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May Newsletter 2010

Who is your Death in Service beneficiary?

If you are a member of a Death in Service Scheme

Following the recent sad death of one of our clients’ Death in Service Scheme members, it reminded me how important it is to have an up to date death benefit nomination (DBN) form in place.

It is important to nominate who you would like to receive the benefits if the worst should happen to you. Whilst the nomination choice may not always be obvious or easy to make, it certainly helps the Scheme Trustees make a decision as to who should receive the benefit.

Death in service benefits can provide a substantial sum of money, which may be required by your beneficiaries without delay in the event of your untimely death. Without the DBN form on file, the Trustees are obliged to explore a deceased member’s potential beneficiaries to decide who they feel should receive the benefit (which may not be in line with your wishes and could take some time).

If you are responsible for administering a Death in Service Scheme

It is good practice to remind all members of the scheme to update their Death Benefit nomination form on an annual basis.

Another point for the Trustees (often the employer) to be aware of is that it is important to have a Trustee bank account set up in case of a claim.

With our advice and prior guidance, the scheme (for the death claim we recently handled) was accurately set up, with up to date death benefit nomination forms on each employee’s file. The result was that the death benefit payment was made to the Trustee bank account within 5 working days of the claim being made and onward payment to the spouse’s account the next day.

One final point – Did you know it’s possible to have a death in service scheme for just one life? This could form part of a good financial planning strategy for some so please ask us for more details.

Corporate ‘Chartered Financial Planner’ Status – what’s it all about?

Having recently attended the Chartered Insurance Institute Head Office in London for my ‘Chartered Financial Planner Graduation Ceremony’ it prompted me to explain the benefits of this prestigious title to our readers.

Chartered Financial Planner status involves personally completing qualifications, adhering to a code of ethics and also a structured continuing professional development programme each year to maintain and improve knowledge.

It is also possible for a firm to hold the title of Chartered Financial Planners, whereby all employees must demonstrate professional commitment and operate in an ethical manner that places clients’ interests at the heart of the advice they give.

This Chartered title is the ‘gold standard’ of excellence and integrity and with less than 300 firms eligible to use this title it provides an exclusive and valuable distinction in our profession. Jackson Jeffrey Financial Services are proud to be Chartered Financial Planners. Click here for more information.

Commercial Property Purchase using your pension

For many years, business owners and executives have used pension funds to purchase commercial property, for their own business use, or just as a strategic investment offering both capital appreciation and rental income earnings.

Pension funds are often a forgotten asset and can even be combined with other people’s pensions to provide sufficient capital for this type of investment.
Example case study:

Three Directors/owners of G&SC Ltd have just over £300,000 pension funds between them.

They want to use these funds to buy their offices currently owned by the business, valued at £600,000.

First they set up a Self Invested Personal Pension (SIPP) each and transfer their existing pension funds into it which will give them the additional investment flexibility to consider property purchase.

Although the combined pension fund is insufficient to buy the property outright, they can arrange a pension loan up to 50% of the combined net fund values. Therefore borrowing of a further £150,000 is agreed, with their pensions wholly responsible for repaying this debt.

This now allows the directors to purchase 75% of the property with the remaining 25% staying under the business ownership. Once the sale is complete, the pensions receive 75% of the rent which can go towards the repayment of the loan.

By doing this, the directors have injected further cash into their business plus securing continued ownership and control of the property.

Other advantages include:

Rent paid into the SIPP is free from income tax.

Rent paid by the business is an allowable expense for corporation tax.

No Capital Gains Tax is due (on the proportion owned by the SIPP’s) if the property is subsequently sold.

The SIPP’s are responsible for the maintenance costs of their proportion of the property.

For the right situation, this can be an extremely efficient way to utilise pension funds. However, it is complex and is not suitable for all. For a full analysis and recommendation, please contact us.

Penalty guidance on late payment of PAYE (for employers)

HMRC have been warning employers for some time that they may have to pay a penalty if they do not pay their PAYE deductions on time (this article was provided by Leigh Christou & Co Accountants.)

HMRC have now issued more detailed guidance on the way in which the penalties will work. The penalties will apply to PAYE deductions due for a period starting on or after 6 April 2010 include PAYE, Student Loan deductions, Construction Industry Scheme payments, Class 1 NICs, annual payments of employers’ Class 1A NICs and annual PAYE Settlement Agreements payments.

Deductions of PAYE, NICs, Student Loan deductions and Construction Industry Scheme payments are generally due by 19 of each month (or 22 if paid by electronic means and cleared into HMRC’s bank account). Small employers are able to pay quarterly.

HMRC are advising employers to let HMRC know if they are likely to have difficulty making a payment on time, so that arrangements can be made and penalties can be avoided. Their guidance states that where employers enter into ‘time to pay’ arrangements, before the liability becomes due, no penalty will be charged.

Penalties for late payment start at 1% increasing to 4% depending on the number of late payments in the year. Extra penalties will be added where liabilities are outstanding for a further six and then 12 months.

Please click here if you have any queries specifically regarding this matter.

