Pension Lifetime Allowance Guide

Transcription

1 Pension Lifetime Allowance Guide Your solution to high value pensions Inside this edition: Lifetime allowance changes How to protect your pension Unique solution to lifetime allowance issues The impact of inheritance tax on your pension

2 Pension lifetime allowance How this report will help you: Understand the lifetime allowance rules and how they can affect you Learn how to protect your pension against further lifetime allowance reductions Discover a unique solution to lifetime allowance planning that can be life-changing Learn the benefits of consolidating old pensions into one new fund Find out why pensions can now play a key part of your inheritance tax planning My name is Alex Ogden and I am one of the founders at Capital Wealth Partners, a company that prides itself on a fresh approach to financial services. You have probably downloaded my guide to the pension lifetime allowance to better understand the rules and implications for you. It should be a simple piece of legislation but has unfortunately ended up being highly complicated. The guide is essentially a collection of some of the articles and blogs that I have written on the subject of the pension lifetime allowance. Some may be relevant to your case and some may not, so feel free to skip past anything that isn t relevant. The guide doesn t need to be read from front to back, and you can select the articles that provide the information you seek. Finally, if you don t find the answers you are looking for, please send me an and let me know. I ll do my best to answer you directly and may use the question to create a new discussion topic in the future.

3 Historical pension lifetime allowance limits /07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 Every UK citizen has a lifetime pension allowance. This is the total amount you can save in your lifetime into pensions, work or private, without additional taxes being applied. Background: An allowance in free fall The current lifetime allowance as of April 2016 is 1 million. This is a reduction on where it was previously. Successive governments have seen it as an easy tax raid. The consequence is that it reduces the capacity of high earners to make tax efficient pension contributions. When introduced, the lifetime allowance (LTA) was set at 1.5 million and then increased each year to 1.8 million by the 10/11 tax year. Since then, the allowance has been in free fall as the government has attempted to rein in spending. Any future increases are planned to be only by the annual rate of inflation. Current estimates indicate that on this basis the allowance won t break the previous 1.8 million level until 2036! Upon retirement, any pension savings that exceed the LTA could be liable to a one-off tax charge of 55% - considerably reducing the value of the pension a person was expecting to receive. It s therefore essential that you monitor the value of your pension(s) each year to avoid being hit with a heavy tax charge in retirement. Taking the right approach Worryingly, 90% of new clients don t know the value of their pension. They presume that as they are only making smaller regular contributions, their pension won t be approaching the LTA. However it s usually not the contributions that take a pension over the LTA, but the investment growth of the funds themselves! For instance, somebody ten years from retirement with a current pension pot of 700,000 could exceed their allowance if their pot grows at 7% a year even if they stop paying into it now. This would create a tax charge on the excess above their LTA. Regular valuations are essential to create a pension plan that aims to maximise your LTA, but not exceed it. This is something that Capital Wealth Partners carry out for each of our clients every six months. Early planning can save hundreds of thousands (and in some cases millions) of pounds in tax over a pension s lifetime. So what can be done to try to protect your pension from the effects of reductions in the lifetime allowance? Pension enquiry team / Info@CWPwealth.co.uk

4 Protecting your allowance Pension protection is designed to help protect the pension pots of people who are either close to or above the lifetime allowance when it is lowered. In order to apply for pension protection you will need to understand how to value the pension or pensions you have. Subject to the scheme, the calculation used is different. If you have a SIPP, SSAS or defined contribution scheme, the policy will have a capital value and this is the value of your pension for lifetime allowance purposes. You do not include your state pension when calculating pension lifetime allowance. If you have a defined benefit pension, you will not have a capital value. Instead there is an annual income in retirement value. For example your scheme may pay you 35,000 a year in retirement. To calculate the lifetime allowance value you multiply this amount by 20, 35,000 x 20 = 700,000 and this becomes the capital value for lifetime allowance purposes. For pensions that were entered into drawdown, or where income has been taken, prior to April 5th 2006 a multiplier of x 25 is used. You will need to add together the capital value of all the pensions you have in order to calculate how much of your lifetime allowance you have used.

