Is a Pension Drawdown Scheme Right for Me?

Pension drawdown schemes are intended to give clients more control over their pension funds and how and when to extract money from their pension pots. When you set up a pension drawdown scheme, you have the option to take out 25 per cent as a tax-free lump sum. Funds then need to be selected for the remainder of your pension pot.

You will be able to draw an income from this remaining pot on a flexible basis, but there are many factors to consider. As with all complex financial choices, it can be beneficial to talk to an independent financial advisor about your options.

Risk

Pension drawdown schemes, which are also known as ‘income drawdown’ schemes or ‘flexi-access drawdown’ schemes carry more risk than annuity schemes. This is because the income isn’t guaranteed for life so, to decide whether this type of scheme is right for you, it’s advisable to consider whether your pension pot will last you throughout your remaining life and if you need a flexible income.

Some of your income may be secure, such as a state pension or defined benefit/final salary pension scheme. Other income is flexible, such as savings and investments, salaried income and rental income, for example. Your Windsor IFA, Giles Warren, will help you to examine your income and work out whether a pension drawdown scheme is right for you.

If you do decide to go for a drawdown scheme, you will need to consider:

  • How much you are likely to need to live on – taking into account your life expectancy isn’t always easy, but we can help you do this objectively.
  • How much you can safely draw down each year. A tried and tested approach can be to withdraw just 4 per cent of your entire pension pot in the first year after retirement, increasing the amount by inflation each year after that.
  • The fact that you can opt out of income drawdown schemes and use some or all of the pension pot to buy into an annuity later on if you prefer.
  • How much you will be expected to pay in income tax on the income you draw down each year. Your IFA can help you plan the amount you drawdown carefully to limit your tax liabilities. You’ll want to avoid going into the higher tax bracket if at all possible.
  • Your lifetime allowance. If your pension pot is worth more than £1,030,300, you’ll pay tax on the amount exceeding the limit when you withdraw it.
  • Inheritance and how the drawdown scheme impacts your estate will also need to be considered.

There are pros and cons to pension drawdown schemes and deciding whether they are appropriate for your unique situation isn’t always easy. Speaking to an IFA can help you to make an informed decision and ensure your pension doesn’t run out before you do!

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How to Limit Taxation After Retirement

Many of us look forward to retirement and hope that we can be financially secure by the time we finish working for good. Careful planning helps but being aware that taxation can continue even past retirement is important if you are going to organise your finances properly. Here, we take a look at the issue of taxation after retirement a little closer.

Income tax

Many people do not realise that you will continue to be liable for income tax after you retire. You may not be receiving a salary any more, but many of you will receive a pension income. Although the State Pension is paid tax-free, this is only the case because it is under your Personal Allowance. You will pay tax on income received from a personal or workplace pensions once you exceed this Personal Allowance. The Personal Allowance for most people is £12,500 tax-free as of April 2019. You will also be able to withdraw 25 per cent of your pension pot tax-free in most cases.

Did you know you can now apply for a State Pension Forecast by filling in this form. This will provide you with an estimate of how much state pension you will receive, together with the date from which you can claim. Or if you know your Government Gateway login, you find out immediately online here.

For those receiving larger pension payouts, income tax is payable at the normal rates on anything over their personal allowance.

Savings and investments

Your income from savings and investments may be taxed, so it’s important to try to limit your exposure by making the most of tax-free savings products. You can invest £20,000 per year into a Cash ISA completely tax-free.

Interest on other savings is taxed, but each of us has a Personal Savings Allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. This is the amount of interest from your savings you can receive each year tax-free.

Annoyingly, you used to be able to opt into receiving your savings income with the tax already taken off by filling in the R85 form, but this is now not the case. However, if you have previously done so, you will continue to receive your interest this way. For the rest of us with savings income over £1,000, HMRC collects the tax through our PAYE code.

Capital gains tax is payable on investment income, so bear this in mind when investing in the first place. Speaking to a good IFA about tax-efficient savings and investments can help to reduce your tax liability.

Inheritance tax

We can’t talk about retirement tax without touching on inheritance tax. Changes have been made recently to inheritance tax rules, which will scrap the tax completely for couples passing on their property up to the value of £1m from the 2020/2021 tax year.

This is being brought in through a new Main Residence Allowance, which will increase in increments over the coming years until it reaches £175,000 per person in 2020. This can be added to the existing £325,000 inheritance tax allowance to total £500,000 per person, hence the £1M per couple.

