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How can you strike a balance between retiring when you want to, receiving the income you need and not paying more tax than you have to? Peter Watters spoke to McPhersons Financial Solutions to find out more.

Drawdown could be an answer. mcphersons financial

What is drawdown?

For those currently aged 55 and over, drawdown is one of the main alternatives to an annuity. If you don’t need all of your pension to provide a secure income immediately, you can use drawdown to keep your pension invested while drawing an income as and when you want to. There is no maximum limit to the income you can withdraw; which you can stop, start or change at any time to meet your needs.  You also have the option to buy an annuity at any point in the future if you wish to.

It is the flexibility of drawdown which makes it appealing.

It offers the potential to increase your pension value through investment growth and the chance to protect your income from inflation. Your loved ones can also continue to withdraw the remaining pension after you die, as an income, or alternatively as a lump sum, and tax free in many cases.

The amount you draw down should depend on how your investments perform and how long you would like your pension to last. Drawdown is higher risk than an annuity; there are no guarantees and your income is not secure. If your investments perform poorly, you withdraw income too quickly or you live longer than expected, you could run out of money.

The tax advantage

The main tax advantage of drawdown is when you don’t need to use all of your pension pot to provide an income. There is no requirement to use your entire pension fund in one go or to draw it at its earliest point.

Partial, or phased, drawdown can be used to maximise this tax advantage; which simply means splitting your pension into parts and converting each part to drawdown at different times, as and when you need the income.

Each time you convert a part of your pension to drawdown you can usually take up to 25% of that amount as a tax-free lump sum up front.

For those who don’t need immediate income, it is possible to just withdraw the tax-free cash for the time being and leave the rest invested to provide a taxable income later on.

This is a strategy favoured by many who are already using drawdown. These investors have taken their tax-free cash and are keeping their pension fund invested for future growth.

You may wish to use this tax-free cash to add to other sources of income. This could be particularly useful if you reduce your working hours or perhaps take on part-time work during retirement. The tax-free cash can supplement your earnings, without increasing the tax you pay.

For example, if you earn £11,000 a year, and you move £30,000 of your pension into drawdown, you could take up to £7,500 (25%) as a tax-free lump sum up front; boosting your annual ‘income’ for that tax year to £18,500. Assuming you receive no other taxable income in that same tax year, the whole £18,500 would be tax free. The £22,500 remaining in drawdown could be left invested to draw a taxable income from in later tax years.

You can move more money into drawdown as many times as you like, until you have exhausted the tax-free cash part of your pension. You could repeat this process while you transition into full retirement, replacing any reduction in your earnings with tax free cash or taxable income from your pension.

It’s important to remember tax rules can change and benefits depend on individual circumstances.

Please get in touch now to arrange your free meeting on 01424 730000 or info@mcphersonsfs.co.uk. 

What you do with your pension is an important decision. Therefore, we strongly recommend you understand your options and check your chosen option is suitable for your circumstances: take appropriate advice or guidance if you are at all unsure.The government’s Pension Wise service can help. Pension Wise provides free impartial guidance on your retirement options.

 

 

 

Various rumours were swirling around Westminster in the days before Philip Hammond rose to deliver his first Budget – confirmed as the last time a major fiscal statement will be made in the spring.

The Chancellor, still scarcely nine months in the job, has a reputation as a cautious man and in advance many expected that much of today’s speech would be laying the ground for the Prime Minister to begin formal negotiations for the UK to leave the EU.

That said, the day before Mr Hammond stood up to address the Commons, the Organisation for Economic Co-operation and Development (OECD) upgraded Britain’s growth forecast, which inevitably raised questions about whether there was yet room for manoeuvre.

Would the Government prove willing to make money available to shore up struggling services or answer the growing criticism over business rates reforms? Would it be tax rises or surprise giveaways bothering the headline writers?

Economic overview

In his opening statement, the Chancellor said that the resilience of the UK economy had continued to defy expectations and the country had enjoyed robust growth. Indeed, he noted that last year Britain’s growth was behind only Germany’s among the world’s biggest economies.

Mr Hammond confirmed that the Office for Budget Responsibility (OBR) had raised its growth forecasts for the year, with the economy now projected to grow by two per cent in 2017, compared with the previous estimate of 1.4 per cent. The independent body suggests growth next year will be 1.6 per cent and in 2019, 1.7 per cent.

