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update on state pensions: essential reading for the under 50s

Recent changes announced by the government to the state pension will result in nearly six million people currently in their forties having to wait longer until they can retire. It’s a development which has raised concerns over the dependability of the state pension, which for many makes up the lion’s share of their retirement income and is the most valuable state-funded perk for even more people.

For the seven decades between 1940 and 2010, the state pension age remained constant for both men (65) and women (60). However, thanks to the 1995 Pensions Act, the age for women was increased to 65, a change which was to be phased in between 2010 and 2020. This was then altered further when the Conservatives and Liberal Democrats formed the coalition government in 2011, speeding up the process so that the age for women would increase to 65 between April 2016 and November 2018, with a further increase to 66 for all working adults from April 2020.

Under these plans, the state pension age would be 68 for those born after 6th April 1978. But the changes announced in July this year mean that window will increase to include those born between 6th April 1970 and 5th April 1978. The pension age for anyone currently under 39 is yet to be confirmed. The changes are likely to affect the younger generations who have lost out through the closure of ‘final salary’, or ‘defined benefit’ pension schemes.

Those in their late 30s and 40s are being described as the ‘sandwich generation’, being as they’ve missed out on the final salary pension schemes enjoyed by older generations, but are now too far through their working lives to feel the full benefit of automatic enrolment which younger generations will experience.

However, there are further concerns that things could change yet again, as the government has stated that law on the proposed pension changes won’t be passed until 2023, essentially preparing to pass the legislative aspects on to a future government. Thanks to Theresa May’s weakened position and Labour’s opposition to the proposed increases to state pension age, the changes may not happen at all.

As such, there have been calls from those in the financial world for an independent body to oversee any future changes, as well as the establishment of a national savings strategy to help people with their savings and investments to provide for their future

Sources
http://www.telegraph.co.uk/pensions-retirement/financial-planning/state-pension-shake-everyone-50-needs-know/

Government launch date for 120% drawdown limit …

The new drawdown limit of 120% will be introduced from 26 March, the government has revealed.

Chancellor George Osborne announced plans to return the limit for capped drawdown to 120% of  GAD (the Government Actuary’s Department) rate in his Autumn Statement in December 2012, but gave no date for the change.

In April 2011 the government changed the drawdown limit from 120% of the GAD rate, reducing it to 100%.

Prior to this, individuals could take 120% of the income level set by GAD. This was reduced to 100% in order to prevent investors from depleting their savings too quickly.

The move to reinstate the 20% uplift at the end of last year followed growing pressure from pension providers and MPs, who received complaints from retirees hit by cuts of up to 50% in their income as the GAD rate tracked annuity rates downward.

How providers are going to facilitate this change we are unsure at the moment, although welcome for retirees in drawdown they still have to wait until March.

 

For further information please do not hesitate to contact us on 01737 225665 or advice@conceptfp.com

 

building your financial future

 

 

Source: Citywire NMA Alex Steger

Pension Death Benefit Changes – April 2011

Information from Her Majesty’s Revenue and Customs (HMRC) signals that there will be a number of significant changes in the pension death benefit rules from April 2011.

The main changes after April 2011, concern three aspects:

1) what pension benefits can be passed on at death

2) what the tax charges may be

3) what the implications are for Inheritance Tax liability

The last major revisions to the HMRC Pension Death Benefit rules were made in April 2006.

For deaths after 5th April 2011, pension lump sum benefits will be allowed at any age. If these benefits are paid to dependants from ‘crystallised rights’ (relevant existing pensions being paid to the individual, which can be an aggregate of several pensions) a tax charge of 55% will be made – an increase from the present 35%. A tax exemption may be allowed if this lump sum death benefit is made to a charity.

From 6th April 2011, the risk of Inheritance Tax charges on pension rights is lessened. Previously any changes to pension rights by an individual, prior to death, such as deferring taking retirement benefits (depriving an estate by an ’omission to act’) or reducing pension income, could be perceived by HMRC as an attempt to benefit others after their death.

