This summer’s Pointers newsletter from Saunderson House  looks at the recent changes to pension rules which are planned to come into effect from 6 April 2015, the new ISA rules already in place and the planned NS&I pensioner bonds. Non-pension planning options are also considered, alongside proposed changes to the tax treatment of certain new trusts.
New drawdown rules for pensions
Currently, for most over 55 (retirement age for private pensions will increase from 55 to 57 in 2028, and thereafter be set at 10 years below state pension age), income withdrawals directly from a pension fund (above any tax-free cash entitlement)
are limited to a predetermined percentage of the fund’s value (known as the relevant “GAD rate”). From April 2015,
however, this limit will be removed, which makes pensions more flexible and provides planning opportunities around
income withdrawals and death benefits.
For those yet to take pension benefits, a smaller portion of a pension fund will need to be vested to withdraw a given sum. Mindful of the difference in the tax treatment of vested and unvested pension funds on death before age 75, vesting only the amount required each year (taking typically 25% as tax-free cash and the remainder as taxable income) and maximising the unvested fund is likely to prove a tax-efficient strategy for those not requiring all their tax-free cash at outset.
Meanwhile, of interest to those already in drawdown or over 75, the Government is consulting on a potential reduction in the rate of tax applicable to vested funds on death (currently 55%), and a further announcement will be made at the Autumn Statement.
These legislative changes also increase the attractiveness of pension contributions for non-earners, including children. As a reminder, anyone under 75 can make payments of up to £2,880 per annum to pensions (equivalent to £3,600 gross, after receipt of basic rate tax relief). Higher rate and additional rate taxpayers can claim further tax relief through their tax returns.
New ISAs (NISAs)
This year’s Budget announced a number of changes to ISAs (now branded NISAs) to increase their flexibility. The most noticeable of these were an increased contribution allowance of £15,000 for the 2014/15 tax year, the ability to allocate contributions freely between a stocks and shares NISA and a cash NISA, and to transfer a stocks and shares NISA to a cash NISA (as well as vice versa).
Contribution allowances for Junior ISAs and Child Trust Funds have also increased to £4,000 annually (while a further £15,000 can be contributed to a Cash NISA for children aged 16 to 18), and the ability to transfer a Child Trust Fund to a Junior ISA should become effective from 6 April 2015. (It is worth noting, however, if the funds for the contributions to a child’s cash NISA are from a parent and the income from the monies exceeds £100 in a tax year, the parent will still be liable to income tax on these monies whilst the child is under 18).
In addition to the changes to contribution levels and transfers, savers are now able to hold an even wider range of investments within a NISA. One particular area to highlight is the addition of AIM shares to the list of NISA-permissible investments, as introduced last year. This change means, subject to the shares satisfying the relevant inheritance tax conditions, NISA savers can benefit from freedom from inheritance tax as well as from income tax and capital gains tax. Individuals without additional income from which to save into NISAs should consider switching any existing taxable deposits and investments into NISAs to maximise the tax-free fund from which future income could be drawn.
National savings pensioner bonds
George Osborne announced that, from January 2015, NS&I will offer one and three year ‘pensioner bonds’ for the over 65s (with a maximum investment of £10,000 per bond per person). While the interest rates and application process have yet to be confirmed, these are likely to be market-leading products offering older savers a better rate of return than available on cash elsewhere. We will let clients/prospects know as soon as we hear more.
No more pension contributions
Non-pension planning has become a greater priority for many high earners, due to reductions to both the annual allowance for pension contributions and the standard lifetime allowance limiting the pension savings which can be accumulated tax-efficiently.
NISAs will rightly remain the first port-of-call for many savers, with cash and investments in NISAs growing virtually tax-free, without tax or restrictions on withdrawals. Following NISAs, savings can be directed to a General Investment Account (GIA), within which income and capital gains are taxable, but which allows for the use of the annual capital gains tax exemption to reduce taxable gains. Thought should be paid to holding GIAs in the name of a lower-earning spouse and holding lower yielding equity investments within GIAs, to also minimise the taxable income generated.
Onshore and offshore investment bonds – though beware of charges – may be appropriate for some individuals expecting to pay tax at lower rates in retirement, retire to certain countries overseas, or gift invested assets to grown-up children. Paying down outstanding mortgages is also a good option, especially if interest rates normalise over the next few years.
Higher-risk investors may consider venture capital trusts or enterprise investment schemes, to benefit from the upfront tax breaks offered on investments (and some exemptions from income, capital gains and inheritance taxes).
All a matter of trust
Despite the availability of a nil-rate band (currently £325,000 per person), a high net worth individual’s wealth can still be subject to inheritance tax. Previously, the inheritance tax applicable to certain types of trust could be partially mitigated through establishing a number of trusts on successive days, each with its own nil-rate band for some inheritance tax purposes.
However, HMRC is proposing new legislation which would close this loophole such that all new trusts established by the same settlor on or after 6 June 2014 will share a single inheritance tax nil-rate band (with the percentage allocated to each pre-determined by the settlor). Alongside trusts, outright gifts of excess income and capital, as well as investments into AIM shares, enterprise investment schemes and other such assets benefitting from reliefs, may also be appropriate for those seeking to reduce inheritance tax on their estate.
Warning! Auto–enrolment can damage your (pension) health!
The Government introduced auto-enrolment into pension schemes from 2012 onwards. Eligible employees are automatically enrolled into their employer’s qualifying pension scheme. Individuals who currently benefit from enhanced protection or fixed protection should take care to ensure that they ‘opt out’ of auto-enrolment every three years to avoid an unnecessary lifetime allowance tax charge. As long as an employee opts out within 30 days of auto-enrolment, it is considered that the employee has not joined the scheme and enhanced protection or fixed protection will not be lost.
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