Independent Financial Adviser Comprehensive Financial Planning Pension Investment Inheritance Tax specialists Chatham Medway Kent

Abolition of contracting out on a defined contribution basis

admin — Thu, 26 Jan 2012 13:49:15 +0000

To help simplify the pensions system and decisions about retirement savings, the Government has decided to abolish contracting out on a defined contribution basis.

At the moment, some pension schemes are set up to provide a pension which replaces all, or part, of the additional State pension (also called the State Second Pension). This includes some company, stakeholder and personal pension schemes. When you join one of these pension schemes, you are said to be ‘contracted out’ of the additional State pension.

There are two ways of contracting out, based on how the benefits are to be calculated. Some company schemes, generally money purchase or defined contribution schemes, along with personal and stakeholder pensions, contract out on a defined contribution basis. Other company schemes, normally defined benefits schemes, are contracted out on a salary- related basis. Currently individuals who are members of a contracted out scheme pay lower National Insurance contributions and/or receive some National Insurance rebates into their pension scheme.

The Government are planning to end contracting out of the additional State pension on a defined contribution basis from 6^thApril 2012. The planned changes mean that you will no longer be able to use a pension contracted out on a defined contribution (money purchase) basis in place of the additional State pension. Instead you will automatically be brought back into the additional State pension and, depending on your earnings; you may begin to build up entitlement to the additional State pension from this time. In most cases you will earn entitlement to the additional State pension.
There may be some cases in which you won’t, for example if you stop working or earn less than the Lower Earnings Limit.

The National Insurance rebates an individual and, where applicable, their employer currently get if they are contracted out are intended, when invested in the contracted- out scheme, to provide benefits broadly the same as those given up in the additional State pension. However, benefits from defined contribution schemes can vary depending on investment returns and annuity rates. This means it is difficult for individuals to predict with any degree of certainty whether they would be better off in the additional State pension or contracted out. To help simplify the pensions system and decisions about retirement savings, the Government has, therefore, decided to abolish contracting out on a defined contribution basis.

From 6^th April 2012, instead of receiving rebates of your National Insurance contributions you may begin to build up entitlement to the additional State pension. For every year that you pay National Insurance on earnings over £5,044 a year (based on 2010/11 earnings) you will get around an extra £1.60 a week on your State pension when you come to claim it. People earning above £14,000 per annum (based on 2010/11 earnings) will also be entitled to an extra earnings- related payment but the earnings- related payment will be gradually withdrawn so that by 2030, additional State pension will be made up of the flat- rate amount only.

If you require any further information on the ‘Abolition of contracting out on a defined contribution basis’ please do not hesitate to contact our office on 01634 281145.

Newsletter November/December 2011

neilphillips — Fri, 11 Nov 2011 09:38:10 +0000

Do your retirement numbers add up?

Saving to secure the kind of pension you would like to live on

How much money do you need to save to secure the kind of pension you would like to live on when you retire? It’s a question that concerns everyone saving for their retirement.

So it’s essential to make sure your numbers add up, especially as older people have seen their cost of living rise by almost a fifth in four years, according to calculations from Saga. Working with the Centre for Economics and Business Research, Saga estimated that the cumulative inflation rate on the RPI gauge has been 13.9 per cent for the general population over the past four years. But people aged between 65 and 74 have suffered a rise of 19.1 per cent.

Daunting prospect
Add to this the daunting prospect that one in three workers in the UK does not currently have a private or company pension, it means that around 15 million people will have to rely on the State pension or personal savings when they retire, according to research of 1,600 adults by Prudential.

This makes the question ‘How much money do I need to save to secure the kind of pension I would like to live on when I retire?’ even more important. Much will depend on when you plan to retire. Some people expect to have to work until they are 65, some with a good pension may aim for 60 and others plan for an early retirement during their 50s.

New-found freedom
Many of us may dream of long, easy days in retirement, enjoying our new-found freedom. But the illusion can too easily be shattered if we do not have enough income to live on. Few of us may realise just how much we could need in retirement to achieve a comfortable standard of living and how long it will have to last.

As more people are living longer today, so our pensions have to last longer during our retirement years. Realistically a pension may have to provide us with an income for over two decades, if not longer, after our salary stops.

Factors to consider
There are several factors to consider, such as your current age, how many years left before your retirement, how you plan on spending your retirement years and how much you can afford to save.

When you retire, the chances are that you may not need as much to live on as you do when you are working. As an estimate, a figure of between two-thirds and a half of your present income may be sufficient to maintain a good standard of living.

The articles featured in this digital magazine are for your general information and use only and are not intended to address your particular requirements. They should not be relied upon in their entirety. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. For more information please visit www.goldminepublishing.com

SIPPing into retirement

Are you in control of your investments?

There are numerous ways of saving for retirement, including various types of pensions. The government views retirement savings as being so important that it offers generous tax benefits to encourage us to make our own pension provision. It is usually also the case that you may be able to contribute to more than one pension – for example, if appropriate, you could contribute to a Self-Invested Personal Pension (SIPP) as well as to your company pension scheme.

Pension wrapper
A SIPP is essentially a pension wrapper, capable of holding investments and providing the same tax advantages as other personal pension plans, that allows you to take a more active involvement in your retirement planning. SIPPs are not appropriate for small investment sums.

You can generally choose from a number of different investments, unlike some other traditional pension schemes that can be more restrictive, and this can give you greater choice over where your money is invested.

It may also be possible to transfer-in other pensions into your SIPP, which could allow you to consolidate and bring together your retirement savings. This may make it simpler for you to manage your investment portfolio and perhaps make regular investment reviews easier.

Tax relief
SIPP investors also receive tax relief on their contributions. So you could potentially benefit from between 20 per cent to 50 per cent tax relief depending upon your own circumstances.

Like some investments in other pensions, any returns from investments within a SIPP are free of income and capital gains tax. However, unlike dividend payments received outside a SIPP, there is no 10 per cent tax credit applied to dividend payments within a SIPP.

Tax advantages
This is a long-term savings vehicle with certain tax advantages, but you should be prepared to commit to having your money tied up until at least age 55. There are various options for taking benefits from your SIPP that you should be aware of. You can receive up to 25 per cent of the pension fund value as a tax-free lump sum (subject to certain limits); the remaining benefits can be taken gradually as an income or as additional lump sums, both of which are subject to your tax rate at that time, although this is potentially a lower tax rate than the one that you currently pay, depending on your circumstances at the time.

Compound growth
UK pension fund investments grow free of income tax and capital gains tax, which allows funds to accumulate faster than taxed alternatives and benefit considerably over the longer term due to the effects of compounding of growth.

Where tax has been deducted at source on income within a pension fund – such as rents, coupons and interest – this is reclaimed by the pension provider and the tax credited back into the pension fund.

Not subject to tax declaration
Assets held within the pension fund that carry no tax at source, such as offshore investments and government gilts, are not subject to tax declaration or payments.

If you are an experienced investor, then managing your own pension investments may be for you. However, you need to be comfortable that you have the skill and experience to make your own investment decisions and have sufficient time to monitor investment performance. So you can either take control of your investments or pay someone to do it for you. If you pay, your costs will increase for this facility.

Managing your investments
There are a number of considerations you need to be aware of, for example, you cannot draw on a SIPP pension before age 55 and there are usually additional costs involved when investing. You’ll also need to be mindful of the fact that you may need to spend time managing your investments. Where an investment is made in commercial property, there could be periods without any rental income and in some cases the pension fund may need to sell on the property when the market is not at its strongest. SIPPs also charge higher costs than a stakeholder and you may pay two sets of management fees for the wrapper and the underlying investments.

A pension is a long-term investment. The fund value may fluctuate and can go down as well as up. You may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

Time to go
annuity shopping?

Don’t make your final decision until you’ve received different comparisons

Before you can start planning your retirement, you need to understand how the money you’ve built up in your pension will be used to provide you with an income when you retire. One of the options you could choose is to invest most of your pension in an annuity, which pays you a regular income throughout your retirement years.

You purchase an annuity using the lump sum from your pension or, perhaps, some savings, which provides you with a guaranteed income for the rest of your life. The size of the income you receive, however, usually depends on the size of your pension fund, your age, your gender and your health. In the UK more than £10bn is invested in annuities every year.

Annuity quotation
When you retire, your pension fund provider will inform you of your pension fund total and offer you an annuity quotation based on the size of your fund. In general, most people purchase an annuity by the time they reach age 75.

Your choice of annuity will depend largely on your financial circumstances, the value of your pension(s), your retirement expectations and, possibly, on your health or the health of your dependants.

You can choose whether you would prefer a level annuity or an escalating annuity. Level annuities pay you a fixed level of income each year, while an escalating annuity increases each year in line with inflation.

The income generated from an escalating annuity is usually significantly lower in the first few years than you would expect to receive from a level annuity.

Poor health
If you suffer from poor health, you may qualify for an enhanced annuity or an impaired life annuity. These usually pay a higher income amount if your health problems (such as high blood pressure, kidney problems or diabetes) could potentially reduce your lifespan. You might also be able to receive an ‘enhanced annuity’ if you are a smoker or diagnosed as obese.

Shopping around
You can purchase your annuity from any provider and it certainly doesn’t have to be with the company you had your pension plan with. The amount of income you receive from your annuity can vary between different insurance companies, so it’s essential to receive comparisons before making your final decision.

‘Open market’ option
Remember that you do not have to accept your pension fund provider’s annuity offer and could find much better value elsewhere. Pension fund providers are also now legally obliged to inform you of your rights to choose an annuity. You can decide to take the ‘open market’ option providing that you haven’t already taken any benefits from your pension or agreed an existing annuity with your pension provider.

Before you take out your annuity, you could also opt to withdraw a tax-free lump sum – up to 25 per cent of the total value of your pension – known as a Pension Commencement Lump Sum.

Best course of action
At times of falling annuity rates it might be tempting to hold off buying an annuity, perhaps while you wait for rates to increase. But this may not necessarily be the best course of action. If you decide to delay your purchase, rates could fall even further. In addition, every month an annuity is deferred is a month without income and this lost income may not be recouped in the future.

Staving off a sovereign default

The need to get to grips with the current crisis of indebtedness

The turbulence that has gripped financial markets is a response to the perception that politicians in the Eurozone and the US have been slow to face up to issues of indebtedness.
If Interest rates in the UK and the Eurozone remain low for years to come, the pound and euro currencies would then be an unattractive place for investors to deposit their cash.

Contingency plans
The direct exposure of UK banks to Greece is fairly limited, but Bank of England Governor, Mervyn King, revealed in his response to MPs’ questions in June that the Bank was working with the Treasury to draw up contingency plans for a Greek default.

