Pensions unshackled

The approaching changes to pension legislation will create both opportunity and possible confusion.

This year, the Chancellor has proposed some surprising, but very welcome, changes to the rules on how pension benefits can be accessed. The changes being lined up have been largely well-received, but those eligible to take advantage of the new rules may be confused by the number of choices available.

There are two big changes. The first one relates to the way people can take benefits at retirement and means that people will be able to take the whole of their fund as one lump sum if they choose. The other change is to do with the way pension benefits are taxed on death. The two of these together have acted as a game changer in terms of overcoming some major reservations that have previously discouraged people from investing for their retirement through a pension rather than something else.

In the first of two articles, Andrew Stokes, Head of Pensions at St. James’s Place, explains how the changes will affect the way in which pension benefits can be taken.

What do the changes mean for an individual who, let’s say, has a pension fund of £100,000?

The changes enable everybody to take out whatever they like from their pension in one chunk. Whether or not they should is a different matter. At the moment people can do this if their fund is very small – less than £30,000 – or if their fund is very large and they have a guaranteed pension in payment of £12,000 a year. The changes mean that people with a fund size of, say, £100,000 now have the same flexibility. One thing we have to remember is that all of these flexibilities don’t remove the need for people to be responsible. It’s why getting advice is more important than ever.

What are the tax implications if someone took the whole £100,000 in one year?

Let’s assume the individual has no other income to begin with and they’re going to take the £100,000 as a one-off lump sum (known as an ‘uncrystallised funds pension lump sum’). The first £25,000 (i.e. 25% of the fund) is paid as a tax-free cash amount. The remaining £75,000 is taxed as income. Using the rates that apply from April 2015 this means:

Tax rate
First £10,500 0%
Next £31,785 20%
Remaining £32,715 40%

After deducting the tax, the individual receives £80,557.

And that’s for them to live off for the rest of their life?

Precisely. Average life expectancy for a 65-year-old male is 83, and the most common age of death for men is 86 (source: ONS – November 2014), so if they’re taking their benefits in their mid-60s they might have to make that money last 20 years or more.

Do these changes signal the death of annuities?

No, annuities still very much have a role to play. They remain the only way to guarantee a pension income for life. For an awful lot of people that certainty is hugely important – more important perhaps than the flexibility that will be offered under the new rules. I often talk about an annuity essentially being your salary, the income you can rely on, and drawdown being a bonus. So no, I don’t see it as the death of annuities, but I do see them changing.

The government has said it wants everybody who’s a member of a defined contribution pension scheme to get free guidance. What do you think the impact of that is going to be?

Guidance is fine in that it will help people understand what they can do, which is a useful first step. But what most will want to know is what they should do, which is what advice is about. It will mean that those people who want to do things for themselves – who are happy to get information – will be facilitated and will be able to make those decisions. But that’s not the reality for most people. I think most people want advice.

Do you think the need for retirement planning has changed?

No, quite simply because the average size of a pension pot is still very small. The Association of British Insurers reported that 60% of people who retired in 2013 had a pension fund of less than £30,000; 30% had less than £10,000. With numbers as small as that, changes in the way you take your benefits won’t really make a big difference. But what the changes should do is prompt action by people who want to invest for their retirement. That need hasn’t changed.

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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Early bird – The secret of successful saving and investing for children is to start early

The secret of successful saving and investing for children is to start early.

The cost of raising children has often been a pressure point for family finances, and the low wage growth, government austerity and ultra-low interest rates of recent years have made many budgets even tighter. The Centre for Economic and Business Research recently quantified the cost of bringing up a child from birth to the age of 21 as in excess of £227,000 compared with more than £140,000 when the research started in 2003. Clearly, bringing up a family has become more of an expense over the last decade, as has the cost of living for anyone making their early steps in adult life.

Faced with these rising expenses and dwindling returns from savings, many parents may well baulk at or be unable to fund the commitment of building a nest egg for their offspring. Some may wish to encourage their children to learn good savings habits for adult life. (Commendably, the Church of England last week unveiled an innovative scheme to educate children to manage money through the creation of credit union-run savings clubs at primary schools.) But, many want to help their children directly by saving on their behalf…

If you would like to read the rest of this article, please visit my website.