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Capping the tax-free lump sum would be a mistake

A new report by an influential think tank has suggested that the tax-free lump sum for pensions should be capped at just £40,000. Giles Warren Financial, and many other independent financial advisors, think this would be a mistake.  Here, we explain why.

What is the tax-free lump sum?

Currently, pensioners are usually able to take as much as 25 per cent of their pension savings as a tax-free lump sum. The maximum this could be, with a lifetime allowance standing at £1m, is £250,000.

Now, the Resolution Foundation has published a report calling for this tax-free lump sum to be capped at just £40,000. It argues that this would generate massive revenues for HMRC while only impacting a quarter of pensioners.

The report states: “The current ability to take over £250,000 tax free is worth up to £119,000 to an additional rate taxpayer, £105,000 to a higher rate payer, £53,000 to a basic rate payer and nothing to lower income pensioners who’d be below the personal allowance each year anyway.”

Why are IFAs hitting back?

IFAs around the country have been hitting back against these claims, pointing out the fact that a move to cap the tax-free lump sum would be damaging in several ways. Most importantly, we think that capping the amount you can withdraw as a pensioner without paying tax would discourage people from saving for their retirement in the first place.

“People are already feeling discouraged from saving for their retirement and a cap on the tax-free lump sum would simply disincentivise pension saving even further,” stated Giles Warren. He added: “We have seen cuts to the lifetime and annual allowances in recent times and a further cap would make pension saving less appealing to younger workers who need to be putting money aside for their future.”

As well as the pension cap idea, the Resolution Foundation’s report also called for the inheritance tax tax-free threshold to remain at £1m. This would mean that it would not increase alongside inflation.

Here at Giles Warren Financial we believe this would amount to a stealth tax increase. It is another idea that will work to disincentivise saving – as the real rate of tax will increase over the years. Failing to adjust the tax-free threshold in line with inflation means a greater proportion of people’s inheritance will be taxed.

Other ‘tweaks’ proposed by the Resolution Foundation in their report included scrapping savings schemes such as the Help To Buy ISA and the Lifetime ISA, both of which are aimed at trying to encourage responsible attitudes to money. They are open to everyone and help people to save tax-free for their future or for a home of their own.

Giles Warren argues: “Scrapping these products will leave a great number of people with very few avenues for saving without heavy taxation.

“Saving is already unattractive to many younger people, but at least tax-free ISAs give them a means through which to grow their cash. Taking these away would be damaging.”

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How much money do I really need to retire?

Whether you have a final salary pension scheme, a private pension or no pension at all, you are likely to wonder how much money you will actually need for retirement. Perhaps you are hoping to retire early and wonder if you have enough in savings to allow you to do this. Here, your trusted Windsor IFA, Giles Warren, takes you through some simple steps to help you work out how much you are likely to need once you’ve stopped working for good.

Consider your priorities

Firstly, it’s important to point out that enough money to live on for one household isn’t necessarily enough for another. Of course you need to consider the amount of money you are used to living on now, but you also need to think about how many luxuries you are hoping to enjoy in retirement.

Many people see retiring as an opportunity to travel more, so the cost of this needs to be factored in. Others prioritise things like new cars, or eating out. Your plans for retirement, in terms of how you see yourself spending time (and money), are a crucial in helping you work out how much you need.

Will you have debts?

We all hope to be debt-free by the time we retire (and that includes a mortgage), but this isn’t always possible. Factoring in mortgage or other debt repayments is a must-do when you start to plan for retirement.

What do most people live on in retirement?

Again, this is hard to say, but research by Which? found that their members spent an average of £2,200 per month (£26,000 per year) in retirement, rising to £39,000 per year for those leading more luxurious lifestyles with long-haul travel etc.

Another common calculation for working out how much you need to retire is to aim for around 70 per cent of your current annual salary, or your final salary before retiring. You’ll then need to deduct the state pension you receive, and the value of your workplace pension and other retirement income, if you have any. This will help you to identify if you have a shortfall that will mean you need to increase your savings.

What does a state pension provide?

The current state pension for a retired couple amounts to, a not-inconsiderable, £251.90 per week. This will go some way towards covering your retirement expenses, but you’ll need to find the remainder from elsewhere if you hope to live any more than a pretty simple existence.

And Workplace Pensions?

