Made to Measure

Making it Much easier for eMployees to find out what benefits are

available to theM

Phasing out the coMPulsory retireMent age

a ‘one size fits all’ retireMent policy is no

longer acceptable

taxing tiMes

using your pension top-ups to Mitigate the

effects of cgt

a financial balancing act

it is little wonder eMployers want to ensure good levels of take-up

Sharing your

pension

Flexible approach boosts participation

Also in this issue

noveMber / deceMber 2010

Alternatives to annuitieschoosing the best tiMe to purchase an annuity whilst generating an incoMe in the interiM period

IFA(SOUTH)LLP

IFA (South) LLPSuite 33, Basepoint Enterprise Centre, Andersons Road, Southampton. SO14 5FETel: 02380 682586 Email: enquiries@ifasouth.co.uk Web: www.ifasouth.co.uk

IFA (South) LLP is an Appointed Representative of Independent Financial Advisor Limited which is Authorised and Regulated by the Financial Services Authority

02

Since the last edition of the magazine we have now successfully purchased the dedicated pension business of Church House Investments headed up by Peter Burton and Joanne Linley. The team bring with them over 60 years of experience in offering professional pension advice running both SSAS and SIPP’s. In addition to this we have opened a new office in Leeds providing the group with offices in Bolton, Southampton and Leeds along with offering specialist advice to the sporting profession through Pro Sport Wealth Management.

Kilminster (Bolton) have now moved into the Bolton office and both Kevan and Philip bring with them over 20 years of experience providing Independent Financial Advice within the North West region.

Following on from both myself and John gaining the accreditation we have now enrolled all consultants onto the Financial Planner Standards Certification ISO 22222 which demonstrates that a Financial Planner’s advice skills and knowledge have been benchmarked against an International Standard, enhancing client confidence in the Financial Planner’s abilities.

A special congratulation should be mentioned to Danielle Gregory on obtaining her Fellowship which is a fantastic achievement with less than 627 ‘Fellows of the Chartered Insurance Institute’ in the UK.

I hope you enjoy this issue of our magazine and find it informative. If you require any further information on any of the subjects covered or on any other matter, please do not hesitate to contact us.

Phillip Rose APFSChartered Financial PlannerManaging Director

n Arranging a financial wealth check

n Building an investment portfolio

n Generating a bigger retirement income

n Off-shore investments

n Tax-efficient investments

n Family protection in the event of premature death

n Protection against the loss of regular income

n Providing a capital sum if I’m diagnosed with serious illness

n Provision for long-term health care

n School fees/further education funding

n Protecting my estate from inheritance tax

n Capital gains tax planning

n Corporation tax/income tax planning

n Director and employee benefit schemes

n Other (please specify)

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Want to make more of your money?

WELCOME / REtiREMEnt

The Treasury has announced that it is looking to relax the law requiring everyone to buy an annuity by age 75. This follows the coalition government’s decision in the emergency Budget to end compulsory annuitisation by April 2011.

The aim is to revolutionise investor attitudes towards pensions and encourage greater retirement saving so that we take greater responsibility for our financial futures. It will also mean that everyone who invests in a pension can retain control of their pension assets right through until the day they die.

The proposed law change is aimed at giving individuals greater flexibility over how they use the savings they have accumulated. This would see the replacement of some pension tax rules with a new system that gives people greater freedom and choice.

This consultation is a revolutionary change and also includes tax breaks available on pensions. It is expected that investors will have the choice of buying an annuity, as at present, and in addition they will have a choice of two drawdown options to select from.

Investors who can demonstrate that they have secured a minimum level of income will have the choice of taking money from a flexible drawdown plan at will. This means receiving it all back in one go as a cash sum if required. Income withdrawals will be subject to income tax.

For those investors with insufficient income to satisfy the ‘minimum income requirement’, there will be the option of a capped drawdown. This capped drawdown will have fairly conservative income limits, designed to ensure that investors never run out of money.

Those investors who do not want to take the high risk involved with drawdown will still be able to convert their pension fund into an annuity, which will pay a secure taxable income for life.

The death benefit rules are changing and becoming simpler and the government has confirmed that it will be ending the Alternatively Secured Pension. n

The value of investments and the income from them can go down as well as up

and you may not get back your original investment. Past performance is not an

indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual

circumstances. Thresholds, percentage rates and tax legislation may change in subsequent

finance acts.

TO FIND OUT MOre Or TO DISCUSS yOUr reTIreMeNT OPTIONS, PLeASe CONTACT US.

