10 December 2013

State Pension Age Continues Upwards

The Government wants to raise the State Pension Age (SPA) at a faster rate according to the recent Autumn Statement. The increases to ages 66 and 67 are due to go ahead in 2018 and 2026 as planned. The increase to 68 was due to take place in 2046, but the Government wants to bring this forward to 2036. And at the same time it has laid out another set of proposed increases to happen every ten years, until the SPA hits 70 for all those born, probably, after 1990.

Given increases in longevity, and the financial savings generated, the increases in SPA are inevitable. Potentially it means someone born today is unlikely to receive any state pension benefits until at least their 72nd birthday.

It's worth bearing in mind that you don't have to take all your pension benefits at the same time as  you reach SPA. With sufficient pension savings you can take a pension earlier or later. But it does make personal savings ever more important in the retirement planning jigsaw, along with taking financial advice around how and when to take benefits.

Here's a summary of the current situation (with thanks to MGM Advantage)...

When? What? Who?
Previously announced Between 2010 and 2018 Women’s SPA to increase gradually to age 65 Women born between April 1950 and December 1953
Between 2018 and 2020 Everyone’s SPA to increase to age 66 Those born between December 1953 and April 1960
Between 2026 and 2028 All SPA’s increase to age 67 Those born from April 1960 until around the end of the 1960s
Proposals within this autumn statement Mid 2030s All SPA’s increase to age 68 Approximately those born in the 1970s
Late 2040s All SPA’s increase to age 69 Approximately those born in the 1980s
At a later date All SPA’s increase to age 70 and beyond, in line with increases in longevity Likely to be anyone born after 1990

2 December 2013

Banks - Still Unworthy of our Trust

Several more issues have come up over the last couple of weeks which show how banks are still way off being the organisations we need them to be.

First there's the Co-op Bank problems at the top (very sad, when many people saw them as offering a more ethical approach), then there's the allegations about RBS closing down small businesses because they wanted their money back, and finally the news that bankers' bonuses are once again on the rise now that the public's attention is elsewhere.

I suspect that, as Robert Peston points out, RBS will say that they were caught in the middle between the regulator telling them to reduce their outstanding debts (including money lent to small businesses), and the government telling them to lend to more new small businesses. But I can't say that I feel any sympathy when it basically comes down to their earlier reckless lending policies.

And as for bonuses (thanks again to Robert Peston), one wonders what world some people live in, and what it will take to get them to see some sense.

Last July (2012), when commenting on the Barclays LIBOR-fixing scandal I concluded with the following which still applies perfectly. Sometimes it's sad to be right...

I suspect that there are many similar situations in the financial world, and only when something goes publicly wrong or is somehow brought to light will we all be outraged yet again.


What is needed is a responsible and ethical culture. But that needs more than a quick staff training course. It's a question of changing attitudes and culture. And that takes time. The sooner that individual financial institutions have less of an impact on all of our lives the better. They are currently hardly worthy of our trust.

21 November 2013

Should I ... Source my own pension income or take advice?

How you obtain an annuity from your pension plan and from which company has been a growing battle in recent years. The "Open Market Option" has been touted as the answer, and all pension companies should now be making it clear that you don't have to buy an annuity from them, but are entitled to search for a better deal on the open market.

That advice seems to be getting through. BUT, along with the fact that clients now have to pay a direct fee to an adviser rather paying it by commission, it means that more people than ever are doing their own thing in finding an annuity. In 2012 32% of annuity sales were people doing it direct, while in 2013 that has gone up to 52%.

That's an improvement, but what if an annuity is not the best thing for you in the first place? There's no doubt in my mind that some will still be losing out and will have a poorer retirement than they might have done, had they consulted a financial adviser.

18 November 2013

Do you have a Joint Bank Account?

Guidance from the British Bankers Association indicates that you will lose the automatic right to access your joint bank account if the other owner loses mental capacity:

If you are the joint account holder and the other joint account holder becomes mentally incapable, you do not automatically have the right to access the account unless you have a Lasting Power of Attorney, Enduring Power of Attorney or an order from the Court of Protection.

Whether that's what banks should be saying is a different question, but the way around the problem is to have a Lasting Power of Attorney in place.

One more good reason.

13 November 2013

Investing to Save Inheritance Tax

Back in July I blogged about the new rules which allow you to invest your ISA money into shares based on AIM (the smaller companies stock exchange) - see AIM Shares, your ISA and Inheritance Tax.

Now, as you'd expect, investment companies have started coming out with plans which take advantage of this. The biggest benefit could come to those who are older and who have a large-ish ISA portfolio along with a potential Inheritance Tax (IHT) liability. That's because after two years of holding most AIM shares, "Business Property Relief" means that they are free of IHT. So a relatively simple ISA transfer into one of these products cuts a potential IHT bill quite quickly.

The downside is the more risky nature of smaller companies. But in the first place a managed portfolio of AIM shares will reduce that risk, and in the second place it is possible to buy life insurance to guard against a loss of value at the date of death. It's also possible to buy insurance to cover the IHT bill in the first two years before Business Property Relief kicks in.

The end result could be an investment with no Income Tax, Capital Gains Tax, or Inheritance Tax. Sounds good to me.

7 November 2013

Will the State Pay My Care Costs?

The funding of social care (in other words long term care, typically in later life) is undergoing changes at the moment.

The Care Bill is still going through Parliament, but the key message is that someone is very likely to have to pay more than the headline figure of £72,000, so it's worth planning ahead for this.

