An important one-off decision that has long-term consequences if you get it wrong

If you save through a private personal pension, when you approach retirement age you’ll have to decide what to do with the pension fund you have built up. If applicable to you, one option is to buy an annuity. It’s important to find an annuity that suits you and provides the best deal because, after your property, an annuity is probably the biggest purchase you will ever make. Continue reading…

To afford the lifestyle you want when you retire, you need to do something about it today

It may be tempting to say, “But retirement is a long way off”, yet it’s never too early to start investing in order to protect your future. To afford the lifestyle you want when you retire, you need to do something about it today. You now have a much greater choice when it comes to how and when to take retirement benefits from pensions since the pension simplification rules were introduced.

UK’s pension tax regime radical overhaul
On April 6, 2006 major changes were introduced to the structure of UK Pension schemes. These changes heralded probably the most radical overhaul of the UK’s Pension tax regime. The new simplified regime was largely a replacement of the past pension framework as opposed to the addition of another layer of legislation.

The most important thing is to plan your retirement funding strategy in advance. Anyone investing in a pension should remember that whilst pensions are extremely tax-efficient, it’s important to regularly review where your money is invested. This becomes more important as you begin to approach retirement when your investment aims may gradually change from growing the value of your pension fund to protecting it.

A private personal or stakeholder pension scheme could be right for you if:
• you want to save money for retirement in addition to your occupational workplace pension
• you’re self-employed, so don’t have access to an occupational workplace pension scheme
• you aren’t working but can afford to pay into a pension
• your employer offers it as an occupational
workplace pension

Personal and stakeholder pensions are ‘defined contribution’ private pensions that you arrange yourself. You contribute money into a pension fund which you use to buy a regular income when you retire. Sometimes employers set up group personal or stakeholder pensions for their employees.

Tax-efficient environment
Personal private pensions grow in a tax-efficient environment. You pay no capital gains tax on any growth and no further UK tax on any income the investments produce, and income from fixed-interest investments and deposits are received gross.

UK investors under age 75 can benefit from up to 50 per cent pension tax relief (2012/13 tax year) and 45 per cent (2013/14 tax year).

The higher your rate of tax, the more tax relief you could receive. Even non earners, including children, and those with an income under £3,600 can benefit, but can only contribute up to £3,600 this tax year.

Basic-rate tax relief of 20 per cent is added automatically. For instance, you contribute £8,000 to your pension and the government adds £2,000, to make a total investment of £10,000.

Higher-rate taxpayers can claim back up to a further 20 per cent through their tax return – another £2,000 in this example. So the cost of a £10,000 contribution is as little as £6,000.

Top-rate taxpayers can claim back up to a further 30 per cent (2012/13 tax year) through their tax return – another £3,000 in this example – so the cost of a £10,000 contribution is as little as £5,000, and 25 per cent (2013/14 tax year).

Annual allowance
The annual allowance (£50,000 in the 2012/13 to 2013/14 tax years) caps the maximum contributions that can be made by anyone (yourself or your employer, for instance) into all your pensions in a tax year. This limit does not apply to consolidating pensions, but includes the value of benefits built up in final salary schemes.
The table shows you the annual allowance for the tax years 2012/13 to 2013/14. Lifetime allowance
The lifetime allowance is the maximum amount of pension benefit you can build up over your life that is available for tax relief. If, when you take your pension benefits, these are worth more than the lifetime allowance there is a tax charge (the lifetime allowance charge) on the excess.

The lifetime allowance charge is a tax charge paid on any excess in the value of your pension benefits over the lifetime allowance limit. The rate depends on how this excess is paid to you. If the amount over the lifetime allowance is paid as:

• lump sum – the rate is 55 per cent
• taxable pension – the rate is 25 per cent

The table shows you the lifetime allowance for the tax years 2012/13 to 2013/14.

Input periods
When you contribute to a private personal pension, your contributions count towards the annual allowance of the tax year in which they are made. For instance, a contribution you make in March 2013 counts towards the 2012/13 tax year. This is not necessarily the case for other pensions. If you have contributed more than £50,000 across the last two tax years, a contribution you make could unknowingly take you over
the annual allowance.

