Changes on pension tax relief for higher rate tax payers

What is pension tax relief?

When we are advising clients on their pension options, we often need to explain pension tax relief. Tax relief is the biggest advantage that pensions have over ordinary investments. This is an incentive set by the government to encourage you to pay into your pension pot. When you pay money into a pension, the government refunds the tax that you paid on this this part of your income meaning the amount is immediately boosted by tax relief. Usually you don’t need to worry about this. Your pension provider will claim it as tax relief on your behalf and add it to your pension pot. You get relief at source in all personal and stakeholder pensions, and some workplace pensions.

What are the current rates?

As it stands, when you pay into a pension, you receive tax relief at the highest rate you pay income tax. Basic rate taxpayers receive 20% pension tax relief and higher rate taxpayers 40%. So if you are a basic rate tax payer you only need to pay £80 to save £100. Higher rate tax payers only need to pay £60 to save £100.

What are the potential changes to pension tax relief?

However, many people within the financial services industry  are speculating that the budget on 11 March may see reforms in this area. There is a suggestion that we may see changes for higher rate tax payers, with a reduction in the tax relief rate from 40% to 20% tax relief. If this is the case, higher rate tax payers would do well to make any pension deposits before the budget. There is unlikely to be any change for basic rate tax payers.
Of course, this is likely to be a highly unpopular move. The Chancellor may decide not to make this change at this time. However, it is a significant change that has been discussed for several years. If it does not happen in this budget, it is still likely to happen in the foreseeable future.
If you are a higher rate tax payer and would like to talk to us about the most efficient way to save for your future, please get in touch and arrange a meeting with one of our independent financial advisers.

What other pension changes may be announced?

We might also see an announcement in the budget about pensions dashboards. This would help people keep track of their retirement savings by displaying all of their pension pots, including the state pension, in one place online. This has been promised in previous budgets, but the December Queen’s Speech announced the Pensions Schemes Bill which should include this change.

How much should I save in my pension?

This is a question that our clients always ask us when we are discussing their private pension arrangements. Putting money away every month or year to benefit us at some point in the future is a major decision to make, and can feel very unreal, when you are more concerned about covering your day to day costs. Of course as advisers, we don’t actually tell you the answer! It is very much your decision. But we can tell you the things we discuss with clients when we are looking at their pension options.

How long until you retire?

The conversation about how much you should invest will very much depend on how long you have until you retire. Put simply, if you are in your thirties or forties your pension pot has longer to grow than if you have reached your mid fifties. You may also have a view about what age you want to be when you retire. Don’t forget you can currently claim the state pension on reaching 66, but this is set to increase, meaning many of us won’t be able to claim that until you are 68.

What other pension arrangements do you have in place?

Very often when we speak to clients they have had a number of previous jobs. This is likely to mean that they have a number of other pension pots in place, some of which they may have forgotten about. If you can find the details of those other pensions before you come and talk to us, this will help us advise you as to the best course of action. You may be able to transfer some of those pots into a new personal product which you then pay into regularly.

How much risk are you comfortable with?

This is a very personal decision and one we can support you with. Some of our clients want a very secure investment and others are happy to take a little more risk. Some pensions will include a combination of funds, so you can benefit from both approaches.

What are your retirement plans?

This can be the most enjoyable part of pension planning! Some people’s retirement plans include travelling the world and supporting their grandchildren. Others have ambitions simply to remain active and enjoy their garden. Whatever your plans are it is worth remembering that the basic state pension is just £129.20 a week in 2019/20. However modest your plans, we suspect you are going to want a little more than that to live on.

What pension contributions can you afford?

This is an essential question, and it would be worth considering before you come to talk to us. Ideally you would be able to put aside a sum every month to invest, so do think about a sum that is affordable for you.
Don’t forget that whatever you put into your pension, you automatically get 20% tax back from the Government as an additional deposit. So for example £200 a month from your bank account means £250 a month goes into your pension.

What if things change?

Don’t forget, we offer all of our pension clients an annual review, so if your circumstances change, you can adjust the amount you put into your pension.

If you would like to review your existing pension arrangements, contact us on 01543 410512 and make an appointment to see one of our advisers.

Old Pensions and Coffee

Our client asked us to review a number of pension schemes from old employers, with one of the schemes run by a well-known Scottish insurer dating back to the 1980’s.

As part of our review of any pension scheme we write for detailed information on the scheme, and we look at the charges on the contract. In this case alarm bells immediately began to ring, as the fund only had a small value which was surprising given it had been invested for over 30 years. On checking the charges we discovered that there were a number of ‘set’ fees, rather than percentage charges. There were a number of these, such as a set monthly plan charge and also a fee as contributions were no longer being paid. Fortunately such charges are extremely rare nowadays.

