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Smart Money

  1. 1. esmartmoney MAY/JUNE 2011Is it time to Take a morespring-clean flexible approach to retirementyour portfolio? How the new rule changes could affect your future planningPicking the right combination of assetswill depend on your risk profile How focusedEstate is your portfolio?planning Investing for growth, income or bothTax saving incentivesfor substantial Absolutecharitable legacies return funds Steadier results through a combination of strategies A ION 16 S E rn C H N S ge G pa N L PE RU E W to Tu E N
  2. 2. IN THIS ISSUE in this issue Financial 16 planning is 12 our business. We’re passionate about making sure 11 your finances are in good shape. 05 Absolute return funds Steadier results through a 15 gender-bAsed insurAnce rAtes 20 budget 2011 At A glAnce combination of strategies EU rules against sex discrimination The key announcements from the Chancellor’s second Budget speech Our range of personal financial planning services is extensive, covering areas from pensions to inheritance 06 Pension reforms Radical changes announced to 16 tAke A more flexible APProAcH to retirement 22 budget 2011 winners the public sector How the new rule changes could Who can expect to be ‘better’ matters and tax-efficient investments. affect your future planning off following George Osborne’s 06 estAte PlAnning Budget speech? Contact us to discuss your current situation, and we’ll Tax saving incentives for substantial charitable legacies 18 Junior individuAl sAvings Account 23 budget 2011 losers Savings for children in Britain Who can expect to be provide you with a complete financial wealth check. 08 is it time to sPring- ‘worse’ off following George cleAn your Portfolio? Picking the right combination of 18 stAte Pension Age Helping Britain live within Osborne’s Budget? assets will depend on your risk profile her means 24 A budget for business The highlights at a glance 10 tAxing times 19 nAtionAl sAvings & How the taxman treats investments investments Reintroduction of index-linked 26 wHAt tHe numbers meAn to you 12 get your Pension PlAnning bAck on trAck savings certificates pegged to the retail prices index Post Budget 2011 taxation and allowance data Are you financially prepared for retirement? 28 emerging mArkets An important consideration for 15 How focused is your Portfolio? Investing for growth, income or both some investors02 03
  3. 3. WElcomE INVESTmENTWelcome Welcome to the latest issue of our magazine, in which we present the key financial planning topics that will help you make more of your money. As life expectancy rates in the UK continue to rise, the coalition Government estimates that nearly one in five people will live to see 08 Absolute return funds their 100th birthday. Radical legislation will be required in an attempt to ensure pension r ss you Steadier results through a combination of strategies d i sc u la n n i n g savings are sufficient for these retirees, which To cial p in turn will help reduce the burden on the r state. As people are also increasingly taking finan iremenTs o er In the current investment climate, absolute return funds could offer the ordinary investor access to a range a more flexible approach to retirement, requ ain furTh se of more sophisticated investment techniques previously only available to the very wealthy. T often winding down rather than retiring on a To ob aTion, plea m infor nTacT us. specific fixed date, on page 16 we explain the These products, which have only become For the more adventurous investor, Unlike hedge funds, absolute return new rules and consider whether you are likely co generally available in more recent years, absolute return funds could be used as the funds are fully regulated by the Financial to be affected. aim to provide a positive return annually foundation of a portfolio while buying more Services Authority and investments All investments carry a degree of risk regardless of what is happening in the aggressive funds alongside. Alternatively, for in them are covered by the Financial but some are more risky than others. Once stock market. However, this is not to say more cautious investors they could provide a Services Compensation Scheme, 06 you have established a solid foundation of they can’t fall in value. Fund managers foundation for a more conventional portfolio. providing they are based in the UK. savings for the short term, you may look stress that investors should not expect However, it is vital that investors choose Investors in absolute return funds are to investments to provide more growth the funds to make money for them month carefully and obtain professional advice principally liable to Capital Gains Tax potential over a longer period, typically in, month out, but over the medium before entering this market. (CGT), which is charged when you sell 23 five years or more. On page 08, we discuss term – five years – they should produce an investment and realise ‘gains’ (profits) why no one investment strategy will suit positive returns. building A above a certain level. Current CGT rates everyone and look at how to divide up your bAlAnced Portfolio are 18 per cent or 28 per cent for basic investment portfolio into different types of invest in A wide Absolute return funds do not rely heavily and higher rate tax payers respectively. investments that change over time. rAnge of Assets on a rising market for their success, In addition, every investor can also realise Do you want to grow your capital, Absolute return funds achieve their steadier rather