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.

Blog Archive