How retirement looks in 2015
On 21 July 2014, the government released their response to the ‘Freedom and Choice in Pensions’ consultation, effectively giving the go-ahead for the sweeping pension changes that were proposed as part of the 2014 Budget in March. These changes could radically alter your plans for retirement.
From April 2015, we have now seen more freedom in ways people can take their pension benefits when they reach 55. Few would vote against choice and flexibility for their pension, but what do the changes mean if you are planning your retirement? Here we give you five areas for consideration.
More freedom in how you draw your income
In theory, the flexibility allows you to treat your pension fund in the same way as any other investment: you are able to take withdrawals whenever you want.
If you are a member of a defined contribution pension scheme and aged 55 or over, you are able to draw money from it as you see fit. You can receive a tax free cash sum of up to 25% of the amount you take, then you have the freedom to access some or all of the remaining fund as income, taxable at your marginal rate of income tax. So if you want to access all of the money from your pension, you can take it as a lump sum.
As tempting as it sounds to get hold of your money when you want it, in practice, the tax treatment may discourage you from extracting large sums in a single year. So unless you really need the extra income, you may want to withdraw your pension savings at a slower rate that is more tax-efficient.
Although the new pension freedoms mean you are no longer compelled to buy an annuity, if you are looking to secure a guaranteed income for the rest of your life, an annuity it still an appropriate option for you, especially as it’s impossible to tell how long you will live.
Changes to how much you can contribute
If you are drawing an income from your pension (after taking tax free cash) and wish to make contributions to a defined contribution scheme, you can continue to do so, but the amount on which you can receive tax relief (the ‘Annual Allowance’) has been cut from £40,000 to £10,000 a year. This could be via employer or personal contributions.
The £10,000 Annual Allowance has been introduced for those already in ‘flexible drawdown’. This provides a potential advantage as the previous rules prohibited tax-relievable contributions if you are already taking income from Flexible Drawdown.
In some circumstances the Annual Allowance does not apply, but the rules can be complex. For example, you can take income from a maximum of three smaller personal pension pots, or an unlimited number of smaller occupational pension pots (in both cases, worth less than £10,000), without being subject to the Annual Allowance restriction. Similarly, if you entered Capped Drawdown before April 2015 and take income within your income limit after this date, the Annual Allowance will remain at £40,000 a year in these cases.
Transferring defined benefit schemes
Transfers from private sector defined benefit to defined contribution schemes is still allowed. The government is also consulting further on allowing full or partial withdrawals direct from private sector defined benefit schemes, to remove the need to transfer out to a defined contribution scheme before taking benefits. If you are a member of a defined benefit scheme that is already in payment and you wish to transfer out, this is still prohibited.
Transfers from unfunded public service defined benefit schemes are not allowed. Transfers from funded public service defined benefit to defined contribution schemes are permitted.
Taxation on death
The tax position on death under the previous rules was that lump sum payments from any money remaining in drawdown was subject to a death tax charge of 55%. The same tax rate also applied to any remaining pension fund not being used to provide benefits, if the death occurred from age 75 onwards. As part of the new reforms, the government has abolished the 55% tax charge for money inherited from pension funds, regardless of the age of death. It has also extended the same generosity to money in drawdown, if the death of the holder occurs before age 75. For deaths after age 75, the tax rate for money inherited from drawdown has been reduced to 45%.
The new rules are effective from April 2015 but importantly, it is the date the claim is settled rather than the date of death, which determines if the money is paid at the new rates.
Guidance or advice?
The government has introduced a new right to impartial financial guidance at the point of retirement, for anyone with a defined contribution pension scheme. The guidance is available through the Pensions Advisory Service and the Citizens Advice Bureau. But it’s important to understand that what is on offer is just guidance – not advice - so while guidance will explain the impact of these new rules and let you know what you could do, it won’t tell you what you should do. Advice, therefore, remains essential.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
Charlotte Poole-Graham represents only St. James's Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group's wealth management products and services, more details of which are set out on the Group's website www.sjp.co.uk/products.
Who needs money ? Why remortgage ?
In today's competitive market, many borrowers choose to switch their mortgage every few years in order to take advantage of the new rates on offer. Those that remain on the same deal for the full term of their loan could lose out on a range of potential benefits, not least the opportunity to reduce the total amount paid back, which could be a significant margin in some cases.
In simple terms, remortgaging involves switching your current mortgage to a new deal, arranged either with your existing lender or with a new lender. As a current homeowner you may want to consider taking this step for a number of reasons, such as:
To save money If you're paying your lender's Standard Variable Rate (SVR), it's likely that your existing lender will offer a better rate and greater flexibility on other available products. This could allow you to save money on your monthly repayments, or to repay your mortgage sooner. And if your current lender doesn't offer better rates or greater flexibility on its other products, you may want to consider switching your mortgage to another lender, even if doing so would trigger early repayment charges payable to your existing lender, as this could still mean a net saving to you.
To raise money Higher income or a rise in your property's value means you could increase your mortgage to help pay for major outgoings such as a wedding or your child's university costs, rather than borrowing separately, and in some cases more expensively, for the outgoing itself.
