Many economists that I have spoken with or listened to in meetings over the past 2 years have advocated that the solution is not only to make cuts and raise taxes.  Used in isolation, these measures will drive the UK into a double dip recession and a sustained period of low or no growth……. or worse, a depression!

David Blanchflower, a professor at Dartmouth College (USA), a Bloomberg Television contributing editor and former Bank of England Monetary Policy Committee member believes that the UK should have a ‘Growth Plan’ because the austerity measures are not working.

Before you can start planning your retirement, you need to understand how the money you’ve built up in your pension will be used to provide you with an income when you retire.

One of the options you could choose is to invest most of your pension in an annuity, which pays you a regular income throughout your retirement years.

You purchase an annuity using the lump sum from your pension or, perhaps, some savings, which provides you with a guaranteed income for the rest of your life. The size of the income you receive, however, usually depends on the size of your pension fund, your age, your gender and your health. In the UK more than £10bn is invested in annuities every year.

Annuity Quote

When you retire, your pension fund provider will inform you of your pension fund total and offer you an annuity quotation based on the size of your fund. In general, most people purchase an annuity by the time they reach age 75.

Your choice of annuity quote will depend largely on your financial circumstances, the value of your pension(s), your retirement expectations and, possibly, on your health or the health of your dependants.

You can choose whether you would prefer a level annuity or an escalating annuity. Level annuities pay you a fixed level of income each year, while an escalating annuity increases each year in line with inflation.

The income generated from an escalating annuity is usually significantly lower in the first few years than you would expect to receive from a level annuity.

Enhanced Annuity/Impaired Life Annuity

If you suffer from poor health, you may qualify for an enhanced annuity or an impaired life annuity. These usually pay a higher income amount if your health problems (such as high blood pressure, kidney problems or diabetes) could potentially reduce your lifespan. You might also be able to receive an ‘enhanced annuity’ if you are a smoker or diagnosed as obese.

Annuity Rates

You can purchase your annuity from any provider and it certainly doesn’t have to be with the company you had your pension plan with. The amount of income you receive from your annuity can vary between different insurance companies, so it’s essential to receive comparisons before making your final decision.

‘Open Market’ Option

Remember that you do not have to accept your pension fund provider’s annuity offer and could find much better value elsewhere. Pension fund providers are also now legally obliged to inform you of your rights to choose an annuity. You can decide to take the ‘open market’ option providing that you haven’t already taken any benefits from your pension or agreed an existing annuity with your pension provider.

Before you take out your annuity, you could also opt to withdraw a tax-free lump sum – up to 25 per cent of the total value of your pension – known as a Pension Commencement Lump Sum.

Finding a Growing Annuity

At times of falling annuity rates it might be tempting to hold off buying an annuity, perhaps while you wait for rates to increase. But this may not necessarily be the best course of action. If you decide to delay your purchase, rates could fall even further. In addition, every month an annuity is deferred is a month without income and this lost income may not be recouped in the future.

A pension is a long-term investment. The fund value may fluctuate and can go down as well as up. You may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

There are numerous ways of saving for retirement, including various types of pensions. The government views retirement savings as being so important that it offers generous tax benefits to encourage us to make our own pension provision. It is usually also the case that you may be able to contribute to more than one pension – for example, if appropriate, you could contribute to a Self-Invested Personal Pension (SIPP) as well as to your company pension scheme.

Pension wrapper

A SIPP is essentially a pension wrapper, capable of holding investments and providing the same tax advantages as other personal pension plans, that allows you to take a more active involvement in your retirement planning. SIPPs are not appropriate for small investment sums.

You can generally choose from a number of different investments, unlike some other traditional pension schemes that can be more restrictive, and this can give you greater choice over where your money is invested.
It may also be possible to transfer-in other pensions into your SIPP, which could allow you to consolidate and bring together your retirement savings. This may make it simpler for you to manage your investment portfolio and perhaps make regular investment reviews easier.

