Freedom & choice for all seasons

Transcription

1 Freedom & choice for all seasons clarity seminar 23 May 2018 IoD, London your summary of the key points & tips How to make the most of recent changes to tax and financial planning legislation, at every stage of life.

2 Careful planning can make a big difference to your overall wealth Over recent years, we ve seen some huge changes to the UK s tax and financial planning rules. The introduction of the pension freedoms; the significant reduction in pension allowances; additional incentives for investing in small companies; a notably increased ISA allowance and range of new ISA options, to name but some. We firmly believe that freedom and choice when managing your money can only be a good thing. However, increased choice often also means increased complexity. Following on from our recent event, this guide provides some helpful tips on how to make the most of current tax and financial planning legislation, whether you re: saving and investing for your own future saving and investing for your children or loved ones considering your pension options and whether to transfer accessing and spending your benefits considering how best to pass wealth to the next generation As with the seminar, this guide is divided into three main sections: 1. The pros and cons of transferring guaranteed pension benefits into one of the new flexible arrangements 2. The benefits of taking a holistic view when considering your long-term savings and investments 3. Options for passing wealth to the next generation You can find out more about our three speakers, whose tips form the basis for this summary, on page 18. 2

3 Contents 1. Guarantees or freedoms? The pension transfer considerations 4 Not all pensions are equal: comparing DB and DC 4 Backdrop to the increased interest in DB to DC transfers 5 The importance of advice 5 Key factors to consider 6 2. Beyond pensions: other saving and investment options 7 Current pension limits and benefits 7 Pension contributions for family members 8 ISAs 8 Investment bonds 8 Residential property as an investment 9 Alternative tax-efficient investment options Intergenerational planning with pensions 12 Pension freedoms and estate planning 12 Dependants, nominees and successors 12 Differences in tax treatment on death pre- and post The pros and cons of using trusts for pension benefits 14 Nominating beneficiaries 15 Aligning pensions with your overall estate planning 16 clarityonline 17 Our expert panel 18 For more information or advice 19 If you re considering your options with regards to a final salary pension, section 1 of this guide summarises the key factors to be aware of. 3

4 1. Guarantees or freedoms? The pension transfer considerations Not all pensions are equal: comparing DB and DC DB: defined benefit pensions also known as: final salary, career average or CARE schemes promise a secure income in retirement, usually based on salary and years of service tax-free lump sum retirement income level and structure set by scheme rules your employer carries the investment risk restricted death benefits, typically spouse s pension and death-in-service lump sum annual allowance test based on increase in promised pension value over the year lifetime allowance test based on 20x pension at retirement, plus any lump sum DC: defined contribution pensions also known as: money purchase schemes (includes personal pensions, stakeholders and self-invested personal pensions/sipps) build a fund for providing your retirement income (either secured or unsecured) tax-free lump sum retirement income level and structure set by fund value and personal choices you carry the investment risk flexible death benefit options, beneficiaries can take lump sum or continue to drawdown annual allowance test based on pension payments made over the year lifetime allowance test based on amount in the fund at retirement The differences in how benefits are tested against the annual and lifetime allowances are one of the many reasons getting proper advice is so crucial. See page 7 for a reminder of the current annual and lifetime allowances. You often hear DB, or final salary, schemes referred to as gold-plated pensions in the press. For many people, the security offered by a DB scheme is indeed very valuable. However, one type of scheme is not necessarily better than the other. It all comes down to personal circumstances and requirements. Although you carry the risk with a DC pension, on the plus side you benefit from full flexibility, choice and control in terms of how much you save, where you invest, how and when you take your income and who benefits when you die. 4

5 Backdrop to the increased interest in DB to DC transfers In 2015, we saw the introduction of the pension freedoms; a dramatic change in the rules surrounding how you can take benefits from DC pensions. The new flexible rules did not apply to DB pensions. The flexibility now offered by DC pensions makes them considerably more attractive than ever before. In addition, in recent years, transfer values from DB schemes have generally been relatively high. This is down to the way that pension commitments are valued, with assumptions often based on gilt yields. A sustained period of low interest rates has therefore been accompanied, for many schemes, with a corresponding increase in transfer values. As interest rates start to rise again, we would expect to see transfer values start to fall. This means that, for anyone considering whether to transfer out of a DB scheme, now is a good time to look at your options. Often, people are better off staying in their DB scheme. However, there are also cases where transferring is the most appropriate course of action. Your adviser can ensure you get the best outcome for your personal circumstances, after considering both the hard numbers and the softer aspects of what you want. Enhanced transfer values (ETVs) Some schemes also offer enhancements as an added incentive for deferred members (people who no longer work for the sponsoring employer of the scheme) to transfer out. These enhancements would of course be taken into account by your adviser when carrying out their analysis, along with the reasons behind why the enhancement was offered. However, please be aware that even enhanced transfer values can still offer poor value, particularly if you require security and guarantees. The importance of advice Deciding whether a DB to DC transfer is right for you is a huge decision and professional advice is essential - in the majority of cases it is a legal requirement. Every case is different - no two people are the same and no two retirements are the same. A suitably qualified adviser will carry out a full transfer value analysis, and balance the pros and cons from an independent standpoint. Once you have transferred there is no way to reverse the decision. Timing is crucial - DB schemes typically provide transfer values that are valid for three months. It is therefore crucial to start the advice process before requesting your transfer value. 5