Here's my bullet point summary of the current situation.
  • Currently, the State will help cover the costs of care and living costs if an individual's assets are below £23,250 (in England). Above that, you're on your own.
  • In future (probably from 2015), you will be eligible for assistance if your total assets (including any property owned on your own) are below £118,000
  • If assets are above that there is a cap on what you will need to pay of £72,000, BUT that only caps the cost of care not the cost of daily life (called "hotel costs") - you could be required to pay up to £12,000 per year towards that
  • In addition, if the local authority rate for the area is lower than the actual cost, then only the lower amount counts towards the cap. That means you have to go on paying for longer because it takes longer to reach the cap of £72,000.
  • Once you have reached the cap, the Government pay the cost of care, but only up to the local authority's limit, and only the care costs not the "hotel costs"
  • If total assets including your house exceeds £118,000 you won't have to sell the house to raise the cash, but the local authority will put a charge on the property which will be recouped from the estate on the death of the resident. Interest rolls up to increase the debt further. These are called the "deferred payment arrangements".
So as ever, don't rely on the Government to look after you if you can possibly avoid it. Plan ahead.

4 November 2013

Hitting pension charges is not the whole story...

Political parties are currently out-doing each other with their rhetoric on pensions. Charges remain at the top of all parties' agendas, though, but are they missing the point?

There's no doubt that pension charges are important. Like any long term investment, the effect of charges is cumulative and has a huge impact on the end result, so they certainly can't be ignored. But whether it's the best thing for pension savers to have to be told the minutiae of the different charges (an Opposition aim for the Pensions Bill) is certainly debatable, while the charges on modern pension plans are not that horrendous anyway.

A much bigger impact on the end result, according to data from the Pensions Policy Institute, is the "triple lock" which no party has committed to in the next parliament. That's the guarantee to increase the State Pension every year by the higher of inflation / average earnings / a minimum of 2.5%.

By linking the State Pension only to average earnings, for example, you have to contribute much more each year than you would if charges were 1% higher (that's a lot  higher). The triple lock is something in the politicians' control, but they are not addressing it. It's easier to point the finger of blame at someone else I suppose - pension providers in this case.

15 October 2013

Why you should avoid Cash ISAs

Let's be clear who this blog applies to first... If you have any investments or intend to have in the near future then this is for you.

Question: Why are ISAs a Good Thing in general?
Answer: Because you don't pay Income Tax or Capital Gains Tax on any income or growth. (You may still have to pay Inheritance Tax but let's ignore that for now.)

So if you have a Cash ISA, you don't pay tax on the interest you receive. But since interest rates are pretty poor at present you don't get much tax to pay, and so there isn't much advantage in a Cash ISA.

In fact, there is a disadvantage if you are an investor. There is an annual limit on how much you can put into ISAs* and if you use your Cash ISA allowance that comes out of your Stocks and Shares ISA allowance. And that can be rather significant - if you expect your Stocks and Shares ISA to grow then there is potentially much more value in those than in a Cash ISA.

So the end result is you save yourself a small amount of tax in a Cash ISA but lose a large amount of potential growth in a Stocks and Shares ISA. The one saving factor is that you can transfer a Cash ISA into a Stocks and Shares ISA later, but in general - avoid Cash ISAs.

* currently (2013/14) £11,520 for a Stocks & Shares ISA, and £5,760 for a Cash ISA

7 October 2013

Should I ... Have Private Medical Insurance?

PMI (or commonly just "health insurance") covers private treatment when you need it - typically for "acute" conditions (things that can largely be cured). It is often provided by employers as part of a remuneration package because it helps you get back to work quicker after an illness. But it can be useful for many people.

Advantages include:
  • Better control on the timing of treatment (jump the NHS queues, or fit treatment in among other commitments)
  • Better control on selection of hospital or specialist
  • A wider range of drugs available
  • Higher quality care (own room, etc.)
A policy could cost somewhere between £30 and £200 a month depending on what is included. Full medical underwriting is likely to be needed, although some policies don't do that and simply exclude claims for any condition you have had before (perhaps within 5 years).

The costs can be kept down by excluding out-patient cover, for example, while some policies give discounts for lifestyle factors such as gym attendance.

So should you have it? For many people it will be an important part of a busy lifestyle, while for others, being more in control of your treatment is the key requirement. 

We all hope we don't need to claim on such insurance, but then that's the whole point of insurance isn't it? It's a safety net for us and our family which helps if things go wrong.

30 September 2013

Absolute Return Uncertainty

Absolute Return funds were introduced a few years ago with the objective - in general - of providing investment growth which is "absolute" rather than relative. Typically they try to do better than a cash-based benchmark like the Bank of England's Base Rate.

Although it wasn't always obvious where they fitted into a diversified portfolio, I was keen on them initially since they aimed to provide investors with what they wanted - after all, who is interested in their investments just doing better than a benchmark which is itself falling by several percent a year?!

However, they rely in part on the non- / low correlation between equities and fixed interest to keep things on an even keel. With the upside-down world we now have due to Quantitative Easing, those asset classes are more correlated for the time being, so it's likely to be increasingly difficult to provide an absolute return in a fund.

As a result, they could end up acting more like a multi-asset managed fund. Nothing wrong with that if well managed, but absolute returns may not be achievable.

9 September 2013

Opting Out of Free Money

The Department for Work and Pensions have done a review on the early stages of Auto-Enrolment - that's the pension regime which all employers are required to adhere to over the next few years.

Employees have to be signed up to a pension scheme with employer contributions - although they can choose to opt out if they insist. Although employees do also have to make their own contributions (unless they have a very generous employer) the fact that the employer is making contributions effectively gives them free money which they may not have had before.

The DWP review says that 9% of large company employees have opted out - and that's seen to be better than expected.

Unless you have some fairly specific circumstances (like you can't afford your own contributions) then it seems to me that opting out means opting out of free money. And why would you do that?!

