Retirement longevity

Your destiny is now in your own hands

If you are in your 50s or 60s, your thoughts are probably turning towards retirement. When should you retire? How much money do you need?

In trying to answer these questions, you face a problem. Because of longevity trends, we are on average living longer. With longevity increasing, your wealth may have to provide you and your spouse or partner with an adequate income for 30 or even 40 years.

Britons aged 30 today have a 50% chance of living to more than 100, while 50-year-olds have an even chance of reaching 95[1]. Longer lifespans, however, raise financial challenges – for individuals as well as for families and society.

The idea of a retirement lasting many decades may seem appealing, but longer retirements mean more years of living off your pension and savings. Will yours be enough?

Extra benefit of compound interest

How much money you need to save depends on when you actually start saving and how much you want to save in total. The earlier you and potentially your employer (if they match your contributions) start adding to your pension pot, the less you will need to save each month because the cost is spread over a longer period.

Moreover, if you start saving earlier, your funds will accrue the extra benefit of compound interest throughout the duration of your savings. Making money from the interest means you can actively save less but still end up with the same amount.

Much more freedom and flexibility

The good news is that changes to pensions also now mean you have much more freedom and flexibility over how to take your benefits – whether as tax-free cash, buying an income for life, leaving your pension fund invested while drawing an income, or a combination of all these options.

Unless you believe the Government is likely to become more generous with the State Pension and other retirement benefits, individuals will almost certainly need to save more to enjoy the standard of living they would like in retirement.

Building a retirement nest egg

Over the last few decades, employer pensions have become generally less generous. Today, people starting a new job in the private sector are very rarely offered a traditional defined benefit pension – where the employer guarantees you a certain level of pension based on your salary and length of service.

Most employer-based pensions now depend on how much you and your employer have contributed and the investment returns achieved by that money. That said, for most people, saving via a workplace pension still remains the correct approach to take for building a retirement nest egg – not least because the employer contributions are effectively free money.

A number of attractive tax breaks

Importantly, pension savers benefit from a number of attractive tax breaks, including Income Tax relief on contributions and up to 25% of the proceeds being tax-free. For 2019/20, the annual limit on tax-relievable personal contributions is 100% of your salary (or £3,600 if more). In addition, there is a limit on tax-efficient pension funding called the ‘annual allowance’ (£40,000 for most people) – this applies to both contributions paid by you and contributions paid by your employer and, if exceeded, means you will pay tax on the excess (an annual allowance charge).

We’ll help keep track of your pension contributions so that you know if you’re getting close to your annual limits.

Maximum tax-free retirement savings

In some cases, we may be able to ask your pension provider to pay the charge from your pension benefits. You may not be subject to an annual allowance charge (or a lower charge may apply) if you have unused annual allowances from the previous three tax years that can be carried forward.

Increasingly, more people are also being caught by the ‘lifetime allowance’, which puts a limit on the total value of their pension funds that can be accumulated without suffering a tax charge. From 6 April this year, the pensions lifetime allowance increased to £1,055,000. The pension lifetime allowance is the maximum amount that you can accumulate in your pension plans without suffering a tax charge (lifetime allowance charge).

Source data:
[1] The 100 Year Life: Living and Working in an Age of Longevity, by Andrew Scott and Lynda Gratton, September 2018

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND YOUR ENTITLEMENT TO CERTAIN MEANS TESTED BENEFITS AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Healthy, wealthy and well advised

Financial complexities of passing on wealth

Passing on wealth is a sensitive subject, not just because of the financial complexities of it all, but also the emotion and family politics involved.

Having built up their business or wealth, many families often wish to enjoy it whilst also ensuring that it is passed on to the next generation in their families. Passing on what you have accrued in the most efficient way is of paramount importance. But some people find the idea of discussing passing on wealth uncomfortable.

Making decisions on your behalf

It is often said about those people who are healthy, wealthy and well advised that they rarely pay Inheritance Tax – or rather, their estates do not. As part of the planning process, it is essential to make certain that you have a current Will in place. Your Will ensures that when you die, your wishes are clear.

Also, give consideration to arranging a Lasting Power of Attorney, a legal document that lets you appoint one or more people to help you make decisions or to make decisions on your behalf.

Your wealth over the years

Dying without a Will could leave your partner without any rights or protection if you’re not married. If you don’t have close family, your estate could pass to a distant relative you do not wish to benefit or do not know, or even to the Crown. If you already have a Will, you should consider reviewing it at least every five years.

