IHT and pensions

The Government has referenced the changes in 2015 as a reason to bringing forward the proposals for technical consultation on pensions and IHT. These changes plan to bring unused death benefits into the estate of the deceased. This covers most death benefits but excludes income paid via a benefits scheme pension, which would be those paid under a defined benefit pension scheme generally.

They also exclude benefits paid from a life policy purchased with pension funds, such as an annuity bought in the lifetime of the member as well as charity lump sum death benefits.

Previously, if pension death benefits were paid under the discretion of the trustees/administrators they would have been generally exempt, but this distinction is now being removed. This may well mean that more people decide to consider a binding nomination on death removing an option of a challenge. The spousal exemption on inheritance will be applicable to pension death benefits in the same way as other assets in the estate.

Although the reporting and calculations will be made by the personal representative, the payment of IHT will be apportioned to the scheme and paid before the funds are released or allocated to the beneficiary for use. This is to ensure that for those who die over the age of 75, there isn’t income tax charged on the amount needed to pay IHT.

Overseas transfers

Transfers to Qualifying Overseas Pension Schemes where the individual remained in the UK and their funds were transferred to the EEA or Gibraltar were previously exempt from the 25% Overseas transfer charge on the whole transfer – unlike if you transferred to another country and didn’t go with your pension fund.

This has meant that you could transfer overseas up to the value of your Overseas transfer allowance (generally £1,073,100) without charge and once the funds were out of the country, you could access the equivalent of their tax-free cash option. As using your Overseas Transfer Allowance didn’t restrict your Lump Sum Allowance, you would retain access to your full entitlement of tax-free cash in the UK.

This was seen as unfair and caused by poorly drafted changes in the abolition of the Lifetime Allowance. This loophole will now be removed, which will bring everyone back in line with the intent of legislation, alongside some more technical changes in this area. This comes into force tonight, so there is no scope for a sudden rush to make overseas transfers and use this loophole.

NLW and AE

The government’s increase in the National Living Wage to £12.21 an hour (£22,222 pa) will drive a rise in auto-enrolment contributions for those impacted, and will reduce the increase in pay in their pocket to some extent, as individuals will not only have to pay tax and national insurance on the increase but also £70 of pension contributions a year (35 hours a week worker).

Having said that, they will benefit from an additional £42 a year from their employer in contributions. Additionally, someone working only 16 hours a week on National Living Wage will now be pulled into auto-enrolment because their earnings will be just over the trigger threshold of £10,000 pa.

This would mean a personal contribution of £195.90 pa, nearly a third of their annual increase before tax and National insurance. They would, of course, benefit from £117.54 of employer contributions.

It should be noted, however, that many employers offer more generous pension schemes, and these figures would therefore be different.

Claire Trott, divisional director retirement & holistic planning at St James’s Place

The post Claire Trott: What the Budget means for pensions appeared first on Money Marketing.

But the world is changing and it is becoming more and more difficult for some to guarantee a comfortable legacy for their loved ones due to challenges posed by their own needs and those of their family during their lifetime.

Future retirees face a very different reality to the retirees of today and, with people living longer, retirement and the responsibilities of retirees are shifting substantially.

Recent research we’ve undertaken delves into these challenges further, revealing how these pressures are hindering many people’s ability to pass on funds after death.

By 2029, there will be 963,000 families with more than one retired generation – an 18% increase from the 813,000 multi-retiree families that exist currently

While seven in 10 UK adults (68%) believe it’s important they leave an inheritance, future retirees must contend with a wide range of economic factors, such as mortgage and rental costs, which pose challenges to doing so.

For instance, 13% of those approaching retirement anticipate still having mortgage payments to make when retired (up from 4% of retirees today), while 16% expect to still be renting when they reach retirement.

All these issues go against the ideal retirement situation we envision for clients, where individuals have fewer outgoings and avoid touching savings earmarked to be left to pass down.

Another factor increasing pressure on the next generation of retirees is the need to financially support other generations also in retirement. In fact, our research revealed the number of families with more than one generation retired at the same time is rapidly rising and, by 2029, there will be 963,000 families with more than one retired generation – an 18% increase from the 813,000 multi-retiree families that exist currently.

