Planning to enjoy your retirement years

Talk to us about the new pension opportunities

One way of looking at planning for retirement is to think about the number of paydays you have before you retire, and the number you hope to have afterwards. Imagine you start your pension planning when youíre age 20, and you plan to retire when youíre age 65. You have 540 paydays between starting your pension plan and retiring to achieve financial independence.

Take action to fund for your retirement
In the 2013/14 tax year the additional rate of tax on earnings over £150,000p.a. has been reduced from 50 per cent and replaced by a new lower rate of 45 per cent. While this means that the highest rate of tax relief available on pension contributions has reduced, it is still important to take action to fund for your retirement.

Carry Forward of unused reliefs
You may be able to contribute in excess of the Annual Allowance of £50,000 for the 2013/14 tax year (this will reduce to £40,000 from April 2014) and receive tax relief at up to 45 per cent using Carry Forward if you have contributed less than £50,000 in any of the previous three tax years. As this is a potentially complex area, particularly where Defined Benefit schemes are concerned, professional advice should be sought.

Annual and Lifetime Allowance reducing
As of 6 April 2014, the Annual Allowance for retirement funding is reducing to £40,000, while the Lifetime Allowance is reducing from its current £1.5m ceiling to £1.25m. The Annual Allowance reduction represents a significant opportunity to fund a higher level of pension contributions prior to this reduction. The reduction in the Lifetime Allowance means that professional advice is even more important to ensure that you are optimising your retirement planning and are benefiting from the latest Lifetime Allowance protection opportunities.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax reliefs depends on individual circumstances. The value of a pension will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

Paying Inheritance Tax

Reflecting an accurate open market value

The personal representative (the person nominated to handle the affairs of the deceased person) arranges to pay any Inheritance Tax that is due. You usually nominate the personal representative in your will (you can nominate more than one), in which case they are known as the executor. If you die without leaving a will a court can nominate the personal representative, in which case they are known as the administrator.

If you have been nominated as someone’s personal representative you have to value all of the assets that the deceased person owned. This valuation must accurately reflect what the assets would reasonably fetch in the open market at the date of death.

In most cases, if an estate owes Inheritance Tax, you must usually pay it within six months after the death or interest will be charged. In some cases, you can pay by instalments once a year over ten years. The due date differs if Inheritance Tax is due on a trust.

Forms you need to complete

If the estate is unlikely to be subject to Inheritance Tax (an excepted estate)
If the estate is likely to be subject to Inheritance Tax
In this case you complete form IHT400 plus any relevant supplementary forms (these are indicated on the IHT400).

You also complete:

form IHT421 ëProbate summary’ if the deceased person lived in England, Wales or Northern Ireland
probate application form PA1 if the deceased lived in England or Wales
form C1 Inventory if the deceased lived in Scotland

(In Northern Ireland you only complete a probate application form at interview.)

The due date for Inheritance Tax is six months after the end of the month in which the deceased died. You must pay Inheritance Tax before you can get the grant of probate (or confirmation in Scotland).

If you’re paying Inheritance Tax by instalments, the first instalment is due six months after the death on the due date. The second instalment is due 12 months after that.

If someone gives you a gift and doesn’t survive for seven years after making it and the gift is liable to Inheritance Tax, the payment on the gift is also due six months after the death on the due date.

If the value of the assets being transferred exceeds the current Inheritance Tax threshold £325,000, Inheritance Tax can be due:

on transfers into a trust
on transfers out of a trust
every ten years after the original transfer into trust
The due date depends on when the assets
are transferred
For transfers made between 6 April and 1 October, the due date is 30 April in the following year
For transfers made between 30 September one year and 6 April the next, the due date is six months after the end of the month in which the transfer was made

If you don’t pay Inheritance Tax in full by the due date, HM Revenue & Customs (HMRC) will charge interest on the amount outstanding, whatever your reason for not paying by the due date. It also charges interest if you pay by annual instalments.

