You have probably heard of Mad Max – its latest incarnation is currently in UK cinemas. You may have heard about the Lifetime Allowance – which has been part of the pension vocabulary since 2006 or “A-Day”. Suffice to say that I believe that the Lifetime Allowance is rather mad.
In the event that you are a politician and reading this, may I ask why you think pensions are important? To my mind, pensions should be encouraged. The end result of a pension should be that people living in the UK are able to provide for themselves above the State Pension, so support their lifestyle. This has several obvious benefits – creating financially independent adults, not requiring State support. Having income means that income tax can be levied and collected to help pay for our society. Let’s also not forget that income is there for using (spending) which enables trade to occur and wealth to be created and so on.
A World of Plenty?
It would seem that politicians generally think not having a rising burden on the State is a good thing. Indeed encouraging pensions with tax relief is the “sweetener” or “bait”. Much like the film Mad Max, we probably don’t want to create a society reliant upon the occassional benevolence of the prevailing “Lord”. Surely we would like a society where all prosper? OK we know the UK has limited resources, so adjust the tax relief, but don’t make it hard or even pointless to save. Even the current regime isn’t tempting enough for millions of people that don’t or cannot save for their future.
At present pension contributions are restricted, which seems fair enough, but the amount that the pension pot grows to is also restricted by the Lifetime Allowance. This is currently £1.25million, which sounds like a reasonable sum, but in practice isn’t as much as you’d like to think, given that it has to last for the remainder of your life. The Lifetime Allowance has already reduced over the years from £1.8m and if the Chancellor does what he suggested he would in the last Budget, it is likely to shrink to £1.0m next April. In other words £250,000 of the Lifetime Allowance will be lost – or more accurately invoke a tax penalty of £137,500.
Mad Max and Excess Tax
If the Lifetime Allowance is exceeded, there is a tax charge of 55% on the excess. OK there are some ways that you can protect your higher pre-legislation allowance, but these are designed by bureacrats and “problematic” to say the least. Essentially this excess tax charge punishes those that save or get good investment results…. let’s not forget that the income from pensions is subject to income tax anyway. So I fail to understand why we don’t simply abolish the Lifetime Allowance and all the protections that have surrounded it. Your pension fund should be just that – a pot that you can actually use with confidence.
Mad Max – Fury Road is currently in UK cinemas, starring Charlize Theron, Tom Hardy and Nicholas Hoult. The Chancellor, George Osborne has his next Budget on 8th July 2015…
Planning for the Tax Year End?
The tax year end is rapidly approaching and you don’t have long to use up various allowances that expire on 5th April 2015, so it really is time to take action now should you wish to do so. Despite the media and politicians doing their best to confuse everyone about tax, tax avoidance is actually perfectly legal and something that is encouraged. By way of example….
- NS&I Premium Bonds & Children’s Bonds
- ISAs – Annual Allowance
- Pensions – Annual Allowance, Lifetime Allowance, Carry Forward Allowance
- Capital Gains Tax Allowance
- Personal Allowance
- Nil Rate Band Allowance (inheritance tax planning)
- Giving Allowance (£3,000 per person)
- Enterprise Investment Schemes, Venture Capital Trusts, Small Enterprise Investment Schemes
- Business Property Relief
There are lots of ways to reduce tax, married couples have even more options. Tax evasion is illegal not tax avoidance. It is certainly true that some schemes are deliberately aimed to test the law on this, but nothing that any of our clients use or would even want to use. Hopefully by now you will have received the lates copy of Talking Money, let me know if you haven’t – we have run out of stock, but you can see an online copy here.
The 2012/13 tax year is nearly at an end. Time is running out. HMRC essentially operate a world of “use it or lose it”. For most people this means ensuring that you have maximised your pension allowances (£50,000 is the maximum permitted in the tax year, subject to a plethora of qualifying rules – aren’t we all thankful for pension “simplification”). These days pretty much the only advantage of a “pension” is the tax relief – which is applied at your highest rate of tax. Thereafter, have you used your ISA allowance, all £11,280 of it? capital gains tax allowances? and a heap of others for those with more sophisticated planning.