It might be the case that you have built up your wealth over the years, or perhaps you have had a windfall or inherited a sum of money. Whatever your individual circumstances, setting up a trust could be the right decision for the future, with the added flexibility of tax-efficiency.

Potential Inheritance Tax liability

With our help, you can work out if you have a potential Inheritance Tax liability. Once we have this information, we’ll make recommendations about how you could reduce your Inheritance Tax by reviewing all the different allowances and options available. Funding your expenses from assets that are subject to Inheritance Tax will also help reduce your taxable estate.

A trust may also help you protect your wealth, making sure that the people who matter to you most are the ones who benefit in a way that you want them to at the right time. Even though the current climate is less favourable, following major Inheritance Tax reform in 2006, there are still a number of instances where trusts can be created without an immediate Inheritance Tax charge.

Significant degree of asset protection

Putting taxation to one side for the moment, the separation of legal ownership of an asset from its beneficial ownership creates great flexibility and offers a significant degree of asset protection. This can be valuable in a range of situations, such as providing for children or grandchildren, dealing with assets on death and on marriage breakdown.

In thinking about passing wealth down the generations, another concern is whether your property may have to be sold to pay for nursing home fees. If a couple, whether or not married, own their home jointly, then it is normally possible to ensure that if the longer-lived member of the couple eventually has to go into a home, the share of the house which was owned by the other member of the couple is ring-fenced by means of a trust, so at least that part of the value of the house does not end up going on home fees.

Tax legislation and allowances constantly evolve

If you are a farmer, you are probably aware that agricultural property relief on agricultural property, including the farmhouse, can be claimed to reduce or avoid an Inheritance Tax bill after death. You should also be aware, though, that if before your death you retire, in the sense that you are no longer actively farming the land yourself, then the relief may be lost, particularly on the farmhouse.

Making sure that you can pass on your wealth to the right people, at the right time, will be one of the most valuable things you can do for yourself and your family. Tax legislation and allowances are constantly evolving, so it is essential to review your financial and investment arrangements to ensure unexpected tax bills won’t jeopardise any wealth intended for your family.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS AND DEPEND ON YOUR INDIVIDUAL CIRCUMSTANCES.

ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE RULES AROUND TRUSTS ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.

Looking at the bigger picture

Creating plans of action to ensure you reach your financial goals

To be prepared for the road ahead, it’s critical to think about having a plan. For many people it’s not clear where their money will come from when they no longer receive a salary. And that can be stressful. When you add in the pressures of today’s bills and basic living costs, not to mention the nice things like holidays, the thought of the future can seem a bit overwhelming.

Planning for the future means making conscious decisions now. And even though we fill our lives with plans for our future selves, we’re always preoccupied with day-to-day events so we forget how important it is to take the time to take a step back and look to the bigger picture.
With our help, you can create a plan of action to ensure you reach your financial goals.

Will a plan really help me? Put simply, ‘yes’.

Where is my money going now?

The first step of your financial planning process is to determine your current financial situation in relation to income, savings, living expenses, and debts. Preparing a list of current asset and debt balances and amounts spent for various items will give you a clearer picture of where you stand financially. A monthly budget is an important step towards your financial fitness and should form the foundation of your financial planning process.

Have I built up a rainy day emergency fund?

The number one reason you should establish a rainy day fund is because, unfortunately, things unexpectedly do go wrong in life. So you also need to make sure you have an emergency fund and work towards saving six months worth of living expenses. This is money that you set aside for the unpredictable and unplanned and to cover expenses such as being made redundant or a sudden change in your income.

What are my financial goals in life?

Specific financial goals are vital to your financial planning. It’s time to consider now what matters to you. You need to decide what’s within reach, what will take a bit of time and what must be part of your longer-term strategy. Apply a SMART- goal strategy to this process. That is, make certain your ambitions are specific, measurable, achievable, relevant and timely. You should also periodically analyse your financial goals to make sure you’re always on track.

Have I prepared for unexpected events?

There are certain times when life-changing events happen. So it’s essential to protect both your and your family’s financial future. It may be difficult to think about, but if something were to happen to you or your partner, you’d want to know you are both protected financially. Think about how much money your family would need to maintain their current lifestyle if you weren’t around. This will give you a better idea of how much protection you need should different events occur – whether this is your ill-timed death, or suffering from an illness or disability.

What big moments do I need to plan for?