Revolutionising investor attitudes towards pensions

Annuity law relaxed

Welcome

Phasing out the compulsory retirement ageA ‘one size fits all’ retirement policy is no longer acceptable

With an ageing population, increasing weight has been given to the argument that a ‘one size fits all’ retirement policy is no longer acceptable and that people aged 65 or over should not be considered incapable of carrying out their jobs to the standards expected.

In July, the government announced that it would launch a consultation process to look at plans to end the default fixed retirement age for the UK’s workforce. Subject to the consultation paper, from October 2011 employers will not be able to force employees to retire at 65 without offering them financial compensation.

The change in the rules would mean that the employer’s only obligation would be to hold a meeting with each older member of staff to discuss their options at least six months before they reach 65.

As an employer must give six months’ notice before someone is made to retire on age grounds, the change in the rules could become effective from 6 April next year.

removing the default retirement age (DrA) of 65 will mean that employers may have to change how they manage their workforce. employees will not be forced to work beyond 65, but will have the option to do so and could even stay on into their 70s or 80s.

A handful of individual employers will still be able to operate their own compulsory retirement age but only if they can justify it objectively on the basis that older staff are unable to do a job properly. examples could include air traffic controllers and police officers.

employment relations minister, ed Davey, said: ‘With more and more people wanting

to extend their working lives, we should not stop them just because they have reached a particular age.

‘We want to give individuals greater choice and are moving swiftly to end discrimination of this kind.

‘Older workers bring with them a wealth of talent and experience as employees and entrepreneurs. They have a vital contribution to make to our economic recovery and long-term prosperity.

‘We are committed to ensuring employers are given help and support in adapting to the change in regulations’.

employers that wish to retire older members of staff will be able to do so only on the same grounds that would apply for someone much younger – for instance, because of their conduct or performance.

Before 2006, the compulsory retirement age was set at 65, or earlier for some jobs. But the previous government changed the law so that workers could request to stay on. However, companies are not compelled to let them. n

THe PrOPOSeD CHANGeS PrOvIDe yOU WITH AN OPPOrTUNITy TO SAve MOre FOr yOUr reTIreMeNT TO eNSUre THAT IT IS A COMFOrTABLe ONe. TO DISCUSS THe OPTIONS AvAILABLe TO yOU, PLeASe CONTACT US FOr MOre INFOrMATION.

Increasing weight has been given to

the argument that a ‘one size fits all’ retirement policy is no longer acceptable.

03

In thisIssueAnnuity law relaxedrevolutionising investor attitudes towards pensions

Phasing out the compulsory retirement ageA ‘one size fits all’ retirement policy is no longer acceptable

Wealth Protection10 tax saving tips to make more of your money

Made to measure Making it much easier for employees to find out what benefits are available to them

Alternatives to annuitiesA financial balancing act

Flexible approach boosts participationIt is little wonder employers want to ensure good levels of take-up

Taxing timesUsing your pension top-ups to mitigate the effects of CGT

Sharing your pensionA financial balancing act

Tax-privileged saving allowance reducedAn alternative approach to restricting pensions tax relief

Content of the articles featured in this publication is for your general information and use only and is not intended to address your particular requirements. They should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. Thresholds, percentage rates and tax legislation may change in subsequent finance acts. Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested.

WEaLth CREatiOn / inSiDE thiS iSSUE

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1. Tax-sheltered ISA wrappersHold higher yielding investments in tax-sheltered ISA wrappers. On 6 April 2010, the annual Individual Savings Account (ISA) subscription limit rose to £10,200. The whole sum can be placed in a stocks and shares ISA or, alternatively, up to half can be put into a cash ISA and the remainder into a stocks and shares ISA. So for a couple, this represents £20,400 savings protected from capital gains or income tax. Make sure you use your entire allowance, as it can’t be carried over into the next tax year.

2. Claim tax relief on your pensionUtilise remaining pension contribution allowances in 2010/11 where higher-rate income tax relief is available. Currently, if you pay higher-rate tax but earn less than £130,000, HM revenue & Customs (HMrC) will give you £40 tax relief on every £100 saved. People with earnings can invest up to 100 per cent in their pension each year up to a current annual limit of £255,000. The lifetime investment allowance is £1,800,000.

3. Make a will to minimise an inheritance tax billIf you pass away without making a will, HMrC rules dictate how your estate is divided up. yet if you do make a will, not only can you have a say over who gets what, but you can also minimise the inheritance tax (IHT) payable. Any amount you leave above £325,000 (2010/11) will be taxed at 40 per cent. However, some gifts, such as money left to charities or paid into trust funds for children and grandchildren, are not taxable. A little planning goes long way in reducing this tax liability.

