31 December 2014

Pensioner Bonds available this month (Jan 2015)

The last Budget promised the issue of some National Savings bonds which would be available to those over 65. They inevitably became called Pensioner Bonds. They will be available some time this month (exact date not published yet), but the government have announced the interest rates which will apply.

There will be two issues - a 1-year bond with an interest rate of 2.8% AER, and a 3-year bond with an interest rate of 4.0%. Interest rates are fixed for the term. They are designed to be kept for the whole term, although early withdrawal is possible with the loss of 90 days interest.

The maximum which can be invested is £10,000 in each bond (i.e. £20,000 per person), although they are likely to be over-subscribed so investors may not get the full amount they want.

It's not often that we can say the government is providing market-beating rates, but here they are, hence the expectation that they will be popular,

The tax situation is less than ideal, though. They are taxable, and will be paid back with basic rate tax deducted. Higher or Additional rate taxpayers will need to declare the interest to HMRC, while non-taxpayers will need to reclaim via HMRC - it will not be possible to ask for the interest to be added gross (the R85 form used by banks and building societies will not work). So some people may decide it's not worth the hassle.

29 December 2014

Bonds in your Investment Portfolio

The make-up of a good portfolio can be confusing if your only prior experience is with interest-paying savings accounts. But bonds would normally form a part of most people's balanced portfolio. So what are they?

We're not talking about savings bonds here - they typically pay a fixed rate for a fixed period of time. Nor are we talking about insurance bonds - they are investment products issued by insurance companies and are more of a "tax wrapper" than an investment themselves.

We are talking about fixed interest investments, where a body - typically a government or a company - issue a bond for a fixed term which investors buy. The issuer pays a fixed interest to the investor (hence "fixed interest"), and at the end of the term repays the original value in full. Most retail investors will use fixed interest funds rather than buying a bond directly, so there is no end date since the fund manager will buy another issue when one matures.

There are different types of bond fund, including "gilts" issued by the government, "investment grade" where corporate bonds are issued by more reliable issuers with good credit ratings, and "high yield" bond funds which contain bonds from smaller issuers who are less reliable and so have to offer a higher interest rate to offset that risk.

The enemy of all fixed interest funds is inflation. If you are receiving a fixed percentage from your bond investment but inflation goes up, that fixed percentage is immediately worth less to you, so the market value of that bond goes down.

Rather than managing the inflation threat yourself, an option I often advocate is to buy "strategic bond" funds. These allow the fund manager to invest in a mix of fixed interest investment which can change over time to suit current circumstances.

As always, seek financial advice to find what is appropriate to your circumstances.

5 December 2014

Why the Cap on Long Term Care won't help you

Following the Dilnot Commission which looked into how Long Term Care should be funded, the government implemented a substantially watered-down version. The headline sounds good - a "cap" on care costs, i.e. a limit to what people will have to pay for their care - but if you look under the surface there is very little good news.

Here's an example to illustrate the point.
  • The average cost of being in a care home is £732 per week. (£1,000 a week is common though)
  • Local authorities will contribute, but based on a rate they set (which would correspond to a very low cost, low quality care home). Let's say that's £530 per week.
  • Of that, part covers food and accommodation (the "hotel costs") while part is the care cost. £230 might be the hotel costs leaving £300 for care costs.
  • Only the care costs count towards the headline cost "cap" of £72,000
  • It would take more than four and a half years to reach the cap (£301 per week) - longer than the average time someone spends in a care home (4 years)
  • And even when you reach the cap it only covers the care costs so the hotel costs will still be down to you
Cap? What cap?

28 November 2014

Using Pensions to save Inheritance Tax

From April 2015 it will be easier to use a pension as a way of passing assets to beneficiaries on your death. Here's how it could work.

Previously pensions in their various guises provided a limited range of options when the pension's owner died. If an annuity had been purchased, payments may have been set up to continue to a spouse, or "value protection" could have been selected when the annuity was bought which would pass some value on - subject to 55% tax. Similarly if the pension was held in a drawdown plan the remaining value could be passed on to dependants - again subject to 55% tax.

The changes mean that if an individual dies before they are 75, their remaining pension value can be passed on to anyone - not just financial dependants as before, but anyone you nominate - and in addition there will be no tax to pay (including Inheritance Tax). Edit: The same also applies to income from an annuity, provided no payments had been made to the deceased.

