I have just received my latest statement from my final salary pension, and I am a little concerned. My worry is the scheme tells me they are in deficit and I don’t want to end up like those poor people at BHS. I also would like access to the funds before I’m 60 because I want to pay off my mortgage. Do I have any options?
With Bloomberg reporting pension fund liabilities have increased to a record £1 trillion after the BoE’s rate cut in August, now is a worrying time for some final salary pension holders.
Final salary pensions have always been perceived as the “gold-plated” pensions that we should all aspire to; guaranteed income that rises with inflation and is payable for the rest of your life. Unfortunately such a good deal for the pensioner doesn’t come without potential risk. As many as 1,000 defined benefit (or final salary) plans are at risk from insolvency, meaning they will not be able to pay what they promised, according to a Pensions Institute report in December. So if you’ve got a final salary pension that you have not yet started to take, what are the options?
Transfer to a defined contribution scheme
A transfer out of a defined benefit or guaranteed income into a defined contribution or non-guaranteed environment is a serious financial decision and needs to be made with help from a financial adviser. The adviser will need to do a significant amount of research on your pension to determine if this really is the best option available to you. If you do this, you will be able to access your pension from the age of 55 under the new pension freedom rules.
However, it still may not be possible.
Advisers work under very strict rules in this area and if their research determines that a transfer out of your pension is not in your financial interest, they may not be able to help you further. These rules are enforced by the regulator to protect you and your adviser. The biggest point you need to remember is that you will be transferring from a guaranteed to a non-guaranteed environment. Your pension currently is guaranteeing to pay you exactly what is says. Once you transfer out, this value can go up, but it can also go down. You need to be comfortable with that.
Transfer values on the rise
It’s not necessarily all doom and gloom out there, as one of the startling impacts of the lower interest rates has been the contrarian rise in transfer values. As the cash equivalent transfer value (or CETV on your statement) is priced using bond yields, a lower bond yield has pushed some transfer values higher.
The key point to looking at all your options is to take advice. An independent adviser will be able to explore all possible options with you and help you make the correct decision.
I am worried about inheritance tax. My mother is 87, in good health but she’s not getting any younger. My father died a few years ago. My mother owns her flat in Barnes, plus has an investment property in Chiswick. She gives the rental income away to a friend as she doesn’t need it. She has cash savings of around £300,000 plus £200,000 in ISAs and then another £200,000 of shares which she has owned forever. I understand inheritance tax may be an issue, but how much will I need to pay on her death and how can I reduce it?
Many thanks for your email. You are not alone in this issue, HMRC claimed nearly £4.7 Billion in 2015/16 in inheritance tax (or IHT) and this is projected to be £5.6 Billion by 2021.
A lot of people don’t want to think about IHT, simply because it involves death – and death is not a nice issue to talk about. However with some careful financial planning, virtually every West London person can put themselves in a better position and reduce the IHT liability. This means more wealth passed down to the people you care most about.
But back to your question. How much tax are you due to pay? If one makes the assumption that both your mother’s flats are worth £600,000 each, then her total asset base is £1.9m. If I then use your late father’s and your mother’s nil-rate bands of £325,000, which gives a total of £650,000 of assets that will not have IHT charges. This leaves around £1.25m taxed at 40% which means you will need to pay around £500,000 in tax on your mother’s death. That is £500,000 less passed down to you and your family.
There are a number of avenues we can pursue.
Let’s first take a look at the properties. Given your mother still lives in her flat, there is not much we can do with that. She is still receiving the benefits of living there, so this cannot be gifted away. The investment property is different. As she doesn’t use the income this property can be gifted to someone who will take over the property title. As the property is a gift, technically there is no sale price which means there is no stamp duty charged. However there are all the other legal costs of selling a property are involved. Using the seven year rule for all gifts, as long as your mother lives another seven years, then this property will be completely outside her estate.
Next let’s look at the ISAs. ISAs are fantastic savings products as you can tax-free income and growth, but have a problem with inheritance tax because this tax-free status dies with the holder. An option to look at here could be switching this ISA into another ISA-based investment that qualifies for Business Property Relief (or BPR). BPR‘s main advantage is these assets will become exempt from IHT after only two years, versus the normal seven for a gift. Another benefit is that the investment will always be held in your mother’s name, so if need she can always get access to them.
And finally we can look at the cash and shares. There are a couple of options we could look at here. First we could look at using trusts as a way of managing the assets. Trusts can be particularly useful as you can structure them to invest the money how you would like, but also pay you an income (which is classed as return of capital) back from the trust. This allows you to receive an instant reduction in your asset value and not wait the full seven years. Another option could be to look at using BPR again, potentially through a potentially more stable investment such as asset-backed loans. This is a little more complex which needs to be discussed in further detail.
This is just a brief outline of some of the options available. Please note this is not advice at this point as we would need to meet properly to get a fuller understanding of your situation.
I am a French national living and working here in the UK. Ignoring the impact of Brexit, I am looking for advice on where to invest my funds, held both here and overseas. What are the major advantages and/or disadvantages I have?
Financial advice is imperative for all people who invest their own money. This is especially the case for expats living and working in the UK. Having your finances and taxation spread over two or more countries can be confusing, costly and inefficient. It can also be downright dangerous if you get your taxation wrong and end up getting into trouble with a tax authority.
There are many different advantages to being located in the UK when you are considered non-domicile. Some of these also apply to normal UK citizens as well. Here are a few examples:
• Investment location
You have the ability to invest through locations such as the Isle of Man and Dublin, which combine very strong investor protection and supervision with tax efficiency. This also applies to UK domiciled people.
You can invest in many different currencies and certain products have the option of having gains treated by the country of residence at the time of selling.
Depending on the characteristics of your investment, it may be seen by HMRC as a “non-income producing asset” and thereby will not be taxed whilst you hold the investment and stay as a UK resident. It also may be likely to have a 5% allowance, meaning potentially you could bring 5% of the value into the UK each year with no tax implications.
Inheritance Tax planning
Inheritance tax only becomes an issue if/when you become domiciled. This changes in April 2017 to count if you have been here 15 out of the last 20 years. If this is the case, then we can look at the options of gifts and trusts.
Clearly the benefits of investing internationally are driven by the individual circumstances - so obtaining financial advice is essential. Here at Sterling & Law we specialise in advising on these financial instruments. If this is of interest to you, please get in touch using the details below.
If you have a question on inheritance tax or any other matter of personal finance, please feel free to contact Adam at firstname.lastname@example.org.
©RiverTribe Magazine 2017