HMRC Pensions Individual Protection application/ Now available

As an update from the last tax year (2013/2014), we note that the HMRC website has been updated today and now includes full details of the new Individual Protection for pensions, along with a facility to apply for this online.

This application can be found here: http://www.hmrc.gov.uk/pensionschemes/ip14online.htm

Chapters Financial is not responsible for the content of external webpages.
As a reminder, the HMRC website confirms:

Individual Protection 2014

The government announced that individual protection 2014 will be available when the lifetime allowance is reduced to £1.25 million for 2014-15. Individual protection 2014 will operate from 6 April 2014, for those with pension savings valued at over £1.25 million on 5 April 2014.

Individual protection 2014 will give a protected lifetime allowance equal to the value of your pension rights on 5 April 2014 - up to an overall maximum of £1.5 million. You will not lose individual protection 2014 by making further savings in to your pension scheme but any pension savings in excess of your protected lifetime allowance will be subject to a lifetime allowance charge.

You'll be able to apply for individual protection 2014 from 18 August 2014. Your application must be received by HMRC no later than 5 April 2017.

You can hold both fixed protection 2014 and individual protection 2014.You can also hold individual protection while holding either enhanced protection or fixed protection but you can't apply for individual protection if you already hold primary protection.

Summary

Pensions and HMRC protection can be a complicated subject, dependent on your individual circumstances. If you would like to consider the points noted above further then please do not hesitate to contact the team at Chapters Financial, who will be able to help you further with your pension enquiries. No individual advice is provided during the course of this blog. If you would like to receive further information regarding your own individual situation and circumstances, please contact the Chapters Financial team in either Guildford or Woking.

Keith Churchouse BA Hons FPFS
Director, Chapters Financial Limited
Chartered Financial Planner
Certified Financial Planner
ISO22222 Personal Financial Planner


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

The Reality of New Pensions’ Flexibility

The Reality of New Pensions’ Flexibility

The spring of 2014 heralded the Chancellor's budget which was significant in the changes it proposed for financial planning and particularly the way pension benefits can be accessed into the future. Some of these changes have already occurred, with the main changes due in the new tax year (2015/2016). 

As the summer of 2014 has warmed many with its glorious sunshine, some enquiries have turned to the thoughts of accessing their pension arrangements sooner rather than later. Sadly, this might be a reflection of some of the historical and negative baggage that surrounded pensions in the last decades. Ironically, this seems to be in conflict with the new thrust of promoting Workplace Pensions via Auto-Enrolment.

The new flexibility imported by the budget certainly creates new financial planning opportunities and the ability for investors to use their funds in ways to meet their needs. This greater flexibility has been welcomed by most, however, in our experience at this time, the consequences of some of this flexibility have not been publicised as well as they could have been. I hope that these potentially negative outcomes are detailed by the press before April next year, rather than waiting for the inevitable ‘sob story’ of those who have drawn their pension benefits to great financial detriment.

Taxable benefit after the tax free cash

The first point to consider is that the Chancellor is effectively offering the opportunity of avoiding annuity purchase, based on gilts (gilt-edged securities which are government bonds), with the proviso that any amount drawn from a personal pension plan, as an example, above the 25% tax-free cash limit would be subject to income tax at the individual’s highest marginal rate in the tax year that the benefits are drawn.

Example:

As an example, if an individual was earning £30,000 gross a year and they had a sole pension plan of £30,000 (and were above the minimum benefit age) they could draw 25% of the fund as tax free cash (£7,500 tax-free) and the balance of the fund drawn would then be subject to income tax. If the total remaining pension fund of £22,500 was drawn, this would be added to their overall taxable income, bringing their total income in the tax year, in this example, to £52,500 gross. In this example, they could suffer higher rate tax (at 40%) on an amount of approximately £10,600.

Final Salary pitfalls

In a different example, we have also seen enquiries from those who maintain valuable final salary pension schemes, who have received transfer values and are looking to transfer this value out (usually to a personal pension) to draw benefits early. The most recent example we have experienced was for a final salary pension scheme that was left many years ago where the client was not aware that the benefits accrued increase with inflation, offers spouse’s protection, and that a significant actuarial reduction would be applied to the transfer value should they draw pension benefits before the normal retirement age of 65.

In the example concerned, the client had reached the age of 55. The combined actuarial reduction is likely to be around half the value of the pension scheme, in addition to any other reductions that may be applied. Therefore, the transfer value of, in this example, £42,000, offers the opportunity to withdraw £10,500 of cash with the balance being used to provide income or the ability to withdraw as additional taxable cash from April 2015 onwards. However, the real financial loss to the individual in doing so is likely to be somewhere in the region of £30,000-£50,000. Taking this latter point into account, the transfer value of £42,000 starts to look highly unattractive.

