6 new changes to pensions 2015

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An at-a-glance look at six newly-clarified rules for pensions, which will sit alongside the new freedoms for savers next April

The pensions revolution was sprung upon us in March, when George Osborne, the Chancellor, disclosed plans in the Budget to liberalise pensions. His initial outline has changed little.

Savers aged over 55 from April 2015 will be able to access their pensions with complete freedom. Instead of being forced, under Government rules, to convert savings into a chunks of annual income, they will be able to take out as much as they like, as often as required.
Historically, savers with non-final salary pensions – i.e. with pots of money invested in the stock market – have bought annuities. This turned a pension into a regular income that lasted for life. A small number of wealthier savers were able to avoid annuities and use “income drawdown”, where the money remained invested as an income was taken. However, a cap on withdrawals applied for all but the very wealthiest who had £20,000 annual incomes from other pensions.

From April 2015, savers have three main choices: withdrawal all their pension money immediately; leave it invested and take income when required; or buy an annuity. Withdrawals will be liable for income tax. People who have already bought annuities are excluded from the freedoms.

Since the Budget the Government has been in consultation on how the new pension system should work. Its conclusions, published on Monday, contained several key clarifications.

1 Final salary pension schemes

Ministers had contemplated a ban on savers transferring final salary pensions to other schemes that would pay out the entirety as cash lump sums. The Treasury feared a rush of transfers would have a detrimental impact on some schemes – and that might put at risk the businesses and members who stayed behind.

However, in its update the Government confirmed transfers out of private sector final salary schemes will still be permitted after 2015. Anyone transferring more than £30,000 will need to take independent financial advice. There will be a consultation on allowing savers to withdraw money directly, removing the need for a transfer. However, the vast majority of public sector workers will be blocked from transferring their generous pensions, it was confirmed.

2 Death tax rate

Currently, money inside a pension that has been accessed can be passed on to beneficiaries, less tax of 55pc, when a pensioner dies. This applies to the drawdown policies held by around 400,000 people. With millions expected to use drawdown in future, this tax rate is deemed too high. If it remained, it would encourage people to pull money out of pensions, even if this option was inappropriate. So the Government will in the autumn announce a reduction to the 55pc rate. This is expected to be 40pc – the same as other inheritance taxes – allowing families to pass on more of their wealth.

3 Rising personal pension age

An increase in the age at which savers can access their personal pensions had been mooted in the Budget. This will rise from 55 to 57 in 2028 and then stay 10 years below the official state pension age, it was confirmed on Monday. Anyone born after March 5 1971 [correction] will be unable to access pension money until age 57. Those aged under 40 are likely to have to wait until age 58. Younger workers may not be eligible for a state pension until age 70, and so will have to wait until 60 to access private pensions.

4 The closing down of the ‘recycling’ loophole

The reforms appeared to have opened a tax loophole to the over 55s. Under the ruse, called “pensions recycling”, a saver might have withdrawn up to £40,000 and immediately fed it back into the fund to cut taxes. This exploited the tax break on pensions, in which income tax is refunded at a saver’s highest marginal rate. From April 2015, anyone over 55 who has already accessed pension money will be allowed to contribute no more than £10,000 a year. This will apply to current drawdown customers, but not those who have bought annuities.

5 New annuities

New rules will permit the creation of “super annuities” that are much more flexible than the current deals. Pensioners could be allowed to withdraw lump sums from annuities or take a larger income in the early years of retirement. And pension firms will be able to provide more generous death benefits. Currently, many single person annuities include a 10-year “guarantee period” which ensures that, should the policyholder die early, an income is paid to a spouse for the remainder of the period. In future, annuities could be designed with lifelong guarantees. Pension providers may also have the freedom to hand back smaller annuities – perhaps worth less than £30,000 – as lump sums, rather than continuing to make regular payments to beneficiaries.

6 Guidance

In March, Mr Osborne promised free, impartial help for savers mulling over how to use the new freedoms. But it was unclear which organisations would give this guidance, and many feared the pensions industry might hijack the process, surreptitiously pushing products on customers who thought they were getting free help.

The Government has decided that every saver will be entitled to obtain guidance, at no cost, from either the Pensions Advisory Service or the Money Advice Service. These two organisations are linked to the Government and do not sell products. The help will be basic, running through customers’ options. For tailored advice, savers will still need to pay for an independent financial adviser.

Original article by The Telegraph – click here to view

New rules for passing on a pension

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The Chancellor George Osborne has announced further changes to the future of pensions, which will take effect from April 2015.

Behind them is a shift of emphasis in what a pension is actually for.

Once a pension existed purely to provide an income in later life.

But now – under Mr Osborne’s vision – a pension fund could become a new tax-efficient savings vehicle, something that will be particularly attractive to those with large savings.

More than that, it will be possible to pass the pension pot on from generation to generation, just like the family silver.

Who will benefit?

Anyone who has a defined contribution pension – where their contributions build up in a pot, which is then used to buy a retirement income. This includes most auto-enrolment schemes. In the UK roughly 12 million people currently save into such pensions – and, according to the Association of British Insurers (ABI), 400,000 people already use them to provide an income – so-called “pension drawdown”.

