The Department for Work and Pensions has just launched a new campaign to explain the new single-tier state pension.
The new single-tier state pension, which will replace both the basic state pension and the state second pension (S2P) is now only 16 months away. While the focus of late has been on increased flexibility for private pensions, the state pension reform is in some respects more significant, if only because it will affect many more people.
The Department for Work & Pensions (DWP) has launched what it describes as a “new multi-channel advertising campaign” which it hopes will “ensure everyone knows what the State Pension changes mean for them.” That may be a tall order to judge from some research results which the DWP published alongside the press release announcing its new campaign. That research showed:
• 42% of people yet to retire admitted that they needed to find out more about saving for retirement;
• 38% conceded they “try to avoid thinking about” what will happen when they stop working;
• Only 60% of those surveyed realised it is possible to take action to increase their State Pension; and
• 37% of those aged 65 or over thought (wrongly) that the amount of their state pension will change as a result of the reforms. Although the DWP did not ask the obvious question, the chances are very few in that group were expecting a cut in payments after April 2016.
The DWP’s ministers “are urging everyone – and the over-55s in particular – to look at what the changes will mean for them and to secure a detailed State Pension statement so that everyone can plan accurately for retirement.” It is a recommendation we thoroughly agree with. However, be warned that if you have ever been a member of a contracted pension scheme you could well find that your projected state pension is less than “around £150 a week”, which is commonly quoted – even by the DWP in its press release.
Details have begun to emerge on how the new inheritable ISA rules will operate. And the good news is that it will be achieved by an increased ISA allowance for the surviving spouse rather than the actual ISA assets themselves. This means clients won’t have to revisit their wills.
How the rules will work.
If an ISA holder dies after 3 December, their spouse or civil partner will be allowed to invest an amount equivalent to the deceased’s ISA into their own ISA via an additional allowance. This is in addition to their normal annual ISA limit for the tax year and will be claimable from 6 April 2015. This means the surviving spouse can continue to enjoy tax free investment returns on savings equal to the deceased ISA fund. But it doesn’t have to be the same assets which came from the deceased’s ISA which are paid into their spouses new or existing ISA. The surviving spouse can make contributions up to their increased allowance from any assets.
What it means for estate planning
By not linking the transferability to the actual ISA assets, it provides greater flexibility and doesn’t have an adverse impact on estate planning that your client may have already put in place. For example, had it been the ISA itself which had to pass to the spouse to benefit from the continued tax privileged status, it could have meant many thousands of ISA holders having to amend their existing Wills. Where the spouse was not the intended beneficiary under the Will or where assets would have been held on trust for the spouse – a common scenario – the spouse would miss out on the tax savings on offer. Instead it’s the allowance which is inherited, not the asset. This means that, even in the scenarios described above, the spouse can benefit by paying her own assets into her ISA and claiming the higher allowance. And the deceased’s assets can be distributed in accordance with their wishes, as set out in their Will.
The tax implications
The tax benefits of an ISA are well documented. Funds remain free of income tax and capital gains when held within the ISA wrapper. And it’s the continuity of this tax free growth for the surviving spouse where the new benefit lies. It’s an opportunity to keep savings in a tax free environment. But the new rules don’t provide any additional inheritance tax benefits. The rules just entitle the survivor to an increased ISA allowance for a limited period after death. The actual ISA assets will be distributed in line with the terms of the Will (or the intestacy rules) and remain within the estate for IHT. Where they pass to the spouse or civil partner, they’ll be covered by the spousal exemption. Even then, ultimately the combined ISA funds may be subject to 40% IHT on the second death.
With ISA rules and pension rules getting ever closer, it may be worth some clients even considering whether to take up their increased ISA allowance if the same amount could be paid into their SIPP. This would achieve the same tax free investment returns as the ISA and the same access for client’s over 55. But the benefit would be that the SIPP will be free of IHT and potentially tax free in the hands of the beneficiaries if death is before 75.
The new allowance will be available from 6 April 2015 for deaths on or after 3 December. Draft legislation is expected before the end of the year and the final position will become clear after a short period of consultation. The new inherited allowance will complement the new pension death rules – a welcome addition to the whole new world of tax planning opportunities for advisers and their clients from next April.
The price of crude oil has fallen around 40 per cent since a recent peak in June this year. This has a profound effect on economies and markets around the world as the cost of manufacturing and transporting goods falls along with oil producers’ income and the currencies of oil-rich countries.
The theory goes that consumer spending will rise because people have more disposable income; that inflation will fall as the price of goods eases; and that companies with high energy bills will become more profitable. If lower prices hold, the effect might become political and environmental as the balance of world power shifts from oil exporters to oil importers, and the impetus to develop cheaper clean energy wanes. Oil seeps so deep into the global economy you might think that to be a successful investor you need to have an accurate view on its price and its impact on asset prices. But you would be wrong.
No-one with an opinion about oil knows whether their view is right or wrong, and only the changing price will confirm which they are. Market prices are a fair reflection of the balance of opinion because they are created by many buyers and sellers agreeing on individual transactions. As an investor you can take a view of whether that balance – that price – is right but, like all other people with an opinion, you have no way of knowing whether you are right or wrong until the price moves.
Knowing this, it seems irrational to take a view (or a risk) on something so random as the direction of the oil price. In fact, why would one take a view on anything related to the changing price of oil; the US economy, for example; or the price of Shell; or Deutsche Post; or anything else?
The rational approach is to let capital markets run their course and to have a sufficiently diversified portfolio that allows you to relax in the knowledge that, over time, you will benefit from the wealth-generating power of your investments as a whole; without risking your wealth on a prediction that might go one way or the other.