your choices in a world of pension freedom lee coles · 6 april 1953 – 5 december 1953 65 63 –...
TRANSCRIPT
YOUR CHOICES IN A WORLD
OF PENSION FREEDOM
Lee Coles
YOUR CHOICES IN A WORLD OF
PENSION FREEDOM
• Welcome from CABA – Wendy Saunders
• Recent service development in Australia
caba.org.uk/australia
• Interactive webinar
• Importance of evaluation
WHAT ARE WE DOING TODAY?
• Considering the planning process
• Examining UK pensions and income tax
• Exploring changes to the UK State Pension
• Exploring the concept of pension freedom
• Looking at pension transfers to Australia
• Identifying the key issues to consider
• Summarising actions and next steps
WHAT AREN’T WE DOING?
• Providing advice – I’m not allowed
• Looking at wider tax and financial considerations
outside of pensions
• Telling you how much tax you’ll pay. Please note
the amount of income tax you pay in any tax
year will depend on your income, your individual
circumstances and the governing tax rules
THE PLANNING PROCESS
PLANNING ESSENTIALS
Dream Money
Gift Money
Freedom Money
Safety Money
Survival Money
Source: Retirement Income Redesigned
HOW TO PLAN
Dream Money
Gift Money
Freedom Money
Safety Money
Survival Money Start with what
you have
Start with what
you want How far can it get
you?
How do
you get
there?
• What are your objectives?
• What form does your money need to be in?
• Key point is around the alternatives we consider
• Change what we need/want – or change what we have
NEED VS HAVE = GAP/SURPLUS
Certainty of position
Review working plans
Review spending
plans
Use money differently
Save more / save less
Get help or advice
TAXATION
THE DOUBLE TAXATION
CONVENTION
• Agreement between UK and Australia
• Income sources can, however, still be:
Taxable only in Australia
Taxable only in the UK
Taxable in both but Australian tax law allows credit for tax paid in UK
Taxable in both but UK tax law allows credit for tax paid in Australia
Taxed in both, but this will usually be in error
RELIEF AT SOURCE/RECLAIMING TAX
• Form Australia
– Individual 2003
Personal allowance £11,000
Income above personal allowance
Any income up to a further £32,000 taxed at 20 %
Any income from £32,000 - £150,000 taxed at 40%
Any income above £150,000 taxed at 45%
• Loss of Personal allowance on income between £100,000 and
£122,000, at which point no allowance would exist
UK INCOME TAX IN 2016/2017
PAYE FOR PAYMENTS UNDER PENSION
FREEDOM
Applying Emergency
Month 1 code
Tax deducted Actual amount taken
from £30,000
Tax free lump (25% = £7,500) 0% Nil
1/12th of £11,000 = £916.67 0% Nil
1/12th of £32,000 = £2,666.67 20% £533.33
1/12th of £118,000 = £9833.33 40% £3,933.33
Any excess over £13,416.67 45% £4,087.50
• Total tax deducted on £30,000 would be £8,554.16
STATE PENSION CHANGES
WHAT TYPE OF PENSION DO YOU HAVE?
• Are you clear on whether each pension is:
State Pension
Defined Benefit (or Final Salary), or
Defined Contribution (of Money Purchase)?
• Are you clear on the rules relating to each?
STATE PENSION AGE
Born Male – State Pension Age Female – State Pension Age
6 April 1950 – 5 April 1953 65 60 – 63
6 April 1953 – 5 December 1953 65 63 – 65
6 December 1953 – 5 April 1960 65 – 66 65 – 66
6 April 1960 – 5 April 1961 66 – 67 66 – 67
6 April 1961 – 5 April 1977 67 67
6 April 1977 – 5 April 1978 67 – 68 67 – 68
6 April 1978 onwards 68 68
In March 2016, the Government announced an additional review of the State Pension Age. This
review will submit its recommendations to Government by May 2017 and will consider life
expectancy, the sustainability of the State Pension and wider changes in society. The review won’t
cover the existing State Pension Age timetable to April 2028.