1 August 2013

Insuring against Cancer

Cancer has reared its head among a number of my contacts recently (and some of it is a little too close to home for comfort). In fact Macmillan Cancer Support predict that half of Britons alive in 2020 will get cancer during their lifetime. I guess that's because other health issues are being beaten leaving the ones we are not yet fully on top of.

As a financial planner I look at all aspects of personal finances that could help people get the best out of life. And one thing that most people can do is to take out some Critical Illness (CI) insurance against cancer and other major illnesses. This pays out a lump sum on diagnosis of an illness that is covered by the policy.

That lump sum won't get rid of the illness but it could help with extra costs like travel to appointments, home adaptations, and time out of work, as well as providing a bit of comfort - some treats for yourself and your family perhaps.

One of the ongoing developments in the CI world is known as partial payments. This means that cancers and other illnesses which were previously excluded will at least get a partial payment of benefit. That might include the more common things like prostate cancer, and certain types of breast cancer, as well as a heart attack followed by coronary angioplasty (e.g. insertion of a stent).

It's worth knowing what your health concerns are and then ensuring that the policy you go for covers those concerns.

So contact us for peace of mind!

23 July 2013

AIM Shares, Your ISA, and Inheritance Tax

The government have just announced that it will be possible to include AIM shares in your ISA - probably from August.
 
What does that mean and why is it significant?
 
AIM shares are company shares traded in the usual way but on the "Alternative Investment Market". Because of the more relaxed regime than on the main London Stock Exchange, AIM shares basically mean smaller companies.
 
Such shares have not been allowed in your stocks and shares ISA before (unless they were also listed on some other exchange as well). Apart from restricting your choice of shares to buy, that has meant that your ISA is free of Income Tax and Capital Gains Tax but is not free of Inheritance Tax - it is assessed as part of your estate just like other investment assets, so your beneficiaries could end up paying 40% tax on your ISA.
 
But AIM shares offer the possibility of using Business Property Relief which, subject to certain criteria, means that you can pass on your part-ownership of   a small company without paying Inheritance Tax.
 
You could previously choose whether to avoid Income Tax / Capital Gains Tax, or Inheritance Tax. Now you have the possibility of avoiding both.

11 July 2013

Deeds of Variation - Changing Someone's Will

It's not commonly known but it's possible to change the contents of someone's will after their death.

Why might you want to do that? Well, tax is the reason very often - Inheritance Tax (IHT) generally. Here's a couple of examples.

Perhaps the children of the deceased already have plenty of assets of their own, and an additional substantial gift will simply add to their own IHT problems. So skipping a generation and passing assets to grandchildren might be preferable.

Or if there is a surviving spouse it may be better to leave assets to them (with no IHT payable) rather than pass it to others where there would be. And if that surviving spouse is young enough there may be scope for using their own allowances to gift the assets over a period of time.

Deeds of variation must be executed within two years of the death.

As ever with IHT, there is often scope for large tax savings, but advice is needed to avoid the pitfalls.

8 July 2013

Auto-Enrolment - some staggering numbers

Small businesses are not renowned for jumping at the opportunity to satisfy legislation. I know - I've been running a small business one way or another for quite a few years. It's just that there are better things to do, like trying to earn a living for you and your staff.
 
I've blogged before about Auto-Enrolment pensions and the various requirements it imposes on all employers (go to the main Money At the Speed of Life website if you're not there already - and find the Auto-Enrolment label on the right to find relevant blogs). But although the process has started already for larger employers, it will be 2014 and 2015 when it hits the vast majority of UK companies.
 
Given that there are around 11 million workers to be enrolled in pension schemes by the end of the process (by the DWP's estimate), that means a vast number of employers who will need to set up a new pension scheme in most cases.

At its peak, there will be 132,000 small companies per month who need a new pension scheme and all the associated processes to enrol staff.
 
But here's the problem, how will smaller employers know how to find the best pension for their staff, and to decide on the most cost-effective pension contribution strategy? There are not going to be enough advisers to go round and recommend what to do for everyone (and make no mistake this is complex stuff, with lifelong implications for staff).

All I can suggest to anyone is to start planning early. It could take 12 months to design and arrange a pension scheme which is really going to be beneficial to staff, so even if your "staging date" is not until 2014 or 2015, now is the time to think about it.

4 July 2013

More Good News on Annuities?

... or perhaps it's just less bad! But back in April I highlighted an increase in average annuity rates in the first quarter of 2013.
 
And now there are further signs of an upward trend, following a slight upward trend in gilt yields. We're starting from a very low base, though, and it may (or may not!) still be worth waiting if you are looking for the right time to buy an annuity with your pension money.
 
Here's a chart showing the trend over the last 5 years (click to expand) - the blue line is the yield on gilts (which determine annuity rates), and the red bars are annuity rates.
 

For advice on the best approach to getting an income in 2013, get in touch:
www.primetimefinancial.co.uk/retirement-planning-advice

25 June 2013

Should I ... Have a Lasting Power of Attorney?

Sadly I have come across a number of situations recently where a Power of Attorney is (or would have been) a good thing to have.
 
A Power of Attorney enables someone (the attorney) to act on behalf of someone else who has given them that authority (the donor). The current version is called the Lasting Power of Attorney (LPA). There are two types, covering finances and health, and either one or both can be in place, depending on your concerns.
 
The forms are quite long and there's a definite process you have to go through to affirm that the donor understands what they are doing, for example. And the LPA must be "registered" before it is used which involves the Court of Protection. Having said that it is not particularly difficult for someone willing to research it all.
 
