Could Relevant Life Policy be a tax-efficient way to provide you with peace of mind?
It's natural to want to protect your family. Life Insurance can help give you peace of mind that, should the worse happen, they'll be financially secure. But there could be a way that's more tax-efficient to provide security for your loved ones. Relevant Life Insurance is a way for business owners to provide effective cover for themselves and employees, benefitting the company, members and potential beneficiaries in the process.
Before we delve into why a Relevant Life Policy can be an efficient alternative; why is Life Insurance important at all?
In simple terms, Life Insurance is a policy that pays out in the event of your death. It's not something anyone wants to think about. However, it's a policy that can provide your loved ones with increased financial security during what will be a difficult time. The money received from a Life Insurance policy could, for example, be used to pay off the mortgage, pay for a child's education and ensure living costs are taken care of while your family grieves. It can give you peace of mind that should something happen to you, your family will be financially secure.
Life Insurance can also be used to leave an inheritance. By naming your beneficiaries you can ensure that something is left behind to those you care about, paving the way for greater financial security for them.
What is a Relevant Life Policy?
A Relevant Life Policy is very similar to traditional Life Insurance; it will pay out a pre-defined sum on your death to named beneficiaries. However, the key difference is that it's offered through a company as a form of death-in-service benefit. The policy is paid for by the company, but pays out to an employee's or director's beneficiaries on death.
A Relevant Life Policy may be attractive if you're a:
- Company director that wants life cover to protect family or to complement existing Life Insurance policies
- Business owner that wants to offer death-in-service benefits to staff members
All Life Insurance policies come with a cost. This premium will be based on a range of factors, including the level of cover desired, age, health and lifestyle choices, such as whether you smoke cigarettes. While it may seem like an expense that isn't necessary, when you consider the security that Life Insurance offers, it's typically one that's worthwhile.
How can a Relevant Life Policy be used to reduce costs?
When you compare a Relevant Life Policy to a traditional Life Insurance policy, it will provide benefits at a lower cost thanks to being tax-efficient. First, when a company pays the premiums towards a Relevant Life Policy, they're usually considered allowable for deductions and not benefits in kind. This means the premiums can be treated as business expenses and you're able to use them to deduct against Corporation Tax, reducing the amount paid.
For holders of a Relevant Life Policy, no National Insurance or Income Tax is liable on the premiums. Premiums also don't form part of an individual's Annual Allowance for pension savings, this is in contrast to Group Life Schemes which do and can result in a tax bill if the threshold is crossed. For high earners who have a tapered Annual Allowance, this can make a Relevant Life Policy particularly attractive.
The tax-efficient benefits can make a big difference to the amount you pay for the financial security a Relevant Life Policy offers. An example created by Zurich demonstrates why using Relevant Life Policy may be more prudent as a company director. According to the insurer:
Mr A is a shareholding director that pays £200 a month for his life cover from his salary after tax. As a higher rate taxpayer, he pays 40% Income Tax on the higher part of his salary, as well as the extra 2% rate above the upper earnings limit for National Insurance.
Once the pre-tax income needed to fund the £200 life cover policy is considered, as well as employer National Insurance contributions, it's estimated to cost Mr A and his company £317.86. In contrast, using a Relevant Life Policy could reduce this to £162.00, a saving of £155.86 a month.
The above example assumes Mr A pays his premiums from his higher marginal rate of tax, and his salary, National Insurance contributions and Relevant Life Policy premiums are all allowable deductions for Corporation Tax.
For beneficiaries, a Relevant Life Policy has the advantage of being paid tax-free, including usually being exempt from Inheritance Tax. This means you can rest assured that those you want to benefit from a Relevant Life Policy will receive the sum specified should you die.
Additional benefits of a Relevant Life Policy
In addition to costing less, a Relevant Life Policy can also have other benefits:
- Compared to the alternative of a Group Life Scheme, a Relevant Life Policy can provide a lower cost and less complex solution, this is particularly true if you have few or even no employees
- A Relevant Life Policy is an attractive perk for employees that can help attract and retain key members of staff.
- It allows business owners to cover themselves using their business rather than personal income
If you'd like to learn more about Relevant Life Policy and whether it's the right option for you, please contact us.
Why are more retirees using Equity Release?
