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Do you know the current position of your Defined Benefit Pension?

I only ask because things have changed quite dramatically recently. In fact, according to PwC, the combined deficit of defined benefit pension funds in the UK is currently standing at a whopping £460bn.

It doesn’t seem to be calming down either, with PwC chief actuary Steven Dicker stating:
“The deficit calculation is based on a ‘gilts+’ approach and is sensitive to even modest market movements. Compounding with the uncertain economic and political climate, the deficits calculated on this basis are likely to remain volatile.”

According to their firm’s Skyval index (which tracks 5,800 DB pension funds), in July and August this year we saw a continued increase in the deficits by a further £40bn.

As always, politics has a role to play

Skyval also tracked the impact of political events and policy decisions on DB deficits in 2016. Unsurprisingly the Brexit vote had the biggest short-term impact on DB pension deficits in 2016 and has an £80bn increase from 23 June to 24 June attributed to it.

PwC’s global pensions head Raj Mody predicts that 2017 will see pension fund trustees and sponsors having to reach much more informed conclusions about how to tackle their pension deficit and to put robust strategies in place.

Mody goes onto suggest “Those involved are increasingly realising the importance of transparency in order to decide appropriate strategy. DB pensions are long-term commitments stretching out over several decades and so there is limited value in pension funds making decisions based on simplified information.”

Time for a plan!

Schemes affected by the deficit have to have a recovery plan in action. So it might be worth looking into what your scheme has mapped out in terms of a action.

What if your sponsoring employer goes bust?

If the sponsoring employer goes bust, the scheme will automatically go into the Pension Protection Fund (PPF).

Unfortunately the likelihood of a sponsoring employer going bust is on the increase, with big names like BHS famously included on the growing list.

Not only that, but with Brexit just around the corner, you can pretty much guarantee that economic uncertainty is here for a while longer.

So what will the PPF do to protect your current pension?

If you’ve already retired, the good news is that things shouldn’t change much at all. If you were over the scheme’s normal retirement age when your employer went bust, the PPF usually pays the full 100% level of compensation.
If you retired early, and you did so before you reached your scheme’s normal pension age (before your employer went bust), then the PPF usually pays up to a 90% level of compensation. However the compensation is capped. The cap at age 65 is, from 1 April 2017, £38,505.61 (this equates to £34,655.05 when the 90 per cent level is applied) per year. With this cap being set by DWP.
There is also a Long Service Cap for members who have 21 or more years’ service in their scheme. Which increases the cap by 3% for each full year of pensionable service above 20 years, up to a maximum of double the standard cap.
If you haven’t retired just yet, when you do reach your scheme’s normal retirement age, the PPF should pay compensation based on a 90% level subject to a cap, as described above.

So who’s most affected by this?

The very simple answer is, that this immediately affects people on high salaries who are approaching retirement.
Which is why it’s important that you have a good understanding of what the impact of this deficit might have on your retirement. That way you will be aware of any difference to what you expected to receive from your pension and can plan accordingly.

Finally, the most important question… what can YOU do about this today?

If your scheme is showing increased deficits, combined with higher transfer values, then now is an opportune time to carry out a full review. Especially as things may have dramatically changed since you started on the scheme and your expectations may no longer be on course to be achieved and delivered.

The MPAA (Money Purchase Annual Allowance) and what it means for you

One pre-election promise that’s here to stay

Despite dropping the clause reducing the MPAA from £10,000 to £4,000 on 25 April 2017, in order to help get the Finance Bill 2017 to come into force before Parliament dissolves on 3 May, the Government did promise that it would re-introduce the dropped clauses after the general election (assuming they got re-elected). Although it may not have made campaign headlines at the time, it’s certainly worth looking at now.

As we stand right now, the clause has been re-introduced with retrospective effect back to 6 April 2017. With a reduction in the MPAA from £10,000 to £4,000. Although the current Annual Allowance rules are not replaced by the MPAA, nor does it reduce the normal annual allowance.

So what do the changes mean?

Ever since 6th April 2015, it has been possible to access all of your Money Purchase Pension Savings, following the reforms known as ‘Freedom & Choice’.

However there is a catch, as accessing your entire fund will result in those monies (with the exception of the tax-free cash) becoming subject to income tax; with this possibly being charged at a rate that could be higher than you usually pay.

