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Self Invested Pensions
Looking to the Future
Family Protection – Back to Basics
State Pension decline
Welcome to the spring edition of our quarterly newsletter.
We hope that you find the following articles of interest. If you have any comments, questions or views, please email us at:info@wealthmatters.co.uk
 Market indications suggest that there has been a massive growth in self invested pensions during the past year. Already popular with more sophisticated investors, their flexibility is gaining support from across the spectrum. But there are still two types; the older Small Self Administered Schemes (SSASs) and Self Invested Personal Pensions (SIPPs) which are only 15 years old.
Self invested pensions used to be mainly for business people who wanted to use their pension flexibly – often to help their business through loans, the purchase of capital equipment and property and share buy-backs. But in the early 1990s, Nigel Lawson, then Chancellor, introduced a personal pension version to give just about everyone access to the wider range of assets that self investment offers.
Since those early days a lot has changed and the recent “pension simplification” that came into force in April 2006 somewhat blurred the lines between the two, so that many people felt that SSASs were dead and only SIPPs had a future. They are, after all, generally less cumbersome and the assets held are allocated to just one individual, rather than being held on behalf of a group of members.
But there can be circumstances where a SSAS still offers marginal benefits when compared with SIPPs. For example, although both SIPPs and SSASs can invest in company shares, particularly those of the employer of the scheme member, a SIPP cannot normally make a loan to the employer.
But more generally, the different status of the two may lead to varying investment strategies overall. SSASs still have all scheme members as trustees. This means that they can adopt a relatively aggressive investment strategy, because all those who are affected are party to decisions. In the case of a SIPP, the trustees are corporate and may feel that they must follow a more cautious investment strategy that might be desired by the member (some may see this as an advantage). Trustees are, of course, likely to be influenced by the members when it comes to selecting investments, but in final analysis they have a duty of care to the member and cannot take unnecessary risks in the same way as the “member trustees” of a SSAS can.
Of course in some areas, SIPPs may have an advantage. Not least of these is where an unsecured pension is to be provided at retirement. Under the SSAS structure, it would be necessary for the retiree to remain as a trustee of the scheme until benefits are eventually provided by an annuity or the scheme is wound up. This would not be the case under a SIPP, where the trustee is ‘external’.
Conversely, the ability of a SSAS to pay a scheme pension (which a SIPP cannot easily do) because in this case, unlike an unsecured income, the level of benefit is calculated by the Actuary to the scheme, rather than following government limits. This in general relates to the maximum income, since the minimum unsecured annual pension is zero. The maximum unsecured income is 120% of the maximum annuity that could be secured. If the Actuary felt it to be supportable, a higher scheme pension could be paid. However, unlike an unsecured pension (which a SSAS can also offer) the income should not normally be varied from year to year.
The ultimate benefit of a scheme pension is, however, that on death any unused fund can be used to the benefit of other scheme members without the problems associated with Alternatively Secured Pensions (after age 75) which the Treasury is trying to prevent from being used to pass money down the generations. They have already insisted that an IHT equivalent charge will apply and may even withdraw ASP altogether, although the ideological arguments for this do not stack up logically, since the tax revenue is almost invariably greater when ASP is used.
Although the case is not clear, it is likely that SSASs will survive for a few more years. SIPPs certainly seem set to run and run.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact us.
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 Statistics can be misleading, but when the new Pension Regulator publishes data indicating that looked at as a whole, the vast majority of pension schemes are under-funded, it is worth taking note … and planning what you will do about it to ensure your own long term financial survival.
In its first “Purple Book” (December 2006) the new Pension Regulator has reported aggregate deficits amongst occupational pension schemes of anything from £33.8 billion to £440.40 billion, although as we reported last November the basis producing the highest deficit is probably artificial as it assumes that all pension schemes are stopped immediately and employers forced to secure all future benefits on one day.
Even so, the shortfall within most occupational pension schemes should give rise for concern. Those who have to rely on their own pension arrangements should also take note that their pensions are based entirely on what they can save. This means that the importance of adequate provision is even greater,
To add to the problem, the government has announced that state pensions will be deferred, for anyone currently under age 47, increasing in stages from 65 to 68. This means that anyone wishing to stop work at 65 or earlier, who was born after 6th April 1959 will need to make additional provision to provide an income to replace the state pension during the intervening period. This could be as long as 36 months for younger people.
Changes made to pension rules last April make it easier for most people to save for retirement through personal pensions, including self invested personal pensions (even if they are members of an occupational scheme) by making higher contributions than was previously possible. But not everyone necessarily wants to take advantage of the tax relief available on pension contributions in respect of their entire retirement provision, because at least 75% of the fund has to be taken as taxed retirement benefits, rather than as a lump sum.
For those seeking greater flexibility, some more good news comes in the extension of Individual Savings Accounts (ISAs) beyond their expected withdrawal date in April 2010. This was announced in last December’s Pre Budget Report and will be welcome to an estimated 16 million people who have already invested in this vehicle.
ISAs may not benefit from tax relief on investments, but they do grow free of UK income and capital gains taxes (other than the 10% withholding tax on dividends from UK companies which can – courtesy of Gordon Brown – no longer be reclaimed by ISA managers on behalf of their investors). Any money in the fund can be withdrawn at any time – not just at retirement – either as a lump sum or an income and is totally free of tax.
The rules are also set to be simplified, probably from April 2007, to remove the current distinction between mini- and maxi-ISAs. Other changes will include the abolition of rules excluding investment trusts with rental income from being held within ISAs and the merging of the old Personal Equity Plans (PEPs) into the ISA regime.
Parents may also be pleased to learn that, as previously indicated, Child Trust Funds (CTFs) will be able to “rollover” into ISAs at maturity.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact us.