The European Central Bank together with the ‘eurosystem’ of 17 national central banks can create money that is used to buy government debts to stave off a sovereign default. There is therefore no theoretical limit to how much can be bought up.

The sooner Europe’s political and financial leaders get to grips with the current crisis, the sooner the markets can try and return to some sort of normality.

US sovereign debt
Across the pond, the recent downgrading of US sovereign debt by Standard and Poor’s (S&P) is an important symbolic moment in the shift of economic power from mature industrialised nations to emerging economies.

The US will only regain its AAA status once politicians have demonstrated that they can implement the necessary tax increases and/or spending cuts that will eventually get the ratio of outstanding debt to GDP onto a downward trajectory.

Private investors are likely to keep their investments as simple as possible via direct investment and collective vehicles such as funds and investment companies, while those with direct exposure to higher risk assets, which may fall in value in the short to medium term, at least have the capacity to grow again in the future.

Fine -tuning your portfolio

Reduce risk, hedge inflation and diversify your overall investment strategy

Commodities have received much media coverage over the past year, with prices rising as other asset classes falter. Investing in commodities within your portfolio may not only create exposure to different investment products, but can also help reduce risk, hedge inflation and diversify your overall investing strategy.

Commodities, like much else, are subject to the laws of supply and demand. When demand rises, as has been the case with gold over the past few years, the price rises. Stock market volatility and rising UK inflation have attracted a diverse mix of investors to this sector.

In October the Monetary Policy Committee (MPC) announced £75bn of new quantitative easing (QE) measures to help boost the faltering economy and free up the money markets. The stock market reacted positively to this news with mining and commodity stocks benefiting from the QE which filtered through to asset prices.

Safe havens preserve wealth
Commodities are physical assets. They include oil and gas, metals such as gold and silver, and so-called ‘soft’ commodities such as wheat, sugar and cocoa beans. They are often called ‘safe havens’ as they preserve wealth in a physical way.

The sector has little correlation with stock markets and currencies, which means if equity markets fall, the price of commodities won’t necessarily fall.

They tend to behave differently to conventional asset classes and can therefore be very useful for the purposes of diversification within an investment portfolio.

Viable way to access commodities
An investment fund that enables investors to access the sector and spread risk, with investors investing in a variety of commodities, is a passive fund incorporating Exchange Traded Funds (ETFs).

ETFs provide appropriate investors with the chance of buying whole indices in the same way as buying a share on the London Stock Exchange. In addition, they are eligible for inclusion within Individual Savings Accounts and do not attract any stamp duty.

Tracking the future price
Equity-based commodity ETFs invest in shares of commodity companies through an index such as the FTSE 100, whereas Exchange Traded Commodities (ETCs) are instruments that track the price of the commodity, or a basket of commodities.

They can either be physically backed by the commodity itself or use swaps with other financial institutions to provide the exposure.

Should the price of the commodity fall, so will the investment, as the ETF will simply track its performance. ETCs also allow investors to ‘short’ or ‘leverage’ their investment. Investors should be careful here, as these strategies involve high risk. Although there are potential gains to be made, there could be significant potential losses too.

With the incredible rise of emerging economies forecast over the coming years, the commodity markets may provide appropriate investors with a range of investment opportunities to enable them to grow their wealth over the longer term.

Investments in commodities are by their nature generally considered to be higher risk. The value of these investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

Tax matters

How much of your hard-earned money will the taxman get his hands on?

Inheritance Tax (IHT) in the UK may be one of life’s unpleasant facts but IHT planning and quality advice could help you pay less tax on your estate.

For the 2011/12 tax year, no IHT is charged on the value of your estate up to £325,000. This is known as the ‘nil rate band’. Everything above this is taxed at 40 per cent.

If an individual’s IHT nil rate band is not used up on their death, the unused proportion can be transferred to their surviving spouse or civil partner.

Assets passed between spouses or registered civil partners are exempt from IHT (assuming the spouse or partner is domiciled in the UK), regardless of the worth of the assets and how soon you die after acquiring them.

Reducing your family’s tax bill
Any amount of money you give away outright will not be counted for IHT if you survive for seven years after making the gift. If you die within this period, the amount of the gift will be included within your estate. Taper relief may apply in these circumstances and can reduce the amount of IHT due.

Making the most of your pension contributions

Are you claiming higher rate pensions tax relief?

If you pay higher rate tax you will not receive tax relief automatically on your personal pension contributions unless you claim it. This means that someone earning more than £42,475 in the current financial year could potentially be losing a fifth of the value of their pension if they are not actively claiming back higher rate tax relief on their contributions.

Claiming tax back
If you pay income tax on your earnings before any personal pension contributions, your pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your personal pension, you end up with £100 invested in your pension fund.

If you are a higher rate tax payer paying 40 per cent, you may able to claim an additional tax relief. Depending on how much you earn over the higher rate tax band, any additional tax relief could range from between a further 1 per cent up to a maximum of 20 per cent.

Additional rate tax payers
From 6 April, if you are an additional rate tax payer and pay 50 per cent, you may also be able to claim additional tax relief at your highest rate. Depending on how much you earn over the higher rate tax band and your level of contribution, any additional rate tax relief could range from between a further 1 per cent up to a maximum of 30 per cent.

Claiming higher rate tax relief on personal pension contributions is for many people the single most important relief they can claim, yet hundreds of thousands could be missing out. To obtain your additional tax relief you must file a tax return or get HM Revenue & Customs to change your tax code. To do this, you have to contact your local tax office.

Full tax relief straight away
If you are employed, usually your employer will take occupational pension contributions from your pay before deducting tax (but not National Insurance contributions). You only pay tax on what’s left. So whether you pay tax at basic, higher or additional rate you receive the full relief straight away.

Personal protection

Could you cope with the unexpected?

Personal protection is an important part of most people’s financial planning requirements. The financial effects on your family in the event of death or illness could be profound. There are many protection options available and we can help you identify the most suitable for your specific requirements.

Personal protection is an important part of most people’s financial planning requirements. The financial effects on your family in the event of death or illness could be profound.

If you were to die, at the very least you’d want your mortgage, debts and funeral costs to be paid for. You’d probably also want the security of knowing that your family would be able to maintain their current standard of living.

If you became seriously ill or were injured and had to give up work, you’d also want to be sure that your family could continue to be supported financially. You may decide to use your existing savings and investments, but how long would these last for before they ran out?

Considering protection solutions is a good way to safeguard against unforeseen events or expenses and can provide your dependants with the financial security you desire.

These are the basic protection foundations you should set up:

Life insurance: this provides financial security for your dependants in the event of your death and helps them to pay some or all of the outstanding debts/financial commitments such as your mortgage and other liabilities

Income protection: this replaces part of your income if you are unable to work because of an illness or disability for a short or a long period of time

Critical illness: this provides you with a tax-free lump sum or regular income if you are diagnosed with a serious specified illness covered by the policy

Certain policies should also be written under an appropriate trust to ensure that monies pass to the right people at the right time and in the most tax-efficient manner.

Emerging Views

The lure of greater growth and younger economies

‘Emerging markets’ is a broad term that encompasses the giants of Brazil, Russia, India and China (BRIC), as well as some other nations. Emerging markets have continued to outperform developed markets, even during the difficult economic climate we have experienced throughout 2011. The lure for investors is greater growth and younger economies than typically found in the developed West, but the trade-off for this growth is higher volatility and greater risk.

The population and economic growth in these markets has created a potentially massive high-consuming middle class – estimated to be more than one billion people by 2030, according to the World Bank, April 2010.

Emerging markets have large reserves of natural resources and these reserves should also aid their future prosperity as commodities continue to be in high demand.

In addition, many emerging markets have lower government debt burdens than developed nations and may have large holdings of foreign exchange. This means that spending in most emerging markets has not been dramatically curbed by the recession, as has been the case in many developed nations, which has allowed further stimulation of their economies and infrastructures to continue while some domestic markets have waned.

Investments in emerging markets are by their nature generally considered to be higher risk. The value of these investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

Protecting your key assets

UK businesses more inclined to protect office equipment than their own staff

Business protection is designed to help safeguard a business against the effects of losing key staff, partners in a partnership or shareholders through death, terminal or critical illness.

The fact is many small and medium-sized businesses rely on certain key people. Without these key persons the business could suffer serious financial loss, from losing a sales manager whose relationships ensure the new business goals remain on target to the designer responsible for new products.

UK businesses remain worryingly passive
Recent research from Scottish Widows has revealed that UK businesses remain worryingly passive when it comes to protecting one of their key assets – their employees. This is despite over three-quarters (77 per cent) admitting that they can identify at least one individual whose loss through death or critical illness would have a serious impact on the profitability or future survival of the business.

77 per cent of businesses say they have a key employee whose loss would seriously impact the profitability or future survival of the business and yet only 13 per cent of these businesses have protection in place to mitigate this risk

Over a quarter of UK businesses
(27 per cent) choose to protect against the breakdown of office equipment, compared to just 10 per cent who have protection against the loss of a key member of staff due to their death or critical illness

Almost a quarter (23 per cent) of business owners have invested their own money into the business in the last
12 months

Businesses are reluctant to protect themselves
The Scottish Widows Business Protection Report, which details research carried out with over 500 UK business decision makers, shows that the majority of businesses are still reluctant to protect themselves from the unexpected happening to a business owner or key member of staff.

Just 13 per cent of businesses who have identified the importance of a key person hold insurance that would protect the business against their loss and despite such a low take up of business protection, 60 per cent of businesses admit that they would definitely not survive the loss of a key person.

Future survival of the business
In fact, it is more likely that UK businesses will insure office equipment, such as the photocopier, against breakdown than they are to insure a key individual whose skill sets are vital to the future survival of the business. The research shows that over a quarter (27 per cent) of businesses have insurance for office equipment in place, compared to just 6 per cent with financial protection if a key person dies and 4 per cent with protection if a key person suffers a critical illness.

A better protected business population
A logical conclusion as to why the take up of Business Protection is so low is down to a lack of knowledge and understanding of the benefits – with 38 per cent of businesses not taking out cover as they don’t see its’ value, 16 per cent saying they hadn’t even thought about taking it out and 17 per cent saying they thought it would be too expensive. This highlights the value of sound professional financial advice which could potentially ensure a better informed and better protected business population.

Unfortunately, despite the majority of businesses openly acknowledging that the loss of a key person would have a severe, if not fatal impact on their future survival, just 29 per cent have actually sought any form of advice on business protection.

Personal assets at risk
In addition, the research highlights that in the last 12 months almost a quarter
(27 per cent) of business owners have invested their own money into their business, while a further 13 per cent expect that they will have to in the future. If people are to put personal assets at risk then it is vital that they take the necessary steps to prevent a damaging impact not just on their business, but potentially their families and personal lives.

