Have you DONE enough to get a full state pension?

Tracy Henson of accountancy firm Barnett & Turner does the sums. We all joke that by the time we reach retirement age, the state pension won’t be worth having. But let’s not give up on it just yet.  I’m still looking forward to getting my own pension and I know what I should get, but do you?  And do you know how to make your position better if you find that you haven’t already done enough to qualify for the full amount?

Whether, and to what extent, you qualify for a state pension is determined by reference to your work history or, more accurately, your National Insurance record.

It’s relatively easy for me, as an employee with a regular income, to say that my National Insurance record is building up nicely, but for the self-employed and especially those in the struggling agricultural sector, it’s not so clear-cut. National Insurance reliefs claimed in the past could have a nasty sting in the tail when it comes to accruing qualifying years.

To get any state pension, you need to accrue a minimum of 10 qualifying years.  Reach this and you'll be paid 10/35ths of the full £155-pw state pension, or about £44.  If you don't manage to meet this minimum, you won't get a penny.  To get the full £155 pension you’ll need to have accrued 35 qualifying years.  Doing the maths, each additional qualifying year increases the pension by £4 per week or £208 per year.

So what is a qualifying year and what’s the issue?

• For the self-employed, a qualifying year is one during which they have continuously paid Class 2 National Insurance.
• Those with low earnings could (and can still) be exempted from paying Class 2 National Insurance, which is not at all uncommon in the agricultural sector, bearing in mind low profitability in recent years. Even in a good year, capital investment may have resulted in much lower taxable profits and therefore low earnings for this purpose.  Claiming exemption because of low earnings may have been sensible at the time but, not having paid the Class 2 will result in gaps in your National Insurance record and, quite possibly, a reduced state pension.

How do you know if you have a problem and, is there a fix?

If you have any concerns regarding your entitlement to a state pension – or a full state pension – we would recommend that you request a state pension statement and/or a National Insurance statement.  These statements will highlight whether there are any gaps in your National Insurance record and to what extent your state pension suffers as a result.

As regards filling any gaps, the solution is simple. At least for me it is!  I won’t reach retirement age until 30 June 2048, so I’ve got another 32 years to work and accrue qualifying years.  If you are closer to retirement age however, you can make voluntary National Insurance contributions.  It can cost as little as £145 to fill a gap year, which seems like a reasonable figure, bearing in mind the annual increase in state pension as a result will be £208.

If you would like to know how to request a state pension statement or a National Insurance statement, just ask your accountant for advice.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Some great ideas to help your grandchildren

There are a number of steps grandparents can take to help their grandchildren financially, argues Jonathan Wilson of Barnett & Turner. In fact, they may be in a stronger position in this respect than the kids’ parents. Everyone wants to do the very best they can for their children. It may be, however, that grandparents are in the strongest position to help when it comes to finances.

Some of the basic options are really simple. Every individual can make a £3,000 gift each year, free from inheritance tax, for instance. This won’t form part of the sums considered for the seven-year exclusion period usually applied to gifts prior to death.

Contributions to Junior ISAs might be something to consider. And pension contributions can be very efficient too. For a £2,880 contribution, the government tops up by 20%, leading to a gross figure of £3,600 – the maximum on which a non-earner can gain relief. And this can be doubled if both grandparents are around.

Understanding Trusts

Discretionary Family Trusts can seem a little more obscure and off-putting, but are well worth discussing with your accountant.

If a parent sets up a trust, it is deemed to be ‘settlor-interested’ and all of the income is treated as belonging to the parents and taxed accordingly. This issue doesn’t arise if we’re talking about grandparents.

Very often, you might choose to help with school fees or create a pot of money that can be used for university. If circumstances allow, each grandparent can transfer in up to £325k in cash or assets not covered by other inheritance tax relief. Anything above this figure is subject to lifetime inheritance tax at 20%.

Company Shares

As discussed above, assets such as cash may be transferred into trust with no immediate tax implications, subject to the £325k per person limit.  If, however, the grandparents hold shares in a trading company, subject to certain conditions such as periods of ownership, the shares are likely to qualify for 100% IHT relief.  Shares of unlimited value may therefore be transferred into Trust with no IHT liability.

Capital Gains Tax may be due on the disposal of shares into the trust, but this can be deferred or “held over” until such time as the shares are sold or passed out to a beneficiary (although again, it may be possible to hold over the liability on such a transfer).

Essentially, the deferral is until such time as there has been a real gain. The tax is levied on the difference in market value at sale and the original base cost of the shares.

If grandparents hold shares in a company, take a dividend and use this to fund, say, school fees, they pay tax at their marginal rate. The net income then goes to the child. If, however, you use a trust instead, you can appoint an interest over the trust assets to the child. Any dividends are treated as the child’s income and when you combine the £5,000 dividend tax-free threshold with the £11,000 personal allowance, the child can benefit from up to £16k tax free.

It is possible to set up trusts for reasons unrelated to tax. Trustees retain control and are responsible for the trust’s day-to-day running. Assets are ring-fenced and they decide who is going to benefit and when. They help their own inheritance tax position without adversely affecting anyone else. What’s more, grandchildren can be protected from the demands of future spouses or creditors.