But he made clear that there was no place for complacency in the current climate, acknowledging that levels of debt were still too high (peaking at 88.8 per cent next year), productivity needs to be improved and many families up and down the country continued to feel the pinch almost a decade on from the financial crash.

OBR figures also suggest that inflation will peak at 2.4 per cent this year, with expectations that it will drop off as we approach the end of the decade.

Trying to strike a balance between prudence and positivity, the Chancellor told MPs that the Budget presented an opportunity to put money into public services while ensuring that the nation continued to live within its means. Crucially, he said, the tax and spending plans would form the bedrock of the EU negotiations ahead.

Business and enterprise

Following several weeks of sustained criticism over the burden that business rates changes would place on many enterprises, Mr Hammond announced a three-point plan which he said would amount to an additional £435million support.

Any firm losing existing rate relief will be guaranteed that their bill will not rise by more than £50 a month next year. In addition, there will be a £1,000 discount for pubs with a rateable value of less than £100,000 and the creation of a £300million fund which will enable local authorities to offer discretional relief.

The Chancellor made clear that a fair tax system was one of the best ways to make Britain a top destination for businesses. He reiterated the commitment made by his predecessor, George Osborne, to bring the Corporation Tax rate down to 17 per cent by 2020. A reduction to 19 per cent will take effect from next month.

Following concerns about the current timetable, he confirmed that quarterly reporting would be delayed for small businesses for a year (at a cost of £280million).

Transport and infrastructure

Acknowledging that congestion was an issue in large parts of the country, Mr Hammond said that some £690million would be made available to tackle traffic problems in urban areas and get local networks moving more freely.

The Chancellor also announced a £270million investment to keep Britain at the forefront of research into biotechnology, robotic systems and driverless cars.

An additional £200million will be ploughed into projects to help secure private sector investment in full-fibre broadband networks and £16million put aside for a 5G mobile technology hub.

Personal tax

Controversially, it was revealed that National Insurance contributions will rise for the self-employed.

Under proposals, Class 4 NICs will increase from nine per cent to 10 per cent next April and to 11 per cent in 2019.

Trying to defend what will undoubtedly be a contentious move, the Chancellor said that the “unfair discrepancy” in contributions between different groups of workers could no longer be justified. Critics have suggested the move has broken with a commitment in the 2015 manifesto.

In more positive news, the personal allowance will rise to £11,500 – the seventh consecutive increase.

The Chancellor reiterated the Government’s previous commitment to increase the allowance to £12,500 and the higher rate threshold to £50,000 by the end of the Parliament in 2020.

There was a boost for road users with confirmation that vehicle excise duty for hauliers and the HGV road user levy will both be frozen.

The Chancellor also announced there would be no change to the previous planned duties on alcohol and tobacco. There will, however, be a new minimum excise duty on cigarettes based on a £7.35 packet price.

Pensions and savings

In what is likely to be an unpopular move, Mr Hammond confirmed that the tax-free dividend allowance for shareholders would be cut from £5,000 to £2,000 as of April 2018.

The Treasury said that the change would “ensure that support for investors is more effectively targeted”, but critics fear it will could further hurt entrepreneurs.

Public spending

Mr Hammond had faced some pressure from his own MPs to plough more revenue into public services.

In an attempt to address criticism that institutions were buckling beneath the strain, the Chancellor confirmed an extra £260million for improving school buildings and funding for an additional 110 free schools (on top of the 500 previously announced). There has been some controversy, however, that some of these are set to be selective.

In an attempt to address the mounting crisis in social care, Mr Hammond announced there would be an extra £2billion in funding over the course of the next three years.  A Green Paper will be published later this year with a view to drawing up a long-term funding plan.

Tax evasion, avoidance and aggressive tax planning

The Chancellor said that a fair tax system required people to pay their dues and a series of measures to curb abuses of the system are expected to raise an additional £820million for the Treasury.

A raft of measures to tackle non-compliance were announced, including preventing businesses converting capital losses into trading losses, curbing abuse of foreign pension schemes, introducing UK VAT on roaming telecoms services and imposing new financial penalties for professionals who help facilitate a tax avoidance arrangement that is later defeated by HM Revenue & Customs.

Summary

In his closing remarks, Mr Hammond struck an optimistic tone. Whatever the uncertainties surrounding Brexit, he told MPs that the UK should be confident that our best days lie ahead of us.

It would be fair to say that the Budget was not strewn with giveaways, but the Chancellor did try and take the sting out of some of the main criticisms levelled at the Government in recent months – including its handling of business rates reform and the sluggish response to a mounting care crisis.