Iain McGowan, Head of Savings and Protection at Scottish Widows commented: “There are many reasons for business owners failing to take action. In some cases, this represents a failure to plan properly or a lack of understanding of the benefits of business protection. Perhaps even a refusal to contemplate the death or critical illness of a colleague. However the potential consequences to the business, demonstrate the importance of protecting arguably the one thing that can ensure its future survival; its employees.”

If you’re a business owner it’s crucial that you safeguard your business against the loss of a key employee. To discuss your protection planning needs, please contact us.

Is the elderly care system unsustainable?

70 per cent of over-55s do not believe they should pay for long-term care

Providing for care in later life, whether for yourself or a relative, can appear a complex issue. Most people with assets over £23,250* will be required to pay for their own care.

Despite government warnings that the current elderly care system is unsustainable, 70 per cent of over-55s don’t believe that they should pay for care in retirement. Of those who do, they state that just £3,610 is a fair cost for a lifetime of care, reveals Aviva’s latest Real Retirement Report.

With the annual cost of a room in a nursing home estimated to be on average £35,984**, how to pay for care can be a major concern for many people.

Long-term care matters

- Just 2 per cent of over-55s have long-term care insurance
- Majority (81 per cent) worried or concerned about meeting care costs
- Almost half (46 per cent) call on the government to set clear care standards

Care conundrum
While the majority of over-55s would prefer not to pay for care, they do concede that it is unlikely that the State will be able to pay for everyone’s care. The most popular funding options were for the “better off” to contribute to the cost of their own care but for the government to pick up the tab for everyone else (51 per cent) or for those who can afford to, to contribute to the cost of care (36 per cent).

How affordability is determined was a matter for debate with some suggesting it should be based on current assets (16 per cent) and others feeling lifetime income (14 per cent) should be the measure. Irrespective of what system was used, the majority (53 per cent) felt there should be a cap on how much an individual was forced to pay towards their own care.

Lack of planning
Despite the fact that under the current system people are expected to finance aspects of their care, the research highlighted a significant lack of preparation. Over half (53 per cent) of over-55s have no plans at all in place to meet these costs and 14 per cent continue to believe that the government will cover all the fees.

Even amongst those who do say they have some plans in place, just 2 per cent have long-term care insurance with others preferring to rely on savings and investments (13 per cent), housing equity (9 per cent), their pension funds (3 per cent) and on family assistance (3 per cent).

However, while some over-55s were happy to use their housing equity to finance care, a clear majority (62 per cent) believe that they should not be forced to sell their house to pay for care. Those aged 65-75 were the most averse to seeing their homes sold to pay for care (68 per cent) – potentially as they have already ear-marked the equity for other costs in retirement.

Significant concerns and confusion
Just 19 per cent of over-55s say they are relaxed with the majority feeling concerned (41 per cent), just over a quarter feel worried (29 per cent) and – even – terrified (12 per cent) about the prospect of meeting long-term care costs. While there were lots of different options as to how care should be funded, one clear message from the research was that the over-55s needed more guidance.

Indeed, almost half (47 per cent) said there needs to be clearer information on the topic, 46 per cent felt the government should set clear universal care standards and 36 per cent would like to see a single government department responsible for all care issues. This move would help to clear up any confusion as 48 per cent of people look to the State in one form or another for advice on this issue – 18 per cent to the government directly, 16 per cent to their local council and 14 per cent to a medical professional.

Rapidly ageing population
The research clearly shows that the majority of over-55s do not believe that they should have to pay for care in retirement. However with a rapidly ageing population, this is simply not possible and over-55s realise that they are likely to have to make some sort of contribution to the overall cost of their care.

* England 2011/2012
** Care of Elderly People UK Market Survey 2010/11 Laing & Buisson

Take AIM with your investments

Invaluable tax break for experienced investors

Saving tax is a preoccupation for many investors. However, for some experienced investors the Alternative Investment Market (AIM) offers an invaluable tax break in the form of business property relief (BPR).
AIM is the most successful growth market in the world. Since its launch in 1995, over 3,000 companies from across the globe have chosen to join AIM, helping smaller and growing companies raise the capital they need for expansion.

Strong grounds for optimism
The most recently published survey of AIM companies and investors shows that there are strong grounds for optimism about the future of AIM and the small-cap sector.

Total fundraisings by companies on AIM were up 24 per cent in 2010 and the number of new companies that joined nearly trebled. The AIM All-share Indices increased in 2010 by more than 40 per cent, out-performing the FTSE 100 over the same period.

Inheritance tax savings
By investing in certain AIM-listed companies, experienced investors could potentially save some 40 per cent on inheritance tax (IHT) on their eventual estate.
The shares that can be traded on AIM must not be fully listed on the London Stock Exchange (LSE) and will fall outside an investor’s estate providing they are held for just two years. The shares must be held beneficially for the investor, which can be done either directly or via an investment manager.

No portfolio size limit
There is no limit to the size of the portfolio, which can in all respects be treated like a normal portfolio. Shares could be ‘swapped’ for other AIM shares without losing the IHT break. The shares must be held until death; however, if they are cashed and the proceeds not reinvested in other BPR qualifying shares, they will fall back into an investor’s estate and be taxed accordingly.
It’s therefore important that the portfolio can be earmarked for the estate and won’t be needed during a person’s lifetime, although it is, of course, possible for it to revert back to the investor should they subsequently need the funds for expenses such as retirement home fees.

Lower level of due diligence
Liquidity risk is an important consideration and investors need to accept that AIM companies are subject to a lower level of due diligence than main listed firms. But a ‘normal’ equity portfolio of LSE stocks also carries risk for investors. AIM now has a market value of £75bn, according to the LSE.

There are plenty of well-run, highly successful companies listed on AIM with a strong market capitalisation. These companies offer BPR and therefore IHT advantages should a person holding them die, unlike their listed counterparts.

Investing is not just about tax breaks, it also needs to make commercial sense. A tax break won’t compensate for a poor investment decision and you should always seek professional advice to discuss you particular situation.

Investments in AIM companies are by their nature generally considered to be higher risk. The value of these investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

Millions of people are not saving enough

Only 7 per cent of larger employers have firm plans on auto-enrolment

Millions of people are not saving enough to have the income they are likely to want in retirement. Life expectancy in the UK is increasing and at the same time people are saving less into pensions.

In 1901 there were 10 people working for every pensioner in the UK. In 2005 there were 4 people working for every pensioner. By 2050 it is expected that this will change to just two workers for every pensioner.*

Reform of
workplace pensions
The Pensions Act 2008 laid the foundations for a fundamental reform of workplace pensions, requiring every employer to automatically enrol their workers into a qualifying pension scheme, if they are not already in one, and contribute to that pension.

Addressing the issues
Automatic enrolment aims to address the issues that prevent people from saving into a pension scheme, such as:

- pensions saving being complicated and confusing;

- people simply not getting around to it;

- a lack of suitable pension products being available for people on low to moderate incomes; and

- lack of employer pension provision, particularly in smaller firms.

Auto-enrolment regulatory requirements
The majority of larger employers (93 per cent) do not yet have firm plans in place to meet auto-enrolment regulatory requirements, according to research from Standard Life. The timing depends upon the size of the employer. This will apply to very large employers first, in late 2012 and early 2013. Other employers will follow during 2013 to 2016.

The pension scheme must be a qualifying scheme, meaning it must meet certain government standards. This is the first time that employers have been required by law to contribute to their workers’ pensions.

Undecided about contribution levels
Of the 200 larger employers surveyed by Standard Life, just 7 per cent had reached a decision on how they will deal with auto-enrolment. 39 per cent had set a date by which a decision will be made, however, over half of those surveyed (54 per cent) did not know when they would have their plans in place.

Over half (56 per cent) were undecided about the contribution levels they would be making for new members being auto-enrolled. Around a third (36 per cent) of employers confirmed they would pay the same levels and just 5 per cent indicated they would reduce payment for new members.

The research highlights that many employers still have some big decisions to make. The majority of those surveyed will need to commence auto-enrolment at some point during 2013 and there is a great deal of planning work that needs to be undertaken.

Spending time now understanding the financial impact of auto-enrolment will help employers identify the difficult decisions that need to be made. The sooner employers start the planning process, the easier the financial and administrative transition will be. To find out more please contact us.

*Department for Work and Pensions

Financial support for your dependants

Over half of UK adults have no life insurance, leaving many families vulnerable

We can’t predict the future, which makes it all the more important we’re prepared for whatever life may throw at us. In the event that the worst happens to you life insurance could help support your dependants, giving you peace of mind that they’ll be financially protected when you’re gone.

A range of benefits
Life insurance could provide a range of benefits should the worst happen to you, enabling you to pay off your mortgage; ensure your family is financially protected, cover the cost of school or university fees and still be able to pay for childcare costs.

Research from Scottish Widows shows that an estimated 28 million¹ of the UK population do not have any life insurance in place, leaving their loved ones vulnerable to financial insecurity if something were to happen to them.

- 56 per cent of adults in the UK don’t have any life insurance in place to secure the financial wellbeing of their loved ones

- More UK adults insure their pets (15 per cent) and mobile phones (13 per cent) than they do their income in case of ill health (12 per cent)

- One-fifth of the population would consider cutting back on critical illness cover (21 per cent) and life insurance (20 per cent) compared to just 15 per cent prepared to cut back on broadband access

- Over half the population (54 per cent) say they review their finances regularly, yet uptake of protection products remains low

Many contine to shun protection products
The third Scottish Widows Consumer Protection Report, which details research carried out on 5,148 UK Adults², shows that many are continuing to shun protection products including life insurance, critical illness cover and income protection.

Although over half of the UK population
(54 per cent) admit to reviewing their finances once or twice a year and awareness of protection is high, the reality is that the take up of these products remains exceptionally low.

Awareness remains high
From those surveyed, 97 per cent were aware of life insurance and the importance of having it, however only 44 per cent had cover. Similarly, when it comes to critical illness cover the awareness remains high (86 per cent).

However the percent of respondents who have actually taken out a product is worryingly low at just 12 per cent. The same goes for income protection insurance where the awareness is 83 per cent, with take up at just 7 per cent.

The research also shows that almost a quarter of the UK population (23 per cent) say they believe they cannot afford life insurance and when it comes to critical illness cover 26 per cent state this as their primary barrier to not taking it out.

Luxury vs. necessity
A worrying trend is that many material goods (e.g. internet broadband) are seen as ‘essential’, whereas insuring income in case of illness is seen as a ‘luxury’. 69 per cent of respondents said their broadband was essential to their day to day living and 55 per cent stated their mobile phone.