the skill of the manager. They are £10,600 of profits in the current 2011/12 increase your income or both? Your answer results through a combination of strategies. therefore a true diversifier and could tax year without having to pay CGT. n will determine the type of investments One strategy is to invest in a wide range also be an important tool for building a you select and, in addition, you need to be of assets, including not only shares, bonds balanced portfolio that grows over the 24 aware of the concept of ‘total return’. This and cash but also the likes of property and medium to long term. is the measurement of performance - the hedge funds. Another is to use derivatives, actual rate of return of an investment or a which are specialised products that Absolute pool of investments over a given evaluation allow investors to bet on the future price period. Total return includes interest, capital movement of an asset. Crucially, this allows return gains, dividends and distributions realised investors to make money when an asset is funds achieve over a given period of time. Read the full falling, as well as rising, in price. To make their steadier article on page 15. money in a falling market, absolute return results through a A full list of all the articles featured in this managers can make use of sophisticated edition appears on page 03. investment tools such as ‘shorting’ and combination of ‘credit default swaps’. strategies. One Used properly, these tools aim to allow strategy is to invest Content of the articles featured in this publication is for your general information and use only and is not absolute return funds to do better than in a wide range of intended to address your particular requirements. They straightforward equity or bond funds when should not be relied upon in their entirety and shall markets are falling. However, they are likely assets, including not not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate to lag behind their more conventional rivals only shares, bonds and timely information, there can be no guarantee that such information is accurate as of the date it is when markets are rising. and cash but also received or that it will continue to be accurate in the the likes of 12 future. No individual or company should act upon such Preserve weAltH, in good information without receiving appropriate professional advice after a thorough examination of their particular times And in bAd property and situation. We cannot accept responsibility for any Absolute return funds have a broad hedge funds. loss as a result of acts or omissions taken in respect of any articles. Thresholds, percentage rates and tax appeal and a place in many investors’ legislation may change in subsequent Finance Acts. Levels and bases of and reliefs from taxation are portfolios because they aim to do what subject to change and their value depends on the a lot of investors want, which is to make individual circumstances of the investor. The value of your investments can go down as well as up and you money and preserve wealth, in good may get back less than you invested. times and in bad.04 05
  4. 4. NEWS IN brIEf PENSION You’ve REfORmS Radical changes announced to the public sector protected your most Labour peer Lord Hutton has recommended to ministers that public sector workers should no longer have final salary pensions. Instead they should valuable assets. have schemes linked to average earnings, while paying more and working longer. From 2015, most of the six million state employees will be expected to retire at the state pension age, which is due to rise to 66 by 2020. Armed Forces Estate planning personnel, firemen and police officers, Tax saving incentives for substantial charitable legacies who can currently retire in their 50s or even younger, would have to wait until If you have an estate currently worth more than £325,000, you But how financially secure are your dependents? they reach 60 to receive a pension. should plan early and act decisively if you are to avoid burdening Lord Hutton was asked to draw up plans your heirs with a future Inheritance Tax (IHT) liability. for the future of public sector pensions, which have become increasingly During Budget 2011 measures were IHT rate. Let’s be clear: no beneficiaries unaffordable as life expectancy rises. announced to encourage charitable giving will be better off, just the charities to Timely decisions on how jointly owned assets are held, This would mean the end of final salary that will be of interest to both the voluntary the tune of £300m. I want to make giving schemes, which have largely disappeared sector and those who donate to charity. The 10 per cent of your legacy to charity the the mitigation of inheritance tax, the preparation of a in the private sector. However, rather than replacing them with the defined benefit reduction from 40 per cent to 36 per cent in the rate of IHT will become applicable from new norm in our country.’ People with estates larger than £325,000 will and the creation of trusts, can all help ensure your schemes common in the wider pensions 6 April 2012 where 10 per cent or more of a should arrange their affairs carefully to dependents are financially secure. industry, he has recommended that the deceased’s net estate is left to charity. avoid paying more IHT than they need relatively liberal career average earnings The current £325,000 nil rate IHT band is to. It’s never too early to think about this system be adopted. frozen until April 2015 and will be indexed subject. There is a plethora of things people against the Consumer Prices Index measure can do to reduce a liability and ensure they Contact us to discuss how to safeguard your Lord Hutton says that, while the special status of these workers should be of inflation. The move to boost philanthropy, known leave the maximum amount to their family and not the taxman. n dependents, wealth and assets, don’t leave it until respected, it is no longer acceptable as ‘10 for 10’, will cost the Treasury about it’s too late. for pensions to be paid in early middle £170m a year by 2015/16 but it is estimated THIS IS A vERY COmPLICATED AREA age. In future, the uniformed services the measure could result in more than OF FINANCIAL PLANNING AND should not be able to retire before £350m worth of additional legacies in the OBTAINING PROFESSIONAL ADvICE their 60th birthday. He also says that it first four years of the scheme. IS ESSENTIAL TO PRESERvE YOUR should be possible to introduce the new The Chancellor, mr Osborne told the WEALTH FOR FUTURE GENERATIONS. pension ages by the end of the current Commons: ‘If you leave 10 per cent or FOR INFORmATION ABOUT HOW WE COULD HELP YOU, PLEASE CONTACT US Parliament, in 2015. more of your estate to charity, then the TO DISCUSS YOUR REqUIREmENTS. Government will take 10 per cent off your06
  5. 5. WEAlTH crEATIoN WEAlTH crEATIoN DID yoU kNoW? Since April 1962 to February 2010, shares have beaten cash: n in 92.3 per cent of all 10-year periods n in 100 per cent of all 15-year periods n in 100 per cent of all 20-year periods Source: The Office for National Statistics and M&G data, February 2010Is it time to The important thing to remember about investments is that, even if your investment goes down, you will only actually make a loss if you cash it in at that time. You should be prepared to take some risk and you may seespring-clean some falls in the value of your investments. There is also the issue surrounding currency risk. Currencies – for example sterling, euros, dollars and yen – move in relation to one another. If you are putting your money into investments in anotheryour portfolio? country, then their value will move up and down in line with currency changes as well as the normal share-price movements. Another consideration is the risk of inflation. Inflation means that you will need more money in the future to buy the same things as now. When investing, therefore,Picking the right combination of assets will depend on your risk profile Saving your money in a range of assets beating inflation is an important goal. n helps reduce your exposure should one ofAll investments, including cash deposits, carry a degree of risk but some are more risky than your investments suffer a downturn. For many SprINg-clEANINg investors the creation of a ‘balanced’ portfolio yoUr porTfolIoothers. Once you have established a solid foundation of savings for the short term, you maylook to investments to provide more growth potential over a longer period, typically five years means spreading investments across a When reassessing your financial plans, it’s important to consider the five steps below before you door more. There is no one investment strategy that suits everyone and your decisions on how to range of products to minimise risk exposure. anything with your money.divide up your investment portfolio into different types of investment will change over time. 1) What are your financial goals? 2) What’s your time frame?If appropriate to your particular situation, your portfolio. Above all, there is tax treatment, which could affect your one particular asset. Key to Growth stocks are held because 3) What is your attitude to risk?the start of the new 2011/12 tax year is the importance of diversification, choice. These asset classes have different diversification is selecting assets investors believe their value is 4) How much can you afford to invest?a good time to reconsider your attitude both geographically and between risk characteristics and whilst these that behave in different ways. likely to grow significantly over 5) Have you obtained professional financial advice?towards risk for return and give some sectors, even between asset classes implicit risks cannot be avoided, they the long term, whereas valuethought to whether the structure of and the weightings you wish to keep can be mitigated as part of the overall A ‘sAfety net’ by shares are held because theyyour portfolio is still in line with your in each part of your portfolio. Not investment portfolio by diversifying. diversifying are regarded as being cheaper TO DISCUSS HOW WE COULD HELP YOUinvestment aims and objectives or having all your eggs in one basket Saving your money in a range of assets Some assets are said to be than the intrinsic worth of REASSESS YOUR ATTITUDE TOWARDS RISK, GET AN OvERvIEW OF SOmE OF THE ALTERNATIvEwhether your investment attitude has means that if one part of your helps reduce your exposure should one ‘negatively correlated’ – for the companies in which they TYPES OF INvESTmENTS THAT ARE AvAILABLEchanged. Also, in the current economic portfolio underperforms, this could be of your investments suffer a downturn. instance, bonds and property represent a stake. By mixing AND HELP YOU mAKE INFORmED DECISIONSclimate, with interest rates so low and compensated for elsewhere. For many investors the creation of a often behave in a contrary way to styles that can outperform or ABOUT HOW, WHEN AND WHERE TO INvEST FORthe prospects of future rising inflation, When you choose to invest, your money ‘balanced’ portfolio means spreading equities by offering