Pensions Tax Changes For High Earners

Pensions tax changes for high earners criticised

The government’s plans face growing criticism The government’s plans to tax the pension contributions of high earners have been criticised as “complex, unfair and inefficient”. The Institute for Fiscal Studies (IFS) also says many wealthy people will simply alter their pay arrangements to avoid the new taxes. From April 2011, the government hopes to raise an extra £3.6bn a year from about 300,000 top earners. That is on top of a new 50% tax rate and the withdrawal of tax allowances. Those two measures, starting next month, will raise about £3.9bn by phasing out the universal personal income tax allowance from anyone earning over £100,000, and by taxing people at 50% on their earnings over £150,000. The pension tax changes, which will come in a year later, will steadily reduce the tax relief high earners can obtain on their own pension contributions, once they earn over £150,000. And some high earners will be taxed on the value of the pension contributions made by their employers. This could affect people with gross pay of just £130,000 if the benefit of their employers contributions pushes them above a proposed £150,000 limit. “The average tax increase would be a whopping £12,000 per affected person per year,” said Carl Emmerson, deputy director of the IFS. Salary sacrifice The government wants to restrict the amount of pension tax relief given to high earners. Higher rate tax payers were given 65% of the £28bn granted in pension tax relief in 2008-09, though they make up just 19% of pension savers. And the very highest earners, the 1% of adults whose income is over £150,000 a year, gained 25% of all pension tax relief, worth an average of £20,000 a year to each of them. The IFS argues that it would be possible for many of them to alter their pay arrangements by using a concept known as “salary sacrifice”, in which they take smaller salaries in exchange for larger pension contributions. By doing this some could depress their earnings below the £130,000 starting point for the new pension tax restrictions. “Treasury figures suggest that nearly two-thirds (63%) of the 300,000 individuals potentially affected by this reform are members of defined contribution schemes, which are inherently more flexible [than final-salary scheme],” said Mr Emmerson. “The scope for some individuals to respond to this reform in a way that minimises its impact on their lifetime tax bill must mean that estimates of the Exchequer gain from the reform are subject to a large degree of uncertainty.” Tax-free cash The IFS suggested that one alternative to the government’s plans would be to restrict the amount of tax-free cash people can take from their pension pot when they retire. “The most obvious anomaly is the fact that individuals can take up to 25% of their pension as a lump sum free of income tax up to a maximum of £437,500,” it said. “A reform that placed a much smaller cap on the amount that can be taken as a lump-sum would improve value for money for the public purse as there is no obvious justification for providing such a generous amount tax free,” it added. The government is currently consulting on its pension tax proposals before finalising details of any changes. Last week, the National Association of Pension Funds said the proposals would do “enormous harm” to company pension provision and called on the government to abandon its plans.

Source: BBC News  http://news.bbc.co.uk/1/hi/business/8543505.stm

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Conservatives plan to restore dividend tax credit

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Bank Of England Keeps Interest Rate On Hold

The Bank of England has announced its decision to hold the interest rate and pause its programme of pumping newly-created money into the economy.

The Monetary Policy Committee’s move was widely predicted by the City, including all members of the Sky News Money Panel. They expected the Bank to shift into “wait and see” mode to judge the strength of the recovery.

The Bank last week finished the latest round of quantitative easing (QE), bringing the total amount of newly-created money spent on Government and company bonds to £200bn.

In a statement, the Bank said: “The committee noted that this stock of past purchases, together with the low level of Bank rate, would continue to impart a substantial monetary stimulus to the economy for some time to come.

“The committee will continue to monitor the appropriate scale of the asset purchase programme and further purchases would be made should the outlook warrant them.”

The MPC’s no-change position, which leaves the cost of borrowing at its historic low level of 0.5%, follows a surprisingly weak climb out of recession in the final quarter of last year.

The UK’s longest and deepest economic downturn officially ended with growth of just 0.1% in the last three months of 2009, leading to fears of a so-called “double-dip” recession.

As a result, some economists rightly predicted the Bank would keep the door open to more QE if the economy continues to struggle.

City expert David Buik, of BGC Partners, told Sky News: “I think the Bank of England is absolutely right to be very cautious and vigilant.

“It wouldn’t surprise me at all if, in the advent of higher taxation almost certainly coming later this year, the Bank had to inject another £25bn, say, in another three months’ time.”

MPC members had access to detailed economic forecasts from the Bank’s forthcoming quarterly inflation report during their two-day meeting.

Recent signs on the economy have been underwhelming, with figures from the UK’s crucial services sector showing slowing growth last month after disruption from the snowy weather.

Meanwhile, Consumer Prices Index inflation jumped at a record rate to 2.9% in December – well above the Bank’s 2% target.