4. Capital gains taxUtilise capital gains tax allowances, worth £10,100 (2010/11) per person, and consider transferring assets to spouse/civil partner as necessary.

5. Shelter income-producing assetsTransfer non-tax sheltered income-producing assets to lower-rate taxed spouses/civil partners. By transferring assets from one spouse to another, couples could pay less

tax. Many partners hold joint savings. But if your income differs, it may be more sensible from a tax perspective to move assets into the sole name of the individual on the lower tax band.

6. Enterprise investment schemesIf you subscribe for new shares in an enterprise investment scheme, you receive 20 per cent income tax relief on the amount subscribed up to a limit of £500,000 (2010/11) a year, as long as you hold onto the shares for three years and have paid enough income tax.

7. Don’t lose out on interestSavings interest usually has 20 per cent tax deducted before the saver receives it. But anyone over 16 whose income is less than their tax allowance does not have to pay income tax on their savings. If you have children who are not working and have a savings account, then they should complete HMrC form r85 to ensure that they are paid gross interest, that is, without tax being deducted.

8. Check your tax codeyour personal tax code is critical to working out how much tax you should pay. yet HMrC’s shift to a new computer system earlier this year saw thousands of erroneous codes sent out. Now more than ever, it’s vital to check your payslip to make sure your salary is stated correctly and that you are being taxed at the appropriate rate.

9. Tick for Gift AidWhether you are sponsoring somebody raising money for charity or donating through the payroll, make sure the Gift Aid box is selected so that the cause gets the full, tax-free amount. Charities take your donation - which is money you’ve already paid tax on - and reclaim the basic rate tax from HMrC on its ‘gross’ equivalent - the amount before basic rate tax was deducted.

10. Trading lossesFreelancers and other self-employed individuals who make a loss can set the loss against income in the year of the loss or carry it back to the previous year. In addition, losses that arise in the first four years of the business can be carried back up to three years. Claims to carry back losses in 2008/09 must be made by 31 January 2011. n

The value of investments and the income from them can go down as well as up and you

may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend

on individual circumstances. Thresholds, percentage rates and tax legislation may change

in subsequent finance acts.

THe UK TAx SySTeM IS COMPLICATeD eNOUGH AND FUrTHer CHANGeS Are INevITABLe UNDer THe NeW GOverNMeNT. TO DISCUSS HOW We CAN HeLP yOU NAvIGATe THrOUGH THe TAx rULeS, PLeASe CONTACT US FOr FUrTHer INFOrMATION.

04 tax pLanning

10 tax saving tips to make more of your money

Wealth protection

Flexible benefits schemes are much more varied than they used to be and employers must choose a structure that suits their needs.

Setting up a flexible benefits scheme used to be a simple matter for employers: select a provider, choose a few perks to include and allocate a pot of money for staff to spend. But now employers are confronted with a seemingly endless range of scheme structures to choose from.

It has been a dynamic decade for flexible benefits. Initially, flex in the UK was the preserve of large organisations that could afford the consulting and the technology. As both of these have become more affordable, flex is a real option for a much wider range of organisations. This has driven different structures to accommodate different businesses. Innovation in the benefits that can sit in the flex plans has also played a part.

The most popular way to structure a flex plan is allowing staff to trade benefits up or down. Under this model, employers give workers a set of benefits, which staff can either exchange for others or flex the level of cover they receive to create a package that suits their individual preferences. For example, one worker could reduce a car allowance to boost pension contributions, while another swaps a few days’ holiday to increase private medical insurance (PMI) coverage.

Simple to understand

According to employee Benefits research 2010, 31 per cent of employers use this structure, up from 25 per cent last year. Trade-up, trade-down has the advantage that it is simple to understand from an employee’s perspective. The snag is that employees could ditch PMI for retail vouchers. Many organisations design wellbeing schemes to maintain workers’ health and manage sickness absence, so if staff ditch these perks, their health and their employer’s bottom line may suffer. Also, an exodus of healthy staff from PMI could leave only

high-risk staff, so pushing up premiums. To get round this, most schemes that operate a trading structure include a core of compulsory benefits.

