Annuity changes provide advisory opportunity

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Nick Huber
Freelance journalist
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Major changes to pensions and a big increase to the amount of money people can save without paying tax announced in the Budget are likely to increase demand for advice on inheritance tax and tax planning.

From 1 July, the limit on the amount of money an individual can pay into a tax-free Individual Savings Account (ISAs) will be increased from £11,800 to £15,000.

The new accounts will be called New Individual Savings Accounts (NISAs). The savings can be held in cash or stocks and shares.

The new proposed rules for pensions will come in from April 2015, but some of the rules have already started to be phased in.

From April 2015, you’ll be able to withdraw as much of the money as you want from your pension when you rea...

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02nd Apr 2014 13:00

Taxation of Death Benefits

IHT is only a part of the picture when it comes to assessing the taxation of pension funds on death.  Although there may be some people who will take the whole pension fund out in one lump sum and pay income tax, there will be a far greater number who will take out the 25% tax free cash and then slowly take the rest of the money out.

Under current rules, if you take out your 25% tax free cash, then the remainder of the fund is classed as a crystallised fund, and as such will be subject to a 55% lump sum death benefit charge.  This is far higher than the IHT charge of 40%, and will effect everyone, not just those with estates large enough to be assessed for IHT.

Many high net worth clients will at least have heard about IHT and are aware they need to do some planning, but how many average people with smaller estates will realise that they may be facing a 55% tax charge on death?  The problem could be a whole lot bigger and may effect people of all estate sizes.

The taxation of death benefits is currently under review, so the rules may change as the 55% tax charge in life is being removed, although there has been no confirmation that this will happen upon death.

Watch this space, as whatever develops could have a major impact on many of your clients.

Thanks (2)
By Nebs
02nd Apr 2014 15:45

Withdraw at 55

Does this mean that, for those people lucky enough to be able to plan how much income they want to take in any particular year, they could have no other income, withdraw the 25% tax free lump sum, and as much as they want of the rest to use up the nil rate/20%/40% rate band (depending on their circumstances), and then the following year take normal income but pay the pension money back in, getting tax relief, and then do the same withdrawl in year 3, etc etc.

Thanks (0)
02nd Apr 2014 20:55

withdrawal at 55

Very interesting point.  I think that there are rules that prevent recycling although I have not seen it operate in practice.  In outline I think that you are asking whether an individual can say put 8k into a pension and as a BR taxpayer have this grossed up to 10k and then withdraw 2.5k tax free and (7.5k*0.8)=6k ie a total of £8.5k.  I don't know the answer but if it looks too good to be true....  

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02nd Apr 2014 22:51

Pension recycling

It's a nice thought, but there are rules in the current system that would prevent you from doing that, and I assume they would be extended into the new regime

There are currently rules that prevent you from immediately recycling your 25% tax free cash, although if you leave the other 75% in capped drawdown or buy an annuity with it, then you are free to make further contributions and get tax relief on them providing you aren't caught by the recycling rules.  However there is a catch, because under the current flexible drawdown rules (which lets you take out however much you want providing you have a min secured income of £12k pa) once you nominate to go into flexible drawdown, you will no longer receive tax relief on any contributions you make to any pension scheme.

Thanks (1)
By Nebs
03rd Apr 2014 00:03

Pension Recycling

I wasn't thinking of flexible drawdown, although that is interesting.

I was thinking along the lines of putting £11,200 into a pension before 5th April, so 14k gross goes in, have no income next tax year, and taken as a lump sum under the trivial commutation rules would give me 25% £3,500 tax free, and the rest covered by allowances, next result government gives me £2,800. I've got a healthy balance on my D's current account to draw on so having no taxable income for a year won't be a problem.

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03rd Apr 2014 22:38

Pension rules
Apart from complying with all the HMRC criteria, you also need to make sure that the pension provider you choose will allow you to take out the lump sum via trivial commutation as they don't have to let you do this. The same problem will be encountered by people who want to take out all or part of their pension when the new rules come in next year, especially those who have older pensions.

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By Vince54
03rd Apr 2014 22:34 can file as many final FPS submissions as you like...

but only up to the 19th April.  After that you must use the EYU, which is the RTI equivalent of the amended P14.

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