lower, but less under-perform under different THE FUTURE, PLEASE CONTACT could be losing out by keeping your can be spread across five main types of asset: investments across a range of products to volatile returns. This provides a economic conditions, the overallmoney in a savings account because minimise risk exposure. ‘safety net’ by diversifying many of risk rating of the investmentinflation is beating the return on interest n Cash Given some forward planning, you the risks associated with reliance portfolio is reduced. Selecting The value of investments and the income from themrates and, therefore, the real spending n Gilts (Government bonds) could decide on the amount of risk upon one particular asset. It is the right combination of can go down as well as up and you may not get backpower of your money is less. n Corporate bonds with which you’re most comfortable. also important to diversify across these depends on your risk your original investment. Past performance is not an n Equities (stocks and shares) By spreading your investments over different ‘styles’ of investing, such profile, so it is essential to seek indication of future performance. Tax benefits maytHe imPortAnce of n Property a wide range of asset classes and as growth or value investing, as professional advice to ensure vary as a result of statutory change and their valuediversificAtion different sectors, it is possible to mitigate well as across different sizes of that your investment portfolio is will depend on individual circumstances. Thresholds,You should consider the weighting You should remember that different the risk that your portfolio becomes companies, and different sectors commensurate with your attitude percentage rates and tax legislation may change inand balance of the constituents of types of investments may receive different overly reliant on the performance of and geographic regions. to investment risk. subsequent Finance Acts.08 09
  6. 6. TAxATIoN TAxATIoNTaxing timesHow the taxman treats investmentsDifferent investments unnecessAry tAx on sAvings Higher rate taxpayers have a total liabilityare subject to different If you or your partner is a non-taxpayer, of 32.5 per cent on dividend income andtax treatment. The make sure you are not paying unnecessary the tax credit reduces this to 22.5 per cent, tax on bank and savings accounts. Avoid while additional rate taxpayers have a totalfollowing is based on the automatic 20 per cent tax deduction on liability of 42.5 per cent reduced to 32.5 perour understanding, as at interest by completing form R85 from your cent after tax credit is applied.6 April 2011, of current bank or product provider or reclaim it using Interest from fixed interest funds: any If you or your partner is a non-taxation, legislation and form R40 from HmRC. interest paid out from fixed interest funds taxpayer, make sure you are not (these are funds that invest, for example,HM Revenue & Customs paying unnecessary tax on bank and savings individuAl in corporate bonds and gilts, or cash) is(HMRC) practice, all of sAvings Accounts (isAs) treated differently to income from funds accounts. Avoid the automatic 20 per centwhich are subject to You pay no personal Income Tax or Capital invested in shares. Income is paid net of tax deduction on interest by completingchange without notice. Gains Tax (CGT) on any growth in an ISA, 20 per cent tax. Non taxpayers can re-claim form R85 from your bank or product or when you withdraw your money. You can this amount, basic rate taxpayers haveThe impact of taxation provider or reclaim it using form save up to £10,680 per person in an ISA in the no further liability; higher rate taxpayers(and any tax relief) 2011/12 tax year. If you invest in a Stocks and pay an additional 20 per cent, additional R40 from Hm Revenue & Customs.depends on individual Shares ISA, any dividends you receive are paid rate taxpayers pay 30 per cent (whethercircumstances. net, with a 10 per cent tax credit. The tax credit distributed or re-invested). greater than 100 per cent of the amount changed from 1 April 2008. The bonds fall Any income (dividends) you receive cannot be reclaimed by anyone including capital gains Tax (cgT): no CGT is paid paid in). If you are a higher or additional rate under different legislation and corporate from your shares carries a 10 per cent non taxpayers. There is no further tax liability. on the growth in your money from the taxpayer now but know that you will become investors are no longer able to withdraw tax credit. Higher rate taxpayers have a The impact of taxation (and any tax reliefs) investments held within the fund, but when a basic rate taxpayer later (perhaps when you 5 per cent of their investment each year and total liability of 32.5 per cent on dividend depends on your individual circumstances. you sell, you may have to pay CGT. You have retire, for example), then you might consider defer the tax on this until the bond ends. income and the tax credit reduces this to a personal CGT allowance that can help limit deferring any withdrawal from the bond 22.5 per cent, while 50 per cent additional nAtionAl sAvings & any potential tax liability. (in excess of the accumulated 5 per cent offsHore investment bonds rate taxpayers have a total liability of investments (ns&i)  Accumulated income: this is interest or allowances) until that time. Whether you pay Offshore investment bonds are similar to 42.5 per cent reduced to 32.5 per cent You can shelter money in a tax-efficient way dividend payments that are not taken but tax will depend on factors