Category Archive Retirement Planning

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Pension Drawdown

Pension drawdown is the process of taking money out of your pension, i.e. drawing down from it, without purchasing an annuity. A pension should really only be used in a person’s retirement, but they are accessible from age 55 onwards, so can provide an emergency fund of sorts if required.

There are many reasons why someone would go into drawdown:

  • Deferring an annuity purchase, thus avoiding being locked into low annuity rates which may apply at the time of retirement;
  • Enabling the policy holder to buy an annuity when it best suits them and hopefully when annuity rates are more favourable or provides an opportunity to avoid purchasing an annuity altogether where appropriate;
  • Enabling investors to retain control over their pension investments and allows them to continue to be invested in the markets, and hopefully make gains on their existing money; and
  • Allowing income to be varied within allowable limits thus giving valuable flexibility, which is useful for tax planning or where other income may have changed.

There are two different types of drawdown contract you can own – capped drawdown and flexi-access drawdown.

Capped drawdown allows you to withdraw income, within limits, from your pension fund without purchasing a lifetime annuity. This was the traditional method of drawdown but has been superceded by flexi-access drawdown. No new capped drawdown arrangements can now be created, however it is still possible to transfer from one capped arrangement to another and, in some cases, for additional pension funds to be added to the capped drawdown plan.

The maximum amount of income that can be drawn is 150% of a comparable lifetime annuity based on tables published by the Government Actuary’s Department. It is not however necessary for any income to be taken. Any amount of income from zero income through to the 150% maximum can be selected. The plan and maximum income will be reviewed every three years up to the anniversary of entering drawdown until the 75th birthday and annually thereafter.

Flexi-access drawdown is very similar to capped drawdown but does not have as many limits with regards the income which can be withdrawn from your pension fund; it is flexible with regards the money which can be taken out.

For flexi-access drawdown, you can choose how much income you want to withdraw without reference to any rates or limits other than the size of your pension fund. If you or your spouse is relatively young, a secured pension (lifetime annuity or scheme pension) would be less attractive due to the lower mortality factor and, in addition, there is a longer timescale to take advantage of the potential investment rewards and risks of a drawdown pension. However, the levels of income provided may not be sustainable, so in other words, your pension fund may run out.

Irrespective of what drawdown contract you have, taking withdrawals may erode the capital value of the fund, especially if investment returns are poor and a high level of income is being taken. This could result in a lower income if/when an annuity is eventually purchased, or no fund at all if fully withdrawn.

Most drawdown contracts allow for the first 25% of a withdrawal to be taken tax-free; everything thereafter is fully taxable at source.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Pension Annuities

Otherwise known as a lifetime annuity, a pension annuity pays a guaranteed income for your life from the funds you have built up in your pension plan. Your annuity provider will pay you a regular income taxed in the same way as earnings.

The amount of income payable is dependent on your age and health, the size of your pension fund, economic factors, the type of annuity and the options you select.

You should also be aware that once you have purchased an annuity you cannot cash it in or make changes to your selected options. Also, an annuity must be purchased using funds from your uncrystallised rights held in a money purchase pension or from drawdown funds.

Some annuity providers offer annuities which pay you a higher than normal income if you have a medical condition(s) which can affect your normal life expectancy. These are called impaired life annuities. An enhanced annuity may be available if you smoke regularly, are overweight, if you have followed a particular type of occupation or live in certain parts of the country.

Annuities can be set-up to be single-life or joint-life. A joint-life last survivor annuity pays out until the second life dies, normally so long as financial dependency can be proven with the second life. Single life on the other hand is just that – it pays to a single life and dies with that person.

You can normally select at outset how often you want to receive your income payments from an annuity. Most people choose monthly, but you can be paid quarterly, half-yearly or annually. Also, income can be paid in advance or in arrears.

You can also decide whether the annuity should be level, escalating or decreasing:

  • A level annuity pays the same amount of income year after year;
  • An escalating annuity is designed to increase each year, meaning because it needs to be able to grow, the initial income will be lower; and
  • The opposite of an escalating annuity is a decreasing annuity whereby the income starts off higher and gradually lessens.

