My favourite 3 Pension myths Reply

Mann mit einem Glas Wein

Some people have some odd ideas about pensions, here are a few:

Auto Enrolment Pensions

Our company doesn’t need an auto enrolment pension as we already have pensions and would just opt out! not true every employer needs an auto enrolment pension and you can not opt out before you have joined.

One Person companies are not subject to Auto Enrolment however, if the company takes on a second worker and the director and new employee have contracts of employment then both could become workers under auto enrolment.

Pensions aren’t as good as buy to let property

Property is a good investment and Buy to Let property has benefited from excellent capital growth, pension schemes can’t invest in residential property but they can invest in

  • Industrial units
  • Offices and shops
  • Farmland and forestry
  • Public houses
  • Nursing homes
  • Hotels
  • Marine berth

Pensions are the most tax efficient way to invest because:

  • You or your company will get tax relief on money paid in (for higher rate taxpayer that’s 40% tax relief)
  • Pension schemes don’t pay income tax or capital gains tax
  • When you are over 55 you can have 25% tax free
  • Pensions are generally outside of the scope of Inheritance Tax

The Pension dies with me

It doesn’t have to die with you, in fact many people are now creating family pension schemes

https://stevejbicknell.com/2016/01/25/how-a-family-pension-scheme-will-save-you-tax/

The potential benefits of the Family Pension Trust are:

  • Members, including minors, can pool funds together to benefit from a wider range of investment opportunities
  • Multiple common investment funds allow a variety of bespoke portfolios to be established for some or all members, which widens investment options and can reduce costs
  • Investment decisions do not have to be unanimous
  • Different attitudes to risk can be catered for
  • No minimum fund requirement
  • Increased borrowing potential
  • Succession planning options and death benefits
  • Comprehensive, flexible options to enable retirement income to be phased

steve@bicknells.net

Don’t ignore work place pensions – the regulator will fine you! Reply

I want you

The fine for small employers with 1 to 4 staff who fail to comply with an EPN is £50 per day and for those with 5 to 49 it is £500 per day.

The Pension Regulator statistics for the first quarter of 2016 show that the number of fixed penalties were 806 compared to the penalties for the whole year of 2015 which were 1,250, so penalties are increasing, partly due to increasing numbers of small businesses being required to enrol.

Staging Dates

 

 

Charles Counsell, Executive Director for automatic enrolment, said: “Most employers comply on time and we continue to see compliance rates in the high nineties. Others need a nudge and are prompted to meet their duties when one of our notices comes through their letterbox.

“It’s simply not fair for staff not to receive the pension contributions they are legally due. But failing to act also means an employer risks clocking up a significant penalty until they put things right.

“Our message remains that if things aren’t going well, then talk to us; don’t ignore us.”

steve@bicknells.net

Pension Tax Changes expected soon 1

fictitious newspapers

On the 20th January 2016…

David Gauke, the Financial Secretary to the Treasury, said a review of pension taxation would keep savers in mind.

“We need to ensure it is effective in terms of encouraging saving, and it is going in the right place,” he said.

Basically there are 2 changes under review..

The ISA idea

Currently you get tax relief when you pay into pensions and pay tax when you take the money out (after taking 25% tax free), the plan under discussion is to change that so that taxed income goes in and growth in the fund is tax free, like ISA’s.

I think we can all agree the current system is much better, I can’t see that making pensions like ISA’s will encourage investment

Flat Rate Tax Relief

The other plan under discussion is to introduce a flat rate of tax relief on contributions into pension schemes, this would replace the current system where tax relief is based on the actual tax rate you pay.

The BBC explained how this might work

At the moment, basic rate taxpayers receive 20% tax relief, higher rate taxpayers receive 40%, and those with the highest incomes receive 45%.

It is thought that this system could be replaced with a flat rate of anything between 25% and 33%.

Millions of high earners would lose out in such a system, but basic rate taxpayers would stand to gain.

http://www.bbc.co.uk/news/business-35360978

So that could be great news for basic rate tax payers!

steve@bicknells.net

Contact Us

 

Can my Pension buy shares in my company? 1

Entrepreneur startup business model

A pension scheme can buy quoted or unquoted shares in a company based either in the UK or overseas.

