January/February 2015

New Year changesFOR YOUR PENSION

2015Protection

ReviewStamp Dutyreforms

Why do I need aWILL?

� Lifestyle Protection � Creating Wealth � Tax Rules �

PensionerBONDS

MoneyMatters

McHardy Financial – Independent Financial AdvisersAberdeen Edinburgh Kirkcaldy

13 Bon Accord Crescent, Aberdeen, AB11 6DE 10a Rutland Square, Edinburgh, EH1 2AS 3 East Fergus Place, Kirkcaldy, Fife, KY1 1XT

Tel: 01224 578 250 Fax: 01224 573583 Email: enquiries@mchb.co.uk www.mchb.co.uk McHardy Financial is a trading style of McHardy Financial Ltd which is authorised and regulated by the Financial Conduct Authority.

We are entered on the FCA Register Number 126147. www.fca.gov.uk Registered Office as above. Registered in Scotland No. SC105200

inside

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Need more information?Simply complete and returnthe information request onpage 12

Pensioner Bonds Page 2

2014 Autumn StatementPage 3

What’s new for you? Page 4

New Year changes for your pension Page 5

Stamp Duty reforms Page 6

2015 Protection ReviewPage 7

2015 pension pitfalls Page 8

Retirement giveawaycontinues Page 9

Final salary pensions … What now? Page 10

Why do I need a Will?Page 11

Trusts Page 11

Adventurous investingPage 12

Not all financial advisers will have regulatory permission to advise on every product mentioned in these articles. Certain products mentioned in this magazine may require advice from otherprofessional advisers as well as your financial adviser and this might involve you in extra costs. The articles featured in this publication are for your general information and use only and are notintended to address your particular requirements. They should not be relied upon in their entirety. Although endeavours have been made to provide accurate and timely information, there canbe no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such informationwithout receiving appropriate professional advice after a thorough examination of their particular situation. Will writing, buy-to-let mortgages, some forms of tax and estate planning are notregulated by the Financial Conduct Authority. Levels, bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.

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Pensioner BondsThe Government has finally revealed detailsabout the long-awaited ‘pensioner bonds’,first announced in the Chancellor’s Budgetin March 2014. These accounts aredesigned to help retirees whose cashsavings have been ravaged by interest ratecuts over several years.

WHAT IS THE DEAL?Savers can invest a lump sum in aGovernment-backed bond with NationalSavings & Investments over a term of one orthree years, with fixed interest rates of 2.8and 4 per cent respectively. 

The minimum investment per person andper bond is £500 up to a maximum of£10,000. So a couple could squirrel away acombined £40,000 spread across both bondtypes.WHO ARE THEY FOR?For people over the age of 65 who wantinflation-beating risk-free returns on cashsavings over the short to medium term. They can be opened individually or in jointnames.WHEN ARE THEY AVAILABLE?They go on sale in January 2015 until theyrun out. There is an overall limit on howmuch savers can put into the bonds, up to£10 billion, enough for one millionpensioners to invest £10,000 each in onebond. They are expected to be popular andwill be awarded on a first come, first servedbasis.

HOW CAN I INVEST?Visit the website at nsandi.com, call 0500500 000 or write to National Savings andInvestments, Glasgow G58 1SB.THE PROS AND CONSInterest is accrued annually and in the three-year bond, interest will be compounded, soyou earn interest on your interest.

Other advantages are that investmentswill be 100 per cent backed by the Treasuryand early access is possible, although saverslose the equivalent of 90 days’ interest. If the bondholder dies, a beneficiary over theage of 65 can inherit and retain the bond.

On the flip side, interest is not payableuntil maturity, excluding those on the huntfor regular income. And basic 20 per cent taxis deducted, so non-taxpayers must reclaimoverpaid tax from HM Revenue & Customs,while higher rate taxpayers must declarethe interest annually on theirself-assessment taxreturn.

2014Autumn Statement

What did the announcements

bring you?I have a lot of money in NISAs? Can Ipass all of them to my spouse if I diefirst?Under the new rules announced in GeorgeOsborne’s autumn statement, your NISA potcan be passed on to your husband or wifewhen you die.

Before the autumn statement, your NISAsavings lost their tax-free status when youdied. The new rules mean your widow orwidower can inherit your NISA savings,keeping their tax-free status.

The Treasury believes around 150,000people who are married and have NISAs, die every year and their “NISA taxadvantages die with them.