With some companies, staff receive a pension, life and health cover, but have the option to reduce cover to a minimum and use the money to buy extra perks. Another option is to structure flex around tax-efficient benefits offered via salary sacrifice arrangements, whereby employees give up some of their pre-tax earnings in exchange for tax efficient benefits, such as pension contributions and childcare vouchers. By paying for such benefits out of pre-tax salary, staff save on tax and national insurance (NI) while the employer cuts NI contributions. This means employers can use the savings to offer flex on a cost-neutral basis.

At least that is the theory. In practice, it can be trickier. Given the economic situation, salary sacrifice is attractive to employers, particularly when looking at the savings available on pension contributions. However, care is needed. It is not right for everyone. Staff on lower pay and women on maternity leave would lose out. There can be a risk to the business if salary sacrifice is not implemented correctly, compliant with HM revenue and Customs’ rules.

Pot of cash

A slightly different approach is to offer a flex fund. Here, employers give staff a pot of cash to spend on a menu of perks. In effect, workers get a salary rise, which in these hard times, can be attractive to staff. Usually, there are core benefits that staff must take up. Flex pots can mean much higher engagement and take-up rates if staff are given additional money to spend. Obviously, this means a cost to the organisation. The flex pot could potentially be provided in lieu of a salary increase.

Providing a flex fund can keep costs down. It depends on the starting position

and current benefits agenda, but a flex pot can help boost control because it may help cap any employer funding into sponsored benefits, such as PMI. Some employers have introduced a facility for employees to top up their flex allowance via salary sacrifice. This model has been adopted by relatively few companies. It is attractive to organisations that wish to have high salary headlines, often as a means of attracting recruits.

Salary sacrifice schemes are common where employers want employees to have access to tax and NI-efficient benefits, but are not ready to move to a true flexible benefits model. These are especially appealing for smaller employers that would not be able to offer full flex on risk benefits because they are too small. The employer would need to communicate effectively and ensure no national minimum wage issues occur and also watch out for the issues around maternity leave.

So how can employers decide which structure suits them? There is no absolute best structure with the needs of the employee base and what, as an employer, they are looking to achieve. They should start the exercise with a robust view of staff needs, what the payback to the business should be and how they are going to measure the success of flex. The most effective way to identify which structure is best is to conduct a feasibility study to assess which option fits the business strategy best. employers can also review what their competitors are doing and benchmark against similar organisations.

ANy CHOICe OF SCHeMe STrUCTUre SHOULD Be INFOrMeD AS MUCH By WHAT eMPLOyeeS WANT AS ANy BUSINeSS AIMS. TO FIND OUT MOre Or TO DISCUSS yOUr OPTIONS, PLeASe CONTACT US.

05EMpLOyEE bEnEfitS

Making it much easier for employees to find out what benefits are available to them

Made to measure

06 REtiREMEnt

In an attempt to address the inflexibility surrounding the timing of annuity purchase, the government introduced Pension Fund Withdrawal, more commonly known as Income Drawdown, from May 1995, initially under Personal Pension Policies. The idea was therefore that individuals would have the ability to choose the best time to purchase an annuity whilst generating an income in the interim period. If all else failed, the annuity route was imposed at age seventy-five.

The concept of Income Drawdown as an alternative to annuity purchase is straightforward. After taking the Tax-Free Lump Sum Payment, leave your pension fund invested and draw an income from it whilst deferring the purchase of an annuity. However, as always, the devil is in the detail as Income Drawdown is a financial balancing act. The rules have undergone many evolutions since their original introduction and the following alternative routes for Income Drawdown are currently available.

As an alternative to immediate annuity

purchase, Income Drawdown in the form of Unsecured Pension is available from age fifty-five and allows withdrawal of a regular income calculated on a prescriptive basis laid down by legislation. The ´Basis Amount´ is broadly in line with a ´Flat rate´ annuity that could be secured on the open market. Income withdrawals are currently permitted at any level up to 120 per cent of the Basis Amount that must be formally reviewed every five years. At the time of writing, after taking his Tax-Free Lump Sum Payment, a sixty-year old male could have elected to receive a maximum annual income of up to £35,400 from an initial income drawdown fund of £500,000. This compares with a non-increasing annuity of around £28,900 per annum.

A major attraction of the Unsecured Pension route is that, as an alternative to the payment of a Dependant´s Pension, 65 per cent of the residual pension fund can currently be paid to Beneficiaries in the event of death before age seventy-seven. The position represents a marked capital

improvement over the annuity route, even though the 35 per cent balance is paid to the Government as a tax charge.

Those individuals who attained age seventy-five before 22 June 2010 and who held a strong principle to resist the New Labour government’s underlying wish for annuity purchase for all will have found the option of Alternatively Secured Pension imposed on them.