That said he is also likely to have stirred up fresh controversies and the decision to increase National Insurance for the self-employed is perhaps evidence that in the current climate tough choices will still have to be made.

To discuss how any of the above changes will affect you and your business, please contact McPhersons on 01424 730000 or email info@mcphersons.co.uk

 

The problem with investing a lump sum amount in one go, is the timing of the stock market. If it is high then it will be a while before those investments increase further. Making smaller regular payments by drip-feeding money into your investments on a monthly basis can be a much better and highly effective strategy. Here we highlight some of the main benefits of investing smaller amounts on a regular basis.

Getting ‘pound cost averaging’ right

Investors are not happy when they experience falls in their values. However, short-term falls in share prices can actually provide opportunity and prove advantageous over the long-term for regular savers. By investing smaller amounts every month, investors average out the buy price of investments and benefit from a phenomenon known as ‘pound cost averaging’. This means your investment buys more units or shares when the price goes down, as per the table below and allows you to benefit from bigger returns if and when the share price recovers.

Month Amount Investment Share Price Number of Shares
1 £100 £5.00 20
2 £100 £4.00 25
3 £100 £2.50 40

Based on the table above, the average price purchased over the 3 months is £3.53 per share which is £300 investment divided by 85 shares. However, if you had invested the full £300 lump sum in one go during the first month, you would only have received 60 shares, which is £300 investment divided by £5.00. Of course had the market risen each month, your monthly investment would have bought fewer shares and actually have been worse off than if you’d invested a lump sum at that time. It is fair to say, investing is as much about timing as picking the right stock.

Benefits of regular savings

Some people believe that you need lots of money to start investing. In fact, drip-feeding money into investments over a longer period of time can build a very substantial sum. If you invested £250 per month for ten years, you would have a total of over £37,500 (based on a medium growth rate and a 1% charge).

Affordability – you can start investing from as little as £25 per month and it often costs no more in dealing charges

No fear – Instinctively you will watch the shares as the move up and down and probably want to buy quickly and more when shares are rising and less when they are falling. With smaller investing the money can be automatically taken from your bank account via direct debit and invested every month, regardless of price and movement, which removes the fear factor.

Flexibility – you can alter your investment choices and the amount you invest from month to month. You can even suspend payments for a period if you wish.

The sooner you start the more you will have invested on share platforms, you can choose to invest monthly into a wide selection of investments including, FTSE shares and eligible investment trusts. It’s easy to get started and you can set up a direct debit with some companies from just £25 per month and drip-feed money into your investments. You can also set up a regular savings instruction into Stocks & Shares ISAs, Fund & Share Accounts, SIPPs, Pensions or a Junior Stocks & Shares ISAs with many companies.

The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Levels, bases and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. Please contact us for further information or if you are in any doubt as to the suitability of an investment.

This guide and article are not advice. If you are unsure of that suitability of an investment for your circumstances please seek advice. Once held in a pension money is not usually accessible until age 55, which is rising to 58 in 2028. 

Need more help? This feature aims to give some informal hints. If you are unsure of the suitability of an investment for your circumstances please contact McPhersons Financial Solutions for a free meeting info@mcphersonsfs.co.uk or call 01424 730000.

 

 

For weeks now, senior figures from the world of business have been at pains to point out just how important this year’s Autumn Statement will be.

The new Chancellor, Philip Hammond, stepped up to the despatch box to give his most significant speech since he took charge of the Treasury during the summer.

If his predecessor George Osborne, now watching from the backbenches, had come to be defined by his ongoing battle to balance the books in the wake of a financial crisis, the start of Mr Hammond’s tenure was always going to be overshadowed by one word. Brexit.

Businesses across the UK – and indeed overseas – were watching closely to see how the Government intends to steady the economy ahead of the UK beginning the formal process of leaving the European Union.

In his opening remarks, Mr Hammond laid out his stall.

“We will maintain our commitment to fiscal discipline, while recognising the need for investment to drive productivity,” he said.

Economic overview

The Chancellor will have been acutely aware, as he rose to address the Commons, that many headlines tomorrow would be dominated by the economic outlook and in particular the fall in growth forecasts.

He sought to extenuate the positives, pointing out that employment levels were at a record high, the deficit was falling as a share of GDP and that the economy had shown resilience in the wake of the summer’s referendum.

