Building your NEST egg?

Britain’s population is ageing, yet many individuals are not saving enough to provide themselves with a comfortable retirement. Recognising that this situation was unlikely to improve on its own, the government introduced the Personal Account, a simple low-cost pension scheme that will begin enrolment in 2012.

What is NEST?
More recently, the scheme has been rebranded as National Employment Savings Trust (NEST). NEST is an independent pension scheme run by a trustee body, NEST Corporation, for the benefit of its members. It is intended to help individuals boost their savings for retirement and is likely to be delivered online.

NEST for employers
At present, 750,000 private-sector employers do not offer a workplace pension scheme. Under the new rules, employers will have to enrol all eligible employees into a qualifying pension scheme and then contribute to that scheme. Employers of all sizes and in all industries can use NEST, which can be used on its own or alongside other workplace schemes. Employers are not obliged to use NEST, but they do have to offer a scheme that is at least as good as NEST if they decide not to take up the option.

NEST for employees
Under the new rules, all qualifying employees will be enrolled automatically into their default workplace pension scheme and then contribute to that scheme, although individuals are able to opt out if they wish. Once enrolled, they are likely to be able to choose how their money is invested from a range of investment funds and if they leave their job or move to one where the employer does not use NEST, they can opt to continue saving in that scheme. Self-employed individuals are also able to join NEST.

Contributions
The maximum annual contribution into NEST is £3,600 (index linked from 2005), so there is scope for employers and employees to make additional contributions if they wish to top up the minimum contributions. With a few exceptions, transfers in and out of NEST are not permitted, although this will be reviewed in 2017.

A relatively positive reaction so far
So far, NEST appears to have been relatively well received by financial advisers and consumer groups. In particular, Which? personal finance campaigner Doug Taylor has commented, “This is another important milestone… consumers want a brand they can trust working for them and the best return they can get for their contributions. We believe that NEST will deliver that.”

Will NEST deliver the intended result? only time will tell ……

Pension Planning – Concept Financial Planning

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Inheritance Tax – The Forgotten Battleground

Not so long ago Tory promises of an increased nil rate band prompted the then Chancellor, Alistair Darling, to introduce new legislation to effectively double the nil rate band for married couples and those in civil partnerships. Inheritance Tax was an important battleground but, as house price growth went into reverse and stock markets fell, it became less of a vote winner.

With a coalition government, compromise is necessary from the outset and inevitably both sides have to sacrifice manifesto pledges. The good news is that the Liberal Democrat Mansion Tax has not survived; the bad news is that neither has the promised £1million nil rate band. In fact, the nil rate band remains frozen for the next 4 years at £325,000. This means more and more estates will fall back into the Inheritance Tax trap. A £650,000 estate increasing in value by 3% per year (probably less than the rate of inflation) will mean the tax bill faced by beneficiaries will increase by approximatley £150 per week over the next 4 years.

So what can be done?

A few years ago including a trust provision within the Wills of married couples was standard practice since it allowed both spouses to utilise their nil rate bands without jeopardizing the security of the survivor. The introduction of the transferable nil rate band effectively rendered such tax planning redundant but, with a static nil rate band, such planning again has appeal. If assets are hived off to a trust on the first death, any future growth falls outside of the estate of the surviving spouse. By contrast, assets passed directly to the surviving spouse effectively means the survivor inherits an extra Nil Rate Band. If the value of the estate increases by 3% a year and the nil rate band stays static, the trust saves £22,000 in tax over 4 years. Of course, the Inheritance Tax position needs to be balanced against possible increases in income and capital gains tax but these taxes too can be mitigated with good advice.

Having reviewed your Wills to ensure maximum tax efficiency, it is then time to look at further planning which can be undertaken now.

Lifetime planning falls neatly into three strategies: reduce; convert; insure.

Gifts can reduce the value of an estate but of course, tax savings should not be made at the expense of your financial security. Although there are exemptions, large gifts need to be survived by 7 years.

By contrast buying assets which qualify for Business Property Relief or Agricultural Property Relief delivers tax savings after just 2 years but the tax advantages need to be weighed against the investment risks.

If neither of these strategies is practical, the final option is to insure against the liability. This is not a solution but it does at least mean that your beneficiaries have the means to pay the tax bill.

Inheritance Tax is a complex area and one size certainly does not fit all, please take professional advice.