Tax relief

SIPP investors also receive tax relief on their contributions. So you could potentially benefit from between 20 per cent to 50 per cent tax relief depending upon your own circumstances.
Like some investments in other pensions, any returns from investments within a SIPP are free of income and capital gains tax. However, unlike dividend payments received outside a SIPP, there is no 10 per cent tax credit applied to dividend payments within a SIPP.

Tax advantages

This is a long-term savings vehicle with certain tax advantages, but you should be prepared to commit to having your money tied up until at least age 55. There are various options for taking benefits from your SIPP that you should be aware of. You can receive up to 25 per cent of the pension fund value as a tax-free lump sum (subject to certain limits); the remaining benefits can be taken gradually as an income or as additional lump sums, both of which are subject to your tax rate at that time, although this is potentially a lower tax rate than the one that you currently pay, depending on your circumstances at the time.

Compound growth

UK pension fund investments grow free of income tax and capital gains tax, which allows funds to accumulate faster than taxed alternatives and benefit considerably over the longer term due to the effects of compounding of growth. Where tax has been deducted at source on income within a pension fund – such as rents, coupons and interest – this is reclaimed by the pension provider and the tax credited back into the pension fund.

Not subject to tax declaration

Assets held within the pension fund that carry no tax at source, such as offshore investments and government gilts, are not subject to tax declaration or payments.
If you are an experienced investor, then managing your own pension investments may be for you. However, you need to be comfortable that you have the skill and experience to make your own investment decisions and have sufficient time to monitor investment performance. So you can either take control of your investments or pay someone to do it for you. If you pay, your costs will increase for this facility.

Investment Management

There are a number of considerations you need to be aware of, for example, you cannot draw on a SIPP pension before age 55 and there are usually additional costs involved when investing. You’ll also need to be mindful of the fact that you may need to spend time managing your investments. Where an investment is made in commercial property, there could be periods without any rental income and in some cases the pension fund may need to sell on the property when the market is not at its strongest. SIPPs also charge higher costs than a stakeholder and you may pay two sets of management fees for the wrapper and the underlying investments.

A pension is a long-term investment. The fund value may fluctuate and can go down as well as up. You may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

How much money do you need to save to secure the kind of pension you would like to live on when you retire? It’s a question that concerns everyone saving for their retirement.

So it’s essential to make sure your numbers add up, especially as older people have seen their cost of living rise by almost a fifth in four years, according to calculations from Saga.

Working with the Centre for Economics and Business Research, Saga estimated that the cumulative inflation rate on the RPI gauge has been 13.9 per cent for the general population over the past four years. But people aged between 65 and 74 have suffered a rise of 19.1 per cent.

Saving for your retirement can be a daunting prospect

Add to this the daunting prospect that one in three workers in the UK does not currently have a private or company pension, it means that around 15 million people will have to rely on the State pension or personal savings when they retire, according to research of 1,600 adults by Prudential.

This makes the question ‘How much money do I need to save to secure the kind of pension I would like to live on when I retire?’ even more important. Much will depend on when you plan to retire. Some people expect to have to work until they are 65, some with a good pension may aim for 60 and others plan for an early retirement during their 50s.

New-found freedom

Many of us may dream of long, easy days in retirement, enjoying our new-found freedom. But the illusion can too easily be shattered if we do not have enough income to live on. Few of us may realise just how much we could need in retirement to achieve a comfortable standard of living and how long it will have to last.

As more people are living longer today, so our pensions have to last longer during our retirement years. Realistically a pension may have to provide us with an income for over two decades, if not longer, after our salary stops.

Retirement options to consider

There are several factors to consider, such as your current age, how many years left before your retirement, how you plan on spending your retirement years and how much you can afford to save.

When you retire, the chances are that you may not need as much to live on as you do when you are working. As an estimate, a figure of between two-thirds and a half of your present income may be sufficient to maintain a good standard of living.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

The National Employment Savings Trust (NEST) is being introduced next year by the government to help people save more for their retirement.

