Pre-Budget Report – 9th December 2009

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The Chancellor, Alistair Darling, will deliver his pre-Budget Report on Wednesday December 9th 2009.

One of the key questions facing the Chancellor, and indeed the Government, will be how to balance the books – ensuring there is enough money coming in to match the amount of money going out.

The country and business community wait with bated breath to hear what the Chancellor has in store.

There are concerns in the pensions industry that he could make further changes to personal pension taxation and in particular with reference to higher rate income tax relief.

If you are fortunate enough to fall in this category it might be a shrewd move to consider discussing any pension contribution planning with your financial adviser and, possibly, taking action to make any pension contribution ahead of the announcements on December 9th.

For a list of local Independent Financial Advisers visit IFA Promotion

Change in Personal Pension Retirement Age – Act NOW!

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I wrote in a previous article about the change in pension retirement age for personal pension plans from age 50 to 55.

When does the change come into effect?

This change comes into effect on 6th April 2010. You may need to take action before that date if you’re aged between 50 and 55 and wish to take pension benefits BEFORE you reach age 55.

Failure to act could mean that you are prevented from taking your pension benefits from your personal pension until you reach 55 – which could have a serious impact on any change in lifestyle you are planning on making in the next 5 years.

Newspaper article highlights opportunity to move t Income Drawdown

This article in the Daily Mail talks about this change in legislation maybe affecting up to 3 million people.

The article highlights the case of a gentleman who will be 50 on 5th April – the day before the change in retirement age comes into effect!

It mentions the option of moving to an “income drawdown” arrangement.

With an “income drawdown” arrangement your existing pension fund is moved into a new contract, tax-free cash (now known as “pension commencement lump sum”) of 25% of the fund value may be taken and the remaining pension fund remains invested and an income may be drawn from it.

This income is limited by the Government Actuaries Department and depends on a number of variables – a financial adviser can provide guidance on this should you decide to take your benefits through this route.

You don’t have to take income immediately from the income drawdown plan and most pension providers have flexible contracts.

You also have the opportunity to move from an income drawdown arrangement to an annuity at any time after commencement (known as vesting – see my article on maximising pension income in year one)

The one downside is that once you move into “income drawdown” the remaining pot will be subject to tax on death, whereas in the “prevested” personal pension plan, the fund might be held outside your Estate through a trust arrangement – you need to check with your specific pension provider to see if your personal pension with them benefits from this kind of trust arrangement.

Alternative Options

You could consider taking your pension benefits by purchasing an annuity. An annuity is an income for life – in exchange for your pension pot (after you have taken your tax-free cash – why wouldn’t you?!) the life company will provide you with an income for life.

This route offers lower risk – once the annuity commences the life office is carrying the risk that you die before the money runs out.

However, annuities are generally inflexible but do suit many people.

It is important to take advice before making any decision.

Alternatively, like most people, you could simply do nothing – many people are not in the fortunate position to be able to benefit from taking their pensions before age 55 – but that’s a topic for another day!

Action needed

If you will be aged 50 or over before the end of this tax year on 5th April 2009 AND you wish to take your pension benefits BEFORE age 55 that you contact an Independent Financial Adviser to ensure that you don’t miss out.

Act quickly as well – don’t leave it until the last minute – with postal strikes, increasing amounts of work in respect of ISA’s etc before tax year end and the generally slow speed at which pension funds move between companies you need to ensure that your IFA has a suitable time in which to understand your position, advise on the most appropriate course of action and to actually physically move the money into the new arrangement!

The whole process can take a few months – even longer depending on the pension provider.

Top 10 Personal Finance Articles – September 2009

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Here is our usual monthly list of the top 10 read articles on shrewdcookie.com in September – there are some surprising entries!

1. Change in ISA allowances in Budget 2009

The changes announced in the Budget in respect of increases in the ISA allowances come into effect on 6th October for those over age 50 before the end of the current tax year – can invest up to £10,200 into a Stocks and Shares ISA. Woo hoo!!!

2. New Tax Year – New ISA Allowance

More detail on the changing ISA allowances.