Where HMRC perceives that an individual had deferred taking their retirement benefits or had reduced their pension income for retirement planning reasons, HMRC will not pursue a claim, particularly if the benefit is paid to a widow(er), civil partner or financial dependant.

On death, if before age 75, after 5th April 2011, any lump sum benefit will still be tax free if paid from ‘uncrystallised rights’ – funds held in respect of the member under a money purchase arrangement that have not as yet been used to provide that member with a benefit under the scheme and so have not crystallised.

Lump sum death benefits paid to charities from ‘crystallised rights’ will not be subject to the 55% tax charge. After 5th April 2011 the option to pay non-annuitised pension benefits tax free to charities, has been extended to include deaths before age 75, subject to a number of criteria, including that the deceased member or dependant has nominated a recipient charity. It will be no longer possible for a scheme administrator to nominate a recipient charity.

Protecting Against Short-Term Risk

*Guest Blog by Colin McInnes @ Quartet Capital Partners LLP 

MY ASSET ALLOCATION – PROTECTING AGAINST SHORT-TERM RISK 

It still surprises me the extent to which private client investment firms ignore managing clients’ asset allocations on a dynamic or tactical basis and believe that fund or stock picking is the way to drive performance. To our mind, asset allocation is the biggest driver behind investment performance and is a key component of Quartet Capital’s investment offering. This is where we seek to add value for our clients. 
Currently we are living in a very unstable macro environment. The biggest influences on returns are the extent to which geopolitical factors will influence market sentiment; whether we are entering an inflationary or deflationary environment; and does the recent pullback in global equity markets spell the end of the recovery started several months ago? 

Our view is that we are just going to have to get used to political intervention – be it with Germany limiting short-selling or Europe muddling through the EU banking stress tests. This intervention will inevitably lead to higher levels of volatility as skittish investors focus on the latest news.

In terms of the global economic recovery, we view the data coming through in the UK, Europe and US as worrying and have increased our fears that we may suffer a double-dip recession. We remain concerned that markets are still in a long-term cyclical bear market and view the drop in risk asset prices as a healthy correction to markets that had spiked.

Until global price/earnings ratios are in single digits, we fear more downward lurches. If the economic recovery does gain traction, this market setback may create short-term buying opportunities, primarily in equities although corporate debt also begins to look interesting. Corporate bond spreads have widened but more as a result of government debt prices rallying strongly. Despite the rally in conventional government debt, we have maintained a large exposure.

This has been done for two main reasons. First, we remain fearful of deflation and are in agreement with the Monetary Policy Committee that UK inflation will quickly reverse in the second half of the year. Second, with big macro risks around, government debt has benefited from a flight to safety. To further protect portfolios, we hold a position in physical gold as a form of disaster insurance.

Elsewhere we have little BRIC, Asia or emerging market exposure due to our concerns that these markets are overvalued and offer little upside on a risk-adjusted basis. We also have no exposure to Europe – either currency, debt or equities across our sterling or US dollar accounts. But we are getting more positive about the prospects for Germany due to its large export sector and we might allocate funds there while hedging out currency exposure. In other currencies we maintain a significant exposure to the US dollar and despite the recent rise in sterling, view the dollar as being the lesser of two evils.

In relation to other assets classes, our hedge fund and absolute return positions have held up well and we remain positive on the outlook for volatility-based investment strategies. We hold two ‘special situation’ positions in the UK commercial property sector. We fear that limited upside now exists in the sector but special situations by their nature should not require broad market catalysts to come to fruition. We also hold a position in a ‘busted’ structured product that should produce a gross redemption yield of around 15% over the next 18 months.

Recent launches look uninspiring due to current interest rate levels but decent opportunities exist in the listed secondary market if one can accurately price the underlying constituents of the structure and can get comfortable with counterparty risk.

To conclude, we are pretty worried about short-term risks and have positioned portfolios accordingly.

We hope to be surprised on the upside.

Colin McInnes Bio

 

 Quartet Capital Partners LLP
 

 

 
 

 
 
 


Quartet Capital Partners LLP – Website Click Here

Concept Financial Planning Main Website

Planning ahead

Throughout every stage of your life, finding the right balance of investments can be a challenge. When stock markets are volatile, investor sentiment is fragile and economic growth is weak, it can seem even more of a conundrum, particularly if you are near retirement. Achieving the right balance of investments is crucial if you want to enjoy a comfortable old age.