Despite its name, this variation of Income Drawdown does not ‘secure’ the initial level of pension in payment. What it does do however is ensure that an individual cannot outlive their pension pot, even though the income may reduce year on year, by allowing withdrawal of a regular income currently calculated on a different prescriptive basis laid down by legislation. Irrespective of the individual’s actual age, the ´Basis Amount´ under this option is broadly in line with a ´Flat rate´ annuity that could be secured on the open market for someone of your gender aged seventy-five. The ability to benefit from ongoing annuity

Choosing the best time to purchase an annuity whilst generating an income in the interim period

Alternatives to annuities

07WEaLth CREatiOn

rates, which can usually be expected to improve with increasing age, is lost. Income withdrawals are currently restricted to between a minimum of 55 per cent and a maximum of 90 per cent of the Basis Amount. The income level must be formally reviewed annually. At the time of writing, a seventy-five year old male could elect to receive an annual income of between £26,125 and £42,750 from an income drawdown fund of £500,000.

When someone in receipt of Alternatively Secure Pension dies, the residual fund must be used to provide a pension to a surviving spouse/civil partner or other financial dependent. If there is no survivor to whom such a pension can be paid, the only options within Alternatively Secured Pension are for the residual to be payable (tax-free) to a registered charity or be passed to HM revenue & Customs.

Following the Coalition government’s announcement in the emergency Budget to end compulsory annuitisation by April 2011, the basis on which Income Drawdown will be available in the future is under review. The potential changes are highlighted briefly in another article in this magazine under the heading ‘Annuity law relaxed’.

Irrespective of the changes ultimately introduced, the following points should be considered before entering into any form of Income Drawdown.

Annuity rates increase with age but are dependent on gilt yields that are sensitive to prevailing interest rates, inflation and political uncertainty. There can be no

guarantee that annuity rates will improve in the future.

Investment choice will be critical to the success or otherwise of any form of Income Drawdown and there are conflicting requirements between the need for growth and security. Balancing these requirements is not easy but is essential to the success of the plan.

you are on your own in Income Drawdown. The mortality cross-subsidy available under an annuity does not exist and investment performance must therefore be higher merely to achieve an equivalent income.

If this enhanced investment return (sometimes called the ‘Critical yield’) is not achieved, the pension pot will be depleted to the point where it can no longer support the required level of income.

Great care should be taken if the pension pot provides the only source of income. In these cases, the worst case scenario is having to take out money on a regular basis when the value of the investments is falling.

even for large funds, Income Drawdown should not be considered as a way of increasing pension.

Income cannot be guaranteed under Income Drawdown and the true value of the facility lies in the flexibility offered.

The development of a suitable investment strategy for Income Drawdown therefore needs careful consideration and advice. As a general observation, it is possible to minimise risk within any portfolio although this will certainly restrict future investment returns and any potential to beat the Critical

yield. Historically, equities have provided higher returns than Gilts over the medium to longer term. However, equities are inherently more volatile in the short term. It is therefore important to seek a balance between potential for growth and the risk of short-term poor performance.

Ongoing reviews are essential in relation to investment strategy, income needs, potential annuity purchase and overall suitability and should be undertaken annually, rather than waiting for the ‘compulsory’ reviews. Part of this review process should involve ‘managing expectations’. It cannot be repeated too often that it is not possible to provide an income one fifth higher than an annuity with no erosion of capital and with potential for capital growth without an unacceptable level of investment risk!

TO FIND OUT MOre Or TO DISCUSS yOUr reTIreMeNT OPTIONS, PLeASe CONTACT US.

The concept of Income Drawdown

as an alternative to annuity purchase is straightforward. After taking the Tax-Free Lump Sum Payment, leave your pension fund invested and draw an income from it whilst deferring the purchase of an annuity.

08 EMpLOyEE bEnEfitS

Take-up of a wide range of benefits can be boosted by incorporating them into a flex scheme, which raises their profile with employees.

Given the cost and effort involved in implementing benefits for staff, it is little wonder employers want to ensure good levels of take-up. Many in the industry say incorporating previously standalone benefits into a flex scheme can help to increase staff response. Pretty much in every employer, you will see a natural increase in take-up. They will see an additional take-up on top of that if they then focus and do specific messaging around particular initiatives. So, for employers looking to increase take-up across the board, or of particular benefits to meet corporate objectives, flexing these benefits might seem a good idea – but they should consider whether this is the right solution for their organisation.