If someone dies after 75, the same thing can happen but there will be a tax charge of 45% (initially anyway) if the pension is withdrawn as a lump sum, or it will be taxed as the recipient's income in the normal way if taken as an income, which can be done at any age. If the beneficiary does not need the value of the pension for themselves, they can pass it on to a "successor", facilitating multi-generation estate planning where appropriate.

Overall that means it is possible to use a pension as the vehicle to pass worthwhile value on to your beneficiaries but still keep access for yourself if needed for care costs later in life, for example.

26 November 2014

Financial Advice ... But it's not as bad as some think!

My previous post bemoaned the complexity that clients are faced with when trying to understand the fees and charges presented to them by financial advisers. I concluded that there was room for improvement - especially where standard forms and letters are used without trying to fit to a particular client's situation.

But I'd have to disagree with some commentators (who ought to know better or to do proper research) who find the need to say how bad financial advisers are (money-grabbing at the expense of their clients, and deliberately obscuring key information - is the impression you get of their views).

Two examples are Investors' Chronicle and Which? who complained that financial advisers refused to disclose their fees up front and work in a "murky" world of hidden fees. My response is that they should try phoning Sainsbury's and asking how much their weekly shop is going to cost! The point is, there is nothing to disclose until the adviser and client have agreed what work is going to be done. After that the fees are there for all to see before any commitment is made.

Investors' Chronicle (no doubt with their self-interest in mind) advise* readers to invest in an index fund rather than pay an adviser! Except in specific circumstances that is likely to give a worse result, and almost certainly doesn't match an investor's willingness and ability to take financial risk.

It is always worth checking that a fee to an adviser is worth paying - either because it has a good chance of leaving you better off financially within a reasonable length of time, or because it achieves some other benefit (a mortgage to buy a property, peace of mind and security for your family with life insurance, or saving tax for your estate, for example). But I'd have to say that with so much scope for getting important things wrong, advice is generally worth it.

*unqualified journalists are allowed to give financial advice

17 November 2014

Financial Advice - still room for improvement

I can only sympathise with those who are not involved full time in the financial world, and who find financial products complicated!

I have my own pension plans (as you'd expect), and one was set up some years ago by a local financial advice firm, before I could do it myself. I have not heard from them for years and had forgotten that they were flagged as the financial adviser for that plan - so they have been receiving "trail commission" every year even though I've been managing it myself.

They have just written to offer an ongoing service - presumably because the Financial Conduct Authority is making noises (quite rightly) about advisers needing to provide an ongoing service if they are receiving ongoing remuneration.

The plethora of charges they quote can only be described as confusing, even to someone in the know like me! Their letter quotes product charges which differ from my annual statement, there are new discounts on the charges which are (though it doesn't explicitly say so) conditional on taking the new ongoing advice service, and there's the new ongoing advice service itself which differs between the financial adviser's letter and the product provider's illustration.

They generously add that they will not charge me an initial advice fee for signing me up for the ongoing service. But they leave it up to me to complete three rather complicated forms if I wanted to go ahead.

Part of the problem is historical - older pension products in particular had complicated charging structures and special deals with certain financial advice firms who promised to do their best to push that providers' products (so much for independence). And I fear that we are not out of those woods yet.

But part of the problem is also being unable to see things as clients do. I'm not perfect (I know!) but I do try hard to present things simply and clearly to my clients, and I do (usually) complete forms for my clients, requiring them only to check and sign. 

I'm always glad to hear if someone thinks there is room for improvement, but I do like to think that our letters to clients are generally readable and accurate.

12 November 2014

Using your Pension to Pass your Assets on

Until the latest announcements relating to pensions - George Osborne's comments at the party conference - it was not sensible to use your pension to pass on your assets on your death. That's because on death that pension, if held in a drawdown arrangement, would have been taxed at 55% -which is higher than the 40% of Inheritance Tax for other assets.

But now, or at least from when the announced changes come into force, that 55% tax has been removed and the situation may have reversed. In fact, for some people it may even be good financial planning to put money into a pension even if you don't receive tax relief on those contributions*, specifically as part of your estate planning to pass assets on in a tax-efficient way. And you don't have to wait seven years!

Beneficiaries - who no longer have to be financial dependants - will be taxed on the value they receive as if it were earned income (unless death occurred before 75), so that needs some thought. But with some careful planning - perhaps skipping a generation and passing assets to the grandchildren, or withdrawing over more than one tax year - that tax can be minimised.