Britons are living longer, and it is now not unreasonable to expect 30 – or even 40 – years of retirement. State pensionable age is likely to continue its rise, forced higher by the massive budget deficit and increased lifespans in the UK. It is wise to start planning early – you shouldn’t wait until you are near retirement before considering your circumstances, so take stock of your situation well in advance.

In order to do this you need ask yourself some questions; When do you want to retire? How much do you need to ensure a comfortable lifestyle? What are your liabilities?  What have you saved so far? Consider all your assets that might be able to generate future income for you, in order to determine the maximum income you might be able to achieve.

As you approach retirement, your attitude to risk is likely to change, and effective asset allocation becomes even more important. Higher-risk asset classes, such as equities, tend to perform well over the long term; however, as you near retirement, your portfolio will have less scope to recover from a stock-market decline. Therefore, as you grow older, it makes sense for your portfolio’s asset allocation to evolve with you and you might want to consolidate your gains and shift into assets with a lower risk profile.

A reduced risk profile is likely to lead to a portfolio that focuses less on volatile assets, such as equities, and more on lower-risk asset classes such as bonds and cash. One simple rule of thumb relates to an investor’s age: if you are 25, 25% of your portfolio should be in bonds and cash; if you are 40, 40% of your portfolio should be in bonds and cash. On this basis, by the time you reach the age of 65, your portfolio should have a maximum of 35% invested in higher-risk investments such as equities.  At Concept Financial Planning we use risk and time adjusted portfolios which balance the risk reward trade off.

Of course, everyone’s circumstances are different, but proper planning will help you towards the retirement you want.  Nevertheless, this is a complex area; expert advice is essential.

Pension Planning Guide

Pension Income Options

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My Property Is My Pension

Disillusioned with returns from pension funds and attracted by a property market boom lasting almost 10 years, many have turned to the property market to help fund their retirement.

The pensions versus property argument is a strange one.  A pension scheme is not in itself an investment but simply a long term savings vehicle which conveys certain tax benefits.  Returns from a pension scheme will depend on the assets that are held within it and this could range from cash accounts to emerging market equity funds.  Indeed it is possible to hold property within a pension fund.  Commercial property can be held directly while access to the residential property market can be obtained from a range of syndicated property vehicles and managed funds.

There is no doubt that residential property has had periods of strong performance but it in recent years we have seen the re-emergence of negative equity and therein lies one of the biggest risks with property investment.  In order to purchase property, it is normally necessary to borrow a large percentage of the asking price.   This works well when property prices are rising but when prices fall equity is quickly wiped out.  With a 10% deposit, a 5% fall in property prices wipes out 50% of your investment.  Furthermore, mortgage interest needs to be serviced and if you are reliant on rental income to meet these payments, things can get difficult if you cannot find a suitable tenant.

It is also worth bearing in mind the cost of ownership.  The upfront cost of owning property includes stamp duty, mortgage fees and survey costs.  Most pension funds have no upfront charges.  The ongoing costs of property ownership can also be high when you factor in insurances, council tax and management fees.   Most pension funds have annual costs of between 1 and 2% of the fund value. When you come to sell a property estate agent and solicitor fees need to be paid and potentially there could also be a large tax bill to pay.

The argument is really about which asset class is likely to perform best over the envisaged investment timescale be it property, equities, fine wines , modern art or any other asset that is likely to increase in value of the longer term.  The most sensible approach to building funds for retirement is to have exposure to a range of asset classes and to hold them in the most tax efficient way possible and that is where pension schemes can play a part.   Pinning your retirement dreams on one single asset class is a risky thing to do, pinning them on one single property which is heavily mortgaged is even more risky.

The Value of Retirement Advice

A recent report by Unbiased, the Independent Financial Adviser search website, has revealed that 36% of those seeking independent financial advice do so in relation to retirement planning.

