Questions on new Pension Freedoms

Recent changes mean that you can choose how to take your money from your pension. For example, you could take unlimited lump sums as and when you like, or even take the whole amount if you wish. As previously, you can take up to 25% of your pension pot tax-free, and a taxable income from the rest, which is added to other income for tax purposes. So how do you decide? Here are some of the key questions you may have
How long will my money last?
We are all living longer, on average a 65 year old in good health is expected to live for 24 years after retirement and it is thought that 25% of us will live to see our 95th birthday. Retirement savings will have to last for a long time, possibly 30 years or more. Leaving your money invested for longer could make a big difference to your lifestyle along your retirement journey.

How much State Pension will I get?
The amount of state pension is not the same for everyone and it depends on your employment history and when you were born. Remember the State Pension is designed to cover only a very basic standard of living without any luxuries.

What about savings I have?
If you have bank saving accounts, premium bonds or ISAs, it may be better for you to take money from these first before drawing from your pension plan. If you own your home you might think about downsizing or renting it out to fund your retirement.

What are my future financial needs?
Consider all of your living expenses, like household bills and family costs, and how these may change over the coming years. Remember to budget for holidays, transport and house repairs. Also factor in the fact that your financial needs are likely to reduce as you get older and become less active, but keep in mind that in your later years costs of long term care may be required.

How can I minimise my tax bill?
Consider your personal tax allowances and plan to take your retirement savings in a way which makes the most use of your personal tax allowance so you don’t have to pay tax unnecessarily.

Should I buy an annuity?
An annuity is a promise by an insurance company to pay you an income for the rest of your life. You should check the terms of the annuity before you commit as they cannot usually be changed afterwards. It is worth shopping around different insurance companies before you buy as prices can vary.

Will I lose any my welfare benefits?
If you are receiving state benefits or Tax Credits then taking your retirement savings could impact on the level of those benefits. This is a complicated area and expected to change in the near future. Make sure you understand how your state benefits, tax credits or long term care needs would be affected before deciding to access your retirement benefits.

What happens when I die?
If you die before age 75, any money left in your pension plan will be paid to your survivors free of any tax. If you die after 75, money paid to your survivors may be subject to tax depending on their circumstances. Retirement savings which remain in pension plans are not normally counted for inheritance tax purposes. If you have purchased an annuity, benefits payable after your death will depend on the insurance contract.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.
McPhersons Financial Solutions 50 Havelock Road, Hastings, East Sussex TN34 1BE T: 01424 730000 F: 01424 457080 E: info@mcphersonfs.co.uk
Registered Address: Suite 1, 4th Floor, International House, Dover Place, Ashford, Kent TN23 1HU Registered in England No 5027747
Mcphersons Financial Solutions is a trading style of Absolute Financial Management Ltd which is authorised and regulated by the Financial Conduct Authority

Need more help?

This feature aims to give some informal hints and tips. McPhersons Financial Solutions are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters p.watters@mcphersons.co.uk or call our Head Office on 01424 730000 for a free consultation at McPhersons’ London, Bexhill or Hastings offices. www.mcphersonsfs.co.uk

What is the best way to save on Inheritance tax?

George Osborne fulfilled an election promise in the recent Budget to lift main family homes worth up to £1million out of inheritance tax if they are left to children or grandchildren.
However, the way it works is more complicated than it sounds so people are understandably thinking about where this leaves them in terms of inheritance planning.

In line with these changes, the Government is also still working out the details of an ‘inheritance tax credit’, so people who own an expensive home and want to sell it before they die can still benefit from the changes.

This is to avoid elderly people skewing the housing market by staying put rather than moving to a smaller property or into a care home.

The tax overhaul of last April produced the pension freedom reforms giving over-55s greater control over how they save, spend and invest their retirement pots.

People are stashing more into their pensions and trying hard to preserve what is already in there, according to recent research among over-50s by Investec Wealth & Investment.

How to make the best use of these changes

The good news is that you may not need to move house to benefit from the full inheritance allowance. The bad news is that the full allowance may not be £1million depending on your circumstances.
If we look at what we know so far about the new ‘Main Residence Nil Rate Band’, the Chancellor was eager to stress that £1million could now be passed onto your children tax free, but in practice a number of conditions must be met for that to happen.
Firstly, the £1million is made up of the £325,000 standard nil rate band for both husband and wife or civil partners, plus an additional Main Residence Nil Rate Band of £175,000 for both husband and wife.
The total of those allowances, assuming all are fully available, is £1million. However, the MRNRB will be introduced in April 2017 at only £100,000 and increase in stages to £175,000 by April 2020. It will also be means-tested, with estates above £2million losing £1 of their MRNRB for every £2 their estate exceeds £2million. In practice, this means that to pass down £1million to your children you must:

a) Be married or in a civil partnership
b) Own a house worth £350,000 or more
c) Have a total estate of less than £2million
d) Die after April 2020, or your spouse must die after that, because on first death any unused nil rate band is transferred to the surviving spouse.