Simply having all their benefits in one place is a good starting point. This makes it much easier for employees to find out what benefits are available to them – an important prerequisite for improving take-up. When benefits are offered on a standalone basis outside a flex scheme, it can be easy for employees to miss out because, for example, they happen to join the organisation just after a particular communications exercise has gone out. With flex, even if employees miss out the first time round, they know they will have another opportunity to take up a benefit the following year.

Flex can be habit-forming. every year employees know there is going to be a flex renewal window, so it becomes the norm for them to think about benefits at a particular time of year. Options such as pension contributions offered via salary sacrifice

benefit a lot from this. It is easier for people because it is on an ongoing annual cycle and because they have to enrol each year, people are much more aware of their match.

Annual renewalOf course, employers can do a lot more with flex communication than simply highlighting the options at annual renewal time. Flex is structured in a way that enables employers to segment messages to specific groups or offer particular benefits in a way that supports wider messages or corporate initiatives for specific things, such as health and wellbeing.

Although any communication should help take-up, employers should take time to ensure it is effective. A flex plan that says ‘you can take or leave all of this’ is likely to lead the employee to think their employer is not giving them anything, whereas if it is structured as a total reward package that says ‘look, your salary might be £40,000, but with bonuses and other benefits it is really £60,000, and now you have got some discretion over how you use that’, then employers are likely to get a better reaction.

However, offering too much choice through flex can be detrimental to take-up. Although moving benefits into a flex scheme will, in most cases, result in increased staff participation. It is human nature, if you give people too much choice, they make no choice. When employers first move to a flex programme, they should make it useful to the individual, but not overextend themselves. We believe they are better to go from no choice to some choice and each year, on a planned basis, widen it out. employers need to be patient and expect incremental increases in take-up over a

number of years, rather than a sudden surge in one day.

In a flex plan, the number of people making choices away from the default position – which effectively would have got them back to where they started from – is relatively small at first, then each year, as it progresses, employers will see more people make more decisions away from the default. The default position within flex is, of course, another important tool in maintaining and, ultimately, boosting, take-up and a way of encouraging staff to make better decisions. For example, if an employer has the strategic aim of improving employees’ health, this might mean ensuring that staff are always covered by private medical insurance, at least to a core level. employers can then offer flexibility by allowing employees to opt for higher levels of cover from themselves, for example, or by extending coverage to other family members.

No cash valueAnother approach is to give the appearance of flexibility on healthcare benefits but to discourage flexibility downwards by giving no cash value to employees who opt out.

Many flex schemes are designed so that once an enhanced level of medical benefit is chosen; this becomes the new default option. This has the effect of gradually ratcheting up the level of cover provided to the individual over time. For employers hoping to improve the health of their workforce by boosting take-up of benefits such as health screening, there is also the option of tilting the playing field through pricing.

The simple knee-jerk reaction would be to say ‘if this costs x to buy from the insurer,

Flexible approach boosts participationIt is little wonder employers want to ensure good levels of take-up

09EMpLOyEE bEnEfitS

then we will pass the whole cost on to the employee’. But, of course, it is possible to structure the plan through pricing to make it better for the employee to buy one benefit rather than another. Similarly, a growing number of organisations are moving their pension arrangements into their flexible benefits schemes, enabling staff to make tax-efficient contributions via salary sacrifice arrangements. In effect, they are looking to ‘buy’ increased participation using employee tax and national insurance (NI) savings.

Pension schemeA number of employers have enhanced their offering by sharing the employer’s part of the NI saving. It is certainly a way of getting people interested and contributing more, and it is a tool used quite a lot. The flex structure offers a number of tools to boost benefits take-up, and employers must decide which ones they should employ to deliver the best results on their wider business objectives.

The value of investments and the income from them can go down as well as up

and you may not get back your original investment. Past performance is not an

indication of future performance. Tax benefits may vary as a result of statutory

change and their value will depend on individual circumstances. Thresholds,

percentage rates and tax legislation may change in subsequent finance acts.

TO DISCUSS HOW We CAN HeLP yOU NAvIGATe THrOUGH THe OPTIONS AvAILABLe, PLeASe CONTACT US FOr FUrTHer INFOrMATION.

From a financial planning perspective we now have some certainty about the rules, which enables us to make positive decisions for our clients about how best to reduce the impact of CGT until at least May 2015. This also gives you more stability and certainty when it comes to your tax and investment planning.

The threshold for gains before CGT becomes payable is £10,100 (2010/11) for all. Most basic-rate taxpayers could face 18 per cent tax on gains above this, while higher-rate taxpayers may be subject to a 28 per cent CGT rate.

