Edison Consulting Pensions Tax Changes Alternative Investments Mortgages

Pension Tax Changes - Highlights  Lifetime Allowance (LTA) from April 2012 will be reduced from £1.8 million to £1.5 million  Ability for individuals to register for Fixed Protection and have a LTA of £1.8 million. However this mean these individuals will have to cease further pension accrual/contributions.  Annual Allowance (AA) now reduced to £50,000 per annum from £255,000  Ability to carry forward unused AA from three previous tax years. For tax years 2008/2009, 2009/2010 & 2010/2011 the AA is assumed to be £50,000.  Hutton Report – further changes to public sector schemes from 2015

Lifetime Allowance

 Simply a limit on the amount of pension benefits you can build up.  How are your benefit in the NHS pension scheme valued for the purposes of the lifetime allowance?  Lets take the example of an individual on a pensionable pay of £80,000 with 8 years pensionable service who is a member of the 1995 NHS pension scheme.  Retained benefits would be a pension of £8,000 (£80,0000/80*8) and a lump sum of £24,000 (£8,000*3). For the purposes of the lifetime allowance these benefit are valued at £184,000 (£8,000*20+£24,000).  Lifetime allowance issue will occur closer to retirement as individuals likely to have seen increase in pensionable pay and accrued further pensionable membership.  Lets assume the individual at retirement has a pensionable salary of £150,000 and 40 years pensionable service. Benefits would be a pension of £75,000 and a tax free lump sum of £225,000. lifetime allowance value of £1,725,000 which would be above the lifetime allowance of £1.5 million.  Excess above lifetime allowance subject to tax at effective rate of 55%

Annual Allowance  Reduction in annual allowance from £255,000 to £50,000  Ability to utilise unused relief from the previous 3 tax years should you exceed the annual allowance  For the NHS scheme the value for the purposes of the annual allowance is not how much you pay into the scheme, rather the value of the benefits you build up during a tax year.  If we take the example of an individual who is currently on a pensionable pay of £80,000 with 8 years pensionable service, assuming salary remains at £80,000 and they accrue a further years service their increase in benefits for the purposes of the annual allowance would be valued at £14,288.  Should their pensionable pay increase to £90,000 the value for annual allowance purposes would be £35,663  Tax charge if annual allowance breached – at the rate you pay income tax at.

Annual Allowance Start of Input PeriodEnd of Input Period Pensionable Service Years89 Pensionable Salary£80,000£80,000 (£90,000) Accrued Pension£8,000£9,000 (£10,125) Accrued Pension x 16£128,000£144,000 (£30,375) Tax Free Lump Sum£24,000£27,000 ( Opening Valued Revalued by CPI (say 2.5%) £156,712 Closing Value£171,000 (£192,375) Value for testing against the AA £14,288 (£35,663)

The Hutton Report  Report which looked into Public Sector Pension Schemes  Final salary basis to career average revalued earnings (CARE) basis. Reality of this recommendation is that for the same number of years and the same level of annual contributions you will receive a lower pension  Normal retirement to be realigned with state pension age. If you are a member of the 1995 pension scheme you have a NRD of 60 and for those in the 2008 scheme this is 65. State pension age is gradually going to increase to 68. Drawing benefits prior to your NRD will result in actuarially reduced pension benefits.  Increase in contributions. Separate from the Hutton Report the Government has announced plans to increase contributions by an average of 3.2%.

The Hutton Report  In summary should the recommendations of the Hutton Report be implemented (and they will in some form or another) then you can expect to: - 1)Pay more into the NHS pension scheme 2)Retire later 3)Likely receive less of a pension at retirement  When is this likely to come into play – well the Government has stated its intention to bring the measures in before the end of Parliament (2015).

Alternative Investments – ISA’s  Ability to contribute £10,680 per annum  The full £10,680 can be invested in a stocks and shares ISA.  Alternatively £5,340 can be invested in a cash ISA and the £5,340 in a stocks and share  Benefits - No income tax or capital gains tax payable on income or gains taken - Accessible – money can be taken out at anytime. With pensions the funds cannot be accessed until age 55  Should you invest £10,680 per annum over a 25 year period you would build up a fund of £342,000 in todays terms (assuming a net rate of return of 2% per annum).

Alternative Investments Enterprise Investment Schemes  It is a tax efficient scheme set up to encourage investment into small, unquoted trading companies  Examples of EIS - Loch Fyne fish restaurants, Capital Pub Company which owns The Square Pig pub. Returns Loch Fyne initial investment £1 per share sold at over £10 per share. Capital Pub Company again £1 per share, currently valued at circa £2.20  This is a higher risk investment, but as such it comes with attractive tax breaks: -  Income Tax – for investments up to £500,000 per tax year income tax relief of 30% is available (assuming sufficient income tax has been paid). Hold for 3 years.  Capital Gains Tax – any growth on free from capital gains tax. Capital gains tax deferral.  Inheritance Tax – hold for two years outside your estate  Loss Relief – ability to claim tax relief should investment result in a loss.

Alternative Investment – Venture Capital Trusts  It is a company that trades on the London stock market. A VCT tends to invest in very small companies which are looking for further funds to help develop their business  Again high risk  Income Tax – 30% income tax relief. On a £10,000 investment you would receive £3,000 in income tax relief meaning the net cost would actually only be £7,000. Need to hold the investment for 5 years  Capital Gains Tax – sale of a VCT does not give rise to CGT.  Tax Free Income – Dividends paid from a VCT are tax free.

Mortgages  Having had a heavy hand in the credit crunch and being left with burnt fingers, mortgage providers have become a lot more stringent on who they lend to.  A deposit of 20% is typically needed to secure a competitive rate, while 100% mortgages are few and far between  Lending multiples do seem to be on the increase now. With lenders now willing to lend 4/4.5 x income, when previously this was as low as 3x income.  With a base rate of 0.5%, there are attractive variable rate deals available some as low as 2/2.5%.  However with 5 year fixed rates at 3.88% it may be worth paying a small premium in the immediate term to secure such a fix rate.