Big Changes to State Pension from 6th April 2010

There will be some very important changes to the state pension system in the next week, especially for women.

New Qualifying conditions

The positive news is that both men and women will only need 30 qualifying years of national insurance payments to receive the full basic state pension of £97.65 a week.

For women, this is a reduction from its present level of 39 years to 30, and for men a similar change will apply – as at present men need 44 qualifying years to get the full pension but, from the 6th April, will only need 30 years.

Although the reduction is greater for men than it is for women, it is women who stand to gain most from the change, as through lifestyle and other factors presently a much lower percentage of women than men currently qualify for the full BSP in their own right.

A qualifying year is one in which you have paid or had credited to you sufficient NI contributions. If you have less than the full number of years required you will receive a corresponding proportion of the full pension.

State pension ages

Whilst many more women will qualify for a better state pension in the years ahead, the not so positive news is that they will have to wait longer for it.

Currently, women can claim their state pension from age 60 but between 2010 and 2020 their state pension age will increase to 65 to bring it in line with men's. This will be phased in gradually starting on 6 April 2010.

During this 10 year period, for women born between 6 April 1950 and 5 April 1955, their state pension age will be set at a date somewhere between their 60th and 65th birthdays depending on their date of birth.

In addition to this and for both men and women, between 2024 and 2026, between 2034 and 2036 and between 2044 and 2046 the state pension age will rise to 66, 67 and 68 respectively. Anyone, born after the 6th April 1959 will be effected by these changes and have to wait longer for their state pension.


Political changes?

It should be noted that the issue of longer term changes to the state pension age is now the subject of political debate, and a change of Government may well result in further changes.

At the most recent Conservative party conference proposals were made to raise the state pension age beyond 65 earlier than currently planned.

For men the increase from 65 to 66 would happen from 2016. For women the existing phased changes up to 65, between 2010 and 2020, would remain in place but the age would rise again to 66 from 2020.

You can check your own state pension age here and use the State Pension Age calculator.

Budget 2010: Key Financial Planning Points

The following is a high level summary of some of the key points from yesterday’s Budget Report.

Despite the Chancellor confirming that borrowing for 2009/10 is projected to be some £11 billion lower than expected, the overall debt and continued need to borrow over the next four years means there was always going to be very little in the way of 'giveaways' in this Budget Report.

The Chancellor stressed the successful measures taken to 'secure the recovery', such as the car scrappage scheme increasing sales by 30% and the one-off tax on Banking Bonuses, introduced in the Pre-Budget Report, reaping some £2 billion in tax revenue.

However, there is a long way to go to reduce the country's debt and many of the changes announced today are minor alterations to the existing tax and financial system. In a theme which has been constant in recent years, further anti-avoidance legislation is also proposed.

Impact on financial planning

Income tax and allowances

In April 2009 Budget the Government announced that with effect from 6th April 2010 individuals receiving an income of more than £100,000 per year would face a cut in their Personal Allowance. This would reduce by £1 for every £2 of income above £100,000.

This was restated in the March 2010 Budget.

New 'additional rate' band of tax

In April 2009 Budget the Government announced that it would be introducing a new 50% rate of tax on income above £150,000 from April 2010.
This was restated in the March 2010 Budget

Winter Fuel Payments

The Government will guarantee payments for another year - this will be at least £250 for pensioners (£400 for those over-80's).

Business Rates

Business rates will be cut for one year from October for SMEs (Small and Medium Enterprises).

Tax credit

Individuals over the age of 60 will now be eligible for Working Tax Credit provided they work for at least 16 hours a week.

National Insurance

In the March 2010 Budget it was restated that employee, employer and self-employed rates of National Insurance contributions (NICs) will increase by 0.5% from April 2011 in addition to the 0.5% increase announced in 2008.

However the level at which people start to pay NICs will increase in April 2011 by £570 above the level previously announced.

Pensions and retirement planning

Implementing the restriction of pensions tax relief (BN33)

Legislation will be introduced in Finance Bill 2010 to recover tax relief above the basic rate on pension contributions made by or on behalf of individuals with high income.

For people with annual income of between £150,000 (inclusive of employer contribution for those with incomes of £130,000 or more) and £180,000, tax relief on pension contributions (including the value of employer contributions for those in employment) will reduce gradually from the individual's marginal rate to the basic rate as income increases. Where income is £180,000 or over the measure restricts tax relief on pension contributions to the basic rate.

The restriction of pensions tax relief will have effect on and after 6 April 2011.
Current law and proposed revisions

The Government announced in Budget 2009 its intention to restrict tax relief on pensions savings with effect from 6 April 2011 for high income individuals.
These rules will affect individuals with income of £150,000 or over. For the purposes of this measure, income is calculated before deduction or relief for pension contributions and charitable donations.

