Pension Wise

Discussing life expectancy as part of your retirement planning is key

Pension Wise, the government’s guidance guarantee service, must discuss life expectancy as part of people’s retirement planning, according to a recent Aviva report.

More accurate picture of life expectancy

The special report on key retirement themes suggests that using nationally agreed longevity figures that take into account the differences between savers and non-savers will provide people with a more accurate picture of their life expectancy.

The report considers the implications for people who underestimate their life expectancy. In particular, people who are savers and healthy are likely to live significantly longer than the national average figures suggest.

New pension freedoms to take effect

People will have far more choice in what they do with their savings from 6 April this year when the new pension freedoms take effect. With the option to take all of their money in one lump sum if they wish, they could find themselves penniless if they outlive their savings. The report highlights significant regional differences in life expectancy in the UK, and the link to lifestyle factors such as smoking and obesity.

The lack of clarity around the interplay of factors affecting life expectancy could mean that many people default to average longevity figures that do not reflect their personal situation, either because they do not understand that as they get older their life expectancy increases or that, as a healthy saver, they need to add years on to their life expectancy.

What do you need to consider?

You should accurately assess your life expectancy as part of your retirement planning, taking into account factors such as existing conditions and lifestyle choices

When thinking about how much money you will need in retirement, you should consider the total savings you have, including all of your assets (such as your property) and measure this against your expenditure and the years you expect to live in retirement

Your life expectancy may change as you get older, so once retired you should review your finances during the course of what could be a long retirement

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.

The Triviality Limit is £18,000? – Well, not always!

I’ve been helping a client recently, who was looking to draw the benefits from his personal pension plan.CII-Chartered Financial Planner gold copy

He was hoping to draw it all out in one go, sometimes known as using the Trivial Lump Sum or Triviality option.  His problem is that the fund was worth £18,700 – which is more than the Triviality limit of £18,000.

He had visited his financial adviser at his bank, and was told there was no way he could get the lump sum out as a trivial lump sum.  His only choice, he was told, was to take 25% as tax-free cash, and then choose an annuity for the rest of his life with the balance.  The income he was quoted was around £680 each year.

My client was not happy.  He was extremely disappointed that HIS pension fund would take roughly 20 years to be returned to him, and he didn’t know whether he was going to live for 20 years.  He wanted his pension NOW!!

Now, this is where it pays to see a good Independent Financial Adviser.

The bank adviser was correct in many ways, but failed to explore my client’s circumstances sufficiently.

The pension was with Legal and General, and it turns out the pension was in their Managed Fund.  Upon contacting Legal and General, I identified that the fund was indeed worth now £18,900.  Too high for a Trivial Lump Sum?

However, I enquired with Legal and General whether there was any point within the last three months when the fund was valued below the £18,000 Triviality limit, as the Managed Fund is known to be quite volatile and can fluctuate widely.  I also knew that in June this year, there was quite a sharp fall in equity prices.

As I expected, on the 26th June, the fund value fell to £17,790.  The following days it increased again to beyond £18,000.  What my client had not been told by his bank adviser was that he was permitted to use a ‘nomination date‘.  The nomination date can be used to identify a point when the Triviality rules could have applied.  Thankfully, my client used the 26th June as his nominated date.  The result is that he could use the Triviality rules, as he wanted initially.

The result is one happy client.   Just last week he had just under £16,000 paid into his bank account (after HMRC had taken their bit!).  The fund had risen to £18,900 at the date that he eventually claimed his benefits, and the Triviality rules permitted him to keep the growth in the fund beyond the £18,000 limit.

My client was overjoyed by the advice he had received.  My fee, for this work, for this client, was £295.00.  Good value for money for some sound advice.

I would like to point out that this article is based on all the information presented to me by the client, and the research I undertook on his behalf.  It is my professional opinion on the matter, and I would be more than happy to discuss any similar offers.

If you need advice on this or a similar matter, please give me a call on 01554 770022, and I will explain how I may be able to offer professional independent financial advice.

Overseas property through SIPP – here’s what the FSA think

Here is an email I’ve just received from the FSA, which backs up a blog I posted last year on unregulated investment through SIPPs.

It’s rather long, but if you’ve been approached by someone about investing in some ‘exotic’ overseas investment, take heed, reading this may save you a fortune, and more importantly, save your retirement income from going pear shaped!