Option to Opt Out

It will involve workers who are not already a member of a ‘Recognised Workplace Pension Scheme’. Employees will be auto-enroled by their employers and will be given the option to opt out. The employer will eventually have to pay a minimum of 3 per cent (initially this is being phased in starting from 1 per cent paid by the employer and 1 per cent by the employee) of ‘qualifying (band) earnings’.

The overall minimum contribution will eventually be 8 per cent and if the employer pays the minimum of 3 per cent the employee will have to pay 5 per cent (with 1 per cent of this coming from tax relief). HSBC found that 23 per cent of people, when told about NEST, said they didn’t like the idea of some of their wages being paid into the scheme.

New Auto-Enrolment

The new auto-enrolment obligations will impact on employers of all sizes and will be phased in between 2012 and 2016. Employers will have responsibility for paying contributions into a pension – both from them and the employees – as well as communicating with staff and ensuring the pension scheme is compliant.

The hope is that these new autoenrolment obligations will help the estimated seven million workers who are not putting money aside for their retirement to start saving for tomorrow, today.
While the NEST scheme is available to all employers, it has features that may make it suitable for some and less desirable to others.

The National Employment Savings Trust is regulated by the Pensions Regulator.

More than half of workers are not aware that they could be automatically enrolled into a new national pension scheme starting in October 2012 and many are likely to be surprised when employers start taking deductions from their pay, research from HSBC has found.

2012 is the start of new phased autoenrolment.

3% is the minimum percentage the employer will eventually have to pay.

More than half of workers are not aware that they could be automatically enrolled into a new national pension scheme starting in October 2012 and many are likely to be surprised when employers start taking deductions from their pay, research from HSBC has found.

The current low interest rates are good news for mortgage repayments but not so good if you are relying on your savings to produce an income. If you are a saver rather than a borrower, you will have noticed the interest you are receiving has fallen some way in recent years.

Emergency Fund

Savers who have seen their savings lose ground to inflation will benefit from reassessing the role of cash in their portfolios. Cash is important to meet short-term purchases and as an emergency fund – 6 to 12 months’ worth of expenditure is common. Cash deposits also work well if you’re concerned about the prospects for markets or need your money back within five years, as stock market investments are for the long term.

However, with interest rates remaining at historic lows, cash is struggling to keep pace with inflation at present, particularly after tax. Therefore it may not be wise to hold too much cash if you are able to accept that your capital and income is not guaranteed and will fluctuate in value.

Generating Income

Generating an income from your investments is often an important requirement for people who are retired or approaching retirement, those who need to supplement their salary or those with a relatively short investment timeframe.

It is important that you seek professional advice when looking to invest for income as any solution needs to take account of your existing savings and investment portfolio and your attitude to investment risk. The following all offer alternative ways of producing an income from your savings; however, they all carry more risk to your capital than leaving it on deposit.

Equity income funds – these funds invest in shares of companies that tend to pay higher dividends on a regular basis for the purpose of providing an income.

Government bonds, or gilts – because most government loan stock is considered as safe an asset as you can get, the returns are lower than corporate bonds because of the lower risk. Guaranteed income bonds – these offer a fixed income over a fixed period, usually up to five years. They often offer a capital guarantee as well, provided you hold them until maturity.

Greater Investment Flexibility

The new ISA rules also offer greater flexibility, including the option to transfer a Cash ISA to a Stocks & Shares ISA in search of a higher yield.

This transfer does not affect your annual ISA subscription but it will put your capital at risk because the value of stock market investments is not guaranteed, so you could get back less than you invest.

Interest on cash in a Cash ISA is paid gross whereas within a Stocks & Shares ISA the income is only paid gross on corporate and government bonds; on everything else, including cash, the income is paid net. You can transfer money from a Cash ISA to a Stocks & Shares ISA but not the other way around.

Social Care Costs

Keeping pace with the growing size of an ageing population…

The funding of long-term care remains one of the biggest public policy challenges facing the government. As the baby-boomer generation grows older, it is estimated that spending on social care needs to double in real terms over the next twenty years just to keep pace with the growing size of the ageing population.

