Tag Archive: Lifetime Allowance

  1. Budget Summary 2016

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    Here are our first thoughts on the budget, a few key points which may affect you, our full summary will follow shortly;

    The key points from today’s statement were:

    • Pensions – no news is good news.
    • LISA – a new savings option
    • Fewer higher rate taxpayers from 2017
    • CGT falls – good news for investors but not landlords

    Budget 2016 – what this means for you

    It’s business as usual for pension saving as the Chancellor confirmed there will be no imminent changes to pension tax relief. And the introduction of the new Lifetime Individual Savings Account (LISA) saving vehicle from April 2017 adds another attractive complementary option to the saving landscape.

    Taken together with cuts in Capital Gains Tax (CGT) rates, further boosts in income tax thresholds and some welcomed tidying-up of pension anomalies, it’s been a good Budget for savers.

    Pensions – no news is good news

    In the run-up to tax year end, with no changes to pension tax relief and the new LISA saving vehicle, this allows us to focus on:

    • Pension saving: Using the higher 2015/16 annual allowance, and carry forward, to make the most of higher rates of tax relief.
    • Lifetime allowance: Planning in earnest for the imminent lifetime allowance cut (including final funding for those using fixed protection 2016 to lock into a £1.25M allowance).

     

    Other pension news

    • Salary sacrifice is here to stay: In more good news for employers and employees, the Government has confirmed that salary sacrifice will continue to be a tax and NI efficient option to fund a pension (as well as other mainstream employee benefits, such as childcare or health-related provision). Its use for other employee benefits may, however, be cut back.

     

    • Workplace pension advice allowance going up: To encourage employers to boost employee access to professional advice on their pensions, the tax and NI free allowance for employer-arranged advice will increase from £150 to £500 per employee from April 2017.

     

    • Pension dashboard coming soon: To help pension planning, a new digital pension dashboard, giving a single view of an individual’s total pension savings, will be launched by 2019.

     

    • Under 23 drawdown anomaly fixed: The current rule that requires minor dependents’ drawdown to stop at age 23 will be scrapped, giving these dependents the same flexibility as other minor beneficiaries to continue drawdown after 23.

     

    • A fairer deal for the seriously ill: Pension tax rules will be relaxed so that serious ill-health lump sums can be paid even where funds have already been accessed under the scheme. And, for payments after age 75, they’ll be taxed as income rather than at a flat rate of 45%.

    LISA – a new savings option

    The Chancellor unveiled plans to introduce a new Lifetime ISA (LISA) from April 2017. But this is a complimentary savings scheme for younger savers, not a replacement for traditional pension saving. Higher rate tax payers will continue to enjoy tax relief at 40% on pension savings of up to £40,000 a year, keeping pensions as their number one long term savings plan. Indeed, the under 40’s will be able to use both and add up to £45,000 pa to their retirement funds.

    The Government aims to encourage long term saving with the inclusion of a ‘buy four get one free’ bonus, but with the ability for first time buyers to use savings to get a foothold on the property ladder.

    How it works on the way in

    The new LISA will only be available to the under 40s and will include a 25% Government top up at the end of each tax year. It won’t be possible to pay as much into the LISA as you can into your pension. Contributions will be limited to £4,000 each year which will be topped up to £5,000. And savers will stop receiving their top up once they reach age 50.

    LISA contributions will count towards the total ISA savings limit which will increase to £20,000 in 2017/18.

    How it works on the way out

    Funds can be accessed tax free after the age of 60. But to help first time buyers, funds may be withdrawn tax free to cover the cost of a deposit on their first home. And anyone already saving in a help to buy ISA will be able to transfer their existing savings to the new LISA.

    Accessing savings before age 60 for other reasons will be allowed but the Government Bonus, and the growth on it, will be lost. There will also be a 5% tax charge applied on the amount withdrawn.

    As with other ISA schemes, the LISA will form part of the estate for IHT.

    Good news for investors as Capital Gains Tax (CGT) falls in 2016/17 – but not for landlords…

    Investors who own mutual funds or shares can benefit from a CGT cut from 6 April 2016. The new rates are:

    • 10% where an individual is not a higher rate tax payer
    • 20% where the investor is a higher rate taxpayer, or the gain takes them into the higher rate band.

    Trustees and legal personal representatives also win, as their tax rate on trust and estate gains falls to 20%.

    However, landlords or second property owners will continue to pay 18% or 28% on any gains when they come to sell.

    Income tax

    In April 2017, the Personal Allowance will rise from £11,000 to £11,500 and the higher rate threshold will increase from £43,000 to £45,000.

    These two changes will see the take home pay of higher rate taxpayers increase by £500 each year, while for basic rate taxpayers the increase will be £100 each year.

    Together with the new dividend and savings allowances available from April 2016, advice will be key to ensuring that clients have their savings in the right place to produce a tax efficient income when they need it.

    Class 2 National Insurance

    From April 2018, self-employed individuals will no longer have to pay Class 2 NICs, currently £2.80 per week.

    They will still have to pay Class 4 NICs, which will be reformed to allow them to build up an entitlement to State Pension and other contributory benefits.

    Corporation Tax

    As an encouragement to UK business, the Corporation Tax rate will be further cut to 17% from 2020. The current rate is 20%.

    Here’s a reminder of what we already know is coming in 2016/17:

    • Lifetime Allowance (LTA) cut to £1M
      The pension lifetime allowance is to be cut from £1.25M to £1M with new protection options for those expecting to be caught.