Carry forward
If your total pension contributions for the tax year are more than the annual allowance you may still be able to claim tax relief as you can carry forward any unused allowance from the previous three years to the current tax year. You will only have to pay tax on any amount of pension contributions in excess of the total of the annual allowance for the tax year plus any unused annual allowance you carry forward. These carry forward rules are not being changed. The effect of this is
that for 2014/15 you will be able to carry forward up to
£50,000 unused allowances from each of the tax years
2011/12 through to 2013/14.

When you can receive your pension
The earliest age you can receive a private personal or stakeholder pension is usually 55, depending on your arrangements with the pension provider or pension trust. You don’t have to be retired from work.

The 3 basic steps when arranging your retirement income are:
• decide when you want to retire
• decide how you want to be paid
• shop around for the best deal on a regular payment (buying an ‘annuity’)

Deciding when to retire
Generally, the older you are when you take your pension the higher the payments because your life expectancy is shorter.

Deciding how you want to be paid
When you’re close to retirement you have to decide how you want your pension to be paid. This will depend on the arrangements you have with your pension provider but usually you’ll have the option to take up to 25 per cent of your pension fund money as a tax-free lump sum and the rest as regular payments. These could be monthly, quarterly, half-yearly or annually.

If all your pension funds total £18,000 or less, you can usually take the whole amount as a lump sum. You have to be at least 60 to do this. If your private personal pension or stakeholder pension is less than £2,000 you can usually take it as a cash payment, no matter how much you get from other pensions.

In some cases, when you’re under 75 and are expected to live less than a year, you can take your whole fund as a lump sum. You won’t have to pay tax on it unless your pension funds are worth more than the lifetime allowance.

A regular payment from the government that you receive when you reach State Pension age

The basic State Pension is a regular payment from the government that you receive when you reach State Pension age. To receive it you must have paid or been credited with National Insurance contributions.
The most you can currently receive is £107.45 per week
(in 2012 to 2013).

The basic State Pension increases every year by whichever is the highest:
• earnings – the average percentage growth in wages
(in Great Britain)
• prices – the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI)
• 2.5 per cent

Additional State Pension
The Additional State Pension is an extra amount of money that you could receive with your basic State Pension. It’s also based on your National Insurance contributions.

How much you receive depends on your earnings and whether you’ve claimed certain benefits. There is no fixed amount like the basic State Pension. You receive the Additional State Pension automatically, unless you’ve contracted out of it.

The Additional State Pension is paid with your basic State Pension. It normally increases every year by prices – the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI). There is no fixed amount for the Additional State Pension.

How much you receive depends on:
• how many years of National Insurance contributions
you have
• your earnings
• whether you’ve contracted out of the scheme

Once you’ve reached State Pension age and are claiming the basic State Pension you’ll automatically receive any Additional State Pension you’re eligible for. There is no need to make a separate claim.
You will not receive the Additional State Pension if you’ve contracted out of it. If you only contracted out for certain periods, you’ll receive a reduced amount.

The Additional State Pension is made up of two schemes. You might have contributed to both, depending on how long you’ve been working.

The main difference between the two schemes is that since 2002 you also contribute to the Additional State Pension if you’re claiming certain benefits.

The State Second Pension since 2002
You contribute towards your Additional State
Pension through your National Insurance contributions when you’re:
• employed and earning over the lower earnings limit of £5,564 a year (in 2012 to 2013)
• looking after children under 12 and claiming Child Benefit
caring for a sick or disabled person more than 20 hours a week and claiming Carer’s Credit
• working as a registered foster carer and claiming
Carer’s Credit
• receiving certain other benefits due to illness or disability

You’re not eligible if you’re:
• employed and earning less than £5,564 per year
• self-employed
• unemployed
• in full-time training

Contracting out of the Additional State Pension
You can only contract out if your employer runs a contracted out pension scheme, so you’ll need to check this with them. If you’re a member of a contracted out occupational workplace pension you don’t contribute to the Additional State Pension for the time you belong to the scheme.

This means that when you retire you either don’t receive any Additional State Pension or it might be reduced, depending on how long you contracted out. You and your employer pay lower National Insurance contributions while you contract out. When you retire, you’ll get a pension from your employer’s scheme.