Pension annuities allow for fixed and guaranteed income and whilst this does not provide any flexibility, it does provide safety.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Defined Benefit Pension Transfers

A Defined Benefit (DB) pension, otherwise known as a final salary scheme, is a type of workplace pension scheme in which an employer promises a specified pension payment, lump sum (or a combination of both) on retirement.

The benefits payable are predetermined using a number of factors, typically including an employee’s earnings history, tenure of service and age, as opposed to relying directly on individual returns. A typical DB pension scheme usually continues to pay a pension to a spouse, civil partner or dependents (for a restricted period) when the member dies.

There are advantages and disadvantages to DB schemes, and in most cases, the advantages far outweigh the disadvantages.

Advantages:

  • Your pension lasts as long as you do so there is no risk of you having no pension income.
  • Although each scheme varies, there will be something for your surviving spouse/civil partner/dependants. Typically a survivor’s pension is half of your pension income and will be paid for the duration of your spouse’s/civil partners lifetime. However, a dependants pension may only be paid for a limited period, i.e. until they reach the age of 23.
  • Some protection against inflation is provided to help you maintain your spending power.
  • Your pension does not rely on the ‘rise and fall’ of the stock market, thus making it much more secure than a personal pension.

Disadvantages:

  • The death benefits of a DB scheme are extremely rigid – if you are not married and have no financially dependent children, your fund may die with you.
  • If you are concerned with your life expectancy, your DB pension scheme may offer you a poor total capital return.
  • It is not possible to vary the level of income you receive from the scheme, thus making it largely inflexible.
  • If your employer becomes insolvent, there may not be enough assets in the pension scheme to pay your pension, although The Pension Protection Fund (PPF) may provide compensation.

Our regulator, the Financial Conduct Authority (FCA), is clear that we should start by assuming that any transfer of a DB pension into a personal pension would most likely not be suitable. Also, you cannot transfer from a DB pension scheme if you are already taking your pension. There are also some types of DB pension schemes where transfers are not possible, for example, public sector schemes for teachers, nurses and civil servants.

If your pension savings are worth £30k or more, you will be required to seek financial advice before even considering transferring a DB pension. If you leave your DB pension scheme, the benefits you’ve built up still belong to you and they can remain there until you retire or you can transfer them to a different type of pension scheme.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Small Self-Administered Schemes

A Small Self-Administered Scheme (SSAS) is an occupational pension scheme which is subject to the normal rules and regulations for registered pension schemes, but offers greater flexibility and freedom of choice over the types of investment it can make.
There are also generous tax concessions afforded to a SSAS which are advantageous to both a company and its directors. These can be used to develop a highly effective and coordinated approach to minimising corporate and personal taxation.

SSASs are generally set up to provide retirement benefits for a small number of a company’s directors and/or senior or key staff. They can be open to all employees and their family members, even if they don’t work for the employer. The number of members is generally limited to 12. Contributions may be made to the SSAS by the members and/or the employer. Each receives tax relief on contributions made, subject to certain conditions.

Most types of conventional investments are freely permitted including quoted stocks and shares, unit trusts, insurance policies, commercial property and employer related investments or loans, but there are some restrictions designed solely to prevent abuse.

Any SSAS holding prohibited assets directly or indirectly will have all tax advantages removed which will broadly mean that it is at least no more advantageous to hold such assets in a pension scheme than it is to hold them personally. Prohibited assets include direct or indirect investment in residential property and certain other assets such as fine wines, classic cars and art & antiques.

The trustees of a SSAS may make loans to the employer, but not the members.

To be eligible to invest in a SSAS and receive tax relief on personal contributions, an individual investor must be under 75 years of age, and resident in the UK (there are some exemptions for individuals who work for the UK Government or have left the UK in the last few years).

Contributions can also be made by your employer or a third party e.g. parent or spouse. The minimum contribution will vary between providers but is usually around £20 per month, and these can be stopped and started at any time.