If Inheritance Tax is due, you have 12 months from the end of the month in which the death occurred to send in a full Inheritance Tax account, this includes form IHT400, any supplementary pages and papers relating to probate (or confirmation in Scotland).

Unless you have a reasonable excuse for not delivering a full and accurate account within 12 months, you may have to pay a penalty in addition to any interest you owe.

Wealth preservation

Making the most of different solutions

Decreasing term assurance
Decreasing term assurance can be arranged to cover a potential Inheritance Tax liability and used as a Gift Inter Vivos policy (a gift given during the life of the grantor who no longer has any rights to the property and can not get it back without the permission of the party it was gifted to). This is a type of decreasing term plan that actually reduces at the same rate as the chargeable Inheritance Tax on an estate as a result of a Potentially Exempt Transfer (PET).

For example, if you gift part of your estate away before death, then that part is classed as a PET, meaning that for a period of seven years there could be tax due on the transfer. This amount of tax reduces by a set amount each year for seven years.

The Gift Inter Vivos plan is designed to follow that reduction to ensure sufficient money is available to meet the bill if the person who gifted the estate dies before the end of the seven-year period.

Such policies should be written in an appropriate trust, so that the proceeds fall outside your estate.

Business and agricultural property
Business and agricultural property are exempt from Inheritance Tax.

Business Property relief: To qualify, the property must be relevant business property and must have been owned by the transferor for the period of two years immediately preceding death. Where death occurred after 10 March 1992, relief is given by reducing the value of the asset by 100 per cent. Prior to 10 March 1992, the relief was 50 per cent.

Agricultural Property relief: Agricultural property is defined as agricultural land or pasture and includes woodland and any buildings used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture, and also includes such cottages, farm buildings and farmhouses, together with the land occupied with them as are of a character appropriate to the property. Where death occurred after 10 March 1992, relief is given by reducing the value of the property by 100 per cent (certain conditions apply). Prior to that date the relief was 50 per cent.

Woodlands relief: There is a specific relief for transfers of woodland on death. However, this has become less important since the introduction of 100 per cent relief for businesses that qualify as relevant business property.

Where an estate includes woodlands forming part of a business, business relief may be available if the ordinary conditions for that relief are satisfied.

When a woodland in the United Kingdom is transferred on death, the person who would be liable for the tax can elect to have the value of the timber ñ that is, the trees and underwood (but not the underlying land) ñ excluded from the deceased’s estate.

If the timber is later disposed of, its value at the time will be subject to Inheritance Tax. Relief is available if:

an election is made within two years of the death, though the Board of HM Revenue & Customs have discretion to accept late elections, and
the deceased was the beneficial owner of the woodlands for at least five years immediately before death or became beneficially entitled to it by gift
or inheritance.

The Pre-Owned Assets Tax
Pre-Owned Assets Tax (POAT), which came into effect on 6 April 2005, clamped down on arrangements whereby parents gifted property to children or other family members while continuing to live in the property without paying a full market rent.

POAT is charged at up to 40 per cent on the benefit to an individual continuing to live in a property that they have gifted but are not paying a full rent, and where the arrangement is not caught by the gift with reservation rules.

So anyone who has implemented such a scheme since March 1986 could fall within the POAT net and be liable to an income tax charge of up to 40 per cent of the annual market rental value of the property.

Alternatively, you can elect by 31 January following the end of the tax year in which the benefit first arises that the property remains in your estate.

Rental valuations of the property must be carried out every five years by an independent valuer.

A gift with reservation

Getting the full benefit of a gift to the total exclusion of the donor

A gift with reservation is a gift that is not fully given away. Where gifts with reservation were made on or after 18 March 1986, you can include the assets as part of your estate but there is no seven year limit as there is for outright gifts. A gift may begin as a gift with reservation but some time later the reservation may cease.

In order for a gift to be effective for exemption from Inheritance Tax, the person receiving the gift must get the full benefit of the gift to the total exclusion of the donor. Otherwise, the gift is not a gift for Inheritance Tax purposes.