The key point to all of this is that your property only needs to be worth £350,000 to fully utilise the MRNRB, so you may not need to move house after all. You could waste your MRNRB if the property is left to someone other than your children or spouse on death. With pensions as the alternative, it used to be the case that you had to die before age 75 having not touched your pension, in order to receive the fund tax free, any funds remaining on death were taxed at 55 per cent.

The new changes now mean that if you die before 75 any remaining pension funds, whether they have been used to provide benefits or not, can be passed tax free to nominated beneficiaries. If you die after 75, the pension fund will be exempt from inheritance tax, but your nominated beneficiaries will pay income tax at their own tax rate as they withdraw the funds. If you are a higher rate income tax payer and you believe your children to likely be basic rate when they take the funds, then living on other assets and leaving your pension to your children will probably be the most tax efficient way of passing on your estate. If you are a basic rate taxpayer and they are higher rate, then it will probably be better for you to take your pension at basic rate to fund your retirement and leave the other assets in your estate to your children. You can also take more than you need and gift the excess to your children over a number of years. Before making any life changing financial decisions, it is recommended that you should always consult your professional financial adviser.

McPhersons Financial Solutions 50 Havelock Road, Hastings, East Sussex TN34 1BE T: 01424 730000 F: 01424 457080 E: info@mcphersonfs.co.uk
Registered Address: Suite 1, 4th Floor, International House, Dover Place, Ashford, Kent TN23 1HU Registered in England No 5027747
Mcphersons Financial Solutions is a trading style of Absolute Financial Management Ltd which is authorised and regulated by the Financial Conduct Authority


Need more help?

This feature aims to give some informal hints and tips. McPhersons Financial Solutions are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters p.watters@mcphersons.co.uk or call our Head Office on 01424 730000 for a free consultation at McPhersons’ London, Bexhill or Hastings offices. www.mcphersonsfs.co.uk

Stamp Duty Reforms

George Osborne recently announced sweeping changes to stamp duty. He claimed 98% of buyers, particularly first-time buyers and low and middle-income families would benefit financially. But now professionals in the property business believe the reforms would not benefit first-time buyers in the long run. The widely held view is, like all property taxes, these changes to stamp duty will very likely be quickly reflected in house prices. This tax saving will allow first-time buyers more money to put towards their property and with all buyers in the same situation, prices would rise accordingly.
The industry thinking is the stamp duty changes will add around 1% to house prices. As stamp duty is normally paid in cash and higher property prices would add to the buyer’s mortgage, that they would pay more in interest. Some allegedly take the view that the Chancellor was trying to engineer a mini house price boom just before a general election without considering peoples’ indebtedness.

How has stamp duty changed?

Under the old “slab” system, house purchasers had to pay their relevant rate on
the whole purchase price. Previously stamp duty started at 1% on sales from £125,000 to £250,000, rising to 3% on sales of up to £500,000 and 4% on homes costing up to £1m. Houses that sold for between £1m and £2m attracted 5% tax, rising to 7% for houses worth more than £2m. Under this system a family buying a house for £400,000 would have to pay 3% on the whole sum, or £12,000.

House prices are expected to rise as sellers cash in on the stamp duty savings
The new stamp duty will consist of “marginal” tax rates, as with income tax. There will be no tax on the first £125,000, then 2% on the cost between £125,000 and £250,000, and 5% up to £925,000. A rate of 10% will apply to the cost between that sum and £1.5m, and 12% on the value above £1.5m.
Now buying a £400,000 home they would pay 2% on the portion between £125,000 and £250,000 and 5% on the remaining £150,000. This reduces their total tax bill to £10,000.

Stamp duty bills will rise for purchases worth more than £937,500. This is likely to affect buyers in London and the South East most, where prices are much higher.

First-time buyers

Many typical aspiring home owners have been hit hard by the combination of stamp duty and rising house prices. People in London know this all too well, many have tried to buy in earlier years but were unable to make their budget stretch to cover the stamp duty.

Such examples are common place. Many first time buyers find their dream property at the top end of their budget, but are all too often unaware of stamp duty and find themselves unable to afford this additional cost, leaving them no option but to pull out and lose their dream home.
Many people who are looking at properties in more affordable areas of London are grateful for the reduction in stamp duty, but fear that if house prices rise further they will be priced out of the market.