6 Key factors to consider Security DB schemes offer secured income in retirement however, the security of the scheme is dependent on the strength of the sponsoring employer with DC schemes, you take the investment risk and your pot is subject to market influences unless you purchase an annuity, there is a risk you could take too much too soon from DC schemes Death benefits DB schemes may only offer limited death benefits DB scheme rules may not provide for co-habitees and long-term partners if single or in an unmarried relationship, then the value of dependants benefits could be wasted it all depends on the individual scheme rules, rather than legislation consider your likely beneficiaries and then check whether your scheme covers them Investments and risk all investment decisions handled for you in DB, whereas investment risk sits with you in DC what is your attitude to investment risk or fluctuations in markets? what is your capacity for loss? with DC, the timing of your income may be influenced by market conditions timing your disinvestments correctly can be key and professional advice is usually needed Retirement ages taking your benefits early can be costly in both DB and DC schemes remember, your benefits need to last for the rest of your life where early retirement is required, check whether your DB scheme allows early access likewise, if late retirement is required, what are the options in the DB scheme? Income requirements do you need a guaranteed income? increasing? fluctuating? are you comfortable continuing to take investment risk with your pension fund in retirement? Longevity how long are you going to live? your DB scheme is guaranteed for life - can your DC pot last? Other assets your pension should always be considered as part of your overall portfolio do you have other pensions and assets? would this be your main source of income? 6

7 2. Beyond pensions Other savings and investment options Current pension limits and benefits Lifetime allowance (LTA) currently 1,030,000 (significantly lower than at its peak of 1.8million in 2011/12) certain protections available but these may restrict your ability to make future contributions Annual allowance (AA) tax relief on contributions up to 40,000 per annum (or 100% of your earnings, if less) reduced to 4,000 if the money purchase annual allowance (MPAA) applies tapered down to minimum of 10,000 if your annual income is above 150,000 DB schemes AA based on the increase in benefits each year significant salary increases could put you at risk of exceeding both the AA and LTA The money purchase annual allowance (MPAA) may apply if you have started to take benefits from your DC schemes but continue saving into pensions. maximum amount you can save into a pension each year without paying tax Your AA IN OUT Your LTA maximum pension savings you can build up in your lifetime without paying tax The benefits of pensions Despite the dramatic reduction in allowances over recent years, pension savings still offer a number of important benefits: tax relief on contributions largely tax-free investment growth up to 25% of your fund available tax free at retirement tax-free withdrawals (with careful income planning) inheritance tax planning options (see section 3 for more info) 7

8 Pension contributions for family members Although pension allowances have reduced in recent years, you can still make pension contributions on behalf of your spouse, children and grandchildren and receive basic rate tax relief on payments of up to 3,600 gross per annum. This applies even for individuals with zero taxable income. Compound growth makes paying into pensions for children or grandchildren particularly attractive. The table below illustrates how much a single contribution of 3,600 could be worth after 50 years, along with a comparison if three years contributions were paid. How much could your child s pension pot be worth after 50 years? Annual growth at... 4% 6% 8% One year s pension contribution ( 3,600) Three years pension contributions ( 10,800) 25,500 66, ,000 76, , ,000 Annual returns compounded. Figures provided for illustration purposes only and are not guaranteed. Inflation will reduce the real spending value. Individual savings accounts (ISAs) tax-free growth and withdrawals five types of ISA now available invest in a combination of cash, equities, bonds, gilts and peer-to-peer lending standard annual ISA allowance for adults currently 20,000 The junior ISA limit is currently 4,260 per tax year; and under the current rules, individuals aged 16 and 17 are able to hold (and contribute to) both a junior ISA and standard cash ISA in the same tax year. Investment bonds can provide life cover for multiple individuals can be assigned or placed in trust for IHT planning facility to take tax-deferred withdrawals of up to 5% of premium per annum, for 20 years withdrawals may then benefit from top-slicing calculation to reduce income tax liability offshore bonds benefit from tax-free growth Insured investment bonds can be particularly useful when used for trust investments, due to the lack of paperwork needed. 8