HM Revenue & Customs figures show theaverage person aged 65 and over who has a NISA has about £29,880 invested in it. For high earners of all ages, with incomesover £150,000, average NISA savingsapproach £50,000. My husband died recently. Will I benefitfrom the new rules?Yes, although they come into effect on April6, 2015, the Chancellor said anybody whodied on or after the day of the autumnstatement, will benefit.What is the NISA allowance each year?You can save £15,000 a year into a cashNISA, a stocks and shares NISA, or acombination of the two. From April next yearit will increase again to £15,240.

Should my spouse die next year and herNISAs pass to me, can I still use myannual allowance?You will be able to inherit her NISA pot, and retain its tax advantages and still put upto £15,240 into your NISA in the same taxyear.What about civil partnerships?The new rules apply to people who are incivil partnerships as well as those who aremarried. Who benefits most from changes?Women will be among the biggestbeneficiaries because, on average, theyoutlive their husbands.

Allowing the transfer of NISA assets tospouses and civil partners on death providesa much fairer outcome, especially for retiredwomen and it will now provide a biggerincentive to save in NISAs.How much is it really worth?Imagine you have a NISA worth £29,880. You would get around £448 in interest(assuming a rate of 1.5% in a cash NISA)and pay no tax on the income. Before thesechanges, a basic rate taxpayer would have lostabout £90, a higher rate taxpayer about £179,and a top rate taxpayer would have lost £202.Was about Junior NISAs?Not much news here but parents will be ableto save £4080 next year into a Junior NISA orinto a child trust fund, which is a 2% risefrom £4,000 currently.

Growth The economy has grown faster thanpreviously reported, up 8% over thisParliament. Business investment has risenby 27%.

GDP growth forecast for 2014 isupgraded from 2.4% a year ago, and 2.7%in March to 3%.

It is predicted that the economy will thengrow by 2.4% next year, 2.2% in 2016,2.4% in 2017 and 2.3% in 2018 and 2019.

Inflation is forecast to be 1.5% this year,1.2% next, and 1.7% the year after. Jobs and education Unemployment will fall to 5.4% next year,the Office of Budget Responsibility says.

Meanwhile, wages will grow fasterthan inflation for the next five years. Loans of up to £10,000 for post-graduatedegrees

National Insurance on youngapprentices will be abolished Borrowing The deficit will fall from £97.5bn in 2013-14to £91.3bn this year.

It will then be £75.9bn, £40.9bn, and£14.5bn in the three years after that. Personal taxes Tax free allowance raised to £10,600 nextyear.

Higher rate tax band raised to £42,385. When someone dies, their husband or

wife will be able to inherit their NISA taxfree. Corporate taxes A 25% tax on profits from activity inthe UK for companies that shift profitsoffshore will raise £1bn over the next fiveyears. Property Stamp Duty reformed to become moreprogressive, introduces marginal tax rates.Changes came into force 4th December2014.

Up to £125,000 - no taxUp to £250,000 – 2%Up to £925,000 – 5%Up to £1.5m – 10%Above that – 12% Stamp duty cut for 98% of homebuyers

who pay it, you pay more if you buyanything above £937,000.Health Confirmed £2bn a year extra spending onNHS

Extending £2,000 employment allowanceto carers Travel Fuel duty frozen again

Air passenger duty for children under 12abolished from next year, and for childrenunder 16 the year after.

The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performanceis not a reliable indicator for future results. Please contact us for further information or if you are in any doubt as to the suitability of an investment.

Investors who rely on interest rates on their savings to boost theirincome have suffered during the financial crisis. Official interestrates languish at 0.5% and various Government schemesdesigned to encourage borrowing have given the banks littlereason to tempt savers with decent interest rates.

Savers were hoping for some good news from GeorgeOsbornes’ 2014 Autumn statement. NISAs Mr Osborne announced that widows and widowers would now beable to inherit NISAs tax-free. Previously NISAs lost their tax-freestatus on death but now under the new rules when someone dies,their husband or wife will be able to inherit their NISA and keepits tax-free status.

The change came into effect on 3 December 2014, if a NISAsaver in a marriage or civil partnership dies, their spouse or civilpartner will inherit their NISA tax advantages.

From 6 April 2015, surviving spouses will be able to invest asmuch into their own NISA as their spouse used to have, on top oftheir usual allowance, and so will be better able to secure theirfinancial future and enjoy the tax advantages they previouslyshared.

One key point of interest was that there was no mention ofexcluding assets in NISAs from inheritance tax. Pensioner Bonds These bonds, designed to pay much better rates than conventionalsavings products from banks and building societies, wereannounced in the Budget in March and more details had beenexpected in the Autumn Statement.