Pensions for estate planning - now there's a new concept.

*either because you are over 75 or because you have little or no earned income (or both).

3 October 2014

Even More Pension Flexibility

"Death Benefits" doesn't sound like an interesting subject, but apparently the Chancellor disagrees and thinks it could be a vote winning one!

He didn't call it that, of course, but in his conference speech this week focussed on the removal of the very high 55% pension tax charge. That is currently applied if you die with a sum still in your drawdown pension, for example, before your family gets the remainder.

The details are still to be finalised (as are the details from the Budget earlier in the year) but the headline change is that there will be more circumstances where your chosen beneficiaries will receive the value of your pension tax-free. And those chosen beneficiaries no longer have to be financial dependants in most cases into the bargain.

Although the new rules will apply from next April to annuities as well, it is only the "value protection" features of annuities which will change - that's the feature which returns the value of your annuity purchase less the income you've received already, which will be tax-free in future.

So most of the benefit of the new rules will apply to pension drawdown plans. Whether you have started an income or not, the value of the pension will be paid out to beneficiaries tax-free if you die before age 75. After 75 tax will still be due, but at a lower rate than 55%. And the withdrawal of the pension's value can use the new pension flexibilities announced in the Budget, rather than having to take a restricted income.

With the ever-increasing level of flexibility available in pensions, their attraction as a tax-efficient means of saving for retirement is also increasing.

25 August 2014

Rethinking Retirement Planning 4 - No Gold Watches

It bears repeating that retirement is not what it was - the actual point of retirement that is. No more gold watch presentation for long service on Friday, followed by consignment to the deckchair on Monday.

A recent survey by LV= found that around two-thirds of those over State Pension Age still worked to some extent. At the very least, retirement is a gradual process, reducing the days per week. But it may also be part of a change to a "portfolio" time - a chance to engage in various occupations, some paid, some voluntary, some employed, some running your own business, perhaps.

The duration for which we do that is likely to extend, too. You can't expect to work for 30-40 years and then live off accrued savings for another 30 years. That doesn't work unless you save around half of your income for retirement.

So a key part of retirement planning is not only financial, but is also likely to be about preparing yourself for the portfolio mode - what are those other things you will be doing? What do you need to do now to prepare?

22 July 2014

How Will the Latest Pension Changes Affect You?

The Government announced its plans on pension changes in more detail yesterday. That's in response to the "Freedom and Choice" changes announced in the March Budget. So how will the changes affect you?

As always with this blog, this is not personal advice but general information. I recommend taking financial advice before taking any actions - it could make a big difference to your future.

If you are confused and need "guidance"...

The Government has confirmed a guidance service will be introduced for people approaching retirement. Details are still being worked on (like who provides it), but it is likely that the guidance will take the form of telling you who to go to for the real advice in your circumstances. We would, of course, recommend taking independent financial advice which will be completely focussed on getting you the best option.

If you are still working and building up a "defined contribution" pension plan...

No changes relating to this phase of life, although you may want to include withdrawing some of your pension money in your future plans - see below.

If you are still working and have a "defined benefit" pension plan from your employer...

No changes here either, but you may be able to transfer your pension into a "defined contribution" plan in future to take advantage of the withdrawal option. That won't apply if you work for a public sector employer with an unfunded scheme though (i.e. where your future pension will be paid by future tax revenues). Any transfers will have to be with advice from a financial adviser independent from the scheme (unless the benefits are valued below £30,000).

If you want to withdraw some (or all) of your pension as a lump sum...

This is the big change. You will be able to do this from April 2015 once you are over 55 (or 57 from 2028, and thereafter 10 years before the State Pension Age as it continues to go higher). However, apart from the 25% tax-free lump sum, the rest will be taxable as income so you risk paying higher rate (40%) or even additional rate (45%) tax, so care is needed. And of course you need to have other plans in place to ensure that you receive an income throughout retirement.

If you are retiring and want a guaranteed income for life...

Buying an annuity is still likely to be a good option for many people. There are existing variations, too, where there is potential for an increasing income. There are also some new options being introduced by a relaxation in the rules, such as guaranteed annuities which reduce in value in the middle years of retirement, then increase again later. Also there will be options to allow beneficiaries to receive payments as a lump sum rather than an income after the pensioner's (annuitant's) death.

If you are retiring and want a flexible income...

