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What is a Lasting Power of Attorney (LPA) and what are the potential benefits of holding one.

What is an LPA?

A Lasting Power of Attorney (LPA) is a legal document that lets you (the ‘donor’) appoint one or more people (known as ‘attorneys’) to help you make decisions or to make decisions on your behalf.

An LPA would give more control over what happens to you if you had an accident or an illness and can’t make your own decisions if you lack mental capacity. The donor needs to be 18 or over and have mental capacity when making an LPA.

Two types of LPAs which would give power to your attorney enabling them to make decisions such as:

Health and welfare

– Daily routine; washing, dressing, eating etc

– Medical care

– Moving into a care home

– Life-sustaining treatment

It can only be used when you are unable to make your own decisions.

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Wondering where to start with retirement planning?

The first 5 steps for pension and retirement planning.

1. Be financially independent

Your ‘personal’ pension is ‘personal’ for a reason. Start to take an interest in your own savings and pension for the future. As you start to expand your knowledge of the different saving streams which can be used towards your retirement your confidence will grow. Professional advice will help guide you down the right path for financial independence, and we would hope this will enable you to understand the requirements to maximise your retirement pot.

2. Start saving now

It’s never too early to start saving for your retirement; it doesn’t matter how much you can afford to contribute towards your pension as every little bit helps. The Annual Allowance for pension contributions is £40,000 per year therefore anyone that hasn’t had their Annual Allowance tapered can make the maximum contribution, although certain rules apply. The £40,000 per year includes any contributions towards your company pension; if you can afford to put the maximum amount in to your pension it may be worth opening a personal pension.

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Money Purchase Annual Allowance (MPAA) does this affect you?

What is MPAA?

The MPAA is in connection to the annual allowance for pension contributions which is £40,000 however you can carry forward unused pension contributions for the previous three years. The MPAA was introduced on 6th April 2015. It was £10,000 in tax years 2015/16 and 2016/17. MPAA was reduced to £4,000 from 2017/18, It remains at £4,000 in 2018/19.

What are the MPAA rules?

Once the MPAA has been triggered, this will affect every tax year onwards including the year which the MPAA was triggered.

What will trigger the MPAA?

– Take income from a flexi-access drawdown (FAD) plan.

– Take an uncrystallised funds pension lump sum (UFPLS). Taking a certain amount some tax free and some taxable or the whole amount out of your pension.

– Convert capped drawdown to FAD and then draw some income.

– Take more than 150% Government Actuary’s Department (GAD) from a capped drawdown plan.

– Receive a stand-alone lump sum when entitled to primary protection and TFC protection is more than £375,000.

– Receive a payment from a flexible lifetime annuity (ie. one where payments can decrease).

– Receive a scheme pension from a Defined Contribution (DC) arrangement where it’s being paid directly from those DC funds to less than 11 other members.

– In addition, anyone in flexible drawdown before 6th April 2015 is subject to the MPAA from 6th April 2015 (irrespective of whether they have taken an income withdrawal before then).

The above relate to a member and their own funds – these triggers don’t apply where benefits are being paid to a dependant/beneficiary. Complexity is created if you have both a defined benefit (DB) and DC personal pension. Even having one employee/employer crystallised benefit limits your contribution to £4,000 with no ability to use carry forward.

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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.

(assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/730110/Table.12.1.)

 

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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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.

Annuities

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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