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.

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