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Should you be taking advantage of current
retirement planning rules?
Time is running
ouT
The changing face of reTiremenT
Controlling investment risk
over time
a eureka momenT!
Passing on your wealTh
Discovering the right investment decisions to grow your wealth
Make sure your loved ones get your hard-earned money and not the taxman
Achieving some peace of mind through market highs and lows
A chance to explore new opportunities or carry on working on your terms
Annuity
chAllenge
Shopping around
for the best deal
could really pay off
Financial planning is our business.We’re passionate about making sure your finances are in good shape.
Our range of personal financial planning services is
extensive, covering areas from pensions to inheritance
matters and tax-efficient investments.
Contact us to discuss your current situation, and we’ll
provide you with a complete financial wealth check.
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The changing face of reTiremenTA chance to explore new opportunities or
carry on working on your terms
maximising your reTiremenT incomeWhat you need to consider with less than
five years to retirement
conTrolling invesTmenT risk over TimeAchieving some peace of mind through
market highs and lows
improve your chances of achieving The reTiremenT you wanTWe can make sure that your plan is on
track to meeting your retirement goals
a eureka momenT!Discovering the right investment decisions
to grow your wealth
Time is running ouTShould you be taking advantage of
current retirement planning rules?
The burden of Tax in reTiremenT Savers need to consider all retirement
income solutions in order to achieve a
degree of certainty
annuiTy challengeShopping around for the best deal could
really pay off
are you uTilising your pension savings efficienTly?A lack of planning could lead to an
unexpected 55 per cent death tax on
pension savings
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noT puTTing all your eggs in one baskeTThe principal tenets of spreading risk
passing on your wealThMake sure your loved ones get your hard-
earned money and not the taxman
creaTing a wider spread of invesTmenT in your porTfolioA broad spread of investments in
which to invest, depending on your
investment remit
do you have proTecTion for when you need iT mosTMaking the right decision to protect your
personal and financial situation
generaTing a bigger reTiremenT incomeFemales could see a jump in pension
income from 21 Decmber
invesTing for incomeSpreading capital costs across different
shares and different asset classes
a guide To The Jargon of proTecTionA Glossary of terms
build you own made-To-measure reTiremenT soluTionWe can help you measure up what type of
portfolio best suits your circumstances
In thIs Issue
in This issue
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To discuss your financial planning requiremenTs or To obTain furTher informaTion, please conTacT us
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conTenTs
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edItorIal
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Whatever your financial goals might be, we can help you grow your wealth so that you can enjoy it and pass it on. As your life changes over time, it’s important to ensure that your financial objectives continue to meet your requirements. There are many different tax-efficient ways to grow your wealth. On page 10, find out how we can help you understand the choices and make the investment decisions that are right for you.
A generation ago, retirement meant stopping work completely and winding down. By contrast, the present generation – the baby-boomers – are much more likely to see it as a fresh start with a chance to explore new opportunities or carry on working on their terms. Read the full article on page 05.
Estate preservation doesn’t only affect the very wealthy. Rising property prices have meant that it’s now an issue for an increasing number of people. So what are the areas you need to consider to protect your wealth? Turn to page 18.
A full list of all the articles featured in this edition appears on page 03.
Need more information? Simply complete and return the ‘Information Request’ on page 03.
The content of the articles featured in this publication is for your general information and use only and is not intended to address your particular requirements. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested.
reTiremenT
05
A generation ago, retirement meant stopping work completely and winding down. By contrast, the present generation – the baby-boomers – are much more likely to see it as a fresh start with a chance to explore new opportunities or carry on working on their terms.
the changIng face of retIrementA chance to explore new opportunities or carry on working on your terms
more affluenT livesWe’re living longer, healthier and often more
affluent lives. Today some retirees can expect to
spend 20 or more years in retirement. The state
pension age is rising, so many of us may have to
work for longer before we can claim our pension
benefits. It’s unlikely that the state will become
more generous in the future, and fewer companies
are offering final salary pension schemes.
Taking greaTer responsibiliTy All of which means that we will need to take
greater responsibility for our pension plans. On
a positive note, the pension system has become
more flexible, so now you don’t have to purchase
an annuity with your pension pot if this option
is not appropriate for your particular situation.
In addition, if you have a Self-Invested Personal
Pension (SIPP) you have the option of leaving your
pension pot invested and drawing an income from
it, subject to certain limitations.
creaTe your own visionThese days there is no blueprint for retirement –
you have to create your own vision of what you
want from life after work. You might want to sell
up and start a new life abroad. Popular destinations
include Spain, France, USA, Canada and Ireland.
Or you might prefer to stay in the UK but
move closer to family and friends.
At some point you might choose to
downsize, perhaps to release some
capital, cut your outgoings or help
your children financially.
Of course, retirement doesn’t have to mean a full
stop to your working life. You might ease yourself
in, cutting back the number of days a week that
you work, or take on contract work. You might
even decide to become an ‘olderpreneur’
and start your own business. n
regardless of The life sTage you have arrived aT, iT’s imPorTanT To receive The righT advice in PreParaTion for your reTiremenT. we can helP you make The mosT of The differenT and somewhaT comPlex Planning oPPorTuniTies. To find ouT more, Please conTacT us To discuss your requiremenTs.
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reTiremenT
With less than five years to go before retirement, there is still a lot you could do to maximise your eventual pension income. Take
a look at our checklist to see how we could help you make the most of your pension pot.
The closer you get to taking your pension, the greater the need to preserve your savings and ensure they will last all through your retirement. In addition, you’ll need to consider whether you need to make changes to your investments as you approach retirement.
In the run up to your retIrementn Request up-to-date statements for your
personal and company pensions
n Get an up-to-date state pension forecast at
direct.gov.uk
n Trace any lost pensions through the Pension
Tracing Service at direct.gov.uk
n Include any investments and savings when
assessing your retirement income
n Seek professional financial advice if there’s a
significant shortfall, as delaying or phasing
retirement could be an option
n Reduce any potential investment risk to protect
your pension from any downturns in the stock
market as you approach retirement
n If possible, augment your pension by
increasing your contributions and/or adding
lump sum payments
n Take advantage of any unused pension tax
allowance. Current rules allow you to carry
unused allowances forward for three years
n Think about whether you want to take
your pension as an annuity or through
income drawdown
n If you want to take an annuity, decide which
type. An annuity can, for example, increase
by a set percentage or be linked to the rate
of inflation
n Look at impaired life annuities if you have
any serious health issues
n If appropriate, consider consolidating your pension
or pensions to a Self-Invested Personal Pension
(SIPP) if you want to take income drawdown
n Consider whether you want to take 25 per cent
of your pension pot as a tax-free lump sum and
think about how you might use this money
n Write a will or review any existing will you
have in place
n Check what will happen to
your pension if you die
n Assess the value of your estate for
inheritance tax (IHT) purposes and consider
ways to reduce a potential liability
n Seek professional advice if the value of your
estate is significantly higher than the nil
rate IHT band (currently £325,000) or your
financial affairs are complicated
All figures relate to the 2012/13 tax year. A
pension is a long-term investment, and 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 Financial Services
Authority does not regulate estate planning,
wills or trusts.
MAXIMISING YOUR
retIrement IncomeWhat you need to consider with less than five years to retirement
whaT should you be doing in The run-uP To reTiremenT? To discuss your oPTions, Please conTacT us for more informaTion. don’T leave iT To chance.