A pension can be used as a highly effective tax shield, so the higher the rate of CGT, the more incentive there is to place funds under the protection of a pension. If you are now facing a 28 per cent CGT rate, we would like to have the opportunity to discuss the options available to you. even as a basic-rate taxpayer you may for the first time find that your gains, when added to your income, push you into paying the higher-rate of CGT.

Selling an asset with gains over the CGT threshold would generate sale proceeds that could be used to fund a pension contribution that would attract tax relief of 20 per cent plus a further 20 per cent for higher-rate taxpayers to claim back through self-assessment. The tax relief could enable you to reduce the effect of any CGT that is paid and contribute to recovering any investment losses from falling markets.

It may be important that you maintain exactly the same portfolio of assets and the same investment strategy. This is possible through an in specie (the distribution of an asset in its present form, rather than selling it and distributing the cash) contribution of assets (or part of the asset, such as a property) which is viewed as a disposal for CGT purposes but also attracts tax relief.

Some Self-Invested Personal Pension (SIPP) providers may not allow in specie contributions in this way but those with experience can manage the process to ensure investors work within the overall contribution limits to maximise the benefits.

An alternative option if you’re a higher earner could be to sell your portfolio into the SIPP. In this instance, CGT would be payable on the sale and there is no tax relief as it is not a contribution. But it could be a useful way of releasing cash held by the SIPP back to you while sheltering the assets from any future CGT liability.

If you’re a high earner there may be other advantages to using pension arrangements. An example of this is if you find dividend income or rent from property push your earnings over £100,000 so that your tax-free personal allowance is reduced. In this instance, shifting the assets into a pension would protect against both an effective rate of income tax of up to 60 per cent and CGT going forward. n

Following the emergency budget, the chancellor, George osborne, has confirmed that the 28 per cent capital gains tax (cGt) rate introduced for higher-rate tax payers would remain in place for at least the length of this parliament.

THe PrOPOSeD CHANGeS PrOvIDe yOU WITH AN OPPOrTUNITy TO SAve MOre FOr yOUr reTIreMeNT. We CAN WOrK WITH yOU TO DeveLOP STrATeGIeS TO ACCUMULATe WeALTH IN OrDer FOr yOU TO eNJOy yOUr reTIreMeNT yeArS. PLeASe CONTACT US FOr MOre INFOrMATION.

Taxing times10 tax pLanning

Using your pension top-ups to mitigate the effects of CGT

11

Over recent years, falls in the stockmarket have made a considerable hole in many pension pots. In addition, following reductions in bank base rate and the associated effect on Gilt yields, predictions have been made that significant falls in annuity rates would follow. These circumstances present an apparent dilemma - whether to purchase an annuity or continue with Income Drawdown? As pension under Income Drawdown is linked to the value of the underlying fund, such individuals would have to balance a potentially larger pension pot, following any recovery in the stockmarket, against the possibility of lower annuity rates.

This apparent ‘black and white’ choice fails to take into account an alternative route for Income Drawdown. Scheme Pension can be used for Income Drawdown either from the outset or after a period of taking benefits as Unsecured Pension or Alternatively Secured Pension. For Scheme Pension to work, an individual must first be offered and decline the option of standard annuity purchase. However, for technical reasons, the Scheme Pension route is not available under an ordinary Self-Invested Personal Pension but can be arranged through a Small Self-Administered Scheme (SSAS) where the individual has – or is prepared to set up – an incorporated company to ‘sponsor’ the arrangement.

The amount of Scheme Pension need not be set solely by direct reference to the usual prescriptive limits imposed under Income Drawdown and the individual’s SSAS effectively becomes its own annuity provider. Income will usually be set in relation to the individual’s age (life expectancy) and health and the value of the underlying fund but taking into account investment income and potential investment performance. How potential increases to the pension in payment will be granted can be decided at the outset. Usually the basis would be for such increases to be granted only if the investment performance was

sufficient to warrant them. However, it is also possible to provide increases at a pre-determined fixed rate or in line with inflation as measured by a chosen index.

For example, a man aged sixty would not be able to benefit in full from a property rental yield of 10 per cent under the Unsecured Pension route where the current maximum pension rate is 7.08 per cent of the pension pot. Scheme pension would allow the full rental to be taken as income and future rental increases could also immediately increase the amount payable.