Income drawdown remains an option. The existing "flexible drawdown" regime is what provides the framework for withdrawing your entire pension, but a more sensible approach for most people will be to take a sustainable income based on an investment portfolio. Previously there hasn't been anything to stop you continuing to contribute to a pension plan as well as taking an income (and getting the benefit of a further tax-free lump sum), but in future, if you take a pension income (beyond the tax-free lump sum) you will be limited to £10,000 per year of further pension contributions. 

The two exceptions to this are (a) if you are already in a "capped drawdown" arrangement the reduced annual allowance won't apply, and (b) using the small pensions rules to withdraw from such plans won't enforce the reduced annual allowance either.

If you are concerned about who gets your pension money when you die...

Other than the potential for new options with annuities (referred to above), on death when in a drawdown arrangement, your beneficiaries can receive the balance as a lump sum, but currently taxed at 55%. There is recognition that this is a bit steep(!) and the Chancellor plans to review this.

16 July 2014

Rethinking Retirement Planning 3 - Oh dear, You're going to live a long life

With the new pension freedoms expected from April 2015 it's worth making sure that you will have enough money in later life. We are generally living longer, but unfortunately that doesn't mean we remain healthy, active, and independent right up to the end, so planning for care costs in later life is important. And that suggests you shouldn't spend all your pension money in your 60s and 70s!

Local authorities do have some obligation to provide for you when you need care, but you may not want the level of service or care that they will pay for - indeed it may not be available locally, so topping it up is your only option. A recent report from Age UK says that public funding for older people decreased by 10% in real terms. So don't expect the state to help too much.

Headlines about a planned "care cap" of £72,000 on what you will have to pay are misleading, too. That only covers the cost of care, not the "hotel" costs - accommodation and meals, for instance.

There are no longer any financial products to pre-fund your potential care costs, so planning is about setting aside sufficient assets to pay for yourself. When the time comes, you could choose to buy an "Immediate Care Annuity" which pays out for the rest of your life. If payments are made direct to a registered care provider they are tax-free.

It's a complicated area with ownership of the family home often a contentious part of it. But it's not going to get any easier any time soon. Contact us for advice to prepare.

1 July 2014

Rethinking Retirement Planning 2 - Protect your future income

With the new freedom to withdraw your pension money (from defined contribution / money purchase pensions anyway), it is worth having a plan and setting a limit on what you withdraw to avoid running out of money in early retirement.

The primary purpose of a pension is to provide a retirement income. Relying on the State Pension is unlikely to be much fun. So it is worth understanding the level of income you need in retirement, and then matching that to the amount of pension you need.

Unless you have a final salary pension from another employer or some other reliable source of income, you should ring-fence some (probably most) of your pension to provide that income.

Planning ahead is the key thing here. Look at the income you need, decide how you can get it, work out how much of your pension needs to be ring-fenced. If you don't do that, the only person to suffer will be you!

30 June 2014

Rethinking Retirement Planning 1 - Using Pensions as Savings

The March 2014 Budget has shaken up retirement planning. By promising easy access to pension plans (defined contribution ones, anyway) new opportunities - and risks - are opened up. Here we look at your pension as savings.

While pensions are taxed differently*, they look a lot more like ISAs than they used to. When you need some capital to spend you will be able to withdraw it from your pension. Since there is a limit to ISA savings putting spare cash beyond that limit into your pension now seems like a better thing than it used to, since you will be able to get it out again.

But there are dangers. Clearly a pension is there primarily to provide an income in retirement, and if you've spent it all, you are going to have hard times!

So it needs some thought, but the new freedoms are likely to be worth taking advantage of.

*Basically, ISAs are subject to tax on the way in (when you add money to them) since that money comes from taxed income, while pensions are taxed on the way out (when you take an income or withdraw a lump sum - other than the initial tax-free lump sum, that is).

11 June 2014

Who will do the best job with your Will?

A recent research project including the Office of Fair Trading and the Solicitors Regulation Authority reviewed 101 wills provided to consumers.

41 of these were provided by solicitors and 9 of those were deemed unsatisfactory by the researchers.

It was a similar unsatisfactory proportion for non-solicitor will writers.

That strikes me as a pretty high percentage, but the key point is that solicitors don't do a better job than anyone else. And when you consider that only a small part of their training is on wills you couldn't say that they are the experts.

Overall, I'd have to say you are better off going to someone who can provide a wider service and can recognise other needs too. We use full time will-writers to provide our service, and as an independent financial adviser I can also provide Inheritance Tax and other advice.

