smart money 25

MARCH / APRIL 2009

Creating wealth during an

economic downturn

give yourself a makeover before the end of tax year

savers experience the lowest savings rates in more than 100 years

Get your ISA skates on

How tax-efficient are your finances?

time is running out if you haven’t used your allowance

smartmoney

Tackling a poTenTial iHT issue • self-invesTed personal pensions • Turning your pension • savings inTo an income

All pension policyholders are now able to take up to 25 per cent of the value of their fund as a tax-free lump sum when they come to take benefits. This new rule has created a level playing field between different pensions.

Another rule introduced is that you and your employer are now able to pay up to one annual allowance into your pension. During the current tax year (2008/09), this is capped at £235,000, with the limit set at £3,600 for low or non-earners paying into personal and stakeholder pensions.

A further move designed to encourage us to save more is the greater ease with which people can now save into a number of different pensions at the same time under the new rules. As well as the annual allowance, there is also a limit on your entire pension savings, including any private pensions, occupational pensions and free-standing additional voluntary contributions. In this current tax year, this amount is £1.65m.

If you exceed £1.65m, you will be subject to the new lifetime allowance charge, or recovery tax, which will be charged at up to 55 per cent

on any excess. A pension fund of more than £1.65m might sound like the preserve of the very rich, but it is likely that more individuals will be in danger of breaching the lifetime limit than they realise.

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 a guide to 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.

Pensions reform has changed the retirement landscape

Welcome to the latest issue of our personal finance and wealth management magazine, featuring articles designed to

help you accumulate and protect your wealth during this official recession.

We look at the Bank of England’s announcement on 5 February 2009 to cut the base rate to an unprecedented low of 1 per cent. This was the fifth consecutive reduction in the cost of borrowing and, as a result, savers are now experiencing the lowest savings rates in more than 100 years. On page 4, we have provided some alternative solutions that may fare better during this period of economic downturn.

If current finances permit, contributing more towards your pension before the end of the current tax year on 5 April 2009 will enable you to benefit from more generous tax relief and from the tax-efficient treatment of pension funds. On page 5, you can find out more about how we’ve been helping recession-hit savers and pensioners to make use of the existing tax rules.

Time is running out if you haven’t already discussed with us how you could take advantage of your tax-efficient 2008/09 Individual Savings Account (ISA) allowance. We have provided answers on page 6 to some of the most frequently asked questions we receive from clients.

At the time of going to press, the global financial crisis and events are changing very quickly, and some further changes are likely to have occurred by the time you read this issue. A full content listing appears on page 3.

From 6 April 2006, also called ‘A-Day’ or ‘pensions simplification’, life changed for retirement savers as the government brought in a new simplified set of rules, effectively bringing to an end the eight previous tax frameworks for pensions.

simplified set of rules ends the previous tax frameworks for pensions

If you are close to or have already exceeded the £1.65m threshold, please contact us to discuss the options available to you.

NeeD MORe INFORMATION?PLEASE CONTACT US WITH YOUR ENQUIRY

n Arranging a financial wealth check

n Building an investment portfolio

n Generating a bigger retirement income

n Off-shore investments

n Tax-efficient investments

n Family protection in the event of premature death

n Protection against the loss of regular income

n Providing a capital sum if I’m diagnosed with serious illness

n Provision for long-term health care

n School fees/further education funding

n Protecting my estate from inheritance tax

n Capital gains tax planning

n Corporation tax/income tax planning

n Director and employee benefit schemes

n Other (please specify)

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For more information please tick the appropriate box or boxes below, include your personal details and return this information directly to us.

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want to make more of your money?

Inside this issue

RETIREMENT

Content of the articles featured in this publication is for your general information and use only and is not intended to address your particular requirements. They should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be 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 information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

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Pensions reform has changed the retirement landscapeSimplified set of rules ends the previous tax frameworks for pensions

Tackling a potential IHT issue Now is a great time to discuss your problem with us

Creating wealth during an economic downturnSavers experience the lowest savings rates in more than 100 years

How tax-efficient are your finances? Give yourself a makeover before the end of tax year

Get your ISA skates on Time is running out if you haven’t used your allowance

How balanced is your investment portfolio? Limit any losses to take advantage of the upside

A social, moral or environmentally responsible agendaStriking a balance between principles and making a profit

Turning your pension savings into an incomeGive yourself plenty of time to think through the options

SIPPs… Tax-efficient wrappers that provide greater control over your pension savings

Could you be eligible for a savings-tax refund? You can reclaim tax going back five years

When was the last time you reviewed your protection portfolio? The fundamental foundation that underpins all financial planning strategies

Propping up the tattered banking systemTaking on hundreds of billions of pounds of extra bank liabilities

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This current slump in asset values may present appropriate taxpayers with a rare opportunity to pass on assets while paying substantially reduced capital gains tax (CGT). The reduction in the CGT rate from up to 40 per cent to a flat rate of 18 per cent in April last year will also reduce the potential tax bill on assets gifted away. For lifetime gifts, the value of assets for IHT purposes is determined at the time they are given away, so while valuations are low, it is worth considering the advantages of gifting assets now.