What triggers the changes to the MPAA?

The MPAA applies when your pensions flexibility has been accessed. However this will only be significant where there is £4,000 or more total contributions to a money purchase arrangement in a Pension Input Period.

This accessing flexibility is referred to as a ‘Trigger Event’ and can be defined in the following examples:

  • Uncrystallised Fund Pension Lump Sum (UFPLS)

    This occurs when you access your pension fund via an UFPLS.

  • Flexi-access Drawdown Income

    Any designation of funds for flexi-access drawdown doesn’t necessarily trigger the MPAA, nor does the payment of a PCLS. Having said that, once any income (or any lump sums from the designated pot) is taken from the funds designated to a flexi-access drawdown plan, the MPAA applies.
    It’s important to note that, should the income be taken from assets that can be wholly attributable to a Disqualifying Pension Credit, then the MPAA is not triggered. Just to clarify disqualifying pension credits are pension credits from divorce pension splitting orders.

  • Capped Drawdown Income Above Cap

    If you were in “capped drawdown” on 5 April 2015 you can then continue in capped drawdown. The existing system for reviewing and calculating the cap is expected to remain in place. It is only if you then choose to take an income in excess of your cap that the MPAA will apply.

  • Existing Flexible Drawdown

    If you had flexible drawdown fund before 6 April 2015, then that is treated as having accessed flexibility on 6 April 2015 as your drawdown became flexi-access on this date.

  • Stand-Alone Lump

    In some circumstances where a stand-alone lump sum is paid out from 6 April 2015 the MPAA will also apply.

What happens when the trigger is pulled?

Once the trigger occurs, then the MPAA applies from the day after the trigger event. The only exception to this is any pre-6th April 2015 flexible drawdowns, which invoked the restricted allowance immediately from 6th April 2015.

So What’s The Tax Implication To You?

With the new annual allowance at £4,000 there are bound to be many more scheme members having to pay an excess tax charge. With these extra charges being paid direct to HM Revenue & Customs after the end of the tax year.

Don’t make a Snap Decision as a result of the Snap Election!

number 10 downing street

Have you settled down after the election yet?

I think it’s fair to say that the shock General Election returned a huge shock of a result, no matter what you political affiliations.

The political correspondents are really earning their money at the moment and the TV satirists are having a field day with the fresh new material they’ve all been supplied with.

If your head is still in a spin with regard to the outcome and it’s implications on the economy and Brexit, just imagine how the markets must feel. Not just here in the UK, but in Europe as well as the rest of the world.

I’m not sure uncertainty quite sums it up.

Will Teresa May be able to hang on in a hung parliament?

The implications of a hung parliament are huge. There’s a great deal of horse-trading going on behind the door of Number 10, with alliances being formed in order to ensure that the Queen’s Speech passes smoothly. However all of these deals come with a cost, in both financial and political credibility terms.

On top of all of that are the noises coming from the more vocal dissatisfied conservatives, as well as telling silences from very senior members of the party. So all things point to a leadership challenge looming large on the horizon.

Not the most ideal way to launch into Brexit negotiations. But we are where we are. We live in the greatest democracy on the planet and the British people have spoken to the Mother of Parliaments – and she must listen.

Who would be brave enough to predict the next six months?

Well none of the political or economic experts feel that they are in a position to comfortably give an opinion of what the next six months might look like. To say that we face a period of instability and choppy waters is about the only thing they can say, with a degree of certainly.

So what do the market’s think?

We know that the one thing that the markets love more than anything else is stability. We also know that that is something that will return at some point; but seems to be a little way of at the moment.

With that in mind, from an investment perspective now might be the time to sit tight, ride things out and see how the markets look when things settle down. We are a few days into this period of turmoil and a wise captain never plots a new course from within the eye of the storm. Far better to let the turmoil play out and re-asses things once the maelstrom has dissipated. And dissipate it will. It always does.

Political and economic history shows us that things calm down. Politicians will do deals, or elections will be called. Either way, a new normality returns; and from the new status quo, the markets settle and return to the long-term trends of growth.

So what are the smart investors doing right now?

Well sometimes the best course of action is no action at all. Leaving your investments alone and waiting for the markets to settle back to a steady state is a proven a strategy that has worked in the past when the markets face ‘interesting times’.