Some retirees are finding themselves asset rich but cash poor, impacting the lifestyle achieved. It's a trend that's led to an increasing number of people using Equity Release products to unlock wealth currently locked away in property. If you're looking for ways to boost your retirement income, Equity Release could be an option that helps improve your overall lifestyle and financial security.
Equity Release is the term for a range of products that allow you to access the wealth that's currently held in property. Usually, it's only available for those aged over 55 that own their home, you don't always need to be mortgage free. The most common Equity Release product is a Lifetime Mortgage. This can pay out either a lump sum or several smaller payments over time. There are multiple products to choose from if you're interested in Equity Release, often the interest will be rolled up so repayments aren't required, but there are some that allow you to repay interest and/or the capital.
Figures from the Equity Release Council revealed that for every £1 of savings accessed via flexible pension payments, 50p of housing wealth is unlocked. Data shows in 2018, total lending activity through Equity Release grew for the seventh consecutive year, reaching £3.94 billion, following a 29% year-on-year rise. The trend indicates that for some retirees Equity Release is an important part of financial security.
Five reasons Equity Release is rising
There are many reasons why Equity Release has become more popular in recent years, among them are:
1. Property price rises: One of the key factors influencing the popularity of Equity Release is property prices. Over recent decades, property prices have soared. It means that many retirees that have paid off their mortgage are finding their home is worth more than anticipated. The average home in the UK is worth around £226,000. It's a sum that could help you achieve retirement aspirations when coupled with pensions, savings and investments.
2. Flexible lifestyle: Retirees today often desire a lifestyle that is more flexible than previous generations. As a result, having a fixed, regular income throughout retirement may not suit retirement objectives. Equity Release allows homeowners to increase their income at points either through a lump sum or over several small payments. It can be a tool to help you tick off one-off expenses, such as travelling or renovating your home, or increase long-term income.
3. A desire to help younger generations: As younger generations struggle financially, more parents and grandparents are choosing to lend financial support. As life expectancy rises, an inheritance is likely to come too late for many striving to reach significant milestones, such as purchasing their first home. Equity Release is one option for accessing some of the wealth you've built up in property to provide support to loved ones at a time when they need it rather than leaving a home as an inheritance.
4. Increased number of products: There's a growing number of Equity Release products available, leading to a more competitive market and lower interest rates. According to the Equity Release Council, there were just 58 product options available in 2016. This figure has more than doubled in two years, reaching 139. As a result, the products on offer are more likely to appeal to more retirees than previously.
5. Product diversity: It's not just the number of products that have increased, there's a wider range of products types. Just a few years ago, there was little difference between the majority of Equity Release products offered, now there's more choice that can help give you peace of mind. For example, many products now offer a no negative equity guarantee and there is a growing range that allows you to pay back the capital borrowed. Increased diversity naturally means that you're now more likely to find an Equity Release product that suits your goals and concerns.
What is Equity Release being used for?
One of the attractive features of Equity Release is that the money accessed can be used in any way that you want. From supplementing general lifestyle costs through to a once in a lifetime holiday, home renovations or paying for long-term care. It's an option that gives you flexibility.
However, you need to ensure that your plans for the money secured through Equity Release is sustainable, whether you take a single lump sum or want to make multiple withdrawals. There is only a finite amount of capital that can be withdrawn from your home, so it's important to think about how you'll use it to achieve your aspirations before making a decision.
If you're considering Equity Release, it's also important to be aware of the drawbacks and alternative solutions first. It's not an option that's right for everyone, contact us to discuss whether Equity Release could help you.
Auto-enrolment increases, but many still won't be saving enough
Auto-enrolment has been hailed a success in getting workers to save for their retirement. However, as minimum contributions are set to rise, there are concerns more will opt out and figures highlight many still won't be saving enough to support them once they give up work.
While auto-enrolment may not be an issue affecting you, it's likely having an impact on the way your children or grandchildren are saving for retirement.
What is auto-enrolment?
Auto-enrolment means the majority of workers in full-time employment in the UK are automatically enrolled in a Workplace Pension, making at least minimum contributions. The initiative aimed to ensure more employees are actively saving for their retirement. With the number of Final Salary pensions offered to employees falling, the responsibility for saving for retirement has shifted to the individual.
