Keeping
it in the
family
The ageing population is perhaps the
biggest challenge facing governments,
financial institutions and savers today.
People are living longer – many of
us could spend a third of our lives in
retirement. And we will require more
savings to match our longevity. The cost
of this demographic time bomb has
already pushed Britain’s government
to raise the state retirement age. As
politicians look to contain pension
budgets, individuals will need more than
ever to take advantage of investment
and tax-saving opportunities provided by
pensions.
Despite the wider picture of falling levels
of savings and rising numbers of people
heading towards retirement, there is an
array of initiatives in place for individuals
to pursue an income for retirement. And,
with the government keen to encourage
us all to save, significant tax advantages
are in place for those contributing to a
pension scheme.
A carefully drawn-up plan can help realise
the twin objectives of reducing tax liability
and saving for retirement. However,
the new tax year will bring an extra
pressure. The government has reduced
the amount of pension benefits that can
accrue, known as the ‘lifetime allowance’,
from £1.5 million to £1.25 million. It is
estimated that this will affect as many
as 360,000 wealthier individuals, who
could help to mitigate a 55% tax penalty
by taking action before the end of the tax
year on 5th April 2014.
The new tax year will also bring a
reduction in the annual amount that
can be contributed to a pension. The
allowance will fall from £50,000 to
£40,000, which makes it even more
important to maximise the current year’s
contribution. Individuals who have not
fully funded their pension in the previous
three years also have the opportunity
to make those contributions before 6th
April. The end of the tax year is the last
opportunity to use the 2010/11 allowance
and offers a potential tax saving of
£22,500.
‘Voluntary levy’
On its introduction in 1986, Labour
politician Roy Jenkins famously observed
that Inheritance Tax (IHT) was “a
voluntary levy paid by those who distrust
their heirs more than they dislike the
Inland Revenue”. Whilst this might have
been a slight exaggeration, with the value
of property and other assets on the rise,
the UK government is looking to bring in
larger sums from this posthumous tax.
Government figures forecast receipts
of £3.3 billion in this tax year, up nearly
14% from two years ago as recovering
house prices boost estate values (www.
parliament.uk, 20/06/13).
The amount of money an individual can
leave to his/her heirs free of Inheritance
Tax is £325,000. This does not include
funds that pass to your spouse or civil
partner and certain organisations.
Above this level, an individual’s estate
is taxed at the rate of 40%. With the
right planning and appropriate use of
available exemptions, this liability can
be substantially reduced and wealth can
be passed on. The end of the tax year
presents a ‘use it or lose it’ deadline for a
number of these valuable exemptions.
IHT planning largely revolves around
reducing an individual’s estate by giving
away assets. When a gift is made it
requires the donor to live for seven years
for the gift to be free of IHT. However,
HMRC also allows any individual to make
gifts each year that are immediately
exempt from IHT if certain conditions are
met. While some of these allowances
may appear small, if they are used
consistently over the years they can
produce significant savings and benefits.
The annual £3,000 gift exemption
provides not just an opportunity to
pass wealth to your heirs, but also an
immediate IHT saving of £1,200. If the
exemption hasn’t been used from the
last tax year, this saving can increase
to £2,400. That means a couple can
potentially give away £12,000 that will be
immediately outside their estate, saving
tax of £4,800 in the process.
Many individuals gain considerable
satisfaction from being able to see their
loved ones use and enjoy such gifts, as
well as from the knowledge t