So long as the gift is an outright gift to an individual and the donor survives seven years after making the gift, there will be a significant long-term tax saving. And with the IHT rate at 40 per cent, the long-term tax saving could be very significant. If there is a risk that IHT becomes due on gifts made prior to death, it is important for taxpayers to consider making gifts while asset values are low.

Lifetime gifts use up the nil-rate band first upon death within seven years. This will affect the allowances and the actual tax paid on the estate. The nil-rate band is the amount up to which an estate will have no IHT to pay and is currently £312,000 (2008/09) if you are single, or £624,000 (2008/09) are married or in a civil partnership.

Inheritance tax glossary n Assets Generally, everything that you own. n Beneficiary A person, or organisation, to

whom you leave a gift in your Will. n Estate The total sum of your possessions,

including property and money, left at your death once any debts have been paid.

n Inheritance tax (IHT) The 40 per cent tax paid on an estate that is over the nil-rate band

threshold. The current 2008/09 threshold is £312,000 for an individual. Married couples or those in a civil partnership have a combined threshold of £624,000.

n Intestate The term for someone dying without having a Will in place. In this case the Rules of Intestacy will decide to whom your estate is passed.

n Nil-rate band The amount of your estate on which IHT is not payable. For the tax year 2008/09 this is £312,000, and for married couples or those in a civil partnership £624,000.

n Potentially exempt transfer A gift made during one’s lifetime that is exempt from IHT should the donor live for seven years after making the gift.

n Trust An arrangement you can make in your Will to administer part of your assets after your death.

n Will A form of instruction as to how someone wishes to dispose of their assets on death.

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 fall in the value of assets such as shares, buy-to-let properties and holiday homes to their lowest levels in years, combined with capital gains being taxed at its lowest rate in 40 years, may be prompting more and more taxpayers to give away surplus assets to minimise future inheritance tax (IHT) bills. If you are considering tackling a potential IHT issue, now is a great time to discuss this with us.

Tackling a potential IHT issuenow is a great time to discuss your problem with us

Inside this issue

WEALTH PROTECTION

If you wish to discuss how we could help you mitigate a potential IHT liability and safeguard the wealth of your estate for your heirs, now is the perfect time to consider the options available to you. For more information, please contact us.

print money, which could be a distinct possibility this year. If this does happen investors will need to be comfortable with the risk associated with an increase in sterling.

Global gilt funds may also be worth considering, those which invest in bonds issued by governments, public authorities and international organisations in any area outside the UK. Corporate bonds are an IOU issued by a company and they pay a fixed amount of interest for a set term and return your capital at maturity. Please note that changes in exchange rates will affect the value of investments that are not in sterling.

Despite the economic gloom, some analysts also believe America could be the first to emerge from the current turmoil. President Barack Obama’s huge bailout package many believe will give the US economy a much needed boost.

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 a guide to 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.

safety of government-backed stock, on the upside index-linked gilts provide investors with the potential to hedge against inflation. If the government puts its ‘quantitative easing’ printing of money plan into action, index-linked gilts could rise as a result of this course of action.

With savings rates at such historic low levels, and Britain in the grip of the credit crunch, it may also be appropriate for some investors to consider looking to generate income by diversification outside the UK. Looking overseas may also yield investors better returns, particularly to areas benefiting from the strength of

the euro, such as Greek and Irish stocks, although it’s important to remember that the guarantee is with the respective governments.

If you are looking for income, some European equity funds have been benefiting from the rising euro and this strength may increase even further if the British government is forced to

Savers are now experiencing the lowest savings rates in more than 100 years, with some accounts actually paying zero interest. Faced with this scenario, we have provided some alternative solutions that may fare better during this current economic downturn.