In contrast just 35 per cent said ensuring their financial security if they were unable to work was essential. Just 15 per cent of respondents said they would consider cutting back on broadband internet access, whilst a fifth said they would be prepared to cut back on critical illness and life insurance.

Coping strategies should the worst happen
The research shows that when faced with the prospect of the loss of their or their partner’s income, over two-fifths (44 per cent) of respondents would make cuts on their general expenditure and 43 per cent said they would delve into their savings. This is a worrying statistic, given that 58 per cent of people surveyed have less than £2,500 in savings, don’t have any at all or don’t know how much they have. This would not go far if you consider that the average monthly mortgage (Interest and Capital repayment) in the UK for new borrowers currently stands at £577³ a month.

¹ General population over 18 in mid 2010 = 49,212,000 according to GAD
http://www.gad.gov.uk/Demography%20Data /Population/2006/uk/wuk06singyear.xls (F27 to F104). Calculation = 56 per cent of 49,212,000

² The survey was carried out online by YouGov who interviewed a total of 5,148 UK adults between 23rd and 28th February 2011. The figures have been weighted and are representative of all UK adults (aged 18+)

³ Halifax and the Bank of England average monthly mortgage payment for a new borrower (Interest and Capital repayment, February 2011)

Giving away your wealth

The British taboo of inheritance

Britons are still reluctant to talk openly with their parents about any expected inheritance, according to figures released by Aviva. Almost two-thirds have not, or would not talk about the subject openly with their parents, despite the fact that 40 per cent of people still expect an inheritance and may even build it into their retirement planning.

“Holy-grail” of inheritance
Despite this expectation, encouragingly more than three-quarters (76 per cent) of those asked would still be happy for their parents or grandparents to take money from their property, often seen as the “holy-grail” of inheritance, so that they may enjoy their retirement.

As highlighted in Aviva’s Real Retirement Report, the rising cost of living has meant that the average unsecured debt of over-55s is £17,112, including debt on credit cards (30 per cent), personal loans (14 per cent), overdrafts (10 per cent) and store cards (7 per cent).

Most valuable asset
For many over-55s, the home is their most valuable asset. While property values are no longer racing ahead as they once did, house prices have more than doubled over the last 20 years, and the average house price for over-55s is £231,306*. This is much higher than the national average of £160,519*.

As house prices have risen, equity release has become increasingly popular, as more cash-strapped retirees consider how to fund the lifestyle they want. Turning to their home in order to fund their later years has been a solution for many, with the over-55 population holding an estimated £1.9 trillion** in equity in the UK.

* May 2011
**Calculations taken from the June 2011 Real Retirement Report by Aviva.

Financial security

Losing a loved one is greatest fear in retirement

It’s understandable that parents and grandparents want to pass their wealth on to the next generations and by making a will we can decide what happens to our property and possessions after our death. Although you do not have to make one by law, it is the best way to make sure your estate is passed on to family and friends exactly as you wish. If you die without a will, your assets may be distributed according to the law rather than your wishes.

A complicated and costly process
Dying without one can create a complicated and costly process, possibly causing family rifts and further problems for those left behind. A third (32 per cent) of retired Britons declared that losing a partner, loved one or close friend is their greatest fear in retirement, according to research from Standard Life.

The savings and investment specialist Standard Life is using the research to encourage the public to consider their estate planning requirements, including the creation of a will, so they can ensure their loved ones are financially secure after their death.

A legally binding will
Standard Life is highlighting to the public they should seek professional advice as the legislation associated with passing on wealth is very complicated and the rules between married and civil partnered couples does not apply to cohabiting couples or close friends. The simplest way for individuals to ensure their estate is paid to the right people is to create a legally binding will – previous research from Standard Life showed that as little as 48 per cent1 of the people in the UK have a will in place.

Further results from the research shows in light of the current inflationary pressures the public is facing, the rising cost of living (20 per cent) is the retired population’s country’s second worst fear in retirement and worries about getting returns on their savings and investments (11 per cent) coming in third for those surveyed.

Serious financial impact
Regardless of an individual’s age losing a loved one can have a serious financial impact, but this problem is accentuated in retirement. And while married and civil partner couples benefit from the spousal inheritance tax exemption and the transferable nil rate band, cohabiting couples or close friends don’t.

The complications of dying without a will can be devastating on others and this is made even worse when going through the heartache of personal loss. Seeking the right advice when creating a will ensures loved ones will be financially secure and that their wealth is passed on correctly.

The research also shows that nearly half (47 per cent) of the UK want to leave an inheritance to their children, with a tenth (11 per cent) directing it to their grandchildren.

Laws and tax rules may change in the future. The information here is based on our experts’ understanding of the current situation.

Junior savers

Avoiding the inflationary risk which comes with cash investments

The merits of the new Junior Individual Savings Account (ISA) are clear according to Fidelity Worldwide Investments but where to invest the allowance needs consideration. With the current low interest-rate environment many savers who would have not contemplated investing in funds may now decide to do so in order to avoid the inflationary risk which comes with cash investments.

Government-backed savings scheme
Junior ISAs are a new government-backed savings scheme for children under the age of 18. You can invest up to £3,600 in the current tax year in a cash or stocks and shares Junior ISA, or a combination of both. Multi Asset or Multi Manager funds may be a sensible option for your Junior ISA investment, especially during these volatile times. You would not have to keep changing your asset allocation to gain from market fluctuations; you could leave that to the fund manager to monitor and make use of their expertise.

Managed solutions such as Multi Asset or Multi Manager funds may also make sense for those who want to put money aside for their children but don’t want to have to worry about where to invest the money. These funds are designed for smooth returns without the individual investor worrying where to make changes in allocation.

Time investment horizon
When considering investments for the Junior ISA, parents should consider the time horizon for their investment. The longer the time horizon, the more beneficial it will be to own higher – return but riskier assets. We are currently in a two speed world, with the Asian economies faring much better than those in the West.

Investors may wish to consider exposure to this growth differential either via regional funds or via the UK where many FTSE listed companies have a strong exposure to emerging markets. The longer time horizons enjoyed by many Junior ISA investors are likely to be appropriate for riskier investments because they can benefit from the ability to ride the ups and downs of more volatile investments.

High yield equity income fund focus
Longer-term investors can also focus on high yield equity income funds. The reason for this is that dividend income has always provided the lion’s share of total returns from equities, thanks to the benefit of compounding and the relative reliability of dividend income compared with capital growth. In a low-growth environment, this is likely to be even more the case.

For those with a shorter time frame, they could consider life-style investing where a portfolio is automatically wound down from a high equity content in the early years to a higher bond and cash weighting as the target date approaches.

The value of investments can fall as well as rise, so your children may get back less than you invest. Tax savings and eligibility to invest in a Junior ISA will depend on personal circumstances. All tax rules may change in future.

The new kid on the block

Pooling your money with thousands of other people

British collective investment funds that pool money from lots of investors go back to 1868. The first funds were investment companies – listed companies that offer shares to investors and then buy shares in other companies with the monies they collect in. Just like fully functioning companies, investment companies have boards of directors to oversee the managers’ efforts, shareholders with voting rights, and reports and accounts.

Closed-ended
They are known as “closed-ended” as they have a fixed number of shares in the market. If the fund does well, the value of the investments rises (called the net asset value) and the share price should follow. In reality, there is usually a time delay and shares can trade at a discount when worth less collectively than the value of the fund, or at a premium if worth more.

Investment companies can also borrow money so they can invest in more stocks. Called gearing, this can accelerate performance if the fund manager does well, but can damage performance by a greater amount if the manager fails to deliver.

A fund is born
As issuing new shares can be cumbersome and costly, another form of fund was born called the unit trust. These issue new units every time someone invests in the fund, so the value of the fund and the value of the units are always in line, with no discounts or premiums. Also, as the funds are not structured as companies, there is no stock market listing and, instead of shareholders, investors are called unit holders and have trustees to ensure all is above board.

Unit trusts usually have a bid-offer spread, the difference between the selling price and the buying price. As unit trusts took off in Britain, another type of fund was taking Europe by storm.

Shareholder voting rights
The société d’investissement à capital variable (SICAV), like investment companies, these have shareholders with voting rights and boards of directors. Luxembourg is their favoured home and many are sold right across Europe. And like unit trusts, they are able to take in new money by issuing new shares each time someone invests. They also tend to have sub-funds that deal in different asset classes or separate currencies for various markets.

Unlike their continental counterparts, unit trusts have been difficult to sell in Europe as international buyers do not like the British trust structure. So in 1997, the Open Ended Investment Company (OEICs) – pronounced ‘oik’ – came into existence. The FSA’s rules governing which types of fund could convert to OEICs were relaxed in 2001 and since then, the majority of fund management groups have converted their unit trusts to OEICs or launched OEIC funds.

Choosing which type of fund to buy depends not only on where you live, but what your attitude to risk and your aims and objectives are. You should seek professional advice to ensure you make the right choices. For more information about how we could assist you to implement the most appropriate investment strategies for your circumstances, please contact us.

The value of these investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

A new flexible friend

Withdrawing as little or as much income from your pension fund as you wish

Generating a retirement income has now become even more flexible. From 6 April, new rules were introduced to replace the previous pension drawdown arrangement which have now provided investors with greater flexibility and control over their pension options when they retire.

Qualifying for this option
Flexible drawdown is more flexible than the previous income drawdown, and if you qualify for this option it removes the cap on the income you could take. This will not be available to everyone and there are certain criteria that must be met before you can opt for it.

Flexible drawdown gives some individuals the opportunity to withdraw as little or as much income from their pension fund, as and when they need it. To qualify, you have to declare that you are already receiving a secure pension income of at least £20,000 a year and have finished saving into pensions. The same rules apply to dependants who elect flexible drawdown.

Secure pension income
If pension contributions have been made to any pension in the same tax year or if you are still an active member of a final salary scheme, it isn’t possible to start flexible drawdown. Once in flexible drawdown, it isn’t possible to make further pension contributions.

A secure pension income means a company pension being paid to you either from the UK or from overseas; or an annuity being paid to you (from a personal pension or company pension) either from the UK or from overseas; or a State pension being paid to you either from the UK or from overseas.

Did you know?

The effective compulsion to buy an annuity by age 75 has ended

You now have more flexibility to defer taking a pension and tax-free cash payments post age 75

Capped drawdown – this option enables you to draw an income for life, with an annual limit, without having to purchase an annuity

Flexible drawdown – if you have a secure income of over £20,000 per annum you will not be subject to limits on the income you take from your drawdown

There has been an increase in the tax payable on lump sum death benefits from drawdown

Flexibility and control over your pension
These new rules, with the exception of the increased tax on death payouts, could benefit those who do not want to buy an annuity by age 75 or who want more flexibility and control over their pension.

