News

It’s time to take control of your pension

Although there is no bad time to review your retirement arrangements, with all the changes taking place in the sector, now is a particularly appropriate moment to ensure you are making the most of your pension.

Lost and found
Research conducted by Age UK has found a quarter of UK adults have lost track of at least one pension accumulated during their careers. The average individual aged over 65 has worked for at least five employers – and a quarter of those aged between 25 and 34 have already worked for a similar number. Given this, we are more than likely to have several different pension pots. To trace a missing pension, try contacting the Pension Tracing Service at https://www.gov.uk/find-lost-pension or call 0845 6002 537.

Consider your options – but take care
If you have several different pension pots, you might consider consolidating them into one. Most occupational and private pension schemes can be transferred and consolidating all your pension savings could cut administration and paperwork, make it easier for you to track the performance of your pension pot and may also reduce costs. But you should take advice – once made, the decision to switch is irreversible and a wrong decision could incur harsh penalties. Chilvester can help you with this.

Take a closer look
Every year, your pension provider should send you a statement showing the current value of your pension pot, and a forecast of what it will be worth when you reach your retirement age. Don’t just file it away – take a closer look. Does the projected value of your pension pot bear any relation to the amount you are aiming for? If not, consider what action you could take to boost its value – perhaps you could boost your pension contributions or you might have to end up working for longer. At present you can pay up to £3,600 or 100% of your earnings, whichever is larger, into a pension every year and receive tax relief on contributions of up to £50,000 (reducing to £40,000 for the 2014/15 tax year).

Focus on the future
Finally, we may talk about “retirement age”, but do you actually know your state pensionable age? Not so long ago, men used to retire at 65 and women at 60 but times have changed. The age at which you become eligible for your state pension – and the amount you receive – is determined by your National Insurance contributions. Find out more using the government’s State Pension Calculator at https://www.gov.uk/calculate-state-pension.

For help with your retirement planning, contact Chilvester to arrange a free initial consultation.

What is auto enrolment?

One of the largest-ever shake-ups in the history of UK pensions, automatic enrolment (auto-enrolment) was introduced in 2012 to provide wider access to pension savings. A changing demographic backdrop means that people in the UK are living longer, but they are not saving enough to finance their increasingly long retirements. Before the advent of auto-enrolment, only 46% of UK employees were enrolled in a qualifying workplace pension scheme.  Read more

Budget 2014: What do the pension changes mean?

The announcements made in this week’s budget set out some of the biggest changes to UK pensions for a generation.

Up until now, it has only been possible to draw an income from a pension by the way of a fixed income for life (an annuity) or by taking income withdrawals within prescribed limits (income drawdown). Taking the whole of a pension as a lump sum has only been available under flexible drawdown rules subject to already having a minimum level of income. For those that don’t meet these criteria, lump sum withdrawals have been heavily discouraged with a punitive 55% tax charge.

These rather inflexible and restrictive ways in which pensions could be accessed meant that many savers may have been discouraged from investing in pensions for their future retirement. The government has recognised this and along with auto-enrolment these new reforms are aimed at getting people saving for their own retirement and being less dependent on the state in their old age.

The changes, which will take full effect from April 2015, mean that in addition to the options available today retirees will now have the opportunity to withdraw lump sums from their pensions without limit, regardless of their level of income, to do with as they please. A quarter of it can be taken tax free as it can under the current rules, with the remainder taxed at the individual’s marginal rate of income tax.

Some have argued that a relaxation of the rules will lead to many blowing away their pension savings on frivolous things like cars & round the world cruises leaving them penniless and looking back to the state for help and support – exactly what the government are trying to get away from. Of course, there will be a large boost for the tax coffers. The full effects remain to be seen in the years ahead.

As an interim measure, for anyone retiring after 27 March this year but before the new rules take effect next April, a number of current limits are being relaxed. From the end of this month it’ll be possible to cash in small pension pots valued up to £10,000 or all of an individual’s pension pots if the total value of all pots is below £30,000. Also the maximum income available from drawdown will increase.

Overall, the changes highlight the growing need for financial advice. Most of us will only get one opportunity to choose the right retirement option and making the right choice is going to be more important than ever.

Please contact us for a free, no obligation, initial consultation to discuss your retirement plans.

Changes to the ISA savings rules

In today’s Budget, Chancellor George Osborne unveiled a number of changes in the ISA system to help encourage savings.

Last year it was announced that from the new tax year commencing 6 April, the annual ISA limit was increasing to £11,880 with up to £5940 of this being able to be put into Cash ISAs.

Whilst this is still happening next month, from 1 July the Cash and Stocks & Shares ISA allowances will be merged into a single ISA vehicle, with an annual tax-free limit of £15,000. This will remove the differentiation between Stocks and Shares and Cash ISAs and effectively allow transfers back and forth between cash deposits and stocks & share based investments as needs change.

At the same time the range of investments that can be put in to ISAs will also be expanded. ISA eligibility will be extended to include peer-to-peer loans and all restrictions around the maturity dates of securities held within ISAs will be removed. The government is also exploring extending the ISA regime to include debt securities offered by crowdfunding platforms, we will await the outcome of this with interest.