I'm of the view that it is worth most older people (60+) with assets having at least the finances version ("Property and Financial Affairs") in place and signed off, perhaps even registered. The only exception might be someone whose assets are all held jointly with a spouse. Even then the fact is that one spouse is likely to be left on their own so it's as well to be prepared, perhaps with a younger family member cued up to be involved.
 
We can help with all this and arrange an LPA for you, whether or not you want to tie it in with any work on your finances. Get in touch.

19 June 2013

Fixed Term Annuities

With standard annuities generally offering poor value at present it is certainly worth looking at alternatives. One such is the "Fixed Term Annuity" - also called various other things (because they are not actually annuities at all!).
 
Here's some key points:
  • You could take the tax-free lump sum from your pension, but not take any income
  • You could take a pre-defined income for, perhaps, 5 years and then look at annuities again to see if rates had improved
  • If you have health concerns you might get a better annuity rate in 5 years time
  • Guarantees are available on the value at the end of the fixed term
  • Some investment growth may be possible depending on the product
  • If you die during the term, the death benefits available to beneficiaries are likely to be better than for a standard annuity
In summary, it's about keeping your options open - something which standard annuities don't let you do.
 
Professional advice is certainly needed when considering these products (you probably couldn't buy one without), but they are an increasingly important option in the difficult process of getting maximum value from pensions.

14 June 2013

Does this match your retirement plan?

Most people only think about their own retirement - and that only happens once in a lifetime so you don't get much chance to practice!

But I deal with retirement issues every day, and I'd have to say that it is worth having more of a plan than most people seem to. So here's some planning thoughts...
 
You could think of retirement in several main stages: 
 
Pre-retirement adjustments
Pre-retirement is about taking a look at your life in general and your finances in particular. Reviewing pensions, paying off any mortgage, considering any home improvements, perhaps taking some initial pension benefits like a lump sum to help with that. 
 
Part-tirement working
Many people don't just stop work all of a sudden. Continuing part time or starting a new low stress part time job is common - hence "part-tirement". Finances don't always allow a full stop, and after all you are probably going to have a good few years left, so there's still time to try something different.
 
Active enjoyment
This is the stage that many look forward to. Doing more travelling, supporting your family, or volunteering for your favourite charity are common activities. The question is whether the finances are there to support it. If you have any savings or investments it may be worth positioning them to provide an additional income at this stage.
 
Slowing down
And finally, there's likely to be a less active phase spent initially at home, but potentially in residential care. And that's certainly where some earlier financial planning is needed due to the costs involved.

So what's the plan?

One approach is to do some "lifetime cashflow planning". That can be a simple view on your finances, showing income / expenditure / assets for each year of potential life remaining. Things certainly won't turn out the way you initially plan, but it does enable you to take some informed decisions about what you are likely to be able to spend at the different stages.
 
Here's an example - let me know if you want help with your version! ...
 
 

7 June 2013

Interest-only mortgage problem yet to bite

Research from Experian shows that there are still plenty of interest-only mortgages around which will cause problems if people haven't organised a way of paying it off.
 
Most people claim they do have a plan for paying it off but around 260,000 don't.
 
There are three peak periods when interest-only mortgages will reach the end of their term:
  • 2017/2018 This peak is a result of endowment mortgages sold in the 1990's and early 2000's and typically consists of those approaching retirement with high incomes, high assets and high levels of equity in the property.
  • 2027/2028 This peak stems from mortgages typically sold from 2003 to 2009, i.e. the years running up to the financial crisis, when lenders were much less cautious than now, but this tranche starts in 2022. It "is characterised by less affluent individuals currently in early to mid-life stages."
  • 2032  This final peak stems from mortgages opened between 2005 and 2008, with higher loan to values and, again, higher income multiples. These are loans that have been converted to interest -only at some point. This tranche has concentrations of "highly indebted individuals with low or negative equity in the property at the point of maturity".
Anyone with an interest-only mortgage needs to take another look to make sure they have the capacity to pay it off.

3 June 2013

Should I ... take my pension lump sum?

Most pensions will provide the option of a tax-free lump sum when you start to take some benefits from it. And this is one of the more significant questions for someone approaching retirement.
 
There are pros and cons, of course, which will be different for each person. And in a short blog we can only really list the things to consider. Let's look at Defined Contribution (money purchase) and Defined Benefit (final salary) pensions separately.

Defined Contribution

Most pension plans will offer you the standard 25% tax-free lump sum when you take some pension benefits.
 
Here are the pros...
  • you get a tax-free lump sum to spend
  • you could invest it and potentially get a higher income than you might by buying an annuity (depending on a range of factors)
  • you could invest it and withdraw lump sums when required - it's good to have flexibility
  • you could invest it and buy a better rate of annuity later in life (perhaps when you are less healthy)
  • it's in your control
And some cons...
  • you get less income from your pension

Defined Benefit

Here the decision is rather different. It largely comes down to how much pension you are giving up by taking a lump sum, and that's down to the "commutation factor" which the employer offers - that's the level of tax-free lump sum which you get for every £1000 of annual income foregone. A typical commutation factor would be 15 - you give up £1,000 of annual pension income to get £15,000 of lump sum. The lower the factor is, the worse the deal on offer is.
 
So here's some pros...
  • you get a tax-free lump sum to spend
  • you may (just) be able to get a better income by investing it or buying an ill health annuity later in life - it depends on the commutation factor, but it's pretty unlikely
  • it's in your control
And the cons...
  • you get less income from your pension - in particular with a Defined Benefit pension you are likely to be losing out on inflation-linked increases in the income
There will always be non-financial considerations like how badly you want that world cruise, or the new conservatory, but one way of looking at the financial aspects is to do a simple spreadsheet of income received year on year by using each option.
 
... or you could always contact us to help you decide!