3. Download a Free 2010 Yearplanner

I have put together a great little yearplanner for 2010 – it can be downloaded in A4 (landscape) or larger A3 (printed on 2 sheets of A4 for those without an A3 sized printer!). Feel free to send copies to friends, family and colleagues at work.

4. 19 Essential Money Tips for Students

With the start of the University/College/School term upon us here is a great article which might help a few students who are struggling through on their limited finances.

5.  Pay Yourself First

One of the first principles spoken of in the great book “The Richest Man in Babylon” is the need to pay yourself first – the principle here is to take a fixed percentage off your take-home pay and keep that money for yourself forever – then your lifestyle will change itself to allow you to live on the remainder. Get a copy of this book – a truly great read. It could be the most valuable £4.99 you ever invest!

6. Cashflow Forecasting – Planning Income and Expenditure

Here is a really helpful little spreadsheet which will allow you to plan your income and expenditure on a monthly basis – you will be able to see exactly where your money goes to each month – allowing you to make changes in your expenditure – a great tool for “what if” scenarios – what if I stopped eating out, what if I increased income by £200 per month etc.

7. Personal Pension Minimum retirement age increasing to 55 from 6th April 2010

Those people who will be over 50 before 5th April 2010 and were planning to retire in the next 5 years may have to take some urgent action between now and then – in the worst case scenario you may have to continue working for another 5 years!

8. Wear a uniform to work – here’s some free money!

If you have to wash your own work uniform you could be entitled to some money from the taxman – read the article for more information.

9. Get Money for your Old Mobile Phone

Did you know you can sell old mobile phones – I recently sold my old Sony Ericsson K800i and got £28 for it – worth checking out what yours might get you – see the article.

10. 10 Great Reasons for Writing a Will

Everyone needs and should have a Will – it saves so many problems in the event of your death – and let’s face it the only two certainties in life are death and taxes! Read the article now – you might be surprised.

And finally……

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Personal Pension? – Minimum Retirement age 55 from 6th April 2010!

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Current Personal Pension Minimum Retirement Age is 50

Did you know that, if you’re lucky enough to be in the position, you can at present take your personal pension benefits from age 50?

Increasing to 55 from 6th April 2010

The rules are changing though – from 6th April 2010 the minimum age for taking personal pension benefits is increasing to age 55. The change in the pension rules could mean those people who are now aged 50-54 and wanting to take their pension benefits early being forced to take pension benefits from age 55 – thereby having to defer retirement for up to 5 years.

So, it pays to plan ahead!

Does this just affect people who want to take an annuity from their personal pension plan?

No – it also affects anyone who wants to move into “income drawdown” before age 55 as well as anyone receiving pension benefits in the form of “phased retirement” – this is whereby you take a percentage of your pension plan each year and is designed, through a combination of tax-free cash and annuity income, to provide you with a level of pension income which allows your remaining pension plans to remain invested and benefitting from tax-efficient growth.

Any unvested (i.e. pension funds which you have not taken pension benefits from) will have to remain so until age 55.

If you’re currently aged under 55 you seriously need to speak to your pension/financial adviser as soon as possible.

Action

  • If you’re in “phased retirement” through your personal pension and are currently under 55 then urgently speak to your financial adviser about what actions you need to take as your income could be cut short from 6th April 2010.
  • If you’re aged 50-54 now and plan on retiring in the next few years you should consider taking benefits now to ensure you don’t fall foul of these changes in personal pension minimum retirement ages.

Naturally, before taking any actions with regard to your personal pensions or any other investments you should seek advice from a suitably qualified professional adviser.

And finally……

Be sure to subscribe to our newsletter – it’s free and you can cancel it at any time.

Also – did you know you can receive our blog posts via RSS.

Related Posts

How to Maximise Pension Income in Year One

Pension Planning for Non-Earners

Instant Returns on Pension Contributions

Personal Pension Plans – an Introduction

Pension Planning for Non-Earners

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Many people assume that a personal pension plan is only available for those people who are in paid employment. Historically this was the case as there was a need to be in receipt of “net relevant earnings” in order to qualify for pension contributions.

This income had to be “earned” income – so if for example you had a large percentage of your income come from savings and investments then this “income” could not be used to calculate the maximum amount which you could invest in a personal pension plan.

