Tuesday, 18 February 2014

Changes to the Pension Lifetime Allowance (LTA)

Changes to the Pension Lifetime Allowance (LTA)

For most clients of Green Financial - and that is who this blog post is for - , given the conversations we’ve had about your circumstances in the past, and your current pension status and value, I don’t think this should be a concern for you. The financial planning we have discussed means that the wider strategies I mention at the end of this document and the other tax efficient work we’ve been doing together should mean all is OK. However, if you’d like to discuss one of the pension protections, please contact me before the end of February.

Please do have a read of the following. Apologies for the length, if you’d rather call me, please do.

The headlines scream “Hundreds of thousands of pension savers in the UK risk being hit by hefty taxes as a result of the latest cut in the pension Lifetime Allowance (LTA). They are being urged to take urgent action to protect their pension pots, which are worth an estimated £250 billion.”

There’s no underestimating the importance of saving into a pension and for many of my clients, the amount they save will not reach the lifetime allowance. However for those who have contributed a significant amount towards their pension or are fortunate enough to have a defined benefit scheme (normally one or more old company final salary schemes) with a long service record could unknowingly discover they could be at risk of exceeding the LTA. In theory, failure to take out the necessary protection could lead to an unexpected tax bill of £137,500, although that does tend to be an alarmist worst case scenario figure for most people.

The LTA, introduced in 2006 as part of pension reform and simplification, is the limit on the amount of money an individual can save into their pension schemes before incurring a 55% tax charge.

When the allowance was introduced on ‘A Day’ (5 April 2006) the powers that be pledged to maintain its real value. This was the case until 2011 when the LTA peaked at £1.8 million. Since then, however there have been several changes to the allowance.
This April  (2014) the LTA will be cut to £1.25 million from the current level of £1.5 million. The powers that be say this will affect as many as 360,000 pension savers by the time they reach retirement. I just want to make sure you are not one of those 360,000.

As above, given the overall planning we are doing and your current pension/retirement income aims and status I don’t think you should have cause for concern but please contact me if you’d like to discuss or double check, especially if you have old pensions that I don't advise on or manage with you.
If you read further in this blogpost, you'll see there is more info on the LTA and the other things we do with financial planning that mean this probably won’t be an issue for you.

If you’d like to have a look at your own figures on a calculator, Standard Life, a pension provider have a web page:
There are others, and your pension provider may have their own page - the one above is just pretty simple and quick to use, hence its inclusion here.

Or just contact me and I’ll do the projection with you / for you.

Further Info
Protecting your allowance

There are two new protection options for 2014, allowing pension savers to lock into the current, higher LTA of £1.5 million beyond 5 April 2014. These are known as ‘Fixed Protection 2014’ and ‘Individual Protection’. The best option for somebody might be to elect for either, both, or even neither. The optimum course of action will of course depend on your individual circumstances.

Fixed Protection 2014 allows pension savers to keep a £1.5 million LTA beyond 2014. This option is available to anyone who doesn’t have any of the earlier forms of protection (such as Enhanced, or Primary).

However there is a trade-off involved in securing this particular protection: Pension contributions to Defined Contribution (DC) schemes (such as your wrap SIPP) have to stop after 5 April 2014 while any increases in Defined Benefit rights can’t exceed a given ‘relevant percentage’ (normally CPI for the previous September) in any tax year.

The deadline for fixed protection applications is 5 April 2014.

Individual Protection is available only to people with pension savings worth more than £1.25 million on 5 April 2014. This gives individuals a personal LTA equal to their benefit value on 5 April 2014 (up to a maximum of £1.5m).

So someone with pension savings worth £1.36m on 5 April 2014 can lock-into a personal lifetime allowance of £1.36m. But someone with savings worth £1.55m would only secure a £1.5m allowance.

Crucially, this protection comes without the trade-off needed for fixed protection. Individuals in this category can keep funding their pension after April 2014 if they want to (or, perhaps more importantly, continue to enjoy pension funding from their employer). So, for individuals whose funds already exceed £1.5m by April, individual protection gives a better deal than fixed – a £1.5m LTA with no requirement to give up on future pension saving.

Smarter saving: wider strategies

I’ve long maintained that whilst pensions have benefits, there are also drawbacks. That’s why pensions have long been just one of the ways I help clients financial plan. If you are compelled to give up funding your pension as a condition of lifetime allowances you will likely still want to invest money somewhere. Luckily there is a wide choice of suitable alternative investment vehicles, and tax wrappers, available, many of which we already use.
Several strategies merit close consideration.

Use spouse’s pension: High net worth individuals should consider contributing to a pension for a spouse or civil partner. This is particularly valuable for a working spouse, as you can pay up to the higher of 100% of the spouse’s salary or £3,600 (less any contribution already being made by the spouse). The spouse will receive tax relief on the contribution. And the ‘gift’ will be covered by the spouse exemption for Inheritance Tax.

Maximise tax allowances: Realising capital gains on mutual funds on an annual basis ensures that you maximise the benefit of your annual exempt allowance for Capital Gains Tax (CGT) and the Income Tax Personal Allowance. If these are not used every year then they are lost and gone forever.

Utilise gaps in tax wrappers: If there are gaps in your use of tax wrappers, redirecting money that can no longer be saved in a pension could prove an ideal opportunity to address this.

Defer tax offshore: Tax deferred can mean tax saved. If you are a higher rate taxpayer now, it can be tax-efficient to invest through an offshore bond. You will not pay tax until funds are taken from the bond, allowing for planning such as taking gains when paying less tax in retirement, or assigning to a non-taxpayer.