To start with, much will depend on the amount of risk for return you are prepared to take, how much accessibility you need to your money and the amount of time over which you want to save or invest. It is important that any savings or investment vehicle matches your feelings and preferences in relation to investment risk and return. The higher up the spectrum of risk, the greater the opportunity for significant capital growth and, conversely, the greater potential for loss.

Depending on your own situation and if appropriate, a mix of assets with varying degrees of risk is probably the best solution. If you are a taxpayer, it may be prudent to utilise your 2008/09 tax-efficient cash Individual Savings Account (ISA) allowance of £3,600. For couples, this can add up to a further £7,200 of tax-efficient savings this financial tax year.

Cash ISA savers can also invest into equity ISAs, with the current combined annual tax-efficient allowance totalling £7,200, of which a maximum of £3,600 can

be held in cash. So a couple could have a combined tax-efficient savings amount of £14,400 sheltered from tax. Children aged 16 and over are also eligible to save in a cash ISA.

Non-taxpayers, including children, do not have to pay tax on any savings income up to their annual personal allowance of £6,035 in

the current tax year. Non-taxpayers should complete HM Revenue & Customs R85 form, available from banks and building societies, to ensure interest is paid gross.

As returns from ordinary deposit savings products have been cut to very low levels, many savers are looking towards lower-risk bond funds offered by investment companies as an alternative home for their money. Bonds, more usually referred to as gilts, are issued by the government when it needs to borrow money. Although the yields of gilts have been dropping as inflation and interest rates fall and investors look for the

04

Creating wealth during an economic downturn SAvERS ExPERIENCE THE LOWEST SAvINGS RATES IN MORE THAN 100 YEARS The Bank of England announced on 5 February 2009 a further base rate cut to an unprecedented low of 1 per cent. This was the fifth consecutive reduction in the cost of borrowing and, prior to this widely anticipated cut, savings providers had already started to cut interest rates ahead of the rate reduction.

WEALTH CREATION

Savers are now experiencing the lowest savings rates in more than 100 years, with some accounts actually paying zero interest.

We can help you identify the best approach that suits your specific needs, based on your own preferred balance between risk and return. To discuss your requirements or for more information about the other services we offer, please contact us.

There is a limit on the value of retirement benefits that you can draw from an approved pension scheme before tax penalties apply. That limit is called the Lifetime Allowance. The Lifetime Allowance is £1.65m in the 2008/09 tax year. At the time of payment, a recovery charge will be applied to the value of retirement benefits in excess of the Lifetime Allowance. The amount will depend on how the excess is paid.

You may also be able to top up your tax-efficient pension contributions to a company pension scheme, or make Additional voluntary Contributions (AvCs). AvCs could offer a cost-effective way to increase your pension fund if you have a company pension scheme. Following the changes that became effective from 6 April 2006, there are now even more ways to pay extra funds into your pension.

If you are a higher rate taxpayer, you may wish to consider saving tax by transferring money into a lower earning, or non-earning spouse’s or civil partner’s name. If appropriate to your situation, maximising personal tax allowances through non-taxpayers will enable them to claim tax back on bank and building society savings accounts, so that the tax liability on the savings is lower, or none.

Fully utilising your annual Individual Savings Account (ISA) allowance, currently £7,200 (2008/09), will enable you to avoid tax by sheltering investments. It may be appropriate to consider moving savings from an ordinary deposit or savings

account into an ISA. Friendly Society savings accounts or products from National Savings & Investments also offer tax-efficient savings options.

If you are single and have assets over £312,000 (2008/09), or are married or in a civil partnership with assets over £624,000 (2008/09), make sure that you don’t leave an inheritance tax (IHT) bill charged at 40 per cent on the assets of your estate over these allowances behind for your heirs to pay on your premature death. Write your life assurance policies in an appropriate trust, utilise your IHT allowances and make a Will. If you have made an outright lifetime gift, the actual IHT rates and allowances could be affected, therefore it is important to receive appropriate advice before taking action.

It’s important to check that you are paying the correct amount of tax. Check your tax code to make sure you haven’t been issued with an incorrect tax code and reclaim any amounts that may be wrong. Also make sure you’re getting your correct personal allowance.

If you are a taxpayer and raising extra income by renting a room under ‘rent-a-room relief’, the rent is exempt from income tax on profits from furnished accommodation in your only or main home if the gross receipts received are £4,250 or less. Receipts over the £4,250 exemption limit are taxed on an alternative basis that may produce a lower tax bill.