If you want to
take an annuIty, decIde whIch type. an annuIty can, for example, Increase by a set percentage or be lInked to the rate of InflatIon.
07
CONtROllING INveStMeNt
rIsk over tIme Achieving some peace of mind through market highs and lows
increasing The long-Term value This simple, time-tested method for controlling
risk over time enables you, as an investor, to take
advantage of stock market corrections. By using
pound-cost averaging, you could increase the long-
term value of your investments. There are, however,
no guarantees that the return will be greater than a
lump sum investment and it requires discipline not
to cancel or suspend regular Direct Debit payments
if markets continue to head downwards.
invesTing money in equal amounTsThe basic idea behind pound-cost averaging
is straightforward – the term simply refers to
investing money in equal amounts at regular
intervals. One way to do this is with a lump
sum that you’d prefer to invest gradually – for
example, by taking £50,000 and investing
£5,000 each month for ten months.
Alternatively, you could pound-cost average
on an open-ended basis by investing, say,
£1,000 every month. This principle means
that you invest no matter what the market is
doing. Pound-cost averaging can help investors
limit losses, while also instilling a sense of
investment discipline and ensuring that you’re
buying at ever-lower prices in down markets.
Taking advanTage of markeT down daysInvestment professionals often say that the
secret of good portfolio management is a
simple one: market timing. Namely, to buy
more on the days when the market goes down
and to sell on the days when the market rises.
As an individual investor, you may find it
more difficult to make money through market
timing. But you could take advantage of market
down days if you save regularly, by using
pound-cost averaging.
commiTTing To making regular conTribuTionsRegular savings and investment schemes can
be an effective way to benefit from pound-
cost averaging and they instil a savings habit
by committing you to making regular monthly
contributions. They are especially useful for
small investors who want to put away a little
each month.
Investors with an established portfolio might
also use this type of savings vehicle to build
exposure a little at a time to higher-risk areas of
a particular market.
averaging ouT The price you pay for markeT volaTiliTyThe same strategy can be used by lump
sum investors too. Most fund management
companies will give you the option of drip-
feeding your lump sum investment into funds in
regular amounts. By effectively ‘spreading’ your
investment by making smaller contributions on a
regular basis, you could help to average out the
price you pay for market volatility.
giving your savings a valuable boosTAny costs involved in making the regular
investments will reduce the benefits of pound-
cost averaging (depending on the size of the
charge relative to the size of the investment
and the frequency of investing). As the years go
by, it is likely that you will be able to increase
the amount you invest each month, which
would give your savings a valuable boost. n
Levels and bases of and reliefs from taxation
are subject to legislative change and their value
depends on the individual circumstances of the
investor. The value of your investments can go
down as well as up and you may get back less
than you invested.
In the light of recent market volatility, it’s perhaps natural to be looking for ways to smooth out your portfolio’s returns going forward. In a fluctuating market, investing regularly – a strategy known as ‘pound-cost averaging’ – can help smooth out the effect of market changes on the value of your investment and is one way to achieve some peace of mind.
no matter how small the investment, Committing to regular saving over the long term Can build to a sizeable sum. the key to suCCess is giving your investment time to grow. regular investing may be ideal for people starting out or who want to take their first steps towards building a portfolio of funds for their long-term future. to find out more about the different options available to you, please ContaCt us.
invesTmenT
IMpROve YOUR ChANCeS
of achIevIng the retIrement you wantWe can make sure that your plan is on track for meeting your retirement goals
Understanding how much you need to contribute towards a pension in order to produce the income you need or desire in retirement should be a key part of your financial plan. To arrive at this figure, the calculation needs to take into account any other assets you have earmarked for the long term, inflation, potential future fund growth and any state pension you are entitled to.
wealTh creaTion
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maximise your Tax reliefPensions remain especially attractive to higher
rate taxpayers. Although recent Budgets have
been preceded by talk of ending higher rate
relief, it’s still currently the case that up to
50 per cent of the cost of pension contributions
can be picked up by HM Revenue & Customs
but, if applicable to you, time is running out as
this will reduce to 45 per cent from 6 April 2013.
every pound counTsMany employers operate a scheme that
promises to match your contributions on
a one-for-one basis. In other words, if you
commit to paying, say, 5 per cent into your
pension, your employer will do likewise. If
you only pay 3 per cent, your employer may
only pay 3 per cent. Such incentives provided
by the employer are extremely attractive,
especially when combined with tax relief.
pension invesTmenT focus There will typically be a wide range of
investment funds in which to invest your
pension contributions. If you are ten years
or more away from retirement, investing the
bulk of the fund in equities could enable you
to produce a bigger pension than a more
cautious approach.
Although many investors are cautious of
the stock market during this economic
climate, it is important to focus on the long
term. In reality, in the short term it matters
little what your pension fund is worth in a
year or two if you have 20 years or more
before you retire.
consolidaTing your poTWith today’s mobile workforce, most people
may accumulate several pension plans.
Understand what these are worth, whether
they are performing well and what you are
being charged. In some cases, making the
most of these assets can bring the financial
choice of retirement closer by several years. It
could make sense to consolidate your various
pots by moving old money-purchase pensions
to your current employer’s scheme if the
charges are lower.
reducing your exposureAs retirement approaches, gradually reduce
your exposure to shares by switching to lower-
risk funds during the six or seven years before
retirement. Many defined contribution schemes
offer ‘lifestyle’ funds that do this automatically,
thereby largely mitigating the effect of any last-
minute stock market downturns.
an income for lifeIt is vital to understand your options at
retirement. You will have the choice of taking
the pension offered by your own scheme or
shopping around for a better annuity rate.
If you are not in perfect health, you might
qualify for an enhanced annuity from one of
a number of specialist providers. Irrespective
of your state of health, if you have a larger
pension fund, consider income drawdown. This
allows you to draw an income, while staying in
control by maintaining the pension pot in your
own name. n
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. Pension drawdown
can leave your funds open to investment risk
and is not suitable for everyone.
YOU SHOULD REvIEW YOUR PENSION ON A REGULAR BASIS TO MAKE SURE THAT IT’S ON TRACK TO MEETING YOUR RETIREMENT GOALS. AS YOU MOvE THROUGH DIFFERENT PHASES OF YOUR LIFE, YOU MAY ALSO BE ABLE TO INCREASE YOUR MONTHLY CONTRIBUTIONS, WHICH COULD IMPROvE YOUR CHANCE OF ACHIEvING THE RETIREMENT YOU WANT. IF YOU’D LIKE TO FIND OUT MORE, PLEASE CONTACT US. DON’T LEAvE IT TO CHANCE.
wealTh creaTion
10%The percentage of income
tax payable on the dividends of shares for basic rate tax payers
10
Whatever your financial goals might be, the ultimate aim is to grow your wealth so that you can enjoy it and pass it on. As your life changes over time, it’s important to ensure that your financial objectives continue to meet your requirements.
£11,280annual individual savings account
(isa) limit
£10,600Annual capital gains tax - free allowance for each individual
wealTh creaTion
a eureka moment!Discovering the right investment decisions to grow your wealth
11
There are many different tax-efficient ways to grow your wealth. We can help you understand the choices and make the investment decisions that are right for you. This will depend on your life priorities, your goals and your attitude to risk.
Tax on invesTmenTsThe type and amount of tax payable will depend on the nature of your investments and on your income level. For higher rate and additional rate taxpayers, returns from investments can be subject to significant taxes in the form of income tax, capital gains tax (CGT) or both.