9 Residential property as an investment ü pros tangible asset historically good long-term returns simple to understand good protection from inflation can use leverage for higher returns û cons management aspect regular work dealing with tenants and service providers hard to sell in a hurry if in need of cash cannot realise capital gains in stages leverage can wipe out gains in down times income is not sheltered from tax expensive to purchase; fees, stamp duty ongoing political pressure on tax relief It is crucial to remember that, like most investments, property can fall in value as well as rise. Realism is also needed around the potential for future significant increases in interest rates. Tax treatment of residential property as an investment tax relief Income tax relief on finance costs for private landlords to be reduced from top rate of 45% to 20% by CGT Higher or additional rate taxpayers liable for 28% (basic rate 18%) on gains from residential property that is not your main home. SDLT Anyone purchasing a property in addition to their main residence is subject to additional stamp duty land tax of 3%, taking the top rate to 15%. Residential property, other than your main residence, is now subject to higher rates of capital gains tax (CGT) than other assets. 9

10 Alternative tax-efficient investment options Agricultural property relief you can pass on some agricultural property free of IHT, either during your lifetime or as part of your will Entrepreneur s relief you could qualify for a 10% CGT rate on gains up to a 10million lifetime limit Woodland income from timber sales is tax free, however expenditure cannot be reclaimed if woodland is commercially managed then it is free 100% from IHT after 2 years of ownership capital gains from selling another business can be used to buy woodland, therefore deferring the gain on disposal, CGT is payable on the increase in the value of the land only, not on the value of the timber Business property relief Providing you have owned the asset for at least two years before death, the following reliefs are available: Relevant business property A business or an interest in a business Unquoted securities which on their own, or combined with other unquoted shares or securities, give control of an unquoted company Unquoted shares, including shares listed on the Alternative Investment Market (AIM) Quoted shares which give control of the company Land or buildings, machinery or plant used wholly or mainly for the purposes of the business carried on by a company or partnership Land or buildings, machinery or plant available under a life interest and used in a business carried on by the beneficiary IHT relief 100% 100% 100% 50% 50% 50% 10

11 VCTs, EIS and SEIS Returns from venture capital trusts (VCT), enterprise investment schemes (EIS) and seed enterprise investment schemes (SEIS) are typically uncorrelated with main market equity returns. These three tax-efficient investments can therefore be used as a valuable diversification tool in a portfolio. The table below compares the tax treatment of each type of scheme. These tax reliefs are allocated on an individual basis, so if you are married or in a civil partnership you each have your own allowance. VCT can provide tax-free income with no liability to CGT. Losses realised from EIS or SEIS can be used to offset gains realised from other investments, to reduce or eliminate CGT. You can also rollover the proceeds from VCT, EIS and SEIS for additional tax reliefs. Remember, these schemes are all considered very high-risk investments and so are not suitable for everyone. Overview of tax reliefs on VCTs and EIS/SEIS VCT EIS SEIS Income tax (IT) relief 30% 30% 50% CGT treatment exempt exempt exempt Maximum annual investment for IT/CGT reliefs Minimum holding period for IT/CGT reliefs 200,000 2 million* 100,000 5 years 3 years 3 years Carry back available no yes yes CGT reinvestment relief no no 50% of the gain CGT deferral no yes no Dividend taxation exempt taxable taxable Capital loss relief available no yes yes Eligible for IHT BPR no yes yes * 2million limit applies for knowledge-intensive companies only, for all other EIS the limit is 1million See our quick guide to VCT, EIS & SEIS for more information 11

12 3. Intergenerational planning with pensions Pension freedoms and estate planning pre-april 2015 post-april 2015 lump sums paid on death of a DC pension scheme member could be subject to a 55% tax charge funds remaining in your DC pension pot can be passed on more flexibly after death a dependant or nominee (and later a successor) can choose whether to take the pension pot as a lump sum, an annuity or flexi-access drawdown Following the introduction of the pension freedoms, it is now possible to use your DC pension as an estate planning tool. Dependants, nominees and successors On the death of a member, a DC pension pot can be paid out to a dependant, nominee or successor, as summarised in the table below: dependant nominee successor somebody who is either the member s surviving spouse, a child under the age of 23, or someone who the scheme administrator considers was financially dependent on the member at their death somebody who the member has nominated to receive their pension on their death (does not need to be a family member or financial dependant) somebody who has been chosen by the dependant or nominee to receive the pension pot after their subsequent death 12

