Wednesday, 29 July 2015

Managing Debt

Debt, even a little, can cause lots of problems both financially and emotionally but there are steps you can take to try and reduce or even eliminate debt from your life. If you just have a little debt, keep up your payments and make sure it doesn’t get out of control. If you have a lot of debt you must put more effort into paying it off.

The first thing to do is list all your debts including who do you owe, total amount of the debt, interest rate, monthly payment, and payment due dates. Refer back to your debt list often, especially as you pay bills. Update your list every few months as the amount of your debt changes.

Late payments make it harder to pay off your debt since you’ll have to pay a late fee. Miss two payments in a row and your interest rate and finance charges will usually increase. Use a diary system on your computer or smartphone and an alert to remind you several days before your payment is due. If you miss a payment, don’t wait until the next due date to send your payment. Instead, send your payment as soon as you remember to.

At least make the minimum payment. Of course, the minimum payment doesn’t help you make real progress in paying off your debt. But, it keeps your debt from growing. When you miss payments, it gets harder to catch up and eventually your accounts could go into default.
If you cannot afford to make all of your payments then speak to the people or companies that you owe money to. Explain your situation and try to negotiate a new payment plan or ask them to reduce the interest being charged.

Decide which debts to pay off first. Credit card debt is the best candidate for priority repayment. Of all your credit cards, the one with the highest interest rate usually gets priority because it's costing the most money. Use your debt list to prioritise your debts in the order you want to pay them off. You can also choose to pay off the debt with the lowest balance first. You may want to consider consolidating your debts into a more affordable payment.

Budget well and use an emergency fund to fall back on. Without access to savings, you’d have to go into debt to cover an emergency expense. Even a small emergency fund will cover little expenses that come up every once in a while. First, work toward creating a small emergency fund. Once you have that, make it your goal to create a bigger fund, like six months of living expenses.

Keeping a budget helps ensure you have enough money to cover all your expenses each month. Plan far enough in advance and you can take early action if it looks like you won't have enough money for your bills this month by speaking to the creditor in advance of missing a payment. A budget also helps you plan to spend any extra money you have left after expenses are covered. You can use this extra money to pay off debt faster.

Try looking for additional sources of income. If your debt payments are unmanageable then either reduce your regular expenditure or try to find a little extra work, a part time job, online work or sell some belongings to help pay off that debt. In very extreme circumstances it may be even be best to clear the decks and start again with an insolvency order.

Doing nothing is not the answer to becoming debt free. Follow the advice above and hopefully you should start to see things getting brighter.

Friday, 10 July 2015

QROPS vs SIPP - Updated July 2015

As a follow up to my previous post regarding the new UK pension rules we are now in a position to understand exactly how QROPS will change to fit with the new UK rules so I have updated this accordingly:

As you are probably aware there have been a lot of changes to the UK pensions legislation throughout 2014/2015. The proposed changes to UK pensions and changes already made, such as removing the requirement to buy an annuity and the removal of the 55% "death tax", means that QROPS (Qualifying recognized overseas pension scheme) could have lost some of their appeal for clients compared to a UK based pension such as a SIPP (Self invested personal pension).

A QROPS and a SIPP are very similar, even more so than ever, however, for people residing outside the UK, in particular those intending not to return and expats with large (£1m +) UK pensions, a QROPS can still offer some advantages over a SIPP.

Below are the key questions that a client should consider when discussing their UK pensions and particularly when deciding between QROPS and SIPPs. It should help you to understand the key differences in a simple format.

As always, pensions are a very complex area and before you make a decision about any financial product you should seek independent advice. Ideally try to find an adviser who is FCA regulated in the UK and actually able to recommend a SIPP and give regulated advice on final salary / defined benefit schemes (these transfers can only be signed off by a suitably qualified FCA regulated pensions expert).

What Benefit applies to you?New Rule – Contact us for more information
PENSION FUND FLEXIBILITY – As of 6th April 2015, if you are aged 55 or more, you can have 100% access to your investment based pension (Income taxes will apply in the country you are resident in) . This does not apply to Defined Benefit schemes.Deminimus limit removed / Trivial commutation is no longer necessary for UK pensions.

INCOME INCREASE - If you are seeking a tax efficient high income as against large lump sum then this is possible, although beware having no fund left!Unlimited income options available once you are aged 55 or over, taxable in the UK or under the DTT with the country you are in.

IS THERE A 45% or 55% DEATH TAX in the UK under 75? - From 6th April 2015, the ANSWER IS "NO", if upon death your investment based pension funds are passed to anyone’s pension; there is no charge, no age limit, and is irrespective of whether you have taken any benefits. If when you die you are UNDER 75, the beneficiaries can choose to take the entire fund as a lump sum tax free in the UK.

Although QROPS are similar, the main issue is that distributions from QROPS may not be recognised as tax free in the country of your beneficiaries!
There is a 100% return of a DC fund, free of any UK tax as long as the fund is not distributed before 6 April 2015.

This will apply to someone dying before the 6 April 2015 as long as the fund remains untouched until after that date. If aged over 74 see RULE BELOW.

Does not include public and private final salary (defined benefit) schemes.