5 The government understands that it would not be fair to backdate the new LTA to savers who already have pension values in excess of the new proposed limit. They therefore offer savers two types of protection. 1. Individual 2. Fixed This type of protection will allow you to protect the value of your pension before the lifetime allowance is reduced. It is designed so that people with pension funds that exceed the new LTA are protected by giving them a personal limit based upon their pension s value on 5 April 2016 (capped at 1.25m). For example, someone with pension savings worth 1.1m on 5 April 2016 can lock in a personal LTA of 1.1m as this is still inside the current limit. However someone with savings worth 1.4m would only secure a 1.25m allowance in other words the value up to the current LTA. It is important to note that you cannot protect the excess of funds above the current (or in some cases previous) LTA. This type of protection will allow you to lock in the 15/16 LTA of 1.25 million. If either you or your company have made any pension contributions since April 5th 2016 this type of protection is not available to you. If fixed protection has been granted, then no further contributions can be made from that date. Therefore, any increase in value will be from investment growth alone. For example: Someone who has pension savings of 1.1m and is happy to make no further pension contributions can apply fixed protection to their pension. This will allow the investment growth of the pension to grow to the current limit of 1.25m even after the prevailing LTA has been lowered below this limit. The protection will allow you to keep the current LTA of 1.25 million and can be applied for retrospectively in the 16/17 tax year. Pension protection is very easy to apply for and can be done online at: Once an application has been made, you will receive confirmation of your acceptance and a pension protection certificate. This should be kept and supplied to your financial adviser or accountant for future reference. Pension enquiry team / Info@CWPwealth.co.uk Pension enquiry team / Info@CWPwealth.co.uk

6 QROPS No need to feel left out... QROPS - Qualifying Recognised Overseas Pension Scheme QROPS, otherwise known as Qualifying Recognised Overseas Pension Schemes, have been around since 2006 and are as the name suggests. They are an overseas pension scheme that has been set-up in such a way that it is deemed as qualifying by HMRC. They are usually based in tax beneficial regions such as Gibraltar, Malta, Cyprus and other countries with a less aggressive approach to tax in order to attract investment. The scheme rules, security of the funds, investment options and cost of administration are all virtually the same as in the UK. Funds are held in designated client accounts that are protected against the country the scheme is registered in and can be invested here in the UK once set-up. The common thought is that UK residents cannot use the schemes. However, after recently conducting my own due diligence, I can confirm that there is nothing in the legislation that excludes UK residents from using one. This was recently confirmed by the independent government body, the Pensions Advisory Service, who also confirmed that QROPS can be used by UK residents.