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The quest for wealth

Five principles can help keep you on track to long-term financial security.

The path to long-term financial security is strewn with uncertainty and complexity, but five principles can help keep you on track.

There was a time when saving and investing for the future was considered a relatively uncomplicated affair that felt many steps removed from the intricacies of finance and global economics. Progress in recent decades – from the sophistication of everyday technology to the ready availability of round-the-clock services – has simplified many parts of our lives. But it has brought more complexity, particularly in matters of personal finance.

Research consistently shows that many people find the decisions they need to make on saving and investing difficult, despite the profusion of information available. The paradox is that this confusion has deepened as financial services have modernised. The real danger is that people disengage from the process of how to create the wealth they need for their future.

While many things have changed, there are a number of constant principles on which investors should base their strategy to help fulfil their financial aspirations. The key rules that investors should follow in their quest for wealth are simply: invest for the longer term; make sure you have sufficient money on deposit for your short-term needs; guard against inflation; diversify your investments; and find the very best managers.

Old habits

Britain’s savers are enduring the lowest returns on cash for centuries; but many remain wary of stock markets, despite their recent recovery. Instead, many continue to accumulate cash; perhaps, overwhelmed by choice, it is easier to cling to old habits. But disappointing rates are expected to endure and the eventual rise will be slow and low. In such an interest rate environment, those who wish to achieve meaningful returns will need to reassess their savings on deposit.

However, cash still plays a vital role in an investment strategy, and enough should be kept on deposit. Chris Ralph, Chief Investment Officer of St. James’s Place, says: “If you maintain adequate liquidity, you should avoid the need to sell long-term investments at a bad time,” says Ralph. “As a guide, you should have enough to be able to sleep at night, and cover both expected needs and unforeseen emergencies.”

Loyalty’s return

Investors who hold enough cash can ignore passing market sentiment; while those with short-term horizons are more likely to be disappointed. Over the long term, investment in real assets, such as equities, provides the best chance of inflation-beating returns. When the ‘dot-com bubble’ burst in March 2000, global equities tumbled for three years; share prices rose until the 2008 financial crisis took markets to a low in March 2009. Since then, shares have climbed again, with ups and downs along the way, to near-record levels.

Ralph comments: “Investors cannot consistently and successfully time the markets, but those who hold assets for extended periods can reap the cumulative benefit of time’s smoothing effect on market fluctuations and unforeseen events.” No one knows what will happen to share prices in the short term, but those who invest over a longer period – say five years or more – are likely to be better off than they are today.

Steady attrition

One persistent obstacle that an individual will need to overcome on the road to wealth creation is inflation. At a level stubbornly below the Bank of England’s 2% target, the inflation threat may feel distant. But even modest levels of inflation can erode cash in a low interest rate environment. And all of us at some point in our lives are likely to live through at least one period of significant inflation.

The effects of inflation can be as severe as a sharp fall in markets. However, whereas market dips are usually followed by recoveries, inflation permanently reduces the value of your savings. While you should hold money on deposit for short-term needs, there is significant risk in trying to play safe by putting all your money into cash-like investments. When investing for the long term, you should keep an eye on inflation.

Variety’s strength

The old adage that investors should not put all their eggs in one basket still rings true. As well as the appropriate level of cash, it is important to diversify as widely as possible across different investments that can protect against inflation. “The trick is to ensure that the selection of assets won’t react in the same way to market events or economic changes,” says Ralph. “Just as investments will not rise at the same pace or time, you should ensure that they do not fall at the same time either.”

Shares, bonds and commercial property are examples of assets that can provide growth. Investing in funds rather than individual investments also ensures that money is more widely spread. And by investing in a selection of funds that diversify across different shares, sectors and regions, as well as asset classes, investors will be better placed to withstand shifts in economic and financial conditions and achieve above-inflation returns over the long term.

Pathfinders

Different managers have different styles and assets; but many invest in the same way, so variety is no guarantee of diversity. There are a large number of fund managers to select from; some are excellent, some are very good, and some are not. “It is critical to have an investment approach that gives the best chance for your money to be with good managers,” advises Ralph. “Understanding how your adviser researches, selects and monitors the fund managers should be high on your list of priorities.”