Since launching in 2012, ten million UK workers have been auto-enrolled into a Workplace Pension. As a result, the policy has been considered a success. Minimum contribution levels have already increased once, and are now just weeks away from rising again for the tax year 2019/20. It'll mean those currently paying the minimum levels will see the amount being taken from their salary increase each month. There are some concerns that it may lead to more employees opting out of their pension, putting future financial security at risk.
| Date | Employer minimum contribution | Employee minimum contribution | Total minimum contribution |
| April 6 2018 - April 5 2019 | 2% | 3% | 5% |
| From April 6 2019 | 3% | 5% | 8% |
However, even with minimum contributions increasing, it's projected that millions will still be undersaving. According to NOW: Pensions, around 12 million people relying on a Workplace Pension could find they face a shortfall when they reach retirement age. The figure is equivalent to 38% of the working age population.
While undersaving is an issue that affects those in low paying positions, it's also a concern for many others. The research indicates that 87% (10.4 million) of those identified as undersaving earn more than £25,000 annually. As a result, many graduates and other professionals could be on track for a retirement that's less financially comfortable than thought.
Encouraging loved ones to engage with their pension
If your children or grandchildren are thinking of opting out of their Workplace Pension or relying on the minimum contributions to provide a comfortable lifestyle, encouraging engagement with their savings can help. The sooner workers get to grips with their pension and understand what it means for retirement, the more likely they are to achieve their goals. So, how can you help?
Explain the benefits of increasing contributions: For younger generations paying off a mortgage or rent, increased pension contributions can seem like an expense they can't afford. However, once you look at the benefits, such as increased tax relief and compound investment returns, it can often be viewed as a prudent, long-term investment decision. It may mean they're slightly worse off financially now, but provide much larger gains for the future.
Encourage them to understand projections: When you look at the projected income from a pension it often has little meaning. Just a glance at the value a pension is expected to be worth at retirement doesn't demonstrate the level of income it will provide or how long it could last for. As a result, delving deeper is crucial for understanding if they're on track to meet retirement goals. Realising they could fall short of their desired lifestyle may give workers the push needed to start increasing contributions.
Look at other ways to fund retirement: While pensions are a tax-efficient way to save for retirement, it can be complemented by other savings or investments. If your loved ones are worried about increasing pension contributions as they'll be locked away until they approach retirement age, exploring alternatives may be the answer. Putting money into an ISA (Individual Savings Account) or creating an investment portfolio with a retirement goal could provide more flexibility and reassurance.
Suggest where to seek professional support: Working with a financial adviser can help put decisions related to a pension into perspective, as well as highlighting how to make the most of income and wealth. However, younger generations may believe they don't need professional support yet. Providing them with insights into how and why you use a financial adviser, along with recommendations, can improve their financial security over the short, medium and long term.
To discuss how your pension is on track to provide the retirement you want or to connect us with the next generation of your family planning for their later years, please contact us.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace Pensions are regulated by The Pension Regulator.
Should you take action if your investments underperform?
Investment markets in 2018 saw the return of volatility. A range of factors, from Brexit to US trade policy influenced how well stocks and shares performed. For some people, it means investments may not have delivered the return expected. A glance at returns that are below projections can naturally lead to the feeling that something must be done, but is it the best course of action?
Investment in stocks and shares will always come with some degree of risk and should be considered a way to build wealth over the long term, rather than a quick fix. However, even with this in mind, when you see the value of investments fall a knee-jerk reaction can be common. While you hopefully invested with a long-term plan and goals in mind, a fall in value can cause concerns that you've gone off track, or your financial security is threatened.
But, often the best course of action to take is to do nothing at all.
When analysing historical data, it shows investment values typically bounce back, and go on to deliver returns. The 2008 financial crisis is a recent example. While those investing in 2007 are likely to have seen the value of their stocks and shares plummet over the course of 12 months due to the financial crisis, since then many funds and investment portfolios have gone on to recover their losses and generate positive returns.
The FTSE 100, which tracks the value of the 100 largest companies listed on the London Stock Exchange, tumbled 12.5% in 2018, the biggest annual decline since 2008. It wiped off more than £240 billion of shareholder value. It can be unnerving to see values fall, but a key thing to keep in mind is that losses are only set in stone when you sell.
So, while investment values may have tumbled in 2018, it doesn't necessarily mean you need to change what you're doing in 2019.