Dear Sir/Madam

Advising on pension transfers with a view to investing pension monies into unregulated products through a SIPP

It has been brought to the FSA’s attention that some financial advisers are giving advice to customers on pension transfers or pension switches without assessing the advantages and disadvantages of investments proposed to be held within the new pension. In particular, we have seen financial advisers moving customers’ retirement savings to self-invested personal pensions (SIPPs) that invest wholly or primarily in high risk, often highly illiquid unregulated investments (some which may be in Unregulated Collective Investment Schemes). Examples of these unregulated investments are diamonds, overseas property developments, store pods, forestry and film schemes, among other non-mainstream propositions.

The cases we have seen tend to operate under a similar advice model. An introducer will pass customer details to an unregulated firm, which markets an unregulated investment (e.g. an overseas property development). When the customer expresses an interest in the unregulated investment, the customer is introduced to a regulated financial adviser to provide advice on a SIPP capable of holding the unregulated investment. The financial adviser does not give advice on the unregulated investment, and says it is only providing advice on a SIPP capable of holding the unregulated investment. Sometimes the regulated financial adviser also assists the customer to access monies held in other investments (e.g. other pension arrangements) so that the customer is able to invest in the unregulated investment.

The FSA is investigating a number of firms and has secured a variation of their Part IV permission so that they are unable to continue operating in this way. The FSA is also considering taking enforcement action against these firms.

We have seen cases where, as a result of these advisory strategies involving unauthorised firms, customers have transferred out of more traditional pension schemes and invested their retirement savings wholly in unregulated assets via SIPPs, taking on very high and often entirely unsuitable levels of risk despite receiving advice on the pension transfer from regulated firms.

Depending on the circumstances, the customer may not be able to have recourse to the Financial Ombudsman Service or Financial Services Compensation Scheme should there be a problem with the unregulated investment.

Financial advisers using this advice model are under the mistaken impression that this process means they do not have to consider the unregulated investment as part of their advice to invest in the SIPP and that they only need to consider the suitability of the SIPP in the abstract. This is incorrect.

The FSA’s view is that the provision of suitable advice generally requires consideration of the other investments held by the customer or, when advice is given on a product which is a vehicle for investment in other products (such as SIPPs and other wrappers), consideration of the suitability of the overall proposition, that is, the wrapper and the expected underlying investments in unregulated schemes. It should be particularly clear to financial advisers that, where a customer seeks advice on a pension transfer in implementing a wider investment strategy, the advice on the pension transfer must take account of the overall investment strategy the customer is contemplating.

For example, where a financial adviser recommends a SIPP knowing that the customer will transfer out of a current pension arrangement to release funds to invest in an overseas property investment under a SIPP, then the suitability of the overseas property investment must form part of the advice about whether the customer should transfer into the SIPP. If, taking into account the individual circumstances of the customer, the original pension product, including its underlying holdings, is more suitable for the customer, then the SIPP is not suitable.

This is because if you give regulated advice and the recommendation will enable investment in unregulated items you cannot separate out the unregulated elements from the regulated elements.

There are clear requirements under the FSA Principles and Conduct of Business rules and also in established case law for any adviser, in the giving of advice, to first take time to familiarise themselves with the wider investment and financial circumstances. Unless the adviser has done so, they will not be in a position to make recommendations on new products.

The FSA asks regulated firms, in particular financial advisers and SIPP Operators to report to the FSA firms that are carrying on these activities in breach of the FSA requirements. You can do this by contacting our whistleblowing team on 020 7066 9200.

I would like to point out that this article is based on all the information presented to me by the client, and the research I undertook on his behalf.  It is my professional opinion on the matter, and I would be more than happy to discuss any similar offers.

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

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.

Act now to get the pension income you deserve

At retirement, many people will use all or some of their accumulated pension fund to purchase an annuity.

This provides them with a guaranteed pension for life. The amount they receive depends on several factors, including how long they are likely to live.

On 21 December 2012, the EU Gender Directive comes into force for individual pensions. From this date, annuity providers will no longer be able to offer different pension rates for men and women. Traditionally, men have received a higher annual annuity income than women, due to their lower life expectancy. This will not be the case in future. The new Directive is likely to reduce the pension income of men retiring after 20 December this year.

What this could mean for men due to retire:

It is estimated by leading annuity provider Partnership Assurance that male annuities will be reduced on average by 2% to 4% . This could directly affect men (and their spouse or partner, if it is planned to take out a joint life annuity).

How seeking Independent Financial Advice can help

At a time of historically low annuity rates, it is essential that retirees receive the maximum pension available – but annuities can vary widely, and your current pension company may not offer the best deal.