However, the majority of people may still want to purchase an annuity in retirement, because it enables them to secure a guaranteed income in retirement.

The fund value of a flexible drawdown arrangement may fluctuate and can go down as well as up. You may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

The IHT Planning Benefits of Junior ISAs

admin — Thu, 10 Nov 2011 08:35:03 +0000

Children may not be restless with excitement of the launch of the Junior ISA, but we are pleased it will sweep aside many of the tax problems and legal issues associated previously with investing for children and offer possibilities for added Inheritance tax (IHT) and Capital Gains Threshold (CGT) planning.

Like the adult ISA, investment returns from a junior ISA will be free from personal liability to income and capital gains taxes. Likewise, the investment returns will not count towards the child’s personal income tax or CGT allowances, so those allowances remain available for other investments or any earnings that may arise.

The junior ISA can also be rolled-over into an adult ISA at age 18 allowing the child to take a large ‘tax exempt’ pot into adulthood.

Unlike the adult ISA, anyone can contribute to the junior ISA, allowing everyone to save for a child in a single vehicle. No tax is payable by any contributions to a Junior ISA. Importantly that includes the parents, which means the current income tax anti avoidance rule on parental gifts to children that generate more than £100 gross income will not apply. Contributions to a junior ISA do not affect the child’s own allowance for a cash ISA at ages 16 & 17, so there is no conflict there.

For grandparents in particular, the potential for some IHT planning might be an extra incentive to help provide a ‘tax free’ return for their grandchildren. Currently, individuals can make gifts worth up to £3,000 in total in each tax year and these gifts will be exempt from inheritance tax on death. This delivers a potential IHT saving of £1,200 on current rates. This small amount can add up and regular use over an 18 year period could still get £54,000 out of the chargeable estate, delivering a potential tax saving of £21,600. The annual exemption is per person, so married grandparents could gift up to £6,000 per tax year, which would be £108,000 over 18 years and a potential IHT saving of £43,200. Though the annual Junior Isa allowance is only £3,600 per child there will often be more than one grandchild in the equation.

Any unused part of the £3,000 annual IHT exemption can be carried forward to the following tax year, but if it is not used in that year it expires. In applying the annual exemptions, you use the exemption for the current fiscal year first, then use any unused part of the previous year’s exemption. In addition, individuals can also currently make an unlimited number of gifts up to £250. However, if they give an amount greater then £250, the exemption is lost altogether; you cannot use the small gifts allowance in combination with the annual exemption.

While this type of IHT planning is not new, there are new benefits associated in combining it with a junior ISA. Because minors cannot hold many types of investments, it has often been necessary previously for an adult to invest in their name on behalf of the child. Junior ISAs will be in the name of the child and therefore without the need for formal legal documents like trusts or deeds of gift. Other than in the event of death or terminal illness no withdrawals can be made until the age of 18. Whilst, some may see this as a disadvantage, many grandparents wanting to give a financial gift to their grandchildren may consider it an advantage compared to handing the money to a young child or setting up a trust. The child will have automatic access to the money at age 18 and if that is an issue the traditional methods of investing money using a trust may still be appropriate.

Retirees’ Dilemma

admin — Wed, 19 Oct 2011 09:40:44 +0000

People retiring in the present economic climate face a dilemma – whether to secure their pension income now, despite very poor annuity rates, or to delay until rates might improve and meanwhile try to get by on other sources of income.

The evidence suggests that delaying may not be the best course. It is possible that rates might improve in the next year or two, but the full benefit of any increase may not be passed on to investors because annuity providers are having to
accommodate ever-rising levels of life expectancy and the fragility of the bond market in which annuity funds are invested.

Also, delaying means missing out on immediate income payments, which may not be recouped even if annuity rates do rise. Those who delay are often disappointed.

When buying an annuity, the most important message is to shop around, not only between annuity providers but also between different types of annuity. The value of the income from a level annuity will quickly erode with inflation so, if a lengthy retirement period is anticipated, it may be wise to include provision for annual increases, or to opt for an annuity whose value is linked to share values, though this will depress the value of the immediate payments.

The most significant development in the annuity market in recent years has been the rise in popularity of annuities which reflect the state of individual investors’ health. These “enhanced” annuities can offer markedly improved levels of income.

If there is a need to supplement pension income, the first port of call should be ISAs, the income from which is tax free, and in this respect equity income funds currently offer significantly higher yields than most corporate bond funds, and certainly much more attractive rates than cash deposits. Some fixed term structured products, whose returns depend on the level of stock markets at a future date, are also attractive, though great attention needs to be paid to the small print. At
times like these, the return of capital is more important than the return on capital.

Those with larger pension funds are better placed to play a waiting game and may well prefer to keep their pension plans in place and draw an income from the investments under an income drawdown arrangement.

Retirees who can demonstrate that their guaranteed pension income from sources other than their drawdown plan exceeds £20,000 a year are particularly well placed, because there is no limit on the amount they can withdraw. The Government considers that having this level of income removes the risk of the investor having to turn to the state for support if the investments in their drawdown fund become worthless.

For other drawdown investors, however, withdrawal levels are restricted by the Government and have recently been reduced, causing retirees to look to other potential sources of income.

Some may consider dipping into capital to supplement their income, but this should be a last resort, as also should the equity release schemes which enable householders to cash in on the value of their homes. Maintaining a capital buffer as protection against unforeseen future financial demands should always be a long term financial objective.

Parents urged to plan for university

admin — Wed, 31 Aug 2011 08:36:43 +0000

Parents must start saving for their children’s university costs with the onset of higher fees, Martin shaw has warned. The chief executive of the Association of Financial Mutual said, “What children need today, just as much as saving to educate, is educating to save. Additional student loans will only exacerbate this issue unless there is a plan in place from an early age especially as students starting university in 2012 could graduate with debts as high as £50,000.

“If the parents of a student starting university this year had put aside £50 a month from birth, they would have accumulated more than £20,000 in savings. Most importantly, they would have helped to demonstrate the value of financial planning and responsibility.”

He added that there are many options open to parents looking to save a regular sum for the long term. Many friendly societies offer tax-exempt savings plans, and from November it will be possible to open a Junior ISA to help fund a child’s education.

Inflation to rise to 5% warns Bank of England

admin — Thu, 18 Aug 2011 12:53:53 +0000

Inflation will remain above the Government’s 2% target for at least 12 months and is likely to rise to 5% this year while interest rates look set to stay on hold until 2013.

The latest figures from the Office for National statistics show inflation stood at 4.2% in June, after falling from 4.5% in May. In the Bank’s Augusts’ inflation report, published last week, the Monetary Policy committee (MPC) says inflation is likely to rise in
the coming months before falling back in 2012 and 2013.

It says: “There is a good chance that inflation will reach 5% later this year, boosted by utility price rises, and reflecting the continuing impact from past increases in VAT and in oil and other import prices.”

The bank cut its growth forecast from 1.8% to around 1.5%, due to the euro zone debt crisis and the threat to US economic growth.

John Charcol senior technical manager Ray Boulger, says: “It looks like base rate will not go up until 2013 here. Bearing in mind the MPC has got 2 remits- to keep inflation to target and the other to facilitate employment in the general economic scenario- and the bank obviously feels it is able to keep base rate where it is and achieve this.”

Capital Economics senior UK economist Vicky Redwood says: “The MPC’s growth forecasts still look optimistic to us, particularly in light of the further market volatility seen since the committee signed off the report last week. Accordingly, we still think that keeping interest rates low will not be enough to generate a strong recovery and more quantitative easing will be necessary.”

Retirement worries keep over- 60s at work

admin — Tue, 16 Aug 2011 09:38:21 +0000

Over- 60s are being forced to work longer to enhance their retirement savings amid fears they will not be able to afford a comfortable retirement, according to research by MetLife.

Data showed that 45% of over 60s cannot afford to retire, while 1/3 want or need to work after the age of 65 to boost retirement savings. More than half, 56% of the age group said they enjoyed working.

Dominic Grinstead, managing director of MetLife UK, said: “The whole concept of retirement is changing rapidly and that is reflected in the number of people aged 60 and over who are carrying on working.

“The past decade has seen a doubling of the number of over 65s who work and clearly the numbers will continue to increase as the abolition of the default retirement age takes effect. Many are keen to carry on working, but many have to keep on working. They need retirement income solutions which can enable them to maximise income while retaining flexibility. “

However the survey identified a split between those who want to work full-time or part-time, with 40% preferring to stay in their current job but on a part-time basis, compared with 28% who want to stay full time in their current job and another 11% who would prefer to move to a new full-time or part-time post.

The poll also found that women were more likely to be unable to afford to retire than men, with 50% of women stating that they cannot afford to stop work, compared with 42% of men.

About 10% of over 60s said their employer had asked them to keep working.

Newsletter July/August 2011

neilphillips — Tue, 05 Jul 2011 19:20:24 +0000

Inflationary Pressures

Counteracting the pensioner’s worst enemy

Inflation is a pensioner’s worst enemy. Over time, it will reduce the value of your income unless you take measures to counteract it. With retirement often stretching to twenty to thirty years, your income should keep pace with inflation.

The State Pension and most final salary schemes will usually build in an annual increase. However, if your retirement income is from other sources, you may have to decide how best to protect yourself and your family against future inflation.

With a privately owned pension (such as a personal pension), the choice is yours. You can choose to have your pension paid at a level amount every year or you can build in an annual increase. This increase can either be a fixed amount each year of, say, 3 per cent or 5 per cent or instead you can request that your income moves in line with inflation.

The downside is that the starting income for an increasing pension will be lower than if you choose a level income. You therefore need to weigh up the benefits of both before making your final decision.

Funding your wealth

Choosing from different sectors

There are thousands of investment funds to choose from and they are divided into different types or sectors. You can buy funds that invest in shares, corporate bonds, gilts, commodities and property among other things; they will also typically have some form of geographical focus.

The wealth of choice means you can target any theme you choose but making the selection can be a baffling process and, to complicate matters, funds are typically divided into two categories: active and passive.

Around one in four funds is passive. There is no stock picking involved, the fund simply buys the shares or market represented and therefore tracks it – for example, a fund that mirrors the FTSE 100 and will deliver the same returns as that market.

An active fund on the other hand has a manager buying and selling assets, attempting to beat the market.

Please contact us for more information about how we can help you MAKE YOUR INVESTMENT CHOICES.

