What is tapered annual allowance and how does it potentially affect you?

What is the Annual Allowance for pension contributions?

There is an annual limit on the total amount of pension contributions that each person can make without incurring a tax charge (this includes employer and employee contributions) which is called the Annual Allowance. Where the total employer and/or individual contribution exceeds the Annual Allowance a tax charge will apply. The rate of tax will be determined by your taxable income in the tax year. For the 2018/19 tax year the Annual Allowance has been set at £40,000.

What is tapered annual allowance?

Tapered annual allowance comes into effect when a person’s total ‘adjusted income’ is over £150,000 and their ‘threshold’ income is above £110,000.

So, what is ‘adjusted’ and ‘threshold’ income?

In simple terms, ‘adjusted’ income is total taxable remuneration including pension contributions from both the employee and the employer. ‘Threshold’ income ignores pension contributions. Consequently, if your ‘adjusted’ income is above £150,000 and your ‘threshold’ income is over £110,000, your annual allowance will be tapered down.

Tapered annual allowance came into effect after the 2016/17 tax year. Anyone who fell into the catchment area stated above would have their Annual Allowance. Unless a person’s income stays below the relevant thresholds year on year or stays at £210,000 or above year on year, they could find their annual allowance changing each year.

Confusion is often caused when calculating the adjusted and threshold income, particularly when deciding whether particular types of income need to be included. Care needs to be taken when preparing these calculations

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Inheritance Tax (IHT) payments to HRMC climb over £5 billion!

The table below shows the total amount of IHT collected each year by HMRC over the last 7 years. The total for 2010/11 was £2.7 billion compared to £5.2 billion in 2017/18. This trend is likely to continue.



How does IHT work?

IHT is typically based on the total value of a deceased person’s estate. When someone dies, the first step is to establish whether the estate is `excepted’ or not. There are three types of `excepted’ estates.

Three types of excepted estate

Low-value estates

A low-value estate is where the total value of the estate is below the nil rate band of £325,000. (2018/19)

Exempt estates

This is where the total value of the estate is below £1,000,000 and there is no IHT due because of a spouse, or civil partner exemption and/or charity exemption.

Foreign domiciliaries

These are the estates where there can be no liability to IHT because the gross value of the estate in the UK does not exceed £150,000

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Carry forward – How you could benefit and the requirements for entitlement

What is carry forward

Carry forward was (re)introduced in a new format in 2011/12, it has been possible, subject to conditions, to carry forward unused annual allowance from the three previous tax years to the current tax year. The annual pension allowance is £40,000 per year therefore it’s possible to bring 3 years’ worth of allowance to the current tax year.

Rules required to be eligible to carry forward pension contributions

  • Carry forward can only be used in the situation where the current years allowance has already been filled.
  • Unused annual allowance is used up from the earliest year first and worked forwards. All defined contribution (DC) pension and defined benefit (DB) accrual made by the individual into a pension pot must be added together.
  • Membership to a registered pension scheme is a requirement to use carry forward at some point during the years being carried forward.
  • There isn’t a requirement for UK earnings to have been received during the tax years being carried forward from.
  • Any unused annual allowance to carry forward from the previous tax year but one year’s annual allowance has been exceeded (known as an intervening year) within the three year carry forward period, the excess will use up some or all of the unused allowance from the earlier year(s) – but only for overpayments in tax years 2011/12 or later
  • Non-UK residents can still benefit from carry forward as long as they have been a member of a registered pension scheme at some point during the tax years. Examples would be, opening a personal pension before leaving the UK or if you have a deferred benefit within a final salary scheme.
  • If you trigger your money purchase annual allowance of £4,000, carry forward becomes invalided in relation to money purchase funding.
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The Royal Wedding: how marriage impacts Wills and changing family structures

The marriage of Prince Harry and Meghan Markle marks many historical changes for the royal family. Meghan is one of a few Americans and the first black woman to be welcomed into the royal family; she has previously been divorced which in the royal family’s past has been frowned upon by the Church of England. It is not only in the royal family that we are seeing changes in family structures in the UK. We are more frequently seeing people marry more than once, become part of a blended family and emigrate overseas. Changes like these can make the estate administration process when someone has passed away much more complicated, especially when no Will is present.