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 The start of a new year is a good time to “get back to basics”; to re-think your finances. The way you protect your family in the event that anything should happen to you, for example; we all know we need life assurance and income protection, but how much is enough? When did you last review your cover?
Fortunately, life assurance costs generally have fallen during the last decade, so plans put in place in the 1990s may no longer represent the best deal. In addition, a change in pension rules in April 2006 now means that you can purchase what is called pension term assurance on a stand-alone basis; that is, it no longer has to be attached to a pension scheme.
This means that you can receive tax relief on your premiums at 22% - higher rate tax payers can get back a further 18% via the self-assessment system. Even if you do not pay tax, you qualify for basic rate relief on pension &/or pension term contributions up to £3,600 a year.
There are, however, some points to remember.
- Your total contributions will only qualify for relief up to your total earnings (other than as indicated above) and then only up to £215,000 for 2006/7 (£225,000 for 2007/8 and rising thereafter).
- If your total pension fund plus any pensions term assurance payout exceeds the lifetime allowance (£1.5 million for 2006/7, £1.6 million for 2007/8 and rising thereafter) there is a punitive tax that could be as high as 55% on the excess.
- Pension term assurance can be less flexible than other forms of life assurance. For example, it will not include critical illness cover.
If you are thinking about switching to pension term assurance, you should be aware that the insurance company will want full medical details again and you should not cancel your existing cover until you know the new one is in place.
You should also note that the government announced on 6th December 2006 its intention to consult on withdrawing this option in respect of arrangements set up after that date. What will be the outcome is difficult to establish but at the worst, any arrangements made may have to be re-arranged on a non-pensions basis.
It is also important to remember that it is not just the principal breadwinner who needs insurance. Even if there is a “non-working” partner – or one who is not economically active, to be more accurate – they make a valuable contribution to the family’s financial wellbeing simply by undertaking such tasks as childcare, cleaning, cooking, shopping, washing, ferrying children about. If the individual was no longer there, it may become necessary to pay a substantial amount of money to someone else to perform the tasks. In this case, substantial life assurance may be required.
Of course, it is not just death that threatens a family’s financial wellbeing. A sustained period of ill health could not just reduce earnings capacity, but also increase living costs. For example, a sustained period in hospital following an accident or picking up an infection could involve daily hospital trips for family members, as well as added expense in buying essential equipment and extras.
Income protection insurance can go a long way towards helping cover the costs and is available for a wide range of occupations including those who are not economically active, but have caring responsibilities. It comes in a number of guises, including accident and sickness insurance (which offers an income as well as some lump sum benefits and is offered on an annual basis), permanent health insurance (which provides an income and is offered for a fixed number of years, even up to retirement) and critical illness insurance, which pays a lump sum, rather than an income. There are also special covers for mortgage repayments, which tend to be cheaper, but are of more limited than other forms of income protection.
Private medical insurance can also not only provide for the cost of health care but can assist in a speedier recovery, as treatment is often faster so that a period in incapacity is shortened. This applies not just to those in work, but also children, whose education could suffer during any sustained period off school.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact us.
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 According to the government, the basic state pension represents a falling proportion of national average earnings; but as it is linked to the Retail Prices Index (RPI) which usually rises more slowly than earnings, this is hardly surprising.
In a recent answer in the House of Commons (24th January) James Purnell, Minister of State for Pensions Reform, indicated that the value of the basic state pension has declined from almost 23.7% of national average earnings in 1981 to 15.7% in 2006 and is likely to decline further to 14.2% by 2012, when the RPI link is due to be restored – if the country can then afford it – after some 32 years; in the then Chancellor’s view.
What this amply demonstrates is that individuals simply cannot afford to rely on the state to provide a reasonable level of income in retirement, especially as the actual rate at which prices rise can be considerably faster than the headline rate of inflation, especially for older people, who rely heavily on heating and other relatively more expensive components of the basket used to calculate the RPI.
A new website www.statistics.gov.uk/pic/ allows you to work out your personal inflation rate; it can make salutary reading.
New rules, introduced in April 2006, allow almost everyone to make larger pension contributions than was previously possible. In fact, you can put your entire earnings (up to an annual allowance set at £215,000 for 2006/7 and £225,000 for 2007/8) into a pension plan and receive tax relief at your highest marginal rate. Of course, for most people can only consider contributing a proportion of their income on a regular basis. But it is worth considering that an inheritance or other windfall, while not actually part of your income for income tax purposes, could be used as a pension contributions if you so wished.
For example, if you earn £60,000 a year and normally put £6,000 a year into your pension (that is 10% of your income), then a windfall of £15,000 could be contributed and, all things being equal, 40% tax relief achieved, reducing the actual cost to just £9,000.
Of course, for the over 50’s, this could be converted into an immediate tax free lump sun of £3,750 with the balance being left in the pension fund for later use as a taxable income, reducing the overall cost to £5,250 for a net pension fund increase of £11,250 – more than double the net cost.
But pensions should always be seen as a way of providing for retirement and, while an immediate tax free lump sum may appeal, the value of the fund growing free of UK tax (other than the 10% withholding tax on dividends from UK companies that Gordon Brown no longer allows pension funds to recover) could make it worthwhile allowing the fund to accumulate for a few years before taking any benefits.
After all, if the basic state pension is only worth 14.2% of national average earnings, think how little it represents for someone earning twice that level; just over 7%. That is a massive drop and since most people in the best pension schemes aim for nearer 67% of their “final salary”, there is a lot of ground to be made up. Sixty percent of £60,000 a year is £36,000 and to generate a fund of that level for a man of 65 would require a fund in excess of more than half a million pounds, even if no widow’s pension or increases in payment are required. If a 50% widow’s pension and 3% indexation are required, the fund required would be more than £750,000, in today’s terms.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact us.
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