Guidance or Advice?

I am also concerned, and have written to the Financial Conduct Authority (FCA), with regards to their proposals to offer individuals ‘guidance’ (rather than advice) for the drawing of pension benefits. I have little conviction that ‘guidance’ will be able to go into such detail noted above and be able to confirm the potential for real financial loss to the client in drawing pension benefits early.

Full advice

The points noted above are only a taster of the complexities of pensions which offer significant value to clients both now and into the future, particularly from final salary pension benefits. We believe those who are considering drawing pension benefits early need to take full advice as to the ‘real’ consequences of their actions before being attracted by any tax-free cash sum or taxable cash that they could withdraw either now, under the newly increased HMRC  Triviality rules, or post-April 2015.

Summary

If you would like to consider the points noted above further then please do not hesitate to contact the team at Chapters Financial, who will be able to help you further with your pension enquiries. No individual advice is provided during the course of this blog. If you would like to receive further information regarding your own individual situation and circumstances, please contact the Chapters Financial team in either Guildford or Woking.

Keith Churchouse BA Hons FPFS
Director, Chapters Financial Limited
Chartered Financial Planner
Certified Financial Planner
ISO22222 Personal Financial Planner

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

Top up & take? / More State Pension changes

Top up & take? / More State Pension changes

We all know that as a demographic, we are living longer. To maintain our standards of living, many of us are also working longer, past the current State Pension age of 65 and beyond.

Whilst taxable earnings are available, some chose to defer their State Pension Benefits until they are needed. This in the past has been advantageous for most with an uplift in deferment of 10.4% pa for each full year deferred. The current standard full State Pension (in the tax year 2014/2015 is £113.10 per week (£5,881.20 pa gross) and you may also be entitled to additional State Pension benefits, such as State Earnings Related Pension (SERPS), Second State Pension (S2P) or a Graduated Pension).  

You may want check your State Pension to ensure you are up to date you can use the State Pension Forecast service here:  https://www.gov.uk/state-pension-statement

The Government has recently announced that this deferral uplift in their State Pension will be cut by almost half. These changes are being brought in because we are all living longer, as noted, and the comparatively generous rate of increase to date will not be sustainable into the future.

The Pensions Minister, Steve Webb, stated that when the new, single-tier State Pension system is introduced in April 2016, people who choose to defer their State Pension beyond state pension age will only receive a 5.8% increase in their pension if they delay payments for a year. Just over half the current increase of 10.4%.

Under the current rules, someone choosing to defer for one year would need to live for around another ten years to make the decision financially worthwhile. When the reduced rate of increase is introduced, you would have to live for about 19 years to benefit from their choice. If we knew how long we would live, this would make the financial planning a lot easier, although I am sure it would have many other undesired effects!

In monetary terms under the new regime for State Pensions to be introduced in just over 18 months’ time, an individual receiving the full flat-rate State Pension of approximately £155 a week (£8,060 a year) would see an increase in their total annual benefits of only £467.48 if they defer for a year. If you look at this over the course of retirement, say 25 years, someone deferring at the old 10.4% pa rate of increase would receive over £17,000 more from a State Pension of £155 a week than an individual under the new rules.

The good news is that anyone who reaches State Pension Age before 6 April 2016 can still get the 10.4% rate of increase if they choose to defer taking benefits. It’s disappointing news, though, for anyone who will retire after that date and had planned to delay their State Pension.

Deferral may still be a sensible move for someone in very good health who intends to carry on working, or who has substantial pension income from other sources. However, for the majority of retirees after April 2016, it may well be a case of ‘top-up and take’ – checking that you have accrued the number of years required to qualify for the full basic State Pension and, if you haven’t, make a lump-sum payment to rectify the situation – and then start taking benefits.

The ability to top-up the State Pension (voluntary Class 3A National Insurance Contributions) will currently become available (from October 2015) to those close to and over state pension age and full details can be found here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/300007/wms-state-pension-top-up.pdf

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

It would be worthwhile checking that any voluntary contribution offers the potential for value before proceeding to join in the new initiative.

The Chapters teams in Guildford and Woking are well placed to advise you on the impact of current and future changes to pension’s legislation on your finances. No individual advice is provided during the course of this blog. If you would like to receive further information regarding your own individual situation and circumstances, please contact the Chapters Financial team in either Guildford or Woking.

Keith Churchouse BA Hons FPFS   

Director, Chapters Financial Limited 

Chartered Financial Planner
Certified Financial Planner 

ISO22222 Personal Financial Planner 

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