We’re fast approaching Gordon Brown’s Budget time again. The year’s turned full circle.
Talking of circles, here’s the 3rd issue of the Square Circular. Or perhaps our 3rd issue should be triangular.
So, what have we to tell you this time? We’re trying to avoid guessing what may be in a pre-General Election Budget. We hope you know that we’ll tell you anyway about important tax developments which affect you. This time we’re reminding you about stakeholder pensions – an important topic for employers – and focusing on a couple of interesting changes in the pension rules.
Next, to quote Benjamin Franklin, nothing is more certain than death and taxes. We’ve managed to combine both unpleasant subjects with a few remarks about inheritance tax and will planning.
For further information on these points or other tax, accounting or financial matters please contact us on 0161 832 4841.
IF I HEAR ANOTHER WORD ABOUT STAKEHOLDER PENSIONS…!
Amazon rain forests are being stripped bare to provide information on Stakeholder Pensions. You can’t even take refuge from the newspaper articles on the subject by turning to other news media. Listen to the radio, watch the television, surf the net…stakeholder pensions pop up again and again.
And with good cause. Although stakeholder pensions are to be introduced in a few weeks time recent research by the Prudential suggests that a third of small to medium sized businesses that do not currently offer staff a pension scheme do not intend to provide access to the new stakeholder scheme for employees. The Government has set the deadline of 8th October after which firms will incur penalties if no access to a pension has been granted. Just in case you’re one of those dragging their heels remember “DOING NOTHING IS NOT AN OPTION !”.
Briefly, if you have 5 or more full and part time employees (including directors) and do not offer an occupational pension or a group personal pension plan you will have to offer access to a stakeholder pension scheme or put in place a suitable alternative pension arrangement for those employees earning over the National Insurance lower earnings limit. As an employer some of your obligations will be to:
- consult your workforce on the choice of scheme
- provide a scheme all members can join
- provide information (but not advice) about the scheme
- provide a payroll deduction facility at the employees’ request
- ensure contributions are passed on to the scheme provider in a timely manner
Since there will be fines imposed for failure to comply with obligations DOING NOTHING IS NOT AN OPTION! Please get in touch with us if you need help.
However, believe it or not the purpose of this brief article is not to tell you about stakeholder pensions. That’s just by the way. There are plenty of other changes being brought in by last year’s Finance Act affecting tax relief on pension contributions. They’re quite complicated. Unused carry forward relief, carry back elections, inter-action with retirement annuity relief, removal of net relevant earnings requirement. In fact, very complicated. Out of it all there are just a couple of points we want to highlight for the time being:-
- The removal of the net relevant earnings requirement enables parents and grandparents to start pension schemes for their children and grandchildren. At present, it’s difficult to see the stakeholder pension replacing the mobile phone as the latest playground status symbol but we are always being told that if you want to build up a pension pot adequate for your old age you have to start early. It may also provide a useful inheritance tax planning opportunity for the contributor as the contributions are likely to be regarded as inheritance tax exempt regular gifts out of income. In practical terms the maximum which can be invested for a child (or a spouse for that matter) with no earnings is £2,808 which grosses up with the tax relief to the annual limit of £3,600.
- From 6 April 2001 the Inland Revenue will no longer allow the self employed and people with personal pensions to use carry forward unused relief. If you have not made the maximum permitted contributions in years gone by, carry forward relief gives you the opportunity to mop up your unused relief for the previous six years. A lump sum invested in your personal pension plan before 6 April can do wonders for your tax liability. In fact, if you haven’t got the funds immediately available for a lump sum pension contribution there are schemes currently on the market to provide loans to fund a Self Invested Personal Pension (SIPP). If you miss the 5 April 2001 deadline you might still scrape in by making pension contributions before 31 January 2002 and combining the carry forward and carry back facilities. At that stage you really do need more specific tax advice. If you telephone either Simon Topperman or your usual contact partner at our office (0161 832 4841) we’d be pleased to help.
TAX EFFICIENT WILLS – NIL RATE BAND
Everybody, but everybody, knows about this, don’t they? Well, if our experience over the last few months is anything to go by, not quite everybody.
Inheritance Tax (IHT) is dealt with on an individual basis as far as spouses are concerned so each spouse has their own nil rate band of £234,000 (year 2000/01). If spouses leave everything to each other they lose the benefit of one of the nil rate bands. Since there is no IHT between spouses if they are both domiciled in the UK one nil rate band is wasted in the typical “all to each other” will.
By transferring the nil rate band’s worth of assets to someone other than the spouse, such as the children, this band is utilised and negates the “bunching” effect on the second death reducing the eventual IHT liability by 40% of £234,000 which is £93,600.
This isn’t rocket science! We’re not telling you anything new. But you’d be surprised how many financially struggling young couples marry, make “all to each other” wills as a
stop-gap measure and then, despite having become rich and famous, don’t remember to change their wills – until it’s too late. At least there are still provisions for variation of wills (for how much longer?). Worse still, is if the spouses never made wills in the first place.
Just one or two more points before you rush off to see your solicitor (apologies, if you ARE a solicitor).
First, you may be worried about giving £234,000 away to your spoilt children if your surviving spouse might not have quite enough to finance the high-living luxurious lifestyle to which they’ve grown accustomed. Don’t worry. Discretionary trusts can help, here.
Secondly, of course, each spouse has to have sufficient assets to give away. It’s no good if one of you is a millionaire and the other a pauper. Equalising your estates can have Income Tax and Capital Gains Tax implications – usually favourable implications.
Obviously, in a few short paragraphs we can do no more than indicate the tip if the iceberg. We suggest you telephone either Simon Topperman or your usual contact partner at our office (0161 832 4841) to view below the surface.