THE NEW STATE PENSION
• If an individual reaches State Pension Age before 6 April 2016 their State Pension is calculated under the old rules
• The full new State Pension for 2016/17 is £155.65 per week. The amount the individual receives can be higher or lower than £155.65 depending on their National Insurance record
• The new State Pension is available to:
• Men born on or after 6 April 1951 and Women born on or after 6 April 1953
• An individual needs at least 10 Qualifying Years on their National Insurance record (previously only one year was needed) – these years do not need to be consecutive
• The "triple lock" system ensures the state pension goes up by whichever is higher - inflation, wages or 2.5%. No increases, however, if resident in Australia
Overview and eligibility
IN OR OUT
Contracted-in
Building up additional SP
Contracted-out
No additional SP built up, but additional external DB / DC
DB contracting out open from 1978-2016, for DC 1988-2012
Start work
PENSION FREEDOM
From April 2015
• From age 55, you may access your DC pension pot and take it
any way you choose, subject to:
• Up to 25% as a tax free cash lump sum
• The remainder being taxed at your normal rate of tax for that
year
• Please note that schemes aren’t obliged to offer all or any of
the new freedoms allowed so you may need to transfer
benefits into a different plan to gain greater flexibility
• If you do use any of the new flexibilities your annual allowance
drops from £40,000 per annum to £10,000 per annum
WHAT IS PENSION FREEDOM?
GUIDANCE THROUGH PENSION WISE
• Entitles everyone with a DC pension to access free, impartial guidance
about options at retirement, on line, over the phone or face to face
KEY PENSION ACCESS QUESTIONS • What are your income and capital needs?
• When do you want to take your benefits?
• What type of pensions do you have and what are your
choices?
Would you prefer certainty or flexibility?
What are the tax implications of your options?
Will your savings last as long as you do?
How is your money going to be invested?
(NOW and in the FUTURE)
What happens if you were to die?
YOUR DEFINED BENEFIT PENSIONS
Service x Accrual Rate x Salary Definition e.g. 20/60ths x £30,000 = £10,000 pa
Taking your pension benefits
• Early/late retirement e.g. payable at 65 or 5% pa reduction/enhancement
• Tax free cash sum commutation e.g. £1 of pension = £12 tax free lump sum
Cash equivalent transfer value e.g. £10,000 pa could = £300,000 or more
• A transfer to a Defined Contribution scheme to secure the new flexibilities would mean you lose the security of a defined income. You’d need to take advice from a financial adviser before such a transfer can be transacted
• Where the transfer value is below £30,000, this can be accessed as a lump sum from age 55, 25% of which will be tax-free with the remainder taxable. No advice is required here
• DB scheme trustees will also have new powers to delay transfers and take account of scheme funding levels when deciding on transfer values
Options can be used in whole or in part
• A tax free lump sum only
• Encashment – also known as UFPLS
• Flexible access – also known as drawdown
• Annuity purchase – conventional / investment-linked
WHAT COULD YOUR DC POT
PROVIDE?
SCENARIO 1 - ACCESSING TAX FREE CASH Dave has a pension pot of £100,000
Dave has £25,000 left outstanding on his mortgage charged at 2.5% costing him £448 pm
Dave is 60 and works full time earning £30,000 per annum
Dave wants to know if he should take his tax free cash sum to repay his mortgage?
TFC
£25,000
£100,000
Pension
Pot
Mortgage
£25,000 5 years
remaining
Monthly
Payment
£448
Before
£75,000
Pension
Pot
Extra
Income
£448
After
SALARY
£30,000
*(£3,800
TAX)
£75,000
PENSION
POT
TOTAL
TAXABLE
INCOME
OF
£105,000
What about Dave’s remaining pension pot? What if he cashes this in,
remembering that he earns £30,000?
Income Tax bill
Personal Allowance £8,500 £0
20% Income Tax £8,500 - £40,500 £6,400
40% Income Tax £40,500- £105,000 £25,800
TOTAL TAX £32,200
ENCASHMENT AFTER THE TAX FREE ELEMENT
+ =
*Please note National Insurance is also payable on salary
SCENARIO 2 – TAKING THE POT GRADUALLY
Mike is 60 and his State Pension will commence when he’s 66, but he wants to stop working
this year. Mike wants to cash in his pension pot of £100,000 but avoid a large tax bill. He
doesn’t need to take his tax free cash all at once. Mike initially cashes in £14,000 in April 2016.