While 65% of current retirees expect to pass down property to their family through inheritance, this figure drops to just 45% among those yet to retire

Naturally, this will place a strain on our clients’ finances and over half (55%) of future retirees expect to provide financial support to other generations in their retirement. Unsurprisingly, one in 10 foresee the requirement to financially support other generations reducing the amount they are able to pass on in inheritance.

Added to this, with younger generations living at home longer, finding it harder to get onto the property ladder and grappling with the significant cost of higher education, many are turning to the bank of Mum and Dad for more support than previous generations.

This, again, takes funds away from any legacy that could be left. While in these cases, it may not mean they miss out, as they will be benefiting while their parents are still around to see it, it will still have an impact, forcing future retirees to dip into emergency funds, leaving them more vulnerable to increased costs of living when they do reach retirement.

Unsurprisingly, future retirees are feeling less confident in their ability to implement inheritance plans.

Unsurprisingly, future retirees are feeling less confident in their ability to implement inheritance plans. A quarter don’t feel confident they have the right plans in place

A quarter (26%) don’t feel confident they have the right plans in place versus 14% of current retirees and, overall, the next generation is a third less likely to pass down assets. While 65% of current retirees expect to pass down property to their family through inheritance, this figure drops to just 45% among those yet to retire. Meanwhile, 60% of current retirees plan to pass down cash savings, contrasting with only 40% of future retirees who share the same intention.

Although some external pressures can’t be accounted for, we can prepare clients to best tackle these issues by helping them to develop a retirement plan that takes into account not only their ideal retirement situation and the assets they would like to pass down, but also the other generations that may need to be supported and other factors such as healthcare costs and long-term care costs.

By working with them to develop a good, flexible and robust financial plan early on, we can help navigate the complexities well before they reach retirement and facilitate greater opportunity to build wealth over time, without them having to making unnecessary sacrifices along the way and putting off retirement indefinitely.

Claire Trott is divisional director, retirement and holistic planning, at St James’s Place

The post Claire Trott: Why leaving a legacy has got a whole lot harder appeared first on Money Marketing.

It has been abolished but a complete set of working regulations for the new lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA) still need to be implemented.

On top of that, the guidance notes the pensions tax manual needs to be complete and up to date, and all the responses to any outstanding working questions also answered.

This is not an easy task, and I really feel for those on the front line trying to shoehorn changes from percentages if a flexible number, such as the LTA, into fixed numbers such as the LSA and LSDBA.

In this period of more calm and certainty, advisers would be wise to continue reviewing clients’ contributions

Percentages were used to deal with changes easily over time. We now have 18 years’ worth of changes to deal with, not including the pre-A-day era of complexities, too.

With all that on the go, and a possible review of the broader pensions landscape on the horizon as mentioned by Labour before the election, now is the time to try and get ahead of any potential changes.

It’s important not to panic. Pensions are full of complex legislation, and changing most things at a drop of a hat is therefore very difficult. Before anything is decided, the potential revenue gains will need to be weighed up against the upheaval of making any changes, so decisions won’t be taken lightly.

The easiest change to make, which we have seen happen multiple times over the years, is with regards to the annual allowance. We now have multiple levels of allowances to stop those accessing pensions from recycling their income, those with high incomes getting too much pension tax relief, and a standard allowance limiting all the other workers. Apart from some simplicity here, changing the allowances wouldn’t achieve very much.

It’s important not to panic. Pensions are full of complex legislation, and changing most things at a drop of a hat is therefore very difficult

It was previously anticipated the LTA would be reinstated, but this is no longer expected. Instead, the new government has stated the need for calm and stability, with the promise of a review. There are also no plans to axe tax-free cash, which will come as a relief to many.

Flat rate tax relief has been mentioned by some, but the review into this in the past has not led to any changes, and given this would create other issues and complexities, it would not be a short-term fix.