An occupational pension scheme can buy shares in one or more of the employers participating in the scheme as long as both the following conditions are met:

  • the total value of the scheme funds invested is less then 20% of the net value of the pension scheme funds
  • the amount invested by the scheme in the shares of any one employer participating in the scheme is less than 5% of net value of the pension scheme funds

Any investment larger than this will be an unauthorised payment and both the scheme employer and scheme administrator will have to pay a tax charge on the amount above the limit.

https://www.gov.uk/pension-trustees-investments-and-tax

So in theory, yes, it is possible, but in reality its likely to fail because:

  1. An independent ‘Arms Length’ valuation will be required, for an unquoted small business or start up this is extremely difficult as establishing a market value for the shares will be difficult and often a start up will have losses in the first few years
  2. The HMRC’s rules which govern all registered pension schemes (in particular the sections covering both taxable property and tangible moveable property) dictate that the combined shareholding in the unquoted company held between the pension fund, the member personally and any other connected persons must never exceed 19%, otherwise there would be enormous tax consequences for all concerned
  3. The company concerned must not (and never should be in the future) controlled by the trustees of the pension fund in conjunction with connected parties

If the business needs the money to buy commercial premises for its trade it would be easier for the pension scheme (SSAS) to lend the money, a SSAS can lend up to 50% of net scheme assets as explained in in this fact sheet from Curtis Banks

If you are over 55, you could also consider drawing down funds from your pension, the first 25% will be tax free.

steve@bicknells.net

Have you been over taxed on your pension withdrawal? Reply

This is exactly how I pictured the partners lounge

You should be able to withdraw 25% of your pension tax free, but your pension provider will tax you on payments above this level.

If they don’t hold a current P45, the pension provider will apply an emergency tax code on a month 1/week 1 basis, which could mean you pay too much tax.

You will need these forms to reclaim the tax

Form P50Z – if the client has chosen to empty all their pension pot in one go and they have no other PAYE or pension income (other than the state pension);

Form P53Z – if the client has chosen to empty all their pension pot in one go and they do have other PAYE or pension income other than the state pension;

Form P55 – where the client has taken a lump sum payment which doesn’t use up all of their pension pot, they have only taken a single payment and don’t intend to take further payments in that tax year.

steve@bicknells.net

Will you be taxed if you inherit a Pension Fund? Reply

Signing Last Will and Testament

IHT only applies if the pension company has to pay the value of your scheme to your estate, in which case it becomes like any other asset, but generally the pension pot is held in a discretionary trust, which means it isn’t taxed on death.

You can now nominate anyone not just dependents to be the beneficiary.

Since 6th April 2015 anyone who inherits a pension fund from a person who dies before the age of 75 is entitled to receive it tax free and the you can take the money as a lump sum or income. Once over 75 a special tax of 45% applies (previously 55%), you could reduce this by taking a regular income.

From 6th April 2016 the 45% tax is likely to be scrapped and income tax rates will be applied.

The BBC website has a useful post which explains the changes in 10 questions, click here to read it

steve@bicknells.net

 

 

Common Auto Enrolment mistakes.. Reply

14975526361_d496e12032_m

The Pensions Regulator (TPR) has recently highlight the following problem areas:

  1. Employer forgeting to do the declaration of compliance within 5 months of staging, many employers wrongly assumed that registering on the Government Gateway was enough.
  2. Confusion caused by running multiple payrolls for the same employer for example weekly and monthly
  3. Completing the declaration of compliance but without choosing a pension provider
  4. Omitting self employed workers who have a contract to provide work personally

steve@bicknells.net

Budget 2014 – Pensions you can spend, hooray! 1

Pot of gold coins isolated on white

Thank Mr Osborne, its been a long time coming but an end to being forced to buy an annuity is coming….

From April 2015, pensioners will have the freedom to cash in as much or as little of their pension pot as they want, removing the need to buy an annuity.

We will now have the choice of taking a lumpsum, drawdown over time or buy an annuity.

The news wasn’t good for Life Insurance Companies who saw £4.4m wiped off their value yesterday.

If you do want to buy an annuity you be able to get free independent advice.

There will also be a new NS&I Pensioner Bond savings scheme to be available from January to all people over 65, paying interest rates of 2.8% for one-year bonds and 4% for three-year bonds.

From 27th March 2014 small penion pots can be cashed in, the ABI say that 25% of annuity sales related to pension pots of less that £10,000.

“Savers with pension pots of less than £30,000 can now take this out as cash, in what is a welcome lifeline for savers with small pension pots,” says David Macmillan, managing director at life and pensions provider Aegon UK.

There are still rules and the changes apply to Defined Contribution Schemes not Defined Benefit Schemes but this is a massive change in pension rules.

steve@bicknells.net

 

 

Will Temp Agencies avoid Auto Enrolment by using Postponement? 1

Pension background concept

The date workers are enrolled depends on the size of the company they work for and is being rolled out over the next six years (this is called a staging date).
  • Large employers (with 250 or more workers), have started automatically enrolling their workers and will continue to February 2014 (some employers may choose to start earlier)
  • Medium employers (50 – 249 workers) will have to start automatically enrolling their workersfrom April 2014 to April 2015
  • Small employers (49 workers or less) will have to start automatically enrolling their workers from June 2015 to April 2017
  • New employers (established after April 2012) will have to start automatically enrolling their workers from May 2017 to February 2018
  • Employers who chose to use Defined Benefit or Hybrid Schemes can delay their staging date until 30 September 2017

You can postpone the start of Auto Enrolment for up to 3 months and then re-test for eligibility using this method could mean that Temporary Staff Agencies could avoid Auto Enrolment for their temps. This also means that many agencies will use NEST because other pension schemes will not want to sign them up as they many not actually receive any contributions.

