Contents:

SIPP's - So what's all the fuss about?

Self Invested Personal Pensions (SIPP's) seem to be the buzz word in the financial press and pension market at the moment. However, they are nothing new and have actually been around for some time, so what is all the fuss about?

As you may know, there are sweeping changes in pension regulation that are taking effect on 6th April 2006, know as "simplification". These proposed changes are making pensions easier to understand and more flexible, in terms of the investments that they can hold, the contributions that can be made in to them, and how the pension is be taken at retirement.

The changes blend particularly well with SIPP's and it is this synergy with that has re-ignited the markets imagination to retirement planning, and put personal pensions firmly back on the map.

But what is it about SIPP's that is so attractive? Well, there are many benefits to using a SIPP over and above a traditional pension plan. SIPP's effectively provide a vehicle to do all sorts of things, both in terms of investing now and the options available to you after your retirement. SIPP's are however more expensive than traditional stakeholder pension plans, so the benefit of the flexibility must be weighed up against cost.

In my last news letter contribution, I discussed some of the changes that are taking place in pension regulation, but as a reminder, the main benefits are;

1. The funding limits which will be much more generous, allowing up to 100% of earnings to a current maximum of £215,000/yr

2. The opportunity to take 25% of the entire pension fund as tax free cash, including protected rights elements (was SERPS, now S2P)

3. The ability to put different types of investments into the pension wrapper, such as residential property.

So what are the benefits of SIPP's?

Investment choice

The primary benefit is the investment choice available, which is almost unlimited. You can choose any Unit trust, Investment trust, Open Ended Investment Company (OIEC), or direct share holding. This allows you to choose the most suitable funds from the range available, from any investment house you see fit. It also allows you to hold new or existing endowments, commercial and residential property, art, race horses, classic cars, fine wines, yachts, in fact, the list is endless.

Of course, the investment must be legal and permitted under Inland Revenue rules, but this still means that the number of assets allowable represents a huge choice. The main benefit of course of holding an asset within a pension wrapper, is that it will grow free of income and capital gains tax. This may be a very attractive proposition indeed, if for example, you have a portfolio of investment property.

There is however a potential tax cost of putting a property into the pension wrapper. The is because the owners would be the pension trustees, who of course, must first approve of the property type and second, must buy it form you, at which point there could be a capital gains tax charge for you the seller.

Flexibility at retirement

Under current pension rules, at retirement, you can elect to take a proportion of the total pension fund as tax free cash and then must draw an income from the remaining pension pot within certain government actuarial limits, but you can still leave the pension fund to grow.

You might want to do this, for example, if annuity rates (the income for life you buy with your pension fund) are low at your chosen retirement date, as this then allows you to defer committing to a bad annuity deal, while still allowing you to draw an income from the pension fund itself. You could then exchange your pension fund for an annuity at a later date, when the prevailing annuity rates are better.

You are able to do this at the moment, by moving your pension funds into a scheme know as "income draw-down" but you must take an income from the pension fund, which you may not want. With a SIPP (post April 2006), you will be able to do this with the SIPP provider direct through an Unsecured Pension or Alternatively Secured Pension, and will not have to take an income at all, if you do not want to.

There is also the addition benefit of being able to access the 25% tax free cash, while still contributing into the plan, where you would receive full tax relief at your highest rate on the contributions you make. This would increase the value of the pension plan for when you need it most, in your later years.

Death Benefits

The death benefits may also be better, though these are still to be ratified by the Financial Services Authority (FSA) but include the possibility of a "family" SIPP, where you can pass on your accumulated pension pot, even after you have taken your tax free cash entitlement and are taking an income from the pension fund, to a nominated beneficiary on your death.

This could create a tax saving of 35% on the value of the pension fund, which is currently charged if you die after taking your pension benefits, but would not be payable if the sum is paid "into" a beneficiary's pension pot for their use at retirement, be it a spouse or child. There may be the additional opportunity to save on Inheritance Tax also, as the fund does not form part of your estate on death and is effectively passed into the estate of another.

