MoneyWorks - Financial Advice Spring '13

Spring Issue 2013

Thomas Carroll Independent Financial Advisers Ltd

Autumn statement brings further pension changes In his Autumn Statement on 5 December 2012, the Chancellor announced yet more changes to the ‘simplified’ pensions regime which will further complicate matters for higher earners in particular. This article provides a brief outline of the most important changes and highlights some key points to bear in mind.

Reduction in the standard lifetime allowance (SLA) From 6 April 2014, the Standard Lifetime Allowance (SLA) which places an overall ceiling on the amount of savings that most individuals can accumulate over the course of their lifetime without suffering a tax charge will reduce from £1.5m to £1.25m.

To counteract this another round of ‘fixed protection’ will be available to anyone (regardless of the current level of their pension savings) who does not already have enhanced, primary or fixed protection 2012, who expect that their pension savings will be more than £1.25m when they come to draw their benefits.

give individuals who register for it a fixed personal lifetime allowance equal to the greater of (a) £1.25m and (b) the value of their pension rights on 5 April 2014 (subject to a cap of £1.5m).

If introduced, this option will only be available to individuals with total pension rights already in excess of £1.25 million on 5 April 2014.

Anyone selecting ‘personalised protection’ would be able to continue accruing pension benefits without losing this protection.

Under both fixed protection 2014 and personalised protection, any pension rights in excess of the applicable lifetime allowance will continue to attract a 55% tax charge.

Comment

Under fixed protection 2014, individuals will continue to benefit from a lifetime allowance of £1.5 million, until such time (if at all) the SLA exceeds £1.5 m in the future.

The deadline for registering for fixed protection 2014 with HMRC is 5 April 2014 but in order to keep this protection, there must be no ‘benefit accrual’ after this date.

The Government is also consulting on introducing a form of ‘personalised protection’ which will

Individuals who may be affected will need to consider whether to elect for protection. Those potentially affected include not only those individuals aged under 75 with benefits still to take, but also those in receipt of a drawdown pension that commenced after 5 April 2006. A further lifetime allowance test at age 75 on that fund may result in them exceeding the reduced £1.25m SLA at that time.

Anyone considering electing for fixed protection should try and

ensure that their pension savings are appropriately maximised by this date given there can be no further accrual after 5 April 2014 For those looking to take benefits in the next few years’ consideration could also be given to taking benefits earlier in order to reduce the percentage of the SLA that would be used up. For example, crystallising benefits with a value of £500,000 in 2013/14 would only use up 33.33% of the SLA, but taking the same amount in 2014/15 would use up 40% of the SLA. Individual’s in receipt of a drawdown

pension could also consider taking higher withdrawals from their fund in order to minimise the chances of facing a LTA charge on attaining age 75 and if someone still has benefits to take from a defined benefit scheme, giving up some of their pension for a tax free cash sum could also reduce the crystallised value to be tested against the LTA. Reduction in the Annual Allowance From 2014/15 onwards the annual allowance, which places an annual limit on the total amount of tax efficient ‘pension input’ that can be made to registered pension

Money Works is published by Thomas Carroll Independent Financial Advisers Ltd For further information about any of the topics discussed, or on any other aspect of financial planning please contact: Pendragon House, Crescent Road, Caerphilly, CF83 1XX Tel: 02920 869531 Fax: 02920 882783 www.thomas-carroll.co.uk Authorised and regulated by the Financial Services Authority. The Financial Services Authority does not regulate taxation and trust advice, deposits or advice on debt or state benefits.

schemes, will be reduced from £50,000 to £40,000.

There are no proposed changes to the carry forward rules though, which means that the maximum amount of any unused annual allowances from tax years 2011/12 to 2013/14 inclusive that can be carried forward to 2014/15 will still be based on the current £50,000 limit.

Comment Once introduced, this new limit is likely to be particularly onerous on members of DB schemes with high salaries. Care will also need to be

taken where a contribution is paid on or after 6 April 2013 into a money purchase arrangement to ensure that it falls in a pension input period in the desired tax year Capped Drawdown The maximum income limit will increase from 100% to 120% of the otherwise available annuity based on the GAD tables.

