Revolutionising investor attitudes towards pensions

The Treasury has announced that it is looking to relax the law requiring everyone to buy an annuity by age 75. This follows the coalition government’s decision in the emergency Budget to end compulsory annuitisation by April 2011.

The aim is to revolutionise investor attitudes towards pensions and encourage greater retirement saving so that we take greater responsibility for our financial futures. It will also mean that everyone who invests in a pension can retain control of their pension assets right through until the day they die.

The proposed law change is aimed at giving individuals greater flexibility over how they use the savings they have accumulated. This would see the replacement of some pension tax rules with a new system that gives people greater freedom and choice.

This consultation is a revolutionary change and also includes tax breaks available on pensions. It is expected that investors will have the choice of buying an annuity, as at present, and in addition they will have a choice of two drawdown options to select from.

Investors who can demonstrate that they have secured a minimum level of income will have the choice of taking money from a flexible drawdown plan at will. This means receiving it all back in one go as a cash sum if required. Income withdrawals will be subject to income tax.

For those investors with insufficient income to satisfy the ‘minimum income requirement’, there will be the option of a capped drawdown. This capped drawdown will have fairly conservative income limits, designed to ensure that investors never run out of money.

Those investors who do not want to take the high risk involved with drawdown will still be able to convert their pension fund into an annuity, which will pay a secure taxable income for life.

The death benefit rules are changing and becoming simpler and the government has confirmed that it will be ending the Alternatively Secured Pension.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

10 tax saving tips to make more of your money

1. Tax-sheltered ISA wrappers
Hold higher yielding investments in tax-sheltered ISA wrappers. On 6 April 2010, the annual Individual Savings Account (ISA) subscription limit rose to £10,200. The whole sum can be placed in a stocks and shares ISA or, alternatively, up to half can be put into a cash ISA and the remainder into a stocks and shares ISA. So for a couple, this represents £20,400 savings protected from capital gains or income tax. Make sure you use your entire allowance, as it can’t be carried over into the next tax year.

2. Claim tax relief on your pension
Utilise remaining pension contribution allowances in 2010/11 where higher-rate income tax relief is available. Currently, if you pay higher-rate tax but earn less than £130,000, HM Revenue & Customs (HMRC) will give you £40 tax relief on every £100 saved. People with earnings can invest up to 100 per cent in their pension each year up to a current annual limit of £255,000. The lifetime investment allowance is £1,800,000.

3. Make a will to minimise an inheritance tax bill
If you pass away without making a will, HMRC rules dictate how your estate is divided up. Yet if you do make a will, not only can you have a say over who gets what, but you can also minimise the inheritance tax (IHT) payable. Any amount you leave above £325,000 (2010/11) will be taxed at 40 per cent. However, some gifts, such as money left to charities or paid into trust funds for children and grandchildren, are not taxable. A little planning goes long way in reducing this tax liability.

4. Capital gains tax
Utilise capital gains tax allowances, worth £10,100 (2010/11) per person, and consider transferring assets to spouse/civil partner as necessary.

5. Shelter income-producing assets
Transfer non-tax sheltered income-producing assets to lower-rate taxed spouses/civil partners. By transferring assets from one spouse to another, couples could pay less tax. Many partners hold joint savings. But if your income differs, it may be more sensible from a tax perspective to move assets into the sole name of the individual on the lower tax band.

6. Enterprise investment schemes
If you subscribe for new shares in an enterprise investment scheme, you receive 20 per cent income tax relief on the amount subscribed up to a limit of £500,000 (2010/11) a year, as long as you hold onto the shares for three years and have paid enough income tax.

7. Don’t lose out on interest
Savings interest usually has 20 per cent tax deducted before the saver receives it. But anyone over 16 whose income is less than their tax allowance does not have to pay income tax on their savings. If you have children who are not working and have a savings account, then they should complete HMRC form R85 to ensure that they are paid gross interest, that is, without tax being deducted.

8. Check your tax code
Your personal tax code is critical to working out how much tax you should pay. Yet HMRC’s shift to a new computer system earlier this year saw thousands of erroneous codes sent out. Now more than ever, it’s vital to check your payslip to make sure your salary is stated correctly and that you are being taxed at the appropriate rate.

9. Tick for Gift Aid
Whether you are sponsoring somebody raising money for charity or donating through the payroll, make sure the Gift Aid box is selected so that the cause gets the full, tax-free amount. Charities take your donation – which is money you’ve already paid tax on – and reclaim the basic rate tax from HMRC on its ‘gross’ equivalent – the amount before basic rate tax was deducted.

