Contents
Pensions simplified - Now that would be nice!
Pension Asset Allocation
Inheritance Tax
Welcome to the Spring edition of the Wealth Matters/Mortgage Professionals newsletter. We have delayed the launch of this newsletter, in case anything interesting happened in the budget or the election, that could have affected your finances. As nothing interesting did happen, we went straight to work on our articles after the election!
We have two exciting announcements from work since our last newsletter. First of all, we would like to congratulate Sharon Marsh, our office manager, who has recently passed her MAQ Mortgage exam. She has now passed all four exams required to become an IFA, and is now on an intensive training course to become an IFA. Secondly, we have taken on a new member of staff, Lynn Oakes. Lynn is providing administration support, primarily to Paul Cleworth, and helping us cope with the burden of compliance paperwork. She is proving to be an excellent new member of our team.
With a combination of stable interest rates, continuing growth in most stock markets, and massive regulatory changes in pensions approaching in April 2006, there has never been a better time to organise a financial review. If a review of your finances is required, please give us a call or drop us an email and we'd be happy to talk to you.
We hope that you find the following articles of interest. If you have any comment, questions or views, please email us at info@wealth-matters.co.uk
0870 numbers There have been a growing number of articles, condemning the use of 0870 telephone numbers, as money grabbing exercises by large corporations. It may have not escaped your notice, that we also use non-geographic numbers! We would like to assure you that the only reason we use these numbers, is that as a growing business, we are frequently moving premises and non-geographic numbers can easily be ported over to a new office. We have never earned a penny from our 0870 number, which bills out at a national call charge cost.
If you would like to call us on our local call numbers, they are as follows:
The Mortgage Professionals: 01582 690095
Wealth Matters: 01582 690979
Fax: 01582 660790
Mobiles:
Bruce Nash: 07818 063 585
Paul Cleworth: 07909 534 049
Julian Gilbert: 07977 481 941
Wealth Matters is a trading style of The Mortgage Professionals Ltd. The Mortgage professionals Ltd is authorised and regulated by the Financial Services Authority
All change!
Retirement planning is enormously complex at present, with 8 different types of scheme that dictate the benefits you receive, each with its own set of rules and regulations to understand. The Finance Act 2004 will effectively establish a single regime encompassing all these different type of schemes, under the Governments intension to make pensions and pension planning significantly simpler.
The vast majority of these changes will be introduced on 6th April 2006 (A-day), though some came into force on 6th April 2005, when The Pensions Regulator (TPR) took responsibility for pension regulation.
So what does this all mean to you now?
Well, currently age and earnings determine pension contributions. After A-day, the limit will be capped at the greater of 100% of earnings or £3,600 gross per year. Also there will be no limit to the contributions your employer can make, as long as they are considered reasonable along side other employees in similar roles. All pensions will have a maximum overall amount of benefits you can accrue by contributions (payments into your pension) in a tax year, know as the Annual Allowance, which is set at £215,000 gross for 2006/7, with any excess contributions facing a tax liability at 40%.
The Government has set an overall limit on the amount your combined pension funds can reach at retirement, and this is called the Life Time Allowance (LTA) and is set at £1.5 million for 2006/7. Funds above this amount will be levied with a tax charge on taking the benefits of 25% if income and 55% if taken as cash sum. This limit does not currently apply, so if your current pension fund is over this value you will need to register it to protect it, as well as any future fund growth. This must be done before 6th April 2009.
From 6th April 2006 all policies will be able to provide 25% of the fund value or LTA (which ever is lower) at the point when you start taking your pension as a tax-free cash lump sum. This will include current contracts which do not offer tax-free cash, such as protected rights and Free Standing Additional Voluntary Contributions (FSAVC's). However, if your tax-free cash entitlement is more than 25% of the fund value, as with some occupational schemes, then you may want look at ways to protect it prior to A-day.
And what about when you actually retire?
Firstly, the minimum age from which pension benefits can be taken will be 50, rising to 55, after 6th April 2010. However, there will be exceptions to this, such as for specialist occupations, and those in occupational schemes who had the right to retire at 50 before 10th Dec 2003, where the age of 50 will be protected.
At retirement, you will have a number of choices, which may offer greater flexibility when you take your pension:
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Scheme Pension a guaranteed pension income, direct from your current scheme by the trustees (your pension company)
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A Lifetime Annuity a guaranteed pension income from an annuity provider chosen by you from the open market
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Unsecured Pension where you can make withdrawals form your pension fund without buying an annuity, to age 75, within limits of 0-120% of the relevant annuity rate.