such as how much onshore investment bonds (above) but there after tax credit is applied. within this Government-backed savings instead reinvested into your fund. Even though gain is realised over the 5 per cent allowance is one main difference. With an onshore When you sell shares, you may be liable institution. During Budget 2011 it was they are reinvested, they still count as income (or on full encashment) and how much other bond, tax is payable on gains made by the to CGT on any gains you might make. announced that NS&I is to relaunch index- and are subject to the same tax rules as for income you have in the year of encashment underlying investment, whereas with an Current CGT rates are 18 per cent or 28 per linked savings certificates. Returns will be dividend income and interest. (the gain plus other income could take you offshore bond no income or CGT is payable cent for basic and higher rate tax payers tax-free and the maximum that can be saved is into the higher rate tax bracket). Those with on the underlying investment. However, respectively. You have an annual allowance £15,000 per individual per investment. onsHore investment bonds age-related allowances could lose some or all there may be an element of withholding tax and special rules apply to calculating your Investment bonds have a different tax of this allowance if the gain on a bond added that cannot be recovered. gains or losses. n unit trusts And oPen-ended treatment from many other investments. to other income takes them over £24,000 The lack of tax on the underlying investment comPAnies (oeics) This can lead to some valuable tax planning in the 2011/12 tax year, which equates to a investment means that potentially it can With a Unit Trust or OEIC your money is opportunities for individuals. There is no marginal rate of tax on ‘the age allowance grow faster than one that is taxed. Tax may, WE ARE COmmITTED TO mEETING pooled with other investors’ money and can personal liability to CGT or basic rate Income trap’ element of their income chargeable at however, become payable on a chargeable THE NEEDS OF OUR CLIENTS AND be invested in a range of sectors and assets Tax on proceeds from your bonds. This is 30 per cent. event (usually on encashment or partial HELPING THEm BUILD WEALTH IN THE such as stocks and shares, bonds or property. because the fund itself is subject to tax, If you do defer withdrawal, you will encashment) at a basic, higher or additional mOST TAx-EFFICIENT WAY. THERE ARE mANY DIFFERENT WAYS TO Dividend income from oEIcS and unit trusts equivalent to basic rate tax. not usually need to pay tax on any gains. rate tax as appropriate. Remember that the GROW YOUR WEALTH. OUR SKILL IS IN invested in shares: if your fund is invested in You can withdraw up to 5 per cent each year However, this will depend on your individual value of your fund can fluctuate and you HELPING YOU TO UNDERSTAND THE shares, then any dividend income that is paid of the amount you have paid into your bond circumstances at that time and, as such, may not get back your original investment. CHOICES AND THEN HELPING YOU to you (or accumulated within the fund if it is without paying any immediate tax on it. This you should seek professional financial and mAKE THE INvESTmENT DECISIONS reinvested) carries a 10 per cent tax credit. allowance is cumulative, so any unused part tax advice regarding this complex area. uk sHAres THAT ARE RIGHT FOR YOU. FOR mORE INFORmATION, PLEASE CONTACT US If you are a basic rate or non taxpayer, of this 5 per cent limit can be carried forward The taxation of life assurance investment If you own shares directly in a company you TO DISCUSS YOUR REqUIREmENTS. there is no further income tax liability. to future years (although the total cannot be bonds held by UK corporate investors may be liable to tax.10 11
  7. 7. rETIrEmENT rETIrEmENTget your pension It is estimated that one third of people in their 50s haveplanning back on track no retirement savings at all. cash. Bonds, gilts and some structured If you have maximised your pension options such as a drawdown pension and products may also provide a halfway contributions, it is also possible to continued pension investment.Are you financially prepared for retirement? house between cash and equities. contribute into a partner’s pension plan. So don’t forget to consider a spouse’s countdown to retirementIf you are a 50-something, are you financially prepared for current and previous employers, who will be able to provide countdown to retirement pension. If you are a higher earner in a – 6 montHs remAiningretirement? It is estimated that one third of people in this age pension forecasts, as will the companies managing any private – 5 yeArs remAining final salary scheme, you should ensure You will need to contact your pensiongroup have no retirement savings at all. However, the plans you pension plans. During this period we can help you that any additional pension savings don’t providers to find out how your pensionmake in the final approach to retirement can have the most You then need to consider how much income you’ll need in review your retirement goals. It’s also breach the ‘lifetime allowance’ as this will eventually be paid and to ascertainsignificant impact on the size of your eventual pension. retirement. It’s important to be realistic – you may spend less if important to obtain up-to-date pension could generate a tax bill. The lifetime the value. If you decide to defer your For those in their 50s, pension planning has always been you are not commuting to work, for