10. Trading losses
Freelancers and other self-employed individuals who make a loss can set the loss against income in the year of the loss or carry it back to the previous year. In addition, losses that arise in the first four years of the business can be carried back up to three years. Claims to carry back losses in 2008/09 must be made by 31 January 2011.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

A ‘one size fits all’ retirement policy is no longer acceptable

With an ageing population, increasing weight has been given to the argument that a ‘one size fits all’ retirement policy is no longer acceptable and that people aged 65 or over should not be considered incapable of carrying out their jobs to the standards expected.

In July, the government announced that it would launch a consultation process to look at plans to end the default fixed retirement age for the UK’s workforce. Subject to the consultation paper, from October 2011 employers will not be able to force employees to retire at 65 without offering them financial compensation.

The change in the rules would mean that the employer’s only obligation would be to hold a meeting with each older member of staff to discuss their options at least six months before they reach 65.

As an employer must give six months’ notice before someone is made to retire on age grounds, the change in the rules could become effective from 6 April next year.

Removing the default retirement age (DRA) of 65 will mean that employers may have to change how they manage their workforce. Employees will not be forced to work beyond 65, but will have the option to do so and could even stay on into their 70s or 80s.

A handful of individual employers will still be able to operate their own compulsory retirement age but only if they can justify it objectively on the basis that older staff are unable to do a job properly. Examples could include air traffic controllers and police officers.

Employment relations minister, Ed Davey, said: ‘With more and more people wanting to extend their working lives, we should not stop them just because they have reached a particular age.

‘We want to give individuals greater choice and are moving swiftly to end discrimination of this kind.

‘Older workers bring with them a wealth of talent and experience as employees and entrepreneurs. They have a vital contribution to make to our economic recovery and long-term prosperity.

‘We are committed to ensuring employers are given help and support in adapting to the change in regulations’.

Employers that wish to retire older members of staff will be able to do so only on the same grounds that would apply for someone much younger – for instance, because of their conduct or performance.

Before 2006, the compulsory retirement age was set at 65, or earlier for some jobs. But the previous government changed the law so that workers could request to stay on. However, companies are not compelled to let them.

How the new rules could affect your retirement provision

From 2011, private sector final salary pensions need only be uprated in line with the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI), the government announced recently. Typically, CPI runs below RPI and, consequently, over time this could mean some final salary members experience a reduction in their retirement income.

This may not apply to all schemes. Some schemes may specifically state in their rules that they will uprate benefits in line with RPI. It’s also worth bearing in mind that although the government sets what the minimum inflation-linking schemes must provide, it’s perfectly possible for a scheme to provide increases in excess of this level.

If your scheme does intend to adopt CPI uprating, this could have a negative impact on the income you can expect to receive from the scheme. Ultimately, this depends on the RPI and CPI levels and how they differ, but historically CPI has trailed behind RPI. The impact on your income will also depend on when you built up benefits, because the inflation protection afforded to final salary scheme members has changed over the years.
Tax is not applicable on the money you are paid out on retirement. But from April next year, if you earn more than £150,000 you will have to pay a tax bill based on your age, length of service and salary.

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested.

Leaving your assets, who gets what?
If you leave everything to your husband, wife or civil partner, in this instance there usually won’t be any Inheritance Tax to pay because a husband, wife or civil partner counts as an ‘exempt beneficiary’. But bear in mind that their estate will be worth more when they die, so more Inheritance Tax may have to be paid then.

However, if you are domiciled (have your permanent home) in the UK when you die but your spouse or civil partner isn’t, you can only leave them £55,000 tax-free.

Other beneficiaries
You can leave up to £325,000 tax-free to anyone in your will, not just your spouse or civil partner (2010/11). So you could, for example, give some of your estate to someone else or a family trust. Inheritance Tax is then payable at 40 per cent on any amount you leave above this.

UK Charities
Inheritance Tax isn’t payable on any money or assets you leave to a registered UK charity – these transfers are exempt.

Wills, trusts and financial planning
As well as making a will, you can use a family trust to pass on your assets in the way you want to. You can provide in your will for specific assets to pass into a trust or for a trust to start once the estate is finalised. You can also use a trust to look after assets you want to pass on to beneficiaries who can’t immediately manage their own affairs (either because of their age or a disability).

You can use different types of family trust depending on what you want to do and the circumstances. If you are planning to set up a trust you should receive specialist advice. If you expect the trust to be liable to tax on income or gains you need to inform HM Revenue & Customs Trusts as soon as the trust is set-up. For most types of trust, there will be an immediate Inheritance Tax charge if the transfer takes you above the Inheritance Tax threshold. There will also be Inheritance Tax charges when assets leave the trust.