We will provide clients with more information as it becomes available. For more information on this or any other matter of personal finance, please contact your adviser.

Helping with the cost of Care

The cost of care in later life can sap your lifetime savings, force you to sell your home and leave you with very little to pass on to your children.  It is a worry for many people and although funding from the local authority is available, it only comes into effect when you have less than £23,250 of assets remaining.

Parliament is currently considering a proposal which tries to protect people’s savings and homes from unlimited care costs by offering a ‘fairer capped funding system’.  If it is passed, by 2016 it could give you more options when looking at funding long term care.  The Care Bill proposes the following for those people needing to fund their own care:

  • Local authorities will help with the cost of care sooner through changes to the means tested capital limits
  • A cap on the total amount you have to pay for care will be introduced
  • The ability to defer the payment of care costs for everyone allowing you to keep your home

Those are the headlines but is it all as good as it sounds? Read more

Planning for long term care

Over the past few years, we have become all too familiar with the effects of an ageing UK population on pensions funding and the gap in state benefits. However, there is another serious issue at stake and it is one that, all too often, is not considered until it becomes an acute problem – the older we grow, the more healthcare we are likely to need. Furthermore at the same time as the state is becoming increasingly concerned about demands on its funds, the cost of long-term care is rising.

Many people are therefore looking for ways to help prepare for such an eventuality, either through a pre-funded insurance policy or, if the situation has already arisen, through an immediate care plan. ‘Immediate needs annuities’ can help to bridge the gap between your income and the cost of your care and are designed to help cover the cost of care if you need it immediately They pay a guaranteed level of income for as long as you live, in exchange for the payment of a one-off lump sum. Pre-funded care plans are no longer available to purchase, although you might have a pre-existing policy that allowed you to insure your future care requirements before they arose. Another possibility would be to consider using your pension pot to buy an enhanced annuity if you have a medical condition, a long-term illness or a lifestyle that could affect your health.

If your income is sufficient or if you have significant savings, you might be able to make any necessary payments for care from your existing resources – in fact, this could well be the most appropriate strategy in the case of short-term requirements.

Above all, however, it is important to plan ahead. Could you – or a family member – need long-term care, either now, or in future? Do you have the money to pay for long-term care? What type of care might be required? What will happen if your care costs increase more quickly than your income? If you are using your savings, how long will they last? Could your savings be depleted before your needs cease? What if you live much longer than expected? These are common concerns for anyone facing an immediate need for care. Chilvester can help you through the maze. Please contact us for an initial meeting.

UK markets lag during November

Most major equity markets posted gains in November despite some short-term volatility that was primarily triggered by macroeconomic data and speculation about the future path of US monetary stimulus. However, despite mounting evidence the UK economic recovery is gathering momentum, UK stockmarkets lagged most of their developed peers during the month. Over November as a whole, the FTSE 100 index declined 1.2%, the FTSE 250 index fell 0.1%, and the FTSE SmallCap index fell 0.7%.

The Organisation for Economic Co-operation & Development (OECD) has cut its forecast for global economic growth in 2013 to 2.7%, citing weakness in emerging economies, although it believes that growth will pick up by 2015. In contrast, the organisation raised its forecast for UK economic growth this year to 1.4%. Elsewhere, the Office for National Statistics (ONS) confirmed that the UK economy had expanded by 0.8% during the third quarter of 2013.

Rarely far from the spotlight these days, the banking sector attracted a considerable amount of attention during November. In particular, Royal Bank of Scotland (RBS) defied expectations with an announcement it would not divide its operations into so-called ‘good’ and ‘bad’ banks but would instead set up an ‘internal bad bank’. The move did not follow the advice laid out by the Parliamentary Commission on Banking Standards. The credit rating of RBS was subsequently downgraded by Standard & Poor’s (S&P), and was also assigned a ‘negative’ outlook by the ratings agency. As justification, S&P cited the bank’s restructuring plans and also pointed to “considerable uncertainties” over RBS’s exposure to future litigation.

Elsewhere in the banking sector, HSBC announced a 30% rise in third-quarter pre-tax profits that was fuelled by robust performance in the company’s home markets of the UK and Hong Kong. Looking ahead, HSBC sees “reasons for optimism with some evidence of a broadening recovery”. Meanwhile, the Bank of England’s Financial Policy Committee is to consider whether it needs additional powers to control the amount of capital that UK banks must hold on their balance sheets.

Following the high-profile initial public offering of Royal Mail in October, leisure group Merlin Entertainments was floated on the London Stock Exchange during November. The company – whose assets include Alton Towers, Legoland and Madame Tussauds – was floated at a price of 315p per share, which valued the business at almost £3.2bn.

Siegel’s paradox

Siegel’s paradox states that if a fixed fraction of a given amount of money is lost and then the same fraction of the remaining amount is gained, the result is less than the original amount. For example if an investor has £10,000 and loses 10% and then gains 20% he has made £10,800 overall. Another investor has £10,000 and makes 10% with no losses. The results are different.