7 Pension Trust - Case Study QROPS and the lifetime allowance QROPS can be a clever piece of tax planning as the transfer of the funds from a UK pension scheme into a QROPS triggers a benefit crystallisation event (BCE). This BCE tests the value of the pension, at the time of the transfer to the QROPS, against the lifetime allowance and any excess is taxed at the lower rate of 25%. Once the tax has been paid and the funds transferred to the QROPS, any further growth is then outside the jurisdiction of HMRC and any future investment growth is no longer assessed against the lifetime allowance. This can be handy if a client is very close to reaching the lifetime allowance as no tax would be due when the transfer occurs. Even for clients who have exceeded the lifetime allowance, it is possible to split the pot, transfer the amount equivalent to your protected lifetime allowance to a QROPS and leave the excess in the UK to grow. The investment growth on the majority of the funds (the funds inside the QROPS) can then grow tax free and the funds exceeding the lifetime allowance can be left to grow in the UK until age 75, when a final lifetime allowance assessment is made. The hope would be that the lifetime allowance is scrapped before age 75, and you gain access to the fund with no tax charge. If the lifetime allowance still exists at age 75, you can opt to pay a reduced rate of 25% on the excess and leave the funds invested to continue to grow. Tax-free lump sum Under pension freedoms in the UK, you are entitled to take 25% of your pension fund as tax-free cash when you retire. This is limited to 25% of the prevailing or protected lifetime allowance. Tax free cash is still available using a QROPS at 25% (and even at 30% in some jurisdictions), however, this is based on the full value of the fund, not limited by the prevailing lifetime allowance. For higher value pensions this can be very advantageous due to the increase in tax-free cash that would be available. I suspect that this feature will become limited in the near future, as the access to excess tax-free cash has been abused in the past. Therefore it should not be a key motivation when considering a QROPS. Income from a QROPS As a UK resident, the income will be taxed in the same way as any other UK pension scheme. You still have the full use of your personal allowance while basic and higher rates of tax remain the same. Should you live abroad, tax will be paid subject to the tax laws in the country of which you are tax resident. Inheritance tax & QROPS Under pension freedoms the rules are similar, however, somewhat more advantageous through a QROPS. If death should occur: Pre-age 75 Under UK rules the value of the pot can be paid out tax free to the beneficiaries. This is limited to the prevailing or protected lifetime allowance. Any excess will still be charged as a lifetime allowance charge at either 25% or 55% and paid by your estate. With a QROPS this is not the case. The full value of the fund can be paid tax free and there is no lifetime allowance consideration. Post-age 75 Under UK law the pension fund is inheritance tax free, however, income tax is paid on any withdrawal from the pension. QROPS is very similar, with the beneficiaries paying income tax on any withdrawals. However, there may also be the option of some tax free cash. The original value of the transfer to the QROPS, plus any tax-free cash and income taken are deducted from the gross value of the fund at the time death occurs. Any excess can be paid as tax-free cash to the beneficiaries. Pension enquiry team / Info@CWPwealth.co.uk

8 QROPS Case Study Mr Jones is 47 years old, and plans to retire in 10 years time. He has already built up a generous pension from his employer in a final salary scheme of 1 million. Due to record high transfer valuations and the desire to leave a pension inheritance in the future, Mr Jones has decided to transfer the final salary scheme into a SIPP. As he has already reached the pension lifetime allowance in the UK, he is concerned about the future growth of the fund being heavily taxed in the future. This leaves two options: 1. Transfer the funds to a UK pension such as a SIPP Transfer the funds to an overseas pension 2. scheme: a QROPS Even at a modest growth rate of 5% per annum, the value at the point of retirement will be 1,628,894. Below is the tax treatment of both cases, based on the transfer to the scheme being completed in the current year. UK SIPP QROPS Pension Value 1,628, LTA 1,248,853 LTA Excess 380,041 Pension Value 1,628, LTA N/A LTA Excess N/A 55% LTA Tax 209,022 55% LTA Tax Net Value 1,419,872 Net Value 1,628,894 QROPS Saving 209,022