But he also acknowledged that the Brexit vote meant it was more imperative than ever to tackle any frailties in the nation’s finances, adding that the Government was committed to tackling these challenges head-on.

Growth is expected to be 2.4 per cent lower over the forecast period as a result of the uncertainty arising from the referendum result.

The Office for Budget Responsibility (OBR) has calculated that growth will be 2.1 per cent this year, falling to 1.4 per cent in 2017.

“That is lower than we would like, but still higher than many of our European neighbours,” said Mr Hammond.

Borrowing, meanwhile, will be 3.5 per cent this year, dropping to 0.7 per cent by 2021-22.

While acknowledging that the Government no longer expected to balance the books by the end of the decade, the Chancellor announced three new fiscal rules: to achieve a surplus in the next Parliament and reduce borrowing to two per cent by the end of this one, to get net debt falling by 2020 and to ensure welfare spending is kept within a cap set by the Government.

Business and enterprise

The Chancellor was unequivocal that he wanted the UK to retain its reputation as a top destination for businesses.

He reiterated his predecessor’s commitment to reduce Corporation Tax to 17 per cent, although speculation that he may announce a further reduction (perhaps to 15 per cent) proved to be wide of the mark.

There was news of a two per cent reduction in the transitional relief cap, which will be overseen by the Communities Secretary, and Rural Rate Relief will increase to 100 per cent. This will be worth up to £2,900 for eligible firms.

Conversely, employers will have to make preparations for another increase in the National Living Wage next year. The statutory wage floor will increase from £7.20 an hour to £7.50 as of April 2017.

As part of efforts to make the UK a “world leader” in 5G broadband, ministers will also be offering 100 per cent business rates relief on new fibre infrastructure from April next year.

Finally £400million will be pumped into venture capital funds, via the British Business Bank, to help unlock £1billion in finance for expanding businesses.

Transport and infrastructure

Mr Hammond said that the Government was committed to high-value investment in the nation’s infrastructure and that all of the UK would feel the benefit, acknowledging that too much onus had been placed on London in the past.

At the core of proposals are plans for a new national productivity investment fund, a £23billion pot which will be used to fund innovation and infrastructure.

There was also a commitment that investment in research and development will increase by £2billion annually by 2020, a £1billion digital infrastructure fund (with an emphasis on improved broadband) and the promise of a £1.1billion in additional spending on England’s transport network.

Property

As had been widely trailed before the speech, Mr Hammond confirmed that he would be banning fees charged by letting agents to tenants.

The move, which had actually been Labour policy at the last General Election, was designed to address the fact that fees were continuing to spiral upwards despite the efforts to regulate them. It had nonetheless attracted criticism in some quarters as another “assault” on landlords.

Mr Hammond admitted that a large section of the population continued to struggle to get a foot on the property ladder and said that the Government would shortly be publishing a new white paper to address some of the pressing issues relating to housing.

The Chancellor also confirmed plans for a £2.3billion Housing Infrastructure Fund, which will lay the ground for the construction of 100,000 new homes. In addition, there will be a £1.4billion investment to deliver 40,000 additional affordable homes.

As part of ongoing efforts to increase home ownership, there will be a “large-scale regional pilot” of Right to Buy for housing association tenants.

Personal tax

There was welcome news for many taxpayers in the form of an increase to the personal allowance. This will rise from its current level of £11,000 to £11,500 from April 2017. And Mr Hammond said that the Government remained committed to raising it still further (to £12,500) by the end of this Parliament.

Meanwhile, the 40p rate will increase to £50,000 over the course of the same period.

As regards National Insurance (NI), from next April the employee and employer thresholds will be aligned at £157 a week.

There was good news for the nation’s motorists, with the announcement that the Treasury would be cancelling the proposed rise in fuel duty for the seventh year running. On average this is calculated to save car drivers £130 a year and van drivers £350.

However, insurance premium tax will rise to 12 per cent (up from 10 per cent) which some have suggested is likely to wipe out any savings arising from the crackdown on fraudulent whiplash claims.

Tax savings relating to salary sacrifice and benefits in kind are also to come to an end, although exceptions will be made for pensions, childcare, cycling and ultra-low emission vehicles.

Pensions and savings

There were comparatively few announcements on pensions, although Mr Hammond did confirm that the Government would usher in a ban on pension cold-calling.

The Chancellor said that the Government was also committed to helping the nation’s savers and set out plans for a three-year investment bond, offering a 2.2 per cent interest rate on deposits of up to £3,000.