CGT is a tax on the gain or profit you make when you sell something that you own, such as shares or property. This tax year there is a tax-free allowance worth £10,600 for each individual, so you’ll only be charged CGT for gains on assets above this level. CGT rates are 18 per cent for basic rate taxpayers and 28 per cent for higher and additional rate taxpayers.
Tax on dividendsDividends on shares are subject to income tax, with 10 per cent being deducted at source before each payment. There are three different income tax rates on UK dividends, depending on your income level: 10 per cent (basic rate taxpayers); 32.5 per cent (higher rate taxpayers); and 42.5 per cent (additional rate taxpayers). Non-taxpayers cannot reclaim the 10 per cent deducted at source. When you invest in UK shares you’re taxed on the transaction. This is known as Stamp Duty Reserve Tax (SDRT) for electronic transactions and Stamp Duty for transactions.
proTecTing your wealTh from TaxIf appropriate, you may wish to consider reducing your tax bill by structuring your savings so that they are owned by the lowest rate taxpayer in your family or household.
Another way to prevent tax eroding your money is to put your cash into tax-efficient savings and investment wrappers, such as an Individual Savings Account (ISA). Because of their tax efficiency, there is an annual limit on how much money you can put into ISAs. The annual limit for the current 2012/13 tax year is £11,280 and this limit is set to increase each year in line with inflation.
Up to £5,640 of your annual limit can be saved in a Cash ISA. The remainder can be invested in
a Stocks & Shares ISA. Alternatively, you could use your full £11,280 ISA allowance to invest in a Stocks & Shares ISA with one provider.
poTenTial for higher reTurnsA Stocks & Shares ISA can include individual shares or bonds, or pooled investments such as investment trusts. The main advantage of investing in a Stocks & Shares ISA is the potential for higher returns than with a Cash ISA, which pays interest at regular periods. Of course, like any investment, the value of a Stocks & Shares ISA can fall as well as rise, which means you might not get back the money you invest.
For higher (40 per cent) and additional (50 per cent) rate tax payers, dividends received inside an ISA suffer no further tax. This means investors retain 25 per cent and 36.1 per cent more of the dividend respectively than if the same investment were held outside an ISA.
Junior isasJunior ISAs are long-term tax-efficient savings accounts especially for children. They are available to any child under 18, living in the UK, who does not have a Child Trust Fund (CTF) account. Like ISAs, you can use them to save cash or invest in stocks and shares. In the current tax year you can save up to £3,600 in a Junior ISA with no tax payable on the interest or dividends. Children aged 16 can also choose to open an adult Cash ISA as well as a Junior ISA. n
All figures relate to the 2012/13 tax year. 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.
Pensions have long been a highly tax-efficient way to save for retirement. If applicable to your particular situation, here are two opportunities you may wish to consider before the rules change next April.
50 per cenT Tax relief While the 50 per cent additional tax rate is in place, it is still possible to receive up to 50 per cent tax relief on contributions to pensions during this current tax year. The 50 per cent rate will be reduced to 45 per cent from 6 April 2013, and this is therefore the last tax year to receive tax relief at up to 50 per cent on pension contributions.
carry forward of unused reliefsYou may be able to contribute in excess of the annual allowance of £50,000 and receive tax relief using Carry Forward relief if you have contributed less than £50,000 in any of the previous three tax years. If you pay 50 per cent tax, you need to do this in the current tax year to maximise tax relief before it drops to 45 per cent. As this is a complex area, professional advice should be sought. n
All figures relate to the 2012/13 tax year. A pension is a long-term investment, and 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.
WE WORK WITH OUR CLIENTS TO BUILD TAILORED FINANCIAL PLANS BASED ON THEIR SPECIFIC FINANCIAL GOALS AND NEEDS AND HELP THEM PUT THAT PLAN INTO ACTION. IF YOU WOULD LIKE TO DISCUSS THE RANGE OF SERvICES WE OFFER, PLEASE CONTACT US FOR FURTHER INFORMATION.
WEIGHING UP ALL THE OPTIONS WHEN YOU ARE THINKING ABOUT RETIREMENT PLANNING CAN SEEM DAUNTING. TO FIND OUT HOW WE CAN HELP YOU, PLEASE CONTACT US TO DISCUSS YOUR REqUIREMENTS.
reTiremenT
tIme Is runnIng outShould you be taking advantage of current retirement planning rules?
the type and amount of tax payable wIll depend on the
nature of your Investments and on your Income level. for hIgher-rate and addItIonal-rate taxpayers, returns from Investments can be subject to sIgnIfIcant taxes.
You’ve protected your most valuable assets.But how financially secure are your dependents?
Timely decisions on how jointly owned assets are held, the mitigation of inheritance tax, the preparation of a will and the creation of trusts, can all help ensure your dependents are financially secure.
Contact us to discuss how to safeguard your dependents, wealth and assets, don’t leave it until it’s too late.
pensioner household incomeOn an average gross pensioner household
income of £20,130, that equates to £5,864
paid out in tax, with income tax accounting
for nearly £1,501 of the bill and indirect taxes
including vAT totalling £1,937. Council tax is
the third-largest tax burden, accounting for
5.8 per cent of gross income.
With an average tax liability of £5,864 for
the UK’s 7.15 million retired households, the
bill from direct and indirect taxation equates to
around £41.9bn. In total, direct taxes, including
income tax and council tax, account for
12.2 per cent out of the 29 per cent tax burden
with indirect taxes, including vAT, duty on
tobacco, alcohol and petrol, vehicle excise duty
and Tv licences, accounting for 16.8 per cent.
direcT and indirecT TaxHowever, less well-off households proportionally
pay out the most in direct and indirect tax with
42 per cent of their gross household income
being paid out in tax. The bottom tenth of
pensioner households, in receipt of gross
income estimated at £8,259 a year, pay £3,599
in taxes.
The top 10 per cent of pensioner households,
with gross income of £47,992, see 29 per cent
of their income going in direct and indirect tax.
planning for reTiremenT Pensioners need to think about the effects
of direct and indirect tax on their retirement
income and plan accordingly. With 29 per cent
of gross retirement income being swallowed
up by tax, it is clearly a major factor to consider
when planning for retirement.
When you add in the potential effects of
inflation in a retirement lasting up to 20 or even
30 years, it is clear that savers need to consider
all retirement income solutions in order to
achieve a degree of certainty.
invesTmenTs and savingsMetLife’s analysis shows that the average retired
household receives 40 per cent of its gross income
from private and occupational pensions, with
39 per cent coming from the State Pension and
the rest coming from investments and savings plus
other benefits. The average private pension pays
£8,134 per household before taxes. n
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.
[1] MetLife analysis of the ONS Wealth and
Assets Survey. ONS estimates that there are
7.151 million retired households.
the bURdeN Of tax In retIrement Savers need to consider all retirement income solutions in order to achieve a degree of certainty
The average UK pensioner household pays out 29 per cent of its income in retirement to the taxman through a combination of direct and indirect taxation, which adds up to an annual tax bill of nearly £42bn, new analysis [1] from MetLife shows (25/07/12).
reTiremenT
An annuity provides you with a guaranteed
income for life when you retire. You buy an
annuity using a lump sum from your pension
or, perhaps, from some savings. Annuities
remove the worry about having to budget for
an unknown period of time. We can help you
understand the retirement process and find
the right annuity for you.
