Estate Planning Guide

9 8 THE ESTATE PLANNING LANDSCAPE THE ESTATE PLANNING LANDSCAPE £2 earned over this limit until it is reduced by £30,000 to £10,000 per annum for those earning £210,000 or more. Where pension savings exceed the AA, an AA charge applies at marginal rates of Income Tax (IT). Currently, unused AA from pension input periods ending in the three previous tax years can be carried forward and added to the annual allowance for the current tax year. (From 2016/17, all pension input periods are concurrent with the tax year.) Those who are “taking benefits” – who have flexibly accessed their pension savings – are subject to a reduced AA, called the Money Purchase Annual Allowance (MPAA) (reduced from £10,000 to £4,000 with effect from 6 April 2017). This is designed to prevent people from recycling their pensions and the tax reliefs they provide by withdrawing cash from their pots and then claiming tax breaks on new contributions. Unused MPAA cannot be brought forward from previous tax years, but individuals can still recycle annuity income into pension contributions using various methods. However, exceeding the MPAA leads to the reduction of the Annual Allowance for any other pension arrangements to £30,000 (the “alternative AA”) plus carry forward of unused AA. This will incur an MPAA charge at the individual’s marginal rate of IT on the excess over the limit. Social Care Many people will need care and support as they age. Paying for this care can be a concern for many people; if someone is still living in their own home, or in a care home, they will often pay for the costs of their own care and support, and the local authority may also contribute. This depends on an assessment of the person’s income and other assets (such as savings and income from a pension). Anyone with funds above the savings and income threshold, currently £23,250 in England and Northern Ireland, £26,250 in Scotland and £24,000 (care at home) or £40,000 (care in a care home) in Wales; is expected to pay for their own care. (The value of their home may be taken into account, depending on the care required and whether or not other parties live there.) Generally, if their savings or income are below the threshold, the local authority should fund their care, either partially or fully. There is usually an upper limit on how much a local authority will spend on an individual’s care home fees. The average local authority rate is £461 per week, whereas the average cost of a care home in England in 2016 was £537 a week. This suggests that some contribution to care costs by the person receiving the care is very common (although the local authority has a duty to meet the assessed care needs of the person, even if these needs take the local authority above its usual price limit). Professionals need to be aware of recent technical developments. For example, changes to pensions mean that some individuals can now only save up to £4,000 per year into their pension without incurring penalty charges. Pension Changes THE LIFETIME ALLOWANCE The lifetime allowance for pension contributions increased according to the Consumer Prices Index from April 2018 to £1,030,000 (from £1,000,000). This equates to the maximum amount an individual can have in their pension without facing a tax penalty. The charge for breaching this limit is 25% if the excess is taken as a pension or 55% if it is taken as a lump sum. THE ANNUAL ALLOWANCE (AA) This is currently £40,000 for those with an “adjusted income” (including pension contributions) of up to £150,000 p.a. The allowance is then reduced by £1 for every Recent technical developments 1.2 Clearly, this is a concern for an ageing population and a heightened incentive to ensure that estate planning is undertaken. The average stay in a care home is currently two and a half years. For many, factoring that into their preparations for later life, along with the savings and income threshold, will inevitably impact their estate planning strategies, particularly in relation to retaining access to their wealth. Against this backdrop, the FCA is actively encouraging professional stakeholders to urge consumers to plan ahead and to better understand the triggers which improve financial resilience. The existing Annual Allowance of £40,000 also applies to Defined Benefit schemes and a member of such a scheme is allowed to accrue benefits totalling up to £40,000 per tax year without incurring tax charges as long as the amount contributed to any Defined Contribution schemes does not exceed £10,000 in any tax year. Those with Capped Drawdown pensions can move to Flexi-Access Drawdown arrangements if they wish, although this will reduce the Annual Allowance for future contributions from £40,000 to the MPAA. Lasting Powers of Attorney – Discretionary Investment Powers In its publication, ‘Make and Register your Lasting Power of Attorney: A Guide (LP12)’ of 7 September 2015, the Office of the Public Guardian provided suggested wording for inclusion in a financial LPA where the donor wishes to authorise attorneys to delegate investment management decisions to a bank. Where the donor already has assets that are managed by a bank, the OPG suggests that the wording of the donor’s authorisation should be checked with the bank concerned before the LPA is registered. In addition, most Lasting Power of Attorneys (LPA) do not give the attorney express powers to delegate investment decisions. Whilst an attorney’s duty is to act in the client’s best interest and various parties are seeking clarification from the OPG, this now suggests that where investments are managed by a discretionary investment manager, appropriate wording needs to be included to avoid the risk of non-compliance. £537 /week £461 /week care home local authority AVERAGE CARE HOME COSTS VS. LOCAL AUTHORITY PROVISION (ENGLAND) ANNUAL ALLOWANCE £40,000 £35,000 £150,000 £160,000 £170,000 £180,000 £190,000 £200,000 £210,000 £30,000 £25,000 £20,000 £10,000 £5,000 £0 £15,000 Increasing choice and complexity for older consumers as a result of pension freedoms. OCCASIONAL PAPER 31, FINANCIAL CONDUCT AUTHORITY, SEPTEMBER 2017