There are no paths for investors that are risk-free and there probably never were. Making an informed and confident choice is not an easy task. The key to building long-term wealth is a realistic assessment of needs and goals that reflects a level of risk that feels comfortable. Individuals are often reticent about reviewing their approach to wealth creation; but advice is the key for a planned, long-term investment strategy and for peace of mind.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested. Equities do not provide the security of capital associated with a deposit account with a bank or building society.

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Financial protection for you and your family

Sadly, over the last month,  I have had to deal with the loss of two of my clients.  My Blog this week focuses on the importance of ensuring that your protection needs are covered for and also that of your family.

Life and health insurance protection is the underpin of most good financial planning. These types of insurance can ensure that, if the worst should happen, the right amount of money will reach the right hands at the right time.

Life insurance puts money in the hands of those who need it when a person dies. There are many reasons why this money might be needed, including paying off a mortgage (or other loan) if a borrower dies, protecting a family against the early death of a spouse, partner or parent (particularly important for people with financial responsibility for children), paying inheritance tax (IHT) or protecting a business against the financial consequences of the loss of its owner or a key employee.

The life assurance needed to cover a loan is relatively simple to assess. You need enough insurance for the amount of the loan and the cover should last for the time that the loan is outstanding. If you pay off some of the loan, you should be able to reduce the amount of cover earmarked for this purpose. But most people also need insurance cover to replace their income if they were to die. The same principles apply but the calculations are a little more complicated. For example, you decide you need life assurance cover to provide the school fees for a child who is now five and will probably be in school until she is 18. You should therefore first quantify the total amount of school fees that you would have to pay over the period and take out cover of this amount for the next 13 years.

The approach to insuring other needs is roughly the same. For example, you could calculate how much your family would need to cover the general household and other expenses and how long they would need the funds.

You can arrange for life cover to pay out a series of annual amounts over a set period, which is a simple approach to replacing an annual income. But most life cover pays out a lump sum. If you want a lump sum to provide £1,000 a year for 10 years, you would need life cover of about £10,000; if the income were needed for 20 years, you may need an amount slightly less than £20,000 as the invested sum may produce some growth or income.

It’s sometimes hard to work out how much life cover you would require overall for your family, because of the difficulties of assessing your family’s needs after one or both parents have died. Current levels of expenditure provide a good starting point for making these estimates, and then you would have to consider the other costs that might be involved, like childcare. It can be especially difficult to assess the potential financial impact of the death of a parent who spends most of their time looking after children and the household. A good starting point is to estimate the costs of buying in these services.

The best way to ensure that the proceeds of a life policy are paid to the people you intend to benefit is usually to arrange for the policy to be in a trust.* The most appropriate type of trust is generally one that gives the trustees discretion or flexibility about how they distribute the benefits, but it’s a good idea to get advice about this. If you die, the policy proceeds will be paid to the trustees and then the beneficiaries – not into your estate. This arrangement should save inheritance tax and speed up the payment to the beneficiaries.

By contrast, the purpose of health insurance is to provide some money if you fall seriously ill or have an accident, potentially affecting you for many years.  In this case, you would probably stop earning although your financial needs might well be greater than ever. The state benefits you would receive would be relatively low and unlikely to provide sufficient income to meet your needs, especially if you have substantial rent or mortgage payments to make. You might also need capital, for example to make adaptations to your home or to pay off loans or other liabilities.

Virtually everyone who is working needs some kind of health insurance to provide financial protection if their earnings are affected by serious illness or disability. Even if you have no financial dependants, there’s a very strong chance that you will need health insurance.

Income protection – sometimes called permanent health insurance – pays a weekly or monthly income if you cannot work because of illness or disability. You may think you don’t need to worry about this kind of cover, but the fact is that, in the UK, there are over 11 million people with a limiting long term illness, impairment or disability and 1 in 7 working age adults suffer from a disability (Taxbriefs, May 2014)..

Some employers provide income protection insurance, but a very large number do not.  It’s worth specifically checking the position with your employer. Income protection can appear relatively expensive, but can be very valuable if you fall seriously ill.

