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

Flat-rate pensions: clearing up the confusion

It appears to be a straightforward concept, but the new state pension regime does, in fact, throw up a few complications writes David Wilson of Barnett & Turner. From 6^th April 2016, anyone who reaches state pension age is entitled to the new flat-rate payment. While the concept implies that all pensioners will receive the same amount of money under the scheme, things aren’t quite that simple.  The sum paid out will depend on how many NI qualifying years you’ve accrued, as well as the number of years of entitlement to the additional state pension you’ve built up.

There’s something else to take into account too. You may have ‘contracted out’ from full entitlements for a period, if you were in a salary-related workplace pension or NI rebates went into a personal pension plan.

Here are some answers to frequently asked questions:

Who qualifies for the flat-rate pension?

If you don’t have a contribution record under the current system, you will have to gain 35 years of NI credits to qualify for the flat-rate payment. If you’ve already built up contributions, however, these will of course be taken into account.

What is meant by the ‘starting amount’?

The government has established transitional provisions which mean that your NI record prior to 6^th April 2016 will be used to calculate your ‘starting amount’ for the new system. This will be either the amount you would get under the current state pension rules (including basic and additional state pension) or, if it is higher, the amount you would get if the new state pension had been in place when you started working.

Is it possible to get a forecast?

Yes. In some cases, this can be done online, although you may have to make the request by post. Visit  www.gov.uk/state-pension-statement to find out more.

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

Pensions come into their own

If you’re a business owner who’s ignored pension provision until now, the new regime should make you sit up and take notice, argues David Wilson of accountancy firm Barnett & Turner. In the past, it’s been hard to persuade some small business owners to take pensions and related guidance particularly seriously. Many may have had other investments and will have been relying on them to produce a suitable income in retirement. The restrictions in the pension rules and what you were able to draw down was certainly a psychological obstacle for a number of people.

Since the change in the regulations earlier in 2015, clients have definitely been taking more notice and have been actively reviewing their options. Some have decided to increase their company pension contributions, restrict their personal income and take tax-free cash straight away. As it’s possible to go back three years in your calculations, contributions per individual can be maximised.

When you put in additional pension contributions and draw tax-free cash, it may be possible to preserve your personal allowance for the current year. What’s more, by reducing your income, you may find yourself going down the marginal tax bands.

The company gets relief on the contributions and individuals are entitled to draw up to 25% of the fund as a tax-free lump sum. (If you draw any income, you restrict the amount you can pay into pensions in the future.)

Another point worth making is that the pension fund can be quite a useful and low-cost life assurance vehicle. That’s because if you die under the age of 75, the proposals are that the full fund will go tax free to any nominated beneficiary.

In some instances, it may be possible for a pension scheme to purchase a commercial property from the individuals that currently own it, effectively releasing equity into their own names. As well as helping with cash planning, this strategy can also reduce exposure to inheritance tax.

So now, with the new regime in place, there are plenty of interesting talking points. Overall, we try to help clients, hand in hand with their financial advisers to achieve a balanced portfolio with a spread of risks. Pensions are a more important part of the equation than ever because of the increased freedoms.

With changes to dividend rules coming into effect in April 2016, I suspect accountants and financial advisers will be having even more conversations with clients who are looking at this issue in a new light.

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

You can, when you plan...

Time is ticking away if you want to do some serious tax planning in this financial year, writes Jono Wilson of Mansfield-based firm Barnett & Turner. With a general election on the horizon, taxation – and each party’s various policies regarding wealth – will be high on the agenda in the coming weeks and months. You may therefore be forgiven for thinking that the money that remains in your pocket is entirely decided by those in power. In reality, you might be more in control than you imagine.

Although this week’s budget gives us a little warning of what the future may hold, planning can only be based on the here and now, starting with the approach of the end of the tax year.

It’s hard to believe, so soon after the 31st January self-assessment bombardment, that there are only a few weeks remaining of the 2015 tax year to plan and adapt.

Tax planning itself will vary in complexity between individuals, but there are a number of things that we all should look at before 5th April 2015 in order to ensure we don’t miss out:

Individual Savings Accounts (ISAs)

Have you taken advantage of your full annual entitlement to these tax-free accounts? The regulations for 2014/15 were relaxed last summer, meaning that you have an annual allowance of £15,000 which can be invested however you choose. The ability to select between cash and/or stocks and shares gives you much greater flexibility than ever before.

Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS)

Investments in these schemes may bring an increased risk, but the tax breaks are attractive. Is now the time to consider whether the relief offered is worth the additional risk?

Pension Contributions

Have you used your full annual allowance of £40,000? Is there any unused allowance from the previous three tax years that you could take advantage of too? Remember, relief from 2011/12 tax year must be used by 5th April 2015.

Personal Allowance

With a tax free earnings allowance of £10,000 per person, it may well be that planning between spouses is necessary in order to obtain maximum advantage. At the other end of the scale, the personal allowance decreases by £1 for every £2 that your adjusted net income exceeds £100,000, giving nil allowances to an individual earning £120,000 or above. Could your adjusted net income perhaps be reduced via pension contributions and gift aid?

Capital Gains

Remember to make use of your Annual Exemption of £11,000 before the end of the tax year. This exemption is per individual, so think carefully about the ownership of any assets that you intend to sell.

Capital Allowances

Consider the timing of asset purchases. Would it be beneficial to buy earlier, in order to take advantage of the allowances at the earliest possible point in time?

It’s easy to see that it’s a really great time to take careful stock of your finances, but the suggestions above are only a starting point. Are you doing everything that you can to help yourself? Why not sit down with your accountant and draw up a plan for maximum tax efficiency?

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

The automatic solution: talking to your accountant about pensions

Back at the beginning of the 20^th century, when the first old-age pension was introduced in the UK, there were 10 people of working age for every person drawing their retirement income. Today, that ratio is 3:1 and it’s set to drop still further to 2:1 by 2050. Given that our pensions are covered by the current working population, it’s hardly surprising that government has – for many years – been worrying about the long-term sustainability of state provision and urging us all to supplement our pension with private plans.

In 2012, we moved from gentle cajoling to a more formal system, with the implementation of the terms of the Pension Act 2008. Auto-enrolment requires every organisation to set up and contribute to a pension for their employees and has been trailed heavily through TV commercials. The three millionth worker was signed up in March 2014 at West Ham United football club.

The system is being phased in up until 2018, giving smaller employers greater time to adapt. But the message from accountants is that even micro businesses now need to focus on the challenges that the legislation poses.

Owners and managers can’t afford to stick their heads in the sand and pretend that the transition to auto-enrolment will be plain sailing. It’s certainly considerably more complex than, say, HMRC’s Real Time Information scheme for reporting PAYE. The recommendation from experts is usually to allow a year of planning before your own ‘go-live’ date, known as the staging date. Registrations are expected to peak in the fourth quarter of tax year 2016/7, but you can check your own particular staging date very quickly by visiting The Pension Regulator’s website at www.thepensionsregulator.gov.uk

What are the complications for employers? Well, first of all, you’ll need to assess your employees to see who counts as an ‘eligible worker’ under the terms of the legislation. (This will probably be an ongoing process, as members of staff leave and others join.)

The next thing is to identify a qualifying pension scheme. The People’s Pension is one of the key players in the market, along with Danish firm NOW: Pensions. Some group deals might be available through other parties too. But the government – recognising that many providers may not be interested in a scheme with fixed criteria including a charge cap of 0.75% – has also created the National Employment Savings Trust (NEST) as a backstop. Even if you choose this option though, the onus is on you, as an employer, to sign up.

After that, there’s a process of communicating with your workforce, enrolling those who should be part of the scheme and registering with The Pensions Regulator. Naturally, there are records to keep as you manage auto enrolment and you’ll need to ensure that your contributions are made in a timely fashion. Penalties for non-compliance with the regulations range from £50 a day to £10,000, so there’s a strong incentive for businesses of all sizes to ensure they’re on board.

There’s a hidden twist to the new arrangements too. Some people may be eligible to be part of the new pension, but elect to opt out.

Software solutions may well play an important part in helping you to manage the auto-enrolment process, but they’re not the complete solution. It’s important you fully understand the implications, both in terms of the administration and also the employer contribution that you will be required to make. So talk to your professional accountancy advisers about exactly how the new system impacts on your business and the level of support they’re able to offer you. An early discussion may pay real dividends in the long term.

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