Is it still worth saving into a pension scheme?

Posted on June 6, 2013 by Janine Edwards

Is it still worth saving into a pension scheme?

Many investors will have been asking themselves that question following the announcement in last year’s Autumn Statement of yet more restrictions on tax reliefs on annual contributions and the size of the pot that can be built up over a lifetime. It would, however, be foolish to write off pensions savings: they should remain a core part of planning for retirement, even though they are likely to be just one part of the investment mix.

Know your limits

The government announced that, as from next April, the annual allowance for pension contributions will be cut from £50,000 to £40,000, while the lifetime allowance – which sets the maximum, penalty-free, value for a pension pot – will fall from £1.5 million to £1.25 million.

Pensions tax relief is now substantially less generous since the lifetime allowance was introduced in 2006. Then, it was set at £1.5 million, but it rose annually to reach £1.8 million in 2010 before being cut back to its starting level in 2012. The fall in the annual allowance has been even more dramatic: set initially at £215,000, it peaked in 2010 at £255,000.

Even the reduced amount of tax relief available is worth using, however. The annual allowance may have fallen substantially, but it is available to everyone and applies to the highest marginal rate of tax. That brings the cost of a £40,000 pension contribution down to £24,000 for anyone paying the 40% higher rate of tax (although the extra 20% must be reclaimed via the individual’s tax return).

The lifetime allowance is also available to everyone, so a married couple can accumulate a pension pot of £2.5 million between them – enough to fund a reasonably generous annual pension. But everyone should also keep track of their progress towards the maximum allowance and take steps to avoid breaching it if that looks likely to be a risk.

Funding retirement tax-efficiently

The reduction in annual allowances and the lower lifetime maximum means using other types of savings, and particularly other tax-efficient schemes such as ISAs to help fund retirement, is likely to become more common. Such an approach may also be more suitable to the changing pattern of retirement.

Twenty years ago, many people retired in their early 60s and looked forward to spending the rest of their lives secure with an income from a final salary scheme, where pensions are based on earnings in the run-up to retirement.

But that option is now available to a dwindling number of people. Final salary schemes are closing, often both to existing and new members, while increasing life expectancy and falling annuity rates are cutting into the incomes available from defined contribution schemes (source: www.napf.co.uk), where pensions are based on the amount of money in the pension pot. That could mean people are more likely to phase their retirement gradually, perhaps working part-time for a while, and fund themselves through a range of investment vehicles.

Those who have used their full pension tax relief should then consider using the maximum ISA allowance. While there is no upfront tax relief on ISA contributions, the funds can be drawn out tax free – unlike pensions, where the proceeds are taxable.

For the current tax year (2013/14), the allowance is £11,520, giving a couple £23,040 between them; and the government has committed to increasing the ISA allowance annually in line with the Consumer Prices Index.

A change for the better

The tax changes have not been all one way, however. The Autumn Statement also included an increased limit to the amount of income that can be drawn down from a pension fund. Drawdown is an alternative to buying an annuity and can be a good option for those who want to maintain their fund rather than surrendering it all to an annuity – particularly when long-term interest rates, and therefore annuity rates, are so low. But the government has stipulated that investors could only draw down an income equal in value to an annuity that could be purchased by an equivalent pension fund. The sharp fall in annuity rates in recent years has led to some pensioners suffering a big drop in income from drawdown so the government has increased the limit to 120% of the relevant annuity as from March this year. (source: www.pensionsadvisoryservice.org.uk)

Keeping your pension fund in check

The changes in pension rules and tax incentives make it essential that arrangements for retirement are kept under regular review. That includes regular checks on the size of the pension fund to ensure that it will not breach the lifetime allowances, as well as making the maximum use of the tax incentives available for pension saving.

The levels and bases of taxation and reliefs from taxation can change at any time and are generally dependent on individual circumstances. The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested

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Auto Enrolment: how prepared are you?