13 Differences in tax treatment on death pre- and post-75 member dies before age 75 member dies after age 75 the lump sum, flexi-access drawdown or annuity will be paid free of income tax similarly, if the member s dependant, nominee or a later successor also dies under age 75, benefits will again be paid free of income tax if a lump sum is paid to a nominee it is taxed at the nominee s marginal income tax rate in the year the payment is received lump sums paid into a trust are taxed at 45% at the time the payment is received - this income tax liability can potentially be offset/reclaimed when funds are subsequently paid out of the trust to beneficiaries flexi-access drawdown, annuities or scheme pensions are taxed at the recipients marginal income tax rate in the year payment received Remember, if the pension fund exceeds the lifetime allowance, tax charges apply in addition to those listed in the table above. Advantages of flexi-access drawdown If a member, nominee or successor decides to use, or continue with, flexi-access drawdown, the funds remain within a pension wrapper. This provides a number of advantages: funds can continue to cascade down the generations within the pension wrapper, so do not incur inheritance tax (IHT) in contrast, any death benefits taken as a lump sum no longer benefit from the tax advantages of pensions - any unspent funds would therefore form part of the beneficiary s estate (and potentially be subject to IHT) on their subsequent death flexi-access drawdown is not subject to the relevant property regime, whereas any lump sum death benefits paid to a discretionary trust would be subject to 10-year anniversary and exit charges assets held within a flexi-access drawdown account benefit from largely tax-free investment growth, with no CGT on gains and no further tax on dividends 13

14 The pros and cons of using trusts for pension benefits Traditionally, trusts were used with pensions in order to prevent any lump sum death benefits forming part of the surviving spouse s estate for IHT purposes on their subsequent death. These arrangements were commonly referred to as spousal bypass trusts. It was assumed that the pension freedoms would mean the end of the use of discretionary trusts for pension benefits. However, there can still be advantages in using trusts with pensions in some circumstances, as summarised in the table. disadvantages payments can only be made to a trust as a lump sum, and must leave the pension wrapper lump sums left to a discretionary trust will attract a 45% tax charge on entry (unless the member died under age 75) and any income generated within the trust will also be subject to the high income tax rate for trusts funds left to a trust will be subject to the relevant property regime with 10-year anniversary and exit charges gains within a trust are subject to CGT running a trust is fairly administratively complex and may generate management costs advantages although 10-year charges may arise within the trust, any funds not paid out to beneficiaries will sit outside of their estates for IHT purposes discretionary trusts can be used to facilitate IHT planning by, for example, lending money to a beneficiary which would then be a debt repayable on their death trusts are often still relevant for people who have been married more than once and have children from different relationships members have no control over who their nominee or dependant may choose as their own successor: trusts allow you to control who benefits from your pension further down the line funds held in a pension could potentially be vulnerable to claims relating to bankruptcy, on divorce or if going into care - funds held in a discretionary trust are generally not taken into account for such purposes beneficiaries receiving a lump sum or taking flexi-access drawdown may spend the entire fund immediately - trusts allow you to control the level and timings of payments Although the tax paid by trusts can be offset against beneficiaries income tax liability once payments are made, it leaves less funds for the trustees to invest. 14

15 Nominating beneficiaries It is essential to keep your nominated beneficiaries for pension scheme death benefits up-to-date. If you haven t reviewed yours for a while, ask your scheme to provide a nomination or expression of wishes form. If you have not nominated specific beneficiaries and you die with financial dependants, the pension scheme trustees can only consider your dependants - no one else. When making your nomination, consider who you would like to receive your pension benefits in the event that your primary nominee dies before you. It is often a good idea to allocate a small percentage (perhaps just 1%) to other beneficiaries or substitute nominees so that they can be considered by the trustees if and when appropriate. Nominating a range of beneficiaries is also a good idea, as scheme administrators cannot pay flexiaccess drawdown to anyone else while there is a living nominee. For example, if a spouse or adult child who is a 40% taxpayer is the only nominee, the scheme administrators cannot pay flexiaccess drawdown to non-taxpaying grandchildren, even at the request of the nominee, they can only pay them a lump sum. If you have nominated a range of individuals, even with just a small percentage, it gives the administrators much more flexibility to pay benefits in line with your wishes. If you are over age 75, think about nominating your pension to lower or nil-rate taxpayers, such as grandchildren, as payments are taxed at the recipient s marginal rate. Remember to keep your pension nominations up to date - it is so important, yet often forgotten! 15

