Ten tips to make the most of pension freedoms

Planning for retirement in the new pensions landscape

The new pension savings market offers much more flexibility and choice post–6 April this year, which is a positive, but it can be overwhelming. For people planning for retirement in the new world of pension freedoms, there are both risks and opportunities – from passing on your pension to loved ones, to making the most of tax relief.

1. Pension freedoms– what are your next steps?

Make sure you have a clear picture of what pensions you have – some people lose track of old pensions from previous jobs, especially after moving property. Use the free government service to track down your money: www.gov.uk/find-lost-pension

2. If you have various pensions from former jobs, think about whether you want to ‘tidy up’ your pensions

There could be benefits in bringing them together and consolidating them in one pot, so it’s easier to keep an eye on what they’re worth and how they’re invested. This might not be suitable for everyone, and professional advice should always be obtained.

3. Check if you are making the most of your workplace pension

Your employer might match some of what you pay in. See if you could afford a bit extra each month to give yourself a better opportunity to build a larger pension pot. Remember that for every £80 you pay in, and depending on your particular situation, this normally gets topped up with £20 in tax relief, and more tax can be reclaimed if you pay tax at a higher rate.

4. Make sure your Beneficiary Nomination is up to date

The new changes mean it’s easier to pass on your pensions to loved ones. Your pension provider will normally look at your Beneficiary Nomination when deciding whom to pay your savings to, and your Will usually isn’t relevant. Keep your Beneficiary Nomination up to date by requesting a form from your pension company, or you might be able to do this online.

5. Talk to your family

With the new flexible rules about inheritance to bear in mind, you may want to work through these decisions together.

6. Check how your pension savings are invested

You might have selected the funds years ago, and they may no longer reflect your wishes today. Or perhaps you are in a ‘default’ fund, one which was automatically selected for you at the beginning. Either way, it’s prudent to look and see if the funds suit you. If you’re not sure, obtain professional financial advice.

7. Other savings

If you’re approaching retirement and have Individual Savings Accounts (ISA) or other savings, you may want to review these and consider moving your savings into your pension in order to make the most of tax relief. This won’t suit everyone but is worth considering.

8. Be aware of scams

The new flexibilities also give more opportunities for scammers. So remember, if it sounds too good to be true, it probably is.

9. Consider reviewing your retirement plans in light of the new rules

To make sure you’re on track to meet your retirement goals, it’s important to review your pension savings and estimate the income they’re likely to generate in retirement. If there’s a shortfall in your savings, the earlier you spot it, the easier it will be to fix.

10. Think ahead about how you might want to access your savings in retirement

You’ll have a choice of accessing cash, keeping your savings invested, drawing a flexible income, buying a fixed income or some combination of these. You’ll feel more confident making your final decision if you’ve spent time thinking about what’s right for you in advance.

Should you need Independent Financial Advice on any of the topics mentioned above, please call 01554 770022 or 07989 599423.  Alternatively fill out our online contact form, and I will contact you.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.

‘Am I diversified enough?’

What’s positive for one investment can be negative for anothergraph

Different types of investments are affected in different ways by factors such as economics, interest rates, politics, conflicts, even weather events. What’s positive for one investment can be negative for another, and when one rises another may fall. This interlinked movement between assets is known as ‘correlation’.

Different assets

Portfolios can incorporate a wide range of different assets, all of which have their own characteristics, like cash, bonds, equities (shares in companies) and property. Asset allocation is the process of dividing your investment between different assets. The idea behind allocating your money between different assets is to spread risk through diversification and to understand these characteristics, and their implications on how a portfolio will perform in different conditions – the idea of not putting all your eggs in one basket.

Potential returns

Investments can go down as well as up and these ups and downs can depend on the assets you’re invested in and how the markets are performing. It’s a natural part of investing. If we could see into the future there would be no need to diversify our investments. We could merely choose a date when we needed our money back, then select the investment that would provide the highest return to that date.

Moreover, the potential returns available from different kinds of investment, and the risks involved, change over time as a result of economic, political and regulatory developments as well as a host of other factors. Diversification helps to address this uncertainty by combining a number of different investments.

Asset classes

When putting together a portfolio there are a number of asset classes, or types of investments, that can be combined in different ways. The starting point is cash – and the aim of employing the other asset classes is to achieve a better return than could be achieved by leaving all of the investment on deposit.

Cash – The most common types of cash investments are bank and building society savings accounts and money market funds (investment vehicles which invest in securities such as short-term bonds to enable institutions and larger personal investors to invest cash for the short term).