It is normally advisable for income protection insurance to be inflation-protected in two main ways. You should be able to increase the level of cover from time to time regardless of your state of health, or the cover should increase automatically in line with inflation or some fixed percentage. But it’s also important to make sure that the benefit payments themselves keep pace with inflation otherwise, if the benefit payments never increased after you fell ill and could not work, their real value would be gradually eroded over the years.

Critical illness insurance pays a lump sum if you are diagnosed as suffering from a specified illness. The advantage of critical illness insurance is the benefit is paid shortly after diagnosis of the illness, without any significant delay – unlike the waiting period of income protection. It’s also in the form of a lump sum that can allow you to make rapid adjustments to your lifestyle and pay off loans.

People often take out critical illness insurance to cover a mortgage or other loan. Because you are more likely to have a critical illness than die, it’s more expensive than life insurance, but this reflects the likelihood of needing to claim on the policy.

The final area to consider is medical insurance. These are policies that help you to afford the cost of private medical treatment.

Private medical insurance (PMI) pays for private health treatment, whereas health cash plans pay for everyday health costs, typically 75% – 100% of costs for dentistry, optical and consultation costs, plus a small sum for each day spent in hospital.

Insurers are constantly looking at new ways to meet people’s needs, such as through life insurance that includes critical illness and/or income protection insurance, which may be cheaper. It’s important to look at your options and seek the assistance of a trusted adviser.

*Trusts are not regulated by the Financial Conduct Authority.

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The importance of business succession planning

The importance of business succession planning

Over the past few weeks a number of my meetings have been with business owners who have expressed  concern about the importance of succession planning. I do hope you find the article below of interest.

What happens to a business if its owner or co-owner dies or falls seriously ill? Much will depend on the type of business – sole trader, partnership or limited company – but unless there has been some advance planning, the chances are that there will be disruption, arguments and the strong possibility that all or part of the business will end up in the wrong hands.

So if you’re a business owner, business succession planning and insurance is important. It’s quite simply the process of planning for what you want to happen if you (or your co-owner, if you have one) were to die or fall seriously ill.

If you would like further information in relation to the importance of business succession planning , please visit my website.

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How retirement will look in 2015

As you may be aware there are several changes planned to Pension Legislation over the forthcoming months which are summarised below.

Should you have any queries, please do not hesitate to contact me on 01676 530606.

On 21 July 2014, the government released their response to the ‘Freedom and Choice in Pensions’ consultation, effectively giving the go-ahead for the sweeping pension changes that were proposed as part of the 2014 Budget in March. These changes could radically alter your plans for retirement.

From April next year, we will see more freedom in ways people can take their pension benefits when they reach 55. Few would argue that choice and flexibility are good things, but what do the changes mean if you are planning your retirement? Here we give you five areas for consideration.

More freedom in how you draw your income

In theory, the flexibility will allow you to treat your pension fund in the same way as any other investment: you will be able to take withdrawals whenever you want.

From April 2015, if you are a member of a defined contribution pension scheme and aged 55 or over, you will be able to draw money from it as you see fit. You can receive a tax free cash sum of up to 25% of the amount you take, then you will have the freedom to access some or all of the remaining fund as income, taxable at your marginal rate of income tax. So if you want to access all of the money from your pension, you will be able to take it as a lump sum.

As tempting as it sounds to get hold of your money when you want it, in practice, the tax treatment may discourage you from extracting large sums in a single year. So unless you really need the extra income, you may want to withdraw your pension savings at a slower rate that is more tax-efficient.

Although the new pension freedoms mean you will no longer be compelled to buy an annuity, if you are looking to secure a guaranteed income for the rest of your life, an annuity will still be an appropriate option for you, especially as it’s impossible to tell how long you will live.

Changes to how much you can contribute

From April 2015, if you are drawing an income from your pension (after taking tax free cash) and wish to make contributions defined contribution schemes, you can continue to do so, but the amount on which you can receive tax relief (the ‘Annual Allowance’) will be cut from £40,000 to £10,000 a year. This could be via employer or personal contributions.

The £10,000 Annual Allowance will be introduced for those already in ‘flexible drawdown’. This provides a potential advantage as the existing rules prohibit tax-relievable contributions if you are already taking income from Flexible Drawdown.