IS THERE A 45% DEATH TAX CHARGE in the UK over age 74? - The ANSWER IS "NO", if your investment based pension funds are passed to anyone’s pension, irrespective of whether you have taken any benefits. We are finding people are being mis-led about this option!

QROPS offer the same flexibility and options, but QROPS allow a full transfer out without applying any 45% tax charge, BUT the main issue is that distributions from QROPS may not be recognised as tax free in the country of your beneficiaries!
If you are 75 or over when you die, there is a 100% transfer of a DC fund, free of any UK tax, to any other qualifying pension of another individual.

The beneficiaries can choose to take the entire fund as a lump sum, but until 5th April 2016, a 45% tax charge will apply.

From 6th April 2016, the 45% tax charge is removed and the recipient / beneficiaries are charged at their own rate of income tax.

Does not include public and private final salary (defined benefit) schemes.

QROPS vs SIPPs at point of death - Up to the age of 75 upon death, there are no longer any advantages for a QROPS over a SIPP.

This assumes the fund is being distributed after 6 April 2015.

If death occurs at age 75 or older then QROPS rules are more flexible, and better in some jurisdiction but not all.
QROPs can provide the same full access to 100% of the pension fund if the jurisdiction that the QROPs is registered and held in changes the pension legislation in that jurisdiction to match the UK’s.

QROPS rules are better in some jurisdiction where there is reduced Income Tax and a DTT for the beneficiaries.

So, the main issue is that distributions from QROPS may not be recognised as tax free in the country of your beneficiaries and become taxed at a higher rate than if it had been left in the UK. BEWARE!

INCOME TAX EFFICIENCY (QROPS vs SIPPs) – By combining your personal income allowance (still available if you are an expat) of over £10,000, along with 25% tax free cash means that consideration should be given to taking funds annually utilising maximum UK zero tax income level and segments of 25% tax free cash.

Taking into account offshore QROPS trustee and investment charges, many people will be better off with a SIPP from the UK and have greater flexibility, matching that of QROPS up to age 75.

Contact us to see how this benefits you and for a personal calculation.
The 55% capital charge on “excess” pension entitlements has been removed from April 2015. Individuals will be given the right to choose which form of pension they want, and different rules apply to the options selected.

You will be able to choose between applying to take "segments" of 25% tax free cash with further income taxed at your marginal rate each year,
or, taking the full fund with an income tax charge on 75% of the fund at highest assessed marginal UK rates.

Both tier options would currently include any annual 0% personal allowance, even for expats, making it very competitive form of taking income for most people.

FULL LIFETIME PENSION FUND ACCESS - From 6 April 2015, people over 55 will have full access to their DC and private pension fund, although it will be part taxed, as detailed above in the previous RULE "Lump sum access".Income tax on any funds taken in excess of the tax free limit will apply in the country that you are resident in.
PENSION TRANSFERS - Funded Private and Public final salary (defined benefit) schemes can continue to be transferred to take advantage of the new rules. Unfunded schemes cannot be transferred.Any transfer of one of these pension schemes can only be done if it is advised and signed off by a G60 / AF3 qualified individual who also is currently regulated by the UK Financial Conduct Authority.
UK PENSIONS versus QROPS – Initial calculations show that UK SIPPS are likely to become a better solution than QROPS for anyone with funds of less than £70,000 and who have tax rates in their home country of 5% or more. Double Tax Treaties for your home country need to be considered of course – contact us for full DTT analysis.QROPS are still likely to be attractive for people with funds greater than £250,000. QROPS are in the dock with regard to Lifetime allowance calculations.

AVOID BONDS (investment or insurance bonds) with high commissions to ensure that your funds do not decrease due to high income levels. High charging investment bonds with extra charges and surrender or access penalties in the early years eat into the investment though charges that are not declared by salesmen, leading to a decrease in investment returns and usually value as well!Re-assessment of maximum income will cease, as will GAD rules, in April 2015, meaning the investment management, flexibility, access, charges and portfolio is more important than ever. Bonds are a step behind platform custodians (often known as WRAP platforms).
AVOID UK IHT (Inheritance Tax) – for everyone under the age of 75, 55% death taxes are removed from 6 April 2015 from UK pensions, even if they die before and their fund is left until then.QNUPS rules are being reviewed currently for IHT benefits. Jurisdictions who have QROPS have to alter their legislation to match the new UK rules for QROPS to qualify in each particular country where the Trustees are based.

FURTHER REVIEWS – the government will now review many of the declared aspects to ensure that their intention to make funds available to pensioners is not abused. There are some examples of the latest position on the right hand side:They announced the outcome of one review in July 2014 and confirmed funded final salary (Defined Benefit) schemes can only be considered by UK regulated qualified advisers. They are separately reviewing SIPP operators to ensure they comply with best client outcomes.
RETAIN FUNDS IN PENSIONS – Wherever possible it will remain advice to retain funds within the tax efficient environment of a pension rather than access it to invest elsewhere. Certain countries (like the US) will continue to recognise UK SIPP’s, although it is questionable if they will recognise non-contractual QROPS as the pension funds will have crossed international boundaries and may not be recognised as pension funds.Initial research says that the introduction of the new rules will lead to a resurgence in UK based pension vehicles. However, much can happen between now and April 2015, so we would advise people considering their options now, not to rush to a decision without quality advice, and not mere guidance.