9 Pension Trust - Case Study QROPS for UK residents research Before introducing our clients to QROPS, we wanted to be sure that they could be used by UK residents that were not looking to move abroad. This, in the past, has been a topic of contention, as most of the available material on QROPS talks about the transferee emigrating or planning to emigrate. After careful consideration we have decided that we need to offer clients the use of a QROPS in order to fulfil our role as independent advisers. The following research helped us make this decision: Legislation There is no mention or restriction listed in the legislation that stops UK residents from making a transfer into a QROPS. EU Law At a meeting of AMPS (Association of Member-directed Pension Schemes) in November 2013, the issue of offshore pensions being marketed to UK Scheme members where the member is not and has no intention of residing overseas was raised with HMRC. As has been reported, HMRC confirmed that, This is a feature built into the design of QROPS. While conducting further research, a QROPS provider, based in the UK, shared with us an from HMRC. Enquirer: I would be very grateful if you would either or write to me so that I have something that I could use to confirm that the residency of an individual has no bearing at all on transfers to QROPS. HMRC: There is no requirement concerning the residence of the transferee We also contacted the Pensions Advisory Service - a non departmental government body and asked the same question. Capital Wealth: I am considering setting up a QROPS pension but have no intention to move abroad. I like the flexibility of the scheme and understand that I can use one, even as a UK resident? Advisory Service Operator: That s true Capital Wealth: Just to clarify, I can be a UK resident, reside in the UK and still use a QROPS if I choose? Advisory Service Operator: Yes So should you consider a QROPS for your pension planning? In our opinion QROPS should be viewed as any other pension product such as a SIPP or SSAS. There is no legislation that limits its use, therefore making it a viable option for pension planning. Costs and charges are also in line with similar pension products, with the annual fee being just 450 a year, the same price as a SIPP. They are just as easy to create as a SIPP account and can be closed just as easily if you decide to transfer to a different scheme in the future. Due to this we feel that QROPS is a viable option for UK residents and are pleased to be able to advise our clients on the many benefits, subject to their specific case. For more information call our pension enquiry team on the number below. Pension enquiry team / Info@CWPwealth.co.uk

10 Consolidate your pensions The average person changes jobs more than six times throughout their career. This usually leads to clients having a collection of pensions sitting idle and underperforming. It is not uncommon to find pensions that have been invested in with profits funds where the bonuses due have not been added for years. Excessive charging structures are also commonplace and in the worst cases can lead to the value of the pension decreasing over time instead of increasing! Are your old pensions restrictive? There can also be a serious lack of features available, like the ability to take flexible drawdown at retirement rather than just taking an annuity. Yet the latest pension legislation enables much more flexibility - recognising annuity rates are at record lows. Hanging on to such pension plans often makes no sense. If you have one you may be paying high charges for poor returns. It is certainly worth carrying out a consolidation review. Your hassle-free solution We understand that time is valuable to you. Therefore we are happy to write to your pension providers to review the performance and potential for consolidation. Subject to the results, our pension team can handle the entire transfer into a new structure. We can provide advice on how the funds should be invested, giving you a more efficient and straightforward pension solution. It is important to note that we are a fully FCA regulated financial advice company. We urge clients considering consolidation to only work with regulated companies, as pensions have become a target for fraudsters. Consolidate your pension Old Pension Old Pension Old Pension Are you: New Pension Being charged too much by your current pension providers? Missing out on with profits bonuses that should have been paid into your pension? Suffering from poor investment performance on the funds? On the next page we take a look at pension consolidation at its best, and explore the solution we provided for one of our clients who had several pensions.

11 Case Study Considerations Before choosing to consolidate your pensions you should consider: The cost of any exit charges and the final transfer value of each policy. The current performance of the funds within the pension. The charging structure and cost of each provider. Additional benefits that may or may not be selected on your policies. Do you have old or previous pensions? Call our team on and ask for our letter of authority. One simple form is all we need to carry out this service on a no-obligation basis. A new client recently contacted us having been referred by someone we had previously helped. We arranged a meeting to review his current pensions. Not a pretty picture We ascertained he had seven personal pensions totalling 250,000 which he had never reviewed, and so he asked for our help. He told us that he had no intention of taking an annuity from the pensions. His preference was to exercise flexible drawdown (drawing all the capital from his pension and reinvesting elsewhere) when he retires fully in five years time. Our research showed fund performance across the seven funds was mediocre at best. Just as significant, we found that only one of his current pension providers allowed flexible drawdown. Unfortunately the provider had high charges and the funds had under-performed. Delivering a pension that does what he wants Given the pension providers restrictions imposed on taking benefits, our advice was to redeploy all seven pensions into a new SIPP with Suffolk Life. The result of our advice meant that the client is now able to access flexible drawdown. This gives him the ability to take whatever drawdown amount he wants from his SIPP year by year. This meets his specific objective. At the same time he gains access to a new Discretionary Fund Manager ensuring active daily management of his pension assets matched to his risk profile. SIPP charges are generally quite low and the charges of the Discretionary Fund Manager are at a very competitive rate of 0.8% plus VAT. Pension enquiry team / Info@CWPwealth.co.uk