Consider the medium to long-term performance of the markets. They are robust and they unrelentingly move forward, despite what the politicians across the world try to do to stop them.

So, unless you need to liquidate your portfolio because your circumstances have changed, the consensus of opinion seems to be to hang on and let things settle.

Elections and Referendums

Just when you think you’ve seen enough of elections and referendums, they’re starting to appear like busses.

Rollercoaster Elections Referendums

Here we all go again!

It seems like only yesterday that David Cameron and Ed Miliband were battling for the keys of Number 10. Then, just as we all got our breath back, we had the EU Referendum.

Hot on Brexit’s heals, we then witnessed President Trump’s march toward The White House. Right now the EU is in the midst of it’s own electoral battles and Turkey is undergoing historic changes that may well bring about fundamental alterations to it’s constitution.

So with all that literally days behind us, Teresa May has now announced a snap General Election for June 8th.

So, what does it all mean for our investments?

Not so steady as we go.

We all know that the markets love stability and that we haven’t had very much of that recently, but things were starting to settling down. Granted there is the sabre rattling regarding Brexit and the UK’s future economic relationship with Europe – but there always has been.

It can’t be good for business though. As we all know that political uncertainty leads to a volatile market. However, we need to remember that political uncertainly doesn’t last, but the markets do!

It’s fair to say that changes in the status quo often disrupt the domestic and international markets, especially if the changes are unexpected or seem to signify a departure from the established order of things. Couple that with the fact that many observers are pointing out that the political and economic landscape of Europe hasn’t changed so much since the end of the Second World War. What is happening in the UK, Europe and America is huge and no one knows exactly where it will all settle. But settle it will. And when it does the markets will adjust themselves, dust themselves down and go about their usual business.

The markets love time more than politics.

Analysts tell us to take great comfort by looking back at long-term market performance. For when we examine how the markets behave historically, the further back we go the more we see steady growth.

In saying that, it doesn’t mean that growth was more assured or stronger years ago. What it means is that if we look at the markets over years rather than months, then the robust nature of investment growth becomes apparent.

It’s by looking back in time that we can clearly see that investments generally return the best options in order to grow a lump sum of cash. This knowledge should arm us with the confidence to look to retaining our market positions in times of uncertainty.

We may not all share the same politics, but we’re all in the same boat.

We are all facing uncertainty. We are all second-guessing the results of the General Election. What that will mean to Brexit? How will the victors navigate the UK on it’s maiden voyage as an Economic power in its own right?

But take comfort in the fact that the markets are used to uncertainty and they can cope with it way better than us mere humans. Just think of the markets as a reflection of life and society. They have their ups and downs and often face periods of calm certainty as well as violent change.

Our approach is evidence-based, long-term buy and hold, concentrating on getting the right mixture of risk and return for our clients. Essentially this is a ‘steady as she goes’ approach which avoids market timing or stock selection as far as possible since these have not been shown to add value. This has generally served them well over time. Unless people’s goals have changed, we do not advocate any changes in the levels of risk taken. We have already made changes to our portfolios to remove the bias to UK equities and these are being rolled out through our regular client review process. So we are not complacent but we do base our approach on our understanding of the long term behaviour of the markets.

Lifetime ISA (LISA)

LISA Lifetime ISA

There’s been a great deal of talk recently about the launch on April 6th this year of the Lifetime ISA (LISA). So, I thought it would be very worth while to provide you with a quick overview of what exactly a LISA is, how they best work and who they work best for.

With property prices increasing and the accompanying problems of getting that all important deposit together for your first home, LISAs are designed to be a vehicle to help overcome this challenge.

Specifically aimed at investors between the ages of 18 and 40, who are saving towards the purchase of their first home. The idea being that savers can put in up to £4,000 a year and receive a bonus of up to £1,000 per year from the Government. So, if you have your LISA between the ages of 18 and 50 that could be as large as £32,000 in bonus payments (based on current bonus payments). Although Mr Osborne stated that the annual bonus would continue to be paid to LISA holders until they reach their 50th birthday, former pensions minister Steve Webb added that the 25% rate could turn out to be a “Teaser LISA” rate that may fall back in the future.