30 May 2013

One approach to retirement income

People are beginning to understand that you can shop around for the best annuity for your pension money. But many haven't yet seen that there are other options than an annuity.
 
Those options include "income drawdown", where your pension money remains invested but you take an income from it up to the allowed limit.
 
But you can also combine different options.
 
Let's say, like many people, you don't want to stop work completely at 65 (or whenever) but intend to work a few days a week. In that case you could move your pension money into a drawdown scheme, and take a small income to replace some of your old salary. The invested money has a chance to grow further if you don't take too much income.
 
And when you stop work completely, you can either increase the income from the drawdown scheme, or use the pension money to buy an annuity. Who knows... perhaps annuity rates will have improved by then! Or (sorry to point this out), perhaps your health will not be quite as good and you will be entitled to an enhanced annuity.
 
Given that retirement might last a third of your life, it has some advantages to keep your options open.

20 May 2013

Don't Forget Inheritance Tax

The amount of tax income the government received from Inheritance Tax increased in 2011/12 to £2.91 billion, up from £2.72 billion in 2010/11 apparently.
 
The most likely reason is the freezing of the allowance - the nil rate band - at £325,000. That's now frozen until 2017/18. The implication for all of us is that more and more people will be brought into the IHT net. In fact, the number of estates which were subject to IHT in that year was up by 3,000 to 20,000. Overall that doesn't sound like a lot, but given the prices of property - the largest part of most estates - my guess is that most of those will be in the south east of the country.
 
There are a number of tried and tested techniques for reducing an IHT liability, although it does need careful consideration of someone's objectives - preserving access to capital to fund care costs is a  big thing for many people, for example.

This is one area where professional advice costing three or four figures could make a five or six-figure difference in a family's wealth!

16 May 2013

Keeping on top of your investment funds

I always advise people to keep investment funds under review - at least annually for a long term investor. Things change in the investment world, as well as in individual funds, and here's an example...
 
Sometimes a popular unit trust (or "OEIC") fund can have too much money being invested with it - believe it or not. The way that unit trusts are structured means that the fund manager has to use investors' money to buy the underlying investments which the fund is there for. But that isn't always easy.
 
Fund managers First State have just announced that their popular Global Emerging Market Leaders fund has reached that point. Too much extra investment in the fund will hamper their ability to use it effectively, they say. So they are imposing an initial charge of 4% from September 2013. That will certainly slow, if not stop, the inflow of new investors' money since there is generally no initial charge.
 
The same thing happened with another emerging markets fund not long ago - Aberdeen Emerging Markets imposed a 2% initial charge.
 
Actually, that does highlight the advantage of another type of investment: Investment Trusts. They are structured differently from Unit Trust funds - but that's another blog.

7 May 2013

Now, where did I put that pension?

Almost one in four people have lost track of a pension plan, according to Age UK. The trouble is that when you change jobs you might be provided with a new pension plan so the old one goes on ice. And when you move house you don't necessarily think to tell all those old pension companies.

There is a government-backed tracing service for pensions which is certainly worth using if you think that applies to you: Pension Tracing Service - beware of commercial imitations which will end up charging you.

But there's an opportunity to improve the system with the new Auto-Enrolment regime. Since every employment will have to provide a pension, it should be possible to transfer your pensions assets from one employer's scheme to another's. Something of the sort is slated for the forthcoming Pensions Bill, but in the meantime, the Tracing Service is your best bet.

Once you've made contact with that pension again, you might consider consolidating it with others to make it easier for yourself in the future (and perhaps to get rid of a pension with high charges, limited investment options, ... but beware of losing the extra benefits of some older plans). Contact us if you would like some help with that.

22 April 2013

Since 6th April you're better off...

....probably - since the personal allowance for income tax has increased by £1,335 to £9,440. That increases the amount of your income which is not subject to tax, and means you pay £267 per year less tax (if you have an annual income higher than £9,440).
 
Lots of people say they can't afford to save, but saving is mostly about small regular sums, so why not put that into a savings account as a start? It equates to £22.25 per month.
 
The headlines from the recent Budget included 1p off a pint of beer. To get the same benefit from that as from the personal allowance increase, you would have to be a drinker of 27,600 pints each year!

18 April 2013

Annuity Rates Increasing?

The latest MGM Advantage Annuity Index shows that average annuity rates have actually increased by 3% in the first quarter of 2013.

That's the first increase for two years!

To demonstrate how bad things have become, here's a comparison of an annuity purchase this year and in 1998, with a sum of £50,000:

March 1998: £4,885 per year
March 2013: £2,875 per year

Equally amazing is that you would expect to live 3 years longer if you are 65 in 2013 than someone who was 65 in 1998.

For advice on the best approach to getting an income in 2013, get in touch:

15 April 2013

Flat Rate State Pension Confusion

Although we gave our view that the new flat rate State Pension was basically a good thing (see our previous blog from January), there are still some significant unknowns about it. Here are some (thanks to Investors Chronicle).

Firstly, Pension Credit (which currently tops up a low pension income on a means-tested basis) will not exist in the new system. Some people will therefore be worse off than they would have been. Will there be any transitional protection to reduce the pain? The DWP Select Committee thinks we should know.

Secondly, under the present system you don't have to take your State Pension at SP age. You can defer it and receive a higher amount later - which is sometimes a good financial planning strategy. We don't know whether you will still be able to do this in the new system.

Thirdly, where women were relying on their husband's National Insurance contributions to give them a Basic State Pension entitlement, they will not be able to do the same with the flat rate system. Should women within 15 years of State Pension Age be allowed to retain this right, since they will not have enough time to do anything about it?