example – but don’t forget forecasts. Is retiring at the age you allowance will be reduced from £1.8m retirement you will have to inform yourparticularly important, but today’s 50-somethings face a series to factor in holidays, travel and any debts you may still have. planned still realistic and achievable? to £1.5m from April 2012. Also, if you pension providers.of challenges that no other generation has had to deal with. If you are currently on target to receiving less than you’d As you approach the final five years, still have outstanding debts, such as a If you decide to purchase an annuity youThis age group has benefited from huge improvements in ideally like, it is essential that you obtain professional advice you’ll need to consider moving any stock mortgage or credit cards, you should use should seek professional advice to ensurehealth and longevity; men retiring at 65 can now expect to live about how you can make up any shortfall. With ten years or market-based investments into safer any surplus money to reduce them. that you get the best rate. If you smoke orinto their early 80s, while women of the same age can expect less to retirement, you need to maximise your savings during options such as cash, bonds or gilts. If Deciding how to take your pension have certain health problems, even minorto celebrate their 85th birthday. this period and not only into pensions but utilising other there is a sudden market correction now, benefits is one of the most important ones, inform the annuity provider as you many people currently in their 50s have also seen their appropriate investments. You will need to consider whether you may have insufficient time to make financial decisions you’re ever likely to may obtain a better rate.pensions and savings squeezed from all sides, with company options such as retiring later or working part-time beyond your good any losses. make. It’s important not to leave it until By deferring taking your state pension,pension schemes being cut back while the value of the state retirement date may be a more realistic way of meeting your If you have any lost pensions and need the last minute to decide what you will you could qualify for a bigger pension. Ifpension has fallen. Ignoring the problem completely is likely to retirement goals. help contacting the provider, the Pension do with your pension fund. You need to you opt to do this you’ll need to contactmake it significantly worse. It is not only how much you save but where it is invested Tracing Service (0845) 600 2537 may be obtain professional advice and consider the Pensions Service. If you work beyond Planning for retirement is one of the biggest financial that can make a difference. We can assist you to carry out an able to help. The tracing service will use your options properly; simply buying the your retirement age you do not have tochallenges people face, and the one you can least afford to get audit of existing pension plans and help you look at where this database, to search for your scheme annuity offered by your pension provider make National Insurance contributions.wrong. If you are in your 50s and find yourself in this position, they are invested, how they have performed and what charges and may be able to provide you with could significantly reduce your income in Any additional money earned could bethere are steps you can take to improve your pension prospects. are levied on them. It may even be appropriate to consolidate current contact details. The information retirement and there is no second chance saved in a pension plan. n existing pension plans or take steps to protect capital values can be used to contact the pension to make a better decision.we cAn HelP you get your Pension – there are a number of guaranteed products that could help provider and find out if you have any You also have other retirementPlAnning bAck on trAck you achieve this. pension entitlement. alternatives available and the freedom As part of this review we can also look at the diversification Potentially you now have just 60 paydays to choose when and how you take your CHOOSING HOW TO TAKEcountdown to retirement of your assets, as this can help protect against sudden market remaining until you retire. So it’s essential pension, with the previous compulsory YOUR PENSION BENEFITS IS– 10 yeArs remAining movements. With a ten-year time frame, investors need to that you save what you can during this annuity age of 75 withdrawn. Under the ONE OF THE mOST ImPORTANTBefore you can draw up financial plans for the future, you weigh up the risks of equity investments against safer cash- period, taking advantage of pensions and new annuity purchase rules, you are DECISIONS YOU’LL mAKE, SO IT’S vITAL YOU HAvE ALL THEneed a clear view of your current position. Do you know what based products. tax-efficient investments. Remember, this given more flexibility about how you FACTS. TO FIND OUT mOREyou are worth? As a starting point, people should establish Generally, the nearer you are to drawing your pension, the money will have to produce enough choose to use your retirement savings. ABOUT HOW WE CAN HELPwhat their likely state pension entitlement would be. This can less investment risk you should take. But over this period it income for you to live off for potentially You can still convert funds to an annuity YOU, PLEASE CONTACT done by completing a form BR19, available at is reasonable to include equities within a mixed portfolio, more than 20 years. if you wish, but you also have You should also contact the pension trustees of your particularly given the very low returns currently available on12 13