Posted on June 3, 2013 by Janine Edwards

Auto Enrolment

Although most employers won’t have their staging date until 2015/2016, there is a lot of work required in order to plan and prepare for Auto Enrolment. As an employer you will need to consider the cost implications and ensure that the appropriate systems and processes are in place to meet your obligations to your team. The Pensions Regulator (TPR) are now contacting employers about their duties 18 months before their specific staging date. However, Scottish Life, an Auto Enrolment provider, has recently estimated that it can take up to two years to prepare sufficiently. When you then consider that some Auto Enrolment providers are refusing to deal with employers who have simply left it too late, then it is imperative that this is addressed in good time.

Should you require any guidance or additional information in relation to Auto Enrolment then please don’t hesitate to contact us.

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Are you willing to let Inheritance Tax damage your wealth?

Posted on May 7, 2013 by Janine Edwards

Are you willing to let Inheritance Tax (IHT) damage your wealth?

Recent changes to Inheritance Tax (IHT) have led to its impact potential broadening.  Once considered as a tax only on the very wealthy, IHT has the potential to affect more estates than ever.

And without proper financial planning and professional advice, HM Revenue & Customs (HMRC) can become the single biggest beneficiary of your estate after you die.

Careful IHT planning means passing as much of the proceeds of an estate as possible to chosen beneficiaries rather than to HMRC. There are several perfectly legal ways of doing this. And with the Government changing course on IHT policy, the need for such planning has come into much sharper focus.

Before the last election, the Conservatives had proposed a dramatic rise in the IHT threshold – the amount up to which an estate will have no IHT to pay. Now, the Coalition Government has changed tack with Chancellor George Osborne announcing that the nil rate band of IHT of £325,000 per person (or up to £650,000 per couple, where the full allowance has been passed to the surviving spouse) will be frozen until 2019.

This means more estates will be sucked into the 40% tax rate. IHT is a tax on assets, and with the increase in property prices over the last decade, this tax is now a problem increasing numbers of people have to consider.

And it is not just the family home that is taken into account. Assets such as Individual Savings Accounts (ISAs), life assurance plans not in trust and even old family heirlooms might have to be sold in order to meet tax liabilities after death. The impact on a relatively modest estate can be both dramatic and upsetting.

The average amount of IHT raised each year is £3.0bn*.

It is quite straightforward for people to ease their potential exposure to IHT.  By not preparing, however, they are effectively leaving their children and grandchildren to sit down one day and write a very large cheque to HMRC.

Here are some of the simple options available to help lessen IHT:

  • Make a Will** and ensure that it is written and planned correctly to save the maximum amount of tax
  • If you die without making one, you will have no control over how your assets are distributed
  • Transfer assets through the prudent use of lifetime gifts
  • Create a tax-efficient fund to enable the beneficiaries of an estate to meet the tax liability without disturbing the family wealth

You should be aware that the levels and bases of taxation and reliefs from taxation can change at any time and are generally dependent on individual circumstances.

Trusts are not regulated by the Financial Services Authority.

*HMRC – July 2012
** Wills involve the referral to a service which is separate and distinct to those offered by St. James’s Place.

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Pension Contribution Opportunities

Posted on May 3, 2013 by Janine Edwards

Pension Contribution Opportunities

Since the start of the new tax year I have been advising clients in the position to do so, to maximise their contributions to their pensions whilst they have the opportunity to do so.

Pension Annual Allowance

On 6 April 2011 the Annual Allowance (i.e. the maximum relievable personal contribution which can be made to a pension in any tax year) was reduced from £255,000 to £50,000, and from 6 April 2014 it will reduce further to £40,000.

Pensions ‘Carry Forward’ Facility

The “Carry Forward” facility was introduced on 6 April 2011 and enables individuals to carry forward any unused Annual Allowance from the previous three pension input periods, and offset this against contributions above the Annual Allowance in the current pension input period.

For further information on this valuable facility, please do contact me – in the current climate it seems tragic to waste such a valuable opportunity to save efficiently for your retirement.