Protecting Wealth

Planning for the future is not to be taken lightly

We all want to protect our wealth and help ensure our families are provided for when we die. However, increasingly HM Revenue & Customs (HMRC) are challenging the valuations of properties given for Inheritance Tax (IHT) purposes, according to accountants UHY Hacker Young.

IHT is currently payable at 40 per cent on any amount over £325,000 – the nil rate band (tax year 2011/12). The nil rate band is the term used to describe the value an estate can have before it is taxed (£650,000 for married couples). So if you have an estate worth £500,000, £175,000 is taxed at 40 per cent, meaning the IHT bill would be £70,000.

The taxman raised £70m in additional tax last year – an average of £24,600 extra tax per case – and are targeting beneficiaries who claim a property they’ve inherited is worth less than it is in order to pay less tax.

During the financial year 2010/11, 16,000 estates paid IHT. Of these, more than a fifth – 3,441 – had the valuation of the property increased, while just 800 had valuations reduced, according to HMRC figures.

Reducing an Inheritance Tax bill

Write a Will

Making a Will is the first step to reducing your IHT bill. It helps you get an idea of what your estate is worth, therefore providing a good basis to understand how much IHT planning is required.

Great give-away

You can give away cash or assets up to the value of £3,000 a year without it incurring any taxes. This can also be backdated by one year if not already used, for example, a couple could effectively gift £12,000 in the first year if not already used and then £6,000 (£3,000 each) thereafter. Parents can also give up to £5,000 to each of their children as a wedding/civil partnership gift while grandparents can give up to £2,500. Others can also contribute to loved ones’ weddings/civil partnerships but are only allowed to give up to £1,000.

You can make small gifts up to £250 to as many people as you like, as long as you haven’t already gifted that person in the same tax year.

If you are still working and earning an income, you are also permitted to give away any surplus amounts of your income provided that, in making these gifts, your own standard of living is not affected. You must not then access your capital (savings and investments) to live off.

Seven-year rule

The seven-year rule allows you to make additional tax-free gifts providing you do not pass away within the next seven years. These gifts are called ‘potentially exempt transfers’ (PETs) and can be anything from cash to property. However, you cannot give something away and still benefit from it, for example, you can’t give away the family home and then continue to live in it unless you pay the market rent.

If you were to pass away before the seven years were up, the assets would be taxable. However, the amount would vary and depend on how close to the seven-year milestone you were. For example, if you were to die within six years, the tax bill would be less than if you passed away within a couple of months. This is known as ‘taper relief’.

A matter of trust

Placing assets into a trust in your lifetime could be a good way to decrease your IHT bill. Limited to the nil rate band, these gifts count as potentially exempt transfers. This means the same rules apply, so if you pass away before the seven years are up, IHT will be due.

It is possible for a Settlor to place assets in excess of the nil rate band in a trust. These gifts are called ‘chargeable transfers’ as tax is payable immediately the asset goes into the trust. However, if the Settlor dies within seven years then there could be an IHT liability to pay too.

Rural ambitions

Buying farmland is an alternative way to help reduce a potential IHT bill, as farmland qualifies for agricultural property relief of up to 100 per cent after two years of ownership. The land has to be actively worked on for ‘agricultural purposes’ so, unless you have rural ambitions, this will not be an option for the majority.

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.

Investing for income

Compounding of returns for the long term

If you are an income seeker, frozen interest rates at historic lows mean real losses for many savers in bank and building society deposits which fail to match inflation.

The most popular forms of income investment are bonds (which are also known as ‘fixed interest’ investments) and cash, both of which pay a regular, consistent rate of interest either annually, twice a year or four times a year. You can also obtain an income from shares in the form of dividends, and many equity funds are set up solely with the aim of generating a stable income. Importantly equity income funds often aim to achieve not only stability, but an increasing income in the long term.

Income stocks are most usually found in solid industries with established companies that generate good cash flow. They have little need to reinvest their profits to help grow the business or fund research and development of new products and are therefore able to pay sizeable dividends back to their investors. Examples of traditional income-generating companies would include utilities such as oil and gas, telephone companies, banks and insurance companies.

You should remember that these investments do not include the same security of capital which is afforded with a deposit account.

10 income investing tips

1. Sustainable long-term dividend growth – Investing in businesses when the growth potential is not reflected in the valuation of their shares not only reduces the risk of losing money, it increases the upside opportunity.

2. Inflation matters - Always bear in mind the detrimental effect of inflation. Corporate and Government bonds offer higher yields than cash but returns can be eroded by inflation. Investment in property or equities provides a vehicle to help achieve an income that rises to keep pace with inflation.

3. Consider international diversification – A small number of UK companies account for some 40 per cent of UK dividend payouts. This compares with over 100 companies in the US, for example, that provide the opportunity to increase the longevity of dividend growth.

4. Patience is a virtue - Investing for income is all about the compounding of returns for the long term. As a general rule, those businesses best placed to offer this demonstrate consistent returns on invested capital and visible earnings streams.

5. Reliability is the key – Select sectors of the equity market that do not depend on strong economic growth to deliver attractive returns to investors.

6. High and growing free cash flow – Look for companies with money left over after all capital expenditure, as this is the stream out of which rising dividends are paid. The larger the free cash flow relative to the dividend payout the better.

7. Dividend growth – In the short term, share prices are buffeted by all sorts of influences, but over longer time periods fundamentals have the opportunity to shine through. Dividend growth is the key determinant of long-term share price movements – the rest is sentiment.

8. Cautious approach - Profits and dividends of utility companies are at the whim of the regulator. Be cautious of companies that pay a high dividend because they have gone ex-growth – such a position is not usually sustainable indefinitely.

9. Investment diversification – The first rule of investment is often said to be ‘spread risk’. Diminishing risk is particularly important for income-seekers who cannot afford to lose capital.

10. Tax-efficiency - Increase your net income by using an ISA (Individual Savings Account). ISA income is free of taxation, thereby potentially improving the amount of income you actually receive. ISAs are also free from capital gains tax, allowing you to switch funds or cash in without a tax charge.

Financial intelligence

Retirement income consumed by the basic costs of living

Investors buying a level annuity with a pension fund of £80,000 will spend their entire monthly income on basic living costs within seven years of retirement, according to new statistics.

Standard Life researchers have warned that many people could see their retirement income consumed by the basic costs of living as the effect of inflation eats into the money they set aside for retirement.

The FTSE 100 company’s retirement team has warned that investors should seek professional financial advice or risk losing out from inflation, restricting living standards in the future.

‘The cost of living is rising fast for most people in the UK but this can be particularly acute for pensioners.’

Spending habits of pensioners are driven by commodities such as food and fuel bills and these inflation rates are much higher than the overall UK inflation rate. So it is crucial to consider how to protect your buying power in retirement from inflation over a long period of time, which could be 30 years or more.

The reality is that if pensioner inflation remains at around 6 per cent a year, people with a fixed income could lose almost half of their spending power within a ten-year period.

There are many options to consider at retirement that could minimise the impact of inflation on your income – seeking professional financial advice is vital. For more information about how we could help you, please contact us to discuss your requirements.

Retirement options

Revolutionising the way pension benefits are taken

Your pension is one of your most valuable assets but is it working as hard as it should be? The new retirement rules will revolutionise the way pension benefits are taken, making retirement more flexible.

Did you know?

1. Age 75 rule abolished

There is no longer a requirement to take pension benefits by a certain age. Historically, individuals have had to set up an annuity or move into Alternatively Secured Pension (ASP) by the age of 75.

2. Retirees can use income drawdown indefinitely

Investors can now use income drawdown or take no income at all for as long as they want. However, tax charges on any lump sum death payments will prevent this option being used to avoid Inheritance Tax. ASP, which had a number of restrictions and limited death benefits, has been scrapped.

3. Flexible Drawdown introduced

This is a new drawdown option that allows some investors to take as much income as they want from their fund in retirement. It is available to people over the age of 55 who can prove they already have a secure pension income of £20,000 a year when they first go into Flexible Drawdown. The secure income can be made up of state pension or from a pension scheme and does not need to be inflation proofed. Investment income does not count. It is not possible to make any further pension contributions to any pension scheme either in the year you move into Flexible Drawdown or any year thereafter.

4. Current Drawdown (now to be known as Capped Drawdown)

The maximum income that can be taken each year is subject to a cap that is broadly equivalent to the income available from a single life, level annuity. This is a slight reduction on the previous maximum allowed (120 per cent of annuity income). The income limits are age and sex specific, even after age 75. The maximum amount will be reviewed every three years (previously every five years). Reviews that take place after age 75 will be carried out annually. There is no minimum income, even after age 75.

5. Changes to death benefits and tax charges

If the pension member dies while the pension fund is in either form of drawdown, or after the age of 75, all the remaining fund can be used to provide an income for a spouse or dependant. Alternatively, it can be passed on to a beneficiary of their choice as a lump sum, subject to a 55 per cent tax charge (or nil charge if paid to a charity). The previous tax charges were up to 82 per cent on lump sums paid after age 75.

6. Rules for those already in drawdown

Individuals who are already in drawdown will not be immediately subject to the new requirements; however, transitional rules apply. They will apply until the next review date when the income limits and review periods change.

7. 25 per cent tax-free cash

The ability for most people to take up to a quarter of the pension fund as tax-free cash is still available when the individual sets up an annuity or goes into income drawdown, even if they take no income.

8. Annuities

Annuities themselves have not been changed; however, it is now possible to buy an annuity at any age after 55. An annuity will still be the option of choice for most retiring investors because, unlike drawdown, it provides a secure income for life. Annuities are to be used to secure the minimum income requirement of £20,000 to allow investors to then use the rest of their pension to go into Flexible Drawdown.

A drawdown pension, using income withdrawal or using short term annuities, is complex and is not suitable for everyone. It is riskier than an annuity as the income received is not guaranteed and will vary depending on the value and performance of underlying assets.

Bear in mind that a pension is a long-term investment. Your eventual income will depend on the size of fund at retirement, future interest rates, and tax legislation.

Flexible Drawdown

Removing the cap on the income you can take

After years of saving into your pension fund, you’ve now decided you want to retire and are overwhelmed by the retirement options available. We can work with you to choose the right strategy in order for you to enjoy your retirement years.

If appropriate to your particular situation, one option you may wish to consider is Flexible Drawdown. Perhaps the most radical aspect of the new income drawdown rules that were introduced from 6 April 2011 is that, under Flexible Drawdown, there is no limit on the amount of income that you can draw each year.

The usual tax-free lump sum is allowed but any other withdrawals taken by you are taxed as income in the tax year they are paid. If you become a non-UK resident while in Flexible Drawdown, any income drawn when non-resident will be subject to UK tax if you return to the UK within five tax years of taking it.