Money held in the bank is arguably more secure than any of the other asset classes, but it is also likely to provide the poorest return over the long term. Indeed, with inflation currently above the level of interest provided by many accounts, the real value of cash held on deposit is falling.

Your money could be eroded by the effects of inflation and tax. For example, if your account pays 5% but inflation is running at 2%, you are only making 3% in real terms. If your savings are taxed, that return will be reduced even further.

Bonds – Bonds are effectively IOUs issued by governments or companies. In return for your initial investment, the issuer pays a pre-agreed regular return (the ‘coupon’) for a fixed term, at the end of which it agrees to return your initial investment. Depending on the financial strength of the issuer, bonds can be very low or relatively high risk, and the level of interest paid varies accordingly, with higher-risk issuers needing to offer more attractive coupons to attract investment.

As long as the issuer is still solvent at the time the bond matures, investors get back the initial value of the bond. However, during the life of the bond its price will fluctuate to take account of a number of factors, including:

Interest rates – as cash is an alternative lower risk investment, the value of government bonds is particularly affected by changes in interest rates. Rising base rates will tend to lead to lower government bond prices, and vice versa.

Inflation expectations – the coupons paid by the majority of bonds do not change over time. Therefore, high inflation reduces the real value of future coupon payments, making bonds less attractive and driving their prices lower.

Credit quality – the ability of the issuer to pay regular coupons and redeem the bonds at maturity is a key consideration for bond investors. Higher risk bonds such as corporate bonds are susceptible to changes in the perceived credit worthiness of the issuer.

Equities – Equities, or shares in companies, are regarded as riskier investments than bonds, but they also tend to produce superior returns over the long term. They are riskier because, in the event of a company getting into financial difficulty, bond holders rank ahead of equity holders when the remaining cash is distributed. However, their superior long-term returns come from the fact that, unlike a bond, which matures at the same price at which it was issued, share prices can rise dramatically as a company grows.

Returns from equities are made up of changes in the share price and, in some cases, dividends paid by the company to its investors. Share prices fluctuate constantly as a result of factors such as:

Company profits – by buying shares, you are effectively investing in the future profitability of a company, so the operating outlook for the business is of paramount importance. Higher profits are likely to lead to a higher share price and/or increased dividends, whereas sustained losses could place the dividend or even the long-term viability of the business in jeopardy.

Economic background – companies perform best in an environment of healthy economic growth, modest inflation and low interest rates. A poor outlook for growth could suggest waning demand for the company’s products or services. High inflation could impact companies in the form of increased input prices, although in some cases companies may be able to pass this on to consumers. Rising interest rates could put strain on companies that have borrowed heavily to grow the business.

Investor sentiment – as higher risk assets, equities are susceptible to changes in investor sentiment. Deterioration in risk appetite normally sees share prices fall, while a turn to positive sentiment can see equity markets rise sharply.

Property – In investment terms, property normally means commercial real estate – offices, warehouses, retail units and the like. Unlike the assets we have mentioned so far, properties are unique – only one fund can own a particular office building or shop.

The performance of these assets can sometimes be dominated by changes in capital values. These unusually dramatic moves in capital value illustrate another of property’s key characteristics, namely its relative illiquidity compared to equities or bonds. Buying equities or bonds is normally a relatively quick and inexpensive process, but property investing involves considerable valuation and legal involvement.

As such, the process is longer and dealing costs are higher. When there is a wholesale trend towards selling property, as was the case in 2007, prices can fall significantly. Conversely, when there are more buyers than sellers, as happened in 2009, price rises can be swift.

The more normal state of affairs is for rental income to be the main driver of commercial property returns. Owners of property can enhance the income potential and capital value of their assets by undertaking refurbishment work or other improvements. Indeed, without such work, property can quickly become uncompetitive and run down.

When managed properly, the relatively stable nature of property’s income return is key to its appeal for investors.

Mix of assets

In order to maximise the performance potential of a diversified portfolio, managers actively change the mix of assets they hold to reflect the prevailing market conditions. These changes can be made at a number of levels including the overall asset mix, the target markets within each asset class and the risk profile of underlying funds within markets.

As a rule, an environment of positive or recovering economic growth and healthy risk appetite would be likely to prompt an increased weighting in equities and a lower exposure to bonds. Within these baskets of assets, the manager might also move into more aggressive portfolios when markets are doing well and more cautious ones when conditions are more difficult. Geographical factors such as local economic growth, interest rates and the political background will also affect the weighting between markets within equities and bonds.

In the underlying portfolios, managers will normally adopt a more defensive positioning when risk appetite is low. For example, in equities they might have higher weightings in large companies operating in parts of the market that are less reliant on robust economic growth. Conversely, when risk appetite is abundant, underlying portfolios will tend to raise their exposure to more economically sensitive parts of the market and to smaller companies.