An important aspect of getting married is what effect the marriage has upon your existing Will, as it could have a significant impact on your wishes after you have passed away. When a marriage takes place, any existing Will becomes invalid as it is automatically revoked. If you were to pass away after you had got married but before you created a new Will, your estate would be distributed in accordance with the rules of intestacy. This means your spouse or civil partner would not automatically receive all of your estate if you have children, grandchildren or great-grandchildren. Your spouse or civil partner would receive the first £250,000 of your estate and then half of everything that is remaining above that amount. The other half would be distributed to your children, grandchildren or great-grandchildren. Any joint bank accounts and property held as joint tenants will also automatically pass to the other owner by survivorship outside of the intestacy rules.

By way of illustration if you die without a Will leaving a spouse, 2 children and an estate of £450,000.  Your spouse takes your personal effects and £250,000 plus half of the remaining £200,000.  The children take £50,000 each when they reach 18.  If the children decide that they want the money straight away your spouse could be forced to sell the property they are living in.

No matter the value of your estate, your age or status, it’s highly important to make plans for the future to ensure your wishes are heard and your legacy is protected after you have passed away. Creating a valid Will and keeping it up-to-date is the only way to guarantee that your estate is distributed in accordance with your wishes.

Sue Jenden – Sue Jenden Associates

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Do you know all the facts about Individual Savings Accounts (ISA’s)? Are you aware ISA’s can be passed on?

Although ISA’s are a tax efficient way to build up wealth, they may be far less efficient when passing them on. So, you do need to have an understanding of what happens to your ISA when you die.

Inheritable ISA rules were introduced in April 2015; individuals can now inherit the value of their deceased spouse or civil partner’s ISA’s, if they died on or after the 3rd December 2014.

The ISA isn’t actually transferred to the surviving spouse or civil partner but an Additional Permitted Subscription (APS) is created when the ISA investor dies.

What is an APS and how does it work?ISA

For example, if Mr and Mrs Smith both have £125,000 in their ISA’s and Mr Smith dies, his widow will inherit his APS of £125,000 in addition to her own ISA value. The allowance is available for three years from his death or 180 days after the estate administration is finalised. If Mrs Smith remarries Mr Bloggs and then Mrs Bloggs dies, the APS would continue to be passed on to Mr Bloggs, therefore he would inherit an APS of £250,000.

If Mr Smith had multiple ISA’s, Mrs Smith could combine all APS’s by transferring them to her provider of choice. However, once a provider has been selected, the APS can only be maximised with that provider.

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Are you struggling to understand State Pensions? Did you know you can defer your State Pension?

Many people are confused about the possible options for claiming a State Pension. Words like triple lock and deferring seem to add complexity to the issue. To be eligible for a full State Pension you must have contributed to your National Insurance (NI) record for 35 years before reaching the Government’s age for retirement. Click the below link to check your National retirement age.

https://www.gov.uk/state-pension-ageState pension

The following post will try to simplify the answers to the questions regarding State Pension.

How to defer your State Pension?

Two months before you reach your State retirement age you should receive a letter informing you of your pension entitlement. You have to claim your State Pension; and if you don’t respond to this letter, your State Pension will automatically be deferred.

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Inheritance tax and pensions

Inheritance tax (IHT) isn’t usually applied to registered pension arrangements, however there are certain situations and actions that you should be aware of to avoid a potential IHT liability.

Incidentally, funds held within the NEST pension scheme are not currently exempt from IHT.

Pension contributions

Pension contributions, once paid, are typically outside the member’s estate. However, you should be aware that when contributions are paid by the member whilst in poor health and death occurs within 2 years of making them, HMRC could treat the contributions as transfers of value and take them into account for IHT purposes. This only applies when the contributions are seen to be Pension‘substantial and unusual.’

Death benefits

There are some situations where pension death benefits would be included for IHT purposes:

  • Member’s estate is legally entitled to receive the death benefits.
  • Lifetime transfers of death benefits within two years of death.
  • Where the member has an unrestricted right to bind the trustees or administrators or had the power to direct that the death benefits be payable to a certain person or to their own estate.
  • Pension and annuity arrangements are exempt under the Inheritance Act 1984 from initial periodic and exit charges normally applied to property held inside a discretionary trust.


Although annuities are typically not subject to IHT, there are two areas where IHT does apply to annuities:

  • Annuity payments continuing under a guarantee period and payable to the estate as of right.; the market value of the remaining payments is included in the estate.
  • If the annuity is protected and the remaining lump sum is payable to the estate, the amount is included in the estate for IHT purposes.