There are also some stipulations that will accompany your LISA. The funds must be used to purchase your first home (wroth up to £450,000). If you don’t use your LISA for the purchase of your
first home, then the funds will be locked away until you are 60 years old.

Just like a standard ISA, you have the choice of holding your investment in cash, or invest it in funds and individual stocks where any growth in your assets will be tax-free. You can use your LISA for the purchase of your first house, or access the funds at 60. However, if you take out any cash before then there is a rather large 5% penalty to pay, as well as losing your government bonus, along with any investment gains you’re made on that bonus!

There has been a great deal of debate as to whether the LISA would make a viable pension vehicle for workers in their 20’s and 30’s, but the fact that a LISA does not attract employer contributions may outweigh its attractive 25% annual bonus.

I suspect the real dilemma, for investors saving for a home, is the choice between the LISA and the Help-to-Buy Isa. Although the latter Help-to-Buy Isa will close to new savers in November 2019 and will only be open to new contributions until 2029. But if you are one of those investors whose timings place you in a position of choice, then there are some important points you should be aware of.

Firstly, the amount you are allowed to invest annually differs. Both products offer a 25% government bonus for those buying a home, but the allowable investment needs considering. A LISA allows you to invest £4,000 annually and will attract a £1,000 top up. A Help-to-Buy Isa allows you to invest £2,400 annually and attracts a bonus of £600. Plus, when you first open a Help-to-Buy Isa, if you can deposit a lump sum of £1,000 that will generate a bonus of £250 (meaning the bonus in the first year could be £850). So, a Help-to-Buy has a bonus cap of £3,000 whereas a LISA pays a bonus of £1,000 every year, so could climb to £32,000.

There are some differences in the value of the property you can buy too. Help-to-Buy allows you to purchase a property up to £250,000 outside London and £450,000 within London. The LISA puts a straight cap of £450,000 wherever you decide to buy in the UK.

So as with all financial products, careful choices have to be made. As the LISA may be ideal for some of us, but that largely depends upon the life stage we are at and what we are planning for in the future.

Article 50 and Your Finances

Brexit Article 50

After nine months the UK has delivered. These words are what European Council President Donald Tusk posted on Twitter when he received Britain’s article 50 letter on Wednesday. We will not join the media in speculations whether the letter was “aggressive” or “positive”, or what particular UK and EU representatives’ reactions reveal about the upcoming negotiations. Instead we will focus on what we know and what it all means for your finances, now and going forward.

Article 50 Process

What exactly does “article 50” mean? It refers to article 50 of the Treaty on European Union (full text here), which regulates the process of voluntary withdrawal of a member state from the EU. It has been in force only since 2009 and is now being used for the first time in history.

The entire procedure specified (very vaguely) in article 50 is as follows:

  • A member state which has decided to leave the EU (as the UK did last year) must formally notify the European Council of its intention (as the UK did on Wednesday).
  • Following the notification, a withdrawal agreement will be negotiated. It will specify the conditions and exact date of withdrawal, as well as the leaving state’s future relationship with the EU.
  • The withdrawal agreement must be approved by the European Parliament and the European Council. The latter will act by qualified majority.

The Deadline: 29 March 2019

Importantly, article 50 specifies a deadline for the negotiations. If no agreement is reached within two years from the formal notification (i.e. 29 March 2019), the UK will cease to be a member of the EU without any trade and other deals in place. This would be the hardest Brexit possible, with disastrous effects which everyone wants to avoid. It is therefore extremely unlikely.

Article 50 contains a provision to extend the negotiations, subject to unanimous (possibly a very important detail) approval by the European Council.

Things to Watch

It is impossible to predict the outcome of the negotiations and effects on the economy. While the media have been speculating about the main topics and most likely sticking points for long time, new issues will almost certainly arise as the negotiations go forward.

Overall, future trade arrangements and access to the single market (as well as the cost the UK will have to pay for it) are the key questions with the greatest potential effect on the markets. Financial industry regulations and the ability to maintain London’s position as the financial capital of Europe will be another important topic.

Role of Individual Countries

One thing to keep in mind is that the UK won’t really be negotiating with one counterparty. Political situation in individual EU countries will certainly affect the tone and outcome of the negotiations. Therefore, some of the key things to watch are this year’s elections in France (first round 23 April, second round 7 May) and Germany (24 September).