The value of a pension will be directly linked to the funds selected and can fall as well as rise. You may get back less than the amount invested. The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

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Ensure your pension pot lasts as long as you do

Posted on April 10, 2013 by Janine Edwards

Once in a blue moon your local newspaper salutes a local resident who has reached the grand-old age of 100. Yet by all accounts, local papers may soon have to devote an entire weekly page to people living to 100 because we are living much longer.

It will lighten many moods to learn that the total number of centenarians is projected to rise from 14,500 in 2012 to 110,000 in 2035. It’s estimated that 13% of males and 18.2% females aged 50 in 2012 will reach their landmark 100 year birthday. And of your new born children, around one-third of babies born in 2012 in the United Kingdom are expected to survive to celebrate their 100th birthday (Source: Office for National Statistics, March 2012).

Of course, people living longer will have an impact on our pensions and long term care systems and, perhaps more importantly, it will greatly affect your own plans.

The pensions landscape

The pensions landscape has changed and people need to make the most of their savings so they can sit back and enjoy their retirement. For the vast majority of people, a single pension provides the bedrock for their income. Now today it is more than that.

In the past, as people grew older their investment portfolios became risk averse. They reduced their exposure to equities and generally avoided investments that put their capital at risk. But times are changing and this may not be the most suitable strategy to adopt.

People are living longer, with many likely to work past the formal retirement age, which itself is set to increase to 67 from 65 between 2034 and 2036. Working longer could mean that turning on the income tap may not necessarily be given such a high priority for many in their early-50s, as there may still be a need to accrue capital.

In any case, if you’re still working, whether full or part time, it may not be necessary to generate maximum income from your investments. If you take income unnecessarily, it could have a detrimental effect.

What’s more, many people will have an assortment of different pension schemes having worked for different employers, while many will have also made the most of their Pep, Tessa and Isa tax allowances of the years. They need to turn this non-pension money into an income stream that might be needed for another 30 to 40 years.

There are also tax implications to consider, be it capital gains, inheritance tax or income tax liabilities. Many people assume that once they have hung up their working boots they will never have to pay tax again. This isn’t the case – tax still has to be paid. Investors need to ensure they are using all their available tax-free allowances and ensuring they are paying as little tax as they need. After all you work hard, paying your taxes all your life, you don’t want to be needlessly paying HMRC after you have retired.

The traditional ways of planning for retirement are past their sell-by date. How lavish, comfortable or tough your retirement years will be is going to be down to you. You simply cannot afford to rely on the state or your employer any more – generous final salary schemes are fast disappearing.

That’s why it is important to get planning early. There is nothing stopping you from getting a clear view of your current position by establishing what your likely state pension entitlement would be. It is also worth contacting the pension trustees of your current and previous employers, who will be able to provide pension forecasts, as will the companies managing any private pension plans.

Examine whether you are on track or whether you may have to consider making extra contributions. Many companies that have replaced final salary schemes with defined contribution pension schemes contribute far less now, putting the onus on the employee to boost their pension pot.

It is great to think that we have a higher chance of living longer, but it means that we have to make our money work harder while we can – and the sooner you start thinking about your pension the better.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested. The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

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Tax Year-End Planning

Posted on March 26, 2013 by Janine Edwards

The end of the tax year is looming. Whilst planning for our financial futures should be a year-round activity, 5 April presents an immoveable deadline for actions which really are ‘use it or lose it’ opportunities. In these austere times, chances to maximise the potential return on our money and minimise our tax bills should not be overlooked.

For many, failure to act will have very simple consequences: a poorer retirement or paying too much tax. This note highlights the key tax-year-end planning opportunities to consider in discussion with your St. James’s Place Partner.

Have you fully utilised your ISA allowance?
Your annual ISA allowance of £11,280 is a valuable tax-efficient opportunity to provide income or build capital for the future. You can invest the full allowance in a Stocks & Shares ISA, but the savings limit is £5,640 in a Cash ISA.

