Pension wake up

AUGUST 13TH, 2010 By DAVID
0 RESPONSES

During the course of this week I was asked by a client about the implications of the case, Fryer v HM Revenue & Customs, and I thought that now would be an opportune time to explain the background to the case and to hopefully clarify any confusion which may have arisen.

The Fryer case involved an individual who had a pension with a retirement age of 60.  The pension provider issued a retirement pack to the individual before their 60th birthday but the individual did not respond to say whether they wanted to take benefits.

The individual died less than two years later (having still not taken benefits from their pension) and HM Revenue & Customs successfully argued that inheritance tax should apply to the lump sum death benefits, as in their opinion the individual had deliberately intended to convey a death benefit to someone else.

The lump sum death benefit from an uncrystallised pension arrangement is normally paid free of inheritance tax, and it is for this reason why the Fryer case has caused such a stir.

Does the Fryer case mean that HM Revenue & Customs has adopted a new approach to pensions?  The simple answer to this question is no.  HM Revenue & Customs has long held the belief that the main aim of a pension scheme is to provide a replacement income in retirement and not to provide a vehicle for the accumulation of capital sums for the purposes of passing on wealth.  This is especially relevant when you consider that tax relief is granted on contributions made by an individual during the accumulation stage.

Most pension schemes allow an individual to dispose of the death benefits and to make changes to the benefits that they are entitled to.  Usually, an individual can nominate, appoint or assign the death benefits to another individual/trust and/or make changes to the pension benefits they intend to take and when they intend to take them.

HM Revenue & Customs has confirmed that if an individual made a nomination, appointment or assignment, or made any changes to their pension benefits in the two years before they died, then there may be a liability to inheritance tax depending on the individual’s circumstances (including state of health).

This last point goes to the heart of the argument put forward by HM Revenue & Customs in the Fryer case, as the individual in question was in poor health at the time that they did not take benefits from their pension.  Furthermore, the deceased’s legal personal representatives could not demonstrate why the individual had decided to defer taking benefits, or why that decision was not a deliberate attempt to preserve a lump sum death benefit.

What can be learnt from the Fryer case?  The first lesson is that greater care must be taken when selecting the retirement date on a pension.  For example, when given the choice, a lot of clients will automatically select the earliest retirement date possible but will then work beyond that date for one reason or another.  Clearly some pension schemes (e.g. defined benefit) do not offer a choice as the retirement date is determined by the employer.

The second lesson is that if an individual’s circumstances change and it becomes clear that the retirement date will need to be altered, then independent financial advice should be sought and the reason for changing the retirement date should be recorded.

End of annuities?

JULY 22ND, 2010 By DAVID
0 RESPONSES

Further details are emerging following the headline Budget announcements by George Osborne. One of the latest topics to be thrown up for debate is the proposal to scrap the requirement to annuitise by age 75.

The Coalition Government is entering a consultation period and after looking through the proposals I am inclined to agree with them.

Prior to 2006 every member of a defined contribution pension scheme that reached age 75, and had not purchased an annuity, had to purchase an annuity (after taking a tax-free pension commencement lump sum). An annuity is a life policy that converts money from a pension fund into a secure pension income for life.

Annuities are not perfect and the main criticisms of them are that the annuity features have to be selected at outset and cannot be altered, and the death benefits are usually limited to a dependant’s pension and/or a guarantee period/value protection. Another problem is that some individuals have had to buy an annuity at 75 when annuity rates have been low and/or after the stock market has fallen.

The previous Conservative Government tried to address some of these issues in 1995 by introducing unsecured pension (USP), which allows an individual to draw an income from the residual pension fund (after taking the pension commencement lump sum) and thus defer the purchase of an annuity to age 75.

The main attraction of USP is the ability to vary the income taken and the fact that the pension fund can
potentially benefit from future investment growth. In the event of death prior to age 75 the residual fund can usually be paid as a lump sum death benefit less a 35% tax charge.

However, in reality USP only provides temporary relief, as the vast majority of individuals in USP currently live beyond 75 and are thus caught by the age 75 rule.

In 2006 the Labour Government introduced alternatively secured pension (ASP) so that individuals who have principled objections to annuitisation did not have to purchase an annuity at age 75.

Although ASP is based on the USP model, the income limits are more restrictive. It was not intended to be a mainstream alternative to an annuity and the tax rules (including tax charges on the residual fund which can be as high as 82%) mean that most people continue to purchase an annuity at age 75.

It is intended that the new rules will come into force on 6 April 2011. The key proposals are:

• No requirement to take benefits from a pension scheme at any age
• ASP will be abolished and USP will be available beyond age 75
• USP will be available in two formats: capped and flexible
• A 55% tax charge will apply to lump sum death benefits paid from pensions in USP and to pensions where benefits have not been taken by age 75

The Coalition Government has reiterated that the main aim of a pension scheme is to provide a replacement income in retirement and not to provide a vehicle for the accumulation of capital sums for the purposes of avoiding inheritance tax.

To that end, the Coalition Government has said that inheritance tax will not ordinarily apply to unused pension funds, but it will monitor the situation to ensure that the system is not abused.

The Coalition Government’s proposals are designed to give individuals more choice which is clearly a good thing. It should be borne in mind that the increase in the tax charge applied to the USP lump sum death benefit prior to age 75 has to be balanced against the reduction in the tax charge applied after age 75.

