Saving across the generations/ Children's pensions

George Osborne's Autumn Statement at the beginning of December 2012 bought into sharp focus the way pension contributions have be made, the falling limits of future contribution levels and also the maximum levels of pension 'pots' that can be accrued before penal tax charges would be applied.

This last point noted refers to the pension 'Lifetime Allowance' (or LTA for short) currently standing at £1.5m of total pension value (already fallen from £1.8m), to a new proposed level of £1.25m in the tax year 2014/2015. As an example, benefits that are crystallised in this tax year at a greater value than £1.5m (without existing protection arrangements) could see the balance taxed at a level of up to 55%.

Based on recent economic times, many people in their middle years only dream of having a total pension pot value of £1.5 or £1.25m at retirement. And it is this point that I have received the most client comment, referring to their own situations of probably 'only' achieving a total pension value of 'say' half this LTA value, and then promptly referring to their children who they fear may not even get close to half their parents half.

This has prompted me to remind various clients that they can start pensions for their children at very young ages and put money away into this for their futures. The contribution would normally be limited to a maximum gross contribution of £3,600 in a tax year, with basic rate tax relief bringing this down to a net contribution of £2,880 for the year. Conveniently, this net amount could also fall outside the donor’s estate for inheritance tax purposes as a gift using the annual gift allowance of (currently) £3,000 per annum.

The pension contributions made for the child and the tax relief, which the insurer will reclaim from the Revenue, are invested in a fund which grows in a tax efficient manner.

It is important that you are aware that the value of the pension as well as any income which they generate can fall as well as rise and that past performance is not a guarantee of the future. If you surrender the contract, especially during the early years, you may get back less than you have invested.

In my opinion, the main factor is not the contribution level, but the duration of time for investment that may have the biggest impact. With the minimum age that pension benefits can be drawn now increased to age 55, a child aged 10 has at least 45 years (currently) before they could draw pension benefits. It is this accumulation time that is likely to see significant value being accrued for a child's future use and benefit.

No individual advice has been provided in the content of this blog, and if you would like to consider this opportunity, then please let us know at our office in Guildford. As you can see, saving in a tax efficient way across the generations is something many parents are considering, fuelled by their concerns for their offspring’s financial futures.

Keith Churchouse FPFS
Director
Chartered Financial Planner
ISO 22222 Certified Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.

The Autumn Statement 2012

It was a busy day at Westminster on Wednesday 05th December with the numerous announcements and changes to the many rules and regulations that maintain the UK Governments fiscal policy. As the saying goes 'the devil is in the detail' of these Budget changes, with additional tax and allowances being taken on one hand and given back or withdrawn (such as the planned 3p (approximate) fuel tax rise in January 2013) on the other.

From a financial planning perspective, there are some headlines that will be of interest (with some benefits and concerns) to our clients and enquirers and I have listed some of these changes below. This is not an exhaustive list, but provides many relevant points that you may want to consider:

Capital Gains Tax (CGT) Increase

The current allowance of £10,600 (2012/2013) will increase by 1% the tax year start 2014, rising to £11,100 by tax year 2015/2016.

ISA Allowance Increase

The current allowance of £11,280 will increase by 1% to £11,520 from the tax year start 2013.

Pension Annual Allowance Reduction

The maximum annual pension contribution in a pension input period (PIP) will fall from £50,000 (from all sources) to £40,000 from tax year start 2014/2015.

This is likely to have significant effect on higher earners and those with members of final salary pension schemes with higher annual incomes.

Pension Lifetime Allowance Limit Reduction

The current Lifetime Allowance Limit (LTA) is falling from its current limit of £1.50m to £1.25m from the start of the tax year 2014/2015.

This is likely to haves significant effect on higher earners who have long service within a final salary arrangement or large private pension arrangements. A point of note is that a transitional 'fixed protection' regime will be introduced for those who understand that they may be affected by the reduction in the lifetime allowance (LTA).

Pension Income Drawdown Maximum Withdrawal Limit

Originally the maximum ‘drawdown’ limit was 120% of the Government Actuarial Departments (GAD) limit that could be approximately achieved through averaged single life annuity rates. This fell to 100% about 18 months ago, sadly at a time when annuity rates were continuing to fall.

