Last time I looked at how to use the new transfer regulations, income drawdown in payment transfers and a review of concurrency. I would like to end this series by looking at three other opportunities – pensions for children, pensions for spouses and even pensions for pensioners.
Pensions for children – giving them a headstart in life
The opportunity to sell pensions to individuals with no earned income is very attractive. One such market is pensions for children. This is a rapidly growing market especially for high-net-worth clients.
Although the concessions in the defined-contribution regime are intended to help mature students, mothers on career breaks and other carers, it is also the opportunity for wealthy clients to provide for their non-working spouses, children and grandchildren.
While the regulations stipulate that a personal pension/ stakeholder contract may only be opened for anyone under 18 by a parent or guardian, grandparents can also pay the contributions, providing that the parent or guardian knows about it.
Let us assume an annual growth rate of 7 per cent. Someone investing £3,600 a year (which is £2,808 net) for a child or grandchild each year until 18, could provide that child with a pension pot of £119,000 before they even start work.
On reaching 18, the child would have the flexibility of continuing contributions and enhancing their retirement benefits. A point to remember is that a parent wanting to fund a pension for their spouse and two children, could invest £10,800 a year gross at a cost of only £8,424 net.
What are the benefits to your clients of this approach?
As funds cannot be accessed until 50, contributions to a pension can be used as an alternative to cash gifts, which are not always wisely used.
This form of pension planning can be used to help mitigate the effect of inheritance tax – regular contributions either monthly or yearly from income can be treated as normal expenditure and therefore should not usually attract inheritance tax liability.
The maximum net contribution of currently £2,808 is within the £3,000 annual gift exemption allowance, so the donee will not be liable for inheritance tax (provided that the gift exemption allowance has not been used up for anything else). Also, remember two grandparents equals two gift allowances.
In the future, the child will have the option to take tax-free cash at any time between 50 and 75, providing maximum flexibility at retirement.
Once a child is given a headstart in life with their own pension, the child can make their own contributions and add to the plan at a later stage.
If you have not discussed this option with your clients it may be time to do so.
Four sales opportunities with pension planning for spouses
The current maximum pension regime provides not just the opportunity to sell pensions for children but also allows additional options for pension planning for spouses. I would like to look at the four most attractive ideas.
£3,600 pension contribution allowance
The regulations provide the opportunity to sell pensions to individuals with no earned income, so you can provide a spouse's pension without any evidence of earnings up to £3,600.
Spouses with a fully funded EPP
Under the concurrency rules, spouses who are not controlling directors but are paid a small salary and have a fully funded EPP as part of a working spouse plan, will also be able to pay up to £3,600 gross to a personal pension/stakeholder. This would not be taken into account when calculating maximum permissible pension benefits from the EPP scheme.
Employ the spouse
By paying a working spouse a salary just above the lower earnings' limit (£3,900 in 2002/03) they will qualify for the new state second pension which came into force in April 2002 for a minimal National Insurance contribution (nil if they earn below £4,615)
The spouse can also pay up to £2,808 net into a personal pension/stakeholder, which is grossed up to £3,600 with 22 per cent tax relief.
Pay a high salary for one year to justify contributions for six years
A spouse could be paid a high salary for one year to justify a contribution higher than the maximum of £3,600 gross, then nothing for the following years, and maintain the same high level of contributions for a further five years.
In the new pension environment, these opportunities can build your business and you may have many appropriate clients to discuss these with, so why not contact them now?
Pensions for pensioners – whatever next?
We have seen throughout my articles that the opportunity to sell pensions to individuals with no earned income is very attractive and one such market is pensions for pensioners.
Retired investors under the 75 could be the biggest winners from the regulations. These clients are able to pay £3,600 gross every year until they reach 75.
Significant opportunities also exist for people who have recently retired and who have sizeable net relevant earnings (NREs) prior to retiring, because as we all know by now, NREs for one year can be used to justify higher contributions for an additional five years.
Mr O'Neil, a partner in a firm of solicitors, retired at 60 with relevant net earnings of £70,000 on April 5, 2002.
Under the regulations, he was able to start personal pension contributions on April 6, 2002 based on his age on this date and his NRE for 2001/02. These could continue at this level for a further five years and at £3,600 until he reaches age 75, even if he has no earnings after this.
This is illustrated in the table at the bottom of this page.
What are the benefits for your clients of this approach? First, existing retired clients, particularly income drawdown clients, can take advantage of the new rules and reinvest some of their income as part of a tax planning exercise.
Second, the obvious example is that, as they continue to build up contributions over the years, they will build up a pension to give further benefits at a later stage.
Finally, the benefits can be taken by the policyholder at anytime between 50 and 75. When the plan is vested, there is also the option to take 25 per cent tax-free cash while the remainder will be used to secure an income.
These clients would have had limited interest in new pension planning before this new opportunity and you should take maximum advantage of these regulations now.