Planning the Future

Often there is a misconception that financial Planning is something for the wealthy – it’s not. We should all be doing it if we are to make the best of our lives.

In short, Financial Planning involves working out what is most important to you, and then adding timescales and costs so that you can work out how to achieve your goals by planning your finances accordingly.

The process will give you a clearer idea of where you are heading and puts you in control, reducing the stress you may feel.

From the outset, a good financial planner will discuss at length your requirements and put you at ease knowing that they will always put your best intentions ahead of their own. They will want to gain a full understanding of what you want to achieve and by when.

Following this, the financial planner will devise a plan, taking into account your goals, and existing financial situation to demonstrate whether that goal is achievable and if not what actions may be required to make it possible.

Regular review of the plan is vital, as circumstances can change over time and alterations are often required along the way.

Choosing the right financial planner for your needs is important as your intention (and theirs) should be to build a long lasting relationship, where there is a great deal of mutual understanding and respect.

Click here to find out more about the financial planning process to see if it’s something that you could benefit from.

Your Questions

QUESTION 1

If I have £5000 to make best use of now, should I top up my existing pension, invest in Stocks and Shares or use it to pay off part of my mortgage? I am 52, and pay income tax at the basic rate. I have also used my cash ISA allowance this tax year. “Mr M. Warwickshire”.

ANSWER 1

My answer to this question would depend on certain further information which we would need to obtain, regarding your mortgage, any existing pension/Stocks and Shares ISA and your financial objectives and attitude to investment risk. Any one of the above could be appropriate; however general guidance would be as follows:

Consideration should be given to the remaining term and the interest rate payable on the mortgage. If it is currently on a standard variable rate it may be possible to obtain a greater return on savings, making a Stocks and Shares ISA or Pension contribution. Alternatively, if the mortgage is a fixed rate you may be paying a greater amount in interest than would be reasonably obtained from a savings vehicle – so making an overpayment may be appropriate. Often, however overpayments can be restricted by the lender, which may make this option unviable.

A major benefit of making a pension contribution is the tax relief that can usually be obtained (at your marginal rate – i.e. 20% or 40%). So it is quite possible that the contribution actually becomes £6250 once the basic rate (20%) tax relief has been added (with any additional higher rate tax relief generally claimed back via self assessment). When you take the pension benefits (generally between age 55 and 75), 25% of the fund can be taken tax free and the remainder used to provide an income which is taxed at your marginal rate.

What is your current pension fund value, earnings and intended retirement age – It is important to be aware of the Standard Lifetime Allowance here. This is the maximum benefits an individual can have in a Pension before a penalty charge would be levied by HMRC. This is currently £1.8m but nevertheless could catch some individuals out. Equally, if no pension provision has been made to date, this should be considered as commencing pension savings at 52 may not be appropriate due to the additional state pension (i.e. Pension Credit) that may be available.

Finally, let’s assume the Stocks and Shares investment is via a Stocks and Shares ISA. Although not eligible for tax relief on the amount going in (like the pension) it is a tax efficient investment vehicle. When the value is ultimately used in the future, there is no tax liability. In addition it is a more flexible investment than the pension as you are not restricted as to when and how you can use the fund’s value.

I am sure you will appreciate that it is actually not that straightforward to give a definite answer to this question – as it very much depends on an individual’s circumstances. This is the sort of financial planning scenario we assist clients with regularly, to help them achieve their long term financial goals. Please contact us if you would like to discuss this in greater detail.

QUESTION 2

We have concerns about the compulsory pension legislation coming into place in 2012, as a small business who pay our employees competitively we have always hoped the employees would arrange their own pensions. How much is this going to cost us, and what do we need to be aware of?

ANSWER 2

A package of proposed changes to both State and Personal pensions was first introduced in the Pensions Act 2007 and then further details were set out in the Pensions Act 2008.

Two key principles were proposed:

Auto Enrolment of working individuals into a pension scheme

Compulsory pension contributions by employers

Originally named Personal Accounts these have recently been changed to National Employment Savings Trusts (NEST). They will apply to all workers aged between 22 and State Retirement Age.

Contributions are to be based on ‘band earnings’ which in 2006 were between £5,033 and £33,540. These earnings will include salary, overtime, bonuses shift allowances and commission.

The minimum contributions (to be phased in from October 2012 over 3 years), based on a percentage of band earnings are:

Employer 3%

Employee 4%

Tax relief rebate 1%

An overall annual contribution cap of about £5000 is expected.

The scheme is likely to be quite basic with few choices to be made by the joiner. There is likely to be a low risk default fund and a limited choice of others.

Workers will be automatically enrolled without any deferred period, unless they personally opt out.

All Employers must offer this type of pension to their employees unless they already have a qualifying scheme in place. Details of what constitutes a qualifying scheme are available on request but broadly must offer at least equivalent benefits to NEST.

We are able to assess existing arrangements and offer guidance for employers wanting to prepare for these changes.

The answers supplied do not form personal recommendation and advice should be sought if you are personally experiencing the situations in question.