Read this if…

You have a pension which is receiving, or may receive, contributions from you or an employer.

If any of the following points apply to you, contact us or your own financial planner for further advice:

 Before April 2011

• You make, or plan to make, total contributions of £20,000 or more (including those from an employer) and in the 2008/09, 2009/10 or 2010/11 tax years earned £130,000 or more from ALL sources (including interest, dividends and rent etc).
• You earn less than £130,000 and plan to make contributions (including those from an employer) of more than 100% of your salary (but NOT dividend) if in employment or profit share if in partnership.
• The total value of your pension funds is £1.5 million or more, even if you have Enhanced Protection.

After April 2011

• You have a final salary pension and expect your annual pension entitlement to increase by more than £4,000 a year. (There are examples below to show who this may apply to).
• You plan to make contributions (including any from an employer) of more than £40,000.

Either Before & After April 2011

• You are a Controlling Director and plan employer contributions of more than 100% of your salary (P60 and P11D but NOT dividends).

Background

The rules on pension tax-relief became a mess as the last government restricted tax-perks for high earners. The new government can’t reverse all the restrictions at this time for political reasons, but it will make the rules clearer. This is good news because it means you will be less likely to break the rules by mistake and suffer a tax-charge.

The mess we’re in

For everyone

Under the current rules an individual is eligible for income tax relief on pension contributions in a year where:

• The individual pension contributions do not exceed the higher of £3,600 or 100% of relevant UK earnings (see Jargon Buster); and
• The total amount contributed (including employer contributions) does not exceed the Annual Allowance.

Currently the Annual Allowance is £255,000.

The Lifetime Allowance (currently £1.8 million) restricts the benefits available to pension funds worth more than this amount.

 For high earners
Until April 2011 we will suffer the madness that is anti-forestalling and the Special Annual Allowance. In brief, for people earning over £130,000 in 2010/11 (from ALL sources) tax-relief is restricted to total contributions of £20,000 (or £30,000 in some cases). The income calculation is absurdly complex and the penalties for exceeding the limits are penal.

For controlling directors
We also have the uncertain mess created by provisions in the Business Income Manual (BIM 46035, 47105 and 47106) which cover whether or not employer pension contributions for Controlling Directors can be treated as a trading expense for the purposes of Corporations Tax.

Proposed changes

From April 2011 the Government plan to make the following changes:

• End the Special Annual Allowance for high earners.
• Reduce the Annual Allowance for everyone to probably £40,000 (but definitely between £30,000 and £45,000).
• Reduce the Lifetime Allowance, probably to £1.5 million.
• Cap tax-relief at 40%, even for 50% rate tax-payers.
• Remove the exception to the Annual Allowance where pension benefits are brought into payment within 12 months of the contribution being made.
• Remove Enhanced Protection which allowed some large funds to avoid the penalties for being larger than the Lifetime Allowance.

We know of no changes to the Business Income Manual affecting employer contributions for Controlling Directors, which is a shame.

Final salary pensions

For members of final salary pensions every £1 increase in annual pension entitlement counts as £10 for the Annual Allowance. So anyone whose pension entitlement increases by more than £4,000 will be caught by the new Annual Allowance. This will disproportionately affect members coming up to retirement. See this example for members in a 60ths scheme:

If the member has 39 years of service and earns £50,000 the pension entitlement is £32,500 a year. If this member has a pay rise of more than £4,750 next year he will fall foul of the new Annual Allowance.

If a different member has only 19 years service and earns £50,000 the pension accrued is £15,833 a year. This member can receive a pay-rise of £9,500 before they fall foul of the new Annual Allowance.

We expect HM Treasury to devise a more generous method so that fewer final salary members are caught by the lower Annual Allowance.

Heading in the right direction

On balance PageRussell believe the Annual Allowance reduction is a reasonable price to pay to end the Special Annual Allowance madness. The other planned changes will not affect many people but they will be unfairly penal those who are. We hope HM Treasury sees sense before next April.