There are still other potential pension changes on the table, such as extension of auto enrolment and the state pension triple lock, or even triple lock plus, which would need to be factored into future policy. But, for now, it feels much more like business as usual.

In this period of more calm and certainty, advisers would be wise to continue reviewing clients’ contributions, maximising them where possible and only accessing pensions where it makes sense.

Claire Trott is divisional director, retirement and holistic planning, at St James’s Place

The post Claire Trott: Embrace the calm of a new government appeared first on Money Marketing.

The overarching issues appear to stem from the move from percentages used to real monetary amounts, and also the fact only the parts of the benefits paid tax free on crystallisation are tested.

These issues have made tweaking current legislation significantly harder, causing more issues than expected.

HM Revenue & Customs’ (HMRC) solution to these issues so far seems to be to delay clients’ retirement plans. However, this isn’t necessarily fair or practical, especially for those who – due to factors such as tax reasons or having only just reached minimum pension age – have had to wait until this tax year to access benefits.

Transitional tax-free amount certificates (TTFAC)

The introduction of these certificates seemed an addition too far with the change in regulations, but they will become essential in some cases where the standard calculations are clearly not fair.

Take those who reached the age of 75 before 6 April 2024, for example. The standard calculations for lump sum allowance (LSA) would mean BCE 5 and 5A would reduce the client’s available tax-free cash, unlike the LTA rules that ignored these for the purposes of tax-free cash calculation.

While the TTFAC can resolve this issue, it creates another one, by causing delays for the client should they wish to take cash in the near future. For example, TTFAC must be applied for before the first crystallisation occurs after 5 April 2024, which means those who would usually make a crystallisation early in the tax year may have to revise their plans to benefit should a TTFAC be required.

Scheme specific tax-free cash

Although we have been aware of issues with the scheme specific tax-free cash calculations for some time, we are still awaiting corrective legislation.

These issues are two-fold. Firstly, the way in which the amount of tax-free cash is revalued contains a form of double counting, which causes incorrect figures for the client.

Secondly, there are also problems with regards to the amount of LSA and lump sum and death benefit allowance (LSDBA) that will be used by this crystallisation. The second issue is generally less of a concern because it should be possible to retrospectively correct, providing the client doesn’t want to take cash payments from other schemes.

Unclear and outdated guidance

With the delays in issuing corrective legislation, HMRC has taken the rather odd view of updating the Pensions Tax Manual based on the incorrect legislation, despite knowing its flaws.

Even the updated legislation issued on 14 March has not fed through to the guidance manual, meaning the only source of truth is the multiple layers of legislation that may or may not still be updated.

Where do we go from here?

As with most legislative change, it isn’t the simple run of the mill cases that cause the issues, it is the complex or large cases that don’t all come to light on day one.

Just in week one, I found what I assume to be inconsistencies in the intent of the legislation and how the regulations have been written. These have clearly been challenged before to some extent but, from what I can see, no acceptable conclusion has been reached.

Given the rushed nature of these changes, it is not surprising we are in this situation. The HMRC team has been approachable and willing to listen, but they can’t fix all these issues as quickly as needed and, unfortunately, the calls from the trade bodies and industry as a whole to delay the implementation fell on deaf ears.

Claire Trott is divisional director of retirement and holistic planning at St. James’s Place

The post Claire Trott: Lost in post-lifetime allowance quagmire appeared first on Money Marketing.

The tax charge applies when an individual or their partner receives Child Benefit and one of them has an income of over £50,000 a year.

The charge isn’t based on the household income but on each individual’s income. Therefore, you could have two people earning £40,000 and there be no impact, but if one earns £60,000 and one earns £20,000, the household would be subject to the charge.

If one person’s income is above £60,000, the HICBC works by clawing back a sum equivalent to all the Child Benefit paid. For individuals with an adjusted net income of between £50,000 and £60,000, it works on a taper basis.

While some avoid complex tax reporting by not claiming Child Benefit, this can cause them to lose out on NI credits towards the state pension

The difficulty is that those affected have various options on what to do, and the consequences of those options are not obvious.