It’s a complex area, so if you’re interested in finding out more, the first step is to sit down with your accountant and talk through the options. But as a grandparent, you may be in a unique position to help your family.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Changes To Taxation Of Pensions On Death

Hot on the heels of the relaxation of the rules on pension drawdown earlier this year, the Chancellor announced at Party conference that he intends to abolish the 55% tax charged in certain circumstances on the balance of undrawn pension funds at death. This creates further flexibility in pension planning which should now be given greater priority in your financial plan. At present a pension fund can only be passed down tax free on death if the individual has not drawn anything from it, including the tax free sum, and is aged under 75 on death, otherwise there is a 55% tax charge on the fund. This has prompted some individuals to draw down the maximum amount available each year during their lifetime on the basis it only suffers a maximum 45% income tax charge. There are however restrictions on how much can be drawn out of the fund each year during an individual’s lifetime, but these restrictions are set to be removed from April 2015.

Now that the 55% tax charge is due to be abolished from April 2015 it will prompt those drawing a pension to reconsider the amount they draw, safe in the knowledge that what they leave behind will not suffer a tax charge on their death and can be passed down. Under these new rules if the death occurs before the age of 75 then the undrawn fund can be withdrawn in full by the beneficiaries tax free but a death after 75 results in an income tax charge on the beneficiaries as they draw it down.

If the fund is not fully drawn down by the beneficiaries in their lifetime then it can pass down to the next generation on their death, thereby creating a situation where pension planning today can be beneficial for a number of generations. These are clearly quite progressive changes and will offer much more scope on pension planning in the years to come. It will also remove one of the biggest criticisms of pension schemes, the restricted access to the fund which currently exists.

Exciting times ahead!!

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Some big news on ‘small pot’ pensions: up to £1,500 is up for grabs

This year’s budget included a few eye-catching announcements, including the decision to increase the ‘small pot’ pension fund from £2,000 to £10,000. Part of the government’s drive to make pensions more flexible, the new rule also had the effect of creating an interesting opportunity for shrewd investors. Although we’re talking about a loophole that has actually been acknowledged by HMRC, it won’t be formally addressed until April 2015. And that means you have a perfectly legitimate window in which to act, if you’re currently employed and aged between 60 and 75. Let’s take a scenario in which you open a personal cash stakeholder pension and pay £8,000 into it. HMRC will top this up to £10,000, accounting for the automatic base tax relief of 20%. It’s possible – after a cooling-off period – to take the balance as cash under the small-pot rules. Previously, you were allowed to draw it as a lump sum on two occasions, but under the new rules, you’re able to do it three times.

Now for the maths. Because only 75% of the £10,000 is taxable, £2,500 remains tax free. And after you’ve paid £1,500 on the remaining £7,500 (at the 20% basic rate), you’re entitled to the £6,000 that’s left.

Your total pot is therefore worth £8,500, giving you a profit of £500. So if you go through the process on two further occasions, you’ll be £1,500 wealthier before provider charges. (If you pay tax at the highest rate, you would actually have a potential gain of £3,375, although there’s a delay in tax relief as it would be processed via your next return.)

The truth is that this loophole always existed, but with the £2k cap on the small pot, pension investors were unlikely to see any significant benefit. Now the figure is five times as high, people are paying attention for the first time.

One word of caution. If you approach a pensions adviser about this arrangement, it’s likely their fees would eat substantially into any potential profit. A more sensible course of action might therefore beto speak to your accountant. Although we’re not authorised to advise on specific products, we’re always happy to give you general advice and talk you through the tax implications.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

£30k in tax-free income for married pensioners? It’s not a pipedream.

When we think about tax planning, it’s tempting to see it as the preserve of the wealthy. The reality, however, is that the process can be just as important – if not more so, in fact – for people on lower incomes. After all, a relatively small saving in tax can make a big difference to someone on a budget. £1,000 might be a well-deserved holiday, for instance. And there are perfectly legitimate ways of minimising your tax burden if you take some good advice at an early stage. Recent government announcements on the Personal Allowance and Starting Rate Band spell good news for many people, particularly pensioners. In tax year 2014/15, the personal allowance has finally reached the magical £10k threshold and is set to increase in April 2015 by another £500. To put the figures in context, this represents more than a 100% increase over the amount allowed just a decade ago. Of course, the amount we can all save in tax-free ISAs has increased to £15k per annum as well.

The current basic state pension is approximately £5,800 pa, which potentially leaves a married couple with £5,000 each of unused Personal Allowance to set against other income. It’s important to ensure that you divide your income where possible to make the best use of each spouse’s allowance and rate band.

Imagine a scenario, for instance, in which there’s a modest amount of bank interest each year and a gross annuity payment of, say, £400 each month. The two pensions wouldn’t attract tax, as they would broadly fall within the level of the Personal Allowance. The interest is usually paid net of 20% tax and with a 10% Starting Rate Band of £2,880 to set against investment income, tax on £3,000 worth of interest would work out at approx £300 rather than £600.

From April 2015, the news gets even better. At that point, the Starting Rate Band will increase to £5,000 and the tax reduces from 10% to zero. By managing tax affairs sensibly, each partner in the marriage could receive pensions to the value of around £10,500 and another £5,000 in gross bank interest without paying tax.

If you’ve saved throughout your working life and have a modest income now, you might not necessarily see the need to retain an accountant on an ongoing basis. But it’s certainly worth having an initial consultation to look at your particular circumstances and discuss the options. That small investment could produce a considerable return, allowing you to get even more enjoyment out of your retirement years.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk