financial planning, as well as the fees for our services, you can get in touch here.

New (Tax) Year, New You!

Posted on April 7, 2014 by - Budget, News, Pensions

Today marks the first working day of the new tax year. While the beginning of a new tax year is usually quite significant from a financial planning perspective, following the significant announcements made in the budget in March, this year is arguably more important than most.

Below you will find a summary of the main changes which are drastically different from previous tax years:

– Those clients in capped drawdown pensions can now withdraw up to 150% of the governments GAD (Government Actuaries Department) rate. This will mean a substantial increase in maximum income for some clients. A word of caution though, withdrawals at this new higher rate are unlikely to be sustainable for the whole of a retirement.

– Those who have £12,000 or more in guaranteed income from state pensions, occupational schemes or existing annuities, will now qualify for ‘flexible drawdown’. This system allows you to have complete access to your accumulated defined contribution pension pots. This facility will be available to all individuals from April 2015, so long as the budget gets through parliament successfully.

– Clients with smaller pension pots can now take up to 3 ‘small pots’ of up to £10,000 each in cash.

– People with total pension savings of below £30,000 can take the whole pot as cash under the ‘triviality’ rules.

– The above rules are a ‘stop-gap’ of sorts until the new pensions regime takes effect from April 2015.

– The government will consult on increasing the maximum age at which you can contribute into a pension from the current 75 and also consider whether to reduce the 55% tax charge on pensions on death.

– The ISA allowance for 14/15 is £11,880. This limit will increase to £15,000 when the new ISA (NISA) rules start to apply. Under the new rules, there will be no restriction on the amount you can save within a cash ISA (within the overall limit) and you will be able to transfer between cash and stocks and shares ISA’s.

– The junior ISA limit has now increased to £3,840 and will increase to £4000 on 1st July.

– The capital gains tax exemption is increased to £11,000.

If you would like to find out how the changes announced in the budget could effect your financial planning, please get in touch here.

Don’t (Not) Spend It All At Once!

Posted on April 4, 2014 by - Budget, Media, Pensions

One point I would like to pick up on following my discussion with Victoria Derbyshire earlier today on BBC Radio 5 Live, is the fact that although we have all been given the flexibility to withdraw our pension plans in one go, there is not any requirement to do so. In fact, for most individuals, this will do nothing more than land them with a large (and unnecessary) tax bill.

There is an argument to take the whole of a pension pot if you have a specific plan to spend the money, don’t have any other more tax efficient funds to spend, and have sufficient income to live off in retirement.

What is worrying however, is that some people seem to want to withdraw the whole pot, with no specific plan to spend it and then invest the money in a bank account or other investment. The problem here is that you will be removing money from a tax efficient environment (in the form of a pension), paying tax on the proceeds, and then investing the money in a potentially taxable home. This hardly seems like efficient tax planning.

Individuals should be aware that there is no obligation to take all of your pension fund in one go. In fact, you can simply withdraw what you need, and leave the remainder sitting in a nice tax efficient home, until such time as it is required. For many, this will be a far more sensible option than (not) spending it all at once.

Beware Pensions Flexibility Pitfalls

Posted on March 27, 2014 by - Budget, News, Pensions

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

Posted on March 20, 2014 by - Budget, News, Pensions

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

Posted on March 20, 2014 by - Budget, News

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

Posted on March 19, 2014 by - Budget, News

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

Posted on March 19, 2014 by - Budget, News, Pensions

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.