In July 2010, the Commission on Funding of Care and Support was set up by the coalition to review the funding system of care and support in England. Chaired by Andrew Dilnot, it presented its findings to the government in its report ‘Fairer Care Funding’, published on 4 July 2011.

Among the recommendations in the report are:
- Individuals’ lifetime contributions towards their social care costs, which are currently potentially unlimited, should be capped. After the cap is reached, individuals would be eligible for full state support for care costs. This cap should be between £25,000 and £50,000. We consider that £35,000 is the most appropriate and fair figure.
- The means-tested threshold, above which people are liable for their full care costs, should be increased from £23, 250 to £100,000.
- National eligibility criteria and portable assessments should be introduced to ensure greater consistency.
- All those who enter adulthood with a care and support need should be eligible for free state support immediately rather than being subjected to a means test.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
Although interest on your current deposits may be at an all -time low, your capital is, at least, relatively safe. Therefore before you sacrifice any safety in a search for income, you should obtain professional financial advice. To discuss your options please contact us.

Complex Measures

The new rules, which were introduced on April 6 this year, are designed to simplify the complex measures introduced by the previous government and may affect the amount you can save into, and withdraw from your pension.

Previously, the amount you could contribute to pension options depended on your total income and the more you earned, the more complex the rules became.

Unused Pension Allowance

On April 6, 2011, this complexity was swept away and replaced with a simple flat £50,000 gross annual limit on contributions, with tax relief available up to 100 per cent of earnings or the above allowance, whichever is lower. The government has also given savers the ability to ‘carry forward’ any unused allowance from 2008/9, 2009/10 and 2010/11, so long as they were a member of a registered pension scheme during those years. An annual allowance of £50,000 will be assumed for those tax years for carryforward purposes.

The unused allowance is not scheme specific – it relates to all pension schemes that an individual may be contributing to, or in which they have benefits accruing.
So, subject to a person’s previous contribution history, they could in theory contribute an additional £150,000 into their pension commencing from the start of this current tax year. Some higher earners who were reluctant to contribute to their pensions in the previous two years will find this facility very attractive.

Delaying Pension Contributions

However, the reduction in the annual allowance from £225,000 to £50,000 means investors will need to assess carefully the potential cost of delaying pension contributions as it will no longer be possible to make large contributions on a regular basis to make up for previous years.

The government is to reduce the total sum that can be invested in a pension (the lifetime allowance) from £1.8m to £1.5m from April 2012 and will introduce transitional rules for those who have accumulated pension benefits based on the current lifetime allowance of £1.8m.

Previous Pension Rules

Under the previous rules, when a person reached age 75 (this rule has now been abolished), they had to take their pension fund and either purchase an annuity or invest in an Alternatively Secured Pension (ASP). On death, the ASP may have been subject to a tax penalty of up to 82 per cent.

From April 6, 2011, this tax has been replaced with a flat 55 per cent tax charge paid at death on the pensions of individuals over 75 or, for those under 75, on the part of their pension they have so far drawn down. For the first time this enables people to pass on some of their pension savings to relatives beyond a surviving spouse. Annuities can now be taken after age 75.

Flexible Drawdown

A new concept of ‘Flexible Drawdown’ has been introduced, allowing individuals to draw down unlimited amounts from their pension funds providing they have secured a minimum income, currently set at £20,000, to prevent them running out of money.

State pensions, annuities (but not purchased life annuities) and secured income from defined benefit schemes also count towards the minimum income assessment.
However, high withdrawals may erode the value of the pension fund; if investment returns are not sufficient to make up the balance this may reduce the amount of any potential pension annuity.

There is also no guarantee that an individual’s income will be as high as that offered under the pension annuity (or compulsory purchase annuity). The new rules regarding contributions do not affect just personal pensions and Self-Invested Personal Pensions (SIPPs) but also occupational schemes, including defined benefits or final salary schemes.

