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What is an adequate retirement income?

Written by admin on . Posted in Property, Wealth, Wills & Probate. No Comments on What is an adequate retirement income?

A leading pension think tank has examined this question – but the findings aren’t straightforward.

Over the years, there has been much focus on the tax treatment of pensions and ways to encourage greater saving for retirement. Arguably, there has been less attention paid to the question of how much income you will need once work ceases.

The Pension Policy Institute (PPI) recently published a paper examining what an adequate retirement income means today in dollar terms. The paper notes that the last serious effort to address the issue was undertaken by the Pensions Commission nearly two decades ago, leading eventually to the introduction of automatic enrolment. The PPI makes the following points:

  • Individuals, employers, the state and society generally all have differing views on what constitutes adequacy. For example, the state view is set by the Guarantee Credit element of Pension Credit (£177.10 a week for a single person and £270.30 for a couple).
  • Changes to the pensions landscape since 2000 have altered the retirement picture both positively and negatively. For example, the new state pension is higher than its basic state pension predecessor, but state pension age has increased (to 66 for men and women) and will continue to increase.
  • The demands made on assets originally saved to provide a retirement income have increased, for example:
    • For some people, there is a widening gap between leaving work and receiving their state pension, a situation exacerbated by pandemic-prompted early retirements.
    • More often now debts, including mortgages, will be carried over into retirement.
    • The shrinking of home ownership will see more retirees having to pay rent; and
    • There may be a need to support other family members – the Bank of Mum and Dad may not be able to close at retirement.
  • The traditional emphasis on retirement income ignores the need to deal with ‘personal financial shocks’, which are better addressed by considering retirement capital.

The PPI says that many people make their retirement planning decisions ‘without support’. It goes on to warn that “As a result, many people struggle to make pensions and savings decisions which offer them the best chance of both achieving their aspirations for retirement and protecting themselves against future risk.” Don’t let that be you – talk to us about assessing what an adequate retirement income means for you and how it can be achieved.

Photo by Diana Parkhouse on Unsplash

Leasehold shake-up on the horizon

Written by admin on . Posted in Law, Wealth. No Comments on Leasehold shake-up on the horizon

Ground rents for residential properties on long leases in England and Wales will soon be abolished, with further reform to follow. This first step in the government’s plan to reform leasehold law affects new leases. However, many homeowners will benefit immediately following a commitment made by two big players in the leasehold sector.

Government reforms

The Leasehold Reform (Ground Rent) Bill currently passing through parliament will remove ground rents for residential leasehold properties with leases of more than 21 years.

The next step, if the Government follows through with its intentions, will be to give leaseholders the right to extend a lease to a maximum term of 990 years, with no ground rent payable. This term is more than 10 times the current standard 90-year extension. An online calculator will be introduced to make it simpler for leaseholders to find out how much it will cost them to extend.

Persimmon and Aviva

The Competition and Markets Authority (CMA) has been investigating the leasehold sector, with doubling ground rent clauses of particular concern. Also, many homes that should ordinarily be sold as freehold have been mis-sold as leasehold. Crucial changes have recently been agreed by housebuilder Persimmon and insurance company Aviva (which buys leaseholds from housebuilders), including:

  • Aviva will remove leasehold clauses that double ground rent every 10 to 15 years, with leaseholders refunded for past increases.
  • Persimmon will grant leaseholders the chance to acquire the freehold of their property at a concessionary price (capped at £2,000), and refund homeowners who have already bought their freehold at a higher price.

As yet there is no date for the implementation of the new leasehold rules. The CMA is continuing its investigations into several other housebuilders and investors in freeholds. The Leasehold Reform (Ground Rent) Bill doesn’t help existing leaseholders, but the hope is that that the recent move by Persimmon and Aviva will send a clear signal without the need for costly court cases.

Photo by Michael Dziedzic on Unsplash

Unhappy families – challenging inheritance issues

Written by admin on . Posted in Inheritance Tax, Lasting Will & Testaments, Wealth, Wills & Probate. No Comments on Unhappy families – challenging inheritance issues

The outcome of a recent High Court case is a warning for anyone challenging a will. 

As inheritances become more valuable, the number of disputes about wills have increased. Court cases rose by almost 50% to 188 in 2019 compared to the previous year according to the latest Ministry of Justice figures. Many more are settled or abandoned along the way. The cases which do reach the High Court tend to be those involving the ‘right’ mix of large sums and elevated emotions. An example that appeared in April 2021 is Miles v Shearer.

Tony Shearer died in October 2017, leaving nearly all of an estate worth about £2.2 million to his second wife, Pamela. His two daughters, Juliet and Lauretta, born in the early 1980s to his first wife, received nothing. This prompted them to make a claim under the Inheritance (Provision for Family and Dependants) Act 1975.