The options are to:

• Not claim Child Benefit at all
• Claim Child Benefit but not receive payment of it
• Receive Child Benefit but pay some or all of it back through the HICBC

Registering a claim for Child Benefit, but then opting not to receive it, is the only way to avoid paying the charge and its associated administration, while also preserving National Insurance (NI) entitlements.

It is not always appreciated Child Benefit has important links with the wider NI system by providing the claimant with NI credits until the child is 12. This can help fill gaps in their NI records for the state pension if they are not working.

You could have two people earning £40,000 and there be no impact, but if one earns £60,000 and one earns £20,000, the household would be subject to the charge

As a result, while some people avoid the complexities of tax reporting by not claiming Child Benefit, this can cause them to lose out on NI credits towards the state pension.

As with many other thresholds, whether clients are impacted or not will depend on their adjusted net income – broadly, total income reduced by certain tax reliefs, such as gifts to charity or pension contributions.

For example, by making pension contributions of £8,000 net, £10,000 gross, someone earning £60,000 would be removed from the HICBC while also building up their pension entitlement and reducing the tax on their income.

This would mean an extra £1,946 could be reclaimed as higher rate relief. In addition, for a household with two children, Child Benefit is worth over £2,000 per year, which is not insignificant.

NI credits can be transferred between parents of children under the age of 12 and this can be back dated for one year

It is also worth noting that where the working parent of a couple has registered to receive Child Benefit rather than their non-working partner, the non-working parent does not receive any NI credits and may therefore lose entitlement to future state pension.

NI credits can be transferred between parents of children under the age of 12 and this can be back dated for one year.

Alongside this, Specified Adult Childcare credits can be used to pass NI on to someone caring for the child under 12 if not needed for those in the household. This was introduced in 2011 and can be backdated to that date. Those caring for the child can include:

• Mother or father who does not live with the child (non-resident parent)
• Grandparent, great-grandparent or great-great-grandparent
• Brother or sister, including:
  • Half-brother or half-sister
  • Step-brother or step-sister
  • Adopted brother or adopted sister
• Aunt or uncle

In some cases where Child Benefit wasn’t claimed, NI credits have been lost for parents or carers. Currently, you can only backdate Child Benefit claims for three months.

For a household with two children, Child Benefit is worth over £2,000 per year

However, the government has recently published an update, which says individuals will be able to apply for NI credits for parents and carers from April 2026, where they have not claimed Child Benefit.

The eligibility for this will be closely based on Child Benefit eligibility criteria, with transitional arrangements to allow them to be backdated to 2013. The credit will add qualifying years of NI where eligible, which will support future state pension eligibility.

Claire Trott is divisional director, retirement and holistic planning, at St James’s Place

The post Planning opportunities around the High Income Child Benefit Charge appeared first on Money Marketing.

We already saw significant announcements in March around the lifetime allowance (LTA) abolition and the increases to the annual allowances. Today was more about wider policy, including options for pension funds to invest in more illiquid assets.

However, this isn’t something that can be forced because pension scheme trustees need to ensure they are doing the best for the members and not just using the funds to help provide growth due to the size of the available pot.

The ‘pot for life’ being linked to the potential expansion of collective defined contribution schemes in the future was a new twist

The announcement that there will be a call for evidence on a ‘pot for life’ pensions savings model, which looks at contributions that would have been directed to auto-enrolment schemes being directed to a provider of the individual’s choice, was no surprise. But this being linked to the potential expansion of collective defined contribution schemes in the future was a new twist.

The first part could be a great thing for individuals who have already built-up significant pension funds and who would rather have everything in one place, avoiding the auto-enrolment scheme entirely.

If it goes through, though, it would put extra pressure on employers and the administrative burden of paying money to a variety of different schemes each month could mean significant time and cost added to payroll processes.

The pot for life concept has been compared to the Australian super funds arrangements, but we don’t have anything akin to this available to receive such funds, so this concept would need to be brought into the mainstream with approved providers being regulated accordingly.

Changes to NI contributions for individuals has little impact on pension savings unless the savings are diverted into their pension pots

We should also remember, pensions do not sit in isolation, so any changes to taxation have an impact on pensions and their value to savers.