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Alternatively Secured Pension (ASP) where you can continue your pension beyond 75, taking withdrawals from your fund without having to purchase an annuity. The range of income allowed under an ASP will be 0-70% of the relevant annuity rate.
What should you do moving forward?
There are a number of questions you should ask yourself or your financial adviser, to make sure that you are making the most of the proposed changes in pension rules and regulation. It is also equally important to make sure that you are not being adversely effected by them, i.e. protecting your pension fund if it greater than the LTA limit, securing the maximum the tax-free cash entitlement, or if your approaching retirement, whether to take your pension benefits now or after 6th April 2006?
At Wealth Matters, we believe there are some fantastic opportunities in pension planning with the approach of A-day, especially through the use of Self Invested Personal Pensions (SIPPs). SIPPs are a more complex pension arrangement that allow a huge range of assets to be held within the pension wrapper, such as direct share holdings, commercial and residential property, Unit Trusts, OEICS, and Investment Trusts.
Apart from the obvious benefit of the vast rage of assets allowable, SIPPs can also be used as a clever financial planning tool, allowing an individual to draw an income from the pension fund for life, (or not, if you so wish), while allowing the pension fund to continue to grow. The pension fund can then be passed* onto a beneficiary on death, a child for example, and is preserved for their future benefit. This could be a big benefit, as currently when you take your pension you exchange it for an income for life, which is called an annuity and must be done by the age of 75. The downside with this is that the annuity generally stops when you die, or majority of it, meaning the pension effectively dies with you, with no pension pot to pass on.
The ability to pass on a pension is currently only offered via one SIPP provider, and is a tremendous opportunity for the right client. For more information, speak to your Wealth
Matters Financial Adviser.
* - Subject to A-day rules and regulations being finalised
Pension Information source - Skandia 1/3/5 ref 18651
The above is based on Wealth Matters' understanding of the Pension simplification proposals as of May 2005. While we are confident it is accurate and up to date, the Pension Simplification proposals and any relevant legislation are subject to change in the future. The comments should not be
construed as recommendations or advice.
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In this article I would like to explain some of the thought processes, that go into setting up a fund portfolio for a client.
In an ideal world, we would love to produce massive rates of returns on investments for our clients, with little or no risk and no tax charges. Unfortunately, if you hadn't already noticed, we don't live in an ideal world. So the approach should be to produce above average growth, with a level of risk that the client is happy with, and using the most tax efficient vehicle available.
Individuals can be cautious, or have a spectulative approach to investment, or lie somewhere between the two. There is no right or wrong answer to investment, it's more down to what the individual is comfortable with. If you take a lower risk approach, your funds should fluctuate far less. So, when the stock market has a major drop, someone with a low risk portfolio should not see such a large drop in their funds as someone with a riskier approach. So, isn't this the best option for everyone? Not really, although past performance is not a guide to future performance. Historically equities tend to perform better than low risk products over the long term (10+ years). Indeed there are risks inherent in a very cautious approach. The key risk is that inflation could erode the real value of your investment; for example if inflation was higher than the return on your investment, in real terms you would be worse off.
A high risk approach will normally produce better returns in the long term. Equities should really be viewed as a long term investment. Ideally, over 10 years. Having said that, recent research has shown that even over a five year period, equities out-perform cash on average 75% of the time(1). But equities do have peaks and troughs and are likely to vary more in value in the short term. This is one of the reasons that as people get older, they generally take a more cautious approach. If you have been saving for your retirement for the last forty years and you've got one year to go, you should ensure that by this stage you have much less exposure to equities. A 20% drop in the stock market, could result in a big drop in your final retirement fund. This is not to say that there are no high risk older people or low risk youngsters.
When putting together a portfolio, one of the key rules is not to put all your eggs in one basket. I generally look at this from three perspectives; spreading risk in terms of the investment vehicle, geographical region and fund manager. I will show how this can be achieved with a case study.
A 30 year old higher rate tax payer wants to contribute £300 gross into a personal pension. This will cost them £234 per month out of their bank account, with an additional £54 being reclaimed at the end of the tax year. In this example, I have suggested a Scottish Widows personal pension, which offers wide fund choice along with competitive and clear charges. They wish to retire at age 65, and have a 50% balanced 50% high risk attitude to risk. With 35 years until they retire, they are prepared to invest a large amount in equities, but wish to also have a certain amount in lower risk investments as a backbone to their portfolio.
