Single-premium policy’s tax perk

There are several ways in which to invest in quoted stocks and shares, whether direct or through some form of collective investment scheme. Some holdings may be sheltered from tax within an Individual Savings Account, but the annual ISA limits may not be sufficient where larger amounts are involved. Many unit trust or open-ended investment company plans are available, for investment in UK companies or on a global basis. Investors may usually opt to receive regular dividend distributions or to reinvest the income to help the value of their holding to rise.

For many investors who do not require a regular (and often taxable) income stream from at least a part of their capital, there is another form of collective investment with additional features that may help with tax planning. This is the investment bond, an investment vehicle offered by many well-known insurance companies. Your professional adviser has knowledge of the features of investment bonds and will explain these fully on request.

Like many other collective schemes, an investment bond can offer a good spread of risk through a wide choice of funds, from index trackers to themed or geographically focused variants. There may even be the facility to switch funds periodically after the bond has been issued, perhaps to take account of market conditions, changes in personal circumstances or a desire to reduce any risk of diminished value in the run-up to a planned encashment date.

The technical difference that makes an investment bond different from other forms of collective investment is its status as a single-premium life insurance policy. Although the life insurance element is usually small and thus most of the lump sum subscribed goes into the chosen investment fund or funds, the investment bond still has a particular advantage: income tax liability is deferred from the year in which dividends accrue until any gains are calculated at a later stage.

When someone buys an investment bond, their money is used to buy units in the chosen fund or funds. Minimum investment levels are usually in the low thousands, but may be higher with some providers. The aim is to achieve capital growth over the medium to long term although, unless you opt for a with-profits bond designed to iron out the ups and downs, unit values will fluctuate in line with the underlying investments.

Despite the absence of income from an investment bond, the money invested and the accruing dividend payments do not have to remain locked in. It is often possible to make withdrawals, although in some cases an early encashment charge may apply. We will be able to point you to funds with the investment objectives, risk characteristics and conditions that suit you.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.

NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

VCT rules eased to boost scheme

Wealth managementIn 2011, the Government ran a consultation on simplifying the Venture Capital Trust scheme. The outcome of the consultation was that, as regards shares issued on or after 1 April 2012, the previous limit of £1 million for a VCT’s investment in any single company would no longer be imposed in most situations. The rule softening was greeted warmly by entrepreneurial businesses that rely on VCT finance as they advance new technologies, break new ground in biological research or provide specialist services or components to major corporations. This change has boosted awareness of the VCT scheme on the part of investors, but HMRC emphasise that they “strongly advise you to get advice from a professional adviser before you decide whether or not to invest in a VCT.” Wise words.

Ventures spearheaded by clever scientists or entrepreneurs can take many years to exploit their product or concept and, if they succeed, gain big financial rewards for their efforts. It is undoubtedly a high-risk zone for investors and impressive rewards are possible but far from guaranteed. Successive governments identified benefits for employment, balance of payments, scientific discovery, medical advances and society at large, so a tax set-up kind to providers of vital capital was put in place.

Inaugurated in 1995, the VCT scheme’s tax concessions and structure were created to give a spread of investor risk across a variety of enterprises and so alleviate the worry that in some cases the breakthrough might not occur, or could not make enough money to recoup investment. Even with dispersed risk and tax benefits, this type of investment is suited to the more experienced investor, who is prepared to put a calculated part of their net worth in investments carrying relatively high risk.

VCTs invest in companies that are unquoted, but VCTs accepted by HMRC for involvement in the scheme are listed on the London Stock Exchange and usually managed by an established investment group. The HMRC website describes some of the aspects and conditions of HMRC approval and sets out the tax relief that may be available. The rules currently permit an investor to subscribe a maximum of £200,000 for VCT shares each tax year and and thereby enjoy income tax and capital gains tax relief.

Income tax relief at 30% may be obtained through subscription to new VCT ordinary shares, on which dividends get tax exemption, so long as they are held for five years or longer. On disposal after five years have elapsed, no chargeable gain arises for capital gains tax purposes. Professional advice can help you to judge whether VCT investment would suit your circumstances and, if so, how much might be put in via a selected entity.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.
NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

Hang on to tax breaks come auto-enrolment

Pension auto-enrolment, which is being rolled out from October 2012, could have the unintended effect of killing tax breaks granted since 2006 to some people who were making large pension investments. Those affected, their employers, pension administrators and trustees should be conscious of the impact auto-enrolment could have upon ‘enhanced protection’ or ‘fixed protection’.