That said, while big countries like Germany and France will definitely act as main drivers, it would be a mistake to underestimate the potential importance of smaller countries and their own particular interests. For instance, most East and South European countries will be concerned about the rights of their citizens living in the UK. Agriculture and fishing, heavily regulated by the EU, will be important topics for some countries; defence or EU budget contributions for others. There is also the very unique role of Ireland with its historical ties to the UK.

Not least, we should not forget those within our borders, particularly Scotland and Northern Ireland.

What It Means for Your Finances

If there is one word to sum up the entire Brexit story, it is uncertainty. There is very little we know. Even the people directly involved in the negotiations are unable to predict the result. Moreover, even if we knew the exact agreement coming out of the negotiations, the effects on the economy and the financial markets are impossible to forecast with any degree of accuracy. Brexit won’t be the only issue affecting the markets in the next months and years. Among other factors, developments in the US, China and other regions will be as important, if not more.

In light of the above, our recommendation is the same as it was immediately after the Brexit referendum: Stick with your strategy and don’t try to bet your savings on things you can’t predict. History has shown that consistent investing beats market timing in the long run.

We will of course continue to monitor the situation and provide updates when necessary.

Tax Year End Planning Checklist

With three weeks left until the tax year end, it’s time to review your finances and check whether there are any actions you can take to make your current and future tax position as efficient as possible. As every year the key date is 5 April, and as always we provide a tax year end planning checklist to guide you through the main optimisation opportunities, which you can find below.

Income Tax and National Insurance

If you have some control over the size and timing of your income, e.g. you are self-employed or own a company, there may be opportunities to optimise your income tax and NI bill, such as delaying an invoice or finding the right combination of salary and dividends.
The main income tax and NI figures for 2016-17 are as follows:

  • £5,824 (£112 per week, same as previous year) = Lower Earnings Limit – minimum to qualify for State Pension and other benefits
  • £8,060 (£155 per week, also unchanged) = Primary Threshold for employee’s NI (12%)
  • £8,112 (£156 per week, also unchanged) = Secondary Threshold for employer’s NI (13.8%)
  • £11,000 = Personal Allowance – basic rate income tax (20%) applies above this amount
  • £32,001 = higher rate income tax (40%) kicks in

All the various rates, thresholds and allowances for this and the next tax year are available on this page on gov.uk.

Dividends

If you have the option, make sure you use your tax-free dividend allowance, which is £5,000 for both 2016-17 and 2017-18 (it will go down to £2,000 in 2018-19, as Chancellor Philip Hammond revealed in his last week’s Budget speech).

Beyond the allowance, dividends are taxed at 7.5%, 32.5% and 38.1%, respectively, for basic, higher and additional rate taxpayers. The taxable amount includes dividends you receive from your own company, as well as any other investments you directly hold, such as shares or funds. It excludes dividends received within tax wrappers such as your pension or ISAs – powerful tax planning tools which certainly deserve your attention before tax year end.

Pension Contributions

The annual pension contribution allowance remains the same as last year at £40,000 for most taxpayers, but for high earners it is tapered at a rate of £1 for every £2 you earn above £150,000, up to £210,000 (as a result, above £210,000 the pension allowance is fixed at £10,000). HMRC provides official guidance here.

Keep in mind that you can also use any unused allowances from the three previous tax years, as long as your total contributions stay below your earned income for the current year. You should also keep an eye on the Lifetime Allowance (LTA), currently at £1 million.

5 April 2017 also marks the deadline for Individual Protection 2014, which allows you to get a higher personalised LTA as a compensation for the April 2014 LTA reduction (LTA was cut from £1.5m to £1.25 in April 2014 and further to £1m in 2016). We have covered this in detail last month.

ISAs

Besides pensions, ISAs are some of the most effective ways to save for retirement and the trend in the recent years has been towards higher allowances and more flexible rules. The range of products and investment options available under the ISA scheme has been expanding. You can invest in the traditional cash ISAs, stocks and shares ISAs and the recently introduced innovative finance ISAs.