Life has a habit of surprising us, disrupting the best-laid financial plans. Having a plan will help you prepare for whatever comes your way, while saving for the things you care about. Whether it’s buying a property, starting a family, changing your career or life after you’ve finished work – whatever your vision for the future, having more money will help to make it rosier.

Are my financial plans still on track for success?

The financial planning process is dynamic and does not end when you take a particular action. You need to regularly reassess your financial decisions. Changing personal, social and economic factors may require more frequent assessments. When life events affect your financial needs, this financial planning process will provide a vehicle for adapting to those changes. Regularly reviewing this decision-making process will help you make priority adjustments that will bring your financial goals and activities in line with your current life situation.

Source data:
[1] The research for Royal London was carried out by Research Without Barriers (RWB) between 12/04/2019 and 15/04/2019 amongst a sample of 1,012 UK adults who have been married and separated, divorced and/or widowed. All research conducted adheres to the MRS Code of Conduct (2014).
[2] There were 101,669 divorces in the UK in 2017, according to the ONS

Are you making use of unused annual pension allowances?

2018 to 2019 could be the last tax year it may be possible for high earners to use a carry forward allowance of £40k.

If you haven’t contributed your full tax-relieved allowance into your pension for the past three tax years, you could be eligible to top up this year.

Our chartered financial planners are well versed in the ins and outs, so please don’t hesitate to contact us to find out whether you are eligible. The rules can be complicated, to say the least, particularly if you are self-employed.

Looking at the big retirement picture

Considering making contributions ahead of the tax year end?

Investing for the future is vital if you want to enjoy a financially secure retirement, and it requires you to look at the big picture. Although pensions can be complicated, we will help you get to grips with the rules if you are considering making contributions ahead of the tax year end. Here are our top pension tax tips.

Annual and lifetime limits
Getting tax relief on pensions means some of your money that would have gone to the Government as tax goes into your pension instead. You can put as much as you want into your pension, but there are annual and lifetime limits on how much tax relief you receive on your pension contributions. Please note that if you are a Scottish taxpayer, the tax relief you will be entitled to will be at the Scottish Rate of Income Tax, which may differ from the rest of the UK.

Provided that you stay within your pension allowances, all pensions give you tax relief at the rate that you have paid on your contributions. For personal pensions, you receive tax relief at the basic rate of 20% inside the pension. That means for every £800 you pay in, HM Revenue & Customs (HMRC) will top it up to £1,000. If you’re a higher or additional rate taxpayer, you can claim back up to an additional 20% or 25% on top of the 20% basic rate tax relief through your self-assessment tax return.

Benefit from tax relief
For workplace pensions, your employer normally takes your pension contribution directly from your salary before Income Tax so that the contribution is not taxed at source like the rest of your employment income, and therefore the full benefit is received inside your pension immediately. If your employer does not handle your contributions before tax, then these would benefit from tax relief in the same way as for a personal pension contribution.

You’re still entitled to receive basic rate tax relief on pension contributions even if you don’t pay tax. The maximum you can pay into your pension as a non-taxpayer is £2,880 a year, which is equivalent to a £3,600 contribution once you factor in tax relief.

Total amount of contributions
The annual allowance is a limit to the total amount of contributions that can be paid in to defined contribution pension schemes and the total amount of benefits that you can build up in a defined benefit pension scheme each year for tax relief purposes.

Taxpayers can pay in up to 100% of their income, up to an annual allowance of £40,000. Any contributions you make over this limit won’t attract tax relief and will be added to your other income, being subject to Income Tax at the rate(s) that applies to you.

Your annual allowance will reduce from £40,000 if your income plus your pension contributions totals £150,000 or more. For every £2 in excess of £150,000, your allowance will reduce by £1, until it reaches a minimum allowance of £10,000.

Carry forward unused allowances
You can also carry forward unused allowances from the previous three years, as long as you were a member of a registered pension scheme during this period.

If you choose to take a taxable income from a personal pension other than via an annuity, your annual allowance will be reduced to £4,000 or 100% of earnings, whichever is lower, and you won’t be able to carry forward previous unused allowances.

Paying tax on the excess
As well as the annual allowance, there’s also a maximum total amount you can hold within all your pension funds without having to pay extra tax when you withdraw money from them, known as the ‘lifetime allowance’. The standard lifetime allowance is £1,030,000 (2018/19), but some people have a higher allowance. The standard lifetime allowance is inflation linked, so it’s likely to increase each year.

