YOUR CHOICES IN A WORLD OF PENSION FREEDOM Lee Coles
YOUR CHOICES IN A WORLD OF PENSION FREEDOM Welcome from CABA Wendy Saunders Recent service development in Australia caba.org.uk/australia Interactive webinar Importance of evaluation
WHAT ARE WE DOING TODAY? Considering the planning process Examining UK pensions and income tax Exploring changes to the UK State Pension Exploring the concept of pension freedom Looking at pension transfers to Australia Identifying the key issues to consider Summarising actions and next steps
WHAT AREN T WE DOING? Providing advice I m not allowed Looking at wider tax and financial considerations outside of pensions Telling you how much tax you ll pay. Please note the amount of income tax you pay in any tax year will depend on your income, your individual circumstances and the governing tax rules
THE PLANNING PROCESS
PLANNING ESSENTIALS Dream Money Gift Money Freedom Money Safety Money Survival Money Source: Retirement Income Redesigned
HOW TO PLAN How far can it get you? Start with what you have Dream Money Gift Money Freedom Money Safety Money Survival Money Start with what you want How do you get there? What are your objectives? What form does your money need to be in? Key point is around the alternatives we consider Change what we need/want or change what we have
NEED VS HAVE = GAP/SURPLUS Certainty of position Get help or advice Review working plans Save more / save less Review spending plans Use money differently
TAXATION
THE DOUBLE TAXATION CONVENTION Agreement between UK and Australia Income sources can, however, still be: Taxable only in Australia Taxable only in the UK Taxable in both but Australian tax law allows credit for tax paid in UK Taxable in both but UK tax law allows credit for tax paid in Australia Taxed in both, but this will usually be in error
RELIEF AT SOURCE/RECLAIMING TAX Form Australia Individual 2003
UK INCOME TAX IN 2016/2017 Personal allowance 11,000 Income above personal allowance Any income up to a further 32,000 taxed at 20 % Any income from 32,000-150,000 taxed at 40% Any income above 150,000 taxed at 45% Loss of Personal allowance on income between 100,000 and 122,000, at which point no allowance would exist
PAYE FOR PAYMENTS UNDER PENSION FREEDOM Applying Emergency Month 1 code Tax deducted Actual amount taken from 30,000 Tax free lump (25% = 7,500) 0% Nil 1/12 th of 11,000 = 916.67 0% Nil 1/12 th of 32,000 = 2,666.67 20% 533.33 1/12 th of 118,000 = 9833.33 40% 3,933.33 Any excess over 13,416.67 45% 4,087.50 Total tax deducted on 30,000 would be 8,554.16
STATE PENSION CHANGES
WHAT TYPE OF PENSION DO YOU HAVE? Are you clear on whether each pension is: State Pension Defined Benefit (or Final Salary), or Defined Contribution (of Money Purchase)? Are you clear on the rules relating to each?
STATE PENSION AGE Born Male State Pension Age Female State Pension Age 6 April 1950 5 April 1953 65 60 63 6 April 1953 5 December 1953 65 63 65 6 December 1953 5 April 1960 65 66 65 66 6 April 1960 5 April 1961 66 67 66 67 6 April 1961 5 April 1977 67 67 6 April 1977 5 April 1978 67 68 67 68 6 April 1978 onwards 68 68 In March 2016, the Government announced an additional review of the State Pension Age. This review will submit its recommendations to Government by May 2017 and will consider life expectancy, the sustainability of the State Pension and wider changes in society. The review won t cover the existing State Pension Age timetable to April 2028.
THE NEW STATE PENSION Overview and eligibility If an individual reaches State Pension Age before 6 April 2016 their State Pension is calculated under the old rules The full new State Pension for 2016/17 is 155.65 per week. The amount the individual receives can be higher or lower than 155.65 depending on their National Insurance record The new State Pension is available to: Men born on or after 6 April 1951 and Women born on or after 6 April 1953 An individual needs at least 10 Qualifying Years on their National Insurance record (previously only one year was needed) these years do not need to be consecutive The "triple lock" system ensures the state pension goes up by whichever is higher - inflation, wages or 2.5%. No increases, however, if resident in Australia
IN OR OUT Contracted-in Building up additional SP Start work Contracted-out No additional SP built up, but additional external DB / DC DB contracting out open from 1978-2016, for DC 1988-2012
PENSION FREEDOM
WHAT IS PENSION FREEDOM? From April 2015 From age 55, you may access your DC pension pot and take it any way you choose, subject to: Up to 25% as a tax free cash lump sum The remainder being taxed at your normal rate of tax for that year Please note that schemes aren t obliged to offer all or any of the new freedoms allowed so you may need to transfer benefits into a different plan to gain greater flexibility If you do use any of the new flexibilities your annual allowance drops from 40,000 per annum to 10,000 per annum
GUIDANCE THROUGH PENSION WISE Entitles everyone with a DC pension to access free, impartial guidance about options at retirement, on line, over the phone or face to face
KEY PENSION ACCESS QUESTIONS What are your income and capital needs? When do you want to take your benefits? What type of pensions do you have and what are your choices? Would you prefer certainty or flexibility? What are the tax implications of your options? Will your savings last as long as you do? How is your money going to be invested? (NOW and in the FUTURE) What happens if you were to die?