In March he said a one-year Pensioner Bond would pay around2.8% and a three-year bond around 4%. At the time the bestrates available on the market were 1.9% and 2.6% respectively.The new bonds will be available to anyone aged 65 or over.

Supply will be limited, with up to £10bn of the bonds beingmade available from National Savings & Investments,

the Government’s savings arm. Pensioners will be allowed to savea maximum of £10,000 in each version of the bond, offering atotal of £20,000.

Experts predict huge demand for the bonds, so they could sellout very quickly once they go on sale in January 2015.

Interest on these bonds will be taxed in line with all othersavings income at the individual’s personal tax rate. But you willnot be able to register to receive interest gross, as is normallypossible with saving accounts. Instead, non-taxpayers or thosewho have had too much tax deducted will have to reclaim via aself-assessment tax return. Interest rates The official interest rates are set independently by the Bank ofEngland. However, Government policies can affect the interestrates that are actually offered to savers by banks.

One example is the “Funding for Lending Scheme”, a source ofcheap funds made available to banks on condition that it was lenton to mortgage borrowers and small businesses. While themortgage side has ended, the Chancellor announced an extensionof the small business part of the scheme.

Official sources of cheap funding for banks reduces their needfor deposits from savers and with it their incentive to offerattractive interest rates, therefore further bad news for ordinarysavers. ‘Peer-to-peer NISAs’ In the Autumn Statement the Chancellor said he would act toboost peer-to-peer lending to allow small businesses better accessto credit.

The Government will consult on whether to allow “crowdfunded debt-based securities” into NISAs and on how it could beimplemented, which is different from ordinary peer-to-peerlending as lenders own a bond that they can sell on.

What’s newfor you?

The value of your investment and the income from it can go down as well as up and you may not get back the original amountinvested. Past performance is not a reliable indicator for future results. Please contact us for further information or if you arein any doubt as to the suitability of an investment.

Investors who rely on interest rateson their savings to boost theirincome have suffered during thefinancial crisis.

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New Year changes for your pension

1. Taking the maximum tax-free lumpsum 25 per cent of your pension fund can be takentax free in one lump sum at retirement if youbuy an annuity with the rest, or put it intodrawdown. In other words, taking the full lumpsum “crystallises” your whole pension so youlose the option to keep it invested and makethe new “bank-account-style” withdrawalsthat have been highly publicised.

People will still be able to take smaller tax-free lump sums alongside the new flexibility bymixing and matching. For instance, if you hada £100,000 pot you could in theory keep£50,000 in their existing scheme and make thenew withdrawals, and put the rest intodrawdown or buy an annuity, taking a £12,500tax-free payment.2. ‘Bank-account-style’ withdrawals areNOT tax-free If you want to use your existing pension like abank account, you will get tax relief on futurecontributions of up to £10,000 a year and willbe able to make withdrawals when you want.Although these payments from uncrystallisedfunds (UFPLSs) may include a 25 per cent tax-free portion, the rest is taxable as income. 3. Will your pension provider give youthe new freedoms? Your company or private pension scheme maynot give you the option to stay invested and

make withdrawals. You may have to movepension schemes to access the new freedomsarrangements.

Savers with large pension pots above £1.5million who registered for primary or enhancedprotection to safeguard their rights when thelifetime allowance was introduced will not beable to make these withdrawals either. 4. Move your pension There may be high exit penalties if you decideto switch provider. Your current scheme mayalso provide valuable benefits you would loseshould you transfer. If your scheme was set upbefore 2006, you could have a tax-free lumpsum above the standard 25 per cent. Schemesset up in the Nineties may pay guaranteedannuity rates much higher than those offeredtoday. 5. What’s the future for annuities? Annuities are still a good option for someretirees. Many people will use annuitiesalongside drawdown so that they can buysome secure income and keep some capitalflexibly invested. 6. Check your pension investmentsYou should check your existing scheme andreview how it’s invested. Check what type offund your pension money is in. It may be in adefault option, such as a ‘lifestyle’ fund, thatmight no longer be appropriate. This fundwould have assumed you are going tobuy an annuity and not remain invested after a pre-set date.

7. Transparency & Knowledge A big part of the reforms is better freepensions guidance for retirees, including face-to-face sessions from Citizens Advice andphone help from the Pensions Advisory Service.You won’t be told what is best for you andmust decide yourself and accept fullresponsibility.

Alternatively, you can seek the advice fromyour professional financial adviser, who wouldbe responsible for recommending the rightsolution, with comeback if they make amistake.8. Keep a lookout The details understood so far are from a draftbill and subject to change, although mostexperts in the business don’t foresee anyreason as to why they will not go through intheir current form. 9. Will my pension be subject to deathtaxes If you fail to nominate beneficiaries for yourpension fund and the trustees can’t decidewho to pay the money to, your fund will beliable for a 45 per cent tax charge, as well asinheritance tax as part of your estate.