The large number of people seeking advice in this area is perhaps not surprising.  Despite “Pension Simplification” retirement planning remains complex.  Increased job mobility means that by the time they retire many people hold a range of pension plans, some occupational, some personal and unsurprisingly these plans are often not fully understood by those that hold them.

There may be a strong temptation to consolidate pensions in order to cut down on paperwork and ease the administrative burden but before undertaking any consolidation exercise, the benefits offered by your existing schemes should be thoroughly explored.  While older contracts may have higher charges they may also offer useful features such as guaranteed minimum growth rates or guaranteed annuity rates (the rate at which the capital will be turned into income once you retire).  If you have final salary pensions then a thorough analysis should be carried out to determine the viability of a transfer.

When you come to take benefits from pension schemes the options are again many and varied but unfortunately most people end up buying an annuity from their existing pension provider.  If annuity purchase is deemed to be the most suitable means of drawing income, it pays to shop around to get the best possible annuity rate.

Whilst it is crucial to take advice on making the most of your retirement funds it is equally important to ascertain the competence of your adviser.  Unfortunately the Financial Services Authority continues to uncover examples of poor advice in relation to retirement planning.  With increased longevity the effects of the decisions you make regarding your retirement could be long lasting and it is therefore vita that you take good advice and make the right choices.

What’s so wrong with an Annuity?

The continued unwillingness of people to make provision for their retirement continues to be a source of concern to policy makers. Much of the debate as to how to encourage retirement saving has centred on tax breaks and product design and the obligation to purchase an annuity is frequently cited as one of the reasons people do not contribute to registered pension schemes. Indeed the Tories have now promised to end compulsory annuity purchase if they get into power and presumably, should this happen, pension providers will be flooded with new applications. But are annuities really that bad?

The main objections to annuities are that they are inflexible, poor value if you die prematurely, and rates are poor. True, they are inflexible in that once you select the features of your annuity you cannot change them. Yes they are poor value if you are short lived but conversely they are good value if you are long lived. But are rates really poor? And if so, what are they poor in comparison to?

Certainly annuity rates have fallen significantly since their peak in 1990 so are they poor value on a historic basis? No not really. In 1990 interest rates hit 14% and inflation was running at around 7% per annum. While this was very bad news for borrowers it was good news for savers. Today savers are lucky to get a 3% return on their cash. Furthermore, in the last 20 years we have seen life expectancy increase further.

A 60 year old man in good health can currently expect to receive an annuity rate of just over 6%. This is for a level annuity with a 10 year guarantee. When considering equity based investments an assumed rate of growth of 7% is generally used. This might lead one to conclude that annuities are poor value since the annuitant only receives what might reasonably be expected as an investment return, while the capital itself is sacrificed.

The key point though is that an annuity carries no investment risk. Buying a level annuity involves exposure to inflationary risk, life company solvency risk and mortality risk, but not investment risk.

To assess whether paying into a pension and then buying an annuity, is worthwhile we need to look at a similar risk alternative.

Case Study

Let us consider the case of Owen Michaels who is nearing retirement. Owen is aged 50, earns a salary of £40,000 and is in good health.
Let us assume that rather than invest into a pension fund Owen chooses to use Cash ISAs as his retirement funding vehicle. This means he is free to draw money out without restriction and without tax liability.

ISA contributions of £400 per month are made from net salary for the next 10 years. After 10 years, the value of his ISA portfolio (assuming a 3% growth rate net of charges) stands at £55,896.

If contributions of £400 a month had been made to a personal pension fund, tax relief of 20% would have been received and at the end of 10 years (again assuming a 3% net growth rate) Owen’s pension fund would be worth £69,870. From this amount, he could take tax free cash of £17,467 and a net income of £2,527 would be generated via the annuity. From the tax free cash let us assume that £631 a year were withdrawn (25% of the net annuity rate) giving a total annual income of £3,158.

If Owen were to draw £3,158 each year from his ISA portfolio, and assuming a continued net growth rate of 3% per annum, the ISA portfolio would be exhausted after 23 years. Coincidentally, the average life expectancy for a 60 year old male is now just over 23 years.