Tax evasion, avoidance and aggressive tax planning

Mr Hammond said the Government had a proud record of tackling tax avoidance and evasion and that the tax gap was one of the lowest in the world.

As part of the ongoing drive to ensure that businesses pay their fair share, he outlined plans for a new penalty for those who enable tax avoidance, which HMRC later challenges and defeats.

Overall it is calculated that the various anti-tax avoidance measures will raise in the region of £2billion over the forecast period.

End of the Autumn Statement

One of the biggest surprises was the news that this year’s Autumn Statement would be the last.

Next year will be the last time that the Budget takes place in the spring. After that it will be moved to the autumn, and while there will be a Spring Statement, this will be used principally to respond to OBR forecasts rather than as a platform for any major announcements.

Mr Hammond said that having just one financial announcement each year would bring the UK in line with the IMF’s best practice.

Summary

Ahead of today’s speech, the Chancellor seemed to play down the prospect of any dramatic new policy announcements, instead placing emphasis on a tax and spending plan which would prioritise prudence and stability.

Certainly this wasn’t a delivery sprinkled with giveaways and perhaps the biggest surprise – given that the media had been briefed in advance about many of the headline announcements – was that Mr Hammond’s first Autumn Statement would also be his last.

The decision to condense all the major tax and spending plans into one annual summary is partly designed to give businesses greater stability and this may well be welcomed in the current climate.

Mr Hammond is unlikely to get away from the fact that uncertainty surrounding Britain’s departure from the EU is calculated to have created a £122billion black hole in the national finances.

 

The state pension was first introduced in May 1908 by the then recently appointed Prime Minister, H.H. Asquith.  The Old Age Pensions Act received royal assent in August of that year and the first payments were made to pensioner in January of the following year.

At that time eligible people over the age of 70 were entitled to a maximum payment of five shilling per week – in today’s term’s this is the equivalent to £20.

Comparing the first 100 years of the state pension it’s clear to see why the government’s pension budget is now under strain. In 1908, there were 500,000 pensioners – in 2008 there were 12 million. The £20 per week payment had increased to £90, and the ratio for surviving to age 100 had increased from 1:200 to 1:4. The government decided to push an initiative for us to save for our own retirement to compliment the state provision.

In 2008, a revised Pensions Act was made for all eligible employees to be automatically enrolled into their company pension. The membership of this scheme runs between October 2012 and February 2018 by which time every organisation of any size will need to offer a workplace pension to their workers.

Employees – will you be automatically enrolled?

As a worker you will fall into one of three categories, one of which automatically places you in your workplace pension. This most common category covers all UK workers aged between 22 and state pension age who earn over £10,000 per year.

If this means you – contributions to your pension will begin at the next pay day after the company’s ‘staging date’ (or after a maximum 3-month postponement period if this has been utilised by your employer). Although you have a right to opt-out, this can only be done once you have been assessed for eligibility, i.e. after staging date.

Pension contributions are based on a qualifying band of income (£5,824 – £43,000 for this tax year). Initially you will pay 1% including tax relief, rising to 5% in April 2019. Your employer will pay 1% of your qualifying earnings, rising to 3% in April 2019. These are minimum amounts and you are normally able to increase your contributions if you wish, however your employer is not obliged to follow suit.

Employers – Is your company ready for auto-enrolment?

Choosing a pension scheme for auto-enrolment is a complicated and time consuming process. There are a number of steps your company will need to go through; starting with finding out your company’s staging date, assessing your workforce, keeping them up-to- date with the pension changes, and informing the Pensions Regulator that you have met your obligations. Once the pension scheme is up and running you then need to make contributions and manage opt-outs and new joiners.

Furthermore, there are a number of other issues that you will need to consider to practically implement the regulations:

  • Which product solution will best suit
  • Which product solution will best suit your company’s needs?
  • What will you choose as your default investment and contribution level?
  • How the costs and admin burden affect your business?
  • How will you retain and maintain your records?
  • How will you notify your eligible jobholders?

Can McPhersons help?

The Pensions Regulator has stated that 7/10 employers are seeking advice on meeting their Auto-Enrolment obligations. If you require assistance, Aron Gunningham is our pension specialist and an independent financial adviser. Aron will be happy to help answer your questions and guide you through your duties.

