Forget the Lamborghini. Park yourself in front of an IFA

New pension rules aren’t just about people acquiring fancy sports cars, they also have big implications for financial planning. 

Much of the coverage in the press about the new pension reforms has been a little bit caricatured. There has been a lot of focus on the ability of savers to cash in and buy a Lamborghini, which probably won’t be top on the list for most people approaching retirement. Considerably less has been said, however, about how the new rules affect financial planning.

In the past, when advising clients on retirement and how to structure income, we have been confronted with a restrictive set of rules. The key factors were the tax implications – both during the retirement period and at death. We didn’t have a great deal of flexibility. There might have been situations where it would have been appropriate to strip out the pension to reduce the pot before the client died, but this action had serious income tax implications.

Things have now moved on, as a worst-case scenario at death is now perhaps a 45% charge, where the figure might once have been as high as 82% or lost entirely with annuity purchase. So leaving your money in your pension pot is not necessarily such a bad thing anymore. Pensions should be considered as part of mainstream unencumbered assets, which you can use as an income source and valuable tax planning ‘wrapper’.

Using your pension fund alongside other investment wrappers such as ISAs, you’re able to maximise net spendable income for the smallest amount of capital spend. Since the advent of the new rules, we may choose to take less out of a fund in many circumstances and make use of other assets for income, protecting the pension fund to pass it on to the next generation.

In short, we’re being presented with a great opportunity to maximise client assets. We can now plan more efficiently in relation to tax, capital preservation, succession planning and income. So if you’re keen to live a better lifestyle and pass on more to beneficiaries, then it’s definitely important to start a conversation with one of our independent financial advisers.

Self Assessment: don’t leave it all to the wire

If you’re relying on your accountant to help you with your self-assessment tax returns, the earlier you’re able to get organised the better.

As accountants, we always like to be proactive and remind clients of the need to get their records, receipts and other relevant information ready as far as possible in advance of their filing deadlines. Inevitably though, pressures of business and life can get in the way and the records only arrive as January 31st looms.

 

Of course, any professional accountancy firm will do their best to turn things around speedily, but it’s not an ideal scenario from anyone’s point of view for things to be done last minute. At that point, for some clients, will come the realisation that cashflow isn’t good enough to cope with the imminent tax demand and there is no time left to budget for the liability. 

 

If you’re able to get ahead of the game, you’ll not only avoid last-minute panics and the danger of possible surcharges and interest for late payment of tax, but you may well have the opportunity to spend some time discussing tax planning options with your accountant too.

 

Another issue is that a last-minute rush may mean your accountant can’t always plan resources effectively. If your tax affairs aren’t that complex, it might be that a relatively junior member of staff can happily take on the work but if they’re already allocated to other projects, a more senior accountant may be needed. Many firms like DNG will do their best to avoid penalising clients financially and even discount senior rates but you want to be certain about the fee level you’re going to pay and help yourself avoid any nasty surprises.

 

So the message is to think ahead and give your accountant a call. See if you can get your adviser the information they need early enough to recalculate any payment on account you have to make in the summer. It may well be that reducing your July payment is worth considering, especially if your income is down on the previous year and accounts have been prepared early which confirm this. For employees who file self-assessment returns, your reminder to take action could be as soon as you have received your P60. 

 

We can then consider the tax that will be due the following January and you can start to budget based on your cash-flow projections. It’s a common sense approach, which will allow both you and your accountant to sleep that little bit easier each New Year. 

You can, when you plan…

Time is ticking away if you want to do some serious tax planning in this financial year.

 

With a general election on the horizon, taxation – and each party’s various policies regarding wealth – will be high on the agenda in the coming weeks and months. You may therefore be forgiven for thinking that the money that remains in your pocket is entirely decided by those in power. In reality, you might be more in control than you imagine. 

 

At this stage, we can only guess what changes to legislation will be introduced in the future. As such, planning can only be based on the here and now, starting with the approach of the end of the tax year. 

 

It’s hard to believe, so soon after the 31st January self-assessment bombardment, that there are only two months remaining of the 2015 tax year to plan and adapt.

 

Tax planning itself will vary in complexity between individuals, but there are a number of things that we all should look at before 5th April 2015 in order to ensure we don’t miss out:

 

 

Individual Savings Accounts (ISAs) 

 

Have you taken advantage of your full annual entitlement to these tax-free accounts? The regulations for 2014/15 were relaxed last summer, meaning that you have an annual allowance of £15,000 which can be invested however you choose. The ability to select between cash and/or stocks and shares gives you much greater flexibility than ever before.

 

 

Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) 

 

Investments in these schemes may bring an increased risk, but the tax breaks are attractive. Is now the time to consider whether the relief offered is worth the additional risk?

 

 

Pension Contributions 

 

Have you used your full annual allowance of £40,000? Is there any unused allowance from the previous three tax years that you could take advantage of too? Remember, relief from 2011/12 tax year must be used by 5th April 2015.

 

 

Personal Allowance 

 

With a tax free earnings allowance of £10,000 per person, it may well be that planning between spouses is necessary in order to obtain maximum advantage. At the other end of the scale, the personal allowance decreases by £1 for every £2 that your adjusted net income exceeds £100,000, giving nil allowances to an individual earning £120,000 or above. Could your adjusted net income perhaps be reduced via pension contributions and gift aid?

 

 

Capital Gains 

 

Remember to make use of your Annual Exemption of £11,000 before the end of the tax year. This exemption is per individual, so think carefully about the ownership of any assets that you intend to sell.

 

 

Capital Allowances 

 

Consider the timing of asset purchases. Would it be beneficial to buy earlier, in order to take advantage of the allowances at the earliest possible point in time?

 

 

It’s easy to see that it’s a really great time to take careful stock of your finances, but the suggestions above are only a starting point. Are you doing everything that you can to help yourself? Why not sit down with your accountant and draw up a plan for maximum tax efficiency?