There are concerns among committee members that inflation may become a problem, although the weakness of the banking sector and credit availability are pushing prices in the opposite direction.

Source: Ed Merrison, Sky News Online

Tories vow to axe compulsory annuities

The Conservatives have pledged to scrap laws which force savers to purchase an annuity by age 75, if the party gets into power.

In a Tory document, A New Economic Model, published yesterday, shadow chancellor George Osborne said that he would axe the much maligned rule of compulsory annuitisation at age 75.

Under current laws, savers have to use their pension savings to purchase an annuity by age 75, which will provide them with an income for their remainder of their life.

But annuity values have plummeted in recent times to an all-time low – offering savers very poor value. Retirees buying an annuity today are getting pension incomes of almost half the level of their counterparts back in 1994.

Commenting on the proposal,  a pensions expert at a well known adviser group, says: ‘The Conservative proposal to scrap the age 75 compulsory annuitisation is a good one. There is no decent justification for forcing investors to buy an annuity.

‘There are currently around 450,000 people aged 74 and the best part of 2.5m between the ages of 70 and 74. A fair proportion of them will not want to buy an annuity. Ever.’

What does an annuity get me?

Research from the financial information firm Moneyfacts looked at what annuity a £10,000 pension pot can buy.

In 1994, a 65-year-old man could have received an average annual payout of £1,145. Today, he would get just £625, a drop of 45%. This would leave someone with a £100,000 pension pot getting £6,250 per year, rather than £11,450.

Each year, around 450,000 people buy annuities with pension pots averaging £25-£30,000.

The average buyer is 63, but the age is likely to rise as workers realise the income would be too low to let them retire. The state retirement age is 65. Notably, the Association of British Insurers, the mouth-piece for the pensions industry, recently called for the age at which people have to buy them to be pushed up to 80.

Research shows that the vast majority of pension funds, at 88%, are worth less than £50,000 at retirement. For investors with small funds, an annuity will continue to present the most efficient way to eliminate investment and longevity risk.

The pension expert said: ‘Changing the rules would benefit those who have a more substantial fund or a secure source of income elsewhere, for example from a final salary scheme. It would also send an important message to prospective savers; that they will be able to retain control of the money that they have saved up. This in turn will encourage more people to engage with the pension system in the first place.’He added that he would like to see one further option, which is for investors to be able to bequest undrawn pension funds on death to their children’s pension funds, thereby keeping the money in the pension system, ‘encouraging thrift and helping to avert the next generation’s own pension crisis’.How do I get the best annuity?The key for savers right now is to ensure that they shop around in order to find the best annuity deal available to them, as opposed to just settling for what their pension company offers. Typically about a third of people fail to look elsewhere, although it is frequently possible to find a better deal.

Source of Article: www.thisismoney.co.uk

Jigsaw Corprate Financial Management can help clients find the best deal on an annuity.

Pada settles on national employment savings trust (Nest) for personal accounts

The Personal Accounts Delivery Authority (Pada) has announced that National Employment Savings Trust (Nest) will be the new permanent name for personal accounts, due to come into effect under workplace pensions reform in 2012.

Nest will be run by a not-for-profit trustee body, the Nest Corporation. Pada developed the brand identity after carrying out research among 3,200 jobholders, employers and advisers, and working with external specialist agencies.

Jeannie Drake, acting chair of Pada, said: “We have one goal in mind: to make saving for retirement become the norm.”

Source: Employee benefits 1st Feb 2010

Key-Man Insurance

Directors beware!
Key-man insurance policies are becoming increasingly popular (or are increasingly being demanded by banks), but the tax treatment of the premiums payable and the proceeds receivable is far from straightforward. Traps await the unwary!
How do we define “key-man” insurance?
A “key-man” insurance policy is one taken out by a business on the life of key-worker to provide it with funds to protect it from the financial consequences of the key-worker dying or becoming incapacitated. The premiums are paid by the company and the proceeds will be receivable by the company, but it is the key-worker’s life (or health) that is insured.

 Tax trap 1

If the policy proceeds are not payable to the company, but are payable to the keyworker’s estate or family, that is not a key-man policy and the premiums will constitute earnings on behalf of the key-worker and PAYE liabilities will arise. If the payments are not declared the back tax and NICs can be considerable when discovered by the Inland Revenue.

Tax trap 2

Assuming one is dealing with a true key-man policy, there are no PAYE or benefit in kind problems as no benefit accrues to the key-worker or his family. The company should be able to claim a corporation tax deduction, but – here comes the next tax trap – this might be denied if the key-worker is also a substantial shareholder in the company.

