Hi everyone, I really hope you enjoyed my first column about Annual Investment Allowance and it gave you some food for thought. How often can you invest in your business and save tax! I really appreciate all the Facebook shares and tweets of the article and did enjoy receiving a few emails from readers.
One of the topical issues this month is the government’s newest pension reforms.
The government has unveiled plans to scrap the 55% death tax on pension pots from next April. This ultimately means you could leave your children your pension pot of up to £1.25m free of inheritance tax!
Pensions can be a confusing subject I know; there seem to be so many different products out there. However, in reality there are just four main types –
- State Pension
- Personal Pension
- Occupational Pension – this is similar to a personal pension, it is just managed by an individuals employer.
- Stakeholder Pension – this is similar to a personal pension, except for the fact it has no upfront costs.
When you retire, you can swap your pension fund into a lifetime income by buying an annuity. You could also decide to go income drawdown i.e. taking income from your pension whilst keeping it invested.
At the moment, most people turn their pensions into an annuity. This can be passed to your spouse tax free but when your spouse dies the remaining pot is taken by the pension company. It cannot be inherited.
If you hold an income draw down pension, you can only pass your pension on to your children as a tax-free sum if you die before you are 75, and you have not yet started to draw down on it. But nowadays people are living way past the age of 75 and very few people can afford not to draw down their pensions on retirement whether that be for general living or the provision of on-going care.
If you have drawn on your pension pot, or are over 75, the tax charge on inheritance comes in at a hefty 55%! This is a staggering amount of money for your children to lose on their inheritance.
Not any more! From April next year, if you die before the age of 75, your children will get your pension pot as a tax-free lump sum regardless of whether you have started drawing an income from it or not. In short it falls outside the scope of inheritance tax.
If you die after the age of 75, you pass on your pension fund tax free as long as the money is kept in a pension. If your heirs then decide to take the money as a lump sum they will pay a 45% tax rate or if they take the money as an income instead they will just pay income tax at their normal rate.
One thing to note is that these new rules only apply to draw down pensions. If you have already taken an annuity or receive income from a final salary scheme, the current rules still apply. As a result there is going to be a rush of people snapping up income drawdown pensions and is another nail in the coffin for annuities.
But we must remember that there is a benefit to annuities; they pay out income until you die and essentially insure against you living longer than expected. If you don’t take out an annuity there is a risk that you could run out of money in retirement and end up living solely on a state pension. When you take income drawdown you become responsible for how and when your pension is used.
There were concerns raised regarding the last major changes made to the pension system. These changes now allow everyone, regardless of the size of their pension pot, to take their cash as and when they like, subject to their marginal rate of income tax.
As a result, the incentive was to spend as much of the pension as possible pre-death to avoid the 55% death tax rate. The risk was then that people would spend too much too soon and would end up living off the State. This new move takes that problem away, and instead incentivises people to be as careful as possible with their pensions. The less they spend, the more they can pass on either tax-free or at relatively low rates.
Perhaps the best pension plan is to divide your pension pot between buying an annuity for security purposes and leaving the rest of your fund invested in an income draw down pension. This means you can still take advantage of the scrapping of the 55% death tax and have the best of both worlds.
Pensions are something no-one really wants to think about as on the face of things it means less in your pocket each month now and no real chance of seeing that money for maybe 30 years at least! However pension contributions each month do not need to break the bank, something is better than nothing. We all need to save for an income to live on in retirement and these reforms can really mean saving inheritance tax and leaving something significant for your children.
As I mentioned last month, a feature of my column is that I will highlight the upcoming important deadlines. The biggest one this month is that paper tax returns need to be filed with HMRC by 31 October. Tax returns filed online have a later deadline of 31 January 2015. Company accounts with a 31 January year end need to be filed at Companies House by 31 October or a £150 fine will be incurred for late filing! Quarter ended September VAT returns to be filed and paid by 7 November and September PAYE to be paid by 19 October. Also remember the minimum wage has increased this month. As of 1 October the national minimum wage increased to £6.50 an hour for those over 21 (other rates apply for apprentices and younger workers).
I hope you found this article useful. Please remember to interact with me and let me know if you want anything covered in the next article.
My email address is hannah@timeaccounts.co.uk or you can follow my firm on Twitter @timeaccounts or visit our business Facebook page (Facebook/timeaccounts). Remember to like our page so you can keep on top of tax saving tips, deadlines and general Time Accounts updates.
Hope to catch you next month. New column coming Thursday 6 November!
Time Accounts t/a Time Business Services are a local Sussex based chartered accountancy practice dealing with all aspects of small, medium enterprises and their financial requirements, so just pick up the phone and call 01273 446595 or send us a call back request via our website Time Accounts and we’ll do the rest!