As the name suggests, this option is much more flexible than income drawdown. Qualifying for this option removes the cap on the income you can take.

You can draw as much income as you like when you like. However, Flexible Drawdown will not be available to everyone and there are certain criteria that must be met before you can choose it.

Giving those with very large funds more flexibility

Those over the age of 55 who can show that they have secured pension income in excess of £20,000 per annum will be able to drawdown an unlimited amount from their pension funds each year, but this will be treated as income for tax purposes.

The income included for satisfying the new Minimum Income Requirement (MIR) includes the basic state pension, additional state pension, level annuity income and scheme pensions. Please note income from purchased life annuities and drawdown arrangements do not count.
The lump sum required to purchase an annuity that will satisfy the MIR, assuming the full state pension is payable, will be about £200,000. This means that this option is available only to a small number of wealthy individuals.

A drawdown pension, using income withdrawal or short-term annuities, is complex and is not suitable for everyone. It is riskier than an annuity as the income received is not guaranteed and will vary depending on the value and performance of underlying assets.

Saving for old age

UK savers face retirement savings gap

The Chartered Insurance Institute (CII) has looked at the cost of living post-work and found that average incomes achieved by retirees are insufficient. UK savers face a retirement savings gap of £9 trillion due to increasing levels of debt, the cost of long-term care and insufficient pension savings.

The CII has used existing data produced by the Organisation for Economic Co-operation and Development (OECD) to calculate the shortfall in savings needed to cover the cost of living in old age. It shows that, on average, pensioners achieve only 30 per cent of their pre-retirement salary as income during retirement, significantly less than the 70 per cent the OECD believes is necessary to live adequately.

This assumption does not factor in the cost of long-term care and paying back of debt, so the CII has tried to show the difference between what people are actually saving and what they need to save to live comfortably and cover these additional costs.

In the latest annual Scottish Widows UK pension report only 51 per cent of British workers are saving adequately for old age. This seventh annual Scottish Widows pension report, based on interviews with 5,200 adults, shows there is ‘widespread and ingrained inertia’ across the country.

Commenting, Pensions Minister Steve Webb said: ‘The next generation will face a different world with increasing life expectancy, the decline in final salary schemes and lower annuity rates. They are going to have to take greater responsibility for saving for their retirement.’

Building a bigger pension

Reintroduction of Carry Forward rules

From 6 April 2011 the annual allowance for pension contributions reduced from £255,000 to £50,000. While this restricts the levels of contributions you can make without attracting an Annual Allowance charge, on the plus side the Government has brought back the Carry Forward rules.

Increasing pension contributions

The principle of Carry Forward allows you to increase pension contributions by using unused annual allowances from the previous three tax years. The facility therefore enables contributions in excess of the £50,000 annual allowance still to be possible.

The Carry Forward facility applies on a rolling three-year basis, so for 2011/12 the three previous tax years will be 2008/09, 2009/10 and 2010/11 – with any unused allowances from the earliest year being used up first.

So, for example, if you made no contributions to a pension in the 2008/09, 2009/10 and 2010/11 tax years, you could contribute up to £200,000 in the 2011/12 tax year.

Even though tax years 2008/09 to 2010/11 inclusive are before the rule changes, the calculation of contribution allowances is based on the new rules, so:

the annual allowance is £50,000 any defined benefit pension plans and cash balance accruals are based on a factor of 16 instead of 10, with some inflation proofing in a year when retirement benefits are taken, any pension contributions made will be assessed against the annual allowance

Qualifying contributions

To qualify, you can Carry Forward any unused annual allowances from a tax year in which you are a member of, or join, a registered pension scheme. You do not need to have a Pension Input Period (PIP) ending in that tax year, or have to contribute to the pension scheme in each tax year. Only unused annual allowances from PIPs ending in the previous three tax years can be carried forward.

Annual allowance

The annual allowance that applies to pension contributions is based upon the tax year in which the PIP ends. Each arrangement in a scheme can have its own PIP; however, the scheme may set the PIP dates or the member can nominate them.

Where the PIP dates are not nominated by the client, the PIP runs from the first contribution date to the end of the tax year in which it started – for example, if the first contribution was made on 7 May 2011, then the first PIP runs from 7 May 2011 to 5 April 2012.

Subsequent PIPs will end on the day before the anniversary of the end of the last PIP.

Where it is possible to nominate a different end date for a PIP, you need to notify the scheme administrator in advance. Subsequent PIPs will end on the day before the anniversary of the end of the last PIP.

Extra opportunities

Adjusting the PIP dates within the rules can provide extra Carry Forward opportunities.

You could amend the PIP dates provided that:

the first PIP can end in the same tax year that it started the first PIP must end prior to the anniversary of payment and can be in the same tax year that it started the second and subsequent PIPs must end in the tax year after the tax year the previous PIP ended there can be only one PIP ending in each tax year

Levels and bases of and relief’s from taxation are subject to change and their value depends on the individual circumstances of the investor. A pension is a long term investment. The fund value may fluctuate and can go down as well as up. You may not get back your original investment.

Wealth Matters

Don’t lose sight of your investment goals

Planning for your future financial independence relies on selecting the right type of investments and balancing the risks you are comfortable with alongside the potential returns. Every investor is unique and complex, so when it comes to investments, a one-size-fits-all approach just doesn’t work – there isn’t a single investment strategy that will work for everyone.

Whatever your investment objectives are for the long term, initially it is prudent to set aside short-term savings to meet any future emergencies. This should be held where you can access your money easily. Your investment goals and attitude to risk for return are personal and may change over time, particularly as you near retirement.

Looking ahead

There are, of course, times in our lives when saving money may be difficult (for example, when studying or bringing up children) but it is important to look ahead. Saving little by little out of your income or investing lump sums when you can all helps. Holding savings for a long time means they can grow in value as well.

There are different types of risk involved with investing, so it’s important to find out what they are and think about how much risk you’re willing to take. It all depends on your attitude to risk (how much risk you are prepared to take) and what you are trying to achieve with your investments.

The questions you need to ask

How much can you afford to invest?

How long can you afford to be without the money you’ve invested (most investment products should be held for at least five years)?

What do you want your investment to provide – capital growth (your original investment to increase), income or both?

How much risk and what sort of risk are you prepared to take?

Do you want to share costs and risks with other investors (by using a pooled investment, for example)?

If you decide to invest using pooled investments, consider which type would be most suitable for you. The main differences between pooled investments are the way they pay tax and the risks they involve (especially investment trusts and with-profit funds).

What are the tax benefit implications, what tax will you pay and can you reduce it?

Future planning

You may be looking for an investment to provide money for a specific purpose in the future. Alternatively, you might want an investment to provide extra income. So having decided that you are in a position to invest, the next thing to consider is: ‘What am I investing for?’ Your answer will help you to choose the most suitable type of investment for you. If you have a particular goal, you will need to think about how much you can afford and how long it might take you to achieve your goal.

You may have a lump sum to invest that you would like to see grow or from which you wish to draw an income. Equally, you may decide to invest in instalments (for example, on a monthly basis) with a view to building up a lump sum.

Investment goals

Your investment goals should determine your investment plan, and the time question ‘How long have I got before I need to spend the money?’ is crucial.

Generally, the longer it is before you need your money, the greater the amount of risk you are able to take in the expectation of greater reward. The value of shares goes up and down in the short term and this can be very difficult to predict, but long term they can be expected to deliver better returns. The same is true to a lesser extent of bonds.

Broadly speaking, you can invest in shares for the long term, fixed interest securities for the medium term and cash for the short term.

Mix of assets

As the length of time you have shortens, you can change your total risk by adjusting the ‘asset mix’ of your investments – for example, by gradually moving from share investments into bonds and cash. It is often possible to choose an option to ‘lifestyle’ your investments, which means that your mix of assets is risk-adjusted to reflect your age and the time you have before you want to spend your money.

Income can be in the form of interest or share dividends. If you take and spend this income, your investments will grow more slowly than if you let it build up by reinvesting it. By not taking income you will earn interest on interest and the reinvested dividends should increase the size of your investment, which may then generate further growth. This is called ‘compounding’.

The value of your investment can go down as well as up and you may not get back the full amount invested.

Green Money

Socially responsible investing

If you are an investor concerned about global warming and other environmental issues, how can you save and invest ethically? Ethical investments cover a multitude of different strategies, with the terms ‘ethical investment’ and ‘socially responsible investment’ (SRI) often being used interchangeably to mean an approach to selecting investments whereby the usual investment criteria are overlaid with an additional set of ethical or socially responsible criteria.

The Ethical Investment Research Service (EIRIS) defines an ethical fund as ‘any fund which decides that shares are acceptable, or not, according to positive or negative ethical criteria (including environmental criteria).’

Negative screening

Funds that use negative screening, known as ‘dark green’ funds, exclude companies that are involved in activities that the fund manager regards as unethical. Each fund group has a slightly different definition of what is unethical but this typically includes gambling, tobacco, alcohol and arms manufacture. It could also cover pollution of the environment, bank lending to corrupt regimes and testing of products on animals.

Positive screening

Positive screening funds use positive criteria to select suitable companies. Funds that take this approach look for companies that are doing positive good, such as those engaged in recycling, alternative energy sources or water purification. So an ethical fund of this type might buy shares in a maker of wind turbines or solar panels.

Engagement funds

Engagement funds take a stake in companies and then use that stake as a lever to press for changes in the way the company operates. This could mean persuading oil and mining companies to take greater care over the environmental impact of their operations or pressing companies to offer better treatment of their workers.

This process may involve making judgements regarding the extent to which such investments are perceived to be acceptable, and about the potential for improving through engagement the ethical performance of the party offering the investment.

Good prospects

Ethical investors will believe that they should not (or need not) sacrifice their life principles in exchange for chasing the best financial returns, with some arguing that in the long term, ethical and SRI funds have good prospects for out-performing the general investment sectors.

Since ethical investment, by definition, reduces the number of shares, securities or funds in which you can invest, it tends to increase the volatility of the portfolio and therefore the risk profile. This can be mitigated by diversifying between funds, and between different styles of funds and fund managers. Like their non-ethical equivalents, some ethical funds are much higher risk than others.

The value of your investment can go down as well as up and you may not get back the full amount invested.

Freedom of choice

Taking more control over your pension fund investment decisions

If you would like to have more control over your own pension fund and be able to make investment decisions yourself with the option of our professional help, a Self-Invested Personal Pension (SIPP) could be the retirement planning solution to discuss.

More accessiblity

A SIPP is a personal pension wrapper that offers individuals greater freedom of choice than conventional personal pensions. However, they are more complex than conventional products and it is essential you seek expert professional advice.