Clearly if Owen does not survive the 23 years the decision to save via ISAs would have been vindicated but, if he had gone down the pension route and taken tax free cash his beneficiaries would still have access to the residual tax free cash and remember, the annuity rate used had a 10 year guarantee so the minimum return would be £25,270 (£2,527 for 10 years). After 10 years Owen’s ISA is worth £35,642 but the pension residual tax free cash would be worth £15,339, so the worst case scenario is a loss of £20,303 when compared to the ISA route.

So when viewed against a similar risk alternative, annuity purchase continues to stack up reasonably well. The real benefit it offers is as an insurance against longevity and if it were viewed as insurance rather than investment it might get a better press. Like any insurance it is good value if you claim (live beyond average life expectancy) and poor value if you don’t claim (die prematurely).

Pensions are intended as a vehicle to providing income in retirement. As a mechanism for turning capital into an income stream which is guaranteed for life, annuities are perfect. Certainly there are more flexible alternatives and it is possible that in future these alternatives will be available beyond age 75 but for those unwilling to accept investment risk annuity purchase continues to be the most appropriate option and still has much going for it.

A Lump Sum Cash Injection – Buy Now While Stocks Last?

The minimum age at which you can take benefits from an authorised pension scheme is currently 50 but from 6 April this year the minimum retirement age increases to 55. Research published in June 2009 suggested that as many as 80% of 50 year-olds who planned to draw on their pension before age 55 were unaware of the change.

Anyone who is currently aged between 50 and 54 should now be considering whether it is appropriate to take benefits from their pension scheme before the opportunity is lost.

Benefits can be taken in the form of a tax free lump sum (usually capped at a maximum of 25% of the pension fund value) and a taxable income. It is possible to access a tax free lump sum and defer taking a taxable income and for many this could be attractive.

Consider the example of 52 year Michael who is a cautious investor with a pension fund of £80,000. In recent years Michael has had to meet some large expenses and as a result is now paying interest on an unsecured loan of £20,000 at a rate of 9% per annum. In line with his preference for a cautious investment strategy, Michael’s pension fund is invested in deposit fund and as such is currently offering a minimal return. Unless Michael’s pension fund offers the realistic prospect of an annual return in excess of 9% per annum Michael would be better served taking a £20,000 tax free lump sum from his pension fund and clearing his debt. The repayments he was making could then be used to replenish his pension fund.
Taking pension benefits prior to age 55 will not be appropriate for everyone but could be beneficial in certain circumstances. For example:

• If you are paying a high rate of interest on loans
• If you wish to help children onto the property ladder
• If are struggling to secure bank funding for your business
• If you wish to stop work before age 55

The above list is not exhaustive and anyone considering take benefits from their pension scheme should seek professional advice.

By David Anderson – Chartered Financial Planner

Concept Financial Planning

Rule Change !

From 6th April 2010, you will have to be 55, rather than 50, to access any money from a personal pension scheme. So if you are likely to want to take any benefits and you are over 50 but not 55 by April you do not have long to make a decision.

What is to decide?

Making this decision is not as straight forward as you might think, there are many things to consider. I have highlighted the 3 areas to think about.

Firstly, how does this fit into my financial plan and what I mean by that is – was this one of your objectives to ‘retire’ or ‘take benefits’ before 55?
Just because legislation changes you don’t have to take the opportunity if it is not in your plan.

Seondly, what are he cost implications for doing this?
Things to consider here…..
* Cost of the product not only now but ongoing
* Tax cost – if income is delivered how much tax will you pay on this?
* Investment – if you take the money-  what do you do with it? – the investment risk and tax status are both   considerations
* Death – once a pension is ‘opened’ you can attract a death tax by the government at a rate of 35%, whereas no tax is payable if your pension has not been opened.

Thirdly – the retirement options market has dramatically changed over the past years with lots more options and choices to make – so think carefully and make the right choice for you and your financial plan – this decision will be with you for the rest of your life, you can not reverse the decision once you have taken action.

These are not the only options you have, the decision that you make for your retirement are important and as such that the advice of a professionally qualified experienced planner to guide you through this complex topic.

Concept Financial Planning – Retirement