If you die before age 75 then yourbeneficiaries can take the money tax-free. If you die later, they will pay tax on anywithdrawals at their normal income tax rates.10. You could fall into a higher taxbracket Be clear that whilst you can access 25 per centof your fund tax-free, other withdrawals aresubject to tax along with any other income.

For example: If you withdraw £40,000, then up to £10,000 could be tax-free but therest would be added to your other earnings forthat year. Someone with £20,000 of furtherincome would have £50,000 of taxable incomeand would pay higher-rate tax.

The value of your investment and the income from it can go down as well as up and you may not get back the original amountinvested. Past performance is not a reliable indicator for future results. Please contact us for further information or if you arein any doubt as to the suitability of an investment.

The pension reforms that come in next April have beenseen as revolutionary and still little is understood bymany. Experts are suggesting crucial points have beenmissed, so what do you need to know?

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But now professionals in the propertybusiness believe the reforms would notbenefit first-time buyers in the long run. The widely held view is, like all propertytaxes, these changes to stamp duty will verylikely be quickly reflected in house prices.

This tax saving will allow first-time buyersmore money to put towards their propertyand with all buyers in the same situation,prices would rise accordingly.

The industry thinking is the stamp dutychanges will add around 1% to house prices.

As stamp duty is normally paid in cash andhigher property prices would add to thebuyer’s mortgage, that they would pay morein interest.

Some allegedly take the view that theChancellor was trying to engineer a mini-house price boom just before a generalelection without considering peoples’indebtedness.How has stamp duty changed? Under the old “slab” system, housepurchasers had to pay their relevant rate onthe whole purchase price. Previously stampduty started at 1% on sales from £125,000to £250,000, rising to 3% on sales of up to£500,000 and 4% on homes costing up to£1m. Houses that sold for between £1m and

£2m attracted 5% tax, rising to 7% forhouses worth more than £2m. Under thissystem a family buying a house for £400,000would have to pay 3% on the whole sum, or £12,000.

House prices areexpected to rise assellers cash in on thestamp duty savings The new stamp duty will consist of“marginal” tax rates, as with income tax.There will be no tax on the first £125,000,then 2% on the cost between £125,000 and£250,000, and 5% up to £925,000. A rate of10% will apply to the cost between that sumand £1.5m, and 12% on the value above£1.5m.

Now buying a £400,000 home they wouldpay 2% on the portion between £125,000and £250,000 and 5% on the remaining£150,000. This reduces their total tax bill to£10,000.

Stamp duty bills will rise for purchasesworth more than £937,500. This is likely to

affect buyers in London and the South Eastmost, where prices are much higher. First-time buyers Many typical aspiring home owners havebeen hit hard by the combination of stampduty and rising house prices.

People in London know this all too well,many have tried to buy in earlier years butwere unable to make their budget stretch tocover the stamp duty.

Such examples are common place. Manyfirst time buyers find their dream property atthe top end of their budget, but are all toooften unaware of stamp duty and findthemselves unable to afford this additionalcost, leaving them no option but to pull outand lose their dream home.

Many people who are looking at propertiesin more affordable areas of London aregrateful for the reduction in stamp duty, butfear that if house prices rise further they willbe priced out of the market.

But it’s not all bad news for first-timebuyers. Those already in the process of buyingwill save money. Typically someone buying a£175,000 house will see their stamp duty cutfrom £1,750 to £1,000.

1. Critical Illness Insurance:If you are diagnosed as having one of thespecific life-threatening conditions denotedin the policy, critical illness insurance will payout a tax-free lump sum. There are a numberof illnesses and definitions, set out byindustry guidelines, which this type ofinsurance must cover; these include a severeheart attack or stroke and an aggressiveform of cancer. Most policies do howevercover many other conditions on top of these.You can also combine critical illnessinsurance with life insurance, depending onyour own requirements; these policies willpay out if you are diagnosed with a criticalillness or in the eventuality of your death,whichever the first to occur.2. Income-Protection Insurance:If you become ill or suffer a disability leavingyou unable to work, income protectioninsurance is designed to replace part of yourlost earnings in order to fill the void.Depending on the policy you choose, incomeprotection insurance will provide you with amonthly payment of 50-60 per cent of yourusual earnings, tax-free. This will customarilycontinue until you either return to work orreach retirement.