Steps to take if your investments have underperformed
Although investment markets have historically recovered, doing nothing at all as investments lose value can be a difficult mindset to master, even when you know it's what should be done. Here are five things you can do to ease concerns and keep your investments on track amid volatility.
1. Take another look at your long-term plan: Looking at the bigger picture can put volatility into perspective and demonstrate how long you have for the value of investments to recover. Short-term volatility should be factored into an investment plan, so the impact of recent dips should be minimal when you look at the full timeframe.
2. Speak to your financial adviser: If you have concerns, speaking to a financial adviser can help you understand the impact volatility will have on your overall life goals. It's an opportunity to bring up particular worries you may have with a professional that understands your aspirations.
3. Consider risk exposure: All investments carry some level of risk. However, if you feel uncomfortable with the level of volatility you've experienced in the last 12 months it may be time to reassess where money is being placed. Risk is individual and should consider both your attitude and circumstances, as both of these can change, regular reviews are important.
4. Evaluate portfolio diversity: An investment portfolio should place money in a range of areas, spreading risk and balancing exposure in line with your goals. It's important to evaluate and rebalance your portfolio where necessary on a regular basis, reflecting your attitude to risk and wider market behaviour.
5. Set review points: It can be tempting to check how investments are performing frequently. However, markets naturally fluctuate on a daily basis and it can give you a skewed outlook of performance. Instead, set out points where you'll review your investments and financial plans as a whole, for example, every six months, as well as following life events.
Is volatility an investment opportunity?
Falling investment values can present opportunities too. Having seen investment values fall you may be reluctant to put more money into the markets. However, it could deliver greater benefits. Buying stocks and shares when the price is low allows you to take advantage of potential rises in the future.
Of course, it's important to weigh up the pros and cons of any investment decision before proceeding. You should evaluate a range of different areas, such as attitude towards risk, capacity for loss and portfolio diversity, to identify opportunities that are right for you.
Whether you're concerned about your portfolio or would like to increase the amount invested, we're here to offer you guidance and support throughout.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
How long could you survive without your income?
If your income were to suddenly stop, how long would you be able to continue your lifestyle, how long would your savings last for?
It's not something anyone wants to think about, but the truth is, people lose their income every day, ranging from illness, being involved in an accident to facing redundancy. Understanding how you'll get by should something happen, can put you in a better position financially, and reduce the stress experienced if you're affected.
We often think 'it won't happen to me'. But official figures show that more than a million workers are off work for more than a month, every year. Do you have a capacity to cover a month's worth of outgoings without it impacting your lifestyle? Research from Royal London found that more than half of workers would worry about their income should they be unable to work for an extended period of time.
Building an emergency fund
One of the best places to start when taking steps to improve your financial security is to start building up an emergency fund, if you haven't already done so.
It's recommended to have between three and six-months' income readily accessible should you experience a financial shock, from an unexpected bill to losing your income. This gives you a financial buffer and peace of mind too; should something happen, you'll know your bills and other financial responsibilities will be taken care of.
While several months salary can seem like a big step initially, even putting relatively small sums away each month means the safety net will quickly grow.
When searching for a home for the emergency fund, make sure it's accessible. Of course, an account that will generate as much interest on this sum as possible is attractive, but be sure your money isn't tied up for a defined period of time before making a decision.
Check your sick pay entitlement
Check your employer's sick pay policy. These vary significantly and some firms don't offer sick pay at all. Understanding what you'll be entitled to if you were unable to work due to illness or injury puts you in a better position to plan and make further deposits to your emergency fund if necessary.
Statutory Sick Pay (SSP) covers most employees, however, some are excluded, and is paid by the government if you're off work for a minimum of four consecutive days. It will pay out for up to 28 weeks, but at just £92.05 per week, it's likely many will face a shortfall if relying solely on SSP.
Company sick pay policies are often more generous, paying your average wage or, a portion of it each month for a set period of time. It's a benefit that can give you peace of mind and security should something happen.
However not everyone will be entitled to company sick pay. If your employer doesn't, you will need to rely on SSP and your own provisions. Your entitlement should be included in your contract. If you have any questions about the amount of money you'd receive and how long sick pay would be paid for, it's best to speak to your employer directly.
Consider protection products
Finally, protection products can be used to provide further security should something happen. These are policies that will pay out in certain sets of circumstances. Before you start to look at protection products, there are some important things to think about.