Spread tax exposure: Diversifying your investments across assets that are subject to income tax and those that are primarily subject to capital gains tax puts you in a potentially better position to weather any variations.

For most clients, we include any of the above which are relevant in our general planning. Let me know if you’d like further info on any of them as it relates directly to you.

Please remember the usual regulatory warnings:

PLEASE don't take this blog post as personalised, specific, financial advice for you solely reading it - it isn't! - it's a generic blog post, with the aim of giving you a little info on some upcoming changes, which - if you are concerned affect your own situation - you can contact me or do further research yourself.
The value of investments can go up or down and may be less than what was paid in. Returns are dependent on investment performance and are therefore not guaranteed.

Tax rules and legislation can change and any information given is based on our understanding of law and current HM Revenue and Customs practice

Monday, 17 February 2014

Pension Consolidation - MAS 7 Questions

The Money Advice Service (MAS) has 7 questions it thinks you should ask an adviser before merging an old pension into another. If Green Financial are engaged to merge a pension into another, we always answer these 7 questions, in writing, for you.

Here is the info from the MAS site. The weblink is at the end of this post if you want to go there directly.

Pension transfers can be complicated and there are a lot of things to think about before going ahead. You need to consider your own situation carefully.

Is transferring a pension a good idea?

If you’re thinking about transferring a current pension into a new personal pension plan or self-invested personal pension (SIPP), we've set out seven key questions for you to consider. But remember, whether a transfer is suitable or not will very much depend on your individual circumstances and objectives. This information can’t cover everything you’ll need to think about but it can help you to start.

Seven key pension questions

1.    Will the new pension be more expensive than my existing one?
If the new pension costs more, make sure you’re satisfied that the additional costs are for good reason. For example, if the new pension offers you access to more funds than your current pension(s), ask yourself whether you need them. You wouldn't take out a more expensive mortgage or insurance policy without good reason, so why do it with your pension?
You’ll get information about the costs of the new pension in the Key Features Document that the pension provider or your adviser should give you. Make sure this document refers to the actual funds and investments that you’ll be using in your new pension. You need to read all the documents you’re given so you can clarify any issues you’re unsure about.
2.    Would a stakeholder pension meet my needs and objectives?
Stakeholder pensions can be cheaper than other personal pensions, so if you have an adviser, make sure they discuss this option with you. If your adviser doesn't think a stakeholder pension would be suitable for you make sure you understand why.
Some stakeholder pensions now provide access to quite a wide range of funds. So even if you’re looking for some flexibility in your investment choices there may well be a stakeholder pension to suit you.
 3.    Is it a good idea to transfer all my pensions into a single new pension?
If you currently have several pensions and are looking to put them into one new pension, make sure you’re aware of any costs. If you’re taking advice your adviser should be able to explain them to you.
You may not need a new pension to put all your pensions together. If one of your existing pensions already meets your needs and objectives it might be possible to transfer all of your other existing pensions into that one.
4.    Will I lose any benefits?
It’s possible that your current pension has valuable benefits that you’d lose if you were to transfer out of it, such as additional death benefits or a Guaranteed Annuity Rate (GAR) option. A GAR option is where the insurance company will pay your pension at a particular rate, which may be much higher than the rates available in the market when you retire.
5.    Are there any penalties if I transfer?
Some pensions may apply a penalty when you transfer out. These can be significant – sometimes several thousand pounds (depending on the size of your fund) so it’s important to check if one applies in your case.
6.    Will the investments in the new pension be right for the amount of risk I’m prepared to take?
You may want to decide for yourself how to invest your money, or your adviser may make recommendations for you. Either way it’s important the investments chosen are appropriate for the amount of risk you’re prepared to take with your money – remember, investments can go up or down.
If you use an adviser they will need to be clear about what fee they will charge, whether it’s for one-off or ongoing advice – find out more below.
7.    Will I need ongoing advice?
Depending on the new pension you choose it may be important for you to have ongoing reviews. Some fund selections need to be reviewed from time to time to maintain the balance of your portfolio.
It is also possible that the amount of risk you’re prepared to take could change over time, for example if your financial situation changes, or as you get nearer to retirement.
Your adviser should explain this, and whether it applies to the pension they recommend. If so they may be able to offer you an ongoing service.
Ask yourself if you have enough knowledge and experience of investment to make decisions without the need for an adviser.

Do you need financial advice?

It can be difficult to make suitable decisions without advice, even when you have all the information you need. So unless you are absolutely sure, you should seek professional financial advice.
If you decide to get advice, make sure your adviser gives you full answers to each of the questions raised above.
It may be helpful to print this guide out and take it with you to any meetings with an adviser and use it as a checklist to refer to when reading any of their written recommendations. If you decide not to get advice make sure you fully understand the risks and benefits of transferring your pension. 

Financial advice – charges

You will have to pay your adviser a fee for any one-off or ongoing advice service – and they must agree this with you upfront. New rules introduced at the start of 2013 mean advisers can no longer instead take commission out of any new products they sell to you

The above was taken from:
on the day of this post

Read all about it! - I'm 'Top Rated' in the National Press

In 3 national newspapers this weekend
I was listed as a 'Top Rated IFA'

VouchedFor.co.uk features customer reviews for Independent Financial Advisers (IFAs) across the UK.

I was among those who received the highest volume of positive customer reviews in the last four months.

This appeared in The Times, The Independent and The Mail on Sunday.

You can read the reviews about me here:
The link is under the stars, under my picture.