The annual ISA allowance for 2016-17 is £15,240 (it will go up to £20,000 next year). Unlike in the past, if you have made any withdrawals during the year, it is now allowed to put money back in without reducing your allowance (provider and product specific rules may also apply).
In any case, the deposit must be made by 5 April, otherwise this year’s allowance is lost. Note that some ISA providers can take several working days to process deposits – make sure to send the final deposit at least a week before the tax year end to avoid disappointment.

Capital Gains Tax

Outside an ISA or pension, capital gains tax (CGT) normally applies when you sell an investment at a profit, with the rates being 18% and 28%, respectively, for basic and higher rate taxpayers. There is an annual CGT allowance, making the first £11,100 of capital gains tax-free. Like the dividend allowance or the ISA allowance, it is use it or lose it, and can’t be transferred to following years.

If you are holding investments with unrealised capital gains, you may want to sell and reinvest part of them in order to use the CGT allowance and reduce the tax bill in future years. You can also reinvest the proceeds in an ISA (a “Bed and ISA” transaction), which effectively earns your investments a tax-free status going forward. Of course, transaction costs apply and may outweigh the tax benefit. Taxes are only one of the many things to consider when deciding your investment strategy and actions.

Inheritance Tax and Gifts

If you have a large estate and inheritance tax (IHT) is a concern, you should also consider maximising your annual allowance for tax-free gifts (called the annual exemption). You can give up to £3,000 a year to your beneficiaries and, if you continue to live for at least seven years, the gift is out of your estate and free of IHT.

More Information and Help

Tax planning is obviously a very complex area and the above are just the main points which apply to most taxpayers. Depending on your circumstances, there may be other opportunities available to you. If you need more information concerning the above listed issues or need help with your particular situation, please do not hesitate to contact us.

Spring Budget 2017

The Rt Hon Philip Hammond MP

Spring Budget 2017

Chancellor Philip Hammond delivered his Budget speech on Wednesday 8th March 2017. It did not contain as many surprises or major changes as some of George Osborne’s Budgets in the last years, but there were a few (mostly unfavourable) points worth noting with respect to individuals and savers.

Self-Employed NICs to Rise

In spite of earlier promises by the Conservatives to not raise National Insurance Contributions (NICs), the Chancellor has announced an increase in Class 4 NICs. As a result, self-employed individuals can see their tax bill rising by several hundred pounds per year.
Currently, those who are self-employed pay two classes of NICs. Class 2 is a fixed amount (£2.80 per week in 2016-17; £2.85 in 2017-18). Class 4 is a percentage, currently 9% of profits between the Lower Profits Limit (£8,060 in 2016-17; £8,164 in 2017-18) and the Upper Profits Limit (£43,000 in 2016-17; £45,000 in 2017-18), and 2% of anything above the latter.

In April 2018 Class 2 will be abolished, as previously announced by George Osborne. This will reduce the tax bill by £146 per year. At the same time, as Philip Hammond announced today, Class 4 NICs will increase from the current 9% to 10% in April 2018 and again to 11% in April 2019. Above the Upper Profits Limit the rate will remain at 2%.

The combined result will be higher NICs for anyone earning above approximately £16,000. The increase will be greatest for those earning at or above the Upper Profits Limit, who will pay approximately £600 per year extra (the exact amounts will depend on the Lower and Upper Profits Limits, which rise every year proportionally to inflation).

Dividend Tax Allowance Cut to £2,000

Another negative surprise in the Budget is reduction of the dividend tax allowance from the current £5,000 to £2,000 per year, effective from April 2018.

Besides company owners, who are the main target of the measure, it will also affect those with larger share portfolios held outside a pension or ISA. Depending on average dividend yield, equity portfolios from about £50,000 net asset value could fall below the new reduced allowance.
Make sure you maximise the use of tax wrappers such as pensions or ISAs. If dividend tax is a concern, you may also want to consider shifting part of your equity holdings from dividend stocks to growth stocks and use the generous capital gains tax allowance to extract profits (of course, taxes are only one of the many things to consider when deciding investment strategy and portfolio structure).

Tighter Rules on Overseas Pensions

With immediate effect (from 9 March 2017) a new tax charge of 25% applies to transfers from UK pension schemes to QROPS (Qualifying Recognised Overseas Pension Schemes). The measure is aimed at those transferring their pensions overseas solely for tax optimisation purposes. Exceptions apply in cases where a “genuine need” exists, e.g. when you are moving to live and work in a different country and taking your pension pot with you.