Most people give money to charity, so do remember that this attracts tax relief in a similar way to pensions. Also you are able to use your annual giving allowance of £3,000 per person (the giver) moving money from within your estate to those that you want to benefit, a very basic form of inheritance tax planning – it can certainly become much more complex based upon the size of the IHT problem that you expect.
There are other forms of allowances, but please treat these with caution and remember the adage “fools rush in where angels fear to tread”. I was on the train on Saturday evening, coming back from a very good performance of “The Judas Kiss” when the couple next to me started discussing their financial planning rather loudly ( I really wasn’t trying to listen). The subject of their conversations was about VCTs (Venture Capital Trusts) and the tax relief available. They had clearly not attended the same meeting as one was describing how the VCT worked to the other. Their “adviser” had not charged for his “advice” (not permitted nowadays) and I was rather concerned about their understanding of the risk involved and the lack of compensation coverage if or when things go wrong. The FSA would suggest that only around 3% of all investors are likely to find this sort of investment suitable (3% of investors, not 3% of the population). Of course some VCTs can be a great solution, others require you to be more of an expert than a Dragon in the Den. Please be aware that there will always be someone willing to discuss a “guaranteed winner” to an unsuspecting person. When it comes to investing, there is no such thing as a guarantee, despite what it may say on the tin. Be warned – and sadly I have to say that the information on the MAS website fails to adequately convey the degree of risk with a VCT. You can lose all of your money. It is not called venture capital for nothing!
We will be closed for Easter (Good Friday is this Friday!). We re-open on Tuesday 2nd April and I can assure you that despite every good effort, attempting to make a tax-year end payment by Friday 5th April will create some significant stress if you leave it late.
For those of you that are higher rate taxpayers, remember that you need to reclaim your higher rate tax relief via your tax return. HMRC do not provide you with an indefinite amount of time to get this sorted. In practice anyone with higher rate relief claims must reclaim the 2008/09 year by 5th April 2013. So make sure you do! In general, you only have 4 years to make a claim.
Rumours: Pension Tax Relief Cut
The pensions industry is always awash with rumour. Today, we returned to the tried and tested rumour of higher rate tax relief being scrapped or reduced on pension contributions. This obviously would mean that the Government will save tax by not providing the relief (quick example – £10,000 investment = £8,000 cost to basic rate taxpayer, £2,000 paid by the HMRC automatically. Higher rate taxpayers reclaim another 20% (£2,000 in this instance) via self-assessment tax returns). So of course there is an obvious “saving”. However this is the social politics of envy and nothing more. Pension contributions have already been restricted to £50,000 per tax year and the Lifetime Allowance has been reduced to £1.5m. Today’s gossip (and that is all it is) suggests that Mr Osborne will be tempted to cut the annual allowance from £50,000 to £40,000 or even £30,000. Alternatively he may simply ban higher rate tax relief.
I’m known for being fairly suspicious of my “industry” and given that there will be a ban on commission at the end of the year, I cannot help but think that hurrying higher rate taxpayers to make large lump sum payments into pensions, earning some advisers a large commission, may not be a timing coincidence.
Pensions have little going for them
Pensions have very little going for them other than tax relief. Automatic Enrolment (AE) has begun for large firms and will eventually mean that everyone is pretty much forced to save into a pension. It seems very odd that we know that Britain does not save enough, yet we constantly elect politicians that lack the courage or wisdom to do anything about our longer-term problems, which I believe will make the cuts, spending reviews and credit crunch look like a time of bounty unless people start taking their own finances seriously.
Taxing our way to the death
Yesterday I attended an excellent talk entitled “Debt, austerity and growth – where’s the money?” and the analogy was made that attempting to increase taxes whilst stimulating growth doesn’t work. The Winston Churchill quote was cited:
“We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”. Sir Winston Churchill (1874-1965)
As I have said before a fair tax is a single rate of tax that everyone pays. It should not be tiered, it should not differ depending on income or the source of income. Fairness is the same treatment. Unfortunately our politicians and most of the media and public seem to confuse this with wealth reallocation.
|2011: The Lincoln Lawyer – Furman|
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