The average Cash ISA rate is currently just 0.65% (source: Bank of England, January 2013) and only two Cash ISA accounts currently pay a rate that beats inflation (source: Moneyfacts, January 2013). The reality is that the tax benefits provided by ISAs are best maximised by investing for the long term in assets capable of achieving capital growth and rising income.

An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.

Have you maximised your pension annual allowance?
The average pension savings pot in the UK will last just 7 years, based on what most people believe they need as a retirement income (source: HSBC, February 2013). Clearly, many people need to do more to plan for their retirement and pensions remain one of the most effective ways to provide for your future. The annual allowance of £50,000 is the maximum amount of pension contribution in a year on which an individual can receive tax relief. A £50,000 pension contribution for a higher rate taxpayer saves £20,000 in Income Tax.

Are you able to make pension contributions of over £50,000 this year?
It may be possible to use ‘carry forward’ to make larger contributions now. Those using their allowance for 2012/13 have until 5 April to carry forward unused allowance from 2009/10. If you have used up these allowances yet want to maximise contributions to secure 50% tax relief you should consider accessing the £50,000 allowance for the 2013/14 pension input period. This could be particularly helpful for individuals or companies who had an especially good year.

Are you an additional rate taxpayer?
Although the reduction in the additional rate of Income Tax that applies to income in excess of £150,000 from 50% to 45% is welcome, it also means that from 6 April 2013 there is a corresponding reduction in tax relief to 45%.

The 5% reduction in tax relief has the effect of increasing the cost of pension contributions by 10%. A gross contribution of £20,000 currently costs an additional rate taxpayer £10,000 after tax relief, but from 6 April 2013 the net cost will increase to £11,000 – 10% more.

You can save 10% on pension contributions by taking action before 5 April.

Have you received a bonus in this tax year?
Sacrificing a bonus in this tax year in favour of an employer pension contribution could mean employer and employee National Insurance savings; and a reduction in taxable income, potentially recovering personal allowance or avoiding tax on Child Benefit.

Have you used your annual Inheritance Tax gifting exemption for this (and last) tax year?

The annual Inheritance Tax (IHT) gifting exemption is £3,000. Unused exemptions can be carried forward for one year but after that will be lost. So, within married couples or civil partnerships, £12,000 could potentially be given away, free of IHT.

Are there children or grandchildren for whom you could invest in a Junior
ISA or a pension?
As a potential use of the annual gifting exemption, Junior ISAs provide a very tax-efficient savings vehicle for parents, family members and friends to invest up to £3,600 in this tax year on behalf of a child. Similarly, you could consider setting up a pension plan for a child or grandchild and making a net payment of £2,880 (£3,600 after basic rate Income Tax relief).

Have you used your annual Capital Gains Tax exemption?
The annual exemption from Capital Gains Tax (CGT) is £10,600 per individual. For those above the basic rate limit, paying tax at 28%, this exemption is worth £2,968 (£5,396 per couple). You should consider crystallising gains up to this limit.

Have you considered Venture Capital Trusts (VCT) or Enterprise Investment Schemes (EIS) to reduce your Income Tax liability or defer Capital Gains Tax?
Investing now into a VCT will provide Income Tax relief at 30% that can be set against an Income Tax liability for 2012/13. Similarly, an Enterprise Investment Scheme (EIS) will provide Income Tax relief at 30% that can be set against Income Tax of up to £1 million, with no limit for Capital Gains Tax deferral relief or business property relief. The allowance can be backdated for 1 year. This will be the last chance to claim the 2011/12 allowance.

All VCT and EIS must invest in unquoted UK smaller companies and such companies, by their nature, involve a higher degree of risk than investment in larger companies. As such there is a risk that any of the investments may not perform as hoped and in some circumstances may fail completely. Also, due to the nature of underlying assets, VCT and EIS are fairly illiquid and such investors must be aware they may have difficulty, or be unable to realise their shares at levels close to that which reflect the value of the underlying assets. Therefore, this type of investment should not be considered unless you are willing to accept a higher level of risk.