If you feel you may benefit from a SIPP pension, then please contact you financial adviser at Wealth Matter, who will help you way op the pros and cons of whether it is the right type of plan for you.

The contents of this newsletter are based on Wealth Matters understanding of the Pension Simplification rules as of (2nd Aug 2005). While we are confident that it is accurate and up to date, the Pension Simplification rules and other relevant legislation may be subject to change in the future. The comments should not be construed as recommendations or advice.

by Bruce Nash

top

Setting up an ISA

Individual Savings Accounts, or ISA's as they are more commonly known, were introduced into the UK in 1999. Currently, every UK tax payer, can pay up to £7000 per annum into an ISA, or £583 per month. This article will focus on investment options within an equity ISA.

Equity ISA's allow client to invest in a range of unit trusts. Not all of the investment has to be in equities (in spite of the name), as other investments such as gilts, fixed interest and corporate bonds can be held within an ISA. The one asset class that currently cannot be held directly in an Equity ISA is a commercial property fund. We feel this is a shame, as commercial property funds have produced impressive returns in the last few years, with little volatility in their performance. The reason for the exclusion, is that to qualify in an ISA, all funds must be open at all times. Sometimes a property fund has to close when it has too much cash in the fund, and it cannot reopen until it has purchased more property. Some investment houses have offered alternative options, such as the Aberdeen Property Share Fund. However this fund invests in shares of property companies, not directly in bricks and mortar. Though this fund has performed well in the last few years, it should not be directly compared with pure property funds, as it has a different investment profile.

Although ISA's have lost much of their tax benefits, due to the removal of tax credits on dividends, at Wealth Matters, we still feel that they remain a valid way of saving for the medium to long term. Many of our clients have seen impressive returns on their ISA's in the last two years, as Major Stock Markets worldwide has grown impressively after the crash at the start of the decade.

When we recommend an ISA, we always look at "ISA Supermarkets" or "Wraps". These are ISA's where our investment choice is not limited to one fund house. The reason for this is that in order to pick the most suitable funds, it's no good being restricted to just a few funds from one company. One investment house may have a great track record in the US, but perform poorly in Europe. It also avoids the problem of having all your eggs in one basket. As an example, a few years ago, a lot of the top fund managers from Jupiter jumped ship and set up New Star. For a while, it looked like there may be problems with Jupiter funds. If this were the case, you could rightfully have been somewhat concerned if ALL your money was invested with Jupiter. As it turned out, Jupiter funds continued to perform well, but the principle of spreading your risk between different fund houses remains.

We normally recommend a minimum of 4-6 funds for the ISA. It is vital to pick funds that match up to your attitude to risk. This is a principle that was lost on many advisers and investors in the late nineties. The consequence was that a lot of investors put their whole ISA allowance in high performing, but high risk, technology funds. For clients that got in early enough, they saw very impressive growth. For clients who invested later on, they saw depressing crashes in the value of their funds. High risk and high performance, combined with little diversity, can also result in large scale drops in the fund in the short, medium or long term.

Different investment classes carry different investment risk profiles. Listed below is are some of the different investment options, listed from the lower risk options first, up to the highest risk options last:

• Gilts
• Fixed Interest
• Corporate Bonds
• High Income Funds
• Managed Funds
• Income funds
• UK Equities
• US and European Equities
• Asian Equities
• Emerging Markets, Eg Latin America, Eastern Europe, China, India
• Specialist funds, Eg Technology stocks, natural resources, health and bio-technology

Shown below are examples of three different portfolios. The first is for a client that wishes to take a balanced approach, with 40% in non-equities and 60% in equities. The second is a client who is willing to take a balanced to high risk approach. In the third example, the client is quite speculative, and is willing to take yet more risk in the hope for higher returns.

If you want to discuss a saving plan, whether for yourself, your children, or perhaps to save up for that car/yacht/holiday you always dreamed of, please contact us at Wealth Matters.

Please note that Past Performance is not a guide to Future Performance. The value of an investment can go down as well as up and is not guaranteed.

The contents of this article are for informational purposes only and should not be construed as advice or recommendations.

by Julian Gilbert

top