Financial Planning - Key Issues
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Financial Planning Top Tips
Financial Planning Client Library
Financial Planning has, as a core activity, often been thought of as simply pension planning, but increasing your retirement income should consist of more than contributing into a pension plan and then taking benefits.
The effectiveness of Pension planning has been lessened by the reduction in annuity rates as interest rates have fallen. Although the government is keen that we all take retirement planning seriously, Pension Planning has been hit by the government action in a variety of areas including taking away pension tax credits.
All Retirement Plans should have, as it’s core strategy, a pension plan so therefore, as with everything in life, do it properly to maximise retirement income benefits.
Savings & investment - Money Made Clear
PENSION PLANNING
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There are risks and costs to a program of action. But they are far less than the long range risks and costs of comfortable in action. John F Kennedy |
Personal and Occupational Pension Plans
Although state benefits do not start until age 65 except women born before1955 you can take other retirement pensions at age 50 (55 from 2010). Some pension schemes may have additional rules or penalties for taking benefit early. Some may even offer what are called guaranteed annuity rates – a benefit you do not want to lose.
Some may impose penalties for early retirement because they are old style plans with old style charging structures. You may have preserved pensions ( often referred to incorrectly as “frozen pensions”) with previous employers or plans you may have completely forgotten about. Check out how the money is invested. If it hasn’t been reviewed in the last few years, and the funds are predominately stock market funds you could have a nasty shock if there is a crash just before you want to take benefits. (2009)
WE WILL CHECK OUT ,FOR FREE,WHETHER ANY OF YOUR OLD PLANS ARE RIGHT FOR YOU UP TO RETIREMENT pensions@youretirementstrategies.co.uk
Retiring soon - Just the facts
State Benefits
Contact the Pension Service to get an idea of how much your State Pension will be, including your entitlement to the State Second Pension (formerly SERPS). This is quite a simple process involving a form called a BR19.
The pension service will write to you four months before you reach state pension age inviting you to claim. Remember that the government is gradually extending the state retirement ages for women from 60 to 65 for those people born after 1950.
If you don’t need to start drawing your state pension at state pensions age you can postpone it and get either extra State Pension or a one off taxable lump sum payment when you do claim it.
The Pension Service – getting a forecast for your state pension and about deferring your pension.
Contracting out of the Second State Pension (S2P)
You may in the past have made a decision to contract out of SERPS (State Earnings Related Pension Scheme) which has now become S2P. Your decision can be an annual choice and as the rules and benefits entitlements have changed you should review whether the decision made previously is still the right one.
Just the facts - should you be contracted out ?
SIPPs-Self Invested Personal Pension Plans
A SIPP is a type of pension that allows you to take total control of how your money is invested. They can be as complicated or as simple as you wish.
The SIPP became popular when business people used the tax efficiencies involved to buy commercial property with the funds accumulated. With the emergence in the availability of external investment house funds ( i.e. fund managers from specialist companies not working for the SIPP provider) they are now commonly used as an alternative to Stakeholder or Personal Pension plans. Investors have total control in the choice of funds from all the leading providers. Previous plans may have restricted investment into the mediocre in house funds of one pension provider.
A SIPP allows clients not just to build up funds up to retirement, but also to take benefits in retirement. With changes in pension legislation, there is now greater investment freedom between the provider and the policyholder.
PLANNING TO RETIRE ABROAD
If you are thinking about retiring abroad, plan well in advance. The Revenue will allow transfers out of the UK pension schemes into what are called QROPS (Qualifying Recognised Overseas Pension Schemes) Once benefits have been transferred, UK rules fall away after 5 years and in Australia, for example, all the fund can be paid as a lump sum. Look in our top tips section for further guidance.
INVESTMENTS
Depending on your circumstances and your attitude towards risk, if you have a portfolio of Investment Bonds, Unit Trusts, ISAs or PEPs etc you may want to review it to replace a high level of risk for a higher degree of capital security. You may also want to alter your objectives to say, providing income from a plan which was previously designed for capital growth.
Fund Supermarkets
It is impossible for one fund manager or one company to continually produce the best returns year in year out. One of the best innovations in recent times, and enhanced with internet access, is the creation of a Wrap or Fund Platform. These companies act as an administrator whilst offering the choice of all the major investment houses and their most popular funds. So investors could have the choice of over 100 investment houses and 1000 different funds all under the one roof. If one fund manager doesn’t perform you simply switch internally to another manager and another fund at little or no cost.