If the value of your pension savings is higher than this, and you have not secured protection from HMRC against the changes in the lifetime allowance at the point that they reduced, you will pay tax on the excess. So, if you’re approaching this limit, be careful about contributing too much.

There’s no immediate tax charge once your pension fund grows beyond your lifetime allowance. It’s only when you choose to take your pension benefits over your lifetime allowance that you pay a tax charge, and the charge only applies to the benefits taken over your allowance.

Freedoms give greater flexibility
Commencing 6 April 2015, under the new ‘pension freedoms’ rules, you can now access your savings from your defined contributions pension scheme once you reach age 55. You cannot make withdrawals from a pension before you’re 55, moving to 56 in 2019 and 57 by 2028. If you’re due to reach retirement this year, you could take up to 25% of your pension fund as a tax-free lump sum if you want to, but the remaining 75% will be liable to Income Tax.

Previously, most pensioners purchased an annuity with their pot, which paid a guaranteed income for life. The pension freedoms give greater flexibility over retirement funding. But you’ll need to plan any withdrawals you make carefully, as taking large sums from your pension can boost your income in a particular tax year, pushing you into a higher rate of tax so that you pay more tax than you need to.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

Exploring your ISA options

Time to give your financial future a boost?

The end of the tax year on 5 April is fast approaching, so make sure you’ve made the most of your annual allowances before it’s too late. No matter what, why or how you want to save and invest, an Individual Savings Account (ISA) could help make your money work harder for you.

ISAs are tax-efficient wrappers. Every tax year, we each have an annual ISA allowance. If you don’t take full advantage of using all or part of it in one tax year, you cannot carry it over to the next.

There are various tax advantages to saving or investing through an ISA: you don’t pay Capital Gains Tax on any capital growth nor Income Tax on any income received, either as interest or dividends, from the investment or cash savings. Another advantage is that you don’t have to declare ISAs on your tax return.

Types of ISA and their allowances
There are currently six different types of ISA.

Cash ISA
Anyone over the age of 16 can put their cash savings into a Cash ISA. Accounts can be either instant access, have notice periods or have fixed terms.

The annual allowance for a Cash ISA is £20,000 (tax year 2018/19). You can invest up to this full amount in your Cash ISA, or you can share this allowance between the different types of ISA, with the exception of the Help to Buy ISA.

Stocks & Shares ISA
A Stocks & Shares ISA is a medium-to-long-term investment (five years or more). Anyone over the age of 18 can put individual shares or managed funds into a Stocks & Shares ISA. It enables you to decide how much risk you are prepared to take when investing, offering access to a range of funds and the potential for better returns than a Cash ISA over the long term.

The annual allowance for a Stocks & Shares ISA is £20,000 (tax year 2018/19). Again, you can invest up to this full amount in your Stocks & Shares ISA, or you can share it between the other types of ISA.

Innovative Finance ISA
This ISA is for investments in peer-to-peer lending platforms. You must be over the age of 18 to invest.

The annual allowance for an Innovative Finance ISA is £20,000 (tax year 2018/19). Once again, you can invest up to this full amount in your Innovative Finance ISA, or you can spread it out between various types of ISA.

Help to Buy ISA
Help to Buy ISAs are available to each first-time buyer, not each home. This ISA has been introduced to help first-time buyers over the age of 18 get on the property ladder. You have to choose between either a Cash ISA or a Help to Buy ISA, but you can have a Help to Buy and a Stocks & Shares ISA in the same tax year.

The Government will top up any contributions you make by 25%, up to the contribution limit of £12,000. So, for every £200 you save, the Government will contribute £50. This means you can earn a maximum of £3,000 from the Government. So, if you’re buying a property with your partner, for example, you’ll be able to get up to £6,000 towards your deposit.

The minimum amount you need to save to qualify for a government bonus is £1,600 (which gives you a £400 bonus). You can start off your ISA with an initial deposit of up to £1,000, which also qualifies for the 25% boost from the Government.

Another important factor is that the proceeds can only be used to buy a property worth up to £250,000 outside of London, and up to £450,000 within London.

Lifetime ISA
The Lifetime ISA is similar to the Help to Buy ISA. It is designed to help investors between the ages of 18 and 39 save for either a first house purchase or their retirement. Once you have a Lifetime ISA, you can continue to contribute until the age of 50.

You can put a maximum of £4,000 into a Lifetime ISA each tax year and are paid a 25% bonus from the Government. The bonus is paid in monthly instalments, and the maximum bonus you can earn in a tax year is £1,000.