In this case, I would invest 25% in non-equities. The most obvious options are gilts, fixed interest, corporate bonds and commercial property. Commercial Property has been producing excellent returns over the last few years, in fact the Scottish Widows Property funds has produced returns of 79.4%(2) over the last five years and with most of the properties on long term leases, this could well continue. With Corporate Bonds underperforming at the moment, and gilts and fixed interests giving low returns, we elect to put all 25% in the Property Fund. It should be noted that gilts and fixed interest are lower risk than property, but we agree that this is a good strategy.
So, the rest of the fund is available for equity investment. We agree that a good way to spread equity risk, is to invest outside the UK as well as flying the flag for our own country. In this example, we have agreed to invest 10% in the US and 10% in Western Europe. The client did not wish to invest in Asia or Latin America, which have been producing excellent returns recently, but are more volatile. In should be noted that in general, overseas funds are viewed as higher risk than UK funds, as they can suffer from currency as well as stock market volatility. In addition less well established economies are usually far more volatile than the UK. So we decide to invest 10% in Gartmore European Opportunities Fund and 10% in Threadneedle American Select Growth. Although the US, has not produced great returns lately, it is generally a good long term bet.
This leaves 55% left. I like to invest in the Newton Managed fund, as this has produced excellent returns with low charges. The fund invests in four Newton funds: Newton Managed, Newton Higher Income, Newton UK Opportunities and Newton International.
This gives a good spread of risk, and we agree to invest 15% here. The balance we invest as follows:
10% Scottish Widows All Share Tracker - this is a low charged fund that follows the performance of the FTSE 100.
10% Jupiter Income - Invests in UK funds that produce high dividends, such as banks, large retail institutions.15% Fidelity Special Situations - Invests primarily in UK companies that have potential for growth. The fund and fund manager Anthony Bolton have a phenomenal track record.15% Artemis UK Smaller Companies - Invests in smaller PLC's. These funds typically growth very strongly in a rising manager, but fall quickly in a falling market, making them quite volatile.
This portfolio achieves our diversity goal of spreading the risk between different investment types (property, equity, etc), different geographical regions and different fund management houses - in this case 5. This has been achieved through market leading funds, at competitive prices and matches the client's attitude to risk.
Of course, this portfolio should be reviewed on a regular basis. Funds rise and fall on a regular basis and fund managers are typically loyal to pay cheque and move on a regular basis. The client agrees that it would be prudent to review the portfolio on an annual basis, and so agrees to join the Gold Plan on our fee planning service. With this service, we also offer the option of filling out an investment questionnaire to ensure that their perceived attitude to risk matches the answers they give in the questionnaire.
In our next email, I will discuss selecting a portfolio for an ISA.
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Daily Telegraph. Saturday February 26th 2005
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Financial Express Ltd, in sterling on a bid to bid basis, with net income reinvested compared with the sector average, rebased to 100. Figures to 01/01/2005
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Did you know ?
That the Government is expecting to receive £3.4 billion from inheritance tax in 2005. This represents an increase of £500 million (14.7%) compared with the previous year.*
- The estimated number of taxpaying estates this year is 37,000 out of a total of approximately 615,000 - make sure you're not one of them!**
Inheritance tax (IHT) is no longer just a concern for the seriously wealthy. It is a growing worry for many people, especially homeowners who have benefited over the last 5 years from growth in the value of their properties. In the last 5 years, the average property price in the country has doubled from £80,893 to £153,876*** According to Home Track, the average property price in London is now £262,400. Property is not the only asset that makes up a person's estate. Your estate also includes: your contents and possessions, your savings and investments, your pension fund and any life insurance not in trust.
Over the years, the IHT thresholds have, in real terms, stealthily fallen. The threshold (nil rate band) of £275,000 has not kept pace with property inflation and as such, more and more people are falling into the trap of paying inheritance tax. IHT is payable at 40% on assets above the nil rate band. Unlike many other taxes though, there are plenty of things you can do now to make sure you pass as much of your wealth on to your family and friends, and not the taxman.
Make a WILL
The first thing to do is to see a professional will writer or solicitor to make a will, and not just a basic will, but an inheritance tax saving will. This consists of two mirror wills, with discretionary trusts. When you die, this arrangement allows your beneficiaries to borrow back assets in the trust in the form of an interest-free loan, which continues to form a debt on the estate. When they die, the loan is repaid from their estate. Until recently, discretionary will trusts were thought to be restricted to married couples. But it has now been made clear that single people and unmarried couples can also make use of them.