The changes will not affect those on final salary company schemes – or the state pension.

How will the changes affect those who die before the age of 75?

Currently, anyone who inherits a pension fund which is already being used to provide an income, has to pay 55% in tax. The only exceptions are spouses or children under 23. Instead, they are required to pay income tax on any income they draw from the fund – at either 20% or 40%. If a pension fund has not been used to provide an income, there is no tax payable.

From April 2015, anyone who inherits a pension fund will have no tax to pay – whether it is already being used or not. They will not be liable for income tax either. But there will still be a limit of £1.25m on the amount of money anyone can put into a pension in total.

How will the changes affect those who die after the age of 75?

Currently anyone who inherits an unused pension pot from someone older than 75 has to pay tax at 55%. Spouses however can inherit the pension (but no other beneficiaries), and pay income tax on the income they receive.

But from April 2015, all beneficiaries will only have to pay income tax. Depending on the rate of tax they pay – their marginal rate – they will have to pass 20% or 40% to the taxman.

How many people have been paying 55% tax?

Until April 2011, anyone over the age of 75 had to buy an annuity. In the three and a half years since then, relatively few people will have paid tax at 55%. But neither the Treasury nor HM Revenue and Customs will say exactly how many.

What will happen to annuities?

Annuities – where a pension pot is used to buy an income for life – will continue to be the only way of guaranteeing a particular level of income. But once an annuity is purchased, it cannot generally be passed on to someone else, other than a spouse, without considerable expense.

As a result, the new tax rules are likely to make annuities look even less attractive, in comparison to keeping savings in a pension fund.

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Can I use a pension to avoid inheritance tax?

Up to the age of 75, passing on a pension will carry no tax liability – whereas other assets, like money in shares or savings accounts – will be liable for Inheritance Tax (IHT). Currently passing on anything worth more than £325,000 to your beneficiaries is taxed at 40%.

Even beyond the age of 75, most inheritors would only pay 20% income tax on the money they receive from a pension fund – far less than under IHT.

So it might make sense for pensioners to put as much as they can into a pension fund, although there is a lifetime limit of £1.25m.

What will the impact be on final salary schemes?

The new freedom to pass on pension pots will make final salary schemes look less attractive. When a worker in a final salary scheme dies, the pension dies too, and can usually only be inherited – in part- by a spouse.

But some schemes allow members to transfer out. So in exchange for an annual pension of £10,000, a worker can accept an equivalent capital sum – say £300,000. From April 2015, that sum can be passed on to beneficiaries.

Original article by BBC -click here to view

What will the FTSE do in 2014?

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It is that time of year when investment experts try to do the impossible – foretell the future.

Predictions about how shares in global stock markets will perform in 2014 are of course guesswork. But asking a handful of respected experts, who have made astute calls over the years, what they think next year will hold gives savers a greater chance of bagging themselves a winner or two.

Here is what the experts are saying about the stock market’s prospects in 2014.

FTSE 100 to hit record high in 2014?

Since the financial crisis British shares have delivered stellar returns. If you were brave enough to put your savings into a FTSE 100 “tracker” fund, which aims simply to replicate the performance of the London stock market as opposed to beating it, you would have netted a 50pc return on your investment.

During 2013 UK shares on the surface had a good year, with the FTSE 100 index returning 9pc to trade at about 6500 today. Since the Victorian era shares have on average delivered 6pc to 7pc a year, so an inflation-beating 10pc return on your money in 2013 looks fairly reasonable.

UK funds managed by City stock pickers, who attempt to beat the performance of the index, have also had a good year. The average fund has returned 23pc, beating the FTSE All Share return of 17pc. This index includes the smaller and faster growing UK companies along with the big stocks found in the FTSE 100, so is seen by many as a better reflection of UK market’s performance.

Given such solid performance it is right to ask whether there is still potential to make more money from UK shares. Investors buying into the market today may be concerned that they have missed out on gains and could be buying at the top.

UK share performance in 2013.

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A – Investment Management Association’s “All Companies” fund sector (23.3pc rise)
B – FTSE All Share, including income and capital growth (16.7pc rise)
C – FTSE All Share tracker funds, including income and capital growth (15.8pc rise)

But the vast majority of experts remain positive and argue that there is plenty of money still to be made. They argue that although UK shares have performed well in 2013, they have been held back by the strong performance of the pound, which since July has strengthened by 10pc against the dollar.

This has stunted export growth for British businesses and in turn dented their performance on the stock market, with the FTSE 100 posting a loss of 4pc since the summer.

Some experts are even predicting that the FTSE 100 will hit a new all-time high in 2014, surpassing the 6930 it achieved during the tech boom in December 1999. One investor in this camp is Guy Foster, who buys shares for wealth manager Brewin Dolphin. Mr Foster is backing the FTSE 100 to break through 7400 by the end of 2014, which would represent a 15pc return on an investment in a tracker fund made today.

Other firms that are bullish include economic forecasters Capital Economics, which predicted that the FTSE 100 would hit 7500 next year An even bolder call has been made by analysts at Citigroup, who have said they expect the index to reach 8000.

Article by the Telegraph – To see the full version follow click here

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