MAKE MONEY ONLINE POSTS: 10/15/18

الاثنين، 15 أكتوبر 2018

10 things you need to know about your pension

Your pension is one of the most tax-efficient ways to save money over the long term. But do you know how to make the most of these benefits? Here are some useful pointers

1 You get tax relief when you pay into your pension

“The big advantage of investing in a pension is that you benefit from tax relief on your contributions, at your marginal rate of income tax,” says Patrick Connolly, a chartered financial planner at Chase de Vere.

This is effectively a refund of the tax you have paid on your earnings. It means basic-rate taxpayers – who get 20% relief – pay £80 into their pension and end up with £100 to invest. Higher-rate taxpayers get relief at 40%, while additional-rate taxpayers get 45%, meaning they only pay £60 and £55 respectively to put away £100.

Basic-rate taxpayers get contributions topped up automatically, but higher- or additional-rate taxpayers should check whether their scheme is a ‘net pay arrangement’, which applies tax relief based on your highest rate of income tax on your behalf, or whether tax relief is ‘applied at source’. If it’s at source, only 20% relief will be applied automatically and you’ll need to claim the further 20% or 25% back via your tax return.

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2 Salary sacrifice can boost your pension

Some employers let you pay pension contributions from your gross salary. This means you pay before tax has been deducted and won’t pay national insurance (NI) on your pension contributions. This NI saving enables you to boost your pension contributions without it affecting your take-home pay.

However, this does lower your formal salary, which can affect employee benefits such as life insurance (which is based on a multiple of your salary) and state benefits such as statutory maternity pay. It may also limit how much you can borrow for a mortgage, so it’s worth discussing the implications with your employer first.

3 There’s an annual limit on pension contributions

The government’s generosity on tax relief on pensions does have a limit. You can currently pay 100% of your earnings into a pension, subject to a maximum of £40,000 a year. If you exceed it, you’ll have to pay a charge.

Higher earners may also be stung by the taper allowance, which reduces your annual allowance by £1 for every £2 of income over £150,000. This reduction is limited to £30,000, meaning anyone earning over £210,000 will see their annual allowance capped at £10,000. If you exceed the annual allowance, the good news is that you can carry forward any unused allowance from the past three years.

4 Watch out for the lifetime allowance

As well as the annual allowance, there is also a limit on how big your pension can get over your lifetime. If the total value of your pensions exceeds £1.03 million, you’ll face an extra tax charge when you access your money, turn 75 or die.

“If the lifetime allowance is breached, the pension value in excess will be taxed at 25% if withdrawn as an income, or 55% if taken as a lump sum,” says Mr Connolly. This is on top of the income tax you’ll also pay.

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5 You can pay into your partner’s pension

If you are close to hitting the annual or lifetime allowance, you can always pay into your partner’s pension to ramp up your combined retirement savings. Just bear in mind that they also can’t receive tax relief on pension contributions that exceed their annual income.

So if your partner earns £15,000 a year, you can’t put more than that into their pension. If they don’t work or pay tax, then they can still contribute up to £3,600 a year into a pension.

“To achieve this £3,600 figure, you only need to invest £2,880, as the payment will still benefit from 20% basic tax relief,” Mr Connolly explains.

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6 You get 25% of your pension tax-free

Once you turn 55, you can access your pension and take 25% tax-free. How withdrawals are taxed depends on whether you have accessed your pension and decided to draw an income from it.

“If you want to take ad-hoc withdrawals from your pension, you will need to check whether you are in ‘flexi-access drawdown’ or ‘uncrystallised funds pensions lump sum’ (UFPLS),” says Helen Morrissey, pensions specialist at Royal London.

“If you are in flexi-access drawdown, you have the facility to take out the 25% tax-free cash in one go – with all subsequent withdrawals taxed. However, if you are in UFPLS any withdrawals will be 25% tax-free with the remaining 75% taxed.”

When it comes to UFPLS, you may also be stung by emergency tax. If this happens, you will need to contact HMRC to apply for a tax refund to ensure you get the money back as soon as possible.

7 You pay income tax on pension withdrawals

Aside from the 25% of your pension that can be withdrawn tax-free, the rest of your pot is subject to income tax at your marginal rate.

“Withdrawals above the 25% tax-free element will be added to your income for that particular tax year,” says Mr Connolly.

At the very least, you’ll be taxed at your current income tax rate, but you could also find that the extra income from your pension pushes you into a higher tax band.

8 Delay accessing your pension to reduce your income tax bill

Given that you pay income tax on your pension withdrawals, it may make sense to delay accessing your pension until your income falls to a lower tax threshold – perhaps after you retire from your job. It’s always wise to consider your current income tax rate, and whether it has the potential to fall before you make a withdrawal from your pension.

It’s possible for some retirees to structure their finances to keep their income below the personal allowance – £11,850 in the 2018/19 tax year – to ensure they don’t pay income tax. Also remember you can top up this income with money saved in Isas, as this money isn’t taxable.

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9 Make the most of tax relief for as long as you can

As soon as you dip into your pension, you will be hit by the Money Purchase Annual Allowance. This restricts how much an individual can put into a pension and receive tax relief to just £4,000 a year. This is an important consideration if you are planning to boost your pension in the final years of your working life, perhaps topping it up with bonuses or any inheritance.

10 Use your pension for inheritance tax planning

“Pensions aren’t counted against someone’s estate when it comes to inheritance tax,” Ms Morrissey explains.

This means your pension can be used as an important weapon in your tax-planning arsenal.

“If the person dies under the age of 75, the recipients will receive any unspent pension tax-free.

If the person is over the age of 75, the recipients will be taxed at their marginal rate – so either 20% or 40% depending on how much they earn,” she adds.

