Wednesday, 10 June 2015

How 'Dinosaur' Investment Funds are costing savers big

It is estimated that there is £450billion of UK savers and investors money sat in stagnant or overpriced investment funds*.

Many savers and investors have not reviewed their savings to ensure the ongoing suitability and efficiency of them, and as such may be losing out by not taking action.

From the 1970’s, With Profit funds were very popular investments for many, including for endowments which were designed to pay off mortgages, amongst other objectives. They were sold as generally being low risk, and employed a tactic called ‘smoothing’.
Smoothing is where the life company running the fund would hold back profits from the good years in order to apply the reserves to the bad years, aiming to give the investor a smooth return over time.

Since 2000 however, many with profit funds have cut their bonuses – and in some cases removed them altogether, meaning that many investments simply are not growing. This is bad news considering that the total UK inflation since 2000 has been 55%**.
It is estimated that With Profit investments account for £220billion across 12million savers in the UK*.

It might not be all bad news though, because there are some With Profit funds out there which will pay a healthy ‘final’ or ‘terminal’ bonus, depending upon the year the funds were invested and the market conditions in the meantime.

Many With Profit funds do not explicitly state the cost of running the fund either, so investors do not know how much is being retained by the life company and what is being distributed to investors. This illustrates the importance of regularly reviewing an investment or a portfolio which will ensure that the investments held remain suitable for individual circumstances, which change over time.

This article is for information only and before undertaking any specific action, please seek independent financial advice.

Wednesday, 20 May 2015

Retirement Options – Are retirees making the most of their pension savings?

The pension landscape for retirees is very different to how it was even 6 months ago. With the advent of the new pension freedoms, savers are being ‘trusted’ with their own money in the sense that they are now able to withdraw what they want and when they want it.
Early research shows though that only 1% of eligible pensioners (age 55+) have chosen to strip out their funds*.

With people generally living longer, making the most of pension savings is crucial to a happy retirement. The last thing you want is to run out of money and not be able to afford to live.
Annuity rates are at an all time low, and many people do not realise they have options such as exercising their right to an Open Market Option – essentially buying an annuity with a provider other than their pension provider, or exploring the possibility of being eligible for an enhanced annuity.

If a person smokes, has a higher than average BMI, takes any medication for blood pressure or cholesterol or has any health problems in general then (subject to medical underwriting) they have a good chance of qualifying for an enhanced annuity.
An independent financial adviser can undertake research and obtain quotations from all providers in this marketplace and as a result could get a retiree a better income than if they had simply accepted what is on offer from their existing provider.
An increasingly common strategy for retirement is income drawdown. Q3 2014 saw an increase of 123% of new income drawdown policies taken out (year on year)**.

The change in taxation laws mean that a pension fund in income drawdown is not subject to any tax where the policy holder is aged under 75, whereas it was previously a 55% tax charge if the fund was taken as a lump sum on death before 75.

With retirement planning, there is no ‘one cap fits all’ approach. What is suitable for one individual may not be suitable for another, and so taking independent financial advice can be seen as being very important to achieving your goals and ensuring you have a suitable retirement plan.
An IFA can also consider the taxation aspect of how to draw income, and look to minimise Inheritance Tax with prudent planning with pensions.

This article is for information only and before undertaking any specific action please seek independent financial advice.


Monday, 23 March 2015

Pension Freedom

With the new pension freedom rules just weeks away, anyone considering drawing their entire fund or a large chunk of it should carefully consider the impact this may have on their estate and tax position.

Under the new rules, after April 6th you will be able to draw as much of your pension fund as you like. It sounds great on the face of it, however you must be careful to plan ahead for the tax liabilities:
·         First of all, your payment will be taxed under an emergency tax code and on a ‘month one basis’.
o   This means that if for example you take £10,000 from your fund, even if you don’t intend to take more than that in the tax year, you’ll be taxed as though you are taking £10,000 per month and so £120,000 in the year. In this example you would immediately be taxed 40% (£4,000) and you would have to claim the tax back.
·         Any income you take should be added to any other earned income in the tax year you are taking it. If the figure being drawn takes your income above £42,386 (tax year 2015/16) then you will be liable for higher rate tax at 40% on any income above this figure.
o   This will need declaring on a self-assessment tax return – something you may not be aware of and the liability wont be due immediately
o   You don’t want to be in a situation where you have spent the money you drew down without realising there’s a potential tax charge to pay down the line

It is also really important to consider your long term retirement income and what your strategy for drawing it down will be. If you draw too much in the early days, you may find that your pension fund runs out before you expected. Consider how this would affect your desired standard of living.

A different point which hasn’t been mentioned much is the impact a large drawdown may have on your estate. Really important to consider what your estate is worth before and after any potential drawdown.
·         Will any potential drawdown make your estate worth more than £325,000? Any excess has inheritance tax applied at 40%.
o   £325,000 is the ‘nil rate band’ each individual has as standard.
o   Some may have enhanced nil rate bands if they have inherited some or all of their late spouse’s nil rate band.
o   The arrangements in your will may allow for a higher nil rate band on second death of a married couple.
o   Important to remember that money in a pension fund does not form part of your estate, so drawing down funds brings those funds into your estate

Lots of planning opportunities with this big change to legislation. Also lots of pitfalls which you need to be careful to avoid. Best to go into it with your eyes open and fully understand the impact any drawdown will have, not just on the obvious points.

This article is for information only and before undertaking any specific action please seek independent financial advice.

Friday, 20 March 2015

Budget Speech Summary 18/03/15

The recent budget speech delivered by George Osborne threw up some interesting points and plenty for us to consider.

The lifetime allowance for pension savings will decrease to £1million from 2018 (indexed in line with CPI). This sounds a lot and Mr Osborne stated that only 4% of pension savers would fall above £1million, however it will give some concern to anyone with substantial savings in a pension wrapper. Prudent planning will be required to ensure that the new limit is not breached. It is worth remembering also that the lifetime limit was £1.8million just 3 years ago.

The government have promised to look into the use of ‘deeds of variations’ to deceased’s wills, and consider whether this should be seen as IHT avoidance. Another planning need when considering the tax consequences of your estate and how it will be divided upon your passing.

Savers should be pleased with several points in this speech also. The removal of any tax liability on the first £1,000 of savings income is a boost, and will be a welcome bonus to millions of savers. You could be earning 2% interest on £50,000 of savings and currently losing £200 to the tax man (basic rate), £400 (higher rate) or £450 (additional rate).

The help to buy ISA should assist many young people who are finding it hard to save for a deposit on a property.

In all it was an interesting speech with plenty to consider, and as usual will create opportunities and needs for sound planning in many areas.