YOUR DEFINED BENEFIT PENSIONS Service x Accrual Rate x Salary Definition e.g. 20/60ths x 30,000 = 10,000 pa Taking your pension benefits Early/late retirement e.g. payable at 65 or 5% pa reduction/enhancement Tax free cash sum commutation e.g. 1 of pension = 12 tax free lump sum Cash equivalent transfer value e.g. 10,000 pa could = 300,000 or more A transfer to a Defined Contribution scheme to secure the new flexibilities would mean you lose the security of a defined income. You d need to take advice from a financial adviser before such a transfer can be transacted Where the transfer value is below 30,000, this can be accessed as a lump sum from age 55, 25% of which will be tax-free with the remainder taxable. No advice is required here DB scheme trustees will also have new powers to delay transfers and take account of scheme funding levels when deciding on transfer values
WHAT COULD YOUR DC POT PROVIDE? Options can be used in whole or in part A tax free lump sum only Encashment also known as UFPLS Flexible access also known as drawdown Annuity purchase conventional / investment-linked
SCENARIO 1 - ACCESSING TAX FREE CASH Dave has a pension pot of 100,000 Dave has 25,000 left outstanding on his mortgage charged at 2.5% costing him 448 pm Dave is 60 and works full time earning 30,000 per annum Dave wants to know if he should take his tax free cash sum to repay his mortgage? 100,000 Pension Pot TFC 25,000 75,000 Pension Pot Mortgage 25,000 5 years remaining Monthly Payment 448 Extra Income 448 Before After
ENCASHMENT AFTER THE TAX FREE ELEMENT What about Dave s remaining pension pot? What if he cashes this in, remembering that he earns 30,000? 75,000 PENSION POT SALARY 30,000 + = *( 3,800 TAX) TOTAL TAXABLE INCOME OF 105,000 *Please note National Insurance is also payable on salary Income Tax bill Personal Allowance 8,500 0 20% Income Tax 8,500-40,500 6,400 40% Income Tax 40,500-105,000 25,800 TOTAL TAX 32,200
SCENARIO 2 TAKING THE POT GRADUALLY Mike is 60 and his State Pension will commence when he s 66, but he wants to stop working this year. Mike wants to cash in his pension pot of 100,000 but avoid a large tax bill. He doesn t need to take his tax free cash all at once. Mike initially cashes in 14,000 in April 2016. 21,500 64,500
TAKING THE POT GRADUALLY State Pension expressed in today s terms
SCENARIO 3 GUARANTEED INCOME FOR LIFE Sarah has a taxable pension pot of 50,000. To top up her State Pension and widow s pension from her late husband s occupational pension, she d like to generate an inflation-proofed income of 2,000 per annum. Sarah smokes and is diabetic. 3,000.00 Hodge Life 2,500.00 LV= LV= 2,000.00 1,500.00 Legal & General Prudential 1,000.00 Income 500.00 0.00 Level Esc RPI Joint 50%, Esc RPI Smoker, Esc RPI Smoker & Diabetic, Esc RPI Source: The Exchange from IRESS 1/2/16, gross annual figures with 5 year guarantee periods
RETIREMENT OPTIONS SUMMARY Description Annuity Drawdown Full cash withdrawal Flexibility / Certainty C F F Tax implications??? Will savings last??? Investment decision?? Death benefits??? Ongoing advice required? Take care regarding your investment position prior to taking benefits
WHERE ARE YOUR DC PENSIONS INVESTED? If you haven t selected your own funds, you may be in a default strategy Most default strategies try to grow your pot when you re younger but then changes where you re invested as you approach retirement Access option Risks to cover How is this covered? Encashment - Volatility Move towards cash assets Annuity Drawdown - Volatility - Falling annuity rates - Time out of the market - Taking too much income in early years Move towards government bonds Staying in growth assets with lower risk assets for any income to be taken in early years
PENSION OPTION TASKS FOR YOUR TO DO LIST Clarify which types of pension you have and what your options are Get an up to date projection of what you ll get back and make sure you understand what this is telling you Is your selected retirement date correct? Consider your needs in terms of certainty vs flexibility, tax efficiency, longevity, investment and legacy If you are invested in a lifestyle investment option, has this kicked in and are you clear which major pension pot conversion option you will be using? Watch this space for changes What about transferring?
TRANSFERRING YOUR PENSIONS TO AUSTRALIA
QUALIFYING RECOGNISED OVERSEAS PENSION SCHEMES OR QROPS A Qualifying Recognised Overseas Pension Scheme, or QROPS, is an overseas pension scheme that meets certain requirements set by Her Majesty's Revenue and Customs (HMRC). A QROPS can receive transfers of UK Pension Benefits without incurring an unauthorised payment and scheme sanction charge (typically of 55%) To become a QROPS, a pension scheme must apply to and be approved by HMRC. A list of QROPS that have consented to have their names published is available on the HMRC website and is regularly updated HM Revenue and Customs (HMRC) can t guarantee these are Recognised Overseas Pension Schemes (ROPS) or that any transfers to them will be free of UK tax. It is your responsibility to find out if you have to pay tax on any transfer of pension savings https://www.gov.uk/government/publications/list-of-qualifying-recognised-overseaspension-schemes-qrops/list-of-recognised-overseas-pension-schemesnotifications#australia
IS THE LAW LIKELY TO CHANGE HERE?
ISSUES TO CONSIDER
WHAT TO THINK ABOUT Where you ll be taking your pension Residency status Consider wider savings/assets Wider tax implications e.g. capital gains and IHT Do you need to change product and/or provider? Do you have further questions? Do you need an initial clinic? Do you need financial advice?
WRAPPING UP FAQ document will be circulated Register for a free 30 minute 1-1 consultation by emailing australia@caba.org.uk by 25 November Evaluation survey caba.org.uk/australia to find out more about CABA s services Wendy Saunders, International Development Manager Wendy.Saunders@caba.org.uk