News Updates - February
13th February 2020
Fears over pension transfers
UK companies are imposing third-party checks on financial planning firms providing retirement advice to employees in a sign of growing boardroom nerves over pension mis-selling. Independent financial advice firms pitching to work for multibillion-pound corporate pension schemes are being required to have the transfer advice they give to pension scheme members reviewed by an independent third party not linked to the regulator. The move reflects the concern of some of the UK’s biggest companies about a growing pension mis-selling scandal that has unfolded since 2015 reforms made it more appealing to members to trade guaranteed “defined benefit” pensions for cash lump sums. Earlier this month the Financial Conduct Authority, the financial watchdog, warned that up to £20bn of DB transfers may have proceeded on unsuitable advice, with tens of thousands of members now at risk of running out of money in retirement. Experts said concerns about reputational damage from bad pension transfer advice, and ensuring members get better outcomes, were spurring employers and trustees to take the action. The appointment of a body to monitor the advice provided by an IFA is an unprecedented step in the corporate world, after Tesco appointed a third-party governance provider to monitor the transfer advice provided by two firms appointed to give retirement support to 220,000 members of its £13bn pension scheme. There are other big schemes considering doing the same as Tesco. Trustees and employers are realising that doing nothing and leaving members to find a reputable adviser on the internet, or on the local high street, is a risk they can no longer afford to take.
Don't miss out on tax free childcare
Over one million families could be missing out on £1,000s per year in Government childcare help, as a new report for HMRC admits that take-up of the Tax-Free Childcare scheme has been lower than anticipated. The Government's Tax-Free Childcare scheme essentially gives eligible families 20% off childcare costs, and is worth up to £2,000 a year per child. HMRC has estimated that 1.3 million families are able to claim, but pensions firm Royal London's analysis of its latest take-up figures shows that only around 1 in 10 of those eligible are doing so. Around 172,000 families are claiming Tax-Free Childcare according to the most recent Government statistics, leaving around 1.1 million eligible families who aren't claiming – though the number of claims has been climbing from previous years. And a new report commissioned by HMRC says that "take-up so far has been lower than originally anticipated". The report found that eligible parents weren't claiming due to factors such as a lack of awareness or understanding of the scheme, as well as issues with logging into the Tax-Free Childcare site and making payments. The scheme was plagued with problems when it was first rolled out, primarily due to website issues. Some families may also be using alternative childcare schemes, such as childcare vouchers. Under the Tax-Free Childcare scheme, parents and carers in the UK can open an account where, for every 80p they deposit, the state adds 20p. In total, the state can add up to £2,000 per child per year (or up to £4,000 if your child is disabled) – so including what you deposit, you can use the scheme to pay for up to £10,000 of childcare per child each year. You can only get a maximum top-up of £500 every three months, but the state's extra 20% is added at the point you put money into your Tax-Free Childcare account, not when you spend it – so if you only pay for childcare seasonally, you can put money into the account throughout the year to avoid missing out on any state top-up.
Tax raid on final salary pensions
A tax raid on pensions would punch a £1bn hole in company retirement schemes and could spell disaster for dozens of firms, experts have warned. Businesses which still offer final salary schemes would come under huge pressure if pension tax relief is slashed in next month's Budget - putting more than a million workers in the firing line. Sir Steve Webb, a former pensions minister, said: “Words like mayhem spring to mind when thinking of the reform. You can’t underestimate just how radical this would be.” Commentators are clear that there’s a reason governments haven’t done this before and if they’re going to alienate millions of people then they have to have a really compelling reason. Anyone earning more than £50,000 a year would be stung by a 20% tax charge on their annual pension savings under the proposals, which are being considered by new Chancellor Rishi Sunak and Boris Johnson. Now, financial experts are warning people who get higher top-ups because they pay a 40% rate of tax to put whatever they can afford into their pensions, just in case of a major shake-up in the Budget.