But it’s not all bad news for first-time buyers. Those already in the process of buying will save money. Typically someone buying a £175,000 house will see their stamp duty cut from £1,750 to £1,000

Need more help?
This feature aims to give some informal hints and McPhersons are offering small businesses free advice so get in touch now to arrange your free meeting 01424 730000.
McPhersons Financial Solutions c/o 50 Havelock Road, Hastings, East Sussex TN34 1BE T: 01424 730000 F: 01424 457080 E: info@mcphersonfs.co.uk
Registered Address: Suite 1, 4th Floor, International House, Dover Place, Ashford, Kent TN23 1HU Registered in England No 5027747
Mcphersons Financial Solutions is a trading style of Absolute Financial Management Ltd which is authorised and regulated by the Financial Conduct Authority

Landlords – How to beat new tax changes

The chancellor’s plan to remove mortgage interest tax relief, announced in the Budget and effective from 2017, will hit hundreds of thousands of property investors.
George Osborne at a stroke wiped almost 11% off the gross returns from buy-to-let properties, leaving many landlords facing the prospect of a future with increasing year on year losses, when he slashed higher-rate relief on mortgages in the Budget.

These losses could compound further should interest rates rise. This tax change, which begins in 2017, will see landlords lose a quarter of their higher-rate relief each year until 2020, when it will be restricted to 20% on all mortgage interest.

How to beat the tax changes

If landlords remortgage now, they will protect themselves against rising borrowing costs and they may be able to claw back the shortfalls from the new tax changes. With tax relief available to higher-rate taxpayers being phased out, it will become more important for landlords to reduce their borrowing costs.

Remortgage

As an example, if a buy-to-let landlord is paying 5% on a typical £120,000 mortgage, which has a rental income of £750 per month or £9,000 annually. After allowing for expenses, agents’ fees and mortgage interest he could be left with a £612 annual profit after tax.
However, when tax relief is reduced to 20% this £612 profit turns into an annual loss of £588. By remortgaging typically at, 3.79% with a five-year fixed-rate loan, he could save £1,452 annually on his interest bill, turning that annual loss back into a profit of £574.
By taking no action and if interest rates rise to say 7% by the time that higher rate tax relief has completely disappeared in 2020, you could be looking at an annual loss of £2,784.

Utilise your spouse’s personal allowance

When a profit is made, if your spouse is not working, you may be able to assign part or all of the rental income to them, allowing them to exploit their personal tax allowance, due to rise to £12,500 by 2020, or 20% tax band.

Form a company

The Government is cutting corporation tax to 19% in 2017 and 18% in 2020. One way for higher-rate taxpayers to cut their tax bills might be to invest via a company, but proceed with caution, as there can be complications. By being a business, all costs can be offset against rental income, so in theory profits may be further improved.
Within a business, income can only be paid out to the directors as a dividend. From next April they can each receive £5,000 annually tax free. After that, dividends paid to higher rate taxpayers are reduced by 32.5%, while basic-rate taxpayers pay a 7.5% dividend tax.

Reduce borrowings by selling

Some landlords, as a consequence of this new tax law, may review selling up or paying off some of the loan, while others will wish to reorganise their arrangements.
Where a landlord has a portfolio, it may make sense to sell one property and reduce the borrowings on the others.

Rent increases

Many professionals believe rents will have to rise, due to the chancellors’ tax change. There has been a substantial shift, with rents climbing faster than property prices, but now there is still further to go, particularly given that landlords have been targeted in the Budget
How buy-to-let mortgages work
The crucial difference with a buy-to-let mortgage is that the lender takes rent as the primary source of income, unlike with a residential mortgage where it is your salary that counts. Some may also take landlord’s personal income into account. Most buy-to-let mortgages are also interest-only. This means lower monthly payments and tax efficiency, but the debt is not being paid off. Typically lenders will want prospective rental income, verified by independent sources, to meet at least 125 per cent of the monthly interest payment on the loan. This will either be based on the pay rate for fixed and tracker deals (i.e. the initial rate before the deal ends) or the lender’s standard variable rate (potentially plus an extra 1 per cent or more). They may stress test you against higher rates arriving once a deal period ends. The rental cover test is to ensure landlords can handle periods when their property may not manage to be let, reassure the lender that they will not default and make sure they are lending against a reasonable asset. Lenders will generally lend only to those with larger deposits, with most deals asking for at least 25 per cent put down by borrowers. The best deals are at the lowest loan-to-values of 60 per cent and below. Any mortgage you have on your own home can potentially cut the amount you can borrow under the buy-to-let scheme if you are relying on personal income to shore up the deal.
The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Levels, bases and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. Please contact us for further information or if you are in any doubt as to the suitability of an investment.

McPhersons Financial Solutions 50 Havelock Road, Hastings, East Sussex TN34 1BE T: 01424 730000 F: 01424 457080 E: info@mcphersonfs.co.uk
Registered Address: Suite 1, 4th Floor, International House, Dover Place, Ashford, Kent TN23 1HU Registered in England No 5027747
Mcphersons Financial Solutions is a trading style of Absolute Financial Management Ltd which is authorised and regulated by the Financial Conduct Authority

Need more help?

This feature aims to give some informal hints and tips. McPhersons Financial Solutions are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters p.watters@mcphersons.co.uk or call our Head Office on 01424 730000 for a free consultation at McPhersons’ London, Bexhill or Hastings offices. www.mcphersonsfs.co.uk