The amount you pay in is linked to your annual ISA allowance (£20,000 for 2018/19). For example, if you pay £1,000 into your Lifetime ISA, you can still pay £19,000 into other ISA products. It is possible to hold both a Help to Buy ISA and a Lifetime ISA, but you will not be able to use both bonuses for a first-time house purchase.

Another differentiator between this type of ISA and the Help to Buy ISA is that the proceeds can be used to purchase a property worth up to £450,000 regardless of its location.

Junior ISA
Cash or investments can be wrapped in this ISA on behalf of children under the age of 18. Anyone can invest in the Junior ISA – parents, grandparents or friends. The money belongs to the child, and they can access it when they reach 18 years of age. The Junior ISA has an annual allowance of £4,260 (tax year 2018/19). You must be a UK resident or crown employee to invest in any type of ISA.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

Can you afford to retire?

Making the most of the next chapter in life

Pensions can seem complicated, but the basic idea is a simple one. And increasingly, if appropriate, people are turning to private pensions as a tax-effective way to increase their retirement income. Once you’ve decided to start saving for retirement, you need to choose how you’re going to do it. The precise amount you’ll need to save each month to retire at 55 depends entirely on the kind of lifestyle you plan on having in retirement. If appropriate to your particular situation, there are several different types of private pension to choose from. But, in light of recent government changes, the tax aspects require careful planning.

Different pension schemes

The term ‘private pension’ covers both workplace pensions and personal pensions. The UK Government currently places no restrictions on the number of different pension schemes you can be a member of. So, even if you already have a workplace pension, you can have a personal pension too, or even multiple personal pensions.

These can be a useful alternative to workplace pensions if you’re self-employed or not earning, or simply another way to save for retirement. Any UK resident between the ages of 18 and 75 can pay into a personal pension – although the earlier you invest, the more likely you are to be able to build up a substantial pension pot.

Pension-related tax relief

A private pension is designed to be a tax-efficient savings scheme. The Government encourages this kind of saving through tax relief on pension contributions. In the 2018/19 tax year, pension-related tax relief is limited to either 100% of your UK earnings, or £3,600 per annum. If you are a Scottish taxpayer, the tax relief you will be entitled to will be at the Scottish Rate of Income Tax, which may differ from the rest of the UK.

Basic rate taxpayers will receive 20% tax relief on pension contributions. Higher rate taxpayers also receive 20% tax relief, but they can claim back up to an additional 20% through their tax return. Additional rate taxpayers again pay 20% tax relief, but they can claim back up to a further 25% through their tax return. Non-taxpayers receive basic rate tax relief, but the maximum payment they can make is £2,880, to which the Government adds £720 in tax relief, making a total gross contribution of £3,600.

Tapered Annual Allowance

The Annual Allowance is the maximum amount that you can contribute to your pension each year while still receiving tax relief. The current annual allowance is capped at £40,000, but may be lower depending on your personal circumstances.

In April 2016, the Government introduced the tapered annual allowance for high earners, which states that for every £2 of income earned above £150,000 each year, £1 of annual allowance will be forfeited. The maximum reduction will, however, be £30,000 – taking the highest earners’ annual allowance down to £10,000.

Overall tax liability

Any contributions over the annual allowance won’t be eligible for tax relief, and you will need to pay an annual allowance charge. This charge will form part of your overall tax liability for that year, although there is the option to ask your pension scheme to pay the charge from your benefits if it is more than £2,000. It is worth noting that you may be able to carry forward any unused annual allowances from the previous three tax years.

If you have accessed any of your pensions, you can only pay a maximum of £ 4,000 into any un-accessed pension(s) you have. This is called the ‘Money Purchase Annual Allowance’, or ‘MPAA’. The MPAA applies only if you have accessed one of your pensions.

Access your pension

The lifetime allowance is the maximum amount of pension benefit that can be drawn without incurring an additional tax charge. From 6 April 2018, the lifetime allowance increase to £1,030,000.

What counts towards your lifetime allowance depends on the type of pension you have. We will be able to help you determine how much of your lifetime allowance you have already used up. This is important because exceeding the lifetime allowance will result in a charge of 55% on any lump sum, and 25% on any other pension income such as cash withdrawals. This charge will usually be deducted by your pension provider when you access your pension.

Pension protection addition

If you are concerned about exceeding your lifetime allowance, it may be possible to apply for pension protection. This could enable you to retain a larger lifetime allowance and keep paying into your pension, depending on which form of protection you are eligible for.