As your local Chartered Financial Planner, Jeremy Phelps is able to search the entire market, review all the options and recommend the most suitable annuity for you.

Jeremy and his firm, Financial Solutions Wales offer up to one hour’s complimentary consultation and the purpose of this is to identify needs and objectives, establish what benefits would result from using their services, outline any associated costs and give you the opportunity to appoint a financial adviser.

If you have any questions about this article, and how it may affect you, call Jeremy Phelps at Financial Solutions Wales on 01554 770022.

Pension investment in overseas property

I am aware as a practicing IFA in Llanelli of some serious, possibly misleading advice being offered to pension savers who risk losing all of their pension savings.

This blog has been inspired after listening to the BBC Moneybox programme of 24th July, titled ‘Pension scams under investigation’.  I urge anyone offered a scheme of the type I describe below to listen to the programme or download the transcript.

My concerns are described as follows:

Earlier this year a new client approached our firm, saying that he had attended a local business club dinner and been approached by someone (not a regulated financial adviser) who offered ‘free pension reviews’, with a view to moving the fund to a Self Invested Personal Pension (SIPP), which allegedly offer some fantastic, guaranteed rates of return of 8-9% per annum.

The offer certainly looks attractive,  and I could not contain my clients enthusiasm, although I was immediately on my guard, by such an offer of a guarantee.

However, he had come to my firm for a second opinion.  You’d think he must be suspicious?

We reviewed his needs, and they were basically as follows:

  • He is aged late 50’s
  • He has circa £100,000 in his personal pension
  • He has a low (cautious) attitude to investment risk
  • He needs the income to start around age 62 (around 6 years away).
  • His pension is presently invested in fixed interest and equity based funds with a well known pension provider.

Following a comprehensive fact find, my advice was to stick with his existing pension, but review the funds due to his cautious attitude to risk.  We would charge him a nominal fee for our time and advice on this matter.

The client asked for our opinion on the SIPP (with guarantees), that he had been offered.  Upon investigation, the investment was to be made into Barbados properties.  It was through an unregulated investment, which basically means that there is no Financial Services Compensation Scheme protection, and is in a scheme which is on the radar of FSA officials who are concerned with transactions of this type.  Click the link here, for what the FSA say about these types of schemes.

My advice to the potential client was that the SIPP scheme offered did not match his risk profile, timescale for investment and need for income in the future.  In my honest opinion, it is quite possible he could lose all of his £100,000 pension fund, or at the very least, find it incredibly difficult to liquidate his pension when the time comes to start taking an income in the future.

The client had been made aware of my concerns, but had gone ahead with the SIPP investment anyway!

If you have been offered a similar scheme, please be cautious.  If it seems too good to be true, it probably is!

I would like to point out that this article is based on all the information presented to me by the client, and the research I undertook on his behalf.  It is my professional opinion on the matter, and I would be more than happy to discuss any similar offers.

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

Trivial pension lump sum – take care!

When you reach age 60, it may be possible to withdraw your pension as a trivial lump sum.  That is, you can take the whole lot out in one go.

However, care needs to be exercised with this, as you need to be sure you are allowed to take the pension in one lump sum.

Here’s a specific example of a client who I met this week….

My client visited me to get my advice on how to fill in the forms to take out the pension in one go.  They had read that if you have a pension pot of less than £18,000 that you could withdraw the whole sum, having 25% paid as tax free cash, and the rest is added to other income for the tax year and taxed at your highest marginal tax rate.

All the paperwork was in hand, some of it filled out already before we met.  We started discussing their circumstances and I quickly identified that my client was already in receipt of an occupational pension of £8,000 per annum.

Unfortunately for my client, I advised they were not allowed to withdraw the pension under triviality rules, due to having other pension funds which also need to be included when calculating eligibility for a trivial lump sum.  The £8,000 pension must also be valued and included in the calculation (the £8,000 pension was valued at £200,000 for the purposes of the calculation!) .  For this client, we have to look at an alternative way of drawing the pension income, but they are still able to take 25% of the fund as tax free cash.

Had my client not taken my advice, they may have faced a HMRC penalty of up to £3,000 for negligently or fraudulently obtaining an unauthorised pension payment.

Therefore, it pays to take expert financial advice.

Jeremy Phelps is a Chartered Financial Planner at Financial Solutions Wales.  If you would like advice on taking your pension as a trivial lump sum, we can assist and take care of all the paperwork on your behalf.  Our fee for this is usually £199.