BR Report 2019

Considerations for investment / Probate fees 38 39 Overfunding pensions signals opportunities When it comes to pensions lifetime and annual allowances, two things have become crystal clear this year: There is a lack of awareness of these pensions changes that is not going away As we suspected, the restrictions are leaving individuals with excess funds that they want to safeguard for later life While pension freedoms introduced in 2015 have made many pensions IHT free (if the pensioner dies under the age of 75), the caps on annual and lifetime contributions come with painful penalties of up to 55% – depending on whether the excess is taken as a pension or a lump sum. So, on the one hand there is an incentive to pour as much as a client can afford into pensions because of their lifetime and post-death tax benefits. On the other, this has been severely curtailed in recent years, with the LTA slashed to £1,055,000 and the AA down to £40,000 (reducing to £10,000 for those earning £200,000 a year or more). The statistics now prove that there are hundreds of millions of pounds of excess cash looking for a tax-efficient home annually. In 2016/17 the total value of pension contributions exceeding the AA and to which penalties apply, was £517 million (from a total of 16,590 individuals). This is over three times the previous year’s £143 million 32 . Meanwhile, the penalties derived from those breaking the LTA in 2016/17 reached £102m (applicable to 2,120 individuals), up from £66 million in 2015/16. According to some research, this is just the tip of the iceberg, finding that 290,000 people have already breached the LTA, with a million further workers who are not currently over the LTA likely to breach it unless they take action 33 . You could add significant value to your client relationships by asking them about their pension contributions. This could not only prevent costly penalties, but also identify planning opportunities. Where clients are keen to build capital for the future, particularly if IHT is a client concern, or if they have left it late to consider estate planning outside of their pension, BR could be a strong option. Investment management and advice trade association perspectives on using BR Business Relief has been available since tax legislation in 1976. Once the qualifying assets have been owned for two years they can be passed on free from inheritance tax on the death of the asset owner. The assets covered could be farmland, forestry, trading business and certain AIM quoted businesses. Using Business Relief allows assets to benefit from the relief faster than using trusts or gifts and, most importantly, it can be done without the owner losing control over the capital as the transaction is carried out in their name. They retain the benefit of the asset, with the intention of passing it on, but the person receiving the asset after death is not faced with an inheritance bill if the relief conditions are met. However, this type of tax relief is complex and specialist. There are a range of limits and exemptions and different stages so it is vital that someone thinking of using these reliefs gets proper professional advice. Advisers must encourage clients to make the time to understand their own financial circumstances and engage sufficiently to ensure they can do their job effectively and provide suitable advice. For an adviser, it is essential to properly understand the circumstances of your client. For example, a client may wish to leave assets to their family and friends or to charity but an adviser must also ensure their client’s financial needs in this world are met too and the advice they give should take into account how the client could meet any changes in their future circumstances. It’s not unreasonable that a client may need extra medical care or to adapt their home in the future even if this is not evident at the time of the advice. The adviser should reasonably assess if it is the best option to commit capital in such a way that the decision is difficult to reverse at a later date if they do require the benefit of funds that they had previously planned not to access. Suitable advice should always take a client’s full circumstances into account and try to take a longer- term view, pre-empting some of the needs the client will have in the future. Of course, the adviser can’t know in advance what those specific changes in circumstances might be, but they ought reasonably to factor in changes such as if the client were to be unwell or retire differently to how they expect at the time of the advice. Consideration must also be given to whether or not they have other financial resources they can call on separate to the assets being considered for IHT relief purposes. It’s important to bear in mind that IHT relief is a specialist area that is not suitable for everyone, which is where the skills of a qualified and suitable adviser can add value and give peace of mind. Desmond FitzGerald Senior Policy Adviser at PIMFA Considerations for Investment / Thought Leadership In 2016/17 16,590 individuals made a total of £517 million worth of pensions contributions in excess of the pensions lifetime allowance. “With recent market volatility we’ve seen advisers focussing on asset-backed portfolios focused on capital preservation. There had been a noticeable increase in advisers looking into the underlying investments in detail. At TIME we recognise the importance of offering full transparency around our research process and investment criteria.” — HENNY DOVLAND, SENIOR BUSINESS DEVELOPMENT MANAGER, TIME INVESTMENTS