Some policies may also offer a “partial” or“rehabilitation” payment if you are able toreturn to your previous job although in areduced capacity – i.e. part time, this

however will only be for a limited period. A number of chosen policies will also agreeto make a “proportionate” payment whichtops-up earnings should you return to full-time employment within a lower paidrole.3. Life Insurance:In the unfortunate event of your prematuredeath, life insurance boosts your dependantsability to cope financially in your absence.Life insurance falls into one of two types;“term assurance” and “whole-of-life” –however there are many variations withinthese two categories; a. Term Assurance: This is the most simple form of life insurancewhich pays out a lump sum in the event ofyour death in a specified period of time. Termassurance is usually purchased along with amortgage, and frequently taken out for thesame duration. There are different sub-categories of term assurance:• Level Term: in the event of premature

death, this pays out the same sumregardless of when the policy commenced.

• Decreasing term: this decreases thepotential payout by a fixed amount eachyear until reaching zero at the end of theterm.

• Increasing term: this increases thepotential payout by a certain amount eachyear for the duration of the term.

• Convertible term: this provides you withthe ability to switch to another type of lifeinsurance in the future should you wish to.

• Family income benefit: this, instead ofpaying one lump sum, pays dependaentsby instalments from the date of death untilthe end of the agreed policy.

b. Whole-of-Life Insurance: This is a policy which remains in force yourwhole life, meaning that whenever youshould die, there is a guaranteed payout toyour dependants. There are different forms ofthis insurance; some offer a set payout fromthe start, whilst others link to investmentsand the payout is dependent onperformance. The terms and conditions ofwhole-of-life insurance policies vary, so makesure you understand the scope of the coverbeing offered before making a commitment.

When it comes to insurance it is alwaysworth seeking professional financial advice.An advisor should help you decipher thelevel of cover you individually require, theduration of the appropriate policy andwhether or not to consider a combination ofinsurances.

It is also vital that whenever you apply forany type of insurance, you provide full andaccurate information – a failure to disclose“material facts” can result in future claims

being declined.

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STAMP DUTY REFORMS 2015

George Osborne announced sweeping changes to stamp duty in his 2014Autumn Statement. He claimed 98% of buyers, particularly first-time buyersand low and middle-income families would benefit financially.

ProtectionReview

As we enter into a New Year; a primary time for reflection, it couldbe considered an ideal opportunity to re-examine your personalfinances – especially the protection of your own future, should theunforeseen occur. With many variants of insurances available, it canbe difficult to determine the most appropriate for you. Here weconsider your options:

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The 2015 pension pitfallsMake sure you don’t run out ofmoney A pension is there to provide income inretirement; this period could be 30 years ormore. If you spend all your pension savingsin the early years, or draw more incomethan is sustainable over the long term,your pension might not last as long as youdo.

Many people in the UK underestimatetheir life expectancy; few will want to bereliant on the state in their old age. It istherefore very important to know howmuch money you are likely to need to lastyour retirement.

Avoiding the problem can be achievedby:1. Setting in place some funds which can

be used to buy a secure income for life?Whilst low on risk and return, this willnever run out and can be used to payessential living costs, which have atendency to keep increasing throughretirement.

2. When you take regular income directlyfrom your pension fund, keep theamounts under regular review to ensureyou stay on track and consider justtaking the income generated by theinvestments themselves.

Will your provider pay the bill?One big unanswered questions of the newfreedoms is will pension firms allow theirclients to take advantage of them in full.

The National Association of PensionFunds, represents around 1,300 funds, with17 million savers, has warned there couldbe severe delays. Major insurancecompanies have also predicted capacityconcerns. There is no legal obligation forproviders to be ready for the April 2015kick-off.Avoiding the problem can be achievedby:Consider transferring your pension to aprovider who will be ready by the kick-offdate?Don’t get a fine from HM Revenue &CustomsSavers who have more than one pensionmay be required to notify their other

pension providers once they start to drawfrom one of these pensions.

Most people have the standard annualallowance of £40,000 which they cancontribute to pensions, and receive taxrelief on these contributions. But investorswho start drawing from their pensionflexibly for the first time after April 2015,will have the amount they can contributeto pensions reduced to only £10,000.

The rules require the investor to notify allpension providers to whom they are stillpaying pension contributions, so thatprovider can apply the new lower £10,000contribution limit. They need to do thiswithin 91 days of receiving a certificateconfirming they have commenced flexiaccess drawdown or starting to makecontributions to the plan if later.

If people ignore this deadline then theycould be hit with a fine of up to £300, with further penalties if this is not met.

