Definitely Maybe
Last month’s article was not about Steely Dan and I am sorry to disappoint those who thought this article was going to be about Oasis.
Definitely maybe certainly describes the way the treasury are providing us exact information about the new pensions regime. However, I did promise you that I would share with you some of the exciting new investments that we can all include in our pension.
"A little learning is a dangerous thing"
People who know only a little, do not understand how little they know and are therefore prone to error. First said by Alexander Pope.
You want to invest in commercial property. Can you do this now?
A self-invested personal pension (Sipp) can already invest in commercial property. If you want to invest, you may wish to complete your purchase before A-Day. After April 6, the borrowing rules for property become less generous. At present, a Sipp can borrow up to 75% of the value of a commercial property to fund a purchase. However, after A-Day you will be able to borrow only 50% of the value of your fund. Please really understand this massive reduction in buying power. Many people have turned their backs on traditional pensions as faith in the system has hit rock bottom. But I would urge you to reconsider the pensions route in the light of the A-day changes.
Consider property, art, wine or vintage cars
You will be able to get tax relief on contributions used to buy holiday homes, buy-to-lets, art, fine wine, vintage cars and even yachts.
But the rules may not be as attractive as they first appear: you will have to pay rent if you continue to benefit from the asset, or tax on the benefit. Say you have a holiday home that is used by your family or friends for 12 weeks of the year rent-free. You would be taxed on those 12 weeks as a benefit in kind. If the property had been let for 12 weeks it might have fetched £6,000 at £500 a week. A higher-rate taxpayer might therefore have to pay 40% of £6,000, or �2,400.
John Lawson of Standard Life, an insurer, said: "The tax will invariably be cheaper than paying rent, but many will still prefer the latter because it is in effect a pension contribution; it is paid into your fund, where it will grow tax-free."
Make higher contributions
You will be able to pay in 100% of your earnings up to a maximum of £215,000, rising to £255,000 by April 2010. In the year before retirement, there is no limit at all.
At present, workers in company schemes can pay up to 15% of earnings. People with personal pensions can pay a fixed percentage of their earnings up to £105,600 depending on their age. Someone earning £100,000 in a company scheme could pay in up to £15,000 under current rules, compared with £100,000 from April 6.
Set up a family pension so your scheme doesn't die with you.
There is good news for those over 75 as under the new pension regime you will be able to avoid buying an annuity and pass pension assets on to your heirs. At present, if you have a money-purchase pension you must buy an annuity - an investment that provides an income for life - by the age of 75.
Annuities are widely resented because any funds that have not been paid out as income before you die will stay with the annuity company.
Under the new rules you will be able to avoid buying an annuity at 75 if you use an alternatively secured pension (Asp). To benefit from the rules your 75th birthday must be on or after April 6 next year.
With an Asp, your pension remains invested. You can take an income of up to 70% of the return you would have received from an annuity, but you do not need to draw an income if you do not need it.
When you die, any remaining funds can be used to pay a pension to a surviving spouse or dependant children under 23 in full-time education.
If there are no dependants you can create a special vehicle where you nominate family members or even friends as members of your scheme.
Unused pension assets may then pass to other scheme members on your death and can continue growing in a tax- advantaged pension fund.
When the beneficiaries reach 55, they can take 25% of the inherited pension fund as tax-free cash and use the rest to provide a retirement income.
It was hoped that, on death, you would be able to pass on any money or assets via an Asp free of all inheritance tax. But the Inland Revenue has indicated that it intends to review the inheritance-tax implications and is likely to impose a tax charge before the new rules come into effect.
Minimum Retirement Age
From April 2010, the minimum retirement age will be increased to 55. The good news is that you won’t need to stop working to draw benefits from your pension scheme.
- If you aim to retire before age 55, you may need to review your retirement planning. It might make sense, for example, to draw on PEPs, ISAs and other investments initially until you can draw on your pensions or it might be best to draw your pension benefits before A-Day.
This is not all of the changes, but I fear that space is at a premium. I know that these changes will make massive differences to all of us, young and old.
Please feel free to contact me or, if you have a financial adviser, contact them. This is one area where you really should seek professional advice.
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