Our ...August Newsletter 2013
In August Jackson Jeffrey Financial Services will be 4 years old and having founded the business in the midst of the recession we’re absolutely delighted to have gained so much support and trust from our clients and providers enabling us to grow to the firm we are today. We’re busy working on a brand new website and look forward to announcing the launch in due course.
In the meantime we wish you all a relaxing and enjoyable summer holiday and hope you enjoy reading our articles below.
This month we highlight a very tax efficient way of securing life cover, we provide a useful warning against pension liberation schemes and we end on a positive note with some good news on the mortgage front.
We hope you find the articles useful.
In this issue:
If you’re a higher earner or the owner of a small business, you could be paying over the odds for life insurance and missing out on significant tax advantages.
Standard life insurance policies or registered Group Life Assurance (Death In Service) schemes pose problems for higher earners as any lump sum benefits paid from an approved scheme form part of the lifetime pension allowance (currently £1.5m, reducing to £1.25m in 2014) and any excess is taxed at 55%. In addition, small firms with fewer than 5 employees can have difficulty getting access to Group Life insurance schemes.
However with a relevant life policy these issues are removed. Each policy is taken out on a single life basis, the benefits are written in trust and the company pays the premiums. 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.
The table below compares the cost for ordinary life cover versus a relevant life policy:
Ordinary Life Cover
Relevant Life Policy
|Company gross cost
Employee’s NI contribution at 2%
Income tax at 40%
Employer’s NI contribution at 13.8%
|Total Gross Cost
|Company net cost
|Corporation tax relief at 20%
* 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%.
What is pension liberation?
Pension fraudsters are preying on individuals strapped for cash by offering pension liberation schemes that will provide cash up front in return for transferring pension funds into a new receiving scheme. However these new scheme providers charge exorbitant fees, which can be as much as a third of the value of the pot, and when the funds are released they are subject to tax which can total more than half their value.
How it works
Pension ‘liberators’ promote their schemes via text, cold calls, email and internet adverts, inducing individuals to transfer their pension funds into new schemes offering cash back in the form of loans. In many cases they are deliberately unclear as to the true cost of these schemes, charging exorbitant fees and misleading scheme members as to the tax implications. These receiving schemes are usually new start ups claiming to take advantage of a tax loophole (there is no loophole) and many are known to invest in poor quality, high risk investments.
Currently you cannot start taking your pension until age 55 (although there are certain exceptions) and if you release your funds before then they are subject to a 55% tax charge regardless of whether you are a basic or higher rate tax payer.
Consider this scenario:
John has £30,000 in an old employer scheme and decides to ‘liberate’ the funds because he has been made redundant and is having difficulty finding a new job. The new scheme takes a 30% commission totalling £9,000 but John is desperate for the money and accepts this charge. 6 weeks later he receives a tax bill from HMRC for 55% of his original pension transfer totalling a further £16,500. John’s pension fund has been virtually wiped out and he must pay the tax bill even if he’s already spent the money!
How to avoid being a victim of pension liberation:
· Never give financial or personal information to a cold caller
· Check with your financial advisor or if you don’t have one, speak to your existing pension scheme administrator before agreeing to any transfer (their details will be on all letters and forms relating to your pension)
· Do not be pressured or rushed into agreeing the transfer
Although pension liberation schemes are technically legal, there is a move to have them declared illegal and a court case is currently underway.
Some positive news on the mortgage front. Mortgage approvals for house purchase and remortgaging rose during the three months to May this year, according to the Bank of England’s Trends in Lending report issued on 18th July.
Also, the number of house purchase approvals in May was the highest since December 2009. In fact, most UK lenders reported high levels of mortgage applications in the offing for last month, indicating an increase in consumer confidence as people feel positive enough to move house.
It is interesting, however, to note levels of lending now compared to those in 2007, when the net average monthly lending figure was around £9billion. In May this year that figure was £0.3billion!
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