A reduction in income tax would have made a difference, mainly in relation to tax reclaims received by pension schemes or lower deductions made through net pay schemes to achieve the same input.

However, changes to National Insurance (NI) contributions for individuals has little impact on pension savings unless the savings are diverted into their pension pots.

The lack of changes with regards to employer NI will mean less of a concern for those using salary sacrifice and benefit from the employer saving. If this had been reduced, individuals could have seen a cut in the benefits they received from salary sacrifice.

In the underlying documents we also have confirmation that the legislation to abolish the LTA will be pushed through to commence in 2024, against calls from the industry to delay.

The announcement usual triple lock rules will stick means we will see an increase of 8.5% in April for both the old and new state pensions

We still wait to see the full legislation, but it is well understood there will be new limits to get our heads around to test tax free cash in lifetime, as well as lump sum benefits in ill heath and on death.

Last but by no means least, we had confirmation the chancellor will honour the triple lock this year.

It isn’t compulsory for the Conservatives to follow this ‘promise’ and they could have played around with the factors used to determine the increases in state pension. However, the announcement that the usual rules will stick means we will see an increase of 8.5% in April for both the old and new state pensions.

Claire Trott is divisional director, retirement and holistic planning, at St James’ Place

The post Claire Trott: Does ‘pot for life’ have potential? appeared first on Money Marketing.

The pension freedoms introduced in 2015 should have made it a lot easier to be able to deal with the death of a client with regards to pensions.

However, we all know pensions are anything but simple and scheme rules play just as much a part in planning as the legislation that creates the options for the schemes.

Expression of wishes

Although the benefits in a pension are usually paid out at the discretion of the scheme trustees or administrators, they need guidance from the member on how this happens when they are gone.

This process is done through a ‘one and done’ form that the client won’t typically review on a regular basis if not reminded to by their adviser. So, why is it so important?

Well, firstly, things change. Any change in personal circumstances could trigger a review of the expression of wishes and not just those directly relating to the member but any of their named beneficiaries. More importantly, though, any potential new beneficiaries, such as a grandchild being born.

It is important to remember that if the desired outcome on death is beneficiaries drawdown and the beneficiary isn’t a financial dependent, they need to be named on the expression of wishes.

It is good practice to name all those that may be in line to benefit and then leave additional instructions with regards to the more intricate details. This could be in a letter that sits alongside the expression of wishes and sets out the splits, should one of the beneficiaries not be alive or not want the funds.

It can also give guidance on things such as why people have been excluded, so it is clear they haven’t just been forgotten. If it isn’t documented, then those making the final decisions won’t know the client’s full wishes.

Reviewing an expression of wishes with a client and them not requiring any change should be documented too.

If a provider holds an expression of wishes that is years old, then they may be more inclined to question it, so updating the details on file – both yours as the adviser and the scheme to confirm no change or even an updated form sent in – can save a lot of time and effort at a difficult time.

Trusts

Spousal bypass trusts are probably used less these days because of all the options provided under legislation to retain funds within a pension and outside of the estate.

However, there are some schemes that still don’t provide a drawdown option, either in life or on death and there is always the issue with death in service payments which can only be paid as a lump sum.

In previous years, it was fairly standard to create a trust to receive death benefits from a pension scheme, should it be needed. If not needed, it would generally fall away on death or the small payment used to establish it distributed.

Now with the Trust Registration Service (TRS) and the 45% tax charge on death after the age of 75, this practice is less popular. We should remember there really are good reasons to use trusts with pension planning and they shouldn’t be dismissed too quickly.

The TRS does add an extra layer of complexity now, with the need to ensure contact details of the trustees are kept up to date, as well as registering the trust in the first place. Older bypass trusts (pre 6 October 2020) don’t need to be registered until they receive assets.

Just with the expression of wishes, it is important to keep the letter of wishes to the trustees of the bypass trust up to date and complete, as well as reviewing the trustees and ensuring they are still capable to act.

