Important pension notice: 55% ‘death tax’ abolished

Ahead of the major pension changes already announced for April 2015, the Chancellor, George Osborne, this week announced another shift in pension policy that could have a big impact on many savers and their financial planning requirements.

Speaking at the Conservative Party’s Annual Conference, Mr Osborne announced the abolition of a so-called ‘death tax’, which can see any pension remaining on death taxed at a rate of 55%, before it is passed on to a beneficiary. The change, as with the other changes to pensions already announced, will be introduced from April next year.

The 55% tax is already waived when pension savings are passed to a spouse or a financially dependent child under the age of 23. The government estimates that the new change announced by Mr Osborne will impact an extra 320,000 people outside of the above groups. The details of the changes revealed different permutations for beneficiaries depending on how old the pension holder is at the time of their death.

• If the deceased is 75 or over, beneficiaries will pay only their marginal rate of income tax, with no limit on how much of the pension fund can be accessed at any one time.
• If the deceased is under 75, access to the pension fund will be tax free, including situations where the pension has already entered drawdown.

The proposal only impacts defined contribution pensions, although there may be new options to consider for individuals in final salary schemes. Similarly, the vast majority of the 320,000 people per year the government estimates this change will benefit will be individuals already in retirement. For those who pass away having not yet started to access their pensions, passing on savings to a beneficiary is a simpler affair, as your pension is counted as being outside of your estate for tax purposes.

The change has been seen by many as a continuation of the changes announced by Mr Osborne during March’s Budget. During that announcement, the Chancellor effectively abolished the need for savers to rely on an annuity in retirement, a device which could also see a portion of pension savings effectively wasted, when it comes time to pass on your estate to your family. The new taxation system announced this week effectively aligns the taxing of pension savings on death with the new approach to pensions which is due to become active in April 2015.

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Sources: George Osborne Conservative Party Conference speech (29/09/14), http://www.theguardian.com/money/2014/sep/29/who-benefits-abolition-55-percent-tax-pensions, http://www.bbc.co.uk/news/uk-politics-29402844

The 8 most important points from the 2014 Budget

The Chancellor may have gone for the popular phrase from Chancellors of yore by taking ‘a penny off a pint’, but what were the real big announcements during The Budget 2014? We summarise the 8 main points:

1. Changes to pensions mean many more options than just buying an annuity

In measures to be introduced in April 2015, pensioners will have complete flexibility on how much of their pension they want to take at retirement, effectively eliminating the need to buy an annuity. This opens up many more options for what to do with your pension in your retirement years.

2. ISA revisions are great for savers

The ISA limit was increased to £15,000 a year and it was announced that Stocks & Shares ISAs and Cash ISAs would be merged into a New ISA. Again, this gives savers much more flexibility and potentially allows more of their income to be shielded within the tax free accounts.

3. New additions to the bonds market

A new Pensioners Bond will be introduced at the start of 2015 with what were described as ‘market leading rates’, thus giving pensioners another option for what to do with their newly released pension savings! There were also changes to Premium Bonds, with an increase in winners promised.

4. Personal tax allowance increase

The personal tax allowance was confirmed as increasing to £10,500 in April 2015, with the increase at the start of the tax year in April going to £10,000. Good news in that a little more of our money is saved away from taxation!

5. Small pension limits increased

For any small pension pots currently held, there was an increase in the total amount of individual pot that can be taken as a lump sum to £10,000. The Chancellor also announced an increase in the total number of pots, up to this size, that could be taken to three, meaning £30,000 could be taken in total.

6. Flexible drawdown limits reduced

In yet another pensions related matter for what was a busy Budget for the industry, savers now only need to have £12,000 (as opposed to £20,000) in their pot in order to access flexible drawdown.

7. Small measures for individuals and businesses; fuel duty, minimum wage and apprenticeships

Whilst these might not be the headline grabbers in overall cost terms, they will have an impact for many individuals and business owners. Fuel duty has been frozen in another attempt to get the current high costs down, whilst both the minimum wage and the number of apprenticeships were increased, with the Chancellor promising to ‘double’ the latter.

8. The new pound coin!

Perhaps it’s not actually one of the most important points from The Budget (though the Chancellor would point to the increased percentage of forged pound coins, which cost the economy) but it will certainly be one of the more visible ones when the new coin starts to enter circulation at some point around 2017.

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Sources: gov.uk

VCTs and EIS compared

Both are high risk investments – but both have the potential of high reward…

Let’s start with some facts. A Venture Capital Trust (VCT) is an investment vehicle quoted on the stock market, like an investment trust. The VCT scheme is designed to encourage investment in smaller, normally higher risk companies, often including start-up companies. The VCT therefore has to hold at least 70 per cent of its portfolio in these qualifying companies with a range of rules defining what is and isn’t a qualifying company. For example, no company it invests in can have gross assets in excess of £15m and none may comprise more than 15 per cent of the entire portfolio.

An Enterprise Investment Scheme (EIS) is an investment in a single unquoted, privately held company. With such an investment, there’s also an opportunity to participate in the running of the business – and to get paid for doing so.

Both investments come with substantial tax breaks. With a VCT, you can invest up to £200,000 per tax year in ordinary shares and qualify for 30 per cent income tax relief, provided you hold the shares for at least five years. There’s no CGT on disposal (but also no CGT relief on losses). Dividends are exempt from income tax.

With an EIS, you can invest up to £1,000,000 and receive 30 per cent income tax relief if you hold the investment for three years. Gains are CGT free, and you can defer CGT gains on other assets by investing them into an EIS. The charges on both VCTs and EIS are higher than on unit trusts and investment trusts.

So, which is better? For many of us, the answer would be “neither”. Both are high risk investments – due to the inherent fragility of start-up companies, in which both vehicles invest. According to the Times 100, one in three UK start-ups don’t last three years. The reasons are many: lack of experience, over-borrowing and under-capitalisation, poor business models, and so on. It’s possible to lose all your money invested in a VCT or an EIS.

However, this means that two-thirds of start-ups do survive: and some of these inevitably go on to become very successful.

So, while unsuitable for novice investors, more experienced and wealthier investors might want to consider these as part of their portfolio.

That being said, which is best? That will depend on your circumstances. However, the VCT spreads risk by investing in a number of companies, not just one like the EIS. Also, because VCTs are traded, you can sell them after five years (or earlier, if you’re prepared to forego the tax breaks). An EIS is highly illiquid, and usually the only way to realise your investment is through flotation.

As always, taking expert, independent financial advice is suggested before indulging in this form of investment. But if you’re happy to take on extra risk for the potential of greater gain, they might be worth considering.

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Sources: hmrc.gov.uk