Lauretta wanted a payment from her father’s estate to cover:

  • The cost of a home, so that she could move out of her mother’s property;
  • Fees for training as a dog behaviourist, to enable her to support herself; and
  • The expenses of caring for her autistic daughter.

Juliet sought funds to:

  • Reduce her mortgage by about £245,000, so that it would become affordable for her on a repayment basis: and
  • Buy out her ex-husband’s share of a flat in which she was living – about another £100,000.

In 2008, shortly after his divorce, Tony gave £177,000 to Juliet and £185,000 to Lauretta. At the time he made clear there would be no further financial support to his daughters. This was an important factor in the case as it reinforced the decisions Tony made in the creation of his will.

The judge rejected the claims of both daughters, stating that neither had established a need for maintenance to be funded from their father’s estate. Two lessons can be drawn from the case:

  • Make your intentions clear in advance to try to reduce potential disappointment and the likelihood of legal action when a will is finally read.
  • Tony’s will achieved what he wanted to happen. Had he left matters to English intestacy laws, Pamela would have received only £125,000 and personal chattels outright, with Juliet and Lauretta immediately jointly receiving half the residue (less about £285,000 of inheritance tax).

Photo by Morgan Housel on Unsplash

 

Business Relief, IHT and Holiday Homes

Written by admin on . Posted in Inheritance Tax, Tax, Wealth. No Comments on Business Relief, IHT and Holiday Homes

There are various tax advantages to a rental property being treated as a furnished holiday letting, but inheritance tax (IHT) business relief is generally not one of them. Even though the law supports HMRC’s view, property owners regularly appeal against their refusal to give relief.

The tax advantages

The most immediate benefit is full tax relief for finance costs. For normal rentals, relief is restricted to the basic rate, so a higher-rate taxpayer with a £250,000 mortgage at an interest rate of 2.5% will receive extra tax relief of £1,250 annually.

When it comes to disposing of a property, business asset disposal relief and holdover relief will be available.

Business relief

Some £225,000 in IHT was at stake in the recent appeal by the executors appointed by Sheriff Graham Loudon Cox against business relief being denied. Although the late taxpayer worked hard to ensure guests enjoyed their stay in his three furnished holiday flats, the First Tier Tribunal dismissed the appeal, finding that there was nothing exceptional about the business to elevate it beyond being one of mainly investment.

And that is the essential problem. The level of additional services provided must be sufficient that the activity is considered as non-investment. This needs to be more than just:

  • cleaning;
  • providing heating and hot water;
  • a welcome pack; and
  • being on call to deal with queries and emergencies.

These are considered as simply incidental or ancillary activities. The extra services which would have helped the appeal, such as dog-sitting, childminding, transport, breakfast and supper, were not provided to guests with sufficient regularity. Owners of holiday lets could consider making use of the CGT reliefs by gifting furnished holiday property to the intended beneficiaries during their lifetime. The property then drops out of charge to IHT after seven years.

Details about the reliefs available for furnished holiday lettings, and the qualifying conditions, can be found here.

Photo by Outsite Co on Unsplash

Wealth Divide Increase Through Inheritance

Written by admin on . Posted in Inheritance Tax, Property, Stamp Duty, Tax, Wealth. No Comments on Wealth Divide Increase Through Inheritance

Research by the Institute for Fiscal Studies provides a stark warning of how important inheritances are going to be for younger generations in terms of both lifetime income and wealth.

Wealth passed down from one generation to the next is fast becoming the most important determinant of how well off a person will become, with those born in the 1980s projected to inherit almost twice as much as those born in the 1960s. The average inheritance for those born in the 1980s will be worth 16% of their lifetime (non-inheritance) income. One in ten can expect to receive more than £500,000, and it will come as no surprise that graduates generally have wealthier parents.

Security comes from inheriting property

With a potential £1 million exemption from IHT, your inheritance may well be tax-free if you inherit the family home. Depending on your circumstances, you may then be able to live mortgage-free or enjoy rental income.

Be warned, however, that the inequalities created by inheritances could see a wealth tax imposed at some point.

Struggle for those without family funds

Without parental help, it is becoming increasingly difficult to get a first step on the property ladder. The temporary stamp duty cut should have helped, but any saving has been wiped out by a surge in property prices. Despite this, there is better news:

  • A new government guarantee scheme has been launched, alongside the return of 95% mortgages. Mortgage rates are of course lower for those who can find a 10% deposit.
  • The latest version of the help to buy equity loan scheme means you can borrow up to 20% (40% in London) towards the cost of a newly built home, so a smaller mortgage is then required.
  • First-time buyers will again have a stamp duty advantage later in 2021 once the temporary reliefs come to an end.

Guidance on help to buy, including the equity loan scheme, is available on the government website.

Photo by Elena Mozhvilo on Unsplash