30 May 2014

Equity Release in the Mainstream

In 2013, £1.07 billion was raised through Equity Release plans. And with booming house prices (in the South East at least), I would expect that figure to continue growing.

That's because an increasing proportion of someone's wealth will be tied up in bricks and mortar. And while it may be great for many people to be able to pass the value on to family in due course, there's also a case for taking advantage of some of that growth yourself! An Equity Release plan provides the liquidity, enabling you to receive a lump sum (or a series of lump sums as an "income").

There is a cost, of course. With a Lifetime Mortgage (the most common form of Equity Release plan) the main cost is the interest on the loan which is added to the amount outstanding and has to be deducted from the value of the house after you die or move into care. And there are advice fees, too.

But to live a better retirement, plenty of people would say it's a cost worth paying.

Contact us for more information on Equity Release plans.

29 May 2014

A Good Time for Structured Products?

Different types of investment perform in different ways. That's what makes diversification so important. I've written about structured products before, and their behaviour can be different to the more common equity-based or fixed interest investments, for example.

Depending on what you think investment markets will do in the near future (the next year or few) now may be a good time to take a look at structured products. If, for example, you believe that markets will not continue going up as they have done now for five years (albeit with a couple of blips on the way), then having the more predictable return of some structured products might be the best thing for you.

One of the most popular types of structured products is the "kickout" or "autocall" product. They provide the advertised return (say 8%) for each year up to the point where you are kicked out - and the kickout occurs because the index that the product follows (such as the FTSE 100) is above a certain level at the anniversary. And because that level can be a "defensive" level below the start point, big returns in markets are not required to give you the product's modest return.

As ever there are risks, and here they include a dependence on the backer of the product - typically a bank - still being there at maturity.

27 May 2014

Thinking about Withdrawing your Pension?

One down-side of withdrawing a whole pension plan (expected to be possible from April 2015, and already possible with "Flexible Drawdown"), is that you get taxed on most of it as income. That is likely to push many people into higher rate tax (or even additional rate tax) even if they are not there already.

So here's a way of getting around that - by investing in an EIS (Enterprise Investment Scheme) you are entitled to income tax relief to the tune of 30% of the value invested. That's not going to suit everyone, but depending on your reasons for withdrawing, it's worth considering.

There may also be benefits should you die - if you don't withdraw a pension and don't use it to generate an income before you are 75, currently it could be subject to 55% tax. But in an EIS, after two years it is likely to be free of tax in the hands of your beneficiaries, since Inheritance Tax won't be due if it's a qualifying investment.

Worth a thought - contact me if it's worth more than that to you!

20 May 2014

Should I ... Invest in Woodford's New Fund?

Neil Woodford managed the highly successful Invesco Perpetual High Income fund for many years. It (still) is an "equity income" fund investing in larger, mostly defensive, companies which pay a dividend.

He left Invesco Perpetual and has now launched a new equity income fund - should you follow him?

Although I am a big fan of the original fund, I will not be recommending clients go into the new one for the time being. The first reason is that, on principle, I would not recommend a fund with a short history (less than three years generally) since it has certainly not had time to prove itself in different market conditions. The second reason is that I suspect that a successful fund needs more than a successful fund manager. While Woodford may have been in a sweet spot at Invesco with great support around him, it's possible he will be distracted by setting up his own company, or that the support team will be less effective, or whatever.

So for me, there's too much risk in the new fund for the time being.

16 May 2014

Fixed Term Annuities - A Good Option for Uncertain Times?

One of the messages I regularly need to get across to people is that buying an annuity is not the only option to create a pension income. I'm glad to say that the Chancellor helped me with this message in the last Budget when the press followed up with "the end of annuities" headlines.

Annuities are not going to end any time soon - they are still the best option in many cases, but it is certainly worth looking at alternatives, one of which is the Fixed Term Annuity (FTA).

The FTA is particularly good in present circumstances with a major change coming to pension in April 2015 (the ability to withdraw all your pension), and with continuing poor annuity rates.

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 May 2014

Not Everyone Should Try Investing

There's no doubt in my mind that investing requires some faith.

You are handing over your money to someone else who may be able to do a good job with it and give you a good result, but on the other hand... At the very least you may well see times when the value of your investment is less than what you put in.

