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Winter Issue 2014

Chancellor abolishes 55% tax charge on death As announced by the Chancellor George Osborne on 29 September, from 6 April 2015 individuals will have the freedom to pass on their unused defined contribution (DC) pension savings to any nominated beneficiary when they die, and the current 55% tax charge that applies to lump sums paid from drawdown funds (when death occurs both before and after age 75) and uncrystallised funds (when death occurs after age 75) will be abolished.

There will also be a relaxation to the tax treatment that will allow a beneficiary (and not just a ‘dependant’ of the deceased) to receive tax free withdrawals from a drawdown pension if the original member (or last drawdown account holder) died before age 75.

The Governments pledge to ‘abolish’ the 55% death tax on pensions is not all it seems though because pension pots inherited when the member (or last drawdown account holder) dies after age 75 will still be subject to tax.

How can pension death benefits be paid after 6 April 2015?

On the death of the scheme member death

benefits can be paid as either a lump sum or kept within the scheme and be taken as income drawdown.

Where the person entitled to drawdown dies then it will be possible for another beneficiary to continue in drawdown or for a lump sum to be paid. For someone who is not a dependant of the member there will be a new category of recipient called a nominee (who can be nominated by either the member or the scheme administrator).

Additionally, where a dependant or nominee dies then a successor can inherit the pension fund. A successor can be nominated by either the dependant, nominee or even a previous successor.

How will the death benefits be taxed?

Member dies before age 75

The punitive 55% tax charge that currently applies to lump sum death benefits paid from drawdown arrangements will be abolished altogether. Any such lump sum will instead be tax-free.

Like now, any lump sum death benefit paid from uncrystallised rights on death before age 75 will continue to be tax free (as long as the lump sum falls within the deceased’s available lifetime allowance).

Furthermore, from 6 April 2015, where the funds are designated to provide a dependant’s /nominee’s flexi-access drawdown account then any withdrawals taken by a dependant or nominee where the original member died before age 75 will also be tax-free in the hands of the recipient, provided the funds are designated to the drawdown account within a two- year period.

It is important to be aware, however, that dependant’s drawdown pensions that are already in payment prior to 6 April 2015 will be taxed under the current rules as that was the legislative position when the income commenced.

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For further information about any of the topics discussed, or on any other aspect of financial planning please contact:

www.thomas-carroll.co.uk

Pendragon House, Crescent Road, Caerphilly, CF83 1XX

Thomas Carroll Independent Financial Advisers Ltd

Thomas Carroll Independent Financial Advisers Ltd

Tel: 02920 869531 Fax: 02920 882783

Capped Drawdown and retaining the £40K Annual Allowance Background

The Annual Allowance (AA) places a limit on the maximum amount of tax relievable pension savings that can be made, by and on behalf of an individual, to all registered pension schemes without incurring a tax charge. The AA is currently £40,000, plus any ‘unused’ AA that can be carried forward from the previous three years.

From 6 April 2015 though, a new money purchase annual allowance (MPAA) of £10,000 for defined contribution (DC) savings will apply to anyone who takes advantage of the new pension flexibility rules after 5 April 2015 (unless the fund is valued at no more than £10,000 and is being commuted under the ‘small pot’ rules).

Whilst, however, it will not be possible for an individual to enter into a new capped drawdown arrangement after 5 April 2015, anyone who is already in capped drawdown on 5 April 2015 will not be subject to this £10,000 MPAA as long as they continue to withdraw no more than the capped income amount after this date. Broadly, this capped amount is 150% of the otherwise available single life, level annuity that the individual could have bought with the fund designated to drawdown, although anyone in capped drawdown has the freedom to choose a flexible income of anywhere between 0% and 150% of this amount.

Capped income drawdown, which provides an alternative means to an annuity for paying an income whilst keeping the funds fully invested, will not be suitable for investors who need a guaranteed income and/or do not have the capacity to accept the investment risk that this inherently entails. However, for those for whom it would be suitable and

who wish to continue making DC pension contributions of at least £10,000 a year, this presents an interesting planning opportunity.

Planning Opportunity

Where an individual has a DC pension fund that is designated to capped drawdown in several tranches over a period of time (typically referred to as phased capped drawdown) there are two different ways in which the drawdown funds designated can be administered by the scheme administrator. These differences are typically driven by the systems used by the scheme administrator but each separate tranche of designated funds can either be:

• used to create a separate drawdown arrangement with its own cycle of three yearly review dates for calculating the maximum income; or

• added to an existing drawdown arrangement (referred to in the legislation as ‘’ additional fund designation’’).