Given the many tax advantages that are available with regard to funding a personal pension there are limits to the tax-relievable contributions that can be paid. Individuals are able to make contributions of up to the greater of £3,600 or 100% of their annual earnings to all of their pensions each tax year and receive tax relief on them.

There is also an annual limit on the total amount of pension contributions that each person can make without incurring a tax charge (this includes employer and employee contributions). This is called the annual allowance. Where the total employer and/or employee contribution exceeds the annual allowance a tax charge will apply.

It may also be possible for contributions in excess of the Annual Allowance to be paid in some circumstances under the rules which allow unused Annual Allowance from the three previous tax years to be brought forward and added to the current year’s Annual Allowance.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Group Pensions

Group Personal Pension Plans (GPP) or Group Stakeholder Plans (GSHP) are a relatively straightforward method of providing employees with a pension arrangement. As they are not classed as occupational schemes, they are not subject to the more onerous rules and regulations applicable to such schemes. Instead, they are made up of a series of individual personal pension policies, with each employee having their own policy.

Group pensions are money purchase schemes allowing both the employer and employee to contribute. On leaving the employment, the accrued pension will cease to be part of the scheme and will be an individual plan the employee can continue funding to if they wish.

An employer can make contributions into a regulated pension scheme without limit subject to the wholly and exclusively accounting rules. To be eligible to make contributions and receive tax relief on personal contributions, employees must be under 75 years of age and be resident in the UK (there are some exemptions for individuals who work for the UK Government or have left the UK in the last few years).

The minimum contribution will vary between providers but is usually around £20 per month, and they can be stopped or started at any time. Given the many tax advantages that are available with regard to funding a personal pension, there are limits to the tax-relievable contributions that can be paid. Individuals are able to make contributions of up to the greater of £3,600 or 100% of their annual earnings to all of their pensions each tax year and receive tax relief on them.

There is also an annual limit, the Annual Allowance, on the total amount of pension contributions that each person can make without incurring a tax charge (this includes employer and employee contributions). Where the total employer and/or employee contribution exceeds the Annual Allowance a tax charge will apply, this will be added to the individual’s taxable income to determine their tax liability. Alternatively, the scheme may agree to pay the charge from the pension benefits if it is over £2,000.

For the 2019/20 tax year, the Annual Allowance is £40,000. It may also be possible for contributions in excess of the Annual Allowance to be paid in some circumstances under the rules which allow unused Annual Allowance from the three previous tax years to be brought forward and added to the current year’s Annual Allowance.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Self-Invested Personal Pensions

Self-Invested Personal Pensions (SIPPs) are subject to the normal rules and regulations for registered pension schemes, but offer the freedom of choice over investment management, whilst keeping the administration in one place.

This means you are able to change the investment manager when you wish, without incurring the expense of changing the provider of the administration. Additionally, you can achieve greater flexibility in the benefits you can take during retirement without necessarily having to transfer your funds again.

You can elect to purchase an annuity or follow the route of phased retirement and/or drawdown pension. There is now no upper age limit at which benefits must be taken.

SIPPs are money purchase schemes with contributions receiving tax relief. An employer may contribute to an individual’s SIPP but this is not obligatory (unless being used to meet auto enrolment obligations). SIPPs can move with individuals when they change jobs, as they are personal to them.

You are free to give direct investment instructions, or more typically, indirectly via an appointed investment manager or adviser. Most types of conventional investments are freely permitted including quoted stocks and shares, unit trusts, insurance policies and commercial property but there are some restrictions designed solely to prevent abuse.

Any SIPP holding prohibited assets directly or indirectly will have all tax advantages removed which will broadly mean that it is at least no more advantageous to hold such assets in a pension scheme than it is to hold them personally. Prohibited assets include direct or indirect investment in residential property and certain other assets such as fine wines, classic cars and art & antiques. SIPPs can also be used to purchase commercial property, albeit this can involve considerable costs.

To be eligible to invest in a PPP and receive tax relief on personal contributions, an individual investor must be under 75 years of age, and resident in the UK (there are some exemptions for individuals who work for the UK Government or have left the UK in the last few years). Contributions can also be made by your employer or a third party e.g. parent or spouse.