As ever the devil will be in the detail and there is plenty of time for these changes to be altered before next April. We will publish updates on these changes when available.
In the meantime if you have any queries please email Tim Page at tim@pagerussell.co.uk

More information is available from HM Treasury.

Important declaration

This document does not recommend you buy, redeem or vary any regulated investment. It is believed to be accurate as at 29th July 2010; however no warranty is given as to its accuracy and no responsibility can be accepted by Page Russell Ltd for any action taken in reliance on its contents.

Who should read this?

This Briefing Note will be of interest to people who are close to or already drawing down from their pension (and their advisers). It should be useful to younger people wondering whether it is worth using a pension as a vehicle for saving for their financial independence.

This Briefing Note is about rules for individual pensions such as personal pensions or SIPP; not final salary pension scheme benefits.

The headlines

There are two useful changes which are due to come into force from April 2011.

First, there is no need to make any change to a pension fund at age 75. You will not be forced to buy an annuity.

Second, if you can prove you have a minimum income from other sources you will be able to “draw down unlimited amounts” from your pension fund.

What happens currently?

Currently from age 55 to 75 you can take a tax-free cash lump sum (usually 25%) from your pension fund and either buy an annuity or draw down an “unsecured pension” from the fund.

At age 75 if you don’t want an annuity you can take Alternatively Secured Pension. This option has strict income limits and an eye-watering 82% tax on any cash lump sum paid on death. It is not a practical option for most people and effectively forces people to buy an annuity.

What’s wrong with an annuity?

Not a lot. Annuities are a cost effective way of buying guaranteed life-time income.

An annuity is insurance against living too long. You hand over a premium (your pension fund) and the insurance company guarantees to pay you an income for the rest of your life – however long or short that is.

Objections to annuity purchase are often emotional, although this makes them no less valid. For example, most PageRussell clients will be on the “winning” side of the annuity gamble and live longer than average; but we understand why they may not want to take the risk. So we understand why having an alternative to an annuity is important.

Long-live drawdown!

From April 2011, the same options will be available whenever you take your pension benefits (which can be any time after your 55th brithday):

• Annuity
Buying an annuity will continue be appropriate for many retirees, especially as money-back guarantees will be allowed on death after age 75.

• Capped drawdown
This option will be similar to the current Unsecured Pension, although we suspect the maximum income limit will be reduced slightly. There has been no mention of a minimum limit, so we expect this to remain at £Nil.

• Flexible drawdown
This option will allow individuals to “draw down unlimited amounts from their pension pot, provided that they can demonstrate that they have secured a sufficient minimum income to prevent them from exhausting their savings prematurely and falling back on the state”.

The 25% tax-free cash option will remain available, even after age 75. Benefits drawn down will continue to be taxed as income.

Minimum Income Requirement

Flexible Drawdown is a useful innovation. But before we get too excited, we need to know what the “minimum income” requirement will be.

To count, any income will need to be:
• Already in payment (that is, not deferred)
• Guaranteed for life
• Inflation proofed

The Basic State Pension and State Second Pension (was SERPS) would count, as would any index-linked annuity or final salary pension. But salary from employment and dividends will not.

The amount of Minimum Income Requirement could be as low as £7,600 or as high as £22,000 a year per person.

What happens if you die?

On death any funds in drawdown (capped or flexible) which are paid out as a lump sum will be taxed at 55%. This compares with 35% now for Unsecured Pension and 82% for Alternatively Secured Pension. This is good news for those aged over 75, but potentially bad news for those aged under 75. Beneficiaries can avoid this tax by buying a dependent’s annuity or continuing in drawdown.

Untouched pension funds can be paid out as cash, free of inheritance tax before 75. It looks like after age 75 untouched pension funds will suffer a similar 55% tax charge.

Welcome reforms

On the whole PageRussell believe these planned changes are welcome and will give savers more confidence that money saved in a pension is not wasted. As ever the devil will be in the detail and there is plenty of time for these changes to be watered down before next April. We will publish updates on these changes when available.

