It’s just two and a half years since the Square Circular first started to take shape (ouch!). About time for a re-think as regards content, style and presentation. So, let’s begin at the end (a logical place for a Square Circular to start) and draw your attention to the Faxback Questionnaire on the back page of this Issue. Your input would be appreciated.
Next, an apology; this Issue of Square Circular was scheduled for January and we’ve kept you waiting while we concentrated on other deadlines. Mind you, we were flattered to have people asking when the next Square Circular was going to press and had they missed one. It does mean that we’ve got to tell you and remind you about a bit more than usual. You’ll find a few “don’t forget” notes after this Issue’s main topic of pensions.
SIMPLICITY, SECURITY AND CHOICE:
WORKING AND SAVING FOR RETIREMENT
That’s the title of the Government’s Green Paper on pensions issued on 17 December 2002 with a view to introducing new legislation in Finance Bill 2004. The consultation period ends on 11 April 2003. It will probably take you until then to read the Green Paper, unless you’re a fast reader or take the soft option of reading only a summary of the Paper.
The proposals include:
• abolition of the different (currently 8) sets of tax rules in use for pensions;
• introduction of a single unified set of rules. Whilst pension rights built up before reform is implemented will be respected, pension saving after implementation will follow a single uniform system;
• there will be a single lifetime limit on the level of the pension pot (including contributions and investment growth) of £1.4million. Whilst this limit may be set too high to affect most taxpayers it will certainly affect some;
• there will be an annual limit on inflows to an individual’s pension fund, intended to be set at £200,000 for 2004 and indexed thereafter;
• flexible retirement allowing, in some cases, drawing pension benefits while continuing to work;
• single set of rules on pensions in payment which will include setting the tax-free lump sum at 25% of the value of the pension fund;
• more flexible annuities.
At a time of poor investment returns and poor annuity rates it is not clear how the new rules are meant to encourage pension saving. What does seem clear is that the tax efficiency of pensions for high earners is being eroded. Having said that the Green Paper is a Paper of proposals only and there is still a long way to go in the consultation and negotiation process.
WHAT ABOUT FURBS?
Interesting to conjecture how FURBS may be affected.
A FURBS is a Funded Unapproved Retirement Benefit Scheme. FURBS have been described as “promises” in lieu of salary from an employer to an employee, which do not enjoy the same tax reliefs as qualifying pension arrangements which have Inland Revenue approval. However, since they are unapproved and do not enjoy the same tax reliefs on approved arrangements they –
• do not subject the employee to a cap on pensionable earnings restricting contributions;
• can provide benefits in excess of those permitted by approved schemes;
• can pay benefits wholly in the form of a tax-free lump sum;
• have greater flexibility as regards permitted investments. All that is required is for the trustees of the FURBS to operate the scheme in the best interests of the beneficiaries.
Contributions made to FURBS by an employer are taxed as a benefit in kind on the employee and perhaps the heyday of the FURBS finished about five years or so ago when National Insurance Contributions were applied to the benefit. Even so, whilst there may be no difference in tax terms between making contributions to FURBS and giving additional remuneration to the individual who then invests the funds himself to provide additional retirement income there are still tax advantages to investing the funds through a FURBS –
• no higher rate of income tax. The individual’s top rate of 40% can be restricted to 10% or 20% or 22% depending on the type of income;
• CGT rate is 34% and not potentially higher rate of 40% (admittedly the annual exemption is only half that of an individual);
• no inheritance tax if established under a discretionary trust.
In the past a FURBS has provided a useful means for directors of owner managed companies to build up a sizeable pension pot very quickly and future restrictions on contributions to approved schemes may entice contributions into FURBS. For further information call Simon Topperman or your usual contact partner on 0161 832 4841.
DON’T FORGET …..
Unfortunately, provision sometimes has to be made for circumstances other than a healthy and ripe old age. Expressions such as life assurance, income protection, key person insurance spring to mind.
If we’re touching a nerve or ringing a bell call us on 0161 832 4841.
DON’T FORGET …..
National Insurance Contributions increase in April. That’s for everybody; employed and self-employed.
There are ways of mitigating the extra burden ….. depending on your circumstances. We’re sure we can help you. What was that number again – oh yes, 0161 832 4841.
DON’T FORGET …..
If you are a small trading enterprise and are currently able to claim 100% first year capital allowances on Information and Communications Technology equipment don’t forget that this particular little privilege ends on 31 March 2003.
Conditions for being small are:
• turnover below £2.8 million;
• assets below £1.4 million.;
• 50 or fewer employees.
If you fulfil two of these three conditions you’re small and you may want to treat yourself to that new computer in March rather than April.
To claim Capital Gains Tax holdover relief on a gift of company shares your company has to be “wholly or mainly” trading. If you are contemplating making a gift of shares to family members other than your spouse and your company has mixed activities bear in mind that the qualifications for being wholly or mainly trading become more stringent after 6 April 2003.
Perhaps you should make the gift sooner rather than later, but after calling 0161 832 4841.
DON’T FORGET …..
Last September we told you about an inheritance tax “loophole” following a decision of the High Court against the Inland Revenue (the Eversden case). It concerned the use of a Defeasible Life Interest Trust.
The Inland Revenue are appealing (perhaps we should re-phrase that) and, as yet, we don’t know how successful such schemes will be. Just a reminder that the opportunity is still there.
DON’T FORGET …..
Year end tax planning. Just a few weeks to go. Maximise income tax, capital gains and inheritance tax reliefs, exemptions and allowances.
First step in your tax planning exercise is to call …. we think we may already have mentioned our phone number.