Make sure, if applicable to your situation, that you take full advantage of your annual capital

gains tax (CGT) exemption limit. For the 2008/09 tax year CGT is charged at a flat rate of 18 per cent on chargeable gains over £9,600. Taper relief and indexation allowance are no longer applied. Financial products are available that could help you to minimise or defer a capital gains tax liability.

If you do have a CGT liability, you may also wish to consider using your allowance more efficiently by transferring assets between you and your spouse or civil partner to make the most of both of your CGT allowances.

Giving to charitable good causes utilises tax-efficient means of charitable giving, including using a deed of covenant, Gift Aid or payroll giving.

If your child or grandchild was born on or after 1 September 2002, they are eligible for a child trust fund (CTF). This is a long-term savings and investment account where the child (and no one else) can withdraw the money when they turn 18. Neither you nor the child will pay tax on income and gains in the account. A £250 voucher is given by the government to start each child’s account and then a further contribution of £250 to all eligible children at the age of seven.

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 a guide to future performance. Tax benefits may vary

as a result of statutory change and their value will depend on individual circumstances. Thresholds,


TAX

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If you would like to find out more about how we’ve been helping recession-hit savers and pensioners to make use of the existing rules, please contact us for further information.

How tax-efficient are your finances?Give yourself a makeover before the end of tax year

If current finances permit, contributing more towards your pension before the end of the current tax year on 5 April 2009 will enable you to benefit from tax relief and from the tax-efficient treatment of pension funds. The total annual allowance for this tax year that you can utilise and receive tax relief upon is up to 100 per cent of your relevant earnings, capped at £235,000, with the limit set at £3,600 for low or non-earners paying into personal and stakeholder pensions.

“Fully utilising your annual Individual Savings Account (ISA)

allowance, currently £7,200 (2008/09), will enable you to avoid tax by sheltering

investments.”

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Get your ISA skates onTime is running out if you haven’t used your allowanceTime is running out if you haven’t already discussed with us how you could take advantage of your tax-efficient 2008/09 Individual Savings Account (ISA) allowance. We have provided answers to some of the most frequently asked questions we receive from clients.

WEALTH CREATION

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WEALTH PROTECTION

Q: What is an Individual Savings Account (ISA)?A: ISAs are tax-efficient and flexible wrappers.

They don’t have to run for a fixed term to qualify for these concessions and they benefit from tax-efficient growth. You do not have to pay any income tax or capital gains tax when you cash in your ISA. An ISA doesn’t have to be mentioned on your tax return.

Q: Who can have an ISA? A: Anybody over the age of 18 (16 for a cash ISA)

is able to save using an ISA as long as they are a UK tax resident. You can also take out an ISA even if you are not currently working. You and your partner are both able to set up an ISA as you receive separate ISA allowances. You cannot take out a joint ISA with somebody; however, you could subscribe to an ISA on behalf of someone else, for example as a gift.

Q: How much can I save in an ISA?A: There is an overall annual maximum

investment limit for ISAs, and separate limits apply to each element. ISAs allow you to save up to £7,200 during the 2008/09 tax year. For this current tax year you can save up to £3,600 in a cash ISA with one provider. The balance of the £7,200 limit (£3,600) can be invested in stocks and shares with another ISA provider.

ISA typeISA limits for the 2008/09 tax yearStocks and shares ISA Up to £7,200Cash ISA Up to £3,600Combined maximum £7,200

Q: Why should I consider using a cash ISA? A: If you are investing for less than five years, or

are a cautious investor, a cash ISA may be the most appropriate option. However, you need to ensure that the interest rate is higher than inflation, otherwise the purchasing power of your savings will reduce. In this current low interest rate environment, if you have cash sitting on deposit in a bank or building society it may be more advantageous to place some of this money into a cash ISA. It

is also important to make sure that you leave yourself with an adequate emergency fund. Money on deposit with a bank or building society is normally taxed at your highest rate of income tax, but all interest is tax-free from a cash ISA.

Q: Why should I consider using a stocks and shares ISA?

A: Over the long term, equities tend to outperform cash and bonds, but they are riskier. The stocks and shares component of an ISA can offer you a wide choice of investments to choose from. These include funds such as unit trusts, OEICs or investment trusts. You could also choose to invest directly into equities, gilts or corporate bonds.

Q: What benefits do I gain by holding shares in my ISA?

A: There is no immediate tax advantage for basic rate taxpayers, but if you are a higher rate taxpayer you benefit because you avoid the extra tax payable on dividends received outside ISAs. If you are a basic rate taxpayer you can still gain a tax advantage if you invest in corporate bond funds, because the 20 per cent tax on the interest can be reclaimed. You also have no capital gains tax to pay on any increases in the value of your investments. In

addition, you could benefit when you retire because the income from ISAs is not counted towards the age allowance.