There’s no going backOnce you’ve bought an annuity there’s no
going back, so you’ve got to get it right first
time. Depending on the provider you go to,
you could increase your income considerably
by shopping around.
If you’re not in the best of health, you may also
be eligible for an annuity called an ‘enhanced’
or ‘impaired’ annuity. These products pay higher
rates because the annuity providers expect to pay
the annuity over a shorter time period.
shop around for The besT dealWith most pensions, you automatically have
what’s called an ‘open-market option’ (OMO).
This means you don’t have to take the pension
offered to you by your pension provider, but
have the right to take your built-up fund to
another provider to obtain a higher annuity rate.
Pension providers are obliged to remind you
of your right to take the OMO. The amount of
income you will receive from your annuity will
vary between different insurance companies, so
it’s essential to make comparisons before making
your decision. n
A pension is a long-term investment, and 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 value of level
annuities will be eroded by inflation over time.
Once taken, an annuity cannot be changed.
ReAdy to tuRn youR pension fund into An income foR life? it’s essential that you take professional advice to help you decide what type of annuity will work best for you. To get the most out of your pension savings fund you should be confident that you are making the right decisions about your retirement income. To discuss how we could help you, please contact us for further information.
annuIty challengeShopping around for the best deal could really pay off
7.15mThe number of uk retired households
13
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A lack of planning could lead to an unexpected 55 per cent death tax on pension savings
noT Taking an incomeThe data provided by Skandia shows that 59 per cent of
customers in ‘capped drawdown’ are not taking an income.
These are individuals who have taken their maximum
tax-free cash lump sum and left the rest of their pension
fund invested. The remaining pension fund is technically in
‘drawdown’, even though they are not taking an income,
which means that the remaining pension fund is subject
to a 55 per cent tax charge if paid as a lump sum to a
beneficiary on the member’s death.
subsTanTial Tax chargeFor those who die below age 75, this tax charge was increased
from 35 per cent to 55 per cent in April 2011, so many people
may still be unaware of it. The 55 per cent tax charge is a
substantial figure, and if applicable to you, it is essential that
you obtain professional advice to see how best to mitigate this
tax liability.
some key areas to look at include:
under age 75It is only money held in drawdown that is potentially
subject to a 55 per cent tax charge on death under age 75.
Untouched pension funds can be left to beneficiaries without
any tax charge.
You could consider phasing the amount you move into
drawdown, using tax-free cash to provide part of your
immediate income needs.
You could consider taking an income from the remaining
money in drawdown. If you do not need the income, you
may reinvest it back into a pension as a contribution.
Contributions will benefit from tax relief, and the pension
fund built from those contributions will not be deemed
in drawdown, so will not be subject to a 55 per cent tax
charge on the member’s death before age 75.
‘Flexible’ drawdown can be used to enable
money to be moved out of the 55 per cent
taxed environment at a much quicker rate than ‘capped’
drawdown. To qualify for flexible drawdown you must be
receiving at least £20,000 guaranteed pension
income a year and have unrestricted access to the remaining
pension fund.
age 75 onwardsAll money left in a pension is subject to a 55 per cent tax
charge on death, regardless of whether the funds are in
drawdown or not.
A worrying number of people in retirement are not utilising their pension savings efficiently, according to statistics revealed by Skandia (30/07/12). This could result in their pension funds being subject to an unexpected 55 per cent tax charge on death. This tax charge could be avoided or reduced in many cases.
ARe YOU UtIlISING YOUR pensIon savIngs effIcIently?
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15
If appropriate, consider accessing as much of your
pension fund as possible to move money outside of this
55 per cent tax charged environment.
Flexible drawdown can again be used to move money
out of the 55 per cent taxed environment at a quicker
speed than capped drawdown allows.
unnecessarily high exposureLeaving money inside the 55 per cent taxed environment
may not always be a bad thing, especially when taking
into account income tax and inheritance tax implications
if it is moved to within your estate. It only becomes a
concern if a lack of planning gives you an unnecessarily
high exposure to this 55 per cent death tax, when action
could be taken to reduce your exposure.
exacerbaTing The siTuaTionThe current economic climate is probably exacerbating the
situation, because people may be delaying taking an income
until gilt yields and stock markets improve as this could help
secure a higher income level. Delaying income could be
part of your long-term financial plan; however, if you are
unaware of the implications your actions could have, your
beneficiaries may, on your death, face an unexpected
55 per cent tax charge on part of those savings. n
All figures relate to the 2012/13 tax year. A pension is a
long-term investment, and 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.
wheTher you are Thinking of sTarTing a Pension, reviewing your exisTing Pension Provision or are abouT To Take benefiTs from a scheme, find ouT how we could helP you Plan for The mosT imPorTanT Time of your life.
reTiremenT
59%Percentage of customers in ‘capped drawdown’
that are not taking an income
Isn’t it timeyou had a financial review?We’ll make sure you get the rightadvice for your individual needs.
We provide professional financial advice covering most areas of financial planning, including, tax-efficient savings, investment advice, retirement planning, estate & inheritance tax planning, life protection, critical illness cover and income protection.
To discuss your options, please contact us.
The principal tenets of spreading risk
Diversification helps lessen what’s known as
‘unsystematic risk’, such as reductions in the
value of certain investment sectors, regions
or asset types in general. But there are some
events and risks that diversification cannot help
with – these are referred to as ‘systemic risks’.
These include interest rates, inflation, wars and
recession. This is important to remember when
building your portfolio.
The main ways you can diversify your porTfolio
asseTsHaving a mix of different asset types will
spread risk because their movements are either
unrelated or inversely related to each other. It’s
the old adage of not putting all your eggs in
one basket.
Probably the best example of this is shares,
or equities, and bonds. Equities are riskier
than bonds, and can provide growth in your
portfolio, but, traditionally, when the value of
shares begins to fall bonds begin to rise, and
vice versa.
Therefore, if you mix your portfolio between
equities and bonds, you’re spreading the risk
because when one drops the other should rise to
cushion your losses. Other asset types, such as
property and commodities, move independently
of each other and investment in these areas can
spread risk further.
secTorOnce you’ve decided on the assets you want
in your portfolio, you can diversify further by
investing in different sectors, preferably those
that aren’t related to each other.
For example, if the healthcare sector takes
a downturn, this will not necessarily have an
impact on the precious metals sector. This helps
to make sure your portfolio is protected from
falls in certain industries.
geographyInvesting in different regions and countries can
reduce the impact of stock market movements.
This means you’re not just affected by the
economic conditions of one country and one
government’s fiscal policies.
Many markets are not correlated with each
other – if the Asian Pacific stock markets
perform poorly, it doesn’t necessarily mean that
the UK’s market will be negatively affected. By
investing in different regions and areas, you’re
spreading the risk that comes from the markets.
Developed markets such as the UK and US
are not as volatile as some of those in the Far
East, Middle East or Africa. Investing abroad
can help you diversify, but you need to be
comfortable with the levels of risk that come
with them.
companyIt’s important not to invest in just one company.
Spread your investments across a range of
different companies.
The same can be said for bonds and
property. One of the best ways to do this is
via a collective investment scheme. This type
of scheme invests in a portfolio of different
shares, bonds, properties or currencies to
spread risk around.
beware of over-diversificaTionHolding too many assets might be more
detrimental to your portfolio than good. If
you over-diversify, you may be holding back
your capacity for growth as you’ll have such
small proportions of your money in different
investments that you won’t see much in the
way of positive results. n
Levels and bases of and reliefs from taxation
are subject to legislative change and their
value depends on the individual circumstances
of the investor.