Under current rules you are able to contribute up to 100% of your earnings, or £3,600 gross per annum, whichever is greater.

How does tax relief work on a personal pension?

All contributions made by individuals are made “net” – i.e. they are paid out of taxed income, and it is the responsibility of the pension provider to reclaim the income tax which has already been paid on the slice of income which is being invested into the personal pension.

Everyone qualifies for basic rate income tax relief at source, regardless of their tax position.

So it is therefore possible for someone who is effectively not paying any income tax, for example a parent who stays home to raise a family, to pay money into a personal pension and have this topped up by HMRC by way of a tax rebate into the plan.

What rate of relief is applied?

Basic rate tax relief is applied, currently being 20%, so in order to make a gross contribution of £3,600 into a personal pension plan, a net contribution of £2,880 is required, with the pension provider, reclaiming £720 income tax relief from HMRC – this provides a non-taxpayer with an instant return on their money invested of 25% – there aren’t many investment which can give that sort of return in the first year!!!!

Don’t forget though, with a pension plan, under current rules, at retirement you can take 25% of your pension fund as a tax-free lump sum (known as “pension commencement lump sum”) with the remainder of the fund providing a pension income of one kind or another, which will be liable to income tax.

Why is this important for families planning their retirement income?

Traditionally in a family with just one adult working, all pension planning has been done in their name – with the subsequent outcome that they will be liable for income tax on reaching retirement.

Now it is possible to fund a pension plan for the non-earner – the benefit here being that both partners will have a personal allowance in retirement, against which no income tax is payable, and therefore pension income for the non-earner in retirement, depending on their other sources of income, could effectively be received without any income tax liability.

For more guidance on pension planning for non-earners we would suggest you take independent financial advice to decide whether this course of action is suitable for your particular circumstances.

How to Maximise Pension Income in Year One

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How to Access in Excess of 25% of Your Pension Fund Today

Click here to download this article as a PDF

Many people often ask about “cashing in their pension plans”. Unfortunately many people seem to believe for one reason or another that you can take all your money out of a personal pension plan n in one go – this simply isn’t the case.

Under current rules, an investor with a personal pension plan in the UK can access 25% of fund value tax-free between ages 50 and 75 (minimum retirement age is rising to 55 from 6th April 2010 – anyone aged between 50 and 55 before 6th April 2010 needs to act in the next 11 months if they want to avoid being unable to access pension benefits until age 55). This tax-free cash as it is commonly known was renamed “pension commencement lump sum” following A Day on 6th April 2006 – I wonder why they changed the name???

Many people wish to access as much of their pension funds as possible, as soon as possible, effectively bringing the money back into their estate now, rather than waiting until later.

There is an option which can be pursued to maximise income from your personal pension plan by combining tax-free cash with income drawdown and annuity purchase.

This is how it works

Let’s assume that you are a male now aged 50 and looking to take the maximum possible amount out of your pension plan in the current tax year – there are three steps you would need to take to achieve this –

1. Take maximum tax-free cash at commencement

It does exactly what it says on the tin – normally this will give you 25% of the current fund value – on some older pension plans you may be able to get in excess of 25%.

2. Move to an income drawdown arrangement and take “maximum GAD” from day one

Income drawdown is a flexible arrangement which allows you to draw an income from your pension fund whilst still allowing your pension plan to remain invested. It’s normally an option taken up by people with a medium to adventurous attitude to investment risk – since your money remains invested there is a possibility that investment performance could move against you, and the level of withdrawals you are taking from your pension fund could exceed the growth you are enjoying, thereby reducing the size of your pension fund. You could in theory use up your entire pension fund BEFORE you die – this is the risk you are running – with an annuity you pass this risk to the pension provider – in exchange for your pension fund they provide you with an “income for life”.

Maximum GAD refers to the amount of your fund which the regulations will allow you to drawdown from your pension pot – GAD stands for the “Government Actuaries Department” and they set the rate that can be drawn down for each age group.

For a 50 year old male, the current GAD rate (April 2009) is £49/£1,000 invested based on a Gilt Yield of 3.75%. This gives a GAD percentage of 4.9% (this figure will differ depending on your age – in simple terms the older you are, the higher the GAD rate will be)

The regulations allow the pensioner in this scenario to take 120% of this amount from their pension plan – which in this case amounts to 5.88% gross.