If the drawdown provider adopts the second option above (and assuming the legislation

comes in as currently proposed), this option can present a long-lasting advantage for anyone who will attain age 55 and who designates some funds to capped drawdown on or before 5 April 2015.

This is because, if they were to designate even just a relatively small element of their DC pension fund to a capped drawdown pension on or before 5 April 2015, they would have a capped drawdown fund that could be augmented at a later date, by means of ‘’additional fund designation.’’

When additional funds are designated to an existing pre 6 April 2015 capped drawdown arrangement after this date, the maximum income that can be drawn would need to be recalculated by the scheme administrator based on the increased drawdown fund value. Even if the maximum capped income limit increases significantly after an ‘’additional funds designation’’ exercise though, the investor can continue to draw an income from their capped drawdown pension fund up to this new higher limit, without subsequently becoming subject to the £10,000 MPAA in respect of any future pension funding that they may wish to make.

The Chancellor also confirmed in the Autumn statement that, from April 2015, beneficiaries of individuals who die under the age of 75 with a joint life or guaranteed term annuity will be able to receive any future payments from such policies tax free. The tax rules will also be changed to allow joint life annuities to be passed on to any beneficiary.

Member dies after age 75

From 6 April 2015, the punitive 55% tax charge that currently applies to lump sum death benefits paid from drawdown arrangements and uncrystallised rights that have been deferred beyond age 75, will initially be reduced to a flat rate tax charge of 45%; and

Any death benefits paid as an income to a beneficiary will continue (like now) to be taxed at the recipient’s marginal rate.

It is the Government’s intention, however, that from 2016/17, the flat rate 45% tax charge will be removed and any lump-sum payment will instead to be subject to income tax at the marginal rate(s) of the recipient.

Comment

Whilst these proposed changes are to be welcomed, beneficiaries will only pay no tax if the member (or last drawdown account holder) dies before age 75. Arguably the vast majority of people will die after age 75 so only a minority of beneficiaries will actually benefit from paying no tax on the death benefits they inherit.

It is also important to bear in mind that, where a scheme member has died prior to 6 April 2015 (and particularly where aged under 75) in certain circumstances it may be worth deferring

any decisions over how the benefits are paid out until after 6 April 2015 in order to benefit from the more favourable tax treatment

The rules are complex and we would suggest you seek professional financial advice if you think you will be affected by these changes.

Intestacy changes from 1 October 2014 The Inheritance and Trustees’ Powers Act 2014 announced some key changes to the intestacy rules. This is the first time that the intestacy rules have changed since 1925 but broadly, as a result of these changes, a surviving spouse/civil partner will inherit a larger part of the estate than was previously the case.

Not with-standing the fact though that this planning opportunity will clearly only work if the selected drawdown pension provider operates phased drawdown on the basis of ‘’additional fund designation’’ there are a number of other factors to consider. For example:

• An individual can only make personal contributions up to 100% of their relevant UK earnings.

• Care needs to be given to the possibility of an individual exceeding their lifetime allowance if funding is continued.

• Would a more advantageous planning point be to build up a spouse or partner’s pension rights to ensure their personal allowance is fully used in retirement?

Another point to consider however is the proposed change to the tax treatment

of death benefits for those who die with drawdown funds and/or uncrystallised funds before and after age 75, as covered in the previous article.

Hopefully this article highlights what, depending on your circumstances, may be a potentially useful planning opportunity. If you require any further information or guidance on the forthcoming pension changes please feel free to contact us.

‘Personal chattels’ will continue to pass to a surviving spouse/civil partner although the new Act amends and expands the statutory definition of personal chattels so that it now includes all tangible moveable property that is not used for business or investment purposes.

There are no changes to the rules for single people on death. This means that, for single people, the order of succession is:

• Children

• Parents

• Brothers and sisters

• Nephews and nieces

• Grandparents

• Uncles and aunts

• Cousins

• The State

There is no division of the estate between the above categories e.g. so if there are children, the estate is shared equally between them, but if there are no children the estate is shared equally between the parents, and so on.

If finding any relatives is difficult, the solicitor may place a notice in newspapers setting a date by which contact should be made, after which the estate would pass to the State.

Summary

It is estimated that almost two-thirds of UK adults have not written a Will and therefore the estate would be distributed in accordance with the rules of intestacy. The changes in the intestacy rules provide more generous provision for a spouse or civil partner but it is still a timely reminder that, even with these changes, unmarried partners would still not inherit any of their deceased partner’s assets.

