If you are not already aware Budget Day this year is Wednesday 16 March 2016.
We will be emailing you before mid-day on Thursday 17 March 2016 with an update of the most significant changes in terms of your finances.
HIGHER RATE TAX RELIEF ON PENSION CONTRIBUTIONS
With more and more people paying higher rate tax at 40% (reported to be nearing one in three) the result is that there are more and more people able to claim higher rate tax relief on pension contributions.
There has been considerable speculation that higher rate tax relief on pension contributions will be abolished on 16 March 2016 and be replaced by a flat rate of between 25% to 33%. This means that a basic rate taxpayer will get more tax relief but higher rate taxpayers will get less.
Currently a pension contribution of £10,000 will cost a higher rate taxpayer only £6,000 whilst a basic rate taxpayer will have to pay £8,000 to achieve the same investment. Clearly there is an advantage and if you are a higher rate taxpayer and you are considering making a pension contribution we would urge you to act now.
If you are fortunate enough to be a higher rate taxpayer this could be your last chance to get higher rate tax relief on a pension contribution.
As a consequence if higher rate tax relief is removed then almost certainly salary sacrifice (also known as salary exchange) will also be abolished. This is a method used by many of our clients where instant tax relief is given at source by reducing salary and the employer making a corresponding pension contribution instead, with some sort of uplift to allow for National Insurance savings made.
We will obviously keep you informed and watch this space!
PENSION LIFETIME ALLOWANCE
This is the value of pension funds you are allowed to accrue before incurring excess tax liabilities and is currently £1.25m.
With effect from 6 April 2016 this is reducing once again to £1m and we are finding that a number of our clients (not all footballers or rock stars!) are nearing this limit and are in danger of breaching it.
There are ways you can protect yourself against this decrease but all require advice on what to do, time frames and consequences.
This is a very complex area and if you want to discuss your own circumstances please contact your usual adviser.
PENSION DEATH BENEFITS AND YOUR NOMINATION
Since 6 April 2015 we have been extolling the virtues of the new pension freedoms, particularly regarding the flexibility both in how you draw your fund and also how your spouse/partner and/or family can use the fund in the event of death.
Currently, on death, any remaining pension funds can be paid as a lump sum to anyone you wish.
Rather than being paid as a lump sum, the remaining value can be used to purchase an annuity that provides a guaranteed income for your spouse, civil partner or other financial dependant. In most cases this annuity option is not particularly attractive.
Alternatively, your remaining pension savings can be paid into a flexi-access drawdown plan for any beneficiary that you nominate. This beneficiary does not have to be dependent on you and could be an adult child or even grandchild but importantly must be nominated during your lifetime.
We would urge you to consider your death benefit nominations now and maybe consider nominating 1% of your pension fund to any children now (payable on death obviously!). This means that if you died and your spouse had predeceased you, or for whatever reason they did not want to inherit your pension fund, your remaining fund could be passed to any adult children and remain invested for them in a flexi-access drawdown plan and used upon their eventual retirement. This may have very advantageous tax consequences by allowing those children to choose when to pay tax or avoid it completely.
So in a very simple scenario if you are married (or in a civil partnership) with two children you could consider rewriting your nomination so that on death your spouse receives 98% of your fund and each child receives 1% of your fund. By doing so this means that all of the death benefit options remain available to all of your intended beneficiaries.
We do not believe that these arrangements will change as a result of the budget and this is something we will be discussing with all clients at ongoing review meetings.
As usual we would stress that you should speak to your usual adviser and we will be happy to supply fresh nomination forms. Just contact us in the usual manner!
This publication is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from any action on the basis of the contents of this publication.
Harrold Financial Planning Limited is Authorised and Regulated by the Financial Conduct Authority
Registered in England and Wales Number: 06447402