First, is the type of protection product you want. This will depend on your circumstances and priorities, in some cases, you may want to take out multiple products or one that covers a range of areas. Critical illness cover, for example, will pay out a lump sum if you, or those covered by the policy, are diagnosed with a medical condition that's named in the policy. Income protection, on the other hand, will usually pay out an income on a monthly basis if you become too ill to work, after a certain period of time. Some policies will continue to pay for a fixed period, such as a year or two, while others will provide income until a maximum age such as 65 or 75.
Second, you'll want to ensure the protection dovetails with the sick pay you'll receive, as there will typically be a deferred period. If, for example, your company will pay your full salary for six months should you fall ill, ideally, you'll want a protection policy that will have a six-month deferment period. This allows you to reduce the premiums paid as much as possible.
If you'd like to discuss your financial situation and the steps you can take to improve short, medium and long-term security, please contact us.
Why regular financial reviews are critical for achieving aspirations
You've set out a financial plan and followed the plan you were advised on. Now, you can kick back and forget about it, right? Wrong. Effective financial planning is about much more than an initial strategy. Regularly going back to your plan and checking in with your financial adviser or planner ensures it remains suited to your needs and aspirations. It should be, at least, on an annual basis.
As with all of life's plans, things go awry, opportunities can present themselves or you may simply have a change of heart. If you fail to go back to your financial plan you may find years later that it hasn't suited your goals and priorities for some time.
It's also the perfect time to reassess your life goals. Often, the bigger picture can get lost in the day-to-day. Frequently coming back to what you want to achieve, and whether you're on track to meet aspirations should be part of your financial plan.
If you're still not convinced about the need to revisit your financial plan at regular intervals, we've got six reasons you should be doing so.
1. Your aspirations and priorities change
When you look back at what you wanted to achieve a decade ago, it's likely there will be change. Aspirations and priorities to shift over time.
You may have started with an investment portfolio that took a relatively high level of risk in a bid to deliver higher returns. However, after welcoming children, stability may now be a greater priority, for example. Likewise, as you plan for retirement you may have taken a measured approach to spending, putting money away to fund your later years. Now that you've reached the milestone, you may want to increase spending to really enjoy your life after giving up work.
Chatting with your financial adviser about what your priorities are now and how they have shifted gives you an opportunity to realign your wealth and assets with this in mind.
2. Your situation can alter
It's not just attitude and personal goals that can change either. Perhaps you've received a pay rise and now have more disposable income to invest. Or maybe you've received an inheritance and your current financial plan hasn't taken this into consideration.
When your personal situation changes, it's always worth taking a step back and asking if it's something that should affect how you're handling your finances. It means you can get the most out of your money, stay on track and maybe even exceed the targets set.
3. Review performance
While constantly watching the performance of your investments isn't a good idea, as they will fluctuate, ensuring you effectively review your plan is crucial. How will you know if you're on the right path otherwise?
Reviews can show if you've gone off course at some points. Taking action early means you can minimise the impact it has on your overall goals. It's also an opportunity to review those areas that have outperformed and could give you a nudge to restructuring assets to follow this.
4. Wider political and economic factors have an impact
Your situation and aspirations are the centre of your financial plan. But some factors outside of your control can impact it too. From legislation altering the way you can access your pension at retirement and tax-efficient allowances changing, to geopolitical tension influencing investment performance.
It's not possible to predict all events or the impact they'll have. However, reviews of your financial plan, ensure you can prepare and respond to potential risks and opportunities.
5. Improve your confidence in your finances
If you are worried about your money or financial decision, conversations with your financial planner can help. Finance can seem complex and ever-changing. As a result, you may not be certain about whether a decision is the right one, even if it's something you've covered in a financial plan years ago.
The more you assess your finances and engage with your plan, the more confidence you'll feel with making decisions. It's a process that can help give you peace of mind that you're taking steps towards the financial independence you want.
6. Effective estate planning
While passing away isn't something anyone wants to think about, Inheritance Tax and estate planning is an important part of the financial planning process. As circumstances, views, and wealth change, it's natural that what you want to happen to your estate will change too.
If you'd like our help, whether to create or review a financial plan, please get in touch.
Are your cash savings delivering the best returns?
From a young age, we're told to save for a rainy day to achieve our future goals, be it retiring early, buying a property or travelling. But, while we're told to save, rarely do we talk about the importance of interest rates as part of growing your savings.