Q: How are the dividends from ISA stocks and shares taxed? A: If you’re a basic rate taxpayer inside or

outside an ISA, you pay tax at 10 per cent on dividend income. This is taken as a ‘tax credit’ before you receive the dividend and cannot be refunded for ISA investments. If you’re a higher rate taxpayer, you would normally pay tax on dividend income at 32.5 per cent. In an ISA you won’t get back the 10 per cent dividend tax credit element of this, but you will save by not having to pay any additional tax.

Q: In the current volatile environment, should I keep clear of stocks and shares?

A: This will depend on your own attitude towards risk for return. However, by regular saving you can drip-feed your money into the stock market, which is a good way to help smooth out the effects of market volatility. Saving regular amounts not only avoids the risk of bad timing, but also removes the need to try and second-guess the stock market’s next move. This is called ‘pound cost averaging’, which means that when prices are high your monthly contribution may buy fewer shares or fund units, but when prices are low your investment buys more shares or fund units. This also assumes there will be a net increase in the investment value over time. The credit crunch may have led many ISA investors to give equities a wide berth, but some are now seeing this as a buying opportunity.

Q: What should I do with my old ISAs?A: If you have a cash ISA that is now paying a

poor rate of interest, or a stocks and shares ISA that has not been performing well, you could transfer your money elsewhere without any loss of tax concessions providing the transfer is arranged by the new manager. You should note that an old stocks and shares ISA cannot be transferred to a cash ISA.

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 a guide to 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.


To discuss your ISA options, or to look at how you could save and invest more tax-efficiently, please contact us for more information.

“ISAs are tax-efficient and flexible wrappers. They don’t have to run for a fixed term to qualify for these concessions and they benefit from tax-efficient growth.”

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INVESTMENT

In this current economic downturn, it may be appropriate that you spread your portfolio over several different investments. This may help limit any losses, and conversely, if markets eventually rise, you may be able to take advantage of the upside. Make sure your investments are appropriate for your risk profile and if you have any concerns please contact us.

If your portfolio isn’t balanced, it may be appropriate to consider a multi-asset fund. As the name suggests, multi-asset funds can be a useful diversification tool, as they invest in a wide choice of assets. This means that if one asset performs badly, you also have exposure to other assets at the same time which may not be affected by the downturn.

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 a guide to future performance.

A social, moral or environmentally responsible agenda

If you are considering this as an option for yourself, firstly you need to determine your attitude to risk. If you’re a low-risk investor, for example, you might want to avoid a collective investment fund that holds stocks and shares altogether, while only aggressive investors should sink their money into collective investment funds investing in high-risk companies such as renewable energy start-ups. You should also diversify to reduce risk. It may be appropriate to spread your investment between different funds, sectors and geographical areas around the world. There are plenty of ethical funds that invest throughout the UK, Europe, the US and Asia, and in sectors such as bonds.

Most ethical investment funds can be held within the wrapper of your 2008/09 Individual Savings Account (ISA) allowance of £7,200, which would mean you mitigate most income tax and all capital gains tax on the money you make. There are also numerous pension companies offering ethical funds, and more experienced investors could consider a self-invested personal pension plan (SIPP). These free you to invest your pension in the full range of UK-based investment funds, including many ethical funds.

Socially responsible investment (SRI) funds are slightly broader in their investment approach than ethical funds. For example, an ethical fund might never invest in a company that practises animal testing, whereas an SRI fund might, but only if it was animal testing for life-saving medicines.

Ethical and SRI funds are measured in shades of green. A ‘light green’ fund uses more relaxed investment criteria when selecting stocks than a ‘dark green’ fund, which has more rigid ethical or environmental requirements.

Both ethical and SRI funds will ‘screen’ or vet companies before investing in them. Ethical funds work on negative selection, so they will exclude companies that invest in ‘unethical’ activities, such as making or selling arms or tobacco. They invest only in areas that fulfil the particular investment company’s own ethical requirements for the fund.

An SRI fund combines both negative and positive criteria when creating its portfolio, so it will pick both companies that it thinks ‘do good’, as well as those that might not instantly stand out as 100 per cent ethical with the aim of promoting change from within.

Although the environment might play a part in the screening process for ethical and SRI funds, strictly speaking a climate change fund is a separate entity. A climate change fund will invest in companies that are developing environmental solutions, such as building wind farms or utilising solar power.