In some circumstances the Annual Allowance will not apply, but the rules can be complex. For example, you will be able to take income from a maximum of three smaller personal pension pots, or an unlimited number of smaller occupational pension pots (in both cases, worth less than £10,000), without being subject to the Annual Allowance restriction. Similarly, if you enter Capped Drawdown before April 2015 and take income within your income limit after this date, the Annual Allowance will remain at £40,000 a year in these cases.

Transferring defined benefit schemes

Transfers from private sector defined benefit to defined contribution schemes will continue to be allowed. The government is also consulting further on allowing full or partial withdrawals direct from private sector defined benefit schemes, to remove the need to transfer out to a defined contribution scheme before taking benefits. If you are a member of a defined benefit scheme that is already in payment and you wish to transfer out, this will continue to be prohibited.

Transfers from unfunded public service defined benefit schemes will not be allowed. Transfers from funded public service defined benefit to defined contribution schemes will be permitted.

Taxation on death to be reviewed

The tax position on death under the current rules is that lump sum payments from any money remaining in drawdown is subject to a death tax charge of 55%. The same tax rate also applies to any remaining pension fund not being used to provide benefits, if the death occurs from age 75 onwards. The government has said 55% may be too high and is now consulting on this. It intends to announce its decision in the Autumn Statement.

Guidance or advice?

From April 2015, the government will introduce a new right to impartial financial guidance at the point of retirement, for anyone with a defined contribution pension scheme. The guidance will be delivered through a range of organisations, including the Pensions Advisory Service and the Money Advice Service. But it’s important to understand that what will be on offer is just guidance – not advice – so while guidance will explain the impact of these new rules and let you know what you could do, it won’t tell you what you should do. Advice, therefore, remains essential.

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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Budget 2014 – The Pensions Revolution

Budget 2014 – The Pensions Revolution

Following the announcement in the budget of the possible changes in Pension legislation from April next year, and the very recent confirmation of how the new rules will look in practice, I thought it would be useful to summarise the changes

The 2014 Budget proposals have been described by some retirement planning experts as a ‘pensions revolution’. The new reforms come at a time when the world of pensions is already undergoing other significant changes.

The annual allowance – the maximum tax-efficient limit for contributions to all your pension arrangements during a tax year – was reduced again for tax year 2014/15, this time to just £40,000 – compared with the £255,000 it was as recently as 2010/11.

There was also another cut in the lifetime allowance. This effectively sets the maximum tax-efficient limit for the overall value of your pension benefits. The lifetime allowance is now £1.25m against a peak of £1.8m.

Automatic enrolment of employees and other workers into pension schemes is gradually progressing through the labour force, having started in October 2012 for the largest employers.

The current structure of the state pension – basic state pension plus, for employees, the State Second Pension (S2P) – will be replaced by a new single-tier state pension, from April 2016. This will cover both the employed and the self-employed, and it will be worth a maximum of about £150 a week in today’s terms, before any transitional increments apply.

In the background, the earliest age at which people will be allowed to start drawing their state pension is set to rise: it will be 66 for both men and women by October 2020, with another year added between April 2026 and April 2028.

The latest proposals announced in the 2014 Budget are designed to change the retirement landscape further by breaking the link between pensions and annuities.

The proposals focus on money purchase pension arrangements, sometimes called defined contribution pensions. These types of pension schemes allow you to build up a fund of money that you use to provide a retirement income and a tax-free lump sum.

Traditionally, most people have used their fund to buy an annuity to provide a regular retirement income, or accessed their fund through a capped drawdown plan.

But from 6 April 2015, all members of a defined contribution arrangement will be able to draw money as they see fit after the age of 55, subject to the rules of their scheme also permitting this. The tax-free lump sum limit of up to 25% of the fund will remain, with the rest of the fund taxable as income.

In theory, the flexibility will allow a pension fund to be treated in the same way as any other investment: you will be able to take withdrawals whenever you want. However, in practice, the tax treatment will discourage the extraction of large sums in a single year. So, unless you really need the extra income, you may want to limit any increase to keep you in your current tax band.

The tax position on death under the current rules is that any money remaining in a pension fund being used for drawdown is subject to a flat tax charge of 55%. The same tax rate also applies to any fund that’s not being used for drawdown if the death occurs from age 75 onwards. Normally there is no inheritance tax due, so with the right trust structure, £1,000 of pension fund can become £450 of cash for your chosen beneficiaries.