An outright gift
For example, if you give your house to your child but continue to live there rent free, that would be a gift with reservation. If, after two years, you start to pay a market rent for living in the house, the reservation ceases when you first pay the rent. The gift then becomes an outright gift at that point and the seven- year period runs from the date the reservation ceased. Or a gift may start as an outright gift and then become a gift with reservation.

Alternatively, if you give your house to your child and continue to live there but pay full market rent, there is no reservation. If over time you stop paying rent or the rent does not increase, so it is no longer market rent, a reservation will occur at the time the rent stops or ceases to be market rent.

The value of a gift for Inheritance Tax is the amount of the loss to your estate. If you make a cash gift, the loss is the same value as the gift. But this is not the case with all gifts

Giving away wealth

Tax-efficiently passing on parts of your estate

There are some important exemptions that allow you to legally pass your estate on to others, both before and after your death, without it being subject to Inheritance Tax.

Exempt beneficiaries
You can give things away to certain people and organisations without having to pay any Inheritance Tax. These gifts, which are exempt whether you make them during your lifetime or in your will, include gifts to:

your husband, wife or civil partner, even if you’re legally separated (but not if you’ve divorced or the registered civil partnership has dissolved), as long as you both have a permanent home in the UK

UK charities
some national institutions, including national museums, universities and the National Trust
UK political parties

But, bear in mind that gifts to your unmarried partner or a partner with whom you’ve not formed a registered civil partnership aren’t exempt.

Exempt gifts
Some gifts are exempt from Inheritance Tax because of the type of gift or the reason for making it. These include:

Wedding gifts/civil partnership ceremony gifts
Wedding or registered civil partnership ceremony gifts (to either of the couple) are exempt from Inheritance Tax up to certain amounts:
parents can each give £5,000
grandparents and other relatives can each give £2,500
anyone else can give £1,000

You have to make the gift on or shortly before the date of the wedding or civil partnership ceremony. If it is called off and you still make the gift, this exemption won’t apply.

Small gifts
You can make small gifts, up to the value of
£250, to as many people as you like in any one tax year (6 April to the following 5 April) without them being liable for Inheritance Tax.

But you can’t give a larger sum ñ £500, for example ñ and claim exemption for the first £250. And you can’t use this exemption with any other exemption when giving to the same person. In other words, you can’t combine a ësmall gifts exemption’ with a ëwedding/registered civil partnership ceremony gift exemption’ and give one of your children £5,250 when they get married or form a registered civil partnership.

Annual exemption
You can give away £3,000 in each tax year without paying Inheritance Tax. You can carry forward all or any part of the £3,000 exemption you don’t use to the next year but no further. This means you could give away up to £6,000 in any one year if you hadn’t used any of your exemption from the year before.

You can’t use your annual exemption and your small gifts exemption together to give someone £3,250. But you can use your annual exemption with any other exemption, such as the wedding/registered civil partnership ceremony gift exemption. So, if one of your children marries or forms a civil partnership you can give them £5,000 under the wedding/registered civil partnership gift exemption and £3,000 under the annual exemption, a total of £8,000.

Gifts that are part of your normal expenditure
Any gifts you make out of your after-tax income
(but not your capital) are exempt from Inheritance Tax if they’re part of your regular expenditure.

This includes:

monthly or other regular payments to someone, including gifts for Christmas, birthdays or wedding/civil partnership anniversaries
regular premiums on a life insurance policy (for you or someone else)

It’s a good idea to keep a record of your after-tax income and your normal expenditure, including gifts you make regularly. This will show that the gifts are regular and that you have enough income to cover them and your usual day-to-day expenditure without having to draw on your capital.

Maintenance gifts
You can also make Inheritance Tax-free maintenance payments to:

your husband or wife
your ex-spouse or former registered civil partner
relatives who are dependent on you because of old age or infirmity
your children (including adopted children and step-children) who are under 18 or in full-time education

Potentially exempt transfers
If you, as an individual, make a gift and it isn’t covered by an exemption, it is known as a potentially exempt transfer (PET). A PET is only free of Inheritance Tax if you live for seven years after you make the gift.