For those in employment it includes the value of any pension benefit funded (or eventually funded) by their employer where the individual's income is £130,000 or more.

A taper will apply for those on incomes between £150,000 and £180,000, gradually reducing tax relief on pension contributions until it is restricted to the basic rate. This restriction will apply to the individual's contributions and to any pension benefit funded (or eventually funded) by their employer. The rate of tax relief on pension contributions will be determined by where individuals lie on the taper.

To prevent bringing forward pension contributions that would otherwise have been paid after April 2011, a special annual allowance applies for the 2009/10 and 2010/11tax years for individuals with income of £130,000 or over. Tax relief above the basic rate is recovered from pension savings above an individual's special annual allowance by the application of the special annual allowance charge. An individual's special annual allowance is the higher of their regular pension savings and £20,000 (or in certain circumstances where contributions have been less regular than quarterly, £30,000).

Lifetime Allowance and Annual Allowance (BN34)

As announced in the 2008 Pre-Budget Report, the 2010/11 Lifetime Allowance of £1.8 million and Annual Allowance of £255,000 will continue to apply, with their rates held constant for a further five tax years, ie up to and including the tax year 2015/16.

A Treasury Order has been laid before Parliament today to put this into effect.

Changes to pensions taxation – NEST and unauthorised borrowing (BN35)

This measure will:
• allow the National Employment Savings Trust (NEST) to register with HMRC for tax purposes, and be subject to the same tax rules as other tax-registered pension schemes;
• remove the tax liability on any interest charges on late pension contributions made by an employer to qualifying pension schemes;
• provide a regulation-making power to deal with any unintended tax consequences that may emerge as a result of the implementation of NEST and the employer duties and compliance as set out in the Pensions Act 2008; and
• remove the tax charge on borrowing linked to the cost of establishing and operating a registered pension scheme, subject to conditions.
The amendments will have effect on and after the date that a Finance Bill introduced in the next Parliament receives Royal Assent.

Pensions Act 2008: employer duties

The Pensions Act 2008 places a duty on employers to ensure that their jobholders are active members of a pension scheme. The introduction of this 'automatic enrolment' duty is planned for 2012.

The Pensions Act 2008 also obliges the employer of a jobholder to make pension contributions to qualifying pension schemes. When the contributions are paid late the employer may, at the Pensions Regulator's discretion, be asked to pay interest to their jobholder's pension account.

Under section 369 of the Income Tax (Trading and Other Income) Act 2005, the jobholder would be taxed on any interest paid by employers to a jobholder's pension account. This tax charge on the jobholder will be removed.

Tax-efficient vehicles

Indexing Individual Savings Account limits from 2011 (BN28)

From 6 April 2011 and on an annual basis thereafter, ISA limits will be increased in line with the Retail Prices Index (RPI).

The annual increase will be based on the RPI figure for the September before the start of the tax year and, if the RPI is negative, the limits would be unchanged. The new annual limits will be rounded to the nearest multiple of 120 – this is to ensure increases to monthly savings ISAs are divisible by 12.

The cash ISA limit will remain at half the value of the stocks and shares ISA limit after indexation. This new approach will therefore allow the benefits of ISAs to be increased in real terms in future years. The ISA allowance for the 2010/11 tax year is £10,200.

Venture Capital Trust Schemes and Enterprise Investment Schemes (BN12)

Changes will be made to the operation of Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) schemes, effective from the date that the Finance Bill receives Royal Assent.

This means that VCTs will be able to be listed on markets throughout the EU/European Economic Area (EEA). The changes therefore expand the geographical scope of VCT and EIS schemes, as well as making additional classes of shares available. The tax treatment and operation of other aspects of these schemes remain unchanged.

Stamp Duty Rates and thresholds (BN24)

The new higher rate will apply to residential purchases where the effective date (normally the date of completion) is on or after 6 April 2011.

At present the highest Stamp Duty Land Tax (SDLT) rate of 4% applies to purchases where the consideration exceeds £500,000. A measure will be included in Finance Bill 2010 to add a new rate of 5% for transactions in residential property where the consideration for the transaction exceeds £1 million.

First time buyers (BN25)

Legislation in Finance Bill 2010 will introduce relief from SDLT for purchases of residential property at up to £250,000 where the purchaser or all the purchasers is/are first time buyers and intend to occupy the property as their only or main home. The new relief will be available for residential purchases where the effective date (normally the date of completion) is on or after 25 March 2010 and before 25 March 2012.

Capital Gains Tax (CGT)

The rate of tax for mainstream CGT remains at 18% and the annual exempt amount of £10,100 remains unchanged.

Entrepreneurs' relief (BN27)

Legislation will be introduced in Finance Bill 2010 to increase the lifetime limit on gains qualifying for entrepreneurs' relief from £1 million to £2 million. The change has effect for disposals on or after 6 April 2010.