To avoid moving home It can be cheaper and more convenient to adapt or add an extension to your existing home, paid for by remortgaging or a further advance, than to move home.
To consolidate your debts Remortgaging can allow you to release some of the equity you hold in your home and consolidate other debts, such as a car loan or credit cards, which can attract higher rates of interest than that of your mortgage.
To Reduce the Term
With each remortgage you can look at reducing the term of the loan bring the mortgage down by years eventually if this is the goal. Why might it not be ? Well you need to speak to me to find out.
Book your free Home Mortgage Review Now 07973 720848 or 01594 719389
TAX FREE EXTRA INCOME
By signing up to the ‘rent a room’ scheme, not only could you enjoy the extra income from the rent, but also up to £4,250 a year is free from tax. ‘Rent a room’ relief is an optional scheme that lets you receive up to this amount in rent each year from a lodger, tax-free. !is only applies if you rent out furnished accommodation in your own home.
LANDLORD’S ENERGY SAVING ALLOWANCE
You can claim ‘landlord’s energy saving allowance’ for the cost of buying and installing certain energy-saving products for properties you rent. You can also claim a special tax allowance of up to £1,500 for insulation, draught proofing and installing a hot water system.
COSTS YOU CAN OFFSET AGAINST TAX
If you rent out property, don’t forget you can deduct certain costs before declaring your taxable income. !e costs you can offset against tax are numerous, including mortgage interest; lettings agents’ and accountants’ fees; insurance; utility bills; council tax; cleaning; and maintenance and repairs (but not improvements – building an extension will enhance the value of your property, but you can’t claim it as a daily expense in the running of that property).
STAMP DUTY CHANGES HOW DOES EFFECT YOU
With the announcement of the stamp duty changes in the Autumn Statement, Chancellor George Osborne, has announced sweeping changes to the system of Stamp Duty. The current system of whichever banding the property price falls into being levied on the whole of the value of the property, will be replaced by one of gradients so that different rates will apply depending on the portion of the purchase price that falls into each rate band
Purchase price of property Rate of SDLT
Up to £125,000 Zero
Over £125,000 - £250,000 2%
Over £250,000 - £925,000 5%
Over £925,000 - £1,500,000 10%
Over £1,500,000 12%
Example: A buyer exchanges contracts for the purchase of a house for £275,000 on 5 December 2014, with completion expected to in February 2015. Under the new rules the SDLT is calculated as follows:
0% on the first £125,000 = £0
2% on the next £125,000 = £2,500
5% on the final £25,000 = £1,250
Total SDLT payable = £3,750
Purchasing a home is undoubtedly one of the most important decisions most individuals will make. Assessing whether to approach a lender directly or employ a mortgage broker is the first choice for many in the route to home ownership.
Advantages of employing a broker
According to the Mortgage Advice Bureau, the number of products in the UK mortgages market reached record levels in August 2014, with over 12,000 different options available. While this is good news for home-buyers, offering a better range of products to suit their needs, it also makes finding the right mortgage a much more complex process.
In addition, legislation introduced by the Mortgage Market Review in April means lenders are required to perform a more extensive range of affordability checks before approving a mortgage.
Again, though this move protects borrowers from inadvisable financial decisions, and many lenders already practised rigorous checks before its introduction, this however could be viewed as an extra level of complexity to the application process for those inexperienced in this procedure The length of time it may take for an initial interview can be upto four weeks with a lender where as with me its days.
Approaching a mortgage broker like myself would be a prudent decision for many homebuyers. As an independent advisor I have an expert knowledge of the market and I’m required to give an unbiased opinion on the best deal for each buyer’s unique circumstances. This can be particularly useful for non-traditional cases, including self-employed or older buyers, who some lenders may automatically discount on inflexible criteria, without reviewing their financial profile as a whole. I will also have a better understanding of why cases might not be accepted and what can be done to overcome these objections, which could save buyers from letting their dream property slip away due to delayed or rejected applications. I will also be able to recommend related insurance products to ensure buyers are still able to meet their mortgage repayments in the case of adverse circumstances, including redundancy or illness.
Despite these numerous benefits of using a Broker, there are several things to consider before approaching any mortgage broker, beginning with the costs involved. Charges can vary for intermediaries, who are likely to either take a fixed fee from the buyer, commission from the lender, a percentage of the secured mortgage or a combination of the above. More information on this topic can be found through the Money Advice Service.
Opting for professional advice could cost buyers hundreds of pounds in the short-term, but over the lifetime of a mortgage, securing even a fractionally better interest rate could lead to significant savings. Using a broker also means homeowners may be able to claim compensation in certain cases if they feel misleading advice drove them to choose an inappropriate mortgage, though buyers are under no obligation to follow recommendations.
Aside from costs, it is also worth bearing in mind that employing a broker does not guarantee the best deal on the market, and buyers should take the time to compare brokers in order to find the right service, at the right price.
Under Financial Conduct Authority guidelines, there are three distinct classes of broker, depending on the number of lenders’ products that will be considered, from tied mortgage brokers who work with a single lender, to whole of market brokers who consider the full market. Even this last category may not have access to every product though, since some mortgage lenders deal only with direct customers.
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