The Budget statement said that “…the government believes that a flat 55% charge will be too high in many cases in the future” and promised to “engage with stakeholders” in reviewing the rule. Whether this will mean a reduced tax rate for all, a two-tier system of pension and inheritance tax, or something else remains to be seen.

The standard earliest age at which you can draw pension benefits is currently 55. A consultation document published alongside the Budget proposed that this minimum age should increase in line with the state pension age (SPA), with the first rise being to 57 in 2028, coinciding with SPA reaching 67. However, the document also asked for views on whether a ten-year gap between the minimum pension age and SPA should be reduced to five years, “to allow more time for people to accumulate pension wealth before they reach retirement.”

And at present there is no tax relief on your personal contributions to pensions that you make once you have reached your 75th birthday. The government now wants to consult on whether to revise or abolish this ceiling.

The complexity of the new options has prompted the government to introduce a new right from April 2015 to impartial financial guidance at the point of retirement for anyone with a defined contribution pension. How this will operate in practice is now the subject of discussion between the Treasury, the Financial Conduct Authority and pension providers. One point is already clear: what will be on offer is just guidance, not advice.

There were a range of other interim measures introduced earlier in 2014 to help smooth the transition to the planned changes in April 2015. At this stage the broad outline of the reforms is clear, but not all of the detail. So it’s important to seek advice from a professional who can keep you up to date with the reforms and build a complete picture of how the new retirement landscape could affect you.

If you require any assistance or have any queries on this or any other issue, please do not hesitate to contact me.

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 and are generally dependent on individual circumstance.

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Exclusive client day at The Belfry

Exclusive client day at The Belfry

The latest in Janine Edwards’ highly popular client days; the event was set in a first class environment with a friendly and social atmosphere whilst addressing the latest wealth management news from industry experts.

To start the event Janine introduced Tim Knight, Head of Investment Consultancy at St. James’s Place head office, who delivered an engaging speech around the investment market performance, before moving on to provide an outlook for the economy.

Following on from Tim, the clients were introduced to Charles Mitchell Wines. Since 1981 Charles Mitchell Wines have been sourcing the finest hand crafted wines from boutique wine growers around the world and they provided an opportunity to taste some fantastic exclusive Grand Cru Champagne and Wine.

To finish, clients were treated to dinner in the fantastic ‘Ryder Room’ at the newly refurbished Belfry Hotel.

We are delighted to provide below some client feedback regarding this event:

‘Very informative talk, good food, venue excellent, good company’ – Tony Billingham

 ‘Easy going, very informative, with current market trends and forecasts explained without being too technical’ – Peter Yates

 ‘Easy to understand, well presented and well structured’ – Harry Kershaw

 ‘The talk on the economy was most informative and enjoyable’ – Alison Ramoutar

 The next event will take place on 30 October 2014  at Lumbers, Jewellers, in Leicester.

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Inheritance Tax and care fees planning do not mix

The focus on my appointments over the past couple of weeks has been on Inheritance Tax planning and care fees. The following article from the  latest edition of the Generation Newsletter provides some useful food for thought.

Inheritance Tax and care fees planning do not mix

Or can they? Many of our clients have expressed a desire to make gifts to reduce their liability to Inheritance Tax but are worried about potential care costs. They feel they have more than enough to live on now, provided nothing happens requiring them to pay for care in the future; whether in their own home, or a residential or nursing home. If this were to happen, their expenses could rise dramatically. This understandable and realistic concern led to the development of the Later Life Planning Scheme, specifically designed to address this problem.

The scheme allows you to make a gift of capital in order to reduce the value of your estate for Inheritance Tax purposes whilst, at the same time, providing you with a predetermined ‘income’ to help meet the expenses of your care in later life, but only if required. As you are unlikely to know when a need for care will arise, it is possible to arrange for the ‘income’ that you retain to increase by a fixed percentage each year. This increase will apply from the date of the gift and will continue while the ‘income’ is in payment.