In the meantime if you have any queries please email Tim Page at tim@pagerussell.co.uk

More information is available from HM Treasury .

Important declaration

This document does not recommend you buy, redeem or vary any regulated investment. It is believed to be accurate as at 16th July 2010; however no warranty is given as to its accuracy and no responsibility can be accepted by Page Russell Ltd for any action taken in reliance on its contents.

Yesterday the Financial Services Authority (FSA) announced plans to make it more difficult for borrowers to get a mortgage. If implemented, these changes will make mortgages more expensive for everyone. The self-employed, first-time buyers and those with a poor credit history will be worst hit.

A painful adjustment

Many people will justifiably argue mortgage market reform is long over due. The problem is that the adjustment to this brave new world will be painful for a generation of homeowners used to cheap mortgages and large loans.

Plan now

Many existing borrowers are relying on low interest rates now and hoping that when rates go back up the mortgage market will be back to its pre-Credit Crunch easy ways. It won’t. You need to plan for this now.

The FSA is now nanny

The FSA used to think if banks treated their customers fairly, customers would make sensible borrowing decisions. But many customers consciously borrowed too much, are only surviving because of low interest rates and can’t save enough for retirement. In future the FSA will act to save consumers from themselves.

It’s all about affordability

Despite some media reports, the FSA does not plan to ban high Loan-to-Value or high Loan-To-Income mortgages – as long as the borrower can show they can afford it.

Lenders will have to check the affordability and income of the applicants for ALL new mortgages (compared with only 57% now). The problem is the calculation will be more conservative than in the past, meaning you can borrow much less – especially those with a poor credit history.

What does this mean?

The extra work for the banks in checking affordability will mean more expensive mortgages for all borrowers.

It will be harder for many people to trade up. Many existing borrowers will be trapped in their current loan, as remortgaging will be more difficult.

Incomes will have to be independently verified – killing off self-certification and fast-track mortgages. This will make it almost impossible for anyone who is self-employed to get a mortgage without 3 year’s accounts.

People with a poor credit history will find getting a loan very tough.

First-time buyers will find it much harder to get a big enough loan to buy their first house than was the case before 2007.
The lenders will continue to squeeze mortgage brokers out of the market, making it even more difficult for borrowers to remortgage.

These changes will put a brake on house price rises over the long-term.

What should you do?

These and other changes mean it will remain difficult to get large mortgages. Also interest rates will go up again eventually. This will be a painful adjustment for the generation of new borrowers since the mid-1990s who are used to easy credit and ever-rising house prices.

You need to prepare for this now whilst you can:
• If you have any bad debts, pay them off. If not, make sure you don’t miss any bill payments.
• If you are planning on going self-employed, get your mortgage first.
• If you are coming to the end of an interest deal on your existing mortgage, accept that you may not be able to remortgage like you have in the past and plan for any increase in payments.
• If you have any spare cash, pay down any credit cards, unsecured loans, and then any existing mortgage. Don’t take on any more unsecured debt if you can avoid it.
• If you want to buy your first home, save like hell. You’ll need a bigger deposit or will have to wait longer.
• If you have to trade up, don’t stretch yourself financially if you can avoid it. If you do stretch yourself, accept that it won’t be feasible to remortgage for many years – so get a deal you know you’ll be able to afford.

It’s an ill wind that blows no good

In future everyone who gets a regulated mortgage can be reasonably confident they will be able to afford it. The scary fact is that many people have borrowed in the past without this reassurance. By borrowing less you will have more cash every month to save for retirement, or a something you think is more important like a holiday…

Important declaration

Page Russell Ltd does not advise on or arrange regulated mortgages. We can give generic advice and commentary and are happy to answer any general queries you may have. If you need specific advice on a regulated mortgage we can refer you to one of our Approved Expert mortgage brokers. This document does not recommend that you buy, redeem or vary any regulated mortgage contract. Your home may be possessed if you do not keep up the mortgage payments. Buy-to-let mortgages are not regulated by the Financial Services Authority.