The minimum contribution will vary between providers but is usually around £20 per month, and they can be stopped or started at any time. Given the many tax advantages that are available with regard to funding a personal pension there are limits to the tax-relievable contributions that can be paid. Individuals are able to make contributions of up to the greater of £3,600 or 100% of their annual earnings to all of their pensions each tax year and receive tax relief on them.

There is an annual limit on the total amount of pension contributions that each person can make without incurring a tax charge (this includes employer and employee contributions). This is called the Annual Allowance. Where the total employer and/or individual contribution exceeds the Annual Allowance a tax charge will apply. Depending on your taxable income the excess pension savings can be charged to tax in whole or in part at 45%, 40% or 20%.

It may be possible for contributions in excess of the Annual Allowance to be paid in some circumstances under the rules which allow unused Annual Allowance from the three previous tax years to be brought forward and added to the current year’s Annual Allowance.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Personal Pensions

Personal Pension Plans (PPP) have now been around since mid-1988. They were introduced by the UK government to enable the self-employed, and employees working for companies not operating a group pension scheme, to build up a pension fund for retirement.

PPPs are money purchase schemes with contributions receiving tax relief. An employer may contribute to an individual’s PPP. Such plans can move with individuals when they change jobs, as it is personal to them.

To be eligible to invest in a PPP and receive tax relief on personal contributions, an individual investor must be under 75 years of age, and resident in the UK (there are some exemptions for individuals who work for the UK Government or have left the UK in the last few years).

Contributions can also be made by your employer or a third party e.g. parent or spouse. The minimum contribution will vary between providers but is usually around £20 per month and they can be stopped and started at any time.

Given the many tax advantages available with regard to funding a personal pension, there are limits to the tax-relievable contributions that can be paid. Individuals are able to make contributions of up to the greater of £3,600 or 100% of their annual earnings to all of their pensions each tax year and receive tax relief on them.

There is an annual limit on the total amount of pension contributions that each person can make without incurring a tax charge (this includes employer and employee contributions). This is called the Annual Allowance. Where the total employer and/or individual contribution exceeds the Annual Allowance, a tax charge will apply.

The rate of tax will be determined by your taxable income in the tax year. It may be possible for contributions in excess of the Annual Allowance to be paid in some circumstances under the rules which allow unused Annual Allowance from the three previous tax years to be brought forward and added to the current year’s Annual Allowance.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

New Tax Year Planning Pt. 2

In our second post about tax planning ahead of the new tax year, we look at income sharing, pension contributions, ISAs and Capital Gains.

Income Sharing

Always try and share income (if possible) between spouses, and so perhaps keep one or both of you out of 40% tax. Yes, we know this is not always possible, but for those who are self-employed, you should think about forming a partnership with your spouse, that would allow this.

Pension Contributions

Where you can afford it, try and maximise pension contributions. Bear in mind that you can put up to £40,000 into your pension every year, and equally where you haven’t used the previous three year’s allowances, you could put that into your pension too.

As you are potentially talking about paying up to £160,000 into your pension, then yes, you obviously need to be able to afford it. And whilst this money would be locked away until age 55 at the earliest, it would be less money to pay tax on now and mean a bigger pension upon retirement.

We had one client who through no fault of her own, received a salary which put her into the 45% tax bracket. Therefore, it was more than worth her while to put the excess amount which caused this, into her pension. You get tax relief at your highest rate of tax – and 45% relief is not to be snubbed! For every £1,000 that went into her pension, she only needed to pay £550, so that’s a bargain!

ISAs

Putting money into an ISA will reduce taxation, as there is no tax on dividends received, and ISAs will never be subject to Capital Gains Tax (CGT), no matter how much you encash later on.

Capital Gains

Everyone has an allowance of £11,700 which means you can make gains of £11,700 per year and pay no capital gains tax at all. This is one of those allowances with a ‘use it or lose it’ scenario, so if you are thinking about cashing in on something which would take you over this limit, and it is possible to cash in part of it this tax year and another part next tax year, you could make gains of £23,400 with no tax to pay at all.

This obviously may not always be possible, but can be done with investments and mean less of your gains are given away in tax.