Pinsent Masons blogged:

Agency workers are different from other workers and so present particular challenges. Many are seeking work for only a short period. Many will register with a number of different agencies and will, in fact, only be ’employed’ by a particular agency for a short period. The auto-enrolment obligation applies to all workers who meet the age and earnings thresholds, but there are options which may assist those employing high churn groups of workers.

Employers can make workers wait up to three calendar months before enrolling them into a pension scheme. If the worker has left by the end of that three-month period, then there is no need to provide that worker with a pension.

If you do postpone, make sure you follow the rules otherwise there could be harsh penalties under the Pension Act 2008 Section 45

Offences of failing to comply(1)An offence is committed by an employer who wilfully fails to comply with—

(a)the duty under section 3(2) (automatic enrolment),

(b)the duty under section 5(2) (automatic re-enrolment), or

(c)the duty under section 7(3) (jobholder’s right to opt in).

(2)A person guilty of an offence under this section is liable—

(a)on conviction on indictment, to imprisonment for a term not exceeding two years, or to a fine, or both;

(b)on summary conviction to a fine not exceeding the statutory maximum.

steve@bicknells.net

Salary Sacrifice has been “clarified”, its time to check that you comply Reply

Staff Benefits

Salary Sacrifice is a very tax efficient way to give your employees benefits and the most popular benefits are Pensions and Childcare. I wrote a blog back in 2011 which explained how it can save 45.8% in tax and NI

HMRC decided on 9th April 2013 that it was time to “clarify”  in their Manuals what are successful and unsuccessful salary sacrifice schemes and have added some further guidance. Their Staff are instructed not to approve schemes (Employment Income Manual EIM42772)….

You (HMRC) may get requests for advice:

  • on how to set up a salary sacrifice arrangement, or
  • on whether draft documentation will achieve a successful salary sacrifice.

You (HMRC) should not comment on either of these areas. Salary sacrifice is a matter of employment law, not tax law. The nature of an employee’s contract of employment is a matter for the employer and employee.

The specific updates are:

EIM42750 – Salary Sacrifice – updated – this contains the examples of schemes

EIM42777 – Contractual arrangements – this has interesting comments on childcare and pensions

  • If the scheme involves childcare or childcare vouchers then the conditions for exemption must be met. (See EIM21905 and EIM16057). Is the agreement to provide childcare between the employee and the childminder or nursery. If so the employer by paying the cost directly is meeting the employee’s personal liability. (See EIM00580).
  • For a registered pension scheme the amount which can be contributed to the scheme is normally linked to the employee’s chargeable earnings. In consequence if the salary sacrifice results in some of the employee’s income no longer being taxable, then the amount of contribution, which can be made to the scheme, will also drop.

EIM42778 – Exemption from Tax/NIC – basically stating that exemption may require that the sacrifice may be available to all employees but that the sacrifice must not reduce the employees wages below National Minimum Wages

The following is an example of an unsuccessful Childcare Salary Sacrifice:

The pay slip for the month ended 31 July 2006 gives monthly pay as £2000 plus overtime of £100, deductions for tax of £355 and NIC. The pay slip for the following month shows monthly pay of £2000 plus overtime of £100, deductions for NIC, childcare vouchers of £200 and tax of £310. The code number operated on the salary has not changed.

The situation is not clear from the payslip. When asked, the employer explains that for August, because childcare vouchers of £55 a week are exempt, £220 of vouchers has been deducted from the gross pay of £2100 and tax charged on the net figure of £1880. Further information is needed, for example a copy of the employment contract and any variations agreed by the employer and employee to that contract.

It is established that in July the employee bought childcare vouchers. The employer was not involved. The employer accepts that as the childcare in July was not provided by him, no tax exemption is available. In August the employee asked the employer to buy the childcare vouchers to take advantage of the exemption. The employer did this and deducted the cost from the monthly salary. The contract of employment shows that the employee is entitled to a base salary of £24000 to be paid monthly. This contract has not been varied. As the employee’s entitlement has remained the same, this is not a successful sacrifice. (See EIM42766).

If you operate salary sacrifice schemes its worth checking that your schemes comply, the tax consequences of failure to comply could be substantial.

steve@bicknells.net