One of the principal tenets of spreading risk in your portfolio is to diversify your investments whatever the time of year. Diversification is the process of investing in areas that have little or no relation to each other. This is called a ‘low correlation’.
NOt pUttING All your eggs In one basket
invesTmenT
we can helP you maximise your wealTh creaTion PoTenTial and develoP an invesTmenT sTraTegy based on your requiremenTs. Please conTacT us To look aT The oPTions available To you.
17
pASSING ON YOUR WeAlthMake sure your loved ones get your hard-earned money and not the taxman
wriTe a willA will is an essential part of your financial
planning. Not only does it set out your wishes
but if you die without a will your estate will
generally be divided according to the rules of
intestacy, which may not reflect your wishes.
This can be particularly problematic for unmarried
couples, as the surviving partner doesn’t have any
automatic rights to inherit, but it can also create
problems for married couples and civil partners.
Married couples or civil partners inherit under
the rules of intestacy only if they are actually
married or in a registered civil partnership at the
time of death. So if you are divorced or if your
civil partnership has been legally ended, you
can’t inherit under the rules of intestacy. But
partners who separated informally can still inherit
under the rules of intestacy.
inheriTance TaxWhile a will helps to ensure that your estate
is distributed according to your wishes, the
inheritance tax (IHT) rules mean that one of your
beneficiaries could be the taxman.
Your estate is made up of everything you own
minus any debts such as mortgages, loans and
your funeral expenses. If the value of your estate
exceeds the IHT nil rate band (currently £325,000),
the surplus will be taxed at 40 per cent.
An extra rule applies to married couples and
registered civil partners. The transferable nil rate
band means that the surviving spouse or partner
can use any of their partner’s unused nil rate
band (NRB).
minimising your inheriTance Tax liabiliTyHaving paid tax throughout our lives, few of us
want to leave the taxman more when we die and
there are a number of ways to reduce the potential
amount that will need to be handed over.
gifTs Giving away your estate can be an effective way
to reduce a future IHT liability.
exempt Transfers: these are gifts where IHT will
never be payable.
potentially exempt Transfers: these can
become exempt from IHT if you survive for seven
years from when you make the gift.
chargeable lifetime Transfers: these may
incur an immediate IHT charge of 20 per cent.
Further IHT may be payable if you die within
seven years of making the gift.
To avoid making a Gift with Reservation, which
will not reduce your estate for IHT, you must give
away the asset you are gifting completely.
TrusTsSometimes giving money outright might not be
the best solution. For instance, you might want
to give money to a child but be worried about
how they might spend it, or you might want to
leave some money for grandchildren but do not
yet know how many you’ll have.
In these situations, a trust can be a good
option. Trusts may allow you to reduce the value
of your estate but retain some control over who
receives the gift and when. This is a very complex
area, so it is important to seek professional
advice when considering this option.
insuranceIf it is likely that IHT will be payable on your
estate, a whole-of-life policy written under an
appropriate trust can be used to ensure that
funds are available to pay all or some of any
future IHT bill.
Provided you pay the premiums, the proceeds
of the policy will be paid to your estate when
you die. It is vital to have the policy written under
an appropriate trust to ensure that the money
paid out by the policy is outside your estate. This
ensures that the money can be used to settle the
IHT tax bill rather than add to it.
pensionsIn certain situations, a lump sum may be
payable from a pension plan when the member
dies. Depending on the scheme rules, it may
be possible for the member to nominate an
individual or a trust to receive this lump sum and
to make this payment tax-efficient. n
All figures relate to the 2012/13 tax year. The
Financial Services Authority does not regulate
estate planning, wills or trusts.
Estate preservation doesn’t only affect the very wealthy. Rising property prices have meant that it’s now an issue for an increasing number of people. So what are the areas you need to consider to protect your wealth?
financial ProTecTion
we can Provide effecTive soluTions To meeT your insurance and ProTecTion needs, wheTher you require life cover or advice on ihT. To find ouT how we can offer The righT advice To suiT you and your family, Please conTacT us for more informaTion.
18
Achieving a comfortable retirement.Do you need a professional assessment of your situation to make this a reality?
If you are unsure whether your pension is performing in line with your expectations, and that you’ve made the right pension choices – don’t leave it to chance.
Contact us to discuss these and other important questions, and we’ll help guide you to a comfortable retirement.
20
a broad spread of insTrumenTsPooled investments are also sometimes called
‘collective investments’. The fund manager
will choose a broad spread of instruments in
which to invest, depending on their investment
remit. The main asset classes available to
invest in are shares, bonds, gilts, property and
other specialist areas such as hedge funds or
‘guaranteed funds’.
Most pooled investment funds are actively
managed. The fund manager researches the
market and buys and sells assets with the aim
of providing a good return for investors.
keeping TrackTrackers, on the other hand, are passively
managed, aiming to track the market in which
they are invested. For example, a FTSE100
tracker would aim to replicate the movement
of the FTSE100 (the index of the largest 100 UK
companies). They might do this by buying the
equivalent proportion of all the shares in the
index. For technical reasons the return is rarely
identical to the index, in particular because
charges need to be deducted.
Trackers tend to have lower charges than
actively managed funds. This is because a fund
manager running an actively managed fund is
paid to invest so as to do better than the index
(beat the market) or to generate a steadier
return for investors than tracking the index
would achieve. However, active management
does not guarantee that the fund will
outperform the market or a tracker fund.
uniT TrusTsUnit trusts are a collective investment that
allows you to participate in a wider range of
investments than can normally be achieved on
your own with smaller sums of money. Pooling
your money with others also reduces the risk.
The unit trust fund is divided into units, each
of which represents a tiny share of the overall
portfolio. Each day the portfolio is valued,
which determines the value of the units. When
the portfolio value rises, the price of the units
increases. When the portfolio value goes down,
the price of the units falls.
making The invesTmenT decisionsThe unit trust is run by a fund manager, or
a team of managers, who will make the
investment decisions. They invest in stock
markets all round the world and for the more
adventurous investor, there are funds investing
in individual emerging markets, such as China,
or in the so-called BRIC economies (Brazil,
Russia, India and China).
Alternatively some funds invest in metals
and natural resources, as well as many putting
their money into bonds. Some offer a blend
of equities, bonds, property and cash and are
known as balanced funds. If you wish to marry
your profits with your principles you can also
invest in an ethical fund.
a number of oTher fundsSome funds invest not in shares directly but in
a number of other funds. These are known as
multi-manager funds. Most fund managers use
their own judgment to assemble a portfolio
of shares for their funds. These are known as
actively managed funds.
However, a sizeable minority of funds simply
aim to replicate a particular index, such as
the FTSE all-share index. These are known as
passive funds, or trackers.
open-ended invesTmenT companiesOpen-ended investment companies (OEICs)
are stock market-quoted collective investment
schemes. Like unit trusts and investment trusts
they invest in a variety of assets to generate a
return for investors.
An OEIC, pronounced ‘oik’, is a pooled
collective investment vehicle in company form.