The Pension Regulator has issued financial penalties for company’s who do not comply by their staging date, or for errors in the scheme once it has been setup. Coupled with the admin involved in meeting your duties, it would be prudent to speak to a financial professional.

Although we can be excused for thinking that our National Insurance contributions should be paying for our retirement, inevitably the state provision will not be sufficient. Under the newly formed ‘single-tier’ state pension, retirees in 2016/17 are entitled to a full pension of £155.65 per week. Rarely is this seen as enough to live on. Like it or not, we must find alternative ways to supplement our retirement income. Auto Enrolment, although not a perfect solution, is the Governments way of forcing us to think more carefully about funding our retirement.

Just call 01424 730000 or email info@mcphersons.co.uk to arrange your free meeting.

George Osborne has announced a Lifetime Isa in his Budget.  The new Isa is due to start in April 2017 and anyone between the ages of 18 and 40 are eligible.

This could be the Isa for you if you are looking to save for your first home or for retirement.  This is significantly better than current pension arrangements and should act as an incentive for young people to save.

The way this Isa works is if you manage to save £4000 a year, the government will give you a £1000.  There is no monthly maximum contribution – you can save as little or as much as you want each month, up to £4000 a year.

You can withdraw the money at any time before you turn 60.  However, you will lose the government bonus, the interest on this bonus and pay a 5% charge.

Savers who have already taken out a Help To Buy  will be able to move their money into a Lifetime Isa.  If they have both types of Isa, they will only be able to use the bonus from one of them to buy a home.

The Help to Buy Isa scheme, which is slightly less generous than the new Isa, is due to end in November 2019.

 

 

On Wednesday 16th March Chancellor George Osborne will deliver the Budget plans to members of Parliament in the House of Commons.

Although the Autumn Statement happened back in November 2015, it was another update on the Chancellor’s economic forecasts. The Budget this week will contain more detail and will happen at 12:30pm and last approximately an hour.

Pension changes were not covered in the Autumn Statement, so some expect changes to this in the Budget on Wednesday. Some have said Osborne may reduce the amount that people can save into their pension.

Although nobody knows what George Osborne will deliver in the Budget, many think that it could be possible for him to introduce a new flat rate on tax relief on contributions of between 25% and 33%.

The Chancellor has admitted that he may have to impose further austerity measures. This could mean more reductions in the budgets of non-protected government departments. He also warned that more savings will be needed due to the worsening of the economic backdrop.chancellor

The Government has hinted that millions of people may soon have to work until they are well into their mid-70’s before even qualifying for their state pensions, as details of a review into the State Pension age were published.

Happy couple on the beach of sea

The new report looks set to forecast a gloomy future for many workers who will have to continue to work on long past the currant retirement age to enjoy the benefits previous generations were able to access.

The current state pension age is 65 for men and 60 for women and is due to rise for both to 66 by 2020.  It is due to increase to 67 between 2026 and 2028.

The government said the review, required under existing legislation, would consider changes in life expectancy as well as wider changes in society and “make sure that the state pension is sustainable and affordable for future generations” It said it would also consider whether “the current system of a universal state pension age” rising in line with life expectancy was “optimal in the long run”.  This suggests the review will look at whether the retirement age should rise even if life expectancy slows

The review is due to report in time for any changes to be considered by George Osborne by May 2017.

The recent Budget contained good news for pension investors. The amount of tax relief that can be received on pension contributions has just increased for some.

What is pension tax relief?

To encourage everyone to save for retirement, some pension contributions receive up to 45% tax relief:   The government automatically pays 20% of your contributions, regardless of your tax rate and higher and top-rate taxpayers can reclaim more through their tax return, up to an extra 20% or 25% depending on individual circumstances.

Imagine you pay £8,000 into your pension, the government will add £2,000 to make it £10,000 in your pension. A higher-rate taxpayer can reclaim up to a further £2,000 and a top-rate taxpayer up to a further £2,500. £10,000 in a pension can in effect cost as little as £5,500.  To receive the full 40% or 45% tax relief you must pay enough tax at that rate.

Who can now receive more pension tax relief?

A £40,000 maximum annual allowance untaxed usually applies to pension contributions each tax year, from all sources into your pension pot. Contributions over this allowance effectively do not receive tax relief.

In the budget, a new £40,000 allowance was introduced for contributions made from 9 July 2015 to 5 April 2016.  This means anyone who made contributions from 6 April 2015 to 8 July 2015 might be able to invest more this tax year as they have the £40k allowance starting again from 8th July 2015 and receive more tax relief. Anyone who hasn’t made contributions still has the same allowance – £40,000 for contributions up to 5 April 2016.