When the charges over the year were added up they came to over 10% of the plan value a year, so it is not surprising the value was not great, as it will have been falling year upon year for many years. The projected final values at retirement were nil for every projection, excepting if the higher rate of return were achieved in which case the whole fund could be used to buy about 4 cups of coffee – not a great outcome.

Fortunately having identified this we were able to move the plan to a new contract with a much more attractive charging structure, and whilst the final value of this plan is still not projected to be massive, at least you wouldn’t be able to spend it with 3 friends in one afternoon trip for a coffee.

This shows the benefit of checking pensions, as you don’t know what might be in the background if you don’t know what to look for, or the questions to ask. If you would like us to check out your pension for you please contact us on 01543 410 512 or email enquiries@acuityfinancial.co.uk and we will get back to you, we will even let you have a coffee for free!

 

 

 

Paying the price of the “University Experience”

It’s no secret that the cost of the “University Experience” is now higher than it has ever been. According to The Guardian, the average cost of a degree per child is now around the £85,000 mark, and it is Parents and Grandparents who are playing an increasingly significant role in funding this. The estimated cost of studying in England is £22,189 over a 39-week year, and typical students (whose parents have an average household income) only receive £14,370 in loans and grants, meaning they (or you) need to make up a surplus of £7,819 on average, or £651 a month!

A lot of the older generation have money available to help, but it is locked away in pensions which cannot be accessed. Pension regulations now allow for income to be taken flexibly, on an as and when basis if needed, and this gives Parents and Grandparents the ability to help out the younger generation in paying for their university life, as well as have flexibility on how they take their own income. Let’s not forget that it is not only tuition fees that need to be paid, but books need buying, bills need paying and of course, social lives need funding.

If, on the other hand, you are a younger parent and are now worrying about how you will fund your child’s future education, that is also something we can help you with. Savings Plans and Investment ISA’s are now more important than ever, and they are something which we can look at setting up for you. With the limit on how much you can pay into an ISA now £20,000 per tax year, we can help you to maximise your saving potential for your children’s futures.

If you are in a position where you think that you can help out your Grandchildren or Children, and want to talk to someone about how you can do this, get in touch with us on 01543 440 300, or drop us an email at enquiries@acuityfinancial.co.uk.

An Extra £700 Income Per Year? Yes Please!

Our client had several older style pension plans with guaranteed annuity rates and asked us to look at these, to obtain the best income available for him.

We obtained quotations from the provider, and these showed an annuity rate of only 7.07%. This was less than we expected from our knowledge of this type of scheme.

We therefore queried this with the provider, who confirmed there has been an error, and we finally managed to secure him a rate of 12.75%, which the original should have been.

Our client would not have been aware that the initial rate was incorrect, and if he had not come to us for advice he may have accepted the original quotations.

This error is unlikely to have been picked up by the provider, as data provided by them was incorrect on two occasions when we queried it, and only after a number of telephone conversations and persistence by us that they had made a mistake did we manage to obtain the correct rates.

Finally our client has ended up £700 per year better off, as a result of taking advice.

Our client was very happy and said “Thank you very much for your detailed letter and for all that you have done to secure the best possible rates for me. It was certainly worth my while consulting you!”

If you have any pension plans which you do not know a lot about (or even some that you do!) that you would like us to take a look at, give us a call on 01543 440 300 or email us at enquiries@acuityfinancial.co.uk.

The Value of Financial Advice

New research sponsored by Royal London shows those customers who receive financial advice can be better off on average by £40,000.

Read the full article here.

For more information on how we can help why not contact us on 01543 440300 or enquiries@acuityfinancial.co.uk

Today is the right time

We advised our client to delay taking his pension a few years ago, as it had special benefits. We’ve today set up an annuity for him, which is 159% higher than he could buy on the open market.

Why not make an appointment with us TODAY on 01543 440300 to review your finances, and see what we can do to help you?

Have you checked your pensions or savings recently?

With so much going on, it’s easy to simply file those pension and investment statements without a second glance, as surely the provider will be making sure that your nest egg is performing as effectively as possible.

Well, think again. In many circumstances, unless you make a conscious effort to review performance and change your investment strategy, then nothing at all will happen to ensure that your investments strategy is working in the way it was designed.

Why not call or email us for a no-obligation appointment on 01543 440300 or enquiries@acuityfinancial.co.uk

 

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