Actually, the government-sponsored pension scheme - NEST - has a novel approach to that. For the early years of pension contributions you are invested in foundation funds which will not grow very much but neither will they fall in value. That gives your pension assets some time to grow and helps to avoid people opting out when they see values going down and don't understand that it happens.

For people who are used to a guaranteed return on their money in the form of bank interest (albeit not much!), it may be too difficult to make the leap into investing, even though the long term case is clearly better.

So if you talk to me as a financial adviser, don't expect me to press you to start investing. It may be that it would not be a comfortable experience for you.

17 April 2014

Are your pension "Lifestyle" funds bad news?

Many pension plans are in Lifestyle funds (and here we're mainly talking about personal pension plans including those arranged by your employer, but not defined benefit / final salary pensions).

In many cases they are the default fund if you don't choose anything, which is not a bad approach if you don't know any better (although I'm not a fan myself). The way they work is that your money is moved into supposedly less risky assets (like gilts) as you approach your chosen retirement date. The idea is to reduce the risk of last minute drops in value, just before you use the whole pot of pension money to buy an annuity. 


With the new-found freedom not to buy an annuity expected from April 2015, why would you do that? If your pension will remain invested after retirement so that you can take a bit a time, it would be much better to remain invested in riskier / growing assets and continue to benefit from longer term growth.

I'm sure there will be many consequences (foreseen and un-foreseen) of the latest pension freedoms and this is one of many.

14 April 2014

Smart Beta - A Different Investment Approach?

The debate about active versus passive investment strategies has been going for some years now. That rather suggests to me that there are merits in both approaches (although I lean towards an active approach in advising clients).

However, a more recent approach is "Smart Beta" (which also goes by other names). Here's the basics.

Rather than following an existing index such as the FTSE 100 - which is what a passive equity fund might do - a Smart Beta approach recognises that such as index is not necessarily a good indication of current value nor of future performance. That's because an equity index is based on the share prices of a range of companies (normally included in the index on a weighted basis), and share prices include not only the fundamental value in a company but some sentiment too, which might push the share price up or down.

Instead a Smart Beta approach might look at the fundamental value of a range of companies as shown in its accounts or by reference to its dividends, for example.

It's an interesting approach, but possibly too soon to judge its merits.

19 March 2014

Budget 2014 - Key Points for those Retiring / Retired

Well we didn't expect such a pensions-and-savings orientated Budget! There are a number of important points so I thought it important to highlight those, even while many in financial services (me included!) are scratching our heads over the details. My initial reaction to each [is in brackets]

Warning: more details (and even corrections) may be forthcoming over the next few days as the detailed Budget documents are studied.

The most important bits...

  • Those with total pension pot of £30,000 or less will be able to take it all (currently £18,000), while those with up to three individual pension pots of less than £10,000 can do the same (currently up to two of less than £2,000) [Comment: Hmmm, *see below]
  • Over 55's with their own pension money could be offered free impartial advice on taking pension benefits - consultation to be conducted on how this will be delivered [Comment: definitely a good thing, although how?]
  • For consultation: Anyone can withdraw their whole pension i.e. no need to buy an annuity [Comment: VERY dangerous - so what happens when that money has been spent on a few holidays at the start of retirement? Call me old-fashioned but sometimes people need protecting from themselves. For those who are prudent with their money it provides a great opportunity for tax-efficient financial planning]
  • From 1st July there will be no separation between Cash ISAs and Stocks & Shares ISAs and the allowance will be increased significantly [Comment: a good simplification and a worthwhile new limit]

  • "Flexible Drawdown" allows you to withdraw your pension money if you have a guaranteed pension income of £12,000 or more (currently £20,000) [Comment: dangerous - too easy to run out of money]
  • "Capped Drawdown" - current income limit increased [Comment: potentially dangerous - too easy to run out of money, but OK if knowledgeable or with advice]
  • From 2028 you will generally have to wait until age 57 to draw any benefits from a private pension (currently it's 55) [Comment: not a big deal for many, but a sensible increase]
  • Transfers from Defined Benefit to Defined Contribution pension schemes will be limited [Comment: mostly not a good thing anyway]
  • Tax allowances go up on 6th April to £10,500 (basic) and £41,865 (higher) [Comment: good]
  • Maximum Premium Bonds holding up to £40,000 in June (currently £30,000) [Comment: I recommend avoiding Premium Bonds anyway]
  • New "Pensioner Bond" from January from National Savings next year offering "market leading rates"
*It's all very well allowing pension flexibility, but my fear is that people will tend to take what they can as soon as possible, and run out of money very quickly and live in pension poverty for longer.