Contributions registered from 6 April 2015 to 8 July 2015 will reduce this new allowance, but only if they exceeded £40,000.  Pension contributions made in the previous tax year could also count; your provider should be able to inform you.

Qualifying for extra tax relief

To receive tax relief, the total value of your contributions this tax year should not exceed your earnings. For instance, to contribute £60,000 in total this tax year you should earn at least £60,000.

If you wanted to invest more than your earnings in any tax year, you could ask your employer to make an employer contribution, possibly set off against future earnings.

If you decide to use your new allowance, remember money in a pension can normally only be accessed from age 55, rising to 57 from 2028, usually 25% of this pension pot is tax free and the rest taxed as income.  Tax rules can change in the future

Need more help?

This feature aims to give some informal hints and tips. Our tax department and McPhersons Financial Solutions are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters p.watters@mcphersons.co.uk or call our Head Office on 01424 730000 for a free consultation at McPhersons’ London, Bexhill or Hastings offices.

George Osborne fulfilled an election promise in the recent Budget to lift main family homes worth up to £1million out of inheritance tax if they are left to children or grandchildren.

However, the way it works is more complicated than it sounds so people are understandably thinking about where this leaves them in terms of inheritance planning.

In line with these changes, the Government is also still working out the details of an ‘inheritance tax credit’, so people who own an expensive home and want to sell it before they die can still benefit from the changes.

This is to avoid elderly people skewing the housing market by staying put rather than moving to a smaller property or into a care home.

The tax overhaul of last April produced the pension freedom reforms giving over-55s greater control over how they save, spend and invest their retirement pots.

People are stashing more into their pensions and trying hard to preserve what is already in there, according to recent research among over-50s by Investec Wealth & Investment.  

How to make the best use of these changes

The good news is that you may not need to move house to benefit from the full inheritance allowance. The bad news is that the full allowance may not be £1 million depending on your circumstances.

If we look at what we know so far about the new ‘Main Residence Nil Rate Band’, the Chancellor was eager to stress that £1 million could now be passed onto your children tax free, but in practice a number of conditions must be met for that to happen.

Firstly, the £1million is made up of the £325,000 standard nil rate band for both husband and wife or civil partners, plus an additional Main Residence Nil Rate Band of £175,000 for both husband and wife.

The total of those allowances, assuming all are fully available, is £1 million. However, the MRNRB will be introduced in April 2017 at only £100,000 and increase in stages to £175,000 by April 2020. It will also be means-tested, with estates above £2 million losing £1 of their MRNRB for every £2 their estate exceeds £2 million. In practice, this means that to pass down £1 million to your children you must:

a) Be married or in a civil partnership
b) Own a house worth £350,000 or more
c) Have a total estate of less than £2million
d) Die after April 2020, or your spouse must die after that, because on first death any unused nil rate band is transferred to the surviving spouse.

The key point to all of this is that your property only needs to be worth £350,000 to fully utilise the MRNRB, so you may not need to move house after all. You could waste your MRNRB if the property is left to someone other than your children or spouse on death. With pensions as the alternative, it used to be the case that you had to die before age 75 having not touched your pension, in order to receive the fund tax free, any funds remaining on death were taxed at 55 per cent.

The new changes now mean that if you die before 75 any remaining pension funds, whether they have been used to provide benefits or not, can be passed tax free to nominated beneficiaries. If you die after 75, the pension fund will be exempt from inheritance tax, but your nominated beneficiaries will pay income tax at their own tax rate as they withdraw the funds. If you are a higher rate income tax payer and you believe your children to likely be basic rate when they take the funds, then living on other assets and leaving your pension to your children will probably be the most tax efficient way of passing on your estate. If you are a basic rate taxpayer and they are higher rate, then it will probably be better for you to take your pension at basic rate to fund your retirement and leave the other assets in your estate to your children. You can also take more than you need and gift the excess to your children over a number of years. Before making any life changing financial decisions, it is recommended that you should always consult your professional financial adviser. 

Need more help?

This feature aims to give some informal hints and tips. McPhersons Financial Solutions are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters p.watters@mcphersons.co.uk or call our Head Office on 01424 730000 for a free consultation at McPhersons’ London, Bexhill or Hastings offices. www.mcphersonsfs.co.uk