These automatically put aside 8 percent of your income each month (from April 2019) but you may need to increase this to save enough to retire in comfort.

If you have a pension through work, you have several options in terms of how you draw down the cash – including a lump-sum, a choice that requires some self-discipline.

 

To conclude, there’s an awful lot in the media about the shortfall in pension and retirement income. However, many people also tend to overestimate how much they will spend in retirement. Consider talking to us about your specific situation if you have concerns about retirement and we can help you to plan for a prosperous future.

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The Autumn Budget – Our View

As trusted providers of financial planning services in Windsor and beyond, we think it’s important to provide you with a quick debrief on how the recent Autumn Budget might impact you. Below we’ll explain how Philip Hammond’s latest Budget will actually affect you and your finances.

For taxpayers…

There was good news for taxpayers in the Autumn Budget. The Chancellor had previously announced his intention to increase the Personal Allowance to £12,500 from April 2020. He also promised to up the Higher Rate threshold to £50,000 at the same time.

In the Autumn Budget he brought these changes forward by a year to April 2019, so some of will see a meaningful reduction in our tax bill a little sooner than expected.

For homeowners…

Hammond also announced the extension of the relief on Stamp Duty to First Time Buyers of shared ownership properties up to the value of £500,000. This is the second year in a row that the Chancellor has extended Stamp Duty relief, further cementing the government’s attempts to help more people get onto the property ladder.

There were also some changes that will impact those selling their homes. As a homeowner, you can avail yourself of the Private Residence Relief on Capital Gains Tax charged on profits made from property. However, there were some minor changes to tighten this relief a little.

Now, if you let out your primary residence for a period, you must be in joint residence with the tenant to still qualify for full Private Residence Relief. Also, if you move out towards the very end of the period of ownership, you will only qualify for the relief if this takes place within nine months of the sale date.

For savers and investors…

There was very little in the budget to interest savers this Autumn. Hammond did, however, offer a small crumb to parents saving for their kids’ futures with an increase in the Junior ISA and Child Trust Fund tax-free limit to £4,368.

And for National Savings and Investment (NS&I) savers, there was good and bad news. On the one hand the government said it wants to attract more people to Premium Bonds by relaxing rules on parents buying them for their children. It is also planning to reduce the minimum purchase of the bonds and release an app to make them even more attractive to savers. On the other hand, those who invested in NS&I’s index-linked savers certificates, will see their returns reduced significantly as the interest will now be linked to the Consumer Price Index, as opposed to the Retail Price Index (reducing the interest from 3.3% to 2.4% as things stand today). This is likely to leave around 500,000 people rather disappointed.

For pension savers…

Although many of us expected changes to the pension tax relief regime, this didn’t come up. However, the Lifetime Allowance, which is the limit on the value of the private pension each person can draw from before they are taxed, will increase a little to £1,055,000, from £1,030,000 from April 2019.

Our conclusion…

Despite all the talk of the ‘end of austerity’ and increased economic growth projections, there was very little in this Budget to suggest anything much has changed. It seems that the shadow of Brexit is simply looming far too ominously for Hammond to make any significant moves towards putting cash back into people’s pockets just yet.

 

 

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Pension changes – Annual Allowance and how it affects high earners.

Postitstax3There is something called the Annual Allowance which is the maximum pension contribution that an individual and employer can make into a pension.   The size of this annual allowance has been  reduced from £40,000 to £10,000 for those earning over £210,000 a year.

Lets assume Dave’s salary is in the middle of these figures – £180,000 and his employer puts in a 10% Employers salary and Dave puts in 5% – he is effectively making an £27,000 annual pension.  This will not affect Dave immediately however when it comes to January in the following tax year its time to do his Self Assessment,  he will then  not be able to claim all the extra tax on his pension.

So you work it out like this – £ 180,000 – £150,000 =  £30,000 divide by 2 = £15,000.  Therefore the annual allowance will drop from £40,000-£15,000 = £25,000.

In this rough example Dave would have normally received 20% at source on the contribution  of £27,000  (£5,400) and then claimed back on Self Assessment an additional 25% (£6,750) making a total tax break of £12,150 for his £27,000 contribution.  However under the new rules he will only receive 45% on the £25,000 i.e. £11,250.  This equates to a loss of tax relief of £1,100.