They may have an umbrella fund structure
allowing for many sub-funds with different
If you require your money to provide the potential for capital growth or income, or a combination of both,
provided you are willing to accept an element of risk pooled investments could just be the solution you are looking
for. A pooled investment allows you to invest in a large, professionally managed portfolio of assets with many
other investors. As a result of this, the risk is reduced due to the wider spread of investments in the portfolio.
CReAtING A WIdeR spread of Investments In your portfolIo
invesTmenT
A broad spread of instruments in which to invest, depending on your investment remit
21
investment objectives. This means you can invest
for income and growth in the same umbrella
fund moving your money from one sub fund
to another as your investment priorities or
circumstances change. OEICs may also offer
different share classes for the same fund.
expanding and conTracTing in response To demandBy being “open ended” OEICs can expand and
contract in response to demand, just like unit
trusts. The share price of an OEIC is the value
of all the underlying investments divided by the
number of shares in issue. As an open-ended
fund the fund gets bigger and more shares are
created as more people invest. The fund shrinks
and shares are cancelled as people withdraw
their money.
You may invest into an OEIC through a
stocks and shares Individual Savings Account
ISA. Each time you invest in an OEIC fund you
will be allocated a number of shares. You can
choose either income or accumulation shares,
depending on whether you are looking for
your investment to grow or to provide you with
income, providing they are available for the
fund you want to invest in.
invesTmenT TrusTsInvestment trusts are based upon fixed amounts
of capital divided into shares. This makes them
closed ended, unlike the open-ended structure
of unit trusts. They can be one of the easiest
and most cost-effective ways to invest in the
stock market. Once the capital has been divided
into shares, you can purchase the shares. When
an investment trust sells shares, it is not taxed
on any capital gains it has made. By contrast,
private investors are subject to capital gains tax
when they sell shares in their own portfolio.
Another major difference between
investment trusts and unit trusts is that
investment trusts can borrow money for their
investments, known as gearing up, whereas
unit trusts cannot. Gearing up can work either
to the advantage or disadvantage of investment
trusts, depending on whether the stock market
is rising or falling.
The abiliTy To borrow money for invesTmenTsInvestment trusts can also invest in unquoted or
unlisted companies, which may not be trading
on the stock exchange either because they
don’t wish to or because they don’t meet the
given criteria. This facility, combined with the
ability to borrow money for investments, can
however make investment trusts more volatile.
The net asset value (NAv) is the total market
value of all the trust’s investments and assets
minus any liabilities. The NAv per share is the
net asset value of the trust divided by the
number of shares in issue. The share price of
an investment trust depends on the supply and
demand for its shares in the stock market. This
can result in the price being at a ‘discount’ or a
‘premium’ to the NAv per share.
less Than The underlying sTock markeT valueA trust’s share price is said to be at a discount
when the market price of the trust’s shares
is less than the NAv per share. This means
that investors are able to buy shares in the
investment trust at less than the underlying
stock market value of the trust’s assets.
A trust’s shares are said to be at a premium
when the market price is more than the
NAv per share. This means that investors are
buying shares in the trust at a higher price
than the underlying stock market value of
the trust’s assets. The movement in discounts
and premiums is a useful way to indicate
the market’s perception of the potential
performance of a particular trust or the market
where it invests. Discounts and premiums
are also one of the key differences between
investment trusts and unit trusts or OEICs. n
Levels and bases of and reliefs from taxation
are subject to legislative change and their value
depends on the individual circumstances of the
investor. The value of your investments can go
down as well as up and you may get back less
than you invested.
invesTmenT
we can helP you maximise your invesTmenT PoTenTial and develoP a sTraTegy for The fuTure. Please conTacT us To look aT The oPTions available To you.
22
We can make sure that you are able to take the
right decisions to deliver peace of mind for you
and your family in the event of death, if you are
too ill to work or if you are diagnosed with a
critical illness.
You can choose protection-only insurance,
which is called ‘term insurance’. In its simplest
form, it pays out a specified amount if you die
within a selected period of years. If you survive,
it pays out nothing. It is one of the cheapest
ways overall of buying the cover you may need.
Alternatively, a whole-of-life policy provides
cover for as long as you live.
life assurance opTionsWhole-of-life assurance plans can be used to
ensure that a guaranteed lump sum is paid
to your estate in the event of your premature
death. To avoid inheritance tax and probate
delays, policies should be set up under an
appropriate trust.
Level term plans provide a lump sum for your
beneficiaries in the event of your death over a
specified term.
Family income benefit plans give a
replacement income for beneficiaries on your
premature death.
Decreasing term protection plans pay out a
lump sum in the event of your death to cover
a reducing liability for a fixed period, such as a
repayment mortgage.
Simply having life assurance may not be
sufficient. For instance, if you contracted a
near-fatal disease or illness, how would you
cope financially? You may not be able to work
and so lose your income, but you are still alive
so your life assurance does not pay out. And to
compound the problem, you may also require
additional expensive nursing care, have to adapt
your home or even move to another more
suitable property.
Income Protection Insurance (IPI) formerly
known as permanent health insurance would
make up a percentage of your lost income
caused by an illness, accident or disability. Rates
vary according to the dangers associated with
your occupation, age, state of health and gender
but IPI is particularly important if you are self
employed or if you do not have an employer that
would continue to pay your salary if you were
unable to work.
If you are diagnosed with suffering from one
of a number of specified ‘critical’ illnesses, a
critical illness insurance policy would pay out a
tax-free lump sum if the event occurred during
the term of your policy. Many life insurance
companies offer policies that cover you for both
death and critical illness and will pay out the
guaranteed benefit on the first event to occur.
Beyond taking the obvious step of ensuring
that you have adequate insurance cover, you
should also ensure that you have made a will. A
living will makes clear your wishes in the event
that, for example, you are pronounced clinically
dead following an accident, and executes an
enduring power of attorney, so that if you
become incapable of managing your affairs as
a result of an accident or illness, you can be
reassured that responsibility will pass to someone
you have chosen and trust.
Of course, all these protection options also
apply to your spouse and to those who are in
civil partnerships. n
The Financial Services Authority does not
regulate estate planning, wills or trusts.
With so many different protection options available, making the right decision to protect your personal and
financial situation can seem overwhelming. There is a plethora of protection solutions which could help ensure
that a lump sum, or a replacement income, becomes available to you in the event that it is needed.
dO YOU hAve pROteCtION for when you most need It?
ProTecTion
Making the right decision to protect your personal and financial situation
we can Provide effecTive soluTions To meeT your insurance and ProTecTion needs, wheTher you require life cover or advice on esTaTe ProTecTion. To find ouT how we can offer The righT advice To suiT you and your family, Please conTacT us for more informaTion.
23
This could result in a significant increase, of
around 8 per cent, in the maximum income
withdrawal limit available to females.
maximum capped income raTes Currently, maximum capped income rates are
calculated using two different tables, one for
males and one for females. As males tend to have
a lower life expectancy than females, the amount
of income males can withdraw from their pension
has tended to be higher than for females. HMRC
has decided to withdraw the female table, so all
calculations, from 21 December, will be based on
the male life expectancy rates.
increase The appeal of capped income wiThdrawalThis jump of around 8 per cent per annum
may help increase the appeal of capped
income withdrawal at retirement for
females. Annuities are also caught by the
gender neutral rules, and life offices are
responsible for adjusting their calculations
accordingly. How this will play out in the
market is yet to be seen, but the rates are
likely to gravitate towards the female rates
rather then towards the male rates, so
females are unlikely to see any significant
improvement in annuity terms.