  8. 8. INVESTmENT NEWS IN brIEf How focused is your portfolio?Isn’t it time Investing for growth, income or both GENdER-bASEd INSURANCE RAtESyou had a Do you want to grow your capital, increase your future economic ups and downs. As your income or both? Your answer will determine the financial situation changes over time, you may EU rules against type of investments you select and, in addition, need to make the necessary adjustments to sex discrimination you need to be aware of the concept of ‘total your investment portfolio and switch from return’. This is the measurement of performance growth assets to income. The European Court of Justice has - the actual rate of return of an investment or ruled that gender-based insurancefinancial review? a pool of investments over a given evaluation investment timeline rates are unlawful in a move that period. Total return includes interest, capital Broadly speaking, younger people are saving could lead to a shake-up in the gains, dividends and distributions realised over for the long term and don’t necessarily need annuity market. This major ruling a given period of time. their investments to produce a current income takes effect from 21 December 2012 but will be looking to guard against inflation. and will fundamentally reshape the income And cAPitAl Under these circumstances growth funds may retirement landscape, leading to the APPreciAtion be more appropriate. likely equalisation of annuity ratesWe’ll make sure you get the right Total return accounts for two categories of return: income and capital appreciation. Income includes interest paid by fixed-income For middle-aged investors, growth funds are still generally the right option, but the amount invested is likely to be larger as a result of for men and women. This ruling means it will be imperative that every investor shops around withadvice for your individual needs. investments, distributions or dividends. Capital appreciation represents the change higher income and savings accumulated over previous years. With a secure capital base their pension fund at retirement; if they don’t they risk ending up in the market price of an asset. Total return behind them, middle-aged investors may also with a homogenised standard–issue looks to combine income with capital growth consider putting part of their savings into annuity which is almost certain toWe provide professional financial advice covering to achieve the best overall return. some higher risk investments, such as more be a poor deal for them. Whether you choose an income or a growth fund specialised pooled funds.most areas of financial planning, including, tax-efficient will typically depend on your circumstances and When investors start to approach retirement, Following this announcement, it would be natural to assumesavings, investment advice, retirement planning, estate objectives – in other words, your investment time frame, your attitude towards investment risk and their priorities change. Having built up a capital sum, they usually need to start switching towards that rates may drift towards the& inheritance tax planning, life protection, critical illness what you need the investment to provide for you. funds that provide an income once they stop work. Although share-based investment funds middle of where male and female rates currently stand. However, tocover and income protection. A regulAr streAm of income tend to do well over the long term, they can swing begin with, insurers might be very If you need a regular stream of income, sharply in value over the short term. So people of conservative about the annuity focusing your portfolio on assets that will help retirement age should perhaps consider switching rates they offer and we could seeTo discuss your options, please contact us. you achieve this, such as cash and bonds, will provide a fixed income. If you have a longer into more defensive, income funds at this point. n rates for men cut to where female rates are without much, if any, rise investment time period or you do not need an WE UNDERSTAND THAT CHOOSING in rates for women. immediate income, you could consider a larger INvESTmENTS CAN BE DIFFICULT, SO allocation to growth-focused investments. WHETHER YOU’RE A FIRST-TImE INvESTOR The ruling may also encourage It is possible to buy an income fund and a growth OR AN ExPERIENCED ONE, WE CAN HELP insurers to build more personalised YOU TO ExPLORE YOUR OPTIONS AND fund to capitalise on the advantages that come with pricing systems, leading to annuity TAILOR YOUR PORTFOLIO. THIS COULD each type of investment strategy. Some investment income becoming more related to BE AS SImPLE AS ENSURING YOU GET houses manage both income and growth funds, THE BEST RATES FOR SHORT-TERm CASH you and your individual lifestyle. To which provide a little of each style in the same fund; mANAGEmENT, OR A mORE COmPLEx some extent this process is already however, there is usually less choice available. UNDERTAKING TO CREATE AN INvESTmENT under way with the expansion Whatever your preference, if you hold a PORTFOLIO TO GROW YOUR WEALTH FOR of enhanced annuities offering a variety of investments, both growth and THE LONG TERm. PLEASE CONTACT US FOR higher income if you have health income, you should be better prepared for mORE INFORmATION. problems or are a smoker. 15
