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Pensions – Cracking the Crunch For financial adviser use only
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Monday – Johnson Associates
Johnson Associates Ltd
THE CRUNCH
Turnover decreased last year and the company are looking to save on payroll costs.
The company facilitates a stakeholder plan for staff who are also ‘feeling the pinch’
Can they reduce payroll costs AND save money for employees?
• Employee direct contribution
• Net contribution £50 • Tax relief added £12.50
• Total £62.50
• Reduction in net salary
• Reduction in net salary £50• Tax saving on salary £14.49• NI saving on salary £7.97• Total £72.46
Employer NI saving £9.27Salary sacrifice allows an additional 16% contribution + employer NI saving.
OR 30.8% if all added to plan
Example 1: basic rate taxpayer with salary below the UEL
If higher rate taxpayer above UEL total additional contribution is 14.7%
What next?
Business owners
Salary exchange / sacrifice
Smith Bros. Ltd
Brian’s take home pay is £35,468 a year, but he pays anything over £32,000 into a pension
Charles is an equal shareholder and wants
to maximise income
Brian’s take home pay is £35,468 a year, but he pays anything over £32,000 into a pension
THE CRUNCH
Brian’s fund value has fallen and he is looking at topping up but cannot afford a drop in income.
Smith Bros. Ltd
2008 / 2009 dividend / salary combinations
Brian needs net income of £32,000 and can afford to pay £3,468
net into a pension(£5,780 gross)
Profit available (each)
Salary
Employers NIC
Pension contribution
Net dividend
Mainstream CT
Income tax on salary
HRT on dividend
Employee NIC
Employee net income
Profit extraction
55,704
50,000
5,704
0
0
0
10,626
0
3,906
35,468
63.7%
55,704
50,000
5,704
0
0
0
10,626
0
3,906
35,468
63.7%
Charles
55,704
29,800
3,119
0
18,000
4,785
4,753
2,017
2,680
38,350
68.8%
Brian
55,704
17,674
1,567
13,678
18,000
4,785
2,328
0
1,346
32,000
82%
Profit available (each)
Salary
Employers NIC
Pension contribution
Net dividend
Mainstream CT
Income tax on salary
HRT on dividend
Employee NIC
Employee net income
Profit extraction
2008 / 2009 dividend / salary combinations
What next?
Business owners
Salary exchange / sacrificeSalary / dividend / pension
Wednesday – Maxwell Trading
Stephen is looking to sell his business.
THE CRUNCH
Due to the downturn he has decided to defer this for a couple of years
He is going to use the sale of the business as his pension
Meanwhile, he has sold some of the assets and is holding cash within the company.
Entrepreneurial Relief
18% Capital gains tax applies on the sale of a business
Any gain under £1m reduced by 4/9ths (effective rate 10%)
Only available for ‘qualifying’ companies.
Will Stephen qualify?
Stephen is the controlling director for Maxwell Trading Ltd.
BUT
How much is non-trading?
Basically, non-trading activities should not make up more than 20% of:
• Turnover from non-trading activities• Company’s asset base • Expenses incurred • Time spent undertaking company’s activities• Historical context of the company
Without entrepreneurs’ relief
Ignoring annual CGT exemption
i.e. £555,556 @18% = £100K
i.e. £1m @18% = £180K
Entrepreneurs’ relief - one year
Gain ER CGT Proceeds kept
£1m £nil £180k £820k
Effect of keeping surplus cash within 20%
Gain ER CGT Proceeds kept
£1m £444k £100k £900k
Surplus company
cash £400K
Surplus company
cash £150K
Solution
Stephen decides to keep cash under 20% of assets
Pension contribution of £200,000 to be made.
Should he offset this against this years Corporation Tax?
Year 2007/8 2008/9
Profit before contribution
£50,000
Tax Rate 21%
Contribution £50,000
Relief £10,500
Solution
Stephen decides to keep cash under 20% of assets
Pension contribution of £200,000 to be made.
Should he offset this against this years Corporation Tax?
Year 2007/8 2008/9
Profit before contribution
£100,000 £50,000
Tax Rate 20% 21%
Contribution £100,000 (c/b) £50,000
Relief £20,000 £10,500
Corporation tax relief £30,500 = 15.25%
Solution
Stephen decides to keep cash under 20% of assets
Pension contribution of £200,000 to be made.
Should he offset this against this years Corporation Tax?