What should you think about?

Although your pension scheme is there to provide for your retirement, there are clearly important considerations in relation to what happens when a member dies, including the impact of IHT on your estate. We would, therefore, recommend that you seek professional advice from your financial planner to make sure the death benefits on your pension are carefully organised.

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5 Tips to Navigate the Pensions Maze

Direction imageIt is important that anyone approaching retirement takes time to get all the help they need, rather than rushing headlong into cashing in their pension, which may be a temptation for many following the new regime.

To help navigate the pensions maze here are 5 points that you might find helpful.

  • Tax needs to be considered

Withdrawals of income on top of any tax-free cash will be subject to tax at a taxpayer’s marginal rate.

Remember also that you will compromise the ability to make further contributions into a pension plan if withdrawing income beyond tax-free cash – as the Annual Allowance then reduces from £40,000 to £4,000.

Smaller pension pots work differently; and it may be possible to cash in a maximum of three pots each worth less than £10,000, without triggering the reduction in the Annual Allowance. However, you would pay tax on the money cashed in after the 25 per cent tax-free cash.

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Can your pension be used to cut your inheritance tax bill?

Current legislation allows for anyone who dies to pass over their pension cash without their heirs being liable for then handing over part of it to the taxman.

Somewhat of a lifeline to the rising number of middle-class savers whose families face being hit with an Inheritance Tax bill when they die.scissors-cutting-red-ribbon_1101-911

The Inheritance Tax levy charged is 40 per cent on estates worth more than £325,000 belonging to individuals, or £650,000 for couples; and is applied to property, investments and savings, although the introduction of the Main Residence Nil Rate Band has afforded some comfort to many.

However increased property prices mean thousands of ‘ordinary’ people are being dragged into this tax trap – initially aimed at the wealthiest.

Under newer pension freedoms, some people could escape having to pay inheritance tax for generations – because no inheritance tax is due on pensions.

Anyone inheriting pension cash from someone who dies before the age of 75 does not have to pay any tax at all.

Those who receive a pension from a loved one who passes away after the age of 75 will pay tax on money they withdraw at their normal rate of income tax.

The reforms also mean that anyone who is already taking their pension may also be able to pay £4,000 a year into a pension plan.

Those with larger estates may be able to top-up every year (provided they had not passed their individual lifetime allowance) to potentially reduce their family’s inheritance tax bill.

So, can your pension be used to cut your inheritance tax bill? Yes it can…

Pensions can be an effective tax planning tool – and have indeed become a new and valuable way of avoiding inheritance tax.

Your Chartered Financial Planner will be able to help you navigate these options if advantageous to your personal circumstances.

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Financial Advice: Independent Vs Restricted

Since the Retail Distribution Review (RDR), or in other words the new set of rules formed with the aim of introducing more transparency and fairness in the investment industry; financial advisers have to offer either ‘independent’ or ‘restricted’ advice… and it’s important to know the difference.divided-apple-1171062-639x508

It has been recently highlighted in the media that these terms aren’t very helpful to consumers, especially without much description as to what they actually mean.

Matrix Capital are completely Independent. The distinction between the two is whether recommendations are limited to certain products or product providers (restricted) or recommendations are ‘whole-of-market’ (Independent).

For a firm to be independent, they must be able to undertake comprehensive and fair analysis of the relevant market which is both unbiased and unrestricted.

Being independent does put additional pressure on firms to ensure they establish and maintain adequate knowledge of the many retail investment products in the market. There are also increased compliance costs attached to firms who offer independent advice.

It’s usually a lot easier to identify an Independent Financial Advisory firm (IFA), who are perhaps more inclined to promote their status. However, some restricted advisers are not calling themselves as such; an issue for people looking for advice who should be able to define this without difficulty.

Restricted firms should offer an explanation about whether their advice is limited to retail investment products from a single company, a single group of companies or a limited number of companies.

Importantly, neither independent nor restricted advisers are incentivised to recommend one product over another.

In summary, if you are getting advice about investing your money, you need to know there are two different types of financial advisers – ‘independent’ and ‘restricted’. This can affect the advice you are given.

All financial advisers have to be approved or authorised by the Financial Conduct Authority (‘FCA’).



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