In the UK, people have on average 11 jobsover a lifetime, so this rule could involveliaising with multiple pension providers ifyou are still paying into them.Avoiding the problem can be achieved by:

Consider consolidating all your pensionsinto one place, which will avoid you havingto notify multiple providers.Take your timeDo not rush into any one product ordecision, either now, or once the new rulestake effect. Take your time, research allyour options and if in doubt ask for anexplanation in full of how things work.Always read the small print and shoparound. Many options are now extremelyflexible, but they could result in you losingyour entire pension in the stock market. At the other end of the scale, some optionsdon’t always allow changes once you’veentered into them.

Husbands and wives whose partners diebefore reaching 75 will get annuity incomefrom their spouse’s pension tax-free, the Chancellor announced in the AutumnStatement.

The move brings annuities used to providea retirement income into line with the optionsto keep your pension invested and draw on it.This change will arrive next April, as part ofthe pensions freedom shake-up.

Beneficiaries of ‘joint life’ annuities or othertypes that come with death benefits currentlypay income tax on what they receive.  

The Chancellor has axed death taxes forunder 75s alongside a major shake-up ofpensions, which will see people given greaterpower over how they spend, save and investtheir retirement pots from next April. 

The changes make it easier for people toshun annuities, which offer guaranteedincome for life but are heavily criticised forbeing poor value. 

Instead they will be able to keep theirpension invested and draw on it as needed,or even cash in their entire pot.This will be done either through a processcalled income drawdown, or by simplykeeping their pension where it is and drawingon it.

People with joint life annuities can namesomeone other than a spouse as abeneficiary, but they have to be approved bythe insurer. If it’s not a family member, it wouldusually be someone likely to be financiallyaffected by your death - for instance, a jointowner of your home.

The change today brings annuities into linewith income drawdown plans, which will seethe so-called 55 per cent ‘death tax’ on anyremaining pot passed on removed from nextApril. 

Instead, beneficiaries will pay no tax if theperson who died was under 75, while if theperson who dies is 75 or over, beneficiarieswill have to pay their marginal rate of incometax in both cases. 

However, the changes do not affect peoplein final salary pensions, normally consideredthe best and most generous schemes,meaning some people could be tempted totransfer out of them in order to leave moneyto their families.

As from April 2015, pension investors will be free to do what they like with their pension savingsat retirement. Almost half a million people will be eligible to take advantage of these new rulesthis year, the question to be answered is, are the pension freedoms a good thing or bad thing?The Government has voiced its opinion that it expects some people to make wrong choices,given the new freedom on offer. Recently, Steve Webb, the Government’s Pension Minister said“this coming April some people will get it wrong”.So what should people be aware of, here we explain some possible pitfalls and how you couldtry to avoid them?

“this coming Aprilsome people willget it wrong”.

Don’t turn yourself into a 45% income tax-payerOnce you turn 55 you can normally take up to a quarter of yourpension as a tax-free lump sum. This has not changed and thistax-free cash is yours to spend or invest as you wish. You can thentake as much or as little as you like from the pension, however,these withdrawals are taxable. Some argue the hope of theGovernment is that these new pension rules could net theTreasury an extra £3 billion in tax receipts over the next fouryears.

All the withdrawals you make during the tax year will be added tothe rest of your income in that tax year, and then will be subjectto income tax at your highest rate. This could move you into ahigher tax bracket and you could possibly end up being a top ratetax payer (45%) if you make a withdrawal which, combined withyour other income, takes you over £150,000.

The other problem here is your personal annual tax allowance(for most people this is £10,000) starts to be scaled down onceyour income exceeds £100,000. It reduces by £1 for every £2 ofincome you have over £100,000. So if your taxable income isbetween £100,000 and £120,000 (2014/15 tax year), you mighteffectively be subject to a tax rate of up to 60%. Avoiding the problem can be achieved by:1. Not taking large withdrawals all at once. Staggering your

withdrawals over different tax years, could reduce the tax you pay.

2. Use more of your tax-free cash to supplement yourotherwise taxable income in the early years.3. Pensions shelter your savings from tax until you

take the money out, you don’t pay income tax orcapital gains tax on the income or growth fromyour investments, and in most cases your

pension is exempt from inheritance tax. It canbe sensible to keep this tax efficient statusgoing for as long as possible. The new rulesalso offer more options for passing on yourpension, in some cases tax free, when youdie.

Retirementgiveawaycontinues

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Final salary pensions

How will the changes affect finalsalary schemes?Company pensions which provide aguaranteed retirement income are known asfinal salary or defined benefit schemes.People with a pension of this type cannottake advantage of the new rules.