Investor 1: £10,000 – £1,000 = £9,000 + £1,800 = £10,800

Investor 2: £10,000 + £1,000 = £11,000

So, when constructing an investment portfolio, do you try to achieve the maximum return by ‘playing’ the markets and taking high risks? Or do you try to achieve the maximum return at an acceptable level of risk?

Research tells us that investors are often irrational and do not like volatility. Because of this fear of loss, investors chasing returns may often lose their composure and sell into cash when an investment falls in value – but this erodes returns.

By taking a risk-based approach to investing generally means that any volatility should fall within a tolerable range, therefore removing the irrational instinct to sell out and improving the likelihood of longer term returns.

Take investor A, they invest £50,000 into a well diversified portfolio constructed in a risk-based manner which consistently delivers 4% per year for 18 years. Investor A has turned their original £50,000 into £101,290*.

Investor B has a much less diversified portfolio and therefore suffers from much greater volatility. The portfolio loses 4% in year one and due to this loss they move the portfolio to cash, getting 0% returns in year two. In the third year, investor B reinvests as the market rises and gains 16%. The 3 year return is 12% (-4% + 0% + 16%), which is an average annual return of 4% – coincidentally the same achieved by investor A.

However, coming back to Siegel’s Paradox, because investor B sold out in year 1 they have eroded their returns by some £5,593* less than investor A at the end of 18 years despite having the same average annual return.

siegel

The benefits of a risk-targeted approach to investing are therefore very evident. By delivering more consistent returns over the longer term, Siegel’s Paradox shows us that greater returns are delivered.

Of course delivering consistently smooth returns is not simple in the real world and most investors should expect some volatility. At Chilvester we have strategies to suit most investors needs and by constructing well diversified investment portfolios based on asset allocation models we have investment strategies to suit different risk appetites.

*Source: Allianz GI Risk Matters Edition 4

The value of investments are not guaranteed and can go down as well as up.

Ask George to buy you a goat

In Britain it was a long time ago that MasterCard replaced livestock as a means of payment however George Osborne still trades in goats.  Many of us regularly make gifts to charity but are we all making the most of Gift Aid?

Following on from our last post about the tax advantages of gifting to charity on death, I thought it would be worthwhile reminding everyone about the tax benefits of giving to charity during your lifetime.

If you gift money to a registered charity or a Community Amateur Sports Club (CASC), and you are a UK taxpayer, you are able to increase the value of your donation through Gift Aid by allowing them to reclaim basic rate tax on your gift.  This means that for every £10 donation you make, it could be worth £12.50 to the charity.  To do this you need to complete a Gift Aid Declaration and the charity or CASC should be able to provide you with this.

If you are a higher rate tax payer you may also able to claim back a further 20% back on the gift (25% for additional rate tax payers) through your Self Assessment tax return, or if you do not complete a tax return you can give the details to HMRC using form P810 Tax Review. Therefore if members of your household pay different rates of tax it may be worth considering who should make the gifts in order to make the most out of Gift Aid.

So this Christmas when you buy three goats from Oxfam, make sure George buys one as well and that he gives you an additional one when you complete your
tax return if you are a higher rate taxpayer.

If you would like to discuss this, or any other matters surrounding personal taxation, please do speak to us at Chilvester.

Getting your name on a lifeboat

They say that nothing is certain except death and taxes, but there are many things we can plan to do that at least reduce the taxes part and one relief in particular can also help you be philanthropic on death.

All gifts made to qualifying charities are exempt from inheritance tax. The government recently introduced a reduced rate of Inheritance Tax for estates which have gifted 10% or more of the net estate to qualifying charities in order to encourage more people to do so. The net estate is the sum of all assets after deducting any debts, liabilities, reliefs, exemptions and the nil-rate band (usually first 650,000 of estate for a couple 2013/14). By gifting at least 10% of this net estate on the remainder of your estate would reduce from 40% to 36% as a reward.

This means that if you have a taxable estate and you make a bequest to charity in your Will, the bulk of the cost of the gift (up to 76%) may effectively be funded by HMRC!! So let’s see how this works.

If a couple have estate worth £1.2 million and on second death they leave all of their wealth to their family, we can see from Column 1 below how this would be taxed. If however they gifted £55,000 to charity and took advantage of the reduced rate of inheritance tax, we see the outcome in Column 2 following result:

 

1

2

Total Estate

£1,200,000

£1,200,000

Nil Rate Band

-£650,000

-£650,000

Gift To Charity

nil

-£55,000

Net Estate

£550,000

£495,000

Inheritance Tax

£220,000

(@40%)

£178,200

(@36%)

Family receives

£980,000

£966,800

This means that the chosen charity receives £55,000 at a cost to the estate of just £13,200.

Of course it may well take quite a substantial gift to actually get your name on a lifeboat but leaving 10% of your net estate to charity may still be enough to make a significant difference to the charity of your choice without making a significant impact on your family’s inheritance.

If you would like to explore this, or any other matters surrounding inheritance tax, please do speak to us at Chilvester.