In addition to pension protection, if you have reached your lifetime allowance or are close to doing so, it may also be worth considering other tax-efficient vehicles for retirement savings, such as Individual Savings Accounts. In the current tax year, individuals can invest up to £20,000 into an Individual Savings Account.

Savings tax-efficiently

The Lifetime Individual Savings Account, launched in April 2017, is open to UK residents aged 18 to 40 and will enable younger savers to invest up to £4,000 a year tax-efficiently. Any savings you put into the Individual Savings Accounts before your 50th birthday will receive an added 25% bonus from the Government. After your 60th birthday, you can take out all the savings tax-efficiently.

Finally, it is worth noting that there will normally be no tax to pay on pension assets passed on to your beneficiaries if you die before the age of 75 and before you take anything from your pension pot, as long as the total assets are less than the lifetime allowance. If you die aged 75 or older, the beneficiary will typically be taxed at their marginal rate.

Remember:

A pension is a long-term investment. The fund may fluctuate and can go down, which would have an impact on the level on pension benefits available.

Pensions are not normally accessible until age 55. Your pension income could also be affected by interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

The value of investments and income from them may go down. You may not get back the original amount invested.

Past performance is not a reliable indicator of future performance.

Plan, prepare

Making new year’s tax saving resolutions

At this time of year, we think about New Year’s resolutions, and it’s also a good time to start planning our tax affairs before the end of the tax year on 5 April. As you think about 2019 and your goals for the coming year, we can help to start you off on the right financial footing. It’s well worth spending some time in January to think about your money so you can achieve your goals as quickly as possible.

Tax planning might not sound very exciting, but it can have a dramatic effect on your personal finances. The Government and HM Revenue & Customs (HMRC) continue to clamp down on what they regard as tax avoidance and unacceptable tax planning. But there is still much that can legitimately be done to save or reduce tax.

Meeting your financial goals
Tax planning is one part of meeting your financial goals. By taking action now, it may give you the opportunity to take advantage of appropriate reliefs, allowances and exemptions, and consider whether there are any relevant decisions that you need to make sooner rather than later. Many of the tax and investment planning opportunities available require action to be taken before 5 April 2019.

While some people avoid making New Year’s resolutions for fear that they will only break them, people who make financial New Year’s resolutions are more likely to end 2019 in better financial shape than when they began.

Ready to put the tips into action?
Here we’ve provided some of the main areas you may wish to discuss with us, if appropriate to your particular situation.

Topping up your pension
Pensions are now more flexible than they have ever been and remain extremely tax-efficient. You’ll receive tax relief at the basic rate of 20% on contributions made to personal and workplace pensions. So for every £80 you pay in, HMRC will top it up to £100. If you’re a higher or additional rate taxpayer, you can claim back up to an additional 20% or 25% through your self-assessment tax return. However, if you are a Scottish taxpayer, the tax relief you will be entitled to will be at the Scottish Rate of Income Tax, which may differ from the rest of the UK.

But you’ll need to watch out for the annual pension allowance. This is the limit on the amount that can be contributed to your pension each year while still getting tax relief. For the 2018/19 tax year, for most people it’s £40,000, or the value of your whole earnings – whichever is lower. Lower allowances may apply if you have already started drawing a pension, or if you are a higher earner with income plus pension contributions that total above £150,000.

If you’ve used your full allowance in the current tax year but not in recent years, you may also (depending on your circumstances) be able to ‘carry forward’ any annual allowance that you haven’t taken advantage of in the three previous tax years. There’s also the Lifetime Allowance to consider. If the value of all your pensions is more than £1,030,000, anything over this limit will be taxed when you start using it.

The value of pensions can go down as well as up, and you may not get back as much as you put in.

Taking your ISA to the max
One of the easiest ways to reduce your tax bill is to shelter any returns above your allowances in an Individual Savings Account (ISA), which is a tax-efficient wrapper. For the 2018/19 tax year, you can put up to £20,000 into an ISA. For a couple with two children, the total ISA allowance available to the family is £48,520, which comprises £20,000 for each adult plus £4,260 of Junior ISA allowance per child.

You can choose to hold all of that in a Cash ISA, or put it into a combination of investments, including funds, shares, gilts and bonds through a Stocks & Shares ISA, or you can invest in peer-to-peer lending through an Innovative Finance ISA. Alternatively, you can split your allowance between a Cash, Stocks & Shares, Innovative Finance and Lifetime ISA. (LISA)

However, with a LISA, you can only allocate up to £4,000 of your £20,000 allowance. You also must be aged between 18 and 39 when you start and can deposit up to £4,000 per year until your 50th birthday. The Government will add an annual bonus of 25% (up to a maximum of £1,000 per year) to any savings.