While these changes somewhat simplify matters when dealing with the estate, they also mean that in many cases other blood relatives will not have a stake in the estate and without a Will this may not be in line with your wishes. The only way to ensure your estate is distributed in line with your wishes is to have an up to date Will in place.

The Inheritance and Trustees’ Powers Act [2014] amends section 46 of the Administration of Estates Act [1925] and is therefore only relevant in terms of the intestacy provisions for England & Wales. The intestacy provisions for Scotland and Northern Ireland therefore currently remain unchanged.

The table below highlights the key changes and illustrates the position before and after 1 October 2014.

Pre 1 October 2014 From 1 October 2014

Married/civil partner - No children (but surviving parents/siblings)

First £450,000 plus half of the residue goes to the spouse/civil partner absolutely.

The remaining 50% goes absolutely to the blood relatives (parents, brothers and sisters etc).

Whole estate goes to the spouse/civil partner.

Married/civil partner – Children

First £250,000 goes to the spouse/civil partner, absolutely.

The residue is divided in two - half to the children absolutely and half held on a life interest trust for the spouse/civil partner.

‘Life interest’ in half the money above £250,000 lets the spouse/civil partner spend the income, but not touch the capital.

When the spouse/civil partner dies the children inherit the other half absolutely.

First £250,000 plus half of the residue to the spouse/civil partner absolutely (therefore no life interest trust).

The other half goes to the children absolutely.

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 fall as well as rise and investors may not get back the full amount originally invested. Past Performance is

not a guide to future performance. Equity investments do not include the same security of capital which is afforded with a cash account.

Junior ISA or Child Trust Fund?For parents looking to save for their children the introduction of the Junior ISA in November 2011 (essentially replacing the Child Trust Fund account) muddied the waters somewhat with many people still often confused as to what accounts they can contribute to on behalf of their child. Hopefully this article will explain the difference between the two and make your options clearer.

Child Trust Fund (CTF)

Firstly it is important to make it clear that it is no longer possible to open a new Child Trust Fund account (CTF), although it is possible to continue contributing to an existing CTF. The CTF was introduced on 6 April 2005 and was available for all children born on or after 1 September 2002 and before 1 January 2011 provided they were living in the UK and child benefit had been awarded for them, which means that to qualify for a CTF account child benefit must have been claimed.

Initially, a Government contribution of £250 was given in the form of a voucher for each eligible child. It was also possible for additional subscriptions to be made, for example by parents, initially of up to £1,200 each tax year. Both cash and stocks and shares CFT accounts were available.

Fast forward to 2010 and the Government announced the running down of contributions to CTF accounts and that there would be no further CTF contributions from 1 January 2011. Any child born after 2 January 2011 was no longer eligible for a CTF account, although subscriptions to existing accounts could continue.

It is important to note that children that were eligible for a CTF are not eligible for the Junior ISA (JISA). It is also important to note that HMRC will have opened an account for any eligible child if the voucher remained unused.

If you are unsure where your child’s CTF account is held there is an online form available to track the CTF account provider at https://www.gov.uk/child-trust-funds/child-trust-fund-vouchers

The good news is that you can still contribute up to £4,000 to an existing CTF for tax year 2014/15 and CTF accounts can still be transferred to other providers. The Government is also intending to merge the CTF with the Junior ISA with effect from 6 April 2015 which should mean there will be more choice and flexibility for those who would like to transfer a CTF elsewhere.

Junior ISA (JISA)

Junior ISAs (JISAs) were made available from 1 November 2011. All children who are under 18 and live in the UK are eligible for a JISA providing they weren’t eligible for a Child Trust Fund account. There are two types of JISA:

• A cash Junior ISA (which pays interest tax-free); and

• A stocks and shares Junior ISA. As the name implies contributions are invested in unit trusts, shares, free of any tax on any capital growth or any additional tax on dividends

A child can hold either or both types of JISA provided that the total subscriptions to JISAs do not exceed £4,000 (2014/15 tax year) – exactly the same as for the CTF account.

It is also important to note that a child cannot hold more than one of each JISA type (for example it is not possible to hold two cash JISAs in the same tax year)

Summary

Whether your child holds a CTF or is eligible for a Junior ISA the important thing to remember is that the subscription limits and savings options are similar and these accounts therefore offer a good opportunity to save tax efficiently on behalf of a child, providing you are happy that your child will have access to the money at age 18.

There are, of course, other options for saving for your child outside of a CTF or Junior ISA if you have already met the subscription limits for this tax year or indeed if you would like a solution that gives more control over when the fund can be accessed later down the line. Please feel free to contact us if you would like any further advice or guidance.