How does the arrangement work?
• The scheme combines an investment with a specifically worded discretionary trust*.
• At the outset, you select the amount of ‘income’ you wish to receive should you need care, and how you would like this ‘income’ to increase, if at all. Once selected, the ‘income’ cannot be changed and, if it becomes payable, it will be paid for the rest of your life or until earlier fund exhaustion.
• We suggest that no more than the current limit of the nil-rate band (£325,000) is invested, assuming you have not used any of your Inheritance Tax nil-rate band elsewhere in the previous seven years.
• The original amount invested will fall outside of your estate if you survive for seven years from the date of the gift. It is possible, in limited circumstances, that tax at a maximum rate of 6% may be payable every ten years and/or
when capital payments are made from the trust.
• On your death, the investment remains in the trust and is held for a selected beneficiary or beneficiaries.
• While alive, you retain complete freedom to change the beneficiary/ies, the amounts they receive and when they benefit.
• After your death, your chosen trustees can decide whether the trust fund should be distributed to your selected beneficiary/ies or retained within the trust for their future benefit. You can give your trustees guidance via a letter of wishes.

In summary, investing in this type of arrangement would mean:

• any growth in the investment is outside your estate for Inheritance Tax purposes, and
• you can have peace of mind that, should you need additional income to meet care costs, you are able to access it without losing any of the valuable Inheritance Tax benefits that may have accrued.
This plan will not be suitable for everybody and it is important to take advice from your St. James’s Place Partner if this is of interest to you.

For more information about Inheritance tax, please visit my website.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You (or your beneficiaries) 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.

*Trusts are not regulated by the Financial Conduct Authority.

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Funding residential or nursing care fees

Funding residential or nursing care fees

Funding care fees, fully or even partially, can be an expensive business. Understanding, therefore, what the state provides plus being clear about costs and affordability
is essential. This article seeks to outline information which any self-funders
should know.

About the 12-week property disregard

Where, excluding your property, your capital is below the threshold – in England and Northern Ireland, £23,250; in Wales, £24,000; and in Scotland, £26,000 (2014/15) – and your income is insufficient to meet the care fees, the local authority can assist with the costs for the first 12 weeks of permanent care. Any financial help beyond that period, however, will be a loan against the value of your property and recovered from the eventual proceeds of its sale.

About deferred payments agreements

If social services has assessed you as needing care and your capital is below the threshold, they can lend you the funds to pay for care, to be repaid from the proceeds of your property when it is ultimately sold. There is, however, a limit to the amount they will lend you. Plus it could also adversely affect your means-tested benefit entitlements.
About Council Tax exemption Should you move into care and leave your property unoccupied, you should be entitled to a full exemption from Council Tax until it’s sold.
About Pension Credit and Severe Disability Addition If you are entitled to Attendance Allowance, then subject to your savings and income, you may be entitled to claim Pension Credit with a Severe Disability Addition, but only where your property is on the market. If it is not on the market, it will almost certainly be treated as capital and affect your entitlement to this benefit.

About Attendance Allowance

Attendance Allowance is a non-means-tested, non-taxable allowance paid at the lower rate of £54.45 per week to those needing care by day or night, and at a higher rate of £81.30 per week for those needing care both by day and night.

About Registered Nursing Care Contributions

Irrespective of whether your stay in care is temporary or permanent, if the care home provides nursing care, the NHS makes a Registered Nursing Care Contribution.
This currently amounts to weekly contributions of £110.89 in England, £120.55 in Wales, £100.00 in Northern Ireland and £75.00 (plus £166.00 for personal care) in Scotland and is paid directly to the care home.

About the National Framework for NHS Continuing Healthcare

Where your needs are primarily healthcare-related, you may be entitled to full care fees funding from your local Primary Care Trust following an assessment under the National Framework for NHS Continuing Healthcare. You can request a review of eligibility at any time.

About local authority funding if your money runs out

Once your capital reduces to the threshold, you can seek local authority assistance. If there is any possibility that you will not be able to meet the full cost of your care in the long term, arrange an assessment of your care needs to ensure they will step in to help with the funding when required.

About financial products to meet care costs

It is perhaps surprising that there exists only one dedicated financial product that has been specifically designed to meet care costs: the immediate needs annuity. This can provide a regular increasing income for as long as you need care, which should cap the cost of care from the outset. It is important, however, to seek advice and not to try to do it alone, as such annuities do not suit all circumstances.

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