12 Inheritance tax & pensions The changes to inheritance tax and pensions in 2014 have brought pensions back to the main stage when it comes to estate planning. It is now possible to leave a crystallised pension (a pension where drawdown has commenced) as an inheritance completely tax-free - as long as the deceased is under the age of 75. Previously a tax charge of 55% applied. In the 16/17 tax year this will allow you to leave up to 1 million as an inheritance with no charge to tax. As you can hold a wide variety of assets within a pension, they are forming the cornerstone to many portfolios for high-income clients. For clients with over 1 million in their pension, this may seem unreasonable. After all, if the pension was in a personal scheme the full value could be left as a pension inheritance. Due to this, the government expect 20% of current final salary scheme holders to opt out of their schemes and move to a more inheritance-friendly scheme. This could allow their families to benefit from any unused pension after they die. An exception to the rule The exception to this is final salary scheme pensions: they cannot be left as an inheritance. This has caused some clients to review their pension structure. There are several advantages to being in a final salary scheme pension: you have no investment or market risk, the income you have is guaranteed for life and it s index linked. However, what happens to that income when you die? What happens in final salary schemes Normally, the surviving spouse continues to receive an income but usually 50% less than the previous benefit. When they die the pension ceases and its value expires leaving no pension inheritance. When considering leaving a pension to beneficiaries as part of an inheritance, you will be asked to disclose if you would like it paid as an income or lump sum. We have found that many clients initially opt for the lump sum until we talk through the options. So let s weigh up those options now.

13 x x Lump sum Benefits: Tax free lump sum (under 75) Ability to control release of capital Tax free investment growth Excluded from beneficiaries estate for IHT Benefits: Income Tax free lump sum (under 75) Ability to control release of capital Tax free investment growth Excluded from beneficiary s estate for IHT As the name suggests this allows the value of the pension to be left to beneficiaries as a tax free lump sum - if you are under 75 at the time of death. If you are over 75, the pension will be taxed as income at the highest marginal rate of the beneficiary. Many beneficiaries will pay the maximum rate of 45% due to the typical size of pension funds. To many people, the lump sum may seem like the obvious choice. Maybe they are preconditioned to the words lump sum the term being associated with the tax-free lump sum that is available upon retirement? However this option may not be as attractive as it seems. In a pension, the funds are held within a very tax efficient wrapper. They would not form part of the beneficiary s estate. There is no tax to pay on investment growth, and as inherited pension value they do not count towards the lifetime allowance of the beneficiary. As soon as they are removed from this wrapper all of these benefits are lost. If you are 75 or older when you die, the lump sum itself can push the beneficiary s tax rate into the 45% bracket resulting in a large charge to tax on the funds received. The word income seems to create the thought that access to the funds would be limited. That the beneficiary would only be entitled to the income the investments produce. This is a misconception. The definition of income in pension terms simply means: free to make withdrawals of any amount on demand. The advantage here is that the beneficiary still holds the funds within the tax efficient pension wrapper. They can draw down funds from the pension, tax-free, whenever they wish. Any investment growth inside the pension is tax-free and the full value remains outside the beneficiary s estate for inheritance tax purposes. Pensions inherited past age 75 can remain inside the pension and will only be taxed when withdrawals are made. This allows the beneficiary to control the release of funds from the pension in accordance with their other earnings in that year and avoid being taxed at 45%. When you consider that selecting the income option will provide you with all of the benefits of the lump sum, but also provide much more flexibility to plan the tax-efficient withdrawal of the funds, the choice is clear! Pension enquiry team / Info@CWPwealth.co.uk

