Our ...November 2016 Newsletter
The feat of Donald Trump at the US elections has taken us all by surprise and following on the heels of the referendum could make for some exciting and challenging times in 2017, it will certainly keep us on our toes.
Pension tax relief may well be back on the agenda for Philip Hammond when he delivers his first Autumn Statement tomorrow with rumours surfacing again about a flat rate of 30% tax relief, or alternatively awarding higher tax relief the younger you are. Our hope is that he will not start tinkering with such matters when there are bigger issues to deal with but we shall see.
This month our articles include a look at the main changes to death benefits as a result of the flexi access pension rules as well as a tax efficient way to arrange life assurance for company directors and the results of a recent court judgement regarding pensions funds and bankruptcy.
We hope you enjoy the articles and find them useful.
In this issue:-
- Pension Death Benefits – a reminder of the changes
- How tax efficient is your Life Insurance?
- Is your Mortgage adequately protected?
- Your SIPP is safe from bankruptcy
The new flexi access pension rules introduced in 2015 resulted in some big changes to the way pension benefits can be passed to beneficiaries which could have a significant impact on retirement planning.
Previously only a dependent could take a continuing income from the pension but the new rules now allow for any nominated beneficiary to take an income. The nominated beneficiary can draw as much or as little from the fund they wish and can in turn nominate their own beneficiaries to inherit the pension on their death, thus allowing the pension wealth to cascade down the generations without ever forming part of an estate until it is paid out (known as inherited drawdown).
Age at death now determines the tax payable on the benefits. If death occurs before age 75, the benefits pass to the beneficiary free of tax, but if death is after age 75, the beneficiary will pay tax at their marginal rate on any funds they draw. If a bypass trust has been set up, the funds will be taxed at 45%.
Pros and Cons
The inherited drawdown option enables the fund to remain within a tax free pension wrapper which allows the chosen beneficiary to access the funds free of Capital Gains Tax and income tax, the funds remain outside their own estate for IHT purposes and the value won’t count towards their own pension lifetime allowance (LTA). However, you could potentially lose control over the ultimate distribution of your funds as the ability for your beneficiary to nominate their own successor beneficiary means the funds could be distributed to a successor of whom you may not approve!
A bypass trust can help retain more control as the funds are paid into a trust and distributed at the discretion of the trustees according to your wishes. The trustees can also grant a loan to a beneficiary repayable from that beneficiary’s estate on death, reducing the size of that estate, which is advantageous for IHT planning purposes. However income and gains on investments within the trust will be subject to tax charges which would not be the case if the funds were accessed via the inherited draw down option.
These are just some of the changes and it’s important to check whether any existing pensions cater for these rules as many older contracts won’t (some only give the option of a lump sum death benefit). For more information or if you have any queries regarding your own arrangements please get in touch with your usual JJFS contact or call 01789 263257 / email: email@example.com
Company directors and higher earning employees paying for their own life assurance privately or through the company (death in service) could be missing out on significant tax advantages.
It can be difficult getting access to Group Life insurance schemes for less than 5 members and even where this is in place, the lump sum benefits form part of the lifetime allowance (currently £1m) and higher earners could be losing out.
However a relevant life policy resolves these issues. Each policy is taken out on a single life basis, the company pays the premiums, the benefits are written in trust and, as a result, the benefits do not form part of the individual lifetime pension allowance and they are not classed as a P11D benefit, therefore not subject to employee National Insurance or tax. The company also benefits as the premiums are likely to be deductible as a trading expense (provided they are wholly and exclusively for the purpose of the company’s trade) and employer National Insurance is no longer payable.
To illustrate the potential cost savings we have put together the following table comparing ordinary life cover with a relevant life policy:
* Please note that this illustration assumes that corporation tax relief at 20% has been granted under the ‘wholly and exclusively’ rules. In both cases we have assumed a payment of £1,000 each year for life cover on an employee paying income tax at 40% and employee’s National Insurance at 2% on the top end of income. We’ve also assumed the employer is paying corporation tax at the small profits rate of 20% and will pay employer’s National Insurance at the contracted in rate of 13.8%. These figures are based on our understanding of current taxation rules and regulations and may be subject to change.
A relevant life policy is an employee benefit that provides tax advantages for both the company the employee but there are specific conditions that apply. For further information or assistance please call us on: 01789 263257 or email: firstname.lastname@example.org
Your monthly mortgage payment may be your biggest outgoing so if you were unable to work through illness or accidence you need adequate insurance cover to ensure you can still make the monthly payments.
Insuring your mortgage payments should be a high priority and policies are usually set up on a decreasing basis with the insured amount decreasing over time in line with the mortgage itself (where the mortgage is a repayment mortgage). It is generally good practice to include critical illness because, even with increased survival rates these days, you still need to factor in recovery time and ongoing treatment which can last well beyond the initial diagnosis of an illness.*
However it is really important to review your cover when you increase your mortgage otherwise your outstanding balance could far exceed any benefit you are paying for. For example, have you moved to a larger house or re-mortgaged to pay for an extension? Have you purchased an additional property as an investment? If yes, then your policy should be amended to reflect any increase. In some cases a policy may even be rendered invalid by your change in circumstances.
If you would like to review your existing mortgage cover to ensure it is still adequate please call us on 01789 263257 or email: email@example.com
* 4 in 5 cancer patients are hit with an average cost of £570 a month as a result of their illness.(Source: MacMillan)
Following a recent Court of Appeal hearing, the High Court ruled that uncrystallised pension funds cannot be made subject to an Income Protection Order (IPO) in the event of bankruptcy.
There was concern that the ability to access an entire pension pot in one go under the new pension freedoms could result in individuals being forced to crystallise their funds in order to meet their debts. In the case of Horton v Henry, however, the Judge ruled that, although Mr Henry was over 55 and had the ability to access his pension funds, he was not actually compelled to and therefore had not become entitled to an income that could be used for an IPO.
On the other hand, funds already in drawdown can be seized, as indicated in Hinton v Wotherspoon where the individual was already taking an income from his pension and an IPO was subsequently allowed against the income being drawn.
There is still some uncertainty regarding defined benefit schemes and occupational money purchase plans, where it is unclear whether an individual can defer benefits until after the scheme’s normal retirement age to avoid an IPO on the income. Although bankruptcy affects only a small minority the ruling does provide comfort for those unfortunate enough to fall on hard times that their funds are likely to still be available to them once they retire.
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