HMRC have confirmed the date of this change will be 26 March 2013 with the revised limits applicable from the start of the next drawdown pension year commencing after this date.

Comment With annuity rates continuing to fall, this 20% increase is to be welcomed for people with a genuine need to maximise the income they can take from their drawdown fund although an income of 120% GAD based on current rates will still provide a significantly lower income than 100% GAD would have done when the ‘simplified’ regime was first introduced on 6 April 2006.

Great care should also always be exercised whenever maximum income withdrawals are being considered – especially if the plan is to draw the maximum income

for a sustained period and/or the individual has little in the way of other pension provision to fall back on. This is because drawing the maximum income will maximise the chance of the funds being depleted, which in turn could not only reduce the maximum income available after the next scheduled review but also reduce the amount of guaranteed income that could eventually be purchased with that drawdown fund.

If you do think you might be affected by any of the above changes please feel free to contact us for further advice or guidance.

The age allowance trap From 6 April 2013, the availability of the age-related income tax personal allowance will be restricted.

However, with some careful financial planning, many people aged 65 or over before this date can take steps to ensure that they maintain their entitlement in full. This article explores how.

What is the age allowance?

Age allowance is an increase in the personal tax-free income allowance which is currently available to any individual in the UK who attains age 65 (or more) during the tax year and whose income does not exceed a certain amount (£25,400 in 2012/13, rising to £26,100 in 2013/14). When income exceeds this threshold, the age-related personal allowance is reduced by £1 for each £2 of additional income – although for individuals with total income below £100,000 the age allowance can never be reduced to less than the normal personal allowance (£8,105 in 2012/13, rising to £9,440 in 2013/14).

So, if someone aged 66 in 2012/13 has total income of £27,400, their age allowance will be cut back by £1,000 (£2,000 / 2) – bringing £1,000 more of their income into charge for income tax.

Older taxpayers, where one party to a marriage or civil partnership was born before 6 April 1935, may also be entitled to married couple’s allowance (MCA) – although like the age-related personal allowance, the MCA is also reduced if income exceeds a certain amount.

What is changing from 6 April 2013?

From 2013/14, anyone born after 5 April 1948 - and who therefore attains age 65 after 5 April 2013 will only be entitled to the standard personal allowance of £9,440.

This means that only those people who had already attained age 65 before 6 April 2013 can continue to benefit from the higher age-related allowance.

Furthermore, whilst the income threshold above which the age allowance is reduced will rise to £26,100, the amount of age

allowance will remain frozen at £10,500 for those aged between 65 and 74, and £10,660 for those aged 75 or over.

transfer both are under the age allowance threshold and therefore able to each benefit from the full age allowance.

With the standard personal allowance continuing to increase each year, and the age related allowance having been frozen, it is therefore clear that the age allowance is gradually being phased-out. This doesn’t mean though that those who are currently aged 65 or over and who have income above the threshold, shouldn’t take steps to preserve it for as long as it continues to exist (!)

Investing for capital growth, rather than income, is also a simple strategy to reduce a taxpayer’s income, and deductions from income for the purpose of testing if the age allowance income threshold has been exceeded are also allowed for the gross amount of any contributions made to a pension or charity.

Preserving age allowance To preserve these higher income tax allowances, taxpayers may wish to “manage” their income.

Particularly helpful are ISAs, because the income is tax-free, and investment bonds may also be of appeal because they allow taxdeferred withdrawals of 5% a year to be taken for 20 years which do not count as ‘income’ either.

It may also frequently be the case that one spouse or civil partner has total income that causes them to lose their own age allowance yet the other has income well below the threshold at which age allowance is cut back. If so, it may be advantageous for the higher earning spouse or civil partner to transfer investments producing taxable savings or dividend income from their own into the other person’s name so that after the

Making tax-relievable pension contributions is also a perfectly legitimate and extremely tax efficient means of reducing or eliminating what is, in effect, a high marginal rate of tax payable on any income which would otherwise exceed the age allowance income threshold – and even if an individual under 75 does not have any ‘relevant’ UK earnings for pension contribution purposes, they can still benefit from full tax relief on a contribution of £2,880 into a personal pension or stakeholder plan that will then be grossed up to £3,600.