Putting it off could mean that your spouse or civil partner receives less

It’s easy to put off making a will. But if you die without one, your assets may be distributed according to the law rather than your wishes. This could mean that your spouse receives less, or that the money goes to family members who may not need it.

If you and your spouse or civil partner own your home as ‘joint tenants’, then the surviving spouse or civil partner automatically inherits all of the property.

If you are ‘tenants in common’ you each own a proportion (normally half) of the property and can pass that half on as you want.

A solicitor will be able to help you should you want to change the way you own your property.

Planning to give your home away to your children while you’re still alive

You also need to bear in mind, if you are planning to give your home away to your children while you’re still alive, that:

- gifts to your children, unlike gifts to your spouse or civil partner, aren’t exempt from Inheritance Tax unless you live for seven years after making them

- if you keep living in your home without paying a full market rent (which your children pay tax on) it’s not an ‘outright gift’ but a ‘ gift with reservation’, so it’s still treated as part of your estate, and so liable for Inheritance Tax

- following a change of rules on 6 April 2005, you may be liable to pay an Income Tax charge on the ‘benefit’ you get from having free or low cost use of property you formerly owned (or provided the funds to purchase)

- once you have given your home away, your children own it and it becomes part of their assets. So if they are bankrupted or divorced, your home may have to be sold to pay creditors or to fund part of a divorce settlement

- if your children sell your home, and it is not their main home, they will have to pay Capital Gains Tax on any increase in its value

If you don’t have a will there are rules for deciding who inherits your assets, depending on your personal circumstances. The following rules are for deaths on or after 1 July 2009 in England and Wales; the law differs if you die intestate (without a will) in Scotland or Northern Ireland. The rates that applied before that date are shown in brackets.

If you’re married or in a civil partnership and there are no children

The husband, wife or civil partner won’t automatically get everything, although they will receive:

- personal items, such as household articles and cars, but nothing used for business purposes

- £400,000 (£200,000) free of tax – or the whole estate if it was less than £400,000 (£200,000)

- half of the rest of the estate

The other half of the rest of the estate will be shared by the following:

- surviving parents

- if there are no surviving parents, any brothers and sisters (who shared the same two parents as the deceased) will get a share (or their children if they died while the deceased was still alive)

- if the deceased has none of the above, the husband, wife or registered civil partner will get everything

If you’re married or in a civil partnership and there were children

Your husband, wife or civil partner won’t automatically get everything, although they will receive:

- personal items, such as household articles and cars, but nothing used for business purposes

- £250,000 (£125,000) free of tax, or the whole of the estate if it was less than £250,000 (£125,000)

- a life interest in half of the rest of the estate (on his or her death this will pass to the children)

The rest of the estate will be shared by the children.

If you are partners but aren’t married or in a civil partnership

If you aren’t married or registered civil partners, you won’t automatically get a share of your partner’s estate if they die without making a will.

If they haven’t provided for you in some other way, your only option is to make a claim under the Inheritance (Provision for Family and Dependants) Act 1975.

If there is no surviving spouse/civil partner

The estate is distributed as follows:

- to surviving children in equal shares (or to their children if they died while the deceased was still alive)

- if there are no children, to parents (equally, if both alive)

- if there are no surviving parents, to brothers and sisters (who shared the same two parents as the deceased), or to their children if they died while the deceased was still alive

- if there are no brothers or sisters then to half brothers or sisters (or to their children if they died while the deceased was still alive)

- if none of the above then to grandparents (equally if more than one)

- if there are no grandparents to aunts and uncles (or their children if they died while the deceased was still alive)

- if none of the above, then to half uncles or aunts (or their children if they died while the deceased was still alive)

- to the Crown if there are none of the above

It’ll take longer to sort out your affairs if you don’t have a will. This could mean extra distress for your relatives and dependants until they can draw money from your estate.

If you feel that you have not received reasonable financial provision from the estate, you may be able to make a claim under the Inheritance (Provision for Family and Dependants) Act 1975, applicable in England and Wales. To make a claim you must have a particular type of relationship with the deceased, such as child, spouse, civil partner, dependant or cohabitee.

Bear in mind that if you were living with the deceased as a partner but weren’t married or in a civil partnership, you’ll need to show that you’ve been ‘maintained either wholly or partly by the deceased’. This can be difficult to prove if you’ve both contributed to your life together. You need to make a claim within six months of the date of the Grant of Letters of Administration.

Staying on track for a comfortable retirement

Saving for your retirement is one of the most important financial plans you can make. You can choose to save in a pension scheme and/or a savings plan, but whatever you decide, you’ll want your funds to grow and be worth as much as possible in the long term.
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