It is also true that annuities will continue to meet the requirements of most individuals e.g. those with small
pension funds/individuals who require the certainty of a defined income stream. This is because annuities provide a guaranteed income and ensure that an annuitant will not run out of money during their retirement.

A day in the life of a financial planner

JANUARY 20TH, 2010 By ADAM
0 RESPONSES

As my role as financial planner within Xentum I thought it would be interesting to give you a brief insight into some of my current projects:

Researching existing investments

One of the first jobs we do for new clients is to analyse their existing investments (or pensions).  It has not been unknown to spend a day simply trawling through what we call ‘a box of tricks’, in other words, a box full of financial paperwork.  Now this may seem an unenviable task to most, but I actually quite enjoy it.  The investments that have been collected over the years often tell a story of their own. 

I am currently working on a ‘box of tricks’ for a married couple who hold a number of investment bonds and unit trusts with various investment companies. In the past week I have been contacting these companies (a laborious but necessary part of my job).  Once I have all the required information I will start to research these investments and then provide the clients with a concise analysis of their overall portfolio.  This document provides a good starting point for any advice we give and is the first step to taking on any new client with existing investments.

Arranging life cover

One client currently has a significant IHT (inheritance tax) liability and along with their solicitor, we have been instructed to look at potential options to cover this liability.  One of the simplest and most cost efficient ways of doing this is through life protection.  I am therefore currently researching the different types of life cover available and the best premiums on the market for these options.  Once I have collated all this research, we will then sit down with the client and advise on the most sensible option going forward.

Finding a solution for a client’s windfall

One of our longstanding clients recently received a windfall.  The shares that had been passed on by the client’s deceased husband had suddenly become worth a considerable amount.  This is because the company with which she held a large number of shares became subject to a management buy out (MBO).  David, our head of technical is currently working on the tax implications of this windfall.  Once we have these, we will then sit down as a team and talk about suitable strategies for the client before agreeing a course of action.  The solution that we decide on in this case will need to balance a number of factors including; income, security, tax implications (particularly IHT) and capital growth. For a complex issue such as this it’s important we work in collaboration with the client’s solicitor and accountant to create the best outcome.

Xentum website

Finally, I’m in the process of overseeing changes to the website making it more interactive and educational for everybody.  So please keep an eye out over the next couple of weeks for any changes and feel free to make any comments or suggestions as to how we can improve the website for you.

Pension Apathy = Penniless Pensioners

SEPTEMBER 10TH, 2009 By DAVID
5 RESPONSES

The buy now pay later philosophy will definitely catch up with the cash happy twenty and thirty something generation. My friends just don’t get the word ‘SAVING’. Their eyes glazed over when I asked them if they’re contributing to a pension, as it’s not something they’re inclined to give much thought to let alone action.

But the reality is, whether you’re in your twenties or your fifties people are just not saving enough for the long term. There has been oodles written about this topic recently.  According to clever statisticians a 30 year old has a 70% chance of reaching 85 years of age and a 55 year old a 63% chance.  More than half of UK adults don’t know how to set up a pension, many are just not saving enough to give them a good standard of living in retirement and many are banking on receiving an inheritance rather than their own savings to see them through. As a nation we have never saved as little as we do today. The average UK household saves a paltry 1.7% of its annual income, the lowest rate since 1959, and a far cry from the 1980s and 1990s when the average savings rate was 8.71% and 9.21% respectively.

The long term situation will only get worse and relying on the State Pension system alone is no longer a viable strategy.  Recent changes to the State Pension system mean that between 2024 and 2046, the State Pension age for both men and women will increase from 65 to 68.  Indeed, Lord Adair Turner, the author of a key report on pension reform and the current chairman of the Financial Services Authority, has recently said that the State Pension age should be raised to 70.

Private sector companies are closing their attractive benefit laden defined benefit pension schemes to new recruits and increasingly to existing members. Unless you work in the public sector it’s likely that these schemes will eventually be unheard of. So, the onus is on you to start taking responsibility for your own finances.

I do have some sympathy with my generation.  We’ve not been brought up with our parent’s fiscal discipline. Easy credit has lured us from these values. We don’t have to save to get what we want. We just get it. Culturally, we are a nation obsessed with property. If you don’t live in your own property by the age of 30, you might as well live in the wilderness! Combined with spiralling higher education debt and sociable lifestyles, plus the pressure to get on the housing ladder means surprisingly the spare money to stash just isn’t there.

You may be wondering why I have decided to write about the perilous state of the nation’s retirement provision.  The answer is quite simple.  Over the last few months we have received a number of enquires from clients who are worried about their retirement provision.

If you are concerned about your own retirement provision, then the first thing you should do is get independent advice and find out what your existing provision is likely to provide when you retire. You need to ask yourself what level of income you would like in retirement and to establish the potential shortfall/surplus if you continue to save at your current rate?  If your existing provision is not going to meet your expectations then look at your spending habits. Are there any sacrifices you can make? What can you realistically afford to save?  If you are struggling to save more, then you may have to downgrade your lifestyle expectations in retirement. 

It is important to stress that retirement planning doesn’t just have to be limited to pensions.  It can include things such as ISAs and rental property, and as with anything, it is important to strike the right balance between your current and future needs.