In summary, if you already are or will be 65 before 6 April this year and you are worried that you might be caught in this trap and would like advice on how best to go about escaping it, the good news is that there are a number of valuable tax planning opportunities available that we would be more than happy to discuss with you.

Inheritance Tax - spouses and civil partners domiciled overseas As announced by the government in the autumn statement on 5 December 2012, legislation is to be introduced in Finance Bill 2013 to: • Increase the IHT exempt limit on transfers from a UK domiciled spouse to a nonUK domiciled spouse from £55,000 to the level of the IHT NRB (currently £325,000), which effectively increases the maximum amount that can be passed IHT free on first death from £380,000 to £650,000; and • Enable non-UK domiciled spouses to elect to be treated as UK domiciled for IHT purposes Careful thought will be needed though before a non-UK domiciled spouse does make an election to be treated as UK domiciled lest a short-term benefit is outweighed by longterm consequences Background It is an individual’s domicile (actual or deemed) rather than their nationality or residence that is important for inheritance tax purposes.

Each party to a marriage or civil partnership can have different domiciles but whilst an individual who is UK domiciled or ‘deemed’ UK domiciled is subject to IHT on their worldwide assets a non-UK domiciled individual, who is not deemed UK domiciled either, is only subject to IHT on their UK assets.

Importantly, an individual who is not UK domiciled is still deemed to be UK domiciled if they have been UK resident for 17 out of the last 20 tax years, including the current tax year Current law At present, the total of all transfers (whether made during lifetime or on death) from a UK domiciled spouse to a spouse who is neither UK domiciled nor deemed UK domiciled is subject to an IHT exempt cap of just £55,000.

The purpose of imposing this cap, which hasn’t changed since

1982, is to prevent UK domiciled spouses from transferring substantial assets to their nonUK domiciled spouse who in turn transfers them overseas to escape IHT. Impact of changes from April 2013 Where a non-UK domiciled spouse chooses not to elect for UK domicile treatment their overseas assets would, as now, be exempt from IHT but any transfers received from their UK domiciled spouse would be subject to the increased exempt cap.

Conversely, non-UK domiciled spouses who do choose to make an election would benefit from uncapped exempt IHT transfers from their spouse, but any subsequent transfers by them could potentially be subject to IHT regardless of whether the transferred assets are located in the UK or overseas.

Given that transfers between UK domiciled spouses are wholly IHT exempt, without limit, making such an election is therefore likely to be of particular appeal where a non-UK domiciled spouse expects to receive large gifts from their UK domiciled spouse during lifetime and/or (more likely) a large inheritance on death.

Great care should be taken though if a non-UK domiciled spouse has significant overseas wealth in their own right because if an election is made to be treated as UK domiciled, this of course would then bring their overseas assets into charge for IHT in the UK. For non-UK domiciled spouses who feel that they would benefit from making such an election, however, there are a number of important points to note:• The election applies for inheritance purposes only. It does not affect the income and capital gains tax treatment of UK resident foreign domiciles.

Lifetime elections, made on or after 6 April 2013, will have immediate effect • If a UK domiciled spouse dies on or after 6 April 2013, and an election had not been made during lifetime, an election can still be made after the UK domiciled spouse has died. In order to be effective, the election must be made within 2 years of death – in which case the election will be deemed to take effect immediately before any transfer that arises as a result of their death.

• The election is irrevocable while the electing individual

continues to remain resident in the UK. This therefore prevents individuals from electing to be treated as UKdomiciled for IHT purposes to get an immediate benefit of an uncapped transfer from their spouse/civil partner, then later reverting to non-UK domiciled status when still living in the UK to regain beneficial IHT treatment for their overseas assets.