The most important thing to understand with regards to pensions death benefits is what is and isn’t available under each of your client’s schemes. If they won’t pay out to a trust, there is no point in establishing one. If they don’t provide beneficiaries drawdown then, on death, this could cause additional issues and you can’t change these things once the client has passed.

Claire Trott is divisional director, retirement and holistic planning, at St. James’s Place

The post Claire Trott: Death is complicated enough; don’t let pensions make it worse appeared first on Money Marketing.

Following the ruling on the McCloud case, certain public service pension schemes have been working towards revisiting and recalculating benefits.

For individuals who were members in 2012 and remained members in 2015, subsequently moving to accrue benefits in the new schemes (usually referred to as 2015 schemes), all benefits accrued in the 2015 schemes will be moved back to the legacy scheme from joining to 31 March 2022.

After that date, any further accrual will go towards the 2015 schemes, with an earnings link to the legacy scheme applicable, as long as they remain an active member.

This recalculation isn’t expected to be communicated until October at the earliest. The recalculations could mean retrospective tax charges could apply in relation to the annual allowance or lifetime allowance for the years 2019/20 to 2022/23.

The uncertainty with regards to reporting and retrospective tax charges has caused numerous questions to be asked of HMRC, mostly in a bid to avoid members experiencing any further disadvantages.

Delayed reporting requirements

Due to the work within the schemes, the pension savings statements will not be issued under the usual timescales (6 October 2023 for the tax year 2022/23). Therefore, members who may have a charge for that year will not be able to declare any charges on the self-assessment before the deadline of 31 January 2024.

To combat this issue, an electronic form has been introduced and the deadline to report this charge extended to the 31 January 2025. Other annual allowance charges due because of the remedy will have a reporting deadline of 31 January 2027.

Scheme pays extension

Scheme pays is only available to those that haven’t taken their benefits from the scheme, due to issues with recalculating benefits, as well as a possible impact on any lifetime allowance charges.

However, delays in reporting and the extension of the reporting requirements on any annual allowance charges mean it will be possible to apply for mandatory scheme pays after benefits have come into payment. This will avoid anyone wanting to use this option having to delay their retirement.

Overpaid tax

Scheme administrators have been granted extensions to reclaim any overpaid tax on lifetime allowance charges or annual allowance charges.

Lifetime allowance implications

As mentioned, changes to the scheme accrual, pension input amounts, annual allowance charges and/or scheme pays usage could cause the amount that should have been tested against the lifetime allowance to change.

In some cases, the excess may have been taken as a lifetime allowance excess lump sum, and therefore resulted in an individual paying too much tax. As well as the scheme being able to recalculate the charges and reclaim the amount, a special rate of 40% will be applied to make it possible for the scheme administrator to recalculate retrospectively.

This also applies to non-public sector pension schemes where lifetime allowance charges need to be recalculated due to the remedy.

Although HMRC’s latest newsletter has provided clarity, members of these schemes will still require help to navigate the implications of the McCloud judgement, ensuring they complete the forms correctly and get what they are entitled to.

Claire Trott is divisional director, retirement and holistic planning, at St James’s Place

The post Claire Trott: Public service pension scheme members get some clarity appeared first on Money Marketing.

However, that is not where we find ourselves. If anything, it feels more complicated than ever, meaning an even greater need for advice in life and to support those left behind on death.

The difference between the lump sum LTA charges of 55% and the 25% charges applicable if excesses taken as income were designed initially to reflect the 40% income tax charge assumed to be payable on the income when eventually drawn.

If anything, it feels more complicated than ever

However, when the changes were introduced to remove income tax payable on pre-75 death benefits from defined contribution pension schemes, the LTA charges were not updated to reflect this for lump sums.

As such, those who opted to take a lump sum, or were forced to because of the scheme rules, were disadvantaged.

The removal of the LTA charges could have put a stop to this unfair discrepancy but it appears to be a deliberate decision to retain the differences in charges. The Spring Budget had brought in new charges to mean that, even on death, those accessing lump sums in excess of the LTA will be worse off.