When putting money away, we want it to grow and not just through your own contributions. As the cost of living rises thanks to inflation, the value of money held in an account falls. To maintain spending power, you need interest rates or investment returns that outpace inflation. But, not all accounts do.
In the past, a typical cash account may have allowed you to keep pace with inflation. But a long period of low interest rates means it's more difficult. Money sat in cash savings accounts are likely to be losing money. So, how can we secure the best returns?
Check your current interest rate: The first step is to understand how your savings are performing. If you don't know what interest rate you're currently receiving, plus any other benefits, it'll be difficult to compare alternatives. A simple check of your bank statement or a browse through your online account is needed. The current Bank of England base interest rate is just 0.75%, and it's likely your rate isn't much higher.
Know what you're saving for: Your saving goals should have a big impact on where and how you save money. If, for example, you're saving for a goal that's still five years away, locking your savings in a fixed term savings account can help you access higher interest rates. If, on the other hand, your savings need to be accessible, you may choose to sacrifice higher returns for flexibility. Regular savers can also benefit from making frequent defined contributions to a savings account.
Use your ISA (Individual Savings Account) allowance: Each year you can place up to £20,000 into ISAs. As ISAs are tax-free, they're a useful tool to keep all of the gains from your saving habit. The useful tax-wrapper can either pay interest or be invested in stocks and shares, depending on the account you choose. There are also Cash ISAs that have competitive fixed interest rates for a defined period on the market.
If you're saving to buy your first home or for retirement, a Lifetime ISA (LISA) can provide a 25% boost to your contributions. However, to open a LISA you must be aged between 18 and 40. Money deposited also can't be accessed (without a penalty) before the age of 60 for a purpose other than buying your first home.
Shop around: Much like getting the cheapest deal on utility bills, finding the most efficient home for your savings means shopping around. There are hundreds of accounts to choose from. Comparison websites are the ideal place to look for the top savings accounts and for new deals entering the market. Once you've found one, be sure to regularly review it and check other providers to keep on top of your plan.
Remember, if your savings exceed £85,000 you will need to spread the money across several banks or building societies to protect it. Savings above this amount aren't covered by the Financial Services Compensation Scheme (FSCS).
When is the time right to consider investing?
With interest rates on many saving rates below inflation, you may be looking for alternatives. Investing is one way to potentially outstrip the eroding effect of inflation. However, some people with the means to invest are cautious of doing out of fear of losing money.
But investing could be the best way to generate returns on the money you're putting aside. Historically, investing has outperformed interest earned in savings accounts over the long term, even when market volatility has been experienced.
Once you've built up an emergency fund, and if your savings objective is long term, investing is worth considering. There is a range of risk profiles available to choose from, allowing you to create an investment portfolio that matches your attitude, goals and capacity for loss. Taking the step to invest or build up your investment portfolio can help you get the most out of your savings.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Should you stop pension contributions if you're approaching the Lifetime Allowance?
If you've been saving into a pension during your working life, you might be closer to the Lifetime Allowance than you think. Going over the threshold could mean facing tax charges on future income and, as a result, some are opting to leave their schemes. But is that the best option?
What is the Lifetime Allowance?
Currently set at £1.03 million, the Lifetime Allowance is the total amount you can save into a pension over your life. It can seem far-off, but when you consider we may pay into a pension over four decades, along with employer contributions, tax relief and potential investment returns, the value of your pension can be more than expected.
What happens if you exceed the Lifetime Allowance?
Legally you can exceed the Lifetime Allowance. But this means paying additional tax. If, when you start taking your pension, the value exceeds the Lifetime Allowance, the excess benefits will be subject to:
- 55% tax if the pension is taken as a lump sum
- 25% if withdrawn as an income
With this in mind, it's easy to see why some are choosing to retire early, reduce hours or opt out of a pension scheme entirely.
It's a trend that's particularly evident among high earners and those with Final Salary pension schemes, which typically offer greater benefits than alternatives. It's a penalty that's affecting doctors, but it's also an issue for other earners.
To calculate a Final Salary scheme in your Lifetime Allowance you must multiply the expected annual income by 20. If, on the other hand, you transfer out of the scheme, the Cash Equivalent Transfer value may be quite high and contribute towards a large proportion of your allowance.