(Important Note: Some personal pension plans provide what is known as a “guaranteed annuity” – this can be as high as 9%-10% – you MUST check with your pension provider before moving to an income drawdown arrangement that you are not entitled to any higher “guaranteed annuity” rates – please consult an IFA before taking pension benefits)

3. Take an annuity with the remaining vested drawdown fund.

Under income drawdown rules it is normal for investors to take an annuity before they reach age 75. An annuity is an “income for life” – in exchange for your remaining pension pot a life insurance company will pay you an income for the rest of your life – however long this might be.

There are different options which can be added to an annuity, such as a widows pension, indexation (to protect the pension income against rises in the cost of living), and guarantees whereby the pension will continue paying out for 5 or 10 years if you die early during the annuity period – remember that generally income from an annuity stops when you die.

To maximise your annuity you need to opt for a simple annuity which contains none of these add-ons

(WARNING – not including some of these add-ons, such as a widows pension, could lead to financial hardship for your family in the event of your death – I cannot emphasis how strongly you should take independent financial advice in respect of accessing your pension benefits in this way.)

For a non-smoking male, age 50, the current best annuity rate available is 5.4% gross per annum – pension income is taxable – you might be liable for tax on this income depending on the other sources of income you may have.

To see what annuity rates are available in the market for your particular circumstances go here –  http://www.moneymadeclear.fsa.gov.uk/tools/compare_products.html

We have therefore identified the three steps which can be used to take maximum cash out of your personal pension plan at this moment in time. Let’s now look at the monetary implications of this.

Let’s assume you have a pension pot today of £50,000. We will now consider the effect on your pot of each of these steps.

1. Take 25% tax-free cash (cash in hand of £12,500 tax free) – remaining pension fund of £37,500.

2. Take income drawdown of 5.88% gross immediately (£37,500 x 5.88% gross = £2,205.00 – less 20% income tax – £1,764.00 cash in hand after tax) – pension pot remaining of £35,295.00.

3. Purchase an annuity after taking income drawdown – based on a pension pot remaining after taking maximum drawdown of £35,295.00 and annuity rate of 5.4% the investor would receive £1,905.93 gross (£1,524.74 cash in hand after tax).

Summary

Having carried out these three actions in quick succession the investor has been able to access £15,788.74 of their pension fund after payment of income tax – amounting to 31.58% (nearly a third of their pension plan).

The remaining fund can then be used to provide an income for the remainder of the pensioners’ life in line with the annuity options chosen at stage 3 above.

Warning

We can’t emphasis enough the need to consult an Independent Financial Adviser before embarking on the course of action outlined in this article. It may be that this course of action is totally unsuitable for your particular circumstances. We accept no responsibility for your actions – you have been warned!!!

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Personal Pension Plans – an introduction

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Personal Pension Plans

One popular method of saving for retirement is to use a “personal pension plan”. This is a tax-efficient savings vehicle for building a fund from which to take a lump-sum and/or income in retirement.

It offers a number of tax benefits which will be covered later in this article.

What is a Personal Pension?

A personal pension is a regulated investment plan into which regular and single premium pension contributions can be made. Money paid into a personal pension plan by an individual qualifies for tax-relief at source – basic rate relief is given – for example, invest £80 per month and £100 per month is actually credited to your pension plan.

The pension company effectively reclaims basic rate income tax from HMRC on your behalf.

Higher rate taxpayers may be able to gain an additional 20% tax-relief on their contributions by completing an annual tax return.

Money invested in a pension plan is typically invested in a fund or funds – these are usually pooled investment/pension funds where the fund manager takes the money of all those invested in the fund and buys a wide range of stocks, shares, property etc depending on the nature and aims of the pension fund.

These investments could be shares, government stocks, corporate bonds, fixed interest investments, commercial property etc. both here in the UK and overseas. The choice of where and into which funds to invest is down to the policyholder.

Alternatively they may choose to invest in a managed fund – which may be a “fund of funds” – in this scenario a fund manager will invest in a range of other pension funds in line with that funds investment goals and a stated attitude to investment risk.