This ability to break the link with the prescriptive limits and provide possible future pension increase raises an important question - how risky is Scheme Pension? The normal risks of investment performance to support Income Drawdown and outliving the pension pot remain. However, there is no requirement for a SSAS to take on these risks without a safety net of some sort. The safety net is provided by the ability for the Scheme Pension to be reduced in the future in the event of, say, worse than anticipated investment performance. Such reductions must be on the basis of ‘actuarial advice’ and must also apply to all Scheme Pensions being provided from the same SSAS.

On death, any assets remaining in relation to a Scheme Pension can be used to provide a pension for a surviving spouse or other financial dependent. However, where it is not possible to arrange a dependent’s pension, assets underpinning a Scheme Pension cannot then be given to a registered Charity as a way of avoiding Inheritance Tax.

Over a period, it is likely that the total amount paid under a Scheme Pension will be higher than that under the alternative forms of Income Drawdown. It is also possible to ‘guarantee’ the Scheme Pension payments for a period of up to ten years, irrespective of when the individual dies. Over the ten year guarantee period and particularly for those individuals aged over seventy, the total gross pension payments

made to the individual or his beneficiaries would return the greater part of the original investment. Potential penal pension fund tax charges would then mainly apply to the investment growth over the period.

It is possible to direct such investment growth into a ‘General Fund’ within the SSAS, provided that the rules of the scheme allow this to happen. This can then be used to pay future expenses under the scheme or redistributed to other individuals within the SSAS.

One particular client with a SSAS wanted to reduce his existing pension payments to the minimum possible to mitigate his personal Income Tax liability and, at the same time, redistribute future growth on the pension fund assets to his wife and children to reduce the ultimate tax charges on the fund on his death.

Based on his fund of £3 million, it was possible to justify an initial Scheme Pension of £97,920 per annum compared with an initial maximum Unsecured Pension of £270,000 per annum for the same fund value. This level of Scheme Pension was the minimum that could be justified in relation to the available fund and achieved the requirement that taxable pension income be reduced.

On the assumptions adopted, after 17 years, an estimated amount of £1.736 million will have been redistributed via the General Fund to the other Members of the SSAS. The client’s residual fund at that time, estimated at £683,000, would potentially be subject to tax charges.

By comparison, if Unsecured Pension and subsequently Alternatively Secured Pension were to be continued under the client’s existing Income Drawdown strategy, his residual fund in 17 years time, estimated at £1.180 million, will be subject to tax charges.

Levels and bases of and reliefs from taxation are subject to change and

their value depends on the individual circumstances of the investor. Thresholds,

percentage rates and tax legislation may change in subsequent finance acts.

A financial balancing act

Sharing your pension

REtiREMEnt

12 REtiREMEnt

The cost of tax relief on pension contributions doubled under the previous government to an annual cost of around £19bn by 2008/09. The government confirmed in the Coalition Budget that it is committed to reform of pensions tax relief and would continue with plans that it inherited to raise revenues from restricting pensions tax relief from April 2011.

The government had reservations about the previous plans. It felt that this approach could have unwelcome consequences for pension saving, bring significant complexity to the tax system, and damage UK business and competitiveness. These concerns were shared both by representatives of the pensions industry and by employers.

The June Coalition Budget announced that the government was considering an alternative approach to restricting pensions tax relief, involving reform of existing allowances. A discussion document on the subject ‘restriction of pensions tax relief:

a discussion document on the alternative approach’ was published in July, inviting views on a range of issues around the precise design of any such regime.

From April 2011 the government has announced the annual allowance for tax-privileged saving will be reduced from its current level of £255,000 to £50,000. Tax relief will be available at an individual’s marginal rate. Deemed contributions to defined benefit schemes will be valued using a ‘flat factor’ of 16. Individuals will be allowed to offset contributions exceeding the annual allowance against unused allowance from the previous three years. For those individuals who see a very significant increase in their pension rights in a specific year, the government will consult on options that enable them to pay the tax charge out of their pension rather than current income.

According to the government, only around 100,000 individuals currently have annual

pension savings above £50,000 – around 80 per cent of whom are on incomes above £100,000. The government anticipates that most individuals and employers will look to adapt their pension saving behaviour and remuneration terms following introduction of the new rules.

The lifetime allowance will also be reduced from its current level of £1.8m to £1.5m. The government’s intention is that the reduced lifetime allowance will operate from April 2012. It is inviting views on the detail of its approach, including the relative burdens for schemes and employers of implementation in 2011 compared with 2012.

An alternative approach to restricting pensions tax relief

Tax-privileged saving allowance reduced