Even if you're approaching the Lifetime Allowance, there are two key reasons to continue paying into your pension:
1. Employer contributions: If you leave your employer's pension scheme, they will stop paying in too. This could end up costing you money overall. While the tax implications may be less tax-efficient once you breach the Lifetime Allowance, it doesn't necessarily mean all the benefit is lost. Where your employer is contributing at high levels, it may be the case that this offsets the additional tax you pay, and you still end up with more than you put in.
2. Auxiliary benefits: Before considering leaving your pension scheme, look at the additional benefits on offer. Some pensions offer auxiliary benefits that may be valuable to you; leaving the scheme typically means forfeiting these. One of the most common auxiliary benefits is a pension for your spouse, civil partner or dependents. It provides financial security for your loved ones should you pass away first, it will usually pay out a percentage of your pension or salary.
While avoiding paying unnecessary tax on your savings makes sense, it needs a balanced approach. Weighing up how the decision can impact financial security, as well as your family's, now and when you reach retirement is important. In some cases, paying more tax could prove beneficial when you look at the bigger picture.
Options if you leave your pension scheme
While it's not the right option for all, for some leaving a pension scheme may make sense. If you progress this option, it's crucial to have a plan for the future. There are other tax-efficient ways to save for your future, such as Cash and Stocks and Shares ISAs (Individual Savings Account).
If you'd like to discuss retirement provisions and tax liabilities and their impact on your wealth, please contact us. We can help you understand if leaving your employer's pension scheme is the right thing to do in your situation.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
Making sense of divorce with cashflow planning
Cashflow planning, in its most basic form, involves forecasting income, expenditure and wealth in the short, medium and long-term. It provides a graphical representation of an individual's, or family's finances, enabling clients to better understand their circumstances.
The value of assets, investments, pensions and debt can all be projected over time, using assumed growth, inflation and interest rates. Income sources and outgoings are also taken into account, on a regular and ad hoc basis. For this reason, the output of cashflow planning is only as good as the data input. Current circumstances and likely future events must be realistically understood by the client and properly interpreted by the financial planner.
Regularly reviewing a cashflow plan is also imperative, especially after big life events such as a divorce or separation, as situations and aspirations can dramatically change. In fact, there are numerous ways cashflow planning can help make sense of divorce.
Relationship strain
Just recently, research from relationship support charity, Relate, found that enquiries often peaked on the first Monday back to work in January, dubbed 'Divorce Day'.
Their website visitor statistics also increase significantly during the month, up 58% on average. As Aidan Jones, CEO of Relate recently explained in the news, The emotional and financial pressures of Christmas and the holidays can push couples to breaking point.
The breakdown of a relationship can be an emotionally charged time, but it's also when significant financial decisions must be made.
Cashflow planning pre-divorce
If your client is considering separation, it's not uncommon for them to be concerned they cannot afford to maintain a financially stable lifestyle on their income alone. In fact, research from Relate found 24% of people in an unhappy relationship said 'we can't afford to break up', as a reason for remaining together. To put that figure into perspective, only 3% more stated the most popular reason; 'for the sake of the children'.
Cashflow planning can give both parties clarity over their finances. That can aid the decision-making process and reduce stress during a difficult time. With careful consideration of their current and potential circumstances, a separation might be more financially viable than first thought.
Embracing cashflow planning at this time can also help identify the most appropriate assets to be shared. This is especially relevant when you consider retirement provisions if one person has taken time out of their professional career to raise children, missing valuable pension contributions. Cashflow planning could identify a likely shortfall in pension income, meaning a sharing order may be appropriate.
Finally, cashflow planning could identify an excess of income or wealth in future, meaning there is little or no need to fight for assets. This could minimise the stress and length of negotiations.
Post-divorce aspirations and financial clarity
The roles of a mediator and solicitor during the process is well known. Beyond resolving the immediate situation, however, this is where a financial planner and cashflow planning can help even further.
Prior goals and aspirations are likely to be no longer appropriate, even if it's not immediately clear what people want from life. Previously, objectives were likely linked to those of their spouse or civil partner. However, following a divorce is an ideal time to reassess. Cashflow planning can take these new aspirations into account, indicating a realistic way of fulfilling them.
Clients should be encouraged to take the time to think about their personal circumstances and what is important to them. With a better idea of what they want to achieve, they'll be in a better position to start setting measurable goals in the short, medium and long term.