The principle purpose of a LISA is for the proceeds to be used to either (a) purchase a first home or (b) provide you with funds to help you in your retirement after you have attained age 60. This means that, if the money is withdrawn for any other purpose (and unless the saver is in serious ill health), the 25% government bonus will be withdrawn, and the proceeds will also incur a 5% charge.

You won’t be taxed on returns from savings or investments held in an ISA, nor will you have to pay Capital Gains Tax (CGT) on any of the profits you make above the annual CGT allowance, which in the 2018/19 tax year is £11,700. The standard CGT rate is 10%, while the higher rate is 20%.

Getting personal with your allowance
Everyone has a certain amount of income they can earn each year without paying Income Tax, known as their ‘personal allowance’. For the 2018/19 tax year, this amount is £11,850.

Your personal allowance is in addition to the Personal Savings Allowance (PSA). Since April 2016, savings interest has been paid tax-free, which means that most savers no longer have to pay Income Tax on the savings income they receive.

Your PSA depends on which Income Tax band you are in, with basic rate taxpayers entitled to a £1,000 allowance, while higher rate taxpayers receive a £500 allowance. Additional rate taxpayers are not eligible for a PSA.

Investors also have a dividend allowance, which means that individuals receive their first £2,000 in dividends tax-free, but any dividends above this amount will be charged at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Take advantage of your marriage vows. If one spouse is a higher rate or additional rate taxpayer and the other doesn’t pay tax at all, it could be more tax-efficient to put the account solely in the non-taxpayer’s name. This would give that spouse full ownership of the account, so you’ll need to make sure you’re both happy with the arrangement.

Keeping your inheritance in the family
ISAs and pensions are the two big ways to shelter your money from tax, but there are other tools at your disposal. Your estate is valued when you pass away and chargeable to Inheritance Tax (IHT) at 40%, although the first £325,000 nil-rate band (NRB) is exempt. Anything that goes to your spouse is also exempt.

Married couples and those in registered civil partnerships can also benefit from an additional family home allowance, which makes it easier to pass on the family home to direct descendants without incurring IHT charges. This was introduced on 6 April 2017, starting at £100,000, and will be phased in gradually until the total IHT threshold reaches £500,000 per person in 2020/21.

The residence nil-rate band (RNRB) acts as a top-up to the current IHT NRB and works in a similar manner by reducing the value of your estate that is subject to IHT at the full rate of 40%. It is potentially available for deaths on or after 6 April 2017 where, in general terms, an interest in the family home is left under your Will to your children, grandchildren or other lineal descendants. The RNRB is offset against the value of your estate ahead of the NRB, and the maximum RNRB amount allowed on a death in the 2018/19 tax year is £125,000.

Current tax rules also enable you to give away up to £3,000 free of IHT each tax year. You can give away more than this amount if you want to, but you must live for at least seven years from the date of the gift for it to be exempt from IHT.

Don’t leave your tax return until the last minute
The deadline to submit your tax return online is 31 January. Failure to meet the HMRC deadline can result in penalty fines or extra interest charges.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

Turning pensions into money you can use

One of the most important decisions you will make for your future

Under the pension freedoms rules introduced in April 2015, once you reach the age of 55, you can now take your entire pension pot as cash in one go if you wish. However, if you do this, you could end up with a large Income Tax bill and run out of money in retirement. It’s essential to obtain professional advice before you make any major decisions about how to access your pension pot.

Deciding what to do with your pension pot is one of the most important decisions you will make for your future, and now you can access your pension in more ways than ever before. This leaves retirees with different options, from withdrawing lump sums in cash as and when needed to staying invested and drawing income, or to use how they wish. It is still possible to opt for the traditional route of buying an annuity offering a guaranteed income.

As well as understanding the various options for accessing benefits, when you are deciding what to do with your pension pot, you also need to consider your personal financial landscape. How long do you expect your investments and pensions to remain invested for? What do you want to achieve in the future, and how do you see your retirement playing out? How much investment risk are you willing to take? What income sources do you currently have or need to create, and how are they taxed?

Pension freedoms

Fundamental change in the approach to retirement savings

A revolution in pensions transformed the retirement prospects for millions following the passing of the Pension Schemes Act 2015. April 2019 is the fourth anniversary since the introduction of the pension freedoms, a fundamental change in the approach to retirement savings.