• Any election will cease to have effect if at any time following the making of the election, the non-UK domiciled spouse becomes non-UK resident for income tax purposes for at least three successive tax years. Where this is the case, the spouse will be treated as being Non-UK domiciled again from the end of the third full tax year of non-residence.

Summary Whilst making such an election could produce a favourable outcome for some people, caution should be exercised in this area, particularly where a non-UK domiciled spouse who intends to remain in the UK has significant overseas wealth, and it is for this reason that it is strongly recommended that professional advice should always be sought before any action is taken.

Are you protecting your income?

A recent ICM survey commissioned by ‘the syndicate’ on behalf of insurers highlighted that a third of respondents were not aware of how long they could claim Employment and Support Allowance (ESA) for, with only 16% of those who replied giving the correct answer of between 9 and 12 months.

The encouraging part was that around a fifth of respondents believed that ESA would only be payable for between 4 and 6 months and, whilst the reality is that this not the case, it does indicate that very few individuals expect that they will receive any form of long term support from the state.

So, exactly what support is available in the event of being unable to work due to long term incapacity?

Statutory Sick Pay (SSP) SSP is payable by employers at a flat rate of £85.85 (2012/13) and it is payable for a maximum of 28 weeks, although of course employers may (and often do) choose to offer more generous sick pay arrangements.

This benefit is only available to employed individuals aged between 16 and 65 and who have earnings at least equivalent to the lower earnings limit (currently £107 per week for 2012/13).

Employment & Support Allowance (ESA) ESA offers financial support if you are unable to work due to illness or disablement, replacing Incapacity Benefit for claims after 27 October 2008.

You can apply for ESA if you are employed, self-employed, or even unemployed.

The table below shows broadly the rates at which ESA is payable as this is dependent on your circumstances. It is important to note that ESA will only be paid once any SSP entitlement has ceased.

After 13 weeks if you are still unable to return to work you will be placed into an ESA group: Either the work-related activity group (broadly those claimants who should be able to return to work at some point) or the Support group (those whose illness or disability severely restricts what they can do). The rate applicable after this point will also depend on which ESA group you are in.

There are also different types of ESA: contributions based (for those with a sufficient NI contribution record) and income based (for those without a sufficient record). Importantly, contributions-based ESA only lasts for 1 year for those in the work-related activity group.

In addition the Universal Credit is also being rolled out in October 2013 for new claimants and this will replace income-related Jobseekers Allowance, incomerelated ESA, Income Support, Working Tax Credits, Child Tax Credits and Housing Benefit.

It is proposed that existing claimants of the above benefits

Time Perod

Circumstances

Weekly Amount

First 13 weeks

Under 25

£56.25

First 13 weeks

25 or over

£71.00

From 14 weeks

Work Related Activity Group

Up to £99.15

From 14 weeks

Support Group

Up to £105.05

Source: https://www.gov.uk/employment-support-allowance/what-youll-get

In addition your income and savings will also affect the amount of ESA you could receive. Your entitlement could be affected if you have savings in excess of £6,000 and those with savings over £16,000 would not qualify for incomebased ESA. Changes in 2013 From 6 April 2013 there may be an overall cap on the total benefits most people aged 16 – 64 can get. This benefit cap is being introduced to certain council areas from April but other areas will introduce the cap by the end of September 2013.

will gradually be migrated to the universal credit benefit.

Income Protection Policies Clearly even the highest rate of ESA would be woefully insufficient for the majority of people to replace income lost through being unable to work long-term, although for many of us employer sick pay arrangements provide some reassurance for shorter-term illness.

It is possible, however, to effect a suitable income protection policy which would pay a percentage of your pre-illness/ disability income (typically 50% – 70%) until you were able to return to work. These policies can be set up with different ‘deferred periods’ (that is the length of time that has to elapse before benefits start to be paid). Typical deferred periods are between 13 or 26 weeks although they can range up to 12 months.

Generally speaking the longer the deferred period selected, the lower the premiums Most of us take insurance to cover our homes, car, mobile phones and even our pets but it makes even more sense to protect our income. So if you want advice on finding suitable income protection cover please feel free to contact us for guidance.

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested