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This is our first newsletter of 2016 and as the Budget looms on 16th March we discuss the potential changes the Chancellor may have up his sleeve for pension taxation. We also explain the new IHT nil rate band that could significantly increase the value of assets falling outside the IHT net, and we have an interesting illustration on the effects of ‘pound cost ravaging’ on pension investments.  We hope you enjoy the articles.

In this issue:

• Will the Chancellor Cut Pension Tax Relief on March 16th?
• The Effects of Pound Cost Ravaging
• Only 6 Weeks Left to Use up Your ISA allowance
• IHT Planning – Introducing the Residence Nil Rate Band

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Will the Chancellor Cut Pension Tax Relief on March 16th?

It is widely expected that George Osborne will announce further changes to the way pension contributions are taxed as part of his attempts to create a budget surplus in 2020, so that all savers, higher and basic rate payers, will see changes to the way we save for our retirement. The predictions vary but his options include further reductions to the annual and or lifetime limits both of which would boost his coffers in the short term. The lifetime limit is reducing to £1m this April (reduced from £1.25m), and the annual limit for tax relieved contributions is £40,000* with some industry experts predicting this to fall below £20,000.

Another option is the introduction of a flat rate tax relief whereby all taxpayers receive the same amount of tax relief regardless of how much they earn. A knock on effect of this could be the removal of salary sacrifice – to make it fair and equitable the employer tax relief would have to equal that of the employee tax relief.

We could also see the introduction of the so called ‘pension ISA’ where tax is paid in advance. All contributions would be made from income after tax and all withdrawals in retirement would then be tax free. But as Steve Webb former Pensions Minister pointed out this weekend, this removes the 25% lump sum tax break since all the money in the pot has already been taxed.

Whatever the Chancellor has up his sleeve, higher rate payers may wish to consider maximising contributions now prior to 16th March (in the event that any changes are effective immediately). Basic rate payers on other hand may wish to hold off taking action in case your tax relief will rise.

If you have any concerns about maximising your pension contributions and tax relief please get in touch with your usual JJFS contact or email justask@jjfsltd.com.

* or £10,000 for those who are already drawing their pension

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The Effects of Pound Cost Ravaging

A pension investment of £100,000 with an average return of 5% and providing an annual income of £5,000 can have vastly differing results depending on the actual returns achieved over the investment period. To illustrate this we calculated the resultant value of an investment after 10 years with an average return of 5% and an annual withdrawal of £5,000. We used two different scenarios –high returns initially, levelling out then turning negative, and vice versa for the second scenario. The resulting values of the fund are surprisingly different – a difference of over £26,000 as a result of ‘Pound Cost Ravaging’. Please click here to view the illustration and find out more.

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Only 6 Weeks Left to Use up Your ISA allowance

Just a reminder that you have until 5th April to use up this year’s ISA allowances. You can save up to £15,240 per adult (or £30,480 per couple) tax free and a further £4,080 tax free for each Junior ISA and Child Trust Fund. Remember that once we reach the new tax year you lose this year’s allowance for ever.

A note of caution: if you are changing ISA providers it is vital to ensure you transfer any funds directly from one provider to the other – if you withdraw the funds outside of the ISA environment, you will lose their tax free status.

For more information about ISAs including the new Help to Buy ISA scheme click here to view or download our ISA factsheet.

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IHT Planning – Introducing the New Residence Nil Rate Band

From April 2017 the Government will introduce a new IHT “Residence Nil Rate Band” (RNRB) of £100,000 in addition to the existing IHT nil rate band of £325,000. It will be phased in over 4 years up to a maximum of £175,000 but is conditional on the main residence passing to direct descendants (i.e. children/grandchildren) on death. The allowance is transferrable between spouses and civil partners on death, so by 2020/21 some individuals could have up to £1m in assets that will not be liable for IHT. On the downside, no RNRB will be available if the deceased holds assets of more than £2.2M, rising to assets of £2.35M in 2021/22 once the full £175K allowance is introduced.

Here are the main points:

How much will it be? £100,000 from April 2017 rising each year by £25,000 to a maximum of £175,000 in the tax year 2020/21. These are maximum amounts and the actual available allowance will be reduced if the value of the property is less than this.

Who will benefit? The RNRB is only available where the main residence passes to children (including adopted, foster or step children) or linear descendants on death. However, the rules have been extended to accommodate situations where the family home passes into the joint names of the deceased’s child and their spouse.

How does it affect large estates? The residence nil rate band will be reduced by £1 for every £2 that the deceased’s net estate exceeds £2M and is therefore not available if the deceased holds assets of more than £2.2M. This will rise to assets of £2.35M in 2021/22 when the full £175K allowance is in place.

What if the family home passes into trust? The RNRB may be lost if the property is placed into a discretionary will trust for the benefit of the children or grandchildren but there are some exceptions including Bereaved Minor Trusts, 18 – 25 Trusts and Disabled Persons’ Trusts.

What about downsizing? The family home doesn’t need to be owned at death to qualify and the RNRB will still be available provided that the property disposed of was owned by the individual and it would have qualified for the RNRB had the individual retained it and the replacement property and/or assets form part of the estate and pass to descendants.

What if there are multiple residences? Only one residential property will qualify so personal representatives must nominate which residential property should qualify if there is more than one. Buy-to-lets cannot be nominated.

For more information about the RNRB or about estate planning in general, please call your usual JJFS contact or email justask@jjfsltd.com