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 a guide to future performance. Tax benefits may vary as a result of statutory

change and their value will depend on individual circumstances. Thresholds,


sTriking a balance beTween principles and making a profiT Many investors are looking for investment vehicles that invest in companies with a social, moral or environmentally responsible agenda. They also require that each fund has its own set of criteria and rules about the types of companies in which it will and won’t invest.

How balanced is your investment portfolio? limiT any losses To Take advanTage of THe upside


It’s still important to strike a balance between your principles and making a profit. Ethical or SRI funds are higher risk than other funds due to the restricted remit and availability of suitable investments. So it’s vital to consider the options available to you. To discuss your ethical requirements, please contact us.

RETIREMENT

There is usually only one chance to get it right and, with recent falls in stock markets, maximising income has become even more important. Retirement should come as no surprise, but too many people leave it far too close to the date they finish work to start detailed financial planning.

If you have a personal pension or a company pension, other than a final salary scheme, you will eventually need to consider how and when you convert the fund built up into an income in retirement. Ideally, you should give yourself plenty of time and start thinking through your options some five years prior to your retirement.

If you currently find yourself in this situation, we can help guide you through the minefield of choices you will have to make. It’s also important to remember that it is not a requirement that you have to take the annuity offered by the company you previously saved your pension with. The open market option provides you with the facility to shop around for a better deal. Depending on your circumstances, this could buy you a significantly higher income. In addition, advances in the way annuities are priced mean that you could qualify

for a higher rate because of previous poor health, your occupation or where you live.

If you use your pension to buy a level annuity, you will receive an income fixed for life. Level annuities give you the biggest income from day one, but do not allow for inflation. An alternative is an escalating annuity that pays a growing annual income. The growth in your future income can be linked directly to the Retail Prices Index or it can be by a set sum annually.

Did you know?Annuities are linked to average life expectancy, with those likely to live the longest receiving a smaller income per pound of their pension fund. But insurers are becoming more sophisticated about the way they do their sums. Rather than simply giving average rates based on age and sex, insurers are turning to more individual pricing. Rates can be linked to occupation, health or even postcode.

Even higher rates may be available for those who have had health problems such as diabetes or high blood pressure.

Enhanced annuity rates can offer significantly more income because a person’s life span is expected to be correspondingly shorter.

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 a guide to future performance. Thresholds, percentage rates and

tax legislation may change in subsequent finance acts.

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Turning your pension savings into an incomeGive yourself plenty of time to think through the options

Turning your pension savings into an income for the rest of your life is one of the most important financial acts you will ever make. Choosing the right deal may determine your income for perhaps the next thirty or more years, and possibly the wealth of your spouse after you die.

If you are approaching your retirement and would like to discuss the options available to you, or for more information on how to maximise your retirement income, please contact us.

What will you do when you retire?Before April 2006, you had to buy an annuity once you reached age 75, but now there are fewer restrictions. Before you reach 75 you could opt for an unsecured pension, also known as ‘income drawdown’. This enables you to take a maximum of 120 per cent of the value of an annuity income.

Or, you could leave it all invested if you don’t require the money at that particular point. You could also opt for ‘phased retirement’. Your pension policy is split into a number of segments. You open enough segments to draw enough ‘income’ for your needs during the year it is required. The ‘income’ is made up of a combination of the tax-free cash available for the segment and income from the remainder of the funds in the opened segment. The non-opened segments remain invested until you wish to draw another tranche of income.

At age 75, you have to take your pension benefits but they can go into an ‘alternatively secured pension’. This is like an unsecured pension but the maximum you can take out is the equivalent of 90 per cent of an annuity income. With this option, when you die any remaining money goes towards a pension for your dependents rather than back into your estate.

“There is usually only one chance to get it right and, with recent falls in stock markets, maximising income has become even more important.”

SIPPs fall under the same basic rules for contributions and tax relief as personal pension plans. You may invest up to £235,000 in 2008/09 to receive tax relief up to 100 per cent of your earnings. There is a lifetime allowance for the maximum amount payable that is treated as tax-privileged, which is currently set at £1.65m for 2008/09.

When you wish to withdraw the funds from your SIPP, between the ages of 55 and 75 (50 and 75 before April 2010), you can normally take up to 25 per cent of your fund as a cash lump sum, free from tax. The remainder is then used to provide you with a taxable income.