However there is a way in which you can claim extra pension contributions and this is by making sure you’ve used up your previous allowances by using a Carry Forward Calculator.  The Prudential have a good one which can be found at the following link http://www.pruadviser.co.uk/content/57818/354015/annual_allowance_calculator/

 If you would like us to help you with any of this information then please call us on 01753 668831 or email info@gileswarren.co.uk.

Thanks

Giles Warren

[This is Giles Warren’s interpretations of the rules.  E&OE]

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New Years Resolutions

Around 50% of us make New Year’s Resolutions and “sort the finances out” must be one of the most popular: but that’s a little vague – it’s more a wish than a firm commitment to take action.

Looking at the January appointments we’ve had with new and existing clients, here are the topics that we’ve discussed most often. If you’re determined to sort out your finances, these may give you some food for thought.

1. Sort out the mortgage

The mortgage is the biggest monthly expense for the vast majority of people, and making sure that the rate you’re paying is competitive is basic common sense. Many people are paying a higher rate than they need to and half an hour with a financial planner or independent mortgage broker can be time very well spent. Yes, there are costs involved in moving your mortgage, but these can often be outweighed by the savings to be made.

2. Sort out our life cover

This is an absolute priority, especially if you have children. Many people don’t know the answer to questions like ‘how much life cover do I need?’ ‘How much do I have?’ ‘Does it include critical illness cover?’ No-one likes to think about the possibility of being seriously ill or dying, and therefore we tend to neglect our protection policies. Life cover can be surprisingly inexpensive: and even if you do have cover in place, make sure you have it checked on a regular basis. In many cases the cost of protection is continuing to fall and it may be possible to replace old policies and increase the amount of protection you have, without increasing your premiums.

3. Start saving for the children

However much you’ve just spent on Christmas presents, your children are going to cost you a lot more in the future. Whether it’s university tuition fees, a first car, your daughter’s wedding or the deposit on a house, the numbers are only going to go one way. Even if you only save a small amount, doing it on a regular basis over a long period can make a significant difference – and with the ability to save tax efficiently through an ISA, at least the taxman will be on your side.

4. Start saving for ourselves

What’s true for the children is equally true for yourself; if there’s a specific savings target you have in mind, or whether you simply need to save for the proverbial ‘rainy day,’ the earlier you start to save the easier it is to achieve your goal.

5. Sort out my pensions from previous employment

Many people have pensions left over from previous jobs, and despite various Government initiatives aimed at simplifying the system they still don’t have an accurate idea of how much is in their pension ‘pot.’ Good pension planning is impossible without knowing the position you’re starting from, so it’s a sensible idea to talk to a financial planner and find out the position with any old pension policies. For example, can they can be brought together and simplified?

6. It’s time I understood the company pension scheme

Just as importantly, far too many people don’t understand their existing company pension scheme. Is it final salary? Money purchase? Eightieths? Sixtieths? Can I make additional contributions? Buy extra years? Again, half an hour with a knowledgeable financial planner will be time well spent. He’ll be able to summarise the main benefits of the scheme for you, tell you the sort of pension you’re likely to receive and advise you of the best course of action if you want to improve your pension benefits.

7. Investigate Inheritance Tax and Long Term Care

If it’s the case that your parents are elderly, then it may be worth thinking about Long Term Care planning. Similarly if their – or your – estate is likely to be subject to Inheritance Tax, then action taken now could pay significant dividends in the future. Again, a financial planner will be able to tell you what’s possible, and the steps that could be taken now to prevent an unpleasant surprise in the future.

8. Look at Private Medical insurance

Many people look at the option of private medical insurance. This may be an investment worth making, particularly if you run your own business and would need treatment at a time to suit you.

9. We need to sort out the partnership insurance

Many businesses are run as a partnership (whether it’s a straightforward partnership or through equal shares in a limited company). The death or serious illness of one of the partners could have catastrophic consequences for the business – and serious implications for the other partner. And yet very few businesses have addressed the simple question of partnership assurance. Your financial planner will be able to explain the basic rules to you and give you an idea of what protection might cost: you may well be pleasantly surprised!

10. We need to make a will

Last – but by no means least – make sure that you have an up to date will. The consequences of dying ‘intestate’ (that is, without a will) can be severe, and with a simple will being relatively inexpensive it’s sensible to make sure that this area of your financial planning is kept up to date.

So there’s plenty to think about… If you would like to discuss any of the above points – or any other aspect of your financial planning – then as always, please don’t hesitate to contact us on 01753 668831 or info@gileswarren.co.uk.

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