The fact that HMRC has taken this step is
an interesting move, and one which could
significantly benefit females taking the capped
income withdrawal route. Maximum income
levels have been adversely impacted recently due
to the record low gilt yield and volatile market
conditions, so this should be a welcome relief for
many females.
choosing a provider wiTh flexible review periodsFemales already taking a capped income can
benefit from this rule change at their next review
period. Females approaching retirement today,
and considering capped income, should ensure
they choose a provider with flexible review
periods, or hold back some pension money to
top-up their drawdown fund after 21 December,
so the entire income amount is recalculated to
benefit from the rule change. n
All figures relate to the 2012/2013 tax year.
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.
HM Revenue & Customs (HMRC) confirmed recently that gender neutral income factors will apply to capped
income withdrawals. From 21 December 2012, the rates used to calculate the maximum amount of income a
female can take from her pension each year in drawdown will be based on male life expectancy rates.
GeNeRAtING A bIGGeRretIrement Income
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Females could see a jump in pension income from 21 December
find ouT moreThis is a comPlex area and you should seek Professional advice. Please conTacT us for furTher informaTion.
24
To avoid concentrating risk, it is important not to
‘put all your eggs in one basket’ by investing in
just one share or in one asset class. If appropriate
to your particular situation spreading capital
across different shares and different asset classes
can reduce the overall level of risk.
creaTe a diversified porTfolioThere are opportunities to create a diversified
portfolio through investing with fund managers who
have the experience, talent and robust investment
process that can withstand the ever-changing
economic and financial climate and deliver a return
above inflation over the medium to long term.
Funds are typically seen as a way to build up
a lump sum of money over time, perhaps for
retirement, but they can also be used to provide
you with a regular income.
Type of income funds
There are four main types of income fund:
money market funds – pay interest and aim to
protect the value of your money.
bond (fixed income) funds – pay a higher rate
of interest than cash deposits, but there is some
risk that the value of your original investment
will fall.
equity income funds – the income comes from
dividends paid to shareholders. In return for
some risk to your capital, you may get a more
regular income than you would from cash, and
that income, as well as your capital, may increase
over time.
property funds – pay income from rents, but
the value of your investment can fall as well as
rise. There are also mixed asset funds, which
invest your money in both bonds and equities.
generaTing income
inTeresT from cash or money markeT fundsThe income varies in line with the interest
rate set by the Bank of England. The fund’s
investment manager will aim to get the best rate
available, helped by that fact that, with large
sums to deposit, funds can often get better rates
than individual investors. The capital amount you
originally invested is unlikely to go down (subject
to the limits for each deposit under the Financial
Services Compensation Scheme). If the interest
rate is lower than the rate of inflation, however,
the real spending value of your investment is
likely to fall.
fixed inTeresT from bondsBonds are issued by governments (known as gilts
in the UK) and companies (corporate bonds) to
investors as a way to borrow money for a set
period of time (perhaps 5 or 10 years). During
that time, the borrower pays investors a fixed
interest income (also known as a coupon) each
year, and agrees to pay back the capital amount
originally invested at an agreed future date (the
redemption date). If you sell before that date,
you will get the market price, which may be
more or less than your original investment.
Many factors can affect the market price of
bonds. The biggest fear is that the issuer/borrower
will not be able to pay its lenders the interest and
ultimately be unable to pay back the loan. Every
bond is given a credit rating. This gives investors an
indication of how likely the borrower is to pay the
interest and to repay the loan. Typically, the lower
the credit rating, the higher the income investors
can expect to receive in return for the additional risk.
A more general concern is inflation, which
will erode the real value of the interest paid by
bonds. Falling inflation, often associated with
falling bank interest rates, is therefore, typically
good news for bond investors. Typically, bond
prices rise if interest rates are expected to fall,
and fall if interest rates go up.
If you invest in bonds via a fund, your income
is likely to be steady, but it will not be fixed, as is
the case in a single bond. This is because the mix
of bonds held in the fund varies as bonds mature
and new opportunities arise.
The recent volatility of global markets has tested the nerves of even the most experienced investors, making it a
difficult time for individuals who rely on income from investments for some or all of their needs.
InvestIng for Income
invesTmenT
Spreading capital across different shares and different asset classes
25
dividends from shares and equiTy income fundsMany companies distribute part of their profits
each year to their shareholders in the form of
dividends. Companies usually seek to keep their
dividend distributions at a similar level to the
previous year, or increase them if profit levels are
high enough to warrant it.
renTal income from properTy and properTy fundsSome people invest in “buy-to-let” properties
in order to seek rental income and potential
increase in property values. Property funds
typically invest in commercial properties for the
same reasons, but there are risks attached. For
example, the underlying properties might be
difficult to let and rental yields could fall. This
could affect both the income you get and the
capital value.
balance your need for a regular income wiTh The risksThe income from a fund may be higher and
more stable than the interest you get from cash
deposited in a bank or building society savings
account, but it can still go up and down. There
may be some risk to the capital value of your
investment, but if a regular income is important
to you and you do not need to cash-in your
investment for now, you may be prepared to
take this risk.
income funds of The same Type are grouped in secTorsThe main sectors for income investors are:
Money Market; Fixed Income (including UK Gilts,
UK index-linked Gilts, Corporate Bond, Strategic
Bond, Global Bond and High Yield); Equity
Income; Mixed Asset (ie.UK Equity and Bond)
and Property.
look aT The fund yieldThis figure allows you to assess how much
income you may expect to get from a fund in
one year. In the simplest form, it is the annual
income as a percentage of the sum invested.
Yields on bond funds can also be used to
indicate the risks to your capital.
decide how frequenTly you wish To receive your incomeAll income funds must pay income at least
annually, but some will pay income distributions
twice a year, quarterly or monthly, so you can
invest in a fund which has a distribution policy to
suit your income needs.
selecT income uniTs/shares if you need cash regularlyThe income generated in a fund is paid out in
cash to investors who own income units. If you
choose the alternative - accumulation units/shares
- your share of the income will automatically be
reinvested back into the fund. n
Levels and bases of and reliefs from taxation
are subject to legislative change and their
value depends on the individual circumstances
of the investor.
invesTmenT
need help?There are many faceTs To your financial PersonaliTy. There are many ways To generaTe income. To discuss The oPTions available To you or To review your currenT Provision, Please conTacT us.
26
assuredA person or persons who are insured under the
terms of a protection policy.
converTible Term assuranceA term assurance plan that gives the owner the
option to convert the policy to a whole-of-life
contract or endowment, without the need for
medical checks.
criTical illness coverCritical Illness Cover is an insurance plan that
pays out a guaranteed tax-free cash sum if you’re
diagnosed as suffering from a specified critical
illness covered by the plan. There is no payment if
you die. You can take out the plan on your own or
with someone else. For joint policies the cash sum
is normally payable only once, on the first claim.
decreasing Term assuranceA term assurance plan designed to reduce its
cover each year, decreasing to nil at the end of
term. Decreasing term assurance cover is most
commonly used to cover a reducing debt or
repayment mortgage.
deferred periodA period of delay prior to payment of benefits
under a protection policy. Periods are normally
4, 13, 26 or 52 weeks – the longer the period
the cheaper the premium.
family income benefiT A term assurance policy that pays regular
benefits on death to the end of the plan term.
guaranTeed premiumsThis means the premiums are guaranteed
to remain the same for the duration of the
plan, unless you increase the amount of
cover via ‘indexation’.
income proTecTionThis insurance provides you with a regular tax-
free income if, by reason of sickness or accident,
you are unable to work, resulting in a loss of
earnings. Income Protection is also known as
Permanent Health Insurance (PHI).