SIPPs allow investors to choose their own investments or appoint an investment manager to look after the portfolio on their behalf.

Individuals have to appoint a trustee to oversee the operation of the SIPP but, having done that, the individual can effectively run the pension fund on his or her own.

A fully fledged SIPP can accommodate a wide range of investments under its umbrella, including shares, bonds, cash, commercial property, hedge funds and private equity.

Thousands of funds

You can typically choose from thousands of funds run by top managers as well as pick individual shares, bonds, gilts, unit trusts, investment trusts, exchange traded funds, cash and commercial property (but not private property). Also, you have more control over moving your money to another investment institution, rather than being tied if a fund under-performs.

Once invested in your pension, the funds grow free of UK capital gains tax and income tax (tax deducted from dividends cannot be reclaimed).

Tax benefits

There are significant tax benefits. The Government contributes 20 per cent of every gross contribution you pay – meaning that a £1,000 investment in your SIPP costs you just £800. If you are a higher or additional rate taxpayer, the tax benefits could be even greater. In the above example, higher rate (40 per cent) taxpayers could claim back as much as a further £200 via their tax return. Additional rate (50 per cent) taxpayers could claim back as much as a further £300.

Other considerations

You cannot draw on a SIPP pension before age 55 and you should be mindful of the fact that you’ll need to spend time managing your investments. Where investment is made in commercial property, you may also have periods without rental income and, in some cases, the pension fund may need to sell on the property when the market is not at its strongest. Because there may be many transactions moving investments around, the administrative costs are higher than those of a normal pension fund.

The tax benefits and governing rules of SIPPs may change in the future. The level of pension benefits payable cannot be guaranteed as they will depend on interest rates when you start taking your benefits. The value of your SIPP may be less than you expected if you stop or reduce contributions, or if you take your pension earlier than you had planned.

A pension is a long-term investment. The fund value may fluctuate and can go down as well as up. You may not get back your original investment.

Discover more

Taking the right steps to making adequate provision for your future

As your life changes, you’ll have different protection requirements. That’s where we can help. Your financial planning isn’t complete until you assess and address your protection needs. It is important that in committing yourself to any form of protection you take into account the affordability, long term, and therefore the sustainability of the policy.

For many of us, our main concern in life is our family – but could your family support their lifestyle if anything happened to you?

5 reasons to protect your financial plan

- You’re diagnosed with a critical illness

- You suffer an accident or illness and are unable to work

- You lose your job

- You want to be treated privately

- You die prematurely

Understanding the products that are available and the sort of financial assistance they offer is reassuringly comforting. We can help you to make the right protection decisions for you and your family – please contact us to discuss your requirements.

Reliable Returns

Alternative complementary asset class

Tax-efficient investments are increasingly being used to complement pensions as part of an overall retirement planning solution. The tax relief provides a reliable return and you are able to access your money after the tax qualification periods, either to reinvest in tax-efficient investments for another round of tax relief, or to invest elsewhere.

Appropriate investors can choose to reinvest the upfront tax relief, either into a Venture Capital Trust (VCT) or Enterprise Investment Scheme (EIS) for further income tax relief or directly into a pension. The net effect is a significant increase to the investor’s retirement fund based upon tax relief rather than stock market performance. As with pensions, you can, if appropriate to your particular situation, make investments into VCTs or EISs over many years, providing diversification and access as each investment period is reached.

There are other factors that point to VCT and EIS solutions being useful tools for retirement planning and as part of an overall investment portfolio. Significantly, pension investments are largely subject to income tax as they are drawn down, whereas VCT and EIS solutions are not. Also, while VCT and EIS investments have to be held for a fixed period to qualify for tax relief, after the holding period, you have additional flexibility when compared to pensions.

However, it is crucial not just to consider them in isolation, but as a valid and important part of an overall portfolio. Even compared to Individual Savings Accounts (ISAs) – the mainstay of tax-efficient investing – they offer generous tax reliefs because, not only is growth tax-free, income tax relief is available on investing.

They are often rated higher risk because they invest in smaller unquoted stocks and due to a lack of liquidity – indeed they have to be held for a set period to retain the tax reliefs. Therefore it is vital that they are appropriately weighted within your portfolio.

They also offer an investment solution that is largely uncorrelated to the markets, and therefore a complementary asset class to more traditional pension investments.

Information is based on our current understanding of taxation, legislation and regulations. Any levels and bases of, and tax rules and reliefs from taxation are subject to change.

These investments are NOT suitable for everyone as they are higher risk investments. The investor could lose some or all of their investment. You should seek professional specialist tax and financial advice before taking any course of action.

Venture Capital Trust

Investors must retain their VCT shares for five years to retain the up-front income tax relief. Please remember that the tax rules and regulations governing VCTs are subject to change. The tax reliefs available to certain investors in VCTs are dependent on individual circumstances as well as the VCT maintaining HM Revenue & Customs approval. If this approval is withdrawn, a VCT will lose its status and all tax reliefs are likely to be cancelled.

The share price of a VCT may not reflect its net asset value. There is only a limited secondary market for shares in VCTs which may render such shares difficult to sell as they may not be readily marketable. VCTs invest in unquoted and AIM-quoted companies which are therefore smaller and carry a higher level of risk than shares which are listed on the main market of the London Stock Exchange. The shares of VCT investee companies may not be readily marketable. An investment in a VCT should be regarded as a long-term investment.

Enterprise Investment Scheme

Investments into an EIS must be retained for a minimum of three years in order to retain the upfront income tax relief. Investments made into EIS qualifying companies, because they are in unquoted companies, are likely to be higher risk than securities listed on the main market of the London Stock Exchange. Investments in shares in unquoted companies are not readily marketable and the timing of any share sales and other such realisation cannot be predicted or controlled. A partial withdrawal of an investment in an approved EIS fund is not permitted. Tax rules and regulations are subject to change, and depend on personal circumstances. Please be aware that investments within an EIS may cease to qualify. In this case, the relief available on that particular investment will be lost.

Pension sharing on divorce

admin — Wed, 29 Jun 2011 12:36:54 +0000

On or after pronouncing a decree of divorce, the English courts have the power to make pension sharing or pension attachments orders to spouses only (not children), as part of the division of family finances.
The vast majority of financial applications on divorce are settled by agreement and made into consent orders. The order will either provide for a clean break between the spouses, i.e. neither having any further financial claims on the other or the other’s estate, or will involve capital and maintenance provision, i.e. one spouse continuing to pay maintenance for the other.

Pension sharing is usually the better remedy in respect of pension rights as it gives the transferee spouse their own separate pension fund. Attachment of pension income can only come into effect when the spouse with pension rights starts to draw them, which they may never do, if they die before reaching retirement age.
If there are substantial assets so that a clean break order can be made, the first consideration is whether it is feasible to divide each class of assets in the same percentage.

Pension sharing orders divide a member spouse’s pension fund(s) in percentages by reference to their cash equivalent transfer value (CETV). That percentage represents a pension credit to the transferee and a pension debit for the transferor. It is a simple exercise if the fund is a money purchase one, as its value on any given day is defined by the value of its underlying investments. With a defined benefit (DB) scheme the CETV will be governed by complex calculations that take into account the member’s salary, age, years of service and the funding of the scheme.

A spouse due to receive a percentage of a CETV of a DB scheme will want to know whether they can take the pension credit in the form of rights in the transferor spouse’s scheme (an internal transfer) or by receiving a payment to another scheme they are already a member of, or will set up. In the majority of cases an external transfer will be the only possibility. Internal transfers more frequently occur where rights in an unfunded public service scheme arise, subject to that scheme being open to new members. A transferee of a pension credit should take advice from a suitably qualified IFA as to what their newly acquired pension pot will provide them with on retirement and at what age. 55 is the minimum age at which benefits can be taken in most schemes, though benefits will be less the earlier they are drawn. Many public service schemes do not permit ex-spouses to draw benefits as early as age 55.

Where a spouse has a pension pot with a CETV worth around £1.5m, it will be most important to ascertain whether he or she has primary and/or enhanced protection under the 2006 regulations or, if they were not applicable, is aware of the need to apply for fixed protection before April 5, 2012 to avoid the special tax charge for having a fund that exceeds the lifetime allowance.

It is important to remember the basis of valuation for the lifetime allowance is quite different in the case of a DB scheme from the CETV valuation.
The tax rules relating to the annual allowance for pension contributions and the lifetime allowance for the value of an individual’s pension fund have become exceedingly complex. Where one spouse has a very substantial pension fund, pension sharing on divorce can offer constructive tax planning opportunities. It is by no means always practical or tax effective to divide each asset class in the same proportions. Even when the parties cannot settle financial issues on divorce, the presiding judge may still leave some discretion to the spouses and their advisers to work out the precise division of the different classes of assets.
If the spouses do not want pension rights shared, the issue of an offsetting payment by the member spouse to the other spouse will arise.

Pension attachment orders can be made in respect of pensions prior to their payment or when they are in payment, in respect of lump sum commutations on retirement or lump sum death benefits. They are more likely to be useful when a clean break cannot be effected and a continuation of periodical payments to one spouse after the paying spouse’s retirement is contemplated. The court has no control of when the spouse with pension rights will retire. Attachment orders cannot be made in respect of rights being shared. Where a spouse has more than one scheme, attaching a death in service lump sum of the scheme that is not being shared maybe useful to the spouse caring for the children as it insures for the loss of periodical payments for them on the paying spouse’s premature death.

KEY POINTS

Pension sharing allows the transferee spouse their own separate pension fund and is usually the preferred option
Pension attachment orders are useful when spouses are unable to make
a clean break and there are continued periodical payments.
Even if spouses are I unable to settle all financial matters upon divorcing, the judge may use their discretion in allowing the parties to divide pension asset classes as they see fit

Britons are clueless about pensions

admin — Thu, 16 Jun 2011 08:45:47 +0000

HSBC’s report about British attitudes towards retirement makes for grim reading, says Allister Heath. 17% of respondents don’t know what their main source of retirement income will be. Another 21% believe it will be the state pension. Only 9% will be relying on personal pensions, while 4% cite selling property. Just 39% have any strategy at all. By contrast, twice as many people in Malaysia, China and India have a financial plan. So what is wrong with Briton? First, too many Britons rely on the State, even though the State pension will “be necessity always be pathetically low”. Second, financial illiteracy means millions of us don’t understand financial products and can’t work out how much we need to put by. Third, the Government keeps changing the rules and has raised costs unnecessarily via excess red tape. Fourth, financial firms are failing to create simple, low cost products. Lastly, the public needs a “reality check”. You can’t hope to “retire in your 50’s like your parents” if you are going to live to be 95.