Use your tax allowance by April 5thPosted on: 14 March 2014 by 50connect editorial
Are you making the most of your tax allowances? With the end of the financial year approaching, fix your finances before George Osborne fixes them for you.
That’s the instruction repeatedly bellowed out by rugby referees, like France’s Romain Poite, in charge last Sunday when England’s victory over Wales at Twickenham brought the home side its first Triple Crown for 11 years.
“Use it – or lose it” is the warning to the side with the ball to get on with the game. Failure to do so means the opposition gets possession.
The same warning should be ringing loud and clear for all of us as the end of the tax year approaches. Use your tax allowances and breaks by April 5th – or most, like the £11,520 ISA allowance, are gone forever.
Wednesday’s (March 19th) Budget will let us know the tax obstacles down the line, although it’s likely that any significant giveaways will be saved for next year as the Chancellor George Osborne prepares for the General Election in May 2015.
Once again pensions are in the spotlight. The government has been sponsoring television advertisements using well-known business celebrities, like Karren Brady, vice-chairman of West Ham United, and Dragons’ Den’s Theo Paphitis, to extol the virtues of pensions in the workplace. Yet, legislation continues to be introduced restricting and reducing the value of those pension pots.
It has already been decided that for the next tax year, the annual allowance (your pension contribution) has been reduced from £50,000 to £40,000. More crucially, the limit on the amount a pension fund can be before it becomes subject to tax charges (the Lifetime allowance) is reduced from £1.5m to £1.25m.
A pension pot of £1.25m might not seem too shabby, but some ISA savers have already passed the million mark. Today, that £1.25m will bring in an annual income of around £70,000, on which income tax is due. A pot of £1.5m twenty years ago would have got three times that, an annual annuity of £210,000!
Labour governments have a proven track record of targeting pensions. Shadow chancellor Ed Balls continued that trend this week. Balls announced that if Labour wins power next May, it will raid the pension pots of the wealthy (as well as bankers’ bonuses) to fund its Welfare Reform, in particular the Compulsory Jobs Guarantee.
Those earning more than £150,000 will only get 20% tax relief on pension contributions, not the 45% they currently enjoy.
This move is unlikely to compare with the greatest raid on pensions, implemented by Chancellor Gordon Brown a few weeks after Labour entered government in 1997.
Brown scrapped the tax relief on dividends paid into pension funds and financial experts have spent the last 17 years trying to work out the precise cost to pensions and pensioners. In 2008, the UK’s Pension Crisis report estimated the figure to be over £100billion-plus in total, or around £17,000 per pension pot.
Annuities providing poor value for money
The government’s current view on the pension crisis focuses on the poor service and poor returns being supplied to those buying an annuity after years of funding. Yet, it's clear the size of that pot has already been substantially reduced by government legislation over the years.
Last month the Financial Conduct Authority (FCA) announced an inquiry into the “broken” annuity market. It revealed that in 80% of cases where individuals had remained with their original pension provider to purchase their annuity, they would have been better off switching!
Otto Thoresen, director-general of the Association of British Insurers (ABI) responded that, from the summer of 2015, insurers would be required to offer a short telephone conversation to customers about the retirement options available or direct the customer to another source of impartial advice or guidance.
Why the delay? Around half a million savers will retire between now and next summer, and annuity purchase is not a transaction that can be changed. Clearly anyone approaching retirement should take care and the best advice.
Of all your savings and investment plans, the pension is the most crucial, the most complicated, the most impacted by legislation and the one which you need the best specialist advice. To maximize what you already have and to make sure that changes aren’t going to catch you unawares, you need an experts helping hand.
Pension pot lifetime limit
Many will look at the reduction in the Lifetime limit to £1.25m and think: “That can’t possibly affect me!” Given that the retirement age is rising and it’s conceivable that today’s youngster might spend 50-years-plus working, your financial adviser will soon demonstrate that might not be the case.
The pension pot lifetime limit was only introduced in 2006 and rose to £1.8m in 2010-11. The Liberal element in the coalition has been an influence in the downward trend and would like the limit reduced further to £1m. Any money above the limit will be taxed at 55%.
Those with pension pots already above the limit can apply for a FP14 (Fixed protection 2014) or an IP14 (Individual protection 2014). FP14 provides protection at the higher £1.5m level. To qualify, no more money can be paid into your pensions after the end of this tax year.
The IP14 gives personal protection, but the pension pot must be within £1.25m and £1.5m and the protection will match the size of the pension. The clock is not ticking so loudly for those after IP14 protection – they can apply from the middle of August and the deadline is April 5, 2017.
For those wanting FP14 protection, HMRC must receive the application by April 5th THIS YEAR!
Some say the pension world is a maze, others call it a mire. There are many tax advantages on the way into investing your money, but the regulations are numerous and complicated. Governments want us to save for the future – theirs as well as ours - but cannot resist fiddling with the rules and sticking their hands in our pension pots when times are hard.
A generation ago, an individual’s pension was THE retirement plan, with maybe some savings on the side in case of an emergency. Not any more with the popularity of property and ISAs. Yet the pension, because of its tax advantages and its compulsory place in many workplaces, remains a crucial investment and the cornerstone of the twilight years.
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