A pension is a long-term investment. The fund value may fluctuate and can go down as well as up. You may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

Inheritance Tax (IHT) is an issue affecting increasing numbers of households across the country. Changes introduced in Chancellor Alistair Darling’s pre-Budget report in October 2007 have made it possible for couples and civil partners to combine their individual IHT allowances, so that it is easier for them to protect their families’ inheritance. IHT is currently payable at 40 per cent on any amount over £325,000 – the nil rate band (tax year 2011/12). The nil rate band is the term used to describe the value an estate can have before it is taxed (£650,000 for married couples). So if you have an estate worth £500,000, £175,000 is taxed at 40 per cent, meaning the IHT bill would be £70,000.

Estate Planning Tool

Trusts are a well-established and useful tool in estate planning. A trust allows someone (the settlor) to make a gift of assets, without completely losing control of those assets, by placing them with a third-party (the trustees) to administer on behalf of the trust beneficiaries.

The value of a trust in IHT planning is that it enables you to reduce the wealth on which your beneficiaries will pay IHT without making a valuable outright gift – something you might be reluctant to do if the potential recipients are quite young or might take an irresponsible approach to a substantial sum of money, for example.

Passing on Wealth

The trust allows wealth to be passed on in a tax-efficient manner under the control of the trustees, who can include the settlor. There are different types of trust. Some give the trustees very little discretion, but can be useful when the aim is to establish the future use of assets.

For example, a Will trust could give a widow the right to certain income, with the capital passing to any children on her death. Other trusts, known as discretionary trusts, allow the trustees to retain control of the assets under the terms of the trust, which set out when and what the beneficiaries receive. They can also allow the trustees to react to changes in the beneficiaries’ circumstances. Again, the settlor can be named as a trustee.

Bare (Absolute) Trusts

With a bare trust you name the beneficiaries at the outset and these can’t be changed. The assets, both income and capital, are immediately owned and can be taken by the beneficiary at age 18 (16 in Scotland).
Interest in Possession Trusts

An interest in possession trust is one where the beneficiary of a trust has an immediate and automatic right to the income from the trust after expenses. The trustee (the person running the trust) must pass all of the income received, less any trustees’ expenses, to the beneficiary. The beneficiary who receives income (the ‘income beneficiary’) often doesn’t have any rights over the capital held in such a trust. The capital will normally pass to a different beneficiary or beneficiaries in the future. Depending on the terms of the trust, the trustees might have the power to pay capital to a beneficiary even though that beneficiary only has a right to receive income.

Discretionary Trusts

Here the trustees decide what happens to the income and capital throughout the lifetime of the trust and how it is paid out. There is usually a wide range of beneficiaries but no specific beneficiary has the right to income from the trust.

Investment Decisions

New figures reveal the best performing investment sectors

We understand that choosing investments can be difficult, so we are here to support you in making your investment decisions. Whether you’re a first-time or an experienced investor, we can help you explore your options. New figures reveal that UK small caps have been the best performers over the past year to 31 July 2011, followed by trusts that invest in property securities, according to the Association of Investment Companies (AIC ).

Annabel Brodie-Smith, Communications Director at the AIC, stated that uncertainty over the past six months from events in Japan and the Eurozone had contributed to what has been dubbed a hippo market – one that wallows about with sudden bursts of volatility.

She said: “It’s almost impossible to time the market, least of all pick the top performers of the future. So a balanced portfolio, taking into account geographical and sector allocation, discounts, gearing and charges, is a good place to start.

“Cautious investors may also like to consider regular investing, which can help smooth out some of the highs and lows in the price of shares, reducing investors’ risk profile. And while it’s always interesting to look at short-term trends, above all, investors need to remember that investing is for the long term.”

Adding further fuel to the investing argument against the debt-laden developed economies, the best performing investment sectors over the longer term have been Asia Pacific, emerging markets and commodities, according to the AIC .

Past performance is not an indication of future performance.