There are also significant tax benefits. The main benefit of contributing to a SIPP is the fact that basic rate tax payments on contributions will be rebated to the fund, which effectively means that, within pension funding limits, you can invest part of your income gross. There have been a number of changes over the years and it is vital that professional advice is taken before considering this retirement planning option.

You also need to balance the advantages of investing in a SIPP with the fact that the set-up costs and charges are likely to be more expensive than for a stakeholder

or personal pension. In addition, SIPPs are unlikely to be suitable for smaller pension funds and can be complicated, making them more suitable for sophisticated investors.

A vast array of investments can be held in a SIPP to meet the objectives of your investment strategy. Some of these funds are more common than others, and some are very complex. SIPPs provide the opportunity to invest in many different types of investments including the usual types of investment funds. However this may vary widely between SIPP providers.

Broadly, funds can be categorised into two main groups: Conventional funds, such as equity and bond funds, and Alternative funds. They can also be categorised by other criteria such as:

Typesn Open-ended funds (OEICs)n Closed-ended fundsn Exchange traded funds (ETFs) n Investment themes

n Emerging markets fundsn BRIC fundsn ‘Frontier’ fundsn Asset class/sector/themen Specialist fundsn Ethical fundsn Goldn Oil

Types of fundsOpen-ended fundsUnit trusts and open-ended investment companies (OEICs) are the most common type of open-ended funds. Open-ended means that the number of units, or shares respectively, in these funds increases and decreases depending on the level of new investments and redemptions. When you buy into an open-ended fund, new units are created. Conversely, if you sell, those units are cancelled. The value of these units or shares directly reflects the value of the underlying portfolio.

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Self-InvestedPersonal PensionsTax-efficient wrappers that provide greater control over your pension savings

“SIPPs fall under the same basic rules for contributions

and tax relief as personal pension plans. You may invest

up to £235,000 in 2008/09 to receive tax relief up to 100 per

cent of your earnings.”

RETIREMENT

Unlike a traditional personal pension, a Self-Invested Personal Pension (SIPP) may offer for appropriate investors far greater flexibility in terms of the assets that can be held within its tax-efficient wrapper. A SIPP enables investors to spread investment risk across various asset options, but also to select investments that aim to meet any specific requirements and financial objectives set. Please note that any assets held within a SIPP will be owned by the pension fund rather than by you.

WEALTH PROTECTION

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Could you be eligible for a savings-tax refund?

When was the last time you reviewed your protection portfolio?The fundamenTal foundaTion THaT underpins all financial planning sTraTegiesEveryone with financial dependents and personal and business liabilities should consider having a sufficient level of financial protection to cover all eventualities.

Simply having life assurance may not be enough. What, for instance, would happen to your financial situation if you contracted a near-fatal disease or illness? You may not be able to work and so lose your income, but you are still alive so your life assurance does not pay out. And to compound the problem, you may need expensive nursing care or to adapt your home, or even move.

When was the last time you reviewed your protection portfolio? Don’t delay or put off addressing this fundamental foundation that underpins financial planning strategies. Talk to us, so that we can guide you through the different protection options available to you.

you can reclaim Tax going back five yearsHM Revenue & Customs (HMRC) estimates that some 2.5 to 3 million savers could be eligible for a refund because they have overpaid income tax on savings in the past.

Basic rate tax at 20 per cent is deducted from savings interest at source (in other words, taken off by your bank or building society before it goes into your account). However, people whose income is below the personal allowance are eligible to have their interest paid gross. All you need to do is fill in an R85 form and send it to your bank and building society.

Many people fail to do so, however, and HMRC estimates that they could be owed about £250m in back tax. To claim your refund, you must fill in a separate form, R40. You can reclaim tax going back five years from the 31 January following the end of the tax year, though the time limit will be reduced to four years on or after April 2010.

Closed-ended fundsInvestment trusts are an example of closed-ended funds. They typically issue shares which are then traded on a stock exchange. The number of shares is fixed. This means that the value of the shares reflects both the ‘net asset value’ of the fund’s underlying portfolio and the supply/demand for the fund’s shares. As a result, a closed-ended fund’s shares can trade either at a discount or premium to its underlying net asset value.

Exchange traded funds (ETFs)ETFs are funds designed to track indices. They are a hybrid between open-ended and closed-ended funds. They are open-ended as their number of shares is not fixed, but have characteristics of closed-ended funds, such as listing on an exchange and intraday dealing. They normally fully replicate the index they track, by holding all the constituents in their respective index weightings.