As soon as legislation will allow, the original limit of 120% is being restored, which will be of interest to those who have seen their maximum withdrawals fall significantly in recent times.

Income Tax Personal Allowance Increase

The Personal Allowance for the tax year 2013-14 will increase to £9,440 and the basic rate limit will be set at £32,010.

The increase in the higher rate threshold will be capped at 1% for tax years 2014-15 and 2015-16.

Inheritance Tax Nil Rate Band Allowance Increase

The current Inheritance Tax nil rate band allowance for an individual of £325,000 will increase to £329,000 from tax year start 2015/2016.

Summary

These are only examples of some of the changes that may be of interest to you when considering your financial planning for the future. Because of the scope of the changes and because each client is advised individually, no individual advice is provided in the content of this Blog.

More details of the Autumn Statement changes can be found at the HMRC website here:
http://www.hmrc.gov.uk/budget-updates/march2012/autumn-statement-dec2012.htm

Chapters Financial Limited is not responsible for the content of external webpages.

If you would like to consider your own financial planning further then please contact Chapters Financial Limited through our website or on 01483 578800.

Keith G Churchouse FPFS

Director
ISO22222 Certified Financial Planner, Chartered Financial Planner Chapters Financial Limited

Chapters Financial Limited is Authorised and Regulated by the Financial Services Authority, number 402899.

The importance of regular financial reviews

For some, pension and investment planning are both fascinating and dynamic in the way that various factors can be applied to provide the overall balance required. Others do not find this topic so consuming, although this does not alleviate the need to regularly review existing financial arrangements to ensure that they continue to meet your expectations.

In many cases, this can be viewed from two specific angles, detailed below:

The Tax Wrapper Angle

Like many issues, tax legislation rarely stands still for long, changing with budgets or possibly amended in Autumn Statements.

It will be interesting to see what our Chancellor achieves in this month’s Autumn Statement. Reviewing the tax wrapper being used (or available) in a pension or investment is worthwhile to ensure, where possible and prudent, that tax allowances are being used efficiently. Headline examples might be this year’s ISA allowance (£11,280) or annual gift allowance (£3,000) for IHT purposes, with many focussing on this later note as we approach the festive Christmas season. There are other less well known (or well used) allowances that can be overlooked, but may remain effective for you and your family’s financial planning. An example might be pension funding (usually to a limit of £3,600 gross in a year) for children. This example might seem an unusual idea, but the effects of very early pension funding for an individual can be significant.

Another great example of change in legislation, in this case in the provision of financial advice, is the ending of commission and a move to fee based advice and implementation from January 2013. This may have an effect on the way you take and pay for future advice. We have detailed this change in previous Blogs on this Chapters Financial website.

The Investment Angle

If you hold existing invested assets, you will have made decisions about the level of investment risk you are prepared to accept and confirmed your objectives for growth, income or possibly both, among many other points. The same would apply for new money being added, taking into account existing arrangements, your expectations and the diversity you expect. Investment markets and fund/ asset allocations usually move constantly, and it is possible to see past/ historic decisions of how you want an Investment Bond (as an example) to be balanced changing because of market movements. Your own circumstance and tolerance for investment risk may have changed from previous times and the current allocation may now be different from the preferred choice. You may, an example, have moved from an accumulation phase for your investments to a required income phase. This could usually be referenced at the time of retirement.

Regular Financial Review

A regular review allows the previous decisions to be considered and challenged to ensure that your existing holdings meet with your expectations and anticipated aspirations. If required, fund switches are usually easy and cheap to arrange and this planning can be used to change asset allocations to meet your on-going requirements and to reflect views of future investment opportunities.

Personal needs may have changed where capital or income may need to be released from existing holdings to meet a specified requirement and reviewing diversified holdings to see where best to release gains ( if available, possibly using tax allowances, such as the Capital Gains Tax (CGT) allowance/currently £10,600 2012/2013) is usually worthwhile and recommended.

Summary

Each client is an individual and we will provide financial planning advice on this basis. Therefore, no individual advice has been provided during the course of this Blog. The team at Chapters Financial Limited will be pleased to help you with your own individual requirements and to review and make recommendations for your existing arrangements.

 

Keith G Churchouse, Director
Chartered Financial Planner
ISO 22222 Certified Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.