A guaranteed pension income for life

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, some savings. Annuities remove the worry of having to budget for an unknown period of time.

You can buy your annuity from any provider and it certainly doesn’t have to be with the company you had your pension plan with. The amount of income you will receive from your annuity will vary between different insurance companies so it’s essential to shop around for comparisons before making your decision. This could be an expensive mistake if you get it wrong.

The difference between the annuity rates will be dependent on the annuity terms selected. Annuities can’t be changed once set up so it is vital you secure the best possible income. Even though you don’t have to stay with the company your pension is currently held with, many people still do.

Types of Annuity

Pension Annuity

A Pension Annuity is bought using money from your pension fund. It may be appropriate if you require a guaranteed income for life, based on the value of your pension, and want to choose whether your income stays the same or increases each year. You could also qualify for a higher income due to a previous or existing medical condition your partner or you have.

An annuity promises to pay you a guaranteed regular income for life. You have the choice to receive your annuity income monthly, quarterly, half-yearly or annually. Payments can be ‘in advance’ (from the start date) or ‘in arrears’ (at your chosen payment interval after the start date). If you don’t have a clean bill of health or you have (or have previously had) one of a range of medical conditions affecting your health or longevity, you may receive a higher income. You may also be eligible if you have lifestyle conditions, such as if you smoke or are overweight.

Once started, your annuity income will not usually go down, even if your health, or your spouse’s health if applicable, improves. Depending on how long you live, you may get back less than you bought your annuity for. Once you’ve bought an annuity it cannot be cashed in at any time and there is no cash-in value. You can take out an annuity that stops whenever you die. Or, alternatively, you can choose an annuity with a smaller income but which is guaranteed to be paid for either five or ten years. This is called the ‘guarantee period’. The options you choose at the start of your plan can’t be changed.

With-Profits Pension Annuity

If you’d like to give your retirement income the potential to grow and you’re happy to accept an element of risk, you could choose this annuity that invests in a With-Profits Fund. With this option, the amount of income you receive has the potential to increase over time.

It guarantees to pay an income to you for the rest of your life. The underlying annuity fund is invested in a wide range of investment assets and the income payable to you each year depends on the investment returns of those assets and the initial bonus rate selected.

This is a stock market related investment. Your income can vary from year to year and could go down. However, your income will never fall below a certain guaranteed level in the case of a withprofits pension annuity.

Your income can be paid monthly or yearly, either ‘in advance’ (from the start date) or ‘in arrears’ (at your chosen payment interval after the start date).

The amount of income you receive has the potential to go down as well as up. A pension is a long-term investment. The fund value may fluctuate and can go down as well as up. You may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

Whether your retirement is a long way off or just around the corner, it’s important to think about how much income you’re going to have. And as you approach retirement, you’ll also have to decide how you’d like to receive the money from any pensions you’ve been saving towards. The most popular way of securing an income for life is by converting your pension fund into an annuity. Contact Watermark Financial Solutions for a free consultation and find out how we can help.

Proposals announced to unravel a raft of complicated tax laws could make life easier for the retired.

The Office of Tax Simplification (OT S) will turn its attention to pensioners in an attempt to unravel a raft of complicated tax laws relating to them.

The OT S, set up by Chancellor George Osborne in 2010, will draw up a list of proposals in time for next year’s Budget aimed at easing the plight of more than 5 million pensioners who struggle to deal with their tax
affairs.

In particular, it is keen to address the tax problems faced by those who draw a low income from multiple sources.

In a letter to the Treasury, the Rt Hon Michael Jack, Chairman of the Office of Tax Simplification, said:
‘For the estimated 5.6 million people of pensionable age paying tax, this area is widely acknowledged as causing too many problems for a group, some of whom are the least able to cope with them.’

You can’t control the markets but you can have a plan. We can help you plan and build an investment portfolio that’s right for you and that will enable you to produce income and /or capital gains. For more information, please contact Watermark Financial Solutions.

The value of investments and the income from them can go down as well as up and you may not get back your original investment.
Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend
on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.