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Pension Pitfalls, ISA Top Ups and the New Marriage Allowance

With the budget next week and the General Election only a few short weeks away, Mr Osborne is likely to include a number of election-winning flourishes designed to keep the voters happy. Pensions continue to be a hot topic with the new pension freedoms available from April creating quite a stir and we have included an article on a couple of pitfalls to watch out for.

As usual we will be sending out the brand new 2015/16 tax tables first thing on the morning after the budget so do look out for the email arriving in your Inbox at 9am on Thursday morning.

In the meantime, we hope you enjoy these articles.

In this issue:

• Pensions Freedom – Watch Out for the Pitfalls

• Remember to Top Up Your ISA!

• Pensioner Bonds Sale Extended

• The New Marriage Allowance

• The Flat Rate Pension – Only a Year Away

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Pensions Freedom – Watch Out for the Pitfalls

From April, if you are aged 55 or over you can access as much or as little of your pension as you wish.  This provides much more flexibility and the opportunity to reduce the overall amount of tax you pay on your pension benefits, however there are a couple of pitfalls to be aware of.

One key issue is the introduction of a new Money Purchase Annual Allowance (MPAA) of £10,000 which restricts the maximum amount you are permitted to contribute to your pension each year under certain circumstances.

Currently the annual contribution limit is £40,000 for contributions made via your company or, if made by you personally, then the limit is 100% of salary, subject to the overall £40,000 cap. You may also be able to pay contributions for unused amounts for the previous 3 years.

So if you are already in drawdown and take an income within the current drawdown limit*, the £40,000 annual contribution limit will be retained.  However, if you take more than the current drawdown income limit*, the new allowance will immediately apply and you will be restricted on any future contributions to the maximum of £10,000 each year.

Equally, if you’re not yet in drawdown but are planning to set up a drawdown arrangement after 6th April, the MPAA will be triggered as soon as you start drawing on the income.

With this in mind one option is to consider maximising your contributions prior to 5th April or at least making a higher pension contribution than you would normally.

You should also bear in mind that your pension income, outside of the 25% tax free lump sum, is taxed at your usual rate of tax, so if you are considering accessing more of your pension fund, this may have adverse implications on your personal tax position.

We therefore strongly suggest taking professional advice before accessing your pension to ensure you avoid the potential pitfalls.  For more information or to discuss how the new changes will affect you, please get in touch with your usual JJFS contact or email us at justask@jjfsltd.com

* currently this is 150% of income calculated by the Government Actuary Department

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Remember to Top Up Your ISA!

A reminder that this year’s ISA deadline is approaching and you have until 5th April to use your allowance or lose it forever.

The current limits are £15,000 per adult and £4,000 for Junior ISA/Child Trust Funds. ISAs are available as cash, stocks and shares or a combination of both, and they are completely tax free.  You can use the funds in your ISA(s) as you wish, but remember that if you withdraw money from your ISA it immediately loses its tax free status.

As mentioned in our last newsletter, ISAs are now inheritable.  However, rather than a simple change of name on the ISA accounts, the surviving spouse or civil partner must make a contribution in their own name of the amount equal to the value of the deceased’s ISA at the time of death. There is a time limit for making the contribution, currently 180 days after distribution of the estate for stocks/shares or 3 years for cash only ISAs.

There are potential tax liability issues until the replacement ISA contribution is made but on balance it is a very  positive move and  the surviving spouse will continue to benefit from the tax free status of the deceased’s ISA so long as it is kept within the ISA wrapper.

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Pensioner Bonds Sale Extended

Following the unexpected demand for the new Pensioner Bonds, the Government has announced that they will remain available for purchase until 15th May 2015.  The rate for the one year bond is 2.8% gross and 4% gross over 3 years.

The bonds can be purchased by anyone aged 65 or over to a limit of £10,000 per person and can be bought directly from NS&I by post, phone or online.

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The New Marriage Allowance

From April, married couples or civil partners will be able to transfer up to £1,000 of their unused personal tax allowance to their spouse, enabling the couple to save around £200 in tax.

To qualify, one partner must earn less than £10,600 (including income from savings and pensions) and the partner receiving the extra tax allowance must be a basic rate tax payer earning less than £42,285 in 2015/16. The Marriage Allowance will be available later this year and you can register your interest online and receive details on when to make your claim.

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The Flat Rate Pension – Only a Year Away

The new State Pension will come into effect on 6th April next year so that anyone reaching state pension age from that date onwards will receive the new payment.   Although the exact amount has yet to be finalised, it will be no less than £148.40 a week (compared to the current maximum of £113.10 per week).  Designed to be simpler and fairer than the existing arrangements, the new plans will do away with the current two tier system, along with the state second pension and means testing of benefits.

You will need 35 years of NIC to receive the full pension (an increase of 5 years) and a minimum of 10 qualifying years of contributions to receive any pension at all, although these do not need to have been earned in consecutive years.

You can continue working after you reach State Pension age although you’ll no longer be required to pay National Insurance contributions and you can also defer when you take your state pension which means you will receive more when you do eventually start to claim it.

From April next year, contracting out will no longer be recognised so if you have previously contracted out, you’ll be required to revert to paying the normal level of NI contributions.  If you have gaps in your NIC record, you may be eligible to pay voluntary contributions to fill these gaps.

To find out how much state pension you may be entitled to, you can order a State Pension Statement and to check on your NI status, you can order a National Insurance Statement.

For more information please get in touch with your usual JJFS contact or email us at justask@jjfsltd.com