This includes any public sector final salarypension schemes, including teachers, civilservants and those in the NHS.

Final salary schemes have long been themost coveted of pensions, because they offera guarantee of the income payable inretirement, where the scheme and not theindividual take on all the risks.

Due to the sheer generosity of a finalsalary pension scheme, anyone fortunateenough to have one could count themselveslucky. There are now very few in existence fornew members outside of the public sector.Does a transfer now make anysense?Whilst the new changes may look interestingto many, in reality the vast majority are likelyto be better off keeping their final salaryscheme in place.

Remember that the primary purpose ofany pension is to provide an incomethroughout your retirement.

Everyone needs some level of guaranteedincome during retirement, to cover theirbasic living costs. A final salary schemeshould be considered as the foundation forretirement income providing some or all ofthe guaranteed income to cover basic livingcosts.Who could benefit from a transfer?Generally, only those approaching retirementbefore their scheme’s normal pension age. It is important to understand that final salaryschemes provide something other pensionsdo not and that is they guarantee yourpension is growing all the time.

Once you are a deferred member of a finalsalary pension, you are given a promise ofthe income you will be paid in retirement. In the vast majority of schemes, thispromised income increases year on year untildeciding to take benefits. The increase isgenerally in line with inflation. This meansyou will not be affected by stock marketfluctuations in the same way as you mightwith a personal pension for example. For thisreason final salary schemes providesomething other pensions do not, theguarantee that your pension is growing allthe time.

A transfer may be worth considering onlyin certain circumstances which could be;

Those people who are in ill health and donot expect to live for a long time inretirement.• Those with family or friends whom they

wish to benefit from their death, but arenot covered by the rules of the final salaryscheme.

• Those who have very large pensionbenefits built up and do not want themajority of their retirement incomeprovided by just one employer.

• Those with a final salary scheme offeredby a company who they think may not bein business when they retire.

• Those with no dependants and are singlewho wish to maximise the benefitspayable throughout their lifetime. Thetransfer value from a final salary schemeincludes the value of any death benefits,even if they are not required. Here atransfer can sometimes allow a higherincome to be paid.

• Those who would prefer to take benefitsearly, but this is not permitted within finalsalary schemes.

Widely seen as the most radical reforms to pensions sincethe State Pension was first introduced, pension savers areset to take advantage of new pension freedoms as ofApril 2015, but does it apply to all pensions?

Why do I need a Will?

The Courts are familiar with familiesarguing over the division of the assets of aparent who died without a Will. If youdon’t want to run the risk of putting yourfamily at war and want to ensure yourfamily is taken care of, here’s what youneed to consider.

1. Make sure you use a regulatedindividual as your Will-maker when makingyour decision as anyone can setthemselves up as a writer of Wills. The LawSociety says: “It is important thatconsumers are able to distinguish betweenthose that are unregulated, uninsured anduntrained, and solicitors who specialise inthis area and offer a quality service”.

2. With effect from the 1st October 2014new rules were introduced relating to whoinherits what if a person dies without aWill. Under these new rules, where thereare no children, if a spouse dies intestatethen the surviving spouse or civil partnerinherits the whole estate, rather than only£450,000 as was the previous case.

Where children are involved, under thesenew rules the surviving spouse or civilpartner would inherit the first £250,000and then half of the remainder of theestate, with the remaining balance of theassets being held in trust for the childrenuntil they become an adult.

Siblings and parents of someone marriedand with no children, will no longer inherita share of the estate if it is worth morethan £450,000, the entire sum will go tothe surviving spouse. However, this is adanger for unmarried couples who do nothave any rights over their deceasedpartner’s estate, so you need to ensure aWill is in place to guarantee your wishesare carried out.

3. Many people have seen their propertyrise in value and some have more thandoubled in value over recent years, butthere is a price to pay in the form ofinheritance tax. One way to mitigate thischarge is to set up a trust; you can thenprotect some of your estate from the 40per cent inheritance tax.

Trusts can also be a good way to protectyour estate for future generations in caseof your divorce or bankruptcy. It is alsouseful to get advice from a solicitor if youhave assets overseas because somecountries will not recognise a Will writtenin the UK.

4. For children you need to name aguardian and check with them first tomake sure they would be happy to take onthe responsibility. In some cases,particularly for unmarried parents, havinga Will is the best way to be sure thatchildren under 18 will stay in the custodyof your loved ones.

5. Making a Will is not relativelyexpensive; not having one could be morecostly. If your needs are simple and basic,you can even use an online company, butusing a solicitor or professional financialadviser who specialises in this area, offerspeace of mind.