Back in 2006, the Government brought in a Lifetime Allowance to cap the total value of retirement benefits that a person could accrue in registered pension arrangements without facing an extra tax charge. This tax ‘recovery’ charge may be 25% or 55%, according to whether benefits are taken as income or a lump sum, based on the amount by which pension savings exceed the Lifetime Allowance and worked out when benefits are crystallised.

Anyone whose benefits already exceeded the £1.5m Lifetime Allowance could apply for ‘primary protection’, thus keeping their entitlement at its existing proportion of the Lifetime Allowance. A different option, ‘enhanced protection’, was potentially available to those with pension benefits expected to top £1.5m. This conditionally conferred exemption from a future tax charge for exceeding the Lifetime Allowance, which increased in stages to £1.8m by 2010, returning to the £1.5m level in April 2012.

A further form of protection, ‘fixed protection’, was available in advance of the 2012 cut to the Lifetime Allowance. This would allow affected individuals, who had accrued retirement savings based on the £1.8m Lifetime Allowance, to avoid the impact of the reduction to £1.5m. In essence, fixed protection obtained before 6 April 2012 continued someone’s £1.8m Lifetime Allowance.

To hang on to their enhanced or fixed protection, people must comply with strict limitations on further pension contributions, which auto-enrolment could break. The rules are complicated and professional interpretation may be needed, but further contributions are usually banned. Advice may also be required on a different angle, namely that some types of death benefit could also nullify enhanced or fixed protection.

The difficulty caused by auto-enrolment is that, when an employer’s ‘staging date’ arrives, virtually every employee aged from 22 up to State Pension Age must be automatically enrolled into the employer’s ‘qualifying pension scheme’ or otherwise into the National Employment

Savings Trust (NEST). Someone holding enhanced or fixed protection who fails to opt out within a month of auto-enrolment may thus be denied that protection.

The death benefit issue is rather technical, but even a small amendment to a death benefit set-up may in effect create a new scheme and negate enhanced or fixed protection. A way round this may be for those affected to join an ‘excepted group life scheme’. Expert advice is again important due to the complexity.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.
NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

Fixed protection

Maze
So much for pensions simplification …

In April 2012, the lifetime allowance – that is the size of fund that can be built up before the taxman starts making a lifetime allowance charge of up to 55% – is to be cut from £1.8 million to £1.5 million. This could create some difficult decisions for anyone whose pension fund is likely to exceed this lower level by the time they retire.

Pension simplification?
Those whose memories go back to April 2006 will recall that pensions were supposed to be simpler after the introduction of new rules that month. Unfortunately, for one reason or another – many related to the need to reduce excessive government borrowing – pension rules have returned to the status of a political football.

In the most recent change, the amount you can put into a pension each year has been dramatically reduced from £255,000 to £50,000 a year. But what probably affects those with large funds most, is the reduction in the lifetime allowance back to the £1.5 million level at which it was set in 2006

Lifetime allowances and protection
Because many people had pension fund already above £1.5 million in 2006, the government introduced ‘primary’ protection. This allowed anyone to apply for their own ‘personal’ lifetime allowance, which would be expressed as a percentage of the general lifetime allowance. If, for example, your fund at 6th April 2006 was £3 million (twice the official figure) then your personal lifetime allowance would always be twice the official figure. Above this figure the lifetime allowance charge would apply.

Those whose pension fund in 2006 were below £1.5 million, but who expected it to rise above the general lifetime allowance by the time they retired could apply for ‘enhanced’ protection. This would give total protection against the lifetime allowance, but the quid pro quo was that no further pension contributions could be made after 6th April 2006. Ever. If they were, the enhanced protection would be lost.

The reduction in the lifetime allowance makes life very difficult for those with larger funds, especially those whose pension arrangements are worth more than £1.5 million, but less than £1.8 million, who would currently be safe, but from next April, find themselves subject to a potential tax charge at retirement.

Fixed protection
Because of this, the government has introduced a third type of protection, ‘fixed’, which fixes the lifetime allowance for the individual at £1.8 million. However, as with enhanced protection there is an absolute prohibition on making future contributions, under normal circumstances. In other words, you and your employer must stop making pension contributions.

Applications for fixed protection must be in before the end of the current tax year (5th April 2012); unlike with previous forms of protection, where there was a three-year application window.

Those with the older forms of protection cannot apply for the fixed version, although anyone with enhanced protection who makes a contribution prior to 5th April 2012 will automatically lose it and may therefore become eligible for the new version, should that be deemed appropriate.

NESTs
Introduction of National Employment Savings Trusts (NESTs) from next year means that anyone who has opted for enhanced or fixed protection will need to ‘opt out’ of their employer’s pension scheme to avoid losing the protection. This must be repeated every three years and there will be one month from the date of auto-enrolment to ‘opt out’, or the protection will be lost. It is the individual’s legal responsibility to advise HM Revenue and Customs if protection no longer applies.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.

NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

Multiple sources of retirement income

Multiple plugs
Too many inputs can be confusing

Do you really want multiple sources of income when you retire? Anyone who has started to receive a company – or any other – pension will know that the first thing they are likely to get is a letter from the Inland Revenue (HM Revenue and Customs as we have to call them now) asking about other sources of income.

For those who simply have a second income from a job not yet given up, or a state pension – and perhaps a few investments – this need not be too much of an issue. But if you have built up several pensions over the years but not brought them together, things can become quite complicated.

After all, which is to be treated as your main source of income, against which your personal allowance should be set?

Consolidation near retirement
It is, of course, possible to consolidate all your pension arrangements in the run-up to retirement. This can be time consuming and there are usually costs associated with doing so, so the result can be a slight reduction in your tax free cash and eventual pension. However, the costs of not consolidating could be higher, not least because each pension arrangement will carry fixed charges which will become duplicated if you have multiple annuity (or drawdown) arrangements.

Pension consolidation now
One alternative is to consolidate your pension arrangements well in advance of retirement. By doing so, you will not necessarily avoid any costs associated with switching existing pension plans into a new one, but these will be immediate, rather than at point of retirement, and you still have plenty of time for investment growth to make good any temporary ‘losses’.

More importantly, however, you could well find that the charges associated with more modern arrangements – especially self invested personal pensions for those with larger funds – can be much lower than those applying to older plans. This means that ongoing charges can take a smaller proportion of your retirement fund – every year.

Managing your pension
Managing asset allocation strategies over a range of pension plans can also be difficult and there is scope easily to miss important sectors, or overload the portfolio in a particular investment area that you might not chose to do, if you had more coherent control over the asset spread.

By consolidating your pension plans into a single arrangement you can not only reduce costs, but also make overall management easier – as well as facilitating changes in a more structured way. You can also consider taking advantage of some of the additional benefits of using a self invested personal pension, such as investing in less common assets and even commercial property.

This can be particularly valuable for those running their own businesses, as it is a way of gaining control over the operational base – and of paying rent to your own pension scheme in addition to ordinary pension contributions, which are now limited to a maximum of £50,000 a year.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.

NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

Do you have money abroad?

For decades, some better-off investors have kept money in overseas banks – most popularly in Switzerland – that offered a high degree of discretion over the details. Whatever the reasons – perhaps for flexibility when travelling abroad, or simply to have money that is not subject to the vagaries of sterling’s fluctuations – this has made it difficult for the UK tax authorities to obtain their ‘pound of flesh’ on any income generated.

While it may appear a good idea for all of us to minimise the amount of tax we pay, this must be legitimate tax avoidance rather than tax evasion. Unfortunately, some investors may inadvertently have forgotten to include their overseas earnings in their UK tax declarations, or not even realised that it was necessary to do so.

Estimating that it is missing out on massive potential amounts of money, HM Revenue & Customs (HMRC) has therefore entered into an agreement with the Swiss banks that will enable it to collect money due to it.

The end of an era
Swiss banks are not suddenly going to start proactively telling UK authorities about those who hold accounts with them. It will, however, soon be possible for HMRC to ask them for information about specific UK taxpayers. This must be targeted at individuals; it will not be possible for the UK’s tax authorities to go on ‘fishing expeditions’ to see who they can catch, as the number of requests will be limited to 500 a year.

The new arrangement
Exception for UK-based Swiss banking customers who already co-operate fully with HMRC (these individuals exempt from the scheme) the accounts that UK customers hold with Swiss banks will, from May 2013, be subject to a new withholding tax on future investment income and capital gains.

The tax will be 48% on interest and 40% on dividends, while capital gains will be subject to tax at 27%.

It is hoped that the deal will bring in as much as £6 billion to the Treasury, which should go some way towards making good the money lost to the country through tax evasion (estimated at £14 billion in 2008).

What about past income and gains?
As part of the deal struck with the Swiss banks, a non-specific payment will be made by the banks to HMRC of £384 million to cover past liabilities and all historic liabilities prior to that date will thereby be considered as having effectively been paid.

In order to avoid ‘hot’ money being moved to alternative banking tax havens in advance of the new arrangement starting, the Swiss banks have agreed to tell HMRC should customers try to move money away from them.

Defending your money against tax
Perhaps the most effective (legal) way to shelter money against UK income and capital gains tax is by using tax-efficient schemes such as Individual Savings Accounts (ISAs) and pensions, although there are alternatives including premium bonds and – for those prepared to accept a far higher level of risk – Enterprise Investment Schemes and Venture Capital Trusts.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.

NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.