A couple who own property together may be advised to change the ownership of their home from 'joint tenants' to 'tenants in common.' This way they can each utilize half of the value of the property to form part of their individual estates, which is typically the biggest asset of any couple. Writing a discretionary will trust will allow each spouse to utilize their nil rate band allowance of £275,000. Thus, you can double up on the allowance given, so that the there will be no inheritance tax payable until the estate has risen to £550,000. There is no IHT payable between spouses, so if a partner dies and leaves his or her estate in full to the spouse, there is no tax to pay. It is the children who typically pay the inheritance tax liability after the death of both parents.
Specialised Trusts
Another means by which IHT can be minimised is the setting up of specialised trusts. These are legal documents that should always be drawn up by experts, usually barristers. They can be extremely dangerous in the hands of an inexperienced solicitor, let alone in the hands of someone with no qualifications. Always consult a member of the Society of Trust and Estate Practitioners.
Two in every three trust deeds written are used to reduce liabilities to Inheritance Tax. Many more are used to prevent children from getting their hands on money until a predetermined age which, depending on the type of trust, can be 18, 21 or 25 - or sometimes until a named individual decides they are capable of dealing with it sensibly.
If the aim is tax-saving, it's important to understand that, once assets have been placed in trust, your access to the money will be affected, so you will need to think carefully about what you can safely afford to give away. There are typically four types of trust in popular use at the present time: Interest in Possession; Life Interest; Discretionary; and Accumulation & Maintenance. Each type of trust does a different job and each comes with its own sets of pros and cons. The utilization of trusts is the best way to minimise your exposure to IHT and if this has piqued your interest, your next step is to consult the legal profession.
Gifting money away and lifetime allowances
Wills aren't the only weapon in the battle to minimise IHT bills. You can, for instance, simply give away as much as possible while you're still alive. This is known as a "Potentially-Exempt Transfer", or PET. Anything you give away is IHT-free, as long as you manage to survive for more than seven years after handing it over. If you die within seven years, the recipients will still be taxed, but on a sliding scale. If you die within three years, they have to pay the full 40 per cent of anything above the Nil-Rate Band. If, however, you die after three years, the tax reduces. When gifting money away, it is often useful to use BONDS as an investment vehicle, and put the bond in trust.
Main Exemptions:
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Most transfers between spouses.
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The first £3,000 of lifetime transfers in any tax year (husband and wife each have own exemption) plus any unused balance from previous year.
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Gifts of up to but not exceeding £250 p.a. to any number of persons.
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Gifts in consideration of marriage to bride and/or groom of: up to £5,000 by a parent, up to £2,500 by a grandparent, or up to £1,000 by any other person.
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Gifts made out of income that form part of normal expenditure and do not reduce the standard of living.
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Gifts to charities, whether made during lifetime or on death.
Equity release
Equity release may be a useful tool for anyone over the age of 60, with no mortgage on their property. Given that property is often the biggest asset one has, it can be prudent to reduce the estate by drawing on the equity in the house. You can either release a lump sum or a monthly income or a combination of the two. The amount you can release is determined by the valuation of your house and your age. The release of capital is tax free. Interest is rolled up so you don't need to pay the money back until death or until you sell your house**** If you move home, you can 'port' the mortgage to another property within certain criteria. SHIP (safe home income plans) members also provide a 'no negative equity guarantee,' so that no matter what happens to the value of your home or however long you live, the beneficiaries of your estate will not have to pay any additional costs on the sale of the home.*****
Whole of life policies
Using a life insurance policy with no end term such as a whole of life (WOL) policy can be very useful in mitigating inheritance tax. The policy can be written in a single name if a widow or the applicant is single or joint names if the applicants are married. If married a couple would apply for a joint life second death policy, so that only on the second death would the policy pay out to the beneficiaries. The amount of cover selected would be set at the outset as the IHT liability, and it should be reviewed once per annum. A WOL policy can be set up on standard cover or maximum cover. The premium will vary depending on the options taken. To decide which type is suitable, please contact your IFA.
Don't pay more tax on your death. Call your IFA today to put the right combination of policies in place for you in order to mitigate as much tax as possible.
* http://www.2020.co.uk/content/taxcentre_taxcard/inherit.html
** http://www.2020.co.uk/content/taxcentre_taxcard/inherit.html
*** According to the Nationwide
**** The rolling up of interest may mean that the eventual repayment may be significantly greater than the sum originally released.
***** Equity release products involve borrowing against or selling your home. There may be more suitable methods of raising the funds that you need.
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