TRUSTSLifetime TrustsLifetime trusts are often known asproperty protection trusts or assetprotection trusts.

Unlike will trusts, which come into beingon death, lifetime trusts are establishedstraight away. Your home is gifted to thetrust, which allows you to carry on living init. The rationale is that if you needresidential care at some point in thefuture, you no longer own a house and canonly be assessed on minimal assets. 

Anyone considering setting up a lifetimetrust for this reason should be aware thata local authority may regard thisarrangement as ‘deliberate deprivation ofassets’. If this is the case, they can assessyou as if you still owned the property (andrefuse to fund your care). 

By placing property outside your estate,lifetime trusts can reduce probate costssignificantly.Lifetime trusts and tax  The tax treatment of lifetime trusts isworth considering carefully. Because yougift the house to the trust, it can attractIHT if it is worth more than the nil-rateband (currently £325,000). 

Those who transfer their property to alifetime trust may face an immediate 20%charge on the balance over £325,000(including gifts made in the previous sevenyears), while the trustees must submit taxaccounts to HMRC. They may have afurther tax bill every 10 years plus incometax on any payments from the trust.   

Lifetime trusts are far more expensivethan basic wills or will trusts. They arenormally sold as part of a package. Discretionary trustsWill trusts and lifetime Trusts can be eitherfixed interest (where the beneficiary hasan absolute right to occupy the house andreceive the income from any trustinvestments) or discretionary (where thetrustees have a pool of potentialbeneficiaries and have a discretion how tobenefit any of the potential beneficiaries).  

Usually a discretionary trust also has aletter of wishes for the trustees toconsider, which may give one beneficiarythe trustees’ permission to live in thehouse or receive the income frominvestments.  The tax treatment of fixedinterest trusts is different fromdiscretionary trusts.

Taxation advice, Trusts and Willwriting are not regulated by theFinancial Conduct Authority

Taxation advice, Trusts and Willwriting are not regulated by theFinancial Conduct Authority

Please note the decision to transfer afinal salary pension scheme is verycomplex, and should only be consideredafter taking financial advice from aprofessional financial advisor.

This magazine is for general guidance only and represents our understanding of the current law and HM Revenue and Customs practice.We cannot assume legal responsibility for any errors or omissions it might contain. Level and bases of, and reliefs from taxation are thosecurrently applying but are subject to change and their value depends on the individual circumstances of the investor. The value ofinvestments can go down as well as up, as can the income derived from them. You should remember that past performance does notguarantee future growth or income and you may not get back the full amount invested.

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Adventurousinvesting

For more information on any subject that we have covered in this issue, or on any other subjects,please tick the appropriate box or boxes, include your personal details and return this section to us.

All investors want to see long-term growth, but many are cautious in theirapproach, they don’t want to take too manychances with their hard earned money. There is however a significant minority,which are prepared to move up therisk/reward ladder.

They recognise that share investment isthe most likely route to generating goodlong-term returns and are ready to acceptthe risks involved.

The key is of course mixing investments, sothat the risk is spread across different assetclasses. We take a look at some of the areasthat adventurous investors might include intheir portfolio.

Value funds The attraction of value funds is that theydeliver high returns over the long term, butthey can also experience long periods ofdepressed growth.

The best managers of value funds look forstocks with unrecognised quality which is

not reflected in the price. This strategy offers a valuable safety margin to adventurous investors who may hold what is otherwise apretty high-risk portfolio.

Smaller company funds The attraction of smaller company funds isthey tend to grow faster than largercompanies, because they can adapt to eventsmore rapidly. Smaller company funds havehistorically produced better returns than theirlarger rivals of the developed world marketsbut smaller companies are riskier and tend tohave higher borrowing costs and can bemore dependent on one or two key people.

Specialist funds Funds with a clear geographic or sector focuscan help investors gain exposure to specificareas of solid performance. Facebook andTwitter are recent examples of success andbiotechnology is another potentially

profitable area. The downside is these areascan be volatile. Emerging, frontier markets The fastest-growing economies in the worldare still the BRICs, Brazil, Russia, India, China and other emerging markets. Althoughthe growth doesn’t always translate intogood stock market performance, it providesthe hunger in which companies can thrive.The growing middle class in developingcountries provides a huge consumer market,as well as scope for vast increases inhealthcare and telecoms.

The danger is that these funds are themost exposed of all, since they carry businessrisk, political risk, currency risk and corporategovernance risk.

You should always seek professionalfinancial advice before making decisionswhich carry great risk.

The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performanceis not a reliable indicator for future results. Please contact us for further information or if you are in any doubt as to the suitability of an investment.

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