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OF THE TOP 50 FUNDS 5 YEARS AGO, NONE ARE EVEN IN THE TOP 500 TODAY Source Standard & Poors Fund service. All UK authorised funds over 5 years to 31.12.04 vs all funds over 5 years to 31.12.99.bid to bid income reinvested |
Tax Efficiencies
It is often the case that high rate taxpayers will become base rate taxpayers and base rate taxpayers become non-taxpayers. All investments should be reviewed to make use of all the allowances which are made available by the government.
Although your investments are now in the right names will that be the case in the future. Should joint name accounts be transferred into single names? Will you use up all your allowances?
MORTGAGES & ENDOWMENT POLICIES
Many people plan to redeem their mortgage by means of the tax free cash from their pensions or endowment policy.
The safest, surest repayment method would be by means of a capital and interest mortgage when you know exactly when it will be repaid with the knowledge that there are no external risks involved provided all payments are made on time.
In the 1980s and 1990s Endowment policies were a favourite method of mortgage repayment but due to many different reasons they will not now reach the target amount. Endowment providers are obliged to send out letters to clients advising them as to whether the target amount will be reached. If you have received an amber or red warning letter then immediate action and advice should be sought. An additional problem is that the original endowment company might have been swallowed up by a much larger company leaving the original fund as a low priority for the new company. For the layperson, an almost impossible task to check out what future returns will be, and whether it is worth continuing with the arrangements set up 10,15 or 20 years ago.
ISAs or PENSIONS
Research from the investment house Fidelity revealed drastically higher returns from investments held in an ISA than any other wrapper.For a £50000 investment in a UK fixed interest fund yielding 5% pa ,placing it in an ISA would yield £31,445 return for a high rate tax payer dwarfing the £17196 return held in a collective wrapper
Both ISAs and pension plans are income tax and capital gains tax efficient. If individuals can afford to invest in both of them they should be the first port of call to boost every retirement pot.
This chart explains the main differences between investing in an ISA ( Individual Savings Account ) and making pension contributions.
We find many people are confused about cash ISAs, TOISAs, stocks and shares ISAs. Why not download our ISA Guide to help you work out what you need to know?
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ISA |
Pension |
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Tax relief when you invest |
No |
Yes |
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Investment grows tax free |
Yes |
Yes |
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Income is taken tax free |
Yes |
No |
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You retain your capital |
Yes |
No |
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Your income grows in retirement |
Yes |
Only if indexed linked annuity chosen |
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In retirement your income is guaranteed |
No |
Yes |
LEGACY PROTECTION AUDIT
One of the main concerns to older people is the ability to leave something for their children. On the other hand people with ageing parents are more concerned with the parents enjoying the fruits of their efforts to the maximum. With careful planning there are ways of avoiding the two greatest threats to their parents lifestyle namely the costs of long term care and the impact of Inheritance Tax. Putting off making a decision or looking at all the alternatives really could cost you and your parents when a simple audit of their affaires would produce peace of mind for the future.
WITH PROFITS INVESTMENTS
Up to 5 million investors hold With Profit policies that are doomed to fail, according to new research by exit with-profits.co.uk. They estimate over £150 billion is invested in these troubled funds.
You may have part of your investment portfolio in a With Profit Bond, or your pension in a With Profits investment. With Profits investmemts have over the longer term provided a low risk approach with better than deposit account returns by means of annual and terminal bonus rates.
Everyone should review their With Profit Fund because: -
- With Profits funds grow by means of annual bonuses (which are guaranteed) and terminal bonuses (which are not) , but over the last few years, companies have reduced or stopped paying terminal bonuses.
- The fund is a mixture of different asset classes including fixed interest. The better With Profit returns were obtained in the 1990s when interest rates were high.
- A significant number of With Profit funds are closed for new business. 51 out of 99 companies operating With Profits funds are closed with assets of £85 billion. (FSA report November 2005). A closed fund is not necessarily a poor investment but regulations can restrict how the fund is invested, possibly meaning a larger part is invested in asset classes which can limit its growth potential.
- With Profits providers, to prevent large outflows after stockmarket falls can apply what is called an MVA on the fund value. (Market Value Adjuster). This means that they can apply penalties on anyone wanting to switch funds or make withdrawals. We have known of MVAs being 30% of the value of the fund.
- The question as to whether a closed fund is stil competitive or not should form part of any review process.
The website lists these providers as being poor performers:- Axa Sun Life, Equitable Life, Lincoln National, NPI, Old Mutual, Pearl, Phoenix, Reliance Mutual, Save and Prosper, Scottish Widows, Sun Life of Canada and Zurich Life.