How to protect your tax allowances
The government has committed to an awful lot of new spending. But the money has to come from somewhere. The unwritten rule of electioneering is to announce the spending increases during campaigning, and wait for the first post-election Budget to reveal the bad news about tax. Over the past few weeks we’ve seen suggestions of everything from some form of ‘mansion tax’ on more expensive homes, to changes in capital gains tax and tweaks in pension tax relief. Sajid Javid’s resignation as chancellor – the person in charge of the Budget – might have derailed some of the plans in progress, but commentators are divided on what’s likely to happen next. Some think fiscal (tax) rules will be relaxed, so there’s less pressure to balance the books and spending can rise alongside tax cuts. Others point to the manifesto pledge to get rid of ‘arbitrary tax advantages’ for the wealth. Unfortunately we don’t have a crystal ball to know what tax changes if any will come to fruition. We think the best way to shelter yourself from any potential tax changes is to take as much advantage as you can with the appropriate current breaks, while they still last:
- Take advantage of ISAs
- Consider a Lifetime ISA
- Don’t forget Junior ISAs
- Top up your pension
- Consider salary sacrifice
- Take advantage of your spousal exemptions
- Claim the marriage allowance
An extra £20,000 for spouses
From 6 February the fixed amount a surviving partner is entitled to when a spouse or civil partner dies without making a will, is rising from £250,000 to £270,000. The fixed sum is known as the ‘statutory legacy’ and is designed to balance the interests of the surviving spouse with those of the deceased’s children when no will is in place. For the millions of adults in the UK without a will, the fixed inheritance sum increase is a safety net – but is no substitute for making sure the right people get what you want them to have after you die. So, if you have children, your spouse will get the first £270,000 and half of everything else. The other half will be divided equally between your children. While at first glance, extra inheritance for the remaining partner looks like their interests have been protected from erosion by inflation. However, they could still be at risk of far worse – of losing their home and lifestyle. For the remaining partner, with no will in place the statutory legacy sum means:
- Assets or money you might need is automatically shared out among the deceased’s children.
- It may be down to the children to decide whether they help you out.
- You stand to lose money or assets that your late partner had held even though they had intended to share these with you.
- You could be landed with an inheritance tax bill that could have been avoided.
Should you invest in VCTs
This year marks the 25th anniversary of the introduction of venture capital trusts (VCTs). The idea was to encourage investors to support young and innovative businesses in exchange for generous tax concessions. Since 1996, VCTs have raised £8.4bn and helped thousands of private companies grow – from GO Outdoors, Secret Escapes, Everyman Cinemas and Five Guys to Zoopla, the first VCT-backed £1bn company. When you invest in a VCT you receive up to 30% tax relief. So on a £10,000 investment you could get back £3,000. All returns, typically paid through dividends, are tax-free. The annual allowance of £200,000 is both generous and straightforward. There is a catch, though. VCTs are not open all year round. Demand for the popular ones far outstrips supply and they sell out quickly. So if any of the below whet your appetite, to avoid missing out invest now rather than waiting for the new tax year. Venture capital trusts' steady income streams mean they are also being increasingly used for intergenerational wealth planning despite their lack of inheritance tax benefits. Even though base dividends may have dropped a little since the rules over payout taxation were changed in 2015, there is usually a special dividend payout from the types of companies VCTs invest in, which helps to boost the tax-free income. This is cementing in people's minds that these are good investments. When you consider the low-interest-rate environment we have had for such a long time, shareholders consider these as investments worth hanging onto.
Rise of the self employed
PUK job growth was the strongest in nearly a year in the three months to November, according to new government data. The Office for National Statistics said the strong jobs growth reflected a particularly weak three-month period to August when jobs fell, but the data also showed the employment rate hit a record high of 76.3% with jobs growth driven particularly by self-employment and the numbers of women in full time work. The number of people out of work dropped by 7,000 to 1.31 million and the unemployment rate of 3.8% remained at its lowest level since early 1975. Over two-thirds of the growth in people in work in the last year came from women working full-time while self-employment has also been growing strongly, and the number of people working for themselves has now passed five million for the first time ever.’ IPSE (the Association of Independent Professionals and the Self-Employed) has welcomed the news that self-employment has passed the 5 million mark for the first time ever, attributing this to the rise in the number of female self-employed. IPSE has also pointed to its own recent research showing freelancers are choosing to work for themselves for overwhelmingly positive reasons.
Pension schemes failing on climate change investment
The UK Sustainable Investment and Finance Association (UKSIF) says pension scheme trustees are failing to comply with their investment duties around ESG and need government intervention to get back on track. In a report released last month the think tank said schemes have adopted a "thin and non-committal" approach to policies to tackle environmental risk. This comes after UKSIF reviewed a collection of statements of investment principles (SIPs) published by trust-based pension schemes offering defined contribution (DC) benefits between October and November 2019. Trustees were required to outline how they factor ESG issues into their investment decisions in SIP statements from October last year. While a majority of trustees surveyed by the think tank said they believe ESG issues will affect scheme asset performance, it also found only one third have complied with the legal transparency requirements. UKSIF said The Pensions Regulator (TPR) must carry out a full review to investigate the level of compliance across the UK pension sector, while the government should create a new public registry for pension scheme investment policies.