How do I build my own diversified portfolio?

Some investors choose to build their own portfolios, either by buying shares, bonds and other assets directly or by combining funds investing in each area. However, this is a very time-consuming approach and it can be difficult to keep abreast of developments in the markets whilst also researching all the funds on offer. For this reason, most investors prefer to place their portfolio into the hands of professional managers and to entrust the selection of those managers to a professional adviser

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Autumn statement 2012

TaxOn 5th December 2012, George Osborne gave his 2012 Autumn Statement to Parliament. The proposals are as follows:

FUEL

  • The 3p increase in fuel duty, planned for next January, is cancelled.

BENEFITS AND PENSIONS

  • From 2014/2015 lifetime allowance to fall from £1.5m to £1.25m.
  • From 2014/2015 annual allowance to fall from £50,000 pa to £40,000 pa.
  • Legislation will be introduced in Finance Bill 2013 to make these changes and will be published in draft on 11 December 2012. The Government also announced that they will discuss with interested parties whether to offer a personalised protection regime in addition to a fixed protection regime.
  • Maximum Government Actuary’s Department rate (GAD) to rise from 100% to 120%.

STATE BENEFITS

  • Basic state pension to rise by 2.5% next year to £110.15 a week.Most working-age benefits to rise by 1% for each of next three years.
  • Child benefit to rise by 1% for two years from April 2014.
  • Local housing allowance rates to rise in line with existing policy next April but increases in the following two years capped at 1%.
  • Changes to welfare to save £3.7bn by 2015/16.

TAXES AND ALLOWANCES

  • Basic income tax threshold to be raised by £235 more than previously announced next year, to £9,440.
  • Threshold for 40% rate of income tax to rise by 1% in 2014 and 2015, from £41,450 to £41,865 and then £42,285.
  • Main rate of corporation tax to be cut by extra 1% to 21% from April 2014.
  • Inheritance tax threshold to be increased by 1% next year.
  • Bank levy rate to be increased to 0.130% next year.
  • £5bn over six years expected from treaty with Switzerland to deal with undisclosed bank accounts.
  • HM Revenue and Customs budget will not be cut.
  • ISA contribution limit to be raised to £11,520 from next April.
  • No new tax on property value.
  • No net rise in taxes in Autumn Statement.

ECONOMIC GROWTH

  • Predicted to be -0.1% in 2012, down from 0.8% predicted in the Budget.
  • Forecasts for next few years are: 1.2% in 2013, 2% in 2014, 2.3% 2015, 2.7% in 2016 and 2.8% in 2017.

GOVERNMENT BORROWING/SPENDING

  • Point at which debt predicted to begin falling delayed by a year to 2016/17.
  • Deficit is forecast to fall this year, as is cash borrowing.
  • Deficit to fall from 7.9% to 6.9% of GDP this year, and to continue falling to 1.6% by 2017/18.
  • Borrowing forecast to fall from £108bn this year to £31bn in 2017/18.
  • £33bn saving to be made on interest debt payment predicted two years ago.
  • Deficit fallen by a quarter in last two years.
  • Government spending as share of GDP predicted to fall from 48% in 2009/10 to 39.5% in 2017/18.
  • Spending review to take place in first half of next year.
  • Departments to reduce spending by 1% next year and 2% year after.

JOBS AND TRAINING

  • Unemployment expected to peak at 8.3%.
  • Employment set to rise in each year of the parliament.

TRANSPORT

  • Extra £1bn to roads, including upgrading A1, A30, and M25.
  • £1bn loan to extend London’s Northern Line to Battersea.

EDUCATION AND FAMILIES

  • £1bn to improve good schools and build 100 new free schools and academies.
  • £270m for further education colleges.

INFRASTRUCTURE

  • Ultra-fast broadband expansion in 12 cities.
  • £600m for scientific research.
  • Annual infrastructure investment now £33bn.
  • £1bn extra capital for Business Bank.
  • Gas Strategy to include consultation on incentives for shale gas.

OVERSEAS AID

Promise to spend 0.7% on development to be honoured next year, but not exceeded.

Thank you to the Compliance Services of SimplyBiz plc for putting together this summary of the Autumn statement 2012

If you need advice on the changes and how they may affect you, please give me a call on 01554 770022, and I will explain how I may be able to offer professional independent financial advice.

Long term care funding

The good news is that we are all living a little bit longer. Mortality rates are rising.

However, it is also expected that more of us will need residential or nursing care in our later years.