16 Aligning pensions with your overall estate planning Your pension is not affected by your will, but it is important the two complement each other and your pensions are taken into account in your overall estate plan. The table below summarises some of the key considerations. Should your spouse receive some or all of your pension? does your spouse need your whole pension pot? remember, if you die after age 75, any pension payment paid to your spouse will be taxed at their marginal rate, but funds left to them in your will are tax-free due to the spouse exemption if a life interest trust is being used for a spouse in your will (perhaps due to children from a previous relationship), should they receive the pension outright or should it also form part of the trust? your spouse can nominate whoever they want as their own successor, so it may be better for your pension to nominate children or grandchildren directly your spouse could also choose to withdraw all funds from the pension, meaning that any left unspent on their subsequent death could be subject to IHT Should your pension nominees receive less in the will? how will you equalise overall benefits left from your estate and your pensions? Do you want to keep things flexible and retain control? consider a trust if you are using a discretionary trust for your children in your will, to protect capital in the event of divorce or bankruptcy, should you do the same for your pension? would you prefer your trustees to decide who should receive benefits and when (from your chosen class of beneficiaries), rather than the scheme administrators? 16

17 clarityonline Tools and guides to help you manage your wealth For many people, one of the most difficult aspects of financial planning is understanding investments and having the confidence to make your own decisions. For those who are keen to play a more active role in managing their investments, clarityonline provides you with the tools to enable you to do just that; from research through to calculators and regular updates. Anyone can register to access: guides, briefings and research covering a broad range of financial topics to help you make informed decisions our user-friendly financial calculators and other interactive tools to help you better understand and evaluate your needs virtualwrap clarity s virtualwrap is provided for our investment management clients at no extra charge and is independent of any platform or provider. You benefit from an easily accessible, single point of reference for all your investments, regardless of where they are held: view your valuations and portfolios process transactions with different financial providers virtualwrap enables you to view the asset allocation of your entire portfolio, as well as create separate portfolios for specific purposes, such as education costs or retirement planning. clarity clients also benefit from our virtualwrap service. 17

18 Our expert panel A big thank you to the three speakers at our recent seminar, whose tips and insights also provided the basis for this guide. Claire Trott, Head of Pensions Strategy, Technical Connections Claire s role is built around her great ability to communicate effectively with different audiences, using a wide array of media. She works closely with advisers, providing technical support on complex pension issues, as well as writing regular blogs and articles, and commenting in the press on topical pension issues. Claire has worked in pensions for over 17 years. Her career has ranged from being a financial adviser specialising in pension transfers, to helping other advisers deal with the complexities of self invested personal pensions (SIPPs) and small selfadministered schemes (SSAS). Angus Jones, CEO, clarity Angus set up clarity in 1998, having previously worked at PwC and City-based investment management company, Capel-Cure Myers. He has advised clients for many years across all aspects of investment, tax and pensions, both in the UK and overseas. Angus is a Chartered Financial Planner, as well as an Associate Taxation Technician and Fellow of the Chartered Institute of Securities and Investment. Christopher Walker, Partner, Thomson Snell & Passmore Christopher is a member of the Society of Trusts and Estate Planning and the Charity Law Association. He has particular expertise in relation to tax planning, wills, trusts, the administration of estates and powers of attorney. 18 Christopher advises both UK resident and non-domiciled clients on a range of personal legal matters, including all aspects of inheritance tax and capital gains tax, estate planning and postdeath tax planning, particularly involving deeds of variation.

19 For more information or advice If you have any questions on any of the information in this guide, or would like some advice in relation to your financial plans or investments, the clarity team are here to help. Please get in touch using any of the methods below: Tel: Web: clarityglobal.com LinkedIn: linkedin.com/company/clarity_7 Post: 1 Crown Square, Woking, Surrey, GU21 6HR Fax: Important information: This guide is provided for information only and should not be relied upon as advice. You should not act on any of the information without first seeking professional advice. The past is not necessarily a guide to future performance. The value of your investment and the income from it can fall as well as rise and is not guaranteed. You may not get back the full amount invested. Our views are based upon our understanding of current legislation in England and Wales. Levels and bases of, and reliefs from, taxation are subject to change and their value to you will depend upon your personal circumstances. clarity Ltd clarity Ltd is authorised and regulated by the Financial Conduct Authority (FCA). The FCA does not regulate all types of pensions, mortgages or taxation advice. claritylaw is provided in conjunction with Taylor Vinters, a firm regulated by the Solicitors Regulatory Authority. 19

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