Ruth Jackson is a freelance personal finance journalist who writes for The Times, MoneyWeek and LoveMoney

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Legal problems? Here’s who you better call

Are you facing a legal issue and don’t know where to turn? Perhaps your landlord wants to evict you or you’re facing unfair dismissal at work. Here’s how to access legal advice that won’t break the bank

If you are facing a legal issue, you may get a rude shock once you receive the bill: legal fees can escalate if you aren’t careful.

According to official HM Courts and Tribunals Service figures, guideline hourly rates for a solicitor with four years’ experience range from £177 to £296, depending on where you live in the UK.

In many cases, your decision to take legal action is entirely optional: it is ultimately down to you to decide whether or not to sue that dodgy kitchen fitter. However, in some instances there will be more at stake than lost cash, so it is essential to get the right legal advice. This is particularly relevant if you have debt problems, are being illegally evicted or have been unfairly dismissed by your employer.

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The good news is that if you find yourself in a legal quandary, you won’t necessarily have to shell out thousands of pounds for help: affordable advice is available.

Do you have legal cover?

One of the first questions that any legal professional is likely to ask when you first approach them is: ‘Do you have legal expenses insurance?’ Even if you think the answer is no, it’s always worth checking if you have it as a bolt-on to another policy, such as your home insurance.

It is often included in quotes at a cost of £25 to £30 a year, so homeowners may have cover but not be aware of it. Plans typically cover legal issues relating to your home, your job, death or personal injury. However, other aspects such as legal advice for a divorce are unlikely to be included.

“It doesn’t cover all types of issues, but the ones it covers can mean that individuals can pursue a claim which they ordinarily would not have been able to afford to do,” explains Katie Whitehead, a solicitor at Ramsdens Solicitors in Yorkshire.

The big catch is that you will have to use a solicitor employed by your insurer and it will usually only fund your case if it thinks it has more than a 50% chance of success.

Similarly, if you’re in a trade union you might be covered if your dispute is employment related, but, again, it will probably only fund your case if it thinks you are likely to win.

Check if you have legal expenses cover as a bolt-on to another policy

Free legal clinics

Although Legal Aid has been cut drastically in recent years, it is still worth checking if you’re eligible – as help remains available in certain circumstances.

If you don’t qualify for Legal Aid, charity Citizens Advice should be your next port of call, says James Sandbach, director of policy and external affairs at LawWorks, a charity that connects people with free legal advice.

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“Often, Citizens Advice offices either run clinics or have close relationships with pro bono clinics. They also know whether some firms may be able to offer cut-price services to people who might be able to afford some advice.”

There are also free legal clinics run by law centres and other groups, which can provide advice and may be able to refer you to a solicitor or barrister who can represent you on a pro bono basis. (Lawworks.org.uk has a comprehensive listing.)

If you’re hoping to access advice via a free clinic, it helps to be organised.

Ms Whitehead, who also volunteers at a legal clinic giving advice on landlord and tenant disputes, says: “These sessions can be very busy and are on a first-come, first-served basis, so it is beneficial to arrive early to have a better chance of being seen. When the sessions are busy, the amount of time we can spend with each individual can be limited to around 10 to 15 minutes.”

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She adds that people need to be realistic about their expectations. “Some queries can be dealt with there and then, but for some issues the purpose of the sessions is to offer guidance on the steps individuals can take and to offer general advice on what they can do or what action they can take.”

For clinics in the LawWorks network, Mr Sandbach says family law issues see the highest demand, followed by employment, housing, immigration and asylum problems.

Cases about unpaid salaries have become such an issue that LawWorks recently set up an unpaid wages project. Claims for unpaid wages are often low value, and many people were deterred from pursuing them after Employment Tribunal fees were introduced in 2013.

After these fees were declared unlawful in July 2017, government figures showed a huge increase in cases: claim numbers rose from 549 last July to 2,926 the following month.

If you are thinking about suing a company, find out if it is a member of an ombudsman scheme. Making a complaint via an ombudsman is free, while pursuing a case through the small claims court will incur fees.

Consider hiring a barrister as they can be cheaper than a solicitor

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If you cannot get the advice you require from these services, you may need to instruct a solicitor. For example, if you need tailored advice or you are not eligible for Legal Aid.

An introductory meeting with a solicitor will typically last 30 minutes. It is worth noting that some law firms charge for this appointment.

“These first meetings will frequently cover just the basics of the issue or matter at hand, and are aimed really at helping people to understand their legal position, work out what they want to do next, and give an approximate idea of the potential legal costs and timescales involved,”explains Kirsten Tomlinson, associate solicitor at Maguire Family Law in Manchester.

Talk to a few solicitors to compare prices and service levels. The Law Society can help you to find specialist solicitors in your area (see below box).

You may also want to consider hiring a barrister instead of a solicitor. It comes as a surprise to many, but barristers can actually be cheaper than solicitors as they are typically self-employed.

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“Barristers have sets of chambers,which are effectively a form of collective,” says Philip Newman, a barrister at 42 Bedford Row chambers in central London.

“They club in to pay for the administrative cost of clerks. Barristers tend not to have personal secretaries, so you have savings there in terms of the infrastructure over a firm of solicitors.”

Not all barristers can be hired directly by individuals, but you can find those who can on MyBarrister and via the Bar Council’s Direct Access Portal. If you work with a barrister, it’s likely you will need to do more of the administrative work involved in the case yourself. But if you’re able to do so, this can provide extra savings when compared with a solicitor.

Whatever your legal issue, it’s crucial you get advice as early as possible so your situation doesn’t escalate and you don’t run out of time to make a claim. This is particularly true if you’re trying to access free help, as demand is high and services are limited.