How much can I invest?

It is possible to invest up to 100% of your salary/earned income in to a personal pension plan, although there is an annual maximum contribution allowance of £235,000 and a lifetime allowance of £1,650,000 – the implications of exceeding these allowances will be covered in later articles.

How do they work?

Your money is invested, either on a single or regular basis, into a fund(s) which you hope will grow between now and retirement. At retirement you have options in terms of taking benefits

Taking Benefits

Under normal personal pension rules it is possible to take up to 25% of your accumulated fund at retirement as a tax-free lump sum – this is known as a “pension commencement lump sum”

The remaining fund is then applied to provide you with an income in retirement and there are two main options open to you in respect of taking this retirement income from your pension plan.

Most people will be familiar with a “pension annuity” – this is an income for life. Basically you exchange your remaining pension fund, after tax-free cash, for an income for life from a pension company.

This income is taxable in retirement, but remember that even retired people continue receive a personal allowance against income tax.

You don’t have to take your pension annuity with the company with which you built up your pension pot – under the “open market option” you are allowed to shop around for the best pension deal – more information on annuity purchase will be given in a separate article at a later date.

Warning – before transfering your personal pension plan to another providers for a “better” annuity rate you should enquire as to whether your current plan contains guaranteed annuity rates – these are sometimes in excess of those available on the open market and over the years we have seen some in excess of 9% per annum depending on the basis on which you take your pension – always seek independent financial advice before taking or transferring benefits to another pension provider.

The second option is known as “unsecured pension” (previously known as “income drawdown” – this is riskier than annuity purchase as your pension fund remains invested and you effectively draw an income from your pension fund.

The government sets limits on the amount of income you can drawdown under this type of arrangement and typically the level of income available is greater than that available under an annuity.

There is a risk though – recent stock market drops have seen many “income drawdown” holders see large reductions in the size of their pension funds, a fall in value which has been escalated by them taking a fixed level of income from the pot – this fixed income becomes an increasingly burden on a falling pension fund.

You should seek specialist advice if you are considering using the “income drawdown” option due to the nature of the risks involved as this type of pension benefit might not be suitable for you.

When can I take pension benefits?

Benefits under a personal pension used to be available between the ages of 50 and 75 – this is changing however and the earliest retirement age is moving to 55 from 6th April 2010.

Tax benefits of a personal pension

As mentioned already, you receive tax-relief on premiums paid into a personal pension plan. Indeed even with out income, a person can contribute up to £3,600 gross per annum into a personal pension and still receive tax relief on premiums invested – in this scenario you would actually invest just £2,880 and the pension provider would reclaim the difference from the HMRC (tax man) on your behalf.

The pension fund grows in a tax-efficient manner with all gains under a personal pension plan being free of capital gains tax.

Choice of investment

Most providers offer a wide range of funds into which you can invest your money. You should consider taking independent financial advice to help in choosing a pension provider and investment portfolio – the adviser will discuss your aims and goals with you, as well as your attitude to investment risk as this will help determine the choice of funds most suited to your requirements.

SIPP – Self-Invested Personal Pension

A SIPP is simply a special type of personal pension plan – it operates in just the same way as a personal pension plan in terms of tax-efficiency, contribution limts, access to benefits etc, it’s main difference being that it has a much broader range of options in terms of where you can invest your pension money: –

Stocks and Shares
Futures and Options
Commercial Property
Unit Trusts and OEICS
Traded Endowment Policies

The range of investments under a SIPP is therefore considerably wider than under a personal pension plan. With some specialist SIPP’s however the charges incurred can be higher.

Pension Transfers

You do not have to keep your personal pension plan with one provider, and indeed you can have more than one personal pension plan at any one time.

From time to time you may consider moving to another provider – for example, the new provider might have a wider fund choice, more competitive charges, better customer service.

Before transfering to another provider it is important to take Independent Financial Advice to ensure that you are not giving up any valuable guarantees under the existing pension plan, such as a guaranteed annuity rate with your current provider.

Summary

This article has given an insight into the workings of a personal pension plan and in subsequent articles we will consider some of these areas in greater depth.