Finally, here's some key fact about the new system:
  • It comes into force on 6th April 2016
  • Men born on or after 6th April 1951 will collect their SP under the new system.
  • For women it's those born on or after 6th April 1953
  • You need 35 years of NI contribs for a full entitlement (currently 30 years)

26 March 2013

How to Satisfy Auto-Enrolment Requirements

Employers are progressively being drawn into the Auto-Enrolment pension net. If you are a small business employer how are you going to satisfy the requirements? Should contributions be at the 7%, 8% or 9% level?
 
One of the key things about Auto-Enrolment is that employers must set up a pension scheme and then make contributions to their employees' pensions. There are actually five ways of satisfying this requirement and all employers must choose one of them (or more than one - employees can be grouped into different categories). Depending on your workforce and pay structure, the costs to you and the benefits to employees will vary between them.
 
Warning: This doesn't make for easy reading but if you run a business, either you have to get into this for yourself or you need to get an adviser to advise you.
 
1. Certify on a "Relevant Quality Requirement" basis
- pension contributions must be at least 8% of qualifying earnings (3% from employer)
- "qualifying earnings" is a band (similar in principle to National Insurance)
 
2. Certify on an "Alternative Quality Requirement" basis - "Tier 1"
- pension contributions must be at least 9% of pensionable earnings (4% from employer)
- "pensionable earnings" must be at least basic pay
- this could be the most expensive option, but it is fairly simple
 
3. Certify on an "Alternative Quality Requirement" basis - "Tier 2"
- pension contributions must be at least 8% of pensionable earnings (3% from the employer)
- "pensionable earnings" must be at least the basic pay of the worker, and must be at least 85% of total pay of those being certified in that way.
 
4. Certify on an "Alternative Quality Requirement" basis - "Tier 3"
- pension contributions must be at least 7% of pensionable earnings (3% from the employer)
- "pensionable earnings" in this case is all earnings, including bonuses, etc.
 
5. Entitlement Check
- Rather than certifying, the employer could check each contribution against an 8% level applied to a qualifying earnings band
- This might be the best way if you have an existing scheme which is not being changed, and scheme rules don't guarantee that individual payments will satisfy the requirements

21 March 2013

Avoid Pension Liberation Schemes

Yesterday's Budget missed the opportunity to clamp down on "pension liberation schemes" and protect people from massive tax charges. These schemes may sound attractive but there is a potential 55% tax charge if HMRC find out what you've done.
 
What is pension liberation?
Pension liberation companies will phone people up and tell them that they can access their pension fund at any age (one called a client of mine while I was visiting the other day!). In fact pensions legislation means you normally have to be at least 55 before you can take benefits, and then 75% of the value must normally be taken in the form of an income, with 25% available as a tax-free cash sum.
 
The pension liberation companies typically charge between 10% and 30% of the fund value, and usually mean the individual agrees to transfer their existing funds overseas. But if HMRC find out that the full fund has been taken before age 55, then they will impose an "unauthorised payment charge" of 55%. So all of the risk falls on the individual, not the companies running the schemes.
 
So what should you do?
By all means take the tax-free lump sum early (but after 55) but you should normally leave the rest invested to provide an income in future. As ever, there may be other ways to achieve your goals. Talk to an adviser to explore them!
 
Example
Mr T has a pension fund worth £50,000 and his age 49. A pension liberation company suggests he can access his full fund. The company will charge him £17,500 to arrange this. HMRC find out, and impose a 55% unauthorised payment charge on Mr T, so that is £27,500. After the pension liberation charges and HMRC tax charges, Mr T is left with £5,000.
 
If Mr T had left his pension fund to grow until age 55 and he achieves an investment return of 5% a year after charges, his pension fund will be worth £67,000. At this point he could have accessed a tax-free lump sum of £16,750.
(Source: MGM Advantage)

19 March 2013

Using Trusts to Improve Financial Planning

I come across two basic attitudes to trusts when talking to clients. Either a trust is the answer to everything, or they are seen as too complicated to think about. Neither is actually correct - but they certainly have their uses.
 
A trust enables "somebody" - the trust - to own something, where that "somebody" is not a person or a company. Assets, such as money, investments, or property, can be gifted to the trust in order to bring about some financial planning benefit. Very often this is to save Inheritance Tax (IHT) or to ensure that assets are used in the way which the person making the gift (called the "settlor") intends.
 
So here are some ways in which trusts can be used:
 
1. To make money available to children - such as for house purchase - while protecting from a possible future divorce
2. To remove money from your estate to avoid IHT but allow it to "revert" to you in case it's needed for care costs in later life
3. To put money aside for future family events but avoiding IHT - a wedding (or golden wedding), or a world cruise later in retirement for instance
4. To provide for (grand)childrens' school fees
5. To make money available to the surviving spouse but without increasing their IHT problem if their assets are above the transferable "nil rate band" (or simply to avoid having to keep the records which are required to claim the transferable nil rate band)
 
Plenty of other opportunities exist, too. It certainly can be a useful planning tool, although both legal and financial advice should be sought.

6 March 2013

Liberate some wealth!

It seems to me that there really is no point living in poverty in an expensive house which you own but cannot benefit from. Other people might feel they want to help out the family, make a big purchase, make some home improvements, etc..
 
What we are talking about here is raising some money by using the value in your house - Equity Release - and it's a growing and very valid area of financial planning in retirement.
 
Equity Release is a fully regulated area of financial advice, with advice being given by advisers with a specialist qualification, and companies who operate in this market are mostly members of the trade organisation – the Equity Release Council (previously SHIP) – who have their own requirements to be followed by members.

It shouldn’t be the first thing to consider – moving into a smaller house may give a better result, and leave your family with more of a legacy, for example. And you have to bear in mind that raising a sum of money may have an impact on state benefits.