Where individuals or trustees make qualifying gains above the previous £1 million limit before 6 April 2010, no additional relief will be allowed for the excess above the old limit. But if they make further qualifying gains after 5 April 2010 they will be able to claim relief on up to a further £1 million of those additional gains, giving relief on accumulated qualifying gains up to the new limit of £2 million.

The other rules for entrepreneurs' relief are unchanged. Gains qualifying for the relief will continue to be reduced by the fraction 4/9, leaving the effective rate of capital gains tax on these gains at 10%.


Inheritance Tax (IHT)

Nil-rate band (BN31)

The 2009 Pre-Budget Report announced that legislation will be introduced in Finance Bill 2010 to freeze the IHT nil-rate band limit for the tax year 2010/11 at the current level of £325,000. This will now be extended to cover the tax years 2011/12 to 2014/15.

Anti-avoidance

The remittance basis: relevant person (BN38)

The remittance basis is an optional basis of taxation available to individuals who are resident but either not domiciled or not ordinarily resident in the UK. Any foreign income or gains of an individual, which are remitted to the UK by way of a relevant person or for the benefit of a relevant person, are taxed on the individual.

A relevant person is widely defined and includes the individual, their spouse, civil partner, children and grandchildren under the age of 18. It also covers close companies and their subsidiaries in which such people are participators.

A relevant person is defined in Section 809M Income Tax Act 2007; this definition is being amended to clarify that a subsidiary of a non-UK resident company, which would be a close company if it was resident in the UK, will be treated as being a relevant person for the purposes of the remittance basis. This change comes into effect on 6 April 2010.

Review of HMRC powers, deterrents and safeguards: tackling offshore tax evasion (BN68)

Legislation is being introduced to provide greater penalties for taxpayers who fail to declare the full extent of their offshore income or capital gains. The penalty framework will work in the same way as it does currently, however the absolute level of the percentage used to determine the tax-geared penalty will be determined by the jurisdictions in which the failure to declare arises.

There are a number of factors which need to be assessed before determining the level of percentage, the outcome of which could result in the individual paying the level currently set or 1.5 or 2 times the current published percentage. This new penalty framework is expected to apply to the tax period commencing on or after 1 April 2011.

I hope you find this summary useful. The links below will take you to HM sites for further information.

HM Treasury

HM Revenue & Customs

Review your Will during Divorce & Separation

When couples get divorced (or a civil partnership is dissolved ) or have separated it is particularly important to review any existing Wills that are in place or to put in place a Will if there isn’t one.

The scenarios that follow offer some reason why:

Pre Divorce or Separation and a Will is in place:

Until a spouse is divorced (or a civil partnership is dissolved), property will still pass upon death under the terms of any will and, commonly, one spouse ( or civil partner) will have bequeathed the whole or a substantial part of his or her estate to the other.

Thus a situation could arise where assets pass to an individual whom a spouse ( or civil partner ) no longer wishes to benefit from their wealth.

Pre Divorce or Separation with no Will in place:

Where there is no Will, the rules on intestacy will apply. As such a large part of the intestate’s estate will pass to the surviving spouse including all personal belongings.

A separated spouse ( or civil partner ) may therefore inherit most of the deceased’s assets unless action is taken at the time of separation to reverse the position by executing a Will.

Post Divorce and a Will is in place:

Decree absolute is the final decree and marks the conclusion of the marriage. Under the current law, a divorced spouse ( or civil partner ) will be treated as if he or she predeceased the deceased person on the date of the divorce for all purposes.

A gift in a Will to a former spouse ( or civil partner ) will therefore lapse on divorce. This may possibly disinherit the children of a former marriage.

Similarly, the appointment of a former spouse as executor and trustee will be void unless the Will provides otherwise.

Should there be a wish to leave property to a former spouse, it should be borne in mind that the spouse exemption does not apply to divorced spouses and as such a gift may therefore be liable to inheritance tax.

Following the divorce, either or both former spouses may marry a new partner. Marriage revokes a Will unless the Will was made in contemplation of the new marriage.

Post Divorce with no Will in place:

Where no Will has been made and there are children of minority age involved it is not uncommon for a situation to develop where the assets of the deceased pass into trust for their benefit, wholly, but are under the control of the former spouse (as the legal guardian of the children).

The former spouse could appoint additional trustees (their new partner for example ?) should they wish to.

Similarly, the children of a new partner will have no rights under intestacy. However, if the children of a new partner are adopted, they will then rank equally with the children of the former marriage. This may well be in accordance with the wishes of those immediately concerned, but if other people, such as grandparents, have left property to `the children of X’ this will equally also include the adopted children.

So, the message we have is a simple one. Either review any Will you have in place or consider putting one in place if you separate and / or are getting divorced so that these changes in your circumstances and your future plans and objectives can be catered for.