You can arrange for your insurance benefit
and premiums to increase annually in line
with inflation or at a fixed percentage.
Premiums are normally increased in line with
RPI (Retail Prices Index) or NAEI (National
Average Earnings Index).
insurable inTeresTA legally recognised interest enabling a person
to insure another. The insured must be financially
worse off on the death of the life assured.
JoinT life second deaThA policy that will pay out only when the last
survivor of a joint life policy dies.
key person (key man) insurance Insurance against the death or disability of a person
who is vital to the profitability of a business.
level Term assuranceA life assurance policy that pays out a fixed sum
on the death of the life assured within the plan
term. No surrender value is accumulated.
life assuredThe person whose life is insured against death
under the terms of a policy.
life insuranceAn insurance plan that pays out a guaranteed
cash sum if you die during the term of the plan.
Some term assurance plans also pay out if you are
diagnosed as suffering from a terminal illness. You
can take out the plan on your own or with someone
else. For joint life insurance policies the cash sum is
normally payable only once, on the first claim.
long-Term care Insurance to cover the cost of caring for an
individual who cannot perform a number of
activities of daily living, such as dressing or washing.
morTgage proTecTion‘Mortgage life assurance’ or ‘repayment
mortgage protection’ is an insurance plan to
cover your whole repayment mortgage, or
A GUIde tO the jargon of protectIon
glossary
27
just part of it. The policy pays out a cash sum
to meet the reducing liability of a repayment
mortgage. You can take out the policy on your
own or with someone else. For joint policies
the cash sum is normally payable only once, on
the first claim.
paid-up planA policy where contributions have ceased and
any benefits accumulated are preserved.
permanenT healTh insurance Cover that provides a regular income until
retirement should you be unable to work
due to illness or disability. Also known as
Income Protection.
renewable Term assuranceAn ordinary term assurance policy with the
option to renew the plan at expiry without the
need for further medical evidence.
reviewable premiumsPlans with reviewable premiums are
usually cheaper initially; however, the
premiums are reviewed regularly and can
increase substantially.
surrender valueThe value of a life policy if it is encashed before a
claim due to death or maturity.
sum assuredThe benefit payable under a life assurance policy.
Term assuranceA life assurance policy that pays out a lump sum on the
death of the life assured within the term of the plan.
Terminal illnessSome life policies include this benefit free of
charge and this means the life insurance benefit
will be paid early if you suffer a terminal illness.
ToTal permanenT disabiliTy coverAlso known as Permanent Health Insurance
or Income Protection and sometimes available
as part of a life assurance policy, this pays out
the benefit of a policy if you are unable to
work due to illness or disability.
TrusTsMany insurance companies supply trust
documents when arranging your policy. Placing
your policy in an appropriate trust usually
speeds up the payment of proceeds to your
beneficiaries and may also assist with Inheritance
Tax mitigation.
waiver of premiumIf you are unable to work through illness or
accident for a number of months, this option
ensures that your cover continues without you
having to pay the policy premiums.
whole-of-lifeUnlike term assurance, whole-of-life policies
provide life assurance protection for the life of
the assured individual(s). Cover may either be
provided for a fixed sum assured on premium
terms established at the outset or flexible terms
which permit increases in cover once the policy
is in force, within certain pre-set limits, to reflect
changing personal circumstances.
glossary
tAx benefits will depend on your circuMstAncesLike all pensions, a SiPP offers up to 50 per
cent tax relief on contributions and there is
no capital gains tax or further income tax
to pay. The tax benefits will depend on your
circumstances and tax rules are subject to
change by the government.
The maximum SiPP contribution is either
£3,600 or 100 per cent of an individual’s
income, up to a maximum of £50,000 per
annum. it is possible to contribute more than
the annual allowance if you have any unused
allowances from the previous three tax years.
however, whereas traditional pensions
typically limit investment choice to a shorter
list of funds, normally run by the pension
company’s own fund managers, a SiPP lets you
invest in a much wider range of investments.
investMent choicesYou can choose from a number of different
investments, unlike other traditional pension
schemes, giving you control over where your
money is invested.
Typically a SiPP will offer a wide range of
investment options for those planning for
retirement, including the following:
n Cash
n equities (both uK and foreign)
n gilts and other fixed income instruments
n unit trusts and oeiCS
n Funds, including hedge funds
n investment trusts
n real estate investment trusts (reiTS)
n Commercial property (including offices,
shops or factory premises) and land
n Traded endowment policies
plAnning for your retireMentThis wide range of pension investment options
means that planning for your retirement can be
done more strategically, enabling the creation
of a truly diversified pension investment
portfolio and the spreading of risk across a
range of asset classes.
one of the major advantages of a SiPP
is that you can consolidate other pensions,
allowing you to bring together your retirement
savings. This simplifies the management of
your investment portfolio and makes regular
investment reviews easier.
tAking benefits froM your sippWhen you reach the age of 55 you can take
benefits from your SiPP. Traditionally, you would
take 25 per cent of the value of the fund and use
the remaining 75 per cent to purchase a pension
annuity. The annuity provides an income for the
rest of your life but, once you have purchased it,
you lose access to your pension fund.
Drawdown provides you with an income and
still leaves you with access to your pension. The
funds remain invested, so you’re still in control
of your investments but there is a risk that if
the income being taken is combined with poor
investment performance, then the fund will decline
and so will the income you can draw from it.
no MiniMuM incoMe requireMentThe maximum income that can be taken is
100 per cent of the equivalent pension annuity;
there is no minimum income requirement so
it can be set at zero. on your death it can be
used to fund an income for your dependants or
be paid out as a lump sum (less a 55 per cent
tax charge) to a nominated beneficiary.
This level of choice can be expensive to offer
and many people find that they do not need
it, so lower-cost SiPPs have been developed
that focus on investment funds only. These
lower-cost SiPPs usually offer significantly more
fund options than you would be offered in a
traditional pension scheme.
Monitoring your investMentsSome of the investments you choose will carry
a certain amount of risk. You will be solely
responsible for any investments and you will
not receive additional help. The option is
available to get some help, but this will incur
additional costs.
Being solely responsible for your investment
will require you monitoring your investments,
and possibly checking on them regularly. A SiPP
investment, like any investment, is never guaranteed
and you should obtain professional advice. n
All figures relate to the 2012/13 tax year. A
pension is a long-term investment, and 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.
A pension is one of the most tax-efficient ways of saving for retirement. A Self-Invested Personal Pension (SIPP) is essentially a pension wrapper that is capable of holding investments and providing you with the same tax advantages as other personal pension plans.
We can help you measure up what type of portfolio best suits your circumstances
if you’d like to find out moRe about a sipp, please contact us foR moRe infoRmation.
RetiRement
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Charlwood IFA is a trading style of Charlwood IFA Ltd which is authorised and regulated by the Financial Services Authority. Charlwood IFA Ltd is Registered in England; Registered No: 04820268. Registered Address: As above
charlwoodifa Ltd 35 Seamoor Road, Westbourne, Bournemouth, BH4 9AE Tel: (01202) 768512 Fax: (01202) 763301 Email: [email protected] www.charlwoodifa.com