Transfers to QROPS requested on or after 9 March 2017 will be taxed at a rate of 25% unless at least one of the following apply:

  • both the individual and the QROPS are in the same country after the transfer
  • the QROPS is in one country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein) and the individual is resident in another EEA after the transfer
  • the QROPS is an occupational pension scheme sponsored by the individual’s employer
  • the QROPS is an overseas public service pension scheme as defined at regulation 3(1B) of S.I. 2006/206 and the individual is employed by one of the employer’s participating in the scheme
  • the QROPS is a pension scheme established by an international organisation as defined at regulation 2(4) of S.I. 2006/206 to provide benefits in respect of past service and the individual is employed by that international organisation

UK tax charges will apply to a tax-free transfer if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer.

UK tax will be refunded if the individual made a taxable transfer and within five tax years one of the exemptions applies to the transfer.

Overall, the new measures will make transfers to overseas pension schemes more difficult and less advantageous in some cases. Careful consideration of all tax and other consequences of such move is as important as ever.

Tax Allowances and Thresholds

Besides the main points discussed above, the Budget also confirmed tax allowances and thresholds for the next year, most of them previously known. Some of the most important figures are listed below:

  • The personal allowance rises to £11,500 in 2017-18.
  • The higher rate threshold goes up to £45,000.
  • The Chancellor has reiterated the Government’s commitment to increase the above to £12,500 and £50,000, respectively, by 2020-21.
  • The annual ISA allowance jumps to £20,000 for 2017-18.
  • Capital Gains Tax allowance rises to £11,300.

We will discuss these in greater detail, as well as possible last minute actions, in our traditional tax year end planning checklist, due next week.

Conclusion

In spite of the unfavourable changes discussed above, the Budget speech has not changed the overall course of the Government’s financial and tax policies, which in light of the upcoming Brexit negotiations can be considered good news. Here you can find the full Budget speech.

Lifetime Allowance Protection Deadline Is Approaching

With almost two months left, there is still plenty of time for the usual tax year end optimisation tasks (we will provide detailed guidelines at the beginning of March). However, this year’s 5 April also marks the deadline for Lifetime Allowance Individual Protection 2014 application, which may require longer time to prepare. If you are still unsure whether you should take advantage of it, now is the time to review your pension and make the decision. Below we will summarise the most important facts and rules.

Lifetime Allowance and Its Reductions

The Lifetime Allowance (LTA) caps the total amount you can draw from your pension throughout your life before triggering the so called LTA charge – a rather high special tax, currently at 25% for benefits taken as income and 55% for a lump sum.

In the recent years, as part of the overall effort to make public finances more sustainable, the Government reduced the LTA on three occasions:

  • In 2012 from £1.8 million to £1.5 million
  • In 2014 to £1.25 million
  • In 2016 to £1 million

LTA Protection

Those who have built up pension pots large enough to exceed the new lowered LTA have the option to apply for LTA protection, as a compensation for the unfavourable rule changes. There have been different versions of LTA protection, always specific to the particular LTA reduction (year) and subject to different conditions (e.g. whether you can continue contributing to your pension plan).

The one whose deadline is approaching now is Individual Protection 2014 (IP 2014), designed for those affected by the 2014 LTA decrease from £1.5m to £1.25m who have continued to contribute to their pension plans after 5 April 2014 or intend to make further contributions in the future.

What Individual Protection 2014 Does

IP 2014 sets your personalised LTA to the lower of:

  • The value of your pension at 5 April 2014
  • £1.5 million

For example, let’s say your pension was worth £1.4 million at 5 April 2014 – within the old LTA effective before the 2014 reduction (£1.5m), but above the new one (£1.25m). As a result, part of your pension would become liable for the LTA charge upon withdrawal. If you apply for IP 2014, you can have LTA set individually to £1.4 million, possibly saving 25% (income) or 55% (lump sum) of £150,000 in LTA charges.

Applying for IP 2014

IP 2014 is not granted automatically and you must make a formal application by 5 April 2017. After that date the opportunity is lost forever.

In order to do so, you first need to know the value of your pension (or the combined value of all your plans if you have more than one) at 5 April 2014. Depending on pension provider, this may take considerable time to find out, which is why we recommend to start immediately.