After divorce it's common for a client to feel a little less secure. Sometimes, this can be emotional, in other cases, it can be more material.
Longer term cashflow planning gives divorcees an opportunity to take back control, with their newly defined goals in mind. It's a step that can improve security now and in future, as well as mental wellbeing.
We are here to help
Finances play a big role in divorce, before and after the event. It's likely that your client's financial situation will change significantly as a result; cashflow planning can clearly demonstrate that effect and help build a robust financial plan.
Planning for a new, positive future, cashflow planning can help realise new goals and aspirations, whilst helping ensure the future is financially secure. For any clients debating or, going through a divorce, we are here to help realise their new ambitions. Please don't hesitate to put them in touch with one of our financial planners.
Not leaving tax-year planning to the last minute
With valuable time left before tax year end, now is an excellent opportunity to remind your clients not to leave their financial planning to the last minute. Thinking strategically, there are various tax-efficient allowances to make use of before it's too late. So, what can be done?
1. Maximising pension contributions
When saving for retirement, the maximum you can tax-efficiently pay into a pension is known as the Annual Allowance. It is the equivalent of your relevant UK earnings in that year, up to a maximum of £40,000. It's worth noting that dividend income does not count towards relevant earnings, which could restrict the amount business owners and investors can pay into their pensions if their remuneration is mostly dividend based for tax efficiency.
If you were a member of a registered pension in the previous three years but did not make full use of those Annual Allowances available, you are able to carry forward the unused amount. For the previous three years the Annual Allowance remained at £40,000, so if a client had not paid anything into a pension, using Carry Forward their potential Annual Allowance would be £160,000.
Whilst Carry Forward is available for the foreseeable future, pension legislation has been prone to change over time. It would be prudent to make use of the maximum Annual Allowance available at any one time, to tax-efficiently maximise retirement income.
Making pension contributions can also help higher and additional rate taxpayers reduce their taxable income, potentially reinstating some lost Personal Allowance under tapering rules for high earners.
Finally, pension contributions can be a very tax-efficient way of remuneration for business owners. If you or, your client would benefit from a conversation about maximising pension contributions and minimising tax, don't hesitate to get in touch.
2. Top up ISAs
ISAs (Individual Savings Accounts) provide tax-efficient savings, whether invested in Stocks and Shares or cash. ISA contributions are currently subject to a maximum of £20,000 a year, which is due to remain the same in 2019/20.
Significantly, unlike the pension Annual Allowance, your ISA allowance cannot be carried forward from one tax year to the next. It's a use it or lose it situation, so any unused ISA allowance should be utilised as a priority before the end of the year.
3. Shareholders and the Dividend Allowance
Since April 2016, the Dividend Allowance lets shareholders, both business owners and investors, receive dividends free of Income Tax. Originally introduced with a tax-free maximum of £5,000 p.a. the allowance was cut to £2,000 in April 2018 where it remains today.
Tax is charged on dividends over £2,000 at a rate of 7.5% for basic rate taxpayers, 32.5% for higher rate and 38.1% for additional rate taxpayers. So, if your client has the opportunity to make use of the relatively modest allowance, especially as an investor, it makes good sense to do so before April.
4. Reduce potential Inheritance Tax
Inheritance Tax (IHT) is payable on estates over a certain value; currently a maximum of £900,000 for a married or civil partnership couple, rising to £950,000 in 2019/20, assuming they qualify for the additional Residential Nil Rate Band and are not subject to tapering. At 40%, it's a widely unpopular tax on the deceased, but only around 5% of estates ultimately end up liable according to the Office of Tax Simplification (ONS). Whilst an ONS review called for simplification of the entire IHT process, there are several planning opportunities available to minimise or mitigate a liability altogether.
The annual gift exemption allows you to gift up to £3,000, which is then immediately excluded from an estate when considering IHT. The amount can be carried forward, but only for one year. Again, it's another exemption that's certainly worth utilising before it's gone. There are other IHT exemptions and planning opportunities available. If a client has IHT concerns, don't hesitate to put them in touch with one of our financial planners.
With precious time available before the tax year end, it's certainly worth promoting the opportunities available before they are gone. If you or any of your clients would like advice and guidance, please phone or email. Our team of expert financial advisers and planners have a wealth of experience to ensure all opportunities are explored and utilised.