Q. My husband and I bought our home in 1990 and, as such, have a considerable amount of equity in the property. Our home is currently for sale, as we are planning to down-size. However, a friend has told me that the Chancellor used his autumn statement last week to introduce Capital Gains Tax on the proceeds from a sale of property. Is this correct?
A. Yes, but not in the circumstances that appear to concern you – the new rules relate to foreign owners of UK property.
At present, any gain on the sale of your main residence is not subject to Capital Gains Tax (“CGT”). However, any profit made by a UK resident upon the sale of a UK property that is not their main residence, such as a buy-to-let investment or a holiday home, attracts CGT (subject to the annual allowances and allowable deductions, such as for improvements).
Until now, these rules did not extend to foreign nationals selling UK properties (meaning that foreigners were not subject to CGT when selling UK property and realising a gain).
The Chancellor, George Osborne, announced during his autumn statement that, with effect from April 2015, non-UK residents will have to pay CGT in respect of property in the UK. The measure, dubbed the “oligarch tax” as it affects particularly affluent foreign-nationals, is intended to counter the perception that we may all experience another housing bubble because of the influx of non-UK residents buying high-end properties in London.
If you remain concerned, I recommend that you seek assistance from a chartered financial planner who specialises in tax planning.
Q. I am due to reach my normal/state retirement age in five years time and expect that I will retire on the government’s proposed single-tier stage pension. I am concerned that the qualification requirements might change and that I therefore may not have made sufficient years’ National Insurance contributions. Do you know what the qualifying criteria are likely to be?
A. You are correct that, if you are to reach your normal retirement age in five years time, you will retire on the new, single-tier, state pension, which is set to be introduced from April 2016 for all retirees from that date. It is anticipated that the single-tier state pension will be approximately £144 per week in today’s terms.
You are correct also that there are minimum qualifying criteria in order for you to receive that single-tier state pension. The Pensions Minister, Steve Webb, announced recently that a person will have to accumulate at least 10 years’ NI payments or equivalent credits in order to be eligible for the new, single-tier, state pension and will require 35 years’ contributions to receive the full benefit. Anyone with more than 10 years’ contributions, but less than 35, will receive a proportionate amount of the full benefit.
It is anticipated that this minimum qualifying criteria will affect just 2-3% of UK residents but approximately 20% of UK nationals living overseas. The government’s justification for imposing the minimum qualifying criteria is to ensure “that state pension expenditure is targeted at individuals who have made a significant social or economic contribution”.
Q. I caught sight of a newspaper headline last week that talked about “defined ambition” pension schemes. I have never heard of these before – can you explain what they are, please?
A. Yes.
As part of its overhaul of the UK pensions system, which includes the introduction of a flat-rate state pension and “auto-enrolment” into a workplace pension scheme, the government is considering proposals that may offer an alternative to the traditional pension scheme structures of defined benefit (often referred to as “final salary” or “career average” schemes) and defined contribution (more commonly referred to as “money purchase”).
Under a defined benefit scheme, the employer assumes a significant majority of the risk and employees can be confident of the level of their retirement income. In contrast, under a defined contribution pension employees assume almost all risks and have little indication, throughout their working lives, what their eventual retirement income may be.
This has prompted the government to consider alternative, compromise, structures that might improve the level of occupational pension provision and thus address a perceived lack of retirement savings as more employers switch from defined benefit to defined contribution pension provision, whilst at the same time reducing significantly the level of contributions they make on behalf of their employees.
The Department for Work and Pensions published a consultation recently, seeking feedback and suggestions from the pensions industry as to what a “defined ambition” pension structure – intended to be a compromise between defined benefit and defined contribution – might look like. The DWP is not seeking to impose product design upon pension providers, but simply design a legislature framework within which an innovative defined ambition product design can flourish.
The consultation focuses on three possible product designs – a more flexible defined benefit structure that enables employers to amend benefits, defined contribution schemes with greater certainty of retirement income for members and collective defined contribution schemes (where members’ assets are pooled in order to take advantages of economies of scale).
Whilst it is commendable that the government is looking at ways to improve the levels of retirement saving in the UK, only time will tell whether the introduction of defined ambition legislation will prove to be a success. However, one of the biggest bugbears of both the pensions industry and employers is the level of legislation governing workplace retirement savings, so I am sceptical, at this stage, whether defined ambition is the solution.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
