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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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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.

New Tax Year Resolutions

As the new tax year is upon us, why not take time to re-appraise your financial position. By making some simple changes your financial position could be significantly enhanced. With the new higher rate of income tax and low interest rates, it is time to take action to make sure your financial planning meets your objectives.

Our top 10 tips are listed below;

1) Make use of your ISA allowances

If you are fortunate enough to have savings it is important to make sure that you do not pay unnecessary tax on the interest. The Cash ISA allowance has now been increased to £5,100.

2) Make full use of personal allowances

Your personal allowance will depend on your age and income but if you are not using all of your personal allowance consider whether income producing assets can be transferred from your spouse.

3) Consider ownership of income producing assets

If your spouse pays tax at lower rate than you it might be worth moving income producing assets into their name.

4) Protect your personal allowance

If you have taxable income over £100,000 your personal allowance will be reduced by £1 for every £2 in excess of £100,000 until it is completely eroded. The personal allowance could be reinstated by making pension contributions or by sacrificing salary in favour of other benefits.

5) Look at your protection arrangements

Life cover is one of the few things that have got cheaper over the years. If you have old life policies it may be worth seeing if these can be replaced with cheaper cover. This would not be advisable though if your health has deteriorated. It is also important to also make sure that your cover is sufficient and the term remains appropriate.

6) Put life cover in trust

If your life cover is not written under a trust it will form part of your estate and may therefore be taxable on death. Furthermore your beneficiaries will not get the proceeds until probate has been granted.

7) Claim gift aid

If you are a higher rate taxpayer and have made gifts to charities you can claim tax relief at the rate of 20%

8 ) Set mortgage interest against rental income

If you have a buy to let mortgage interest can be offset against your rental income for tax purposes. It is therefore best to secure debt against your rental property rather than your main residence although what matters is the purpose of the borrowing.

9) Consider repaying Mortgage Debt

With savings rates at all time lows it might make more sense to use savings to repay mortgage debt, particularly if you are on an uncompetitive fixed rate. Watch out for early repayment charges.

10) Make a Will

The laws of intestacy are complex and are unlikely to result in the best outcome for those you would want to benefit on your death. Having a valid and appropriate will in place is vital.

By David Anderson – Chartered Financial Planner @ Concept Financial Planning Ltd

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