This just means the complexities of pensions death benefits are even greater. That is also not the only issue beneficiaries are facing with regards to accessing their benefits and paying any appropriate taxes.

Those that receive them as a lump sum may be subject to a nasty surprise further down the line

Following a U-turn by HM Revenue & Customs, it is still the responsibility of the personal representative to report any LTA excesses to it.

With the removal of the LTA lump sum excess charge of 55%, this should have been easy, but the introduction of income tax payable on LTA lump sum excess payments still means this is needed. These are:

• Uncrystallised funds lump sum death benefit
• Defined benefits lump sum death benefit

This is an issue because, firstly, the personal representative needs to know which benefits are subject to LTA tests, and, secondly, they need to know what has previously been used.

For most people, this is something they will have never experienced dealing with.

The process on death is as follows:

1. The scheme administrator tells the personal representatives of the deceased scheme member about any benefit crystallisation events on death. This will only be for funds that haven’t been previously tested against the LTA because there is no second test on death.
2. For lump sum death benefits only, the scheme administrator reports the lump sum death benefit payment to HMRC if the payments from the scheme total more than 50% of the standard LTA.
3. The personal representatives calculate the available LTA at death and whether the benefit payment or designation is chargeable. For this, they will need to collect any information with regards to any benefits already taken, including those pre-6 April 2006. This may mean requesting relevant information from providers. They will also need to be aware of any LTA protections in place.
4. The personal representatives will need to report any amount over the individual’s LTA to HMRC. There is no set format for this and the personal representative just needs to write to HMRC.
5. Once the report is made, HMRC will follow up with the providers to establish to whom the funds have been paid, how much and in what form, so they can conduct their own calculations.
6. Once the calculations have been conducted, HMRC will assess all the individuals to whom a charge is applicable.

As you can see, there are many stages in this process and although under the new rules those who inherit pension benefits in the form of income shouldn’t need to worry, those that receive them as a lump sum may be subject to a nasty surprise further down the line.

As the charge is now income tax, the knock-on impacts to any tax planning they may be doing could be compromised. Just one more reason to ensure beneficiaries are well educated and have access to ongoing advice.

Claire Trott is divisional director, retirement and holistic planning, at St. James’s Place

The post Claire Trott: The many ways lifetime allowance changes have messed with death benefits appeared first on Money Marketing.

His apparent motive was to help the senior National Health Service (NHS) workforce – preventing them from retiring early or working less due to the disincentives created by annual allowance (AA) and lifetime allowance (LTA) charges.

However, Hunt decided to extend the tax benefits to everyone and, by abolishing the LTA entirely, went much further than anyone expected – or was necessary – to solve the problem.

The Labour Party instantly hit back with a commitment to reverse the LTA changes but, crucially, has singled out NHS workers as an exception. We will have to wait to see exactly what it means by that but, for now, let’s focus on the immediate changes.

The abolition of the lifetime allowance has resolved one issue but the annual allowance has always been the bigger problem

Up until the Budget, higher earning NHS consultants and GPs would face the double whammy of both regular AA charges and the prospect of LTA charges when they came to take their benefits.

The abolition of the LTA has resolved one of these issues entirely, meaning they can now build up as much pension as possible without fear of an LTA charge. The change removes a significant disincentive to continue working.

That said, the AA has always been the bigger issue. While the increase from £40,000 to £60,000 will definitely help the problem, there are still likely to be spikes in pension inputs about the annual limit, caused by NHS pay scales and whenever individuals take on additional pensionable responsibilities.

The higher AA coupled with potentially more carry forward available should, however, mean AA excesses are far less frequent. Breaching the £60,000 AA in a defined benefit (DB) scheme would mean an above-inflation pension increase of over £3,750 in a year, which is a considerable sum to accumulate with the full tax advantages.

Whether the tax benefits are enough to keep the workforce motivated is another question

Hunt also revealed that those who have a negative pension input amount in one scheme are now able to offset it against the other scheme within the same year. This is unlikely to have a huge impact but may help those who have small pay reviews in one year (below inflation) and then catch up or larger reviews in subsequent years.