Tax trap 3

If the policy was taken to provide a financial “cushion” from the loss of the key-worker, then the proceeds will be taxed as if they were a trading receipt. It is often mistakenly assumed that if tax relief on the premiums is not claimed, then any proceeds receivable will be tax-free. This is not correct as the Inland Revenue has win-win rules. The taxability of policy proceeds is dependent upon the nature of the policy, not on whether a tax deduction is allowed (or claimed) in respect of the premiums. If the premiums are allowable as trading payments, the proceeds will inevitably be taxable as a trading receipt – but the reverse is not necessarily true.
So take care!
It can be seen above that it is quite possible for premiums not to be tax deductible, but for the proceeds to be taxable! These proceeds will usually be quite large, so the tax liability arising could be significant. And if the intention is to pass the proceeds to the key-worker or his family, double-taxation could arise.

Top Tips

• Decide who the intended beneficiary is to be. If it is the keyworker or his family, the policy should be in his name and the premiums should be paid by him out of taxed income.
• For a true key-man policy, consider whether the premiums might not be regarded as “wholly and exclusively” for the company’s trade (e.g. if the key-worker is a major shareholder) and therefore not tax deductible.
• Ensure that policies do not attain a surrender value (e.g. endowment policies) as such premiums will be capital in nature and gains will be taxable.

Top Tips is designed to be a simple and useful source of ideas and information for clients and contacts of Jigsaw CFM. If you are unsure about the implications of any idea contained therein please contact Jigsaw CFM. Jigsaw CFM cannot take responsibility if the ideas are implemented without its involvement.

Delays and extensions the name of the game for 2012 reforms

The Government has issued amended draft regulations today regarding the 2012 pensions reform changes, with further delays and extensions the common theme.

The final rules for the Government’s pensions reform were put before Parliament on Tuesday January 12, 2010, and featured several changes to the draft regulations following a consultation on the original draft in autumn 2009.

The 2012 pensions reforms will now see those who employ less than 50 workers not having to automatically enrol workers into a qualifying pension scheme until sometime between March 2014 and February 2016. New companies setting up after 2012 will also have the time until they need to enrol staff extended, to some date between March and September 2016. Originally, small employers would have taken on their duties in groups at some point between October 2013 and April 2015, and new companies established after October 2012 would have had to enrol staff between April and October 2015.

As well as delays, the amended reforms also feature extensions, with the time that new employees have to be enrolled onto the scheme increased from 14 days to within one month of starting work. The employee is then entitled to a further month in which they may opt out and be treated as never having enrolled as a member. This timescale and process will apply to all types of pension scheme.

The Government’s current ‘19-day rule’, in which time employers must pass pension contributions onto the scheme, has also extended to allow the employer to hold onto contributions for new joiners until the end of the second month. This takes into account the possibility of an employee opting out, and makes reforms simpler, quicker and cheaper for those who do decide to opt out.

The final amendment regards the Government’s recently re-branded National Employment Savings Trust (NEST) scheme, which will not be allowed to accept transfers from other pension schemes, nor allow member to transfer out, in an effort to ensure the scheme is targeted at low and medium earners without any pension provision. Workers will, however, be eligible to transfer these benefits to another regulated pension scheme from retirement age of 55 onwards.

“The changes announced today show that the Government has listened to businesses,” commented Katja Hall, Confederation for British Industry (CBI) director of employment policy. “However, discussions are still taking place about how these reforms will affect firms with existing pension schemes. The Government needs to ensure it does not make the system too onerous for companies who are already doing more than the law will require, or it could encourage them to cut contributions to the legal minimum.”

Andrew Tully, senior pensions policy manager at Standard Life, added: “It is positive that the Government has taken on board employer and industry concerns, and amended their original proposals. Having the same process for trust and contract schemes aids simplicity. And allowing employers more time before they have to pass contributions will reduce the number of refunds which need to be made, saving cost and complexity.”

Source:  Sophie Baker      Pensions age

SSAS clients face tax shock

NEST in a nutshell and FAQs

Five need-to-know facts about NEST:

• NEST is the permanent name of the new national workplace pension scheme being launched in 2011 that is designed to meet the needs of low-to-moderate earners and their employers.
• NEST will be one of the schemes employers can use to fulfil new duties under the workplace pension reforms due to come into effect from 2012.
• NEST will be a low cost, easy to use, online pension scheme that is open to any employer.
• NEST will be run by a not-for-profit trustee corporation called NEST Corporation.
• NEST’s name and logo were developed after an extensive programme of research that involved more than 3,200 jobholders, employers and people who advise employers about pensions.

Read the frequently asked questions about NEST here (PDF, 45kb)

Source: Personal Accounts Delivery Authority