Year 2006/7 2007/8 2008/9
Profit before contribution
£400,000 £100,000 £50,000
Tax Rate 32.75% 20% 21%
Contribution £50,000 (c/b) £100,000 (c/b) £50,000
Relief £16,375 £20,000 £10,500
Corporation tax relief £46,875 = 23.44%
What next?
Business owners
Salary exchange / sacrificeSalary / dividend / pensionReview pension funding in time for company year endOffset previous corporation taxQualify for entrepreneurial relief
Alan - USP benefits
Alan took cash from USP in May 2006. He draws no income and at outset had no Lifetime Allowance issues.
THE CRUNCH
The pre-budget report announced a freeze on Lifetime Allowance at £1.8m from 2010/11 to 2015/16.
Impact on Alan?
Second Benefit Crystallisation Event
•Original fund available May 2006 £1.2m
80% SLA•After cash (£300,000)•Fund left £900,000
•Age 75 (2016) SLA is £1.8m•Fund is £1.5m•Amount of remaining fund already tested (£900,000)•Leaves fund for SLA test £600,000
•BUT only has 20% SLA left £360,000•Remainder liable for tax charge £240,000
Solution
Alan’s daughter is expecting a son.
3rd Party contributions using income from Alan’s USP?
Payment of £240pm is £300pm in grandson’s pension
After 16 years
At grandson’s age 60
For grandson to fund from age 25, cost
All figures assume a 7% growth rate, 1% annual charge
£95,000
£1.2m
£900pm
What next?
Business owners
Salary exchange / sacrificeSalary / dividend / pensionReview pension funding in time for company year endOffset previous corporation taxQualify for entrepreneurial relief
Individual clients
Revisit existing USP clients – are they in for a surprise?Consider ‘Generational’ financial planning
Friday - Bob
Due to an MVR, he has a transfer value of £80,000
Bob is 45, planning to retire at 65
The current value of Bob's fund is £100,000
THE CRUNCH
He has a PPP which is a paid up policy in a closed
with-profits fund
FSA Reports
Cost comparisons
Good practice
“The firm set out a section in its template suitability report outlining any switch penalties on the ceding scheme and clearly explained the impact of charges of the switch. They did this by comparing the reduction in yield (RIY) figures for the ceding and new scheme (they used a software system to calculate the RIY of the ceding scheme)”.
FSA: ‘Quality of Advice on Pension Switching’ December 2008
Example output
Product Suitability considerations
Important to review whether the features of the current plan still meets the needs of the client. For example:
•Can the plan still accept new contributions?
•Fund choice – mix of managers / fund styles?
•Option to self-invest
•Drawdown option (including protected rights)?
•What is asset mix of With Profit funds?
•Service levels
•Financial strength of provider
Product Suitability considerations
But there may be valid reasons why retaining the current plan is in the client’s best interests. For example:
•Basis of death benefit may change
•Risk benefits (life cover, waiver of contribution) may not be available on same basis/terms
•Guaranteed Annuity Rates
•Tax free cash entitlement
FSA Reports
Matching the recommendation to the customer’s ATR and personal circumstances
Good practice
“The firm used a risk profiling tool to make an initial assessment of the customer’s ATR.
They then used a stochastic modelling tool to create a series of model portfolios, with the individual funds selected by an independent fund research company.
Although systematised, the approach was not used as a ‘black box’ – the tools were used as a basis for discussion and the process was adapted, when merited, for individual customers”.
FSA: ‘Quality of Advice on Pension Switching’ December 2008
Demonstrating Risk and Reward
Portfolio Architect produces a client facing report
Shows:
•Risk profiling•Asset allocation•Product selection•Forecasting
Client report is available in Rich Text Format (RTF), therefore allowing the Adviser to add or amend if required
What next?
Business owners
Salary exchange / sacrificeSalary / dividend / pensionReview pension funding in time for company year endOffset previous corporation taxQualify for entrepreneurial relief
Individual clients
Revisit existing USP clients – are they in for a surprise?Consider ‘Generational’ financial planning Revisit plan suitability
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• This item is aimed at financial advisers only. If you reproduce any part of this information for use with retail clients, you must ensure it conforms to the Financial Promotion rules. In addition if used to advise retail clients you are subject to the advising and selling rules and you are responsible for any financial advice which you provide to your clients
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Compliance Ref No: A0122 Item expires: 27/08/2009