The cost of care is an issue that many older people feel that it is impossible to avoid. The cost of care in Wales averages between £419 and £589 per week*, depending on whether residential care or nursing care is required. The standard of care also differs widely, depending on the care home selected.

The family and person entering care will often desire the best care home, but have reservations about long term costs. It is also possible that some people entering care will qualify for some state help with the cost of care, but are unsure about what financial assistance is available. Some costs of care may be met by the local health board, and some by the local authority.

It is important to also consider assets which may be exempt from any financial assessment for care costs.

It is also important to know what state benefits you are entitled to when entering care.  Entitlement to state benefits such as Attendance Allowance will also depend on whether you are self funding, or in local authority funded care.

There has also been a lot of news recently about people paying for care when it should have been provided free through continuing care by the NHS.

There are several fears for people entering care, such as:

  • If self funding, how long will the money last?
  • The intended inheritance could disappear after many years paying for care.
  • Having to move a settled relative out of a care home if the available funding runs out.
  • Local Authority funding not meeting the costs of the desired care home.
  • The family may have to top-up funding to meet the costs of the care home.

How can we help?

As a specialist adviser on financing long-term care, we can discuss and put in place the most appropriate funding solutions for paying for long term care costs.

This will include discussing your entitlement to local authority support, as well as whether there is a need to pay for your own care, or whether it could it be provided free by the NHS.

Our knowledge in this area will assist when considering the long term funding options.

Our service.

We will offer you a no obligation initial meeting, provided entirely at our own cost, to see whether you need advice, and agree how we can work together.

If you decide that you need financial advice, then we can develop a plan, and discuss the advantages and disadvantages of the options available.

We are able to provide professional independent financial advice on the choices available for care funding, and would be delighted to meet with you and your family to discuss all the options available. The costs of such advice will be made clear if you appoint us as advisers.

If you require independent financial advice on Long Term Care funding, feel free to call on 01554 770022 and we can arrange a no obligation appointment.

*Source: Partnership Assurance research 2009/10

Our short guide to ISAs

‘ISA’ stands for Individual Savings Account, a tax-efficient wrapper offered under Government legislation as a way of encouraging you to save. An ISA sits over your choice of a number of different investments to shelter them from further tax on any income or gains earned.

There are now just two types of ISA – the Cash ISA and the Stocks and Shares ISA – and the combined allowance for both in 2012/13 is £11,280.

Within this, the limit for Cash ISAs – or for the cash element within a Stocks and Shares ISA – is £5,640.

However, there is flexibility over how these limits can be used – you can, for example, put the maximum £5,640 in a cash account and £5,640 in a stocks and shares account. Alternatively, though, if you place just £2,000 in cash, you can use the entire remaining balance – £9,280 in this case – to invest in stocks and shares. If you wish, you may put the full £11,280 into a Stocks and Shares ISA.

In addition, you can transfer existing Cash ISA holdings to a Stocks and Shares ISA without impacting on your current tax year allowance. So, if you have £10,000 already sitting in existing cash ISA plans then this amount can be moved to a Stocks and Shares ISA, yet leave your entire current tax year allowance.

Finally, if you already have an ISA, you are permitted to transfer it to a new plan manager, without using any of your annual allowance.

Please feel free to download the ‘Guide to ISAs‘ brochure*. It contains plenty of information on what you should consider when considering investing in an ISA.

Alternatively, if you require independent financial advice on ISAs, feel free to call on 01554 770022 and we can arrange a no obligation appointment.

*Guide provided courtesy of http://www.adviser-hub.co.uk

Investing for children

No parent will need reminding children cost money.

Many parents or grandparents are in the fortunate position to be able to save for their family and so often need advice on what may be the most suitable route.

With so many options available, where do you start?  A bank account, Junior ISA, Child Trust Fund or shares, to name a few?  Protection from inflation also needs to be considered.

Your timeline is very important.  A savings account for a toddler has a longer time horizon, and maybe you could afford to take more risk.  On the other hand, putting money aside for a teenager will probably need more security, and may be better suited to a deposit account.  Your attitude to risk will probably drive the most suitable investment.

Here are some considerations:

  1. Use personal allowances – the child will be able to earn £8,105 free of tax (2012/13).
  2. Are Junior ISAs or Child Trust Funds suitable?
  3. Trusts – these may provide the saver with more control over the investment.
  4. A pension contribution for the child may be desired.
  5. Friendly Society savings bonds may offer a suitable solution.
Please feel free to download the ‘Investing for Children‘ guide.  It contains plenty of information on what you should consider when investing for a child.
If you require advice on savings for a child, feel free to call on 01554 770022 and we can arrange a no obligation appointment.