In general, an application makes sense for those with pensions worth above £1.25m at 5 April 2014. You can apply even if your pension was worth more than £1.5m (above the old LTA) – in such case your personal LTA would be protected at £1.5m.

If You Already Have LTA Protection

Note that you can have multiple versions of LTA protection at the same time. In other words, you can also apply for IP 2014 even if you already have some of the other kinds of LTA protection in place, such as a fixed protection (any of the years) or enhanced protection (but those with primary protection are ineligible).

Applying for IP 2014 can make sense even when you already have a more favourable LTA protection in place. Different versions are subject to different conditions, and some actions (such as making further contributions to your scheme) may invalidate certain kinds of LTA protection going forward – then you will be able to use the next best version you have.

More Information and Assistance

You can find more detailed official information on the HMRC website. We would be happy to provide more detailed explanation, or assist with obtaining pension scheme details and making the application. You can contact us here

Inheritance Tax Planning and the New Main Residence Nil-Rate Band

Effective from 6 April 2017, a new main residence nil-rate band (RNRB) will be available on top of the existing inheritance tax (IHT) threshold. It can potentially save tens of thousands in IHT, but at the same time, compared to the existing IHT threshold it is subject to stricter conditions. Let’s have a look at the key points.

Summary of Existing IHT Rules

First let’s start with the basic rules which are already in place and will continue to apply:

  • IHT is due when passing assets to your children, or generally to anyone other than your spouse, civil partner, a charity or a community amateur sports club.
  • The headline IHT rate is 40%, reduced to 36% if at least 10% of the estate is given to charity.
  • The first £325,000 of your estate is free of IHT. This is called the IHT threshold or nil-rate band. Unused portion can be transferred to your spouse, which effectively makes the IHT threshold £650,000 for couples.
  • Besides the IHT threshold, there are various reliefs applying to different kinds of assets and subject to different conditions, which can further reduce the IHT liability. The Business Relief is a common example.

The New Main Residence Nil-Rate Band

The new RNRB will be available on top of the existing IHT threshold. It will be phased in gradually over the next four tax years, from £100,000 in 2017-18 to £175,000 in 2020-21. From 2021 on it should continue to grow in line with inflation. The full RNRB will be available only for estates worth under £2 million. It will be reduced by £1 for every £2 above the £2 million taper threshold.

Like the existing IHT nil-rate band, the new RNRB will be transferable between spouses or civil partners. Transfers will be possible even when the first partner died before 6 April 2017, even though the RNRB wasn’t available at that time (the unused portion of the RNRB is transferred as percentage rather than amount).

Importantly, while the existing IHT threshold has no restrictions in terms of how many items or which kinds of assets are included or who the beneficiaries are, the new RNRB only applies to one residential property being passed to children or direct descendants.

Who Qualifies As Direct Descendant

The new RNRB can be used only when passing your property (or a part of it) to the following:

  • Your children and their lineal descendants (e.g. your grandchildren). There are no age restrictions – the beneficiary can be under or over 18 at the time when you die.
  • Spouses or civil partners of the above, also including widows/widowers.
  • Your step-children, adopted children or foster children.

On the contrary, your siblings, nephews, nieces and other relatives do not qualify.

What Qualifies as Main Residence?

The RNRB has been designed to reduce the tax burden for families when passing on the family home to the next generation. Therefore, it can only be used for one property where the deceased has lived at some stage. A holiday home may qualify. A buy-to-let property won’t. When the estate includes multiple properties where the deceased has lived, the beneficiaries or personal representatives can choose one (but only one).

If you downsize or cease to own your home prior to your death and lose access to the RNRB as a result, your personal representatives may be able to make a claim for the so called downsizing addition to compensate for the lost RNRB. Conditions apply and the claim must be made within 2 years after the end of month when you die.

What It Means for Inheritance Tax Planning

The new RNRB is a welcome tax saving opportunity, making the total potential allowance £500,000 for individuals or £1 million for couples. When used to its maximum potential, the RNRB can save a couple as much as £140,000 of IHT (2 x £175,000 x 40%, using the 2020-21 RNRB). A good understanding of the rules and careful advance planning are essential for minimising future tax liability.