14 Delaying the lifetime allowance charge Dodging the bullet... Although it is possible to accrue benefits of any size in a UK registered pension scheme, the lifetime allowance (LTA) caps the benefits that can be taken without a tax charge (the LTA tax charge). The LTA is currently 1 million in the 16/17 tax year. The LTA tax charge only applies when Benefit Crystallisation Events (BCE) occur. There are currently 13 triggers to a BCE. However the most common are when a person buys an annuity, draws a tax-free lump sum, puts their pension fund into drawdown or reaches age 75. Dodging the bullet until age 75 There s no requirement to ever draw your pension benefits. However, they will be measured against the LTA when you turn age 75. Therefore, it is not possible to completely avoid an LTA test just by deferring your pension benefits! You do not need to draw all your pension benefits in one go. Instead, you can part-crystallise a pension and delay the LTA tax charge until a further BCE occurs. Thus aiding the overall investment growth potential, as the funds would remain untaxed in the pension. So how much will need to be paid? When a BCE occurs that incurs an LTA tax charge, you have two options: Lump Sum You can take the excess as a lump sum and pay a one-off 55% tax charge. Income You can leave the excess within the pension and pay a one-off 25% tax charge. Any withdrawals will be charged at your highest marginal rate of tax. Deciding which option best suits you depends on whether you plan to leave the pension as an inheritance, or plan to draw on the funds in the future. It is possible to plan for this event. You can draw down any investment growth each year in order to pay tax at your highest marginal rate rather than incur the 55% tax charge at 75. However, this should be considered as part of a wider income strategy long before the event occurs. Managing the lifetime allowance and your pension s exposure to tax takes an in-depth knowledge of legislation and tax rules both in regards to pensions and income.

15 Case Study Mr Jones is 60 and has a pension worth 1.7 million. He wants to take the maximum amount of tax-free cash from the pension, which will be 25% of the lifetime allowance limit of 1 million, so 250,000 (it is important to note that tax-free cash is limited to 25% of the prevailing or protected lifetime allowance). Once this event has occurred there is now 1,450,000 left in the pension - 700,000 un-crystallised and 750,000 crystallised. As Mr Jones has not crystallised more than the 1million lifetime allowance, there would be no LTA tax to pay at this point. Therefore, 700,000 would be left in the pension to continue to grow until another BCE event occurs. Would you like to defer your lifetime allowance charge? If you want to ensure that your pension planning is as tax efficient as it could be, then contact a member of our team to discuss your situation. We are always happy to discuss your planning and point out any areas that we feel might enhance any planning you already have in place. Call us today and find out if you are missing out on some pension planning that could save you thousands of pounds in retirement. Thank you & next steps Thank you for taking the time to read this guide. We hope that it has opened your eyes to some of the possibilities that are available for your pension. Not every strategy is right for every client. An individual assessment of your circumstances will be needed before you decide if a product or course of action is the right choice for you. To help you explore the options, we have a team of experts who are happy to talk through your circumstances and explore relevant ideas. This can be done over the phone or in person. We have an open information policy that means we are happy to discuss the options available to you free of charge. Contact a member of our team now: or us at Info@cwpwealth.co.uk Pension enquiry team / Info@CWPwealth.co.uk

16 The information within this guide produced by Capital Wealth Partners Limited is provided as a convenience to clients and should be used for information purposes only. It is subject to change without notice. None of the information contained in this document constitutes financial or other professional advice in any way. If you require additional information, you should contact appropriate Capital Wealth Partners personnel. While Capital Wealth Partners uses reasonable efforts to ensure that the information contained within this document are current and accurate at the date of publication, no warranties are made, either expressed or implied, as to reliability, accuracy or completeness of the information. Capital Wealth Partners accepts no liability for any loss arising directly or indirectly from the use of or action taken in reliance on such information. This document should not be copied, reproduced or redistributed, in whole or in part. Published 13/01/2017