Announced by the then Chancellor, George Osborne, in Budget 2014, pension freedoms gave over-55s full control of their retirement savings. The changes which commenced on 6 April 2015 gave individuals with a defined contribution pension the freedom to access their pension as they wished from age 55. Under these changes, those with a defined contribution pension scheme are no longer required to purchase an annuity.

Income in retirement

With a defined contribution pension, you build up a pot of money that you use to provide an income in retirement. Unlike defined benefit schemes, which promise a specific income when you retire, the income you receive from a defined contribution pension depends on the amount you contribute, how investments perform and the choices you make at retirement to take an income.

At the time of the introduction of pension freedoms, the then Minister for Pensions, Steve Webb, said, ‘The passing of this Act marks the culmination of a five-year pensions revolution under this coalition government. While for years, successive governments simply watched the slow decline of the final salary scheme, we have responded by giving firms new ways of providing their staff with secure pensions.

‘There is a real appetite from employers to offer high-quality pensions for their staff, and the new Defined Ambition pensions made possible by this Act will enable a new generation of better, fairer schemes. The Act also protects the new pension freedoms and flexibilities, so people have control of their pension pots, and know it is a criminal offence for scammers to pretend to offer official Pension Wise guidance.’

Biggest shake-up

To date, the introduction of pension freedoms has been the biggest shake-up of the pensions market and has given individuals control over how to use their retirement savings, but a number of unintended consequences have emerged. Retirement savers have accessed approximately £17.5 billion through pension freedoms since reforms were introduced in April 2015, according to data from HM Revenue and Customs (HMRC). Its report, Flexible payments from pensions: July 2018, also found that the number of individuals who have received flexible payments from their pensions between the second quarter of 2017 and the first quarter of 2018 is 375,000.

This is compared to 393,000 individuals between the second quarter of 2016 and the first quarter of 2017, and 232,000 between the second quarter of 2015 and the first quarter of 2016. Since the introduction of pension freedoms in April 2015, approximately 1 million individuals have accessed their pension for flexible payments.

Between April and June 2018, 574,000 payments were received by 264,000 individuals, totalling £2.3 billion. This compares to 500,000 payments to 222,000 individuals in the first quarter of 2018, at a total of £1.7 billion. From October to December 2017, 454,000 payments were made to 198,000 individuals, totalling £1.5 billion. Between April and June 2017, 435,000 payments were made to 198,000 individuals, amounting to £1.6 billion.

Reforms gathering pace

Previously, most pensioners purchased an annuity with their retirement pot, which paid a guaranteed income for life. The pension freedoms now allow those over the age of 55 access to their savings and give greater flexibility over retirement funding. Despite some isolated cases of pensioners spending their savings on fast cars and other luxuries, figures from HMRC signal that the reforms are gathering pace.

According to Prudential, around one in ten (11%) workers aged over 55 have found pension freedoms have encouraged them to save more since the rules came into effect. In the last three years, this group said they had started saving into a pension for the first time, encouraged their partner to save more, increased pension contributions or restarted pension saving since the introduction of the pension freedoms rules.

According to the research, which surveyed 1,000 UK adults aged over 55 in February 2018, one in eight (12%) expected to work past their original planned retirement date. How your future looks will ultimately be determined by having the right vehicle in place for your retirement.

Taking your money

As you approach retirement and start thinking about when and how to take your money, it’s important to obtain professional advice to check what pensions you have and what they might give you. The rules around pensions are continuously changing, which means receiving regular advice will ensure you’re investing your pension effectively.

The concept of an ‘ageing population’ may feel overused, but the fact is that advances in medicine and generally improving living standards are combining to increase how long we can expect to live. The backdrop to this is a tightening of the welfare state, including the basic State Pension.
Retirement should be the best time of your life, when you can relax and enjoy your life by reaping the benefits of what you earn in so many years of hard work. To keep yourself and your finances in good shape, start planning today. We can help create a clear picture of what you need so that the best is yet to come.

Source data:
The figures are based on data reported to HM Revenue & Customs. Individual numbers are rounded to the nearest 1,000. The yearly individual totals are lower than the sum of the quarterly individual numbers, as some have taken payments in multiple quarters. Reporting was optional up to April 2016, when it was made compulsory. For this reason, figures prior to this are not comprehensive. This may account for part of the increase in reported payments seen in the second quarter of 2016.