£21,500
£64,500
TAKING THE POT GRADUALLY
State Pension expressed in today’s terms
SCENARIO 3 – GUARANTEED INCOME FOR LIFE
Sarah has a taxable pension pot of £50,000. To top up her State Pension and widow’s
pension from her late husband’s occupational pension, she’d like to generate an
inflation-proofed income of £2,000 per annum. Sarah smokes and is diabetic.
£0.00
£500.00
£1,000.00
£1,500.00
£2,000.00
£2,500.00
£3,000.00
Level Esc RPI Joint
50%, EscRPI
Smoker,
Esc RPI
Smoker &
Diabetic,Esc RPI
Income
Hodge Life
Legal & General
Prudential
LV=LV=
Source: The Exchange from IRESS 1/2/16, gross annual figures with 5 year guarantee periods
RETIREMENT OPTIONS
SUMMARY Description Annuity Drawdown Full cash
withdrawal
Flexibility / Certainty C F F
Tax implications ? ? ?
Will savings last? ? ?
Investment decision ? ?
Death benefits ? ? ?
Ongoing advice required ?
• Take care regarding your investment position prior to taking benefits
WHERE ARE YOUR DC PENSIONS
INVESTED?
Access option Risks to cover How is this covered?
Encashment - Volatility Move towards cash assets
Annuity - Volatility
- Falling annuity rates Move towards government bonds
Drawdown
- Time out of the
market
- Taking too much
income in early
years
Staying in growth assets with
lower risk assets for any income
to be taken in early years
• If you haven’t selected your own funds, you may be in a default strategy
• Most default strategies try to grow your pot when you’re younger but
then changes where you’re invested as you approach retirement
PENSION OPTION TASKS FOR
YOUR ‘TO DO’ LIST
• Clarify which types of pension you have and what your options are
• Get an up to date projection of what you’ll get back and make sure you understand what this is telling you
• Is your selected retirement date correct?
• Consider your needs in terms of certainty vs flexibility, tax efficiency, longevity, investment and legacy
• If you are invested in a ‘lifestyle’ investment option, has this kicked in and are you clear which major ‘pension pot’ conversion option you will be using? Watch this space for changes
• What about transferring?
TRANSFERRING YOUR
PENSIONS TO AUSTRALIA
QUALIFYING RECOGNISED OVERSEAS
PENSION SCHEMES OR QROPS
• A Qualifying Recognised Overseas Pension Scheme, or QROPS, is an overseas
pension scheme that meets certain requirements set by Her Majesty's Revenue and
Customs (HMRC). A QROPS can receive transfers of UK Pension Benefits without
incurring an unauthorised payment and scheme sanction charge (typically of 55%)
• To become a QROPS, a pension scheme must apply to and be approved by HMRC.
A list of QROPS that have consented to have their names published is available on
the HMRC website and is regularly updated
• HM Revenue and Customs (HMRC) can’t guarantee these are Recognised Overseas
Pension Schemes (ROPS) or that any transfers to them will be free of UK tax. It is
your responsibility to find out if you have to pay tax on any transfer of pension
savings
• https://www.gov.uk/government/publications/list-of-qualifying-recognised-overseas-
pension-schemes-qrops/list-of-recognised-overseas-pension-schemes-
notifications#australia
IS THE LAW LIKELY TO CHANGE
HERE?
ISSUES TO CONSIDER
WHAT TO THINK ABOUT
• Where you’ll be taking your pension –
Residency status
• Consider wider savings/assets
• Wider tax implications – e.g. capital gains and
IHT
• Do you need to change product and/or provider?
• Do you have further questions?
• Do you need an initial clinic?
• Do you need financial advice?
WRAPPING UP
• FAQ document will be circulated
• Register for a free 30 minute 1-1 consultation by emailing
[email protected] by 25 November
• Evaluation survey
• caba.org.uk/australia to find out more about CABA’s services
Wendy Saunders, International Development Manager