Do you run your own company with a tax year-end of 31 March?
With around 40% of limited companies having their corporate tax year-end on 31 March 2013, there are some excellent opportunities to reduce the liability to Corporation Tax by making a significant pension contribution now.

Unlike the position for personal contributions, contributions made by employers are not limited to 100% of relevant UK earnings. In addition, carry forward can be used for employer contributions as well as personal contributions.

Have you considered pension contributions to reduce the Child Benefit
tax charge?
From January this year, a parent with an income over £50,000 will suffer a tax charge on his/her Child Benefit. HMRC estimates that 1.2m families will be affected by these new rules. The benefit will be totally removed for those whose income exceeds £60,000.

Could you make sufficient pension contributions to reduce your ‘adjusted net income’ below £50,000 and reclaim Child Benefit?

Don’t leave it too late to take action. Please contact your St. James’s Place Partner for more information.

 

The levels and bases of taxation and reliefs from taxation can change at any time and are generally dependant on individual circumstances. The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

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Awards

Posted on March 26, 2013 by Janine Edwards

Last week I met with the three finalists for the ‘best customer services award’ in the Leicester Business Awards. I am sponsoring this particular award this year. The winner will be announced on Thursday evening.

St. James’s Place Wealth Management are very proud to have won many awards over the years, and in 2012 won no less than five awards:

2012

  • Britain’s Most Admired Companies Award – Top in sector
  • The Personal Finance Awards Best Financial Adviser
  • FT/Investors Chronicle Wealth Manager of the Year
  • City of London Wealth Management Company of the Year
  • UK Stock Market Awards Winner
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Happy New Year

Posted on January 10, 2013 by Janine Edwards

Happy New Year everyone.

This week is of course everybody’s first full week back to normal after the festive period. Many of my clients are looking to start the year by reviewing their existing investments, pensions and protection policies as well as revisiting their overall goals and estate planning.  With the New Year upon us it is an ideal opportunitiy for you to review any of your existing financial planning arrangements, with your current wealth manager to ensure you are on track to meet your financial goals.

I do hope that 2013 is a very Happy, Healthy and Successful one for you and yours.

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Pensions and auto-enrolment

Posted on December 12, 2012 by Janine Edwards

This week I am seeing several employees of clients about their Pensions and about Auto Enrolment.

I have spoken about auto enrolment before and the fact that any Employer, even with one Employee, can be caught by these new auto enrolment rules and should find out their position as soon as possible.

As an employer you need to understand what a Qualifying Scheme (QS) is, what the auto enrolment process will be, how it will work, what duties you must comply with to support the new QS and, perhaps most importantly, when you need to comply with the new rules.

Preparation and planning is key for all businesses in order for them to understand and determine the impact auto enrolment it will have on them.

What has been interesting is the number of people I have seen that also have old paid up plans from previous employments or old Private Pensions. I am also offering to review these for them. Sometimes they can be poor performers or poorly managed and sometimes clients just don’t know what exactly they are or what they will receive in retirement.

The advice I’ve been giving to employees is that it is important to remember that your life in retirement is going to be very different from your working one, both personally and financially. Outgoings are likely to be lower, but you may want to spend more money on leisure activities. Retirement is like a holiday – but every one of your retirement years has to be paid for. That is why it is essential to seek professional advice and start planning for retirement now, whatever your age, to provide an income that is going to see you through potentially many more years than those enjoyed by previous generations

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Fund Manager Interviews

Posted on October 10, 2012 by Janine Edwards

Last week I attended a St. James’s Place Conference, where I had the opportunity to meet with some of our Fund Managers and hear them talk about the economy, the outlook and their views on markets, Europe and the UK. Many of the fund managers I met have been interviewed on St. James’s Place TV, available for all clients to watch. There are some very interesting points in the fund manager interviews and I would encourage everyone to take the time to watch. In this period of negative feeling in the Press it is great to hear some more balanced opinions and comments.

Please visit http://www1.sjp.co.uk/press-and-media/sjp-tv.aspx then click on ‘Investment Interviews’ to view these fund manager videos.

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