The most common appoach is a Lifetime Mortgage which is a loan secured against your house. You do not have to pay interest each month typically, because it gets rolled up, thereby increasing the loan. It is paid back after you die or move out when the house must be sold. This reduces the value of what you would otherwise pass on to family.

Depending on your age, with a Lifetime Mortgage, for instance, you may be able to borrow between 20% and 50% of the value of your house. If you want an income, you would take it a bit at a time rather than as a lump sum, so that the outstanding loan doesn’t grow so fast. There could be Inheritance Tax benefits as well.

25 February 2013

Long Term Care - The Proposals

The Government's aim with the recent proposal has been (it says) to bring greater peace of mind to people in capping the cost of long term care. The proposal is that an individual's costs will be "capped" at £75,000 from 2017.

In addition, the current means-tested level of assets at £23,250 (above which you pay for yourself) is proposed to increase to £123,000. However, between that amount and the lower limit of £17,500 the local authority will use someone's income level to increase their notional capital - potentially putting it over the limit and outside of local authority funding.

A further "however" is that the cap only covers "personal social care" and doesn't cover living expenses, or any other expenses above what the local authority would normally pay. In other words it's not much of a cap at all. So things are still not at all clear.

It's a costly area, whether individuals pay or the Government pays. And the current proposal to provide part of the funding will come by continuing the freeze on the Inheritance Tax threshold at £325,000 for another three years beyond the current freeze which ends in 2015.

All in all there is a long way to go before there is clarity, and even further before there is fairness. For individuals the best approach, as ever, is to plan ahead with professional advice.

4 February 2013

Rich or Poor? - here's how you choose

To me, being rich or poor is not about the level of assets you own or the income you receive. Instead it's about your ability to make choices.
 
Let me explain that at two levels:
 
1. The biggest financial planning tip which I can give to anyone is to plan ahead. And that basically means saving - whether into a pension, via stock market investments, or simply a deposit account. And yes, that means making a choice to have less now in order that you can have more later in life.
 
Sadly, it's not unusual for me to come across people with very good incomes who have always spent the whole lot each month and have no savings (and may even have big debts). Basically they have stolen their own future. Their choices are limited; they are poor (and it's not unusual to see such people at the local foodbank which I volunteer at).
 
Choosing to save now means you have more choice later. You may not feel "rich" when you retire but you will certainly feel "poor" if you only have the State Pension. So do yourself a favour! (... and your children, grandchildren, employees, ... who can all be helped in the right direction).
 
2. But the principle also applies to life as a whole. If you perceive that you are unable to make choices, then you will feel poor. Here's the crunch - sometimes it's not the level of assets which needs to change but the perception.
 
If your perception is that you need a 5 week world cruise as a holiday every year, then you will feel poor if you are unable to have it. On the other hand if you can choose between two favourite local campsites then you will feel rich.
 
As well as people with assets who are poor, I have also met plenty of people without much who are rich. It's your choice.

30 January 2013

Getting the Best Savings Rate?

Savings rates seem to be on the way down again.
 
The general view seems to be that the Government's "Funding for Lending" scheme is to blame. That provides additional capital to the banks that they need, so that they no longer need to offer good savings rate to attract your money. (OK the Government is providing your money too since that's all it has, but you know what I mean!).
 
Our website has some links to the latest rates and our monthly newsletter has a regular link (sign up on our website). But as a couple of examples: Cheshire BS is offering 2.5% on an Easy Access ISA, and Principality BS is offering 2.3% on a 30-day notice account.
 
As usual, banks and building societies are not interested in good service (only my opinion) and will generally reduce the rate after an initial period, hoping you will leave your money there, of course. So keep vigilant.

28 January 2013

Should I ... Top Up my State Pension?

Although the State Pension is likely to change from 2017 (see my Flat Rate State Pension post), until then you may still have the option to top-up your pension if you are not expecting the full amount.
 
You would be entitled to less than the full amount if you have less than 30 years of National Insurance contributions (or have been receiving equivalent state benefits). That might have happened if you were working abroad, a low earner at some time, or if you were unemployed and didn't claim benefits.
 
But if you have less than 30 years of contributions you can pay HMRC a lump sum to buy extra years. These are "Voluntary Class 3 National Insurance contributions". You will normally get invited to make that payment if HMRC detect that you have a gap in your National Insurance contributions.
 
If this applies to you it may be well worth your while making that payment. On the other hand it may not! Take a look at HMRC's own information on http://www.hmrc.gov.uk/ni/volcontr/toppingup.htm.
 
For a consumer view you could try http://www.moneysavingexpert.com/reclaim/increase-state-pensions which has a calculator (not updated recently, though, so beware).

23 January 2013

Facts and Opinions - Flat Rate State Pension

Here's some facts about the Government's recent proposal:
  • £144 per week (£7,488 per year), but increased with inflation by the time it starts
  • Will increase each year by the higher of earnings, prices, or 2.5%
  • It won't apply to anyone whose State Pension Age comes earlier than 2017 (and perhaps later than that)
  • Requires 35 years of National Insurance contributions for the full amount (currently 30 years)
  • At least 10 years contributions before any State Pension is given
  • State Pension Age will increase with life expectancy
  • Couples will qualify (or not) as individuals - no more married couples rate
  • The State Second Pension (was SERPS) will be closed and contracting out will be abolished (already abolished for Defined Contribution pensions)
  • Previously contracted out employees will have to pay 1.4% more National Insurance contributions on relevant earnings - including most public sectors employees
  • The baseline State Pension will be adjusted to take account of periods of being contracted out (details not known yet)
  • It will avoid mass means-testing - no more Pensions Credit which put some people off saving, while others didn't claim and should have
  • The Minimum Income Guarantee will remain (£142.70 per week currently)
  • There will be no more inheritance of pension entitlement for widows and divorcees
  • The self-employed will be better off since they cannot currently gain entitlement to more than the Basic State Pension