Emerging markets fundsThese funds aim to give investors exposure to stock markets in emerging economies, either on a global basis or in specific regions, such as Eastern Europe. Emerging economies are considered those that have a low-to-mid per capita income, have ongoing economic development and reform programmes, and are considered to be fast-growing economies.

BRIC fundsIn fund management jargon, ‘BRIC’ stands for Brazil, Russia, India and China. BRIC funds generally have the remit of providing exposure to only these four emerging economies.

‘Frontier’ fundsFrontier funds allow investors to gain exposure to those economies classified as ‘frontier markets’. Frontier markets are generally defined as those markets that tend to have a smaller capitalisation, fewer traded securities and are less liquid than emerging markets. Countries within this frame can be at different levels of economic development, with gross domestic product per capita ranging from low, in countries such as vietnam and Nigeria, to high, such as in the Gulf countries.

Specialist fundsFunds can provide a way of outsourcing to a specialist investment manager. Specialist funds are funds that invest in a particular area or sector. For example, instead of buying a number of holdings in UK banks, an investor can buy a specialist financials fund managed by someone who may be better placed to try to select the best mix of bank and financial stocks from a global perspective.

Ethical fundsEthical, or socially responsible, funds typically either look for companies that are actively pursuing ways of improving health and the environment, or avoid companies that they consider have a negative effect on society.

Exposure to gold via fundsAn investor can gain exposure to gold via ETFs designed to track the gold price, or via specialised funds investing in companies with gold exposure, such as mining companies.

Exposure to oil via fundsAn investor can gain exposure to oil via ETFs designed to track the oil price, or via specialised funds investing in companies exposed to oil, such as exploration, development, production and servicing companies.

‘Soft’ commodities‘Soft’ commodities is another term for agricultural commodities, such as wheat, cotton, palm oil and orange juice. An investor can gain exposure to soft commodities via ‘agricultural’ funds. These can either invest in future contracts on soft commodities, or in companies that are involved in, related to, concerned with, or affected by agriculture and farming related issues. Investors can also gain exposure to individual soft commodities by buying ETFs designed to track the price of single commodities.

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 a guide to 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.

planning for a successful reTiremenT requires professional advice To ensure THaT you fully acHieve your reTiremenT goals. many of The invesTmenTs and funds feaTured in THis arTicle are also available THrougH personal pension plans. for more informaTion abouT THe services we provide and THe opTions available To you, please conTacT us.

Asset Protection Scheme Banks are being allowed to buy insurance from the government to protect themselves against losses against their portfolios of toxic assets. It is estimated that up to £260bn may have to be underwritten. The scheme is modelled on America’s last November rescue of Citigroup. Analysts argue that it would be better to set up a so-called ‘bad bank’, which removes all the debts from firms’ books.

Under Britain’s scheme, lenders will still nurse heavy losses because

the bad debts will remain on their balance sheets. Taxpayers will pay the bulk of the bill as and when borrowers default. Asset Purchase Plan The Bank of England will be empowered to lend directly to companies. It will buy up to £50bn of debts and will hopefully bring down the cost of borrowing for cash-starved companies. It finally brings UK policy into step with the US Federal Reserve, which has been lending directly to companies for months.

It also paves the way towards what economists call ‘quantitative

easing’ by the Bank of England. This would involve the Bank printing money and lending it to firms. Mortgage Guarantee Scheme The government will guarantee sales of bundled up mortgages and other loans in the hope of kick-starting the lending markets. This acts on a set of proposals published by former Halifax Bank of Scotland chief, Sir James Crosby, under which he said the state should underwrite up to £100bn of so-called ‘mortgage-backed securities’. The government will

also extend a guarantee of £250bn of bank debt. Nationalised banks to lend more Northern Rock will stop ‘actively encouraging’ its customers to quit the bank when their current mortgage deals expire. In addition, the government will swap up to £5bn of ‘preference shares’ in RBS for ordinary shares that pay a less punitive rate. In return, RBS has pledged to bolster lending to firms and individuals. The twin moves are an attempt to plug the widening gap in Britain’s consumer loans market.

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They are the most far-reaching proposals yet to prop up the tattered banking system. Yet it is far from certain that the government taking on hundreds of billions of pounds of extra bank liabilities will kick-start lending to firms and families. So what did the government announce and will it work?

Taking on hundreds of billions of pounds of extra bank liabilities

Asset Protection Scheme Banks

are being allowed to buy insurance from the government to protect themselves against losses against their portfolios of toxic assets.

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Propping up the tattered banking system

BANKING