Congratulations to Tim on the birth of his son Edmund Richard Page (Eddie) on 19th June. Eddie and his mum Annie are both doing well. Tim is now back at work again and “enjoying” the sleepless nights.

“I feel relieved and in charge of my destiny once more.

A great deal of pressure has been released from me personally. My ‘black holes’ and ‘no go’ areas have been visited and plugged and I can now make better-informed decisions. I feel I have found honest and interested support from a firm that want to understand my issues both personally and business related and want to help me succeed.

If it wasn’t for PageRussell, I would have searched long and hard to find such a good service delivered with feeling and passion surrounded by a family business atmosphere.

The service and advice was provided impartially, with sensitivity and good knowledge and focus on the full range of business matters.

I felt comfortable with PageRussell from the very first meeting, with the discussions that took place and the initial advice given. The company oozed sincerity and genuineness as well as credible expertise and advice on the illustrations presented”.

Phil Taylor, Brett Valley
www.brettvalley.com

“The service has always been first class and professional. PageRussell “tell it like it is” with clear and bare facts, no hidden agendas. I feel more assured about my financial future and more relaxed about having treats now instead of thinking I have to save for a rainy day all the time.”

Dorothy Heng, Eastravel Ltd

www.eastravel.co.uk

Influenced by traditional financial advisers, most people only buy a financial product as a reaction to a life event.  They might move house and buy a mortgage; change jobs and buy a pension; have children and buy life insurance; or they might read in the financial pages of a newspaper that gold funds will grow at 20-30% minimum every year and invest all their money there.  This series of uncoordinated events results in a trolley full of policies.

Will you have what you need at the check out?

The problem is there is no form of measurement until it is too late.  You reach the check out at retirement and have to hope that you have enough in your trolley to last you through.  Or worse something goes wrong on the way to the check out (such as an illness or accident) and you have to rummage in the trolley in the hope that there’s something there to deal with the problem.

This retail service is flawed

Even in the best hands traditional financial advice delivered this way will be at best reactive and almost always result in the sale of a product.  In the worst hands this service can lead to biased and expensive advice; with no measurement of how far the existing arrangements will get you towards your objectives.

Advice not products

Because you are buying policies, the people who deliver the traditional advice service to you tend to get paid commission.  They get paid according to what they sell.  This payment method works in most retail environments.  And you might ask why it should not be so in financial services.  We think the reason it should not is that most people go to a financial adviser for advice – not a shopping trip.

Problems with commission

Commission-based advice only works because of cross-subsidisation.  Clients that buy policies paying big commissions, also pay for all the time the adviser spends with clients that don’t buy or buy smaller policies.  This cross-subsidisation is being driven out of the market.  Traditional advisers have to compromise themselves or their clients more and more, just to make enough money to keep their businesses afloat.

This cross-subsidy is under threat from financial services companies who can’t afford to play that game any more; the Government who have decided enough is enough and are introducing ways to end commission for investment advice; and wealthy clients who see the conflicts of interest and no longer want to subsidise other people’s advice.

The alternative is financial planning

A financial planning service is more comprehensive and proactive.  It equips you with the tools you need for your financial journey through life.  Crucially it measures your progress.  Financial planning shows you how much to save or spend; to invest or repay debt; how fast your investment needs to grow, the corresponding investment mix and what insurances you need to live your desired lifestyle.

Very often a financial planning service will recommend you avoid or get rid of financial products.  This conflicts with commission-based advice.

A financial planning service will not work if it is commission-based.  It has to be fee-based so it protects your confidence and trust in the impartiality of the service.

PageRussell can help

We provide financial planning and investment services to individuals, business owners and trustees in East Anglia and London.  To find out more check out the How we work section of our web site or call us on 0845 345 6282.

Her latest success was with the CF4 paper on Retirement Planning on 28^th May 2010.  Only one more paper and she’ll have her Certificate.  Well done Hayley!