     

    • Annual Allowance (AA) cut for higher earners
      The standard £40k AA will be reduced by £1 for every £2 of ‘income’ you may have over £150k in a tax year, until their allowance drops to £10k.

     

    • £5k Dividend Allowance
      A new allowance will see the first £5k of dividends paid tax free. The changes also affect new rates of tax for dividends in excess of the allowance and an end to the notional 10% tax credit.

     

    • Personal Savings Allowance
      Also from April 2016 the first £1k of interest will be tax free (£500 for higher rate taxpayers). Interest will also be paid gross so that non-taxpayers no longer have to reclaim tax deducted at source. Additional rate tax payers will not benefit from this new allowance.

     

  2. Groundhog Day

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    Dealing with a cut to the Lifetime Allowance (LTA) may seem a little like ‘Groundhog Day’ – we’ve been here before in 2014 and 2012. But each subsequent cut brings the impact more and more into the mainstream – affecting an increasing number of our clients.

    Aside from the fundamental ‘protect or not’ question, the need to review pension saving after April raises a number of other advice issues which may need urgent attention before April:

    • Should you pay a final pension top-up before opting for Fixed Protection?

     

    • Should you increase contributions to maximise the level of protection available?

     

    • Without protection could you secure a higher tax free cash entitlement by crystallising and taking your ‘tax free cash’ before April?

     

    Who should be concerned?

    A £1M limit begins to bring LTA concerns into the mainstream. An accrued £50,000 p.a. Defined Benefit (DB – otherwise known as ‘Final Salary’) pension entitlement will now hit the threshold. This pension would have been £90,000 p.a. when the LTA was at its peak of £1.8M – so it represents a considerable drop.

    Even allowing for the fact that from April 2018 the LTA will increase in line with CPI, a fund of £780,000 today will breach the LTA in 10 years’ time if it achieves a real rate of return of 2.5%. And that’s without making any further contributions.

    There’s much to consider and action may be needed before the tax year end.

    Locking into a higher Lifetime Allowance

    Shaving £250,000 off the LTA could see a tax charge of up to £137,500 for people with pension funding in excess of the reduced limit if you don’t put protection in place (£250,000 taxed @ 55%). It could also reduce the maximum ‘tax free cash’ amount that can be taken from £312,500 to £250,000. If you are entitled to TFC greater than this amount and you don’t wish to apply for protection you may want to crystallise benefits before April.

    Two new forms of protection will be available for those caught. These mirror the protection options from 2014.

    Fixed protection 2016 allows you to keep a £1.25M LTA beyond 2016. But, as before, there’s a trade-off:

    • Defined Contribution scheme (DC – otherwise known as ‘Money Purchase’) contributions have to stop after 5 April 2016

     

    • Increases in DB rights can’t exceed the ‘relevant percentage’ (normally CPI for the previous September) in any tax year from 2016/17 onwards

     

    So this only leaves a short window to maximise your tax efficient contributions and build a bigger retirement pot to protect. Don’t forget that carry forward of unused annual allowance could be used as a final funding boost. And with the amendments to the annual allowance and alignment of pension input periods in 2015/16, there could be scope for additional funding this year.

    Individual protection 2016 is only available to you if you have pension savings worth more than £1M on 5 April 2016. This gives you a personal LTA equal to your benefit value on 5 April 2016 (up to a maximum of £1.25M). Importantly, Individual Protection 2016 allows funding to continue. There’s no downside to individual protection, so anyone eligible should do it. You’ll secure an increased LTA with no trade-off. It can be used alongside any of the fixed protections to provide a safety net to fall back on if fixed protection is lost.

    Anyone close to the LTA may want to consider some additional funding before the end of the tax year to push the fund value over the £1M limit to secure individual protection.

    However, the deadlines for registering for protection will change. Individuals will no longer need to apply for fixed or individual protection before next April. New deadlines are currently under consideration and due to be announced later in the year.

    What now?

    Protection won’t be right for everyone – especially if it means missing out on valuable employer pension funding. Some will be in a better position by continuing to fund and paying the tax charge.

    Looks like we will need to wait a little longer to find out the details about pension protection against the Lifetime Allowance.

    On the 28th September, HMRC issued Pensions Schemes Newsletter 72. Of interest to firms will be the update given on the new forms of transitional protection for the reducing lifetime allowance in April 2016.

    Lifetime allowance reduction and transitional protection – delay for forms “From 6 April 2016, the lifetime allowance (LTA) for tax relieved pension savings will reduce from £1.25 million to £1 million. In Pension Schemes Newsletter 71 we said we would aim to provide further information about the transitional protection on offer. Unfortunately, we are not able to provide as much detail as we would have liked. Legislation for both the reduction in the LTA and the protection regimes (fixed protection 2016 (FP2016) and individual protection 2016 (IP2016)) will be delivered in Finance Bill 2016. As a result it will not be possible for scheme members to apply for protection until after April 2016. This means that individuals cannot notify us of their intention to rely on FP2016 in advance. Individuals who want to rely on FP2016 need to start thinking about what arrangements they need to make to stop accruing benefits after 5 April 2016. The application process for FP2016 and IP12016 will be online and will require the member (or their authorised representative) to provide similar information and declarations as for FP2014 and IP2014. The online system will provide a response to the notification along with a protection reference number. The member will need to provide this protection reference number to their pension scheme in order to take their benefits using a protected LTA. For these protection regimes, no certificate will be issued”. View the newsletter in full here:

    https://www.gov.uk/government/publications/pensionschemes-newsletter-72-september-2015