5 March 2014

Savings - How to Lose Money

One of the saddest things I see with new clients is where they have held their assets in the wrong place for a long time, and could have done a lot better for themselves if they had done some different. That could mean pensions with poor performance and high charges, property in the wrong place, or simply in cash savings. Really?! Surely having savings is a good thing?

This week marks the fifth anniversary of UK base rates being held at 0.5% - a response in March 2009 to the global financial crisis of 2008. That may have been helpful to homeowners with a mortgage but it has meant that cash has been the riskiest asset for savers.

According to M&G, UK equities would have provided investors with a return of 99.4% over the last five years, while global equities would have provided 69%. Corporate bonds and commercial property would also have provided good news.

But taking tax and inflation into account, they estimate that cash would have lost you 10.4%.

I'm certainly not going to say that you shouldn't have any savings - it's important to have some easy access cash for a rainy day - but you need to be aware of the cost of  holding it as cash. The future is not going to be like the past (and at some point interest rates will start to rise again), but it does emphasise that a long term view of your finances requires consideration of other types of asset.

3 March 2014

Should I ... Jointly Own Assets with my Spouse?

Married couples often own assets jointly. That could include the family home, savings and investments. There are certainly advantages in doing this - it keeps it simple when one spouse dies, for example. But it isn't always the best approach.

First of all some assets just can't be held jointly. ISAs and pensions are good examples.

One advantage of holding assets separately is that it allows you to take advantage of different tax situations. If one spouse is a non-taxpayer, for example, then a better tax outcome might be achieved by that person owning assets which are being sold. And since it is often straightforward to pass ownership between spouses there is potential for savings by shifting the ownership just before the sale.

However, problems can arise with joint ownership - for example, if either spouse has been married before. Generally you would want your children (from the first marriage) to inherit some of your assets on death, rather than everything going to your new spouse who might then expect to pass everything to THEIR children on their death leaving your children without anything.

So it may best to keep pre-owned assets under individual ownership in those circumstances. At the very least it needs some serious planning to avoid some bad feeling (or even legal action) between families in due course.

13 February 2014

If You Should Die Without a Will...

I came across this little ditty recently. It's not Keats but the sentiment is good enough.

If you should die without a will
Whose pockets will your money fill?
The ones you truly want to have it
Or someone else who'll gladly grab it?
Consider these important "ifs"
Alas, ignored by countless stiffs.

If you're intestate it's decreed
A "special grant" is what  you need
This means not you, but legislation
(called Letters of Administration)
Decides who gets you garden gnomes
Your spouse? Your kids? Consult the tomes!

If you've no spouse nor next of kin
"Bona Vacantia" may come in
In other words your precious pounds
Are simply give to the Crown
Or to a Duchy, or if not
The Duke of Cornwall cops the lot.

If you're insane and if you find
"A sound and a disposing mind"
Are not among your personal traits
You'll have to stay an intestate
But if you're sane, for a small bill
Have peace of mind and MAKE A WILL!

4 February 2014

Tax-Efficient Investing - VCTs and EISs

Apart from investment performance and charges, the other main factor when considering how to invest some hard-earned money is tax. Obvious starting points are the annual ISA allowance, and the tax relief you receive on pension contributions. But both of these have their limits.

For larger sums (and for other reasons), Venture Capital Trusts (VCT) or the Enterprise Investment Scheme (EIS) may be appropriate. Although often considered together, and both created by the government to encourage investment in small companies, they are actually rather different beasts. But without going into too much detail here's some highlights.

Both provide Income Tax relief of 30% - that means getting back Income Tax you have paid up to 30% of the value of your investment. Regardless of investment performance this is often a reason for VCT or EIS investment on its own. You do have to hold the investment for a while, though - 3 years for EIS, 5 years for VCT. The latter also provides tax-free dividend payments.

With an EIS investment there is also potential to defer Capital Gains Tax - business owners selling a company can take advantage here. And your Inheritance Tax situation may also be improved with an EIS investment after two years using "Business Property Relief".

All in all, these types of product are worth considering, particularly if you have a tax issue which can be addressed. However, ultimately you have to remember that you are investing in small companies which are inherently less stable than larger ones. Professional advice is certainly recommended.

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