For very high earners, there is still the issue of tapering. However, the increase in the adjusted income limit will move more NHS workers out of scope.

Everyone will have a higher AA with the increase in the minimum tapered AA to £10,000 if adjusted income reaches £360,000 or more. Many NHS workers in this bracket are likely to have an element of private earnings and, in many cases, can control their level of taxable income through the use of limited companies to perform their private duties.

In addition to the changes announced in the Budget, we have also recently seen new retirement flexibilities confirmed and technical changes implemented to resolve pension input issues caused by inflation.

Until we see the outcome of the McCloud judgements, NHS workers remain a little in the dark

The ability to take pension benefits from the 1995 section of the scheme at age 60 and continue to accrue benefits in the 2015 scheme without fear of an LTA charge really should provide a great incentive for doctors to avoid retiring at 60.

That said, whether the tax benefits in themselves are enough to keep the workforce motivated and working when, in many cases, individuals will have already built up a comfortable pension is another question.

All the small steps announced in the Budget are likely to be welcomed. However, until we see the final outcome of the McCloud judgements – where members are put back into the older schemes and pension input amounts recalculated – NHS workers will be a little in the dark about where they stand.

Claire Trott is divisional director, retirement and holistic planning, at St. James’s Place

The post Claire Trott: Has Hunt solved the NHS issues? appeared first on Money Marketing.

The PPF stated at the time that the majority of its members and those paid under the FAS were already in receipt of this level of benefits, therefore most members wouldn’t be seeing an increase.

But further court proceedings in 2019 resulted in the compensation cap being removed entirely, meaning more members would be subject to an increase in benefits – for some, significantly so.

We are now seeing these increased offers dropping onto members’ doormats. And while, this is a positive for most, some will have lifetime allowance (LTA) implications that will need to be dealt with.

What are the implications on calculations?

The PPF will provide the member with updated options for benefits as well as the LTA figures. It’s therefore important to ensure these changes are dealt with.

If the increase in benefits doesn’t result in an LTA charge with the PPF but benefits have been subsequently taken from other schemes, then these schemes will need to be informed of this increased use.

In a rare case, a scheme may be exhausted or the benefits unable to be reduced, so no funds are available to pay the LTA charge

This could result in one of the other schemes now having to apply an LTA charge. In any case, it will reduce what is available for use in the future.

If the increase results in a charge on the PPF, then this will be payable by reduction of these new benefits and the scheme will offer various options such as maximum lump sums, with the associated charges applied.

Again, all schemes crystallised after the date of original payment from the PPF will need to be notified in order, which may result in more tax charges being applied.

In a rare case, a scheme may be exhausted or the benefits unable to be reduced, so no funds are available to pay the LTA charge. In these circumstances, the scheme can apply to be relieved of their responsibility to collect and pay the charge. This will fall on the member to pay through self-assessment.

What can be done?

If the member is entitled to apply for Individual Protection 2016 or Fixed Protection 2016, this should be done before accepting the compensation increase.

The certificate number should be passed onto the PPF and all other schemes before the updated lifetime allowance usage is calculated to reduce or rule out any charges. This could take some time to gather the data and may also come at a charge, since schemes have been able to charge for this information for some time now.

Although the increase in compensation from the PPF does not count as accrual, so won’t impact annual allowance charges or invalidate any protections already in place, the very fact benefits were reduced because of the cap could mean members continue to fund their pensions.

This would mean they have unnecessarily missed out on protections they may have sought should they have been expecting a full pension from the PPF and not the reduced amount.

The PPF suggests that, with HM Revenue & Customs (HMRC) permission, it could be possible to unwind any contributions paid since 2016 to give members the option to apply for Fixed Protection 2016. That said, this would be a significant challenge for many providers to deal with and may cause more problems with returning any tax relief already received.

The PPF has also suggested HMRC may consider applications for older protections. This could have some merit because it isn’t the member’s fault the protection didn’t appear to be available.

The PPF states there is wording available for these requests and members should contact it directly about this.

Claire Trott is divisional director, retirement and holistic planning, at St. James’s Place

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