  9. 9. rETIrEmENT rETIrEmENTTake a more flexibleapproach to retirement Retirement OptionsHow the new rule changes could affect your future planning Your questions answeredAs life expectancy rates in the UK continue to rise, the n Your GAD maximum will be reviewed conventional Drawdown flexible Drawdowncoalition Government estimates that nearly one in five people every three years up to age 75 and lifetime Annuity annually thereafter.will live to see their 100th birthday. Radical legislation will n Drawdown is available from age can I get tax-free cash? Yes, up to 25 per cent Yes, up to 25 per cent Yes, up to 25 per centattempt to ensure pension savings are sufficient for these 55 (or earlier for those with a of your pension fund cent of your pension fund of your pension fundretirees, which in turn will help reduce the burden on the state. protected pension age) with no upper age restriction. I’m over 55, how Anybody with a private Anybody with a private Anybody with a minimumPeople are also increasingly taking a new retirement rule n If you die after starting to draw do I qualify? pension can buy an annuity pension can go into drawdown, secure pension incomemore flexible approach to retirement, cHAnges from 6 APril 2011 an income from your pension, any but not all pension providers of at least £20,000 a yearoften winding down rather than retiring n The maximum pension contribution remaining pension fund will be taxed at offer the option can go into flexibleon a specific fixed date. The new rules limit is reduced to £50,000 from 55 per cent, regardless of your age. drawdown but not allallow for that flexibility, enabling you £255,000 annually. The balance of a n Until age 75, there will be no tax pension providers offerto secure income from part of your notional £50,000 annual allowance charge on death for undrawn funds this optionpension while keeping the rest invested, from the previous three tax years and a lump sum can be paid to yourfor instance. If you are under 75 you are can be carried forward, allowing for beneficiaries. After age 75, undrawn How much income It depends on the size of your As little or as much as you As little or as much as youlikely to be affected. Even people with potential catch up in 2011/12. funds will be taxed at 55 per cent on will I get? pension pot and the annuity rate want, within a yearly want up to 100 per centsome years to go until retirement have n The previous types of income-drawing death, but ring-fenced from the rest of (you can shop around to secure maximum limit of your pension, providedsomething to think about. arrangement have been abolished your estate. the best rate) you qualify While the new rules make these and replaced by the simple term n Defined benefits will be valued usingretirement options possible, not all ‘drawdown pension’, of which there a flat factor of 16. How much tax will I pay? Your income is taxed at source Your income is taxed Regular payments andpension providers will necessarily offer are two types – capped and flexible. n The Lifetime Allowance will be under PAYE (Pay As You Earn) at source under PAYE cash withdrawals areall the options. very few providers n To qualify for flexible drawdown, you reduced from £1.8m to £1.5m from (Pay As You Earn) taxed as income at sourcealready have a drawdown option must have a secure income stream April 2012. under PAYE (Pay As You Earn)for traditional personal pension already in payment of £20,000 per n Tax charges are applicable on fundsplans. Fewer still are expected to year or more. in excess of the Lifetime Allowance. What happens to You exchange your fund for a Your pension (or part of it) Your pension (or part of it)offer flexible drawdown. So these n Under capped drawdown, the my pension? secure income from an stays invested stays investedrule changes mean that now is an maximum annual income is based on WITH THE INTRODUCTION OF THE insurance provider NEW PENSION RULES, THERE’S NOappropriate time to discuss your a Government Actuary Department BETTER TImE TO REvIEW YOURpension arrangements with us. On the (GAD) calculation of 100 per cent of ExISTING ARRANGEmENTS. THIS What are the risks? None. Your income is secure As at least part of your pension Any part of yourright, we have provided a summary of the relevant annuity, instead of the IS A COmPLEx SUBjECT AND and it never runs out is invested, its value could go up pension that remainsthe retirement rule changes. previous 120 per cent. RECEIvING PROFESSIONAL ADvICE as well as down. In the worst invested could go up ABOUT THESE CHANGES AND HOW case scenario, the value of your as well as down in value. TO COPE WITH THE NEW mINImUm pension could be completely In the worst case scenario, INCOmE REqUIREmENT IS ESSENTIAL TO ENSURE YOU mAxImISE YOUR eroded. You might live longer the value of your pension RETIREmENT INCOmE. TO DISCUSS than you expect could be completely eroded YOUR PARTICULAR REqUIREmENTS, You might live longer than PLEASE CONTACT US FOR you expect FURTHER INFORmATION. What investment No investment As much or as little as As much or as little as choice do I have? choice needed your pension provider allows your pension provider allows What happens if I die There is nothing payable The rest of your funds can be The rest of your funds after I take it out? unless you have selected a joint used to provide an income for a can be used to provide life annuity, an annuity dependant or can be passed an income for a dependant guaranteed for a term, on to a beneficiary as a lump or can be passed on to or value protection sum, subject to a 55 per a beneficiary as a lump sum, cent tax charge subject to a 55 per cent tax charge to discuss your options at retirement please contact us for further information.16 17