And here's some opinions (mine):
  • The State Pension is worth having - you would need around £150,000 in your own pension plan to get the equivalent income
  • This is a good simplification of a complex system
  • In spite of what the politicians say this is not the end of tinkering with the pensions system - similar claims were made in 1998, 2002, and 2006
 

21 January 2013

Beware Restricted Financial Advice

I seem to be saying "beware" a lot at the moment. Part of the reason for that is the new financial advice regime which started on 1st Jan, and the fact that its worst points are only now becoming clear. So in spite of the FSA supposedly protecting consumers*, the best advice, as ever, is "buyer beware".
 
The new regime includes what the FSA calls "restricted advice" (see my previous blog on The New World of Financial Advice for an explanation). But the big issue with this approach - which would be fine if everyone is clear what they are getting - is that it is NOT clear at all. Many large financial advice firms now only offer "restricted advice" not "independent advice" but don't make that clear, and that also applies to most building societies.
 
The likelihood is that if you engage with a building society "adviser" you are actually dealing with a Legal & General salesman. Although commission is now banned, the advice fee is only charged if you go ahead with the product recommended. Sounds an awful lot like commission to me. What has changed?! Restricted advice is fine if you know what the restriction is and are happy with that.
 
* The Treasury Select Committee has just said that the FSA left consumers exposed to some of the worst scandals in financial history, and failed to pick up on major failures in the making. It urged the FCA (which will take over from the FSA this year) not to pick up where the FSA left off. Hmmm.

17 January 2013

Where Should you Invest in 2013?

As I point out to my clients I am no economic expert, nor even an investment expert, in one sense. My role is really to read widely, watch what is happening and then form my own consensus opinion on the various issues relating to investments, and then explain it in terms that people can understand. So here are some bullet points on what I believe will happen in 2013.
 
Beware bonds!
Fixed interest investments from Gilts to corporate bonds and high yield bonds in particular have had a great run over the last year or two in terms of capital growth. My prediction is that it won't last. In particular gilts have a lot of room to disappoint, throwing in the air the standard approach to asset allocation.
 
Beware Europe!
There is still plenty of reason for uncertainty in Europe, although the Euro will remain as it is now and with all its current members thanks to political fudging. The basic problems have not been sorted out. That may result in investment values falling at some point in the year when the uncertainty re-surfaces, but in the meantime ride the rally.
 
Stick with Equities
In spite of wider problems, a diversified portfolio will still do well this year.
 
The FTSE 250 will do better than the FTSE 100
In other words, smaller companies are in a better position than the bigger ones. But both will be affected at some point in the year by another large fall (as we have had in the last two years). This might be triggered by another Europe problem, something in the Middle East, US political / economic problems resulting from the lack of fiscal agreement, or something else (there are enough candidates to trigger this).
 
No real UK growth
There is little prospect for a real turnaround in the economy this year. Individual companies will often do well, though.
 
Britain will lose its AAA rating
We are tetering on the edge of this and it will happen later in the year causing Government borrowing to be more expensive.
 
Interest rates will stay low
0.5% Base Rate will continue for most - if not all - the year. Inflation will continue to be present, though, and the Bank of England will start to increase the rate in about a year's time.
 
Emerging Markets will return to form
In 2012 investing in Emerging Markets was disappointing, largely due to Chinese growth slowing. That will turn around in 2013 making an investment allocation worthwhile.
  

11 January 2013

The New World of Financial Advice

Since 1st Jan the world of financial advice has changed. After 6 years in the planning, financial advisers have to work differently. There are 3 main changes:

1. No commission allowed on investment or pension advice

Hooray! So it should now be clear that it is up to the client and their adviser to agree how much the advice will cost, not for a product provider to decide. That will also remove the need for an adviser to recommend a product just in order to get paid. Real financial planning doesn't always require a product to implement a plan.

But it also means that the client will have to pay for the advice more directly - and that might put some people off.

2. Higher qualifications for advisers

Phew! That's a good thing - real financial advisers are knowledgeable professionals who keep themselves up to date, not product salesmen. But it was a lot of work to get there for many! Some estimates say that up to a third of advisers are no longer advising ... and that can't be good for consumers.

3. Independent or Restricted? >>>UPDATED<<<

Hmmm! Most people had got used to the idea that an Independent Financial Adviser wasn't linked to a product provider. Although it wasn't so clear that many advisers could only advise on a limited range of products (like bank advisers, and big firms like St James Place and Towry Law).

Now we have "Independent" and "Restricted", and I'm not sure that will make things clearer. Independent means two things: able to advise across the whole of the market (all providers) and also able to advise on all types of investment product. Restricted means "not independent" (yes, really that's how it's defined).

>>>
That leaves us with two problems: Firstly why is a financial adviser "restricted" - it could be because they offer a limited range of products, or even represent one provider (which should be a big red flag for consumers), or because they have declined to advise on a less common type of investment (which is less of an issue).

Secondly it is still not clear enough if a financial adviser firm is restricted (basically aiming to sell you their product range). Vouchedfor.co.uk (quoted in Investor's Chronicle) have just found that 8 out of the largest 10 advice firms are now only offering restricted advice, although in many cases you wouldn't know it from their websites.

Come on FSA, the whole idea of this costly shake-up was to make things clearer for the consumer. Get it sorted!
<<<

To be sure of the best result, make sure that you use an Independent adviser.

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