If you would like to find out more information or would like to start investing today, please contact Money Advice & Planning Ltd on 0345 241 1808 or e-mail us at enquiries@mapfinances.co.uk.

The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent professional advice for your own particular situation. Money Advice & Planning Ltd is authorised and regulated by the Financial Conduct Authority.

Bymapfinancesadmin

New Tax Year Planning Pt. 1

In the first of two posts about tax planning, ahead of the new tax year, we look at how you can use salaries, dividends and pensions to maximise tax-free income.

Salaries

You may think this is a strange one to put in for tax planning, but it is an obvious one, and sometimes we all miss the obvious. The main thing to remember about personal allowances is use it or lose it – it’s that simple.

In the current year we get a personal allowance of £11,850 which is the amount we can earn without paying any tax. If you have your own company, and you or your spouse haven’t used your allowances for the year, it is worth thinking about taking an amount as a salary to use these allowances up. After all, if you don’t, it means some tax-free money has gone.

Dividends

As with the above, if you are a shareholder of your own company, think about taking £2,000 in dividends, as this would be tax-free. Please ensure however that you have profits of at least this amount, as dividends should only be taken out of net profits.

You should even look at the possibility of taking out more than £2,000 if the company can afford it, as dividends over £2,000 are taxed at 7.5% for those in the 20% tax bracket (a saving of 12.5%) and at 32.5% for those in the 40% tax bracket (a saving of 7.5%). The same warning as before still applies however; the company must be making equivalent profits.

Pension Income

If you are taking a pension income and your fund could stand you taking out more and this amount is available tax-free, i.e. by taking up to £11,850, then why not? You should always maximise the tax-free element – even if you extract it and put it in the bank – as at least you are not paying tax on it. Don’t forget this applies per person, so if you are married, your spouse can do the same.


If you would like to find out more information or would like help with any aspect of tax planning mentioned, please contact Money Advice & Planning Ltd on 0345 241 1808 or e-mail us at enquiries@mapfinances.co.uk.

The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent professional advice for your own particular situation. Money Advice & Planning Ltd is authorised and regulated by the Financial Conduct Authority.

Bymapfinancesadmin

Tax Planning for Spouses

Capital

As mentioned in a separate article in our January 2019 Professional Newsletter, as transfers between husband and wife are ignored for Capital Gains Tax (CGT) purposes, why not use this as much as you can to reduce a clients’ tax bill for any gains?

Pensions

Many a time when looking at a couple’s finances, everything seems to be done in the husband’s name and very little in the wife’s. If you are wanting to reduce long-term tax, this needs to change.

Let’s say all pension planning is done in the husband’s name alone, and he ends up with a pension of £60k p/year. This will obviously be well into 40% tax whereas, if it was done jointly and evenly, such that each party had £30k pensions p/year, only 20% tax would be payable. That represents a big tax saving and shouldn’t be ignored. Planning must be started early on to achieve this – and that’s where MAP comes in.

If you are doing accounts for a self-employed person, is it possible to do the same thing as a partnership, by introducing a wife into the planning? Perhaps through setting up a Limited Liability Partnership?

Inheritance

Every individual now gets £325k basic exemption from Inheritance Tax Planning (IHT), and then on top of this is the residence nil rate band which in due course will bring the exemptions up to £500k per person. The same applies with CGT – if assets were owned jointly, then maximum exemption could be obtained, and so significant savings on tax could be made.

A lot of these simple exemptions need a bit of planning as they just don’t happen overnight. Care has to be taken every step of the way to ensure compliance with the legislation, and that is what we do at MAP.

One of our IFAs is also a qualified accountant (and ex-Inland Revenue employee), who has many years’ experience as a financial adviser, and his work is all about planning. If he can help your clients, just let us know.

If you would like to find out more information or would like to start investing today, please contact Money Advice & Planning Ltd on 0345 241 1808 or e-mail us at enquiries@mapfinances.co.uk.

The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent professional advice for your own particular situation. Money Advice & Planning Ltd is authorised and regulated by the Financial Conduct Authority.