To contract out you must be:
• earning at least the lower earnings limit of £5,564 a year (in 2012 to 2013)
• paying Class 1 National Insurance (or treated as paying them – check with your employer)

Different rules apply if you’re a member of a salary-related pension scheme before 6 April 1997. These rights, known as the ‘Guaranteed Minimum Pension’, can’t be taken before age 65 (men) or 60 (women). The Guaranteed Minimum Pension will continue to be paid at these ages even when the State Pension age rises.

The sooner you start saving for your retirement the more secure your future will be

Saving for your retirement may not seem important when you’re starting out. But the sooner you start saving for your retirement the more secure your future will be.

Having a private personal or occupational
workplace pension

It’s so important to invest for your retirement. Putting as much as you can into a pension provision as soon as you can gives you a much better chance of having the retirement you want.

When planning your retirement there are three main types of pension you need to consider. These are State Pensions, private personal pensions and occupational workplace pensions.

First post-war ‘baby boomers’ pass the old Default Retirement Age of 65

Securing your eventual financial independence in retirement requires making sure that your plans enable you to achieve this goal. Whatever provision you already have in place must be regularly updated as your circumstances and requirements change, and you need to ensure that you are still saving enough. But for many retirees’ the future looks less certain.

The UK is witnessing the march of a new type of retiree as the first post-war ‘baby boomers’ pass the old Default Retirement Age of 65. According to Aviva’s latest Real Retirement Report, more than one in three (39 per cent) over-55s are continuing to receive a wage and nearly half are intent on using their extra earnings to travel more when they finish full-time work.

Data from the latest census in 2011 showed there
were 754,800 people aged 64 in England and Wales, and almost 6.5 million people are turning 65 over the next decade compared with 5.2 million in the previous decade. The spike is due to the post-war birth rate soaring when the armed forces returned from the Second World War, with the new-born generation dubbed the ‘baby boomers’.

Pushing back the boundaries
Allied with improved health care, more people are remaining active as they approach retirement age, and the report shows how they are pushing back the boundaries at work and in their leisure time.  23 per cent of 65- to 74-year-olds were still wage earners in December 2012, compared with 18 per cent when the report first launched almost three years ago in February 2010.

Fuelling the rise of income and savings
With 55 per cent of 55- to 64-year-olds also still in employment, compared with 41 per cent in February 2010, this trend looks set to continue as more baby boomers pass the age of 65. It has already fuelled the rise of income and savings among over-55s during the last three years. The typical over-55 now has an income of £1,444 each month along with £14,544 in savings (December 2012), compared with a monthly income of £1,239 and savings of £11,590 in February 2010.

Enjoying the fruits of your labour
Despite 80 per cent being concerned by rising living costs over the next six months (December 2012), the UK’s over-55s are determined to enjoy the benefits of extending their working lives. Nearly half (44 per cent) plan to use their extra time in retirement to travel more, while 42 per cent are focused on spending more time in their gardens.

Socialising is high on the agenda for many over-55s in retirement, with 37 per cent planning to invest extra time in their families and 33 per cent keen to socialise more with friends.

The most common motivation
They also have philanthropic intent: two-thirds (66 per cent) of over-55s would be interested in carrying out charity work or volunteering once they have retired. The most common motivation is to give something back to the community (49 per cent) and to stay active by getting out of the house (48 per cent).

A new model for later life
It’s clear that the first baby boomers are setting out a new model for later life, and getting the most out of their improved physical health and the freedom to continue working for longer. Many people find that staying active in a job helps to keep them young at heart – with the bonus being that it boosts their earning and savings potential in the process.

The key to making the most of this opportunity is for people to start planning for their 60s and beyond well in advance. In this way, rather than accepting the old retirement stereotypes, you can have the freedom of choice about whether you continue to work or not, rather than feeling forced to carry on out of the demand to meet financial commitments.

Flexible for the future
Everyone enjoys using their wealth in different ways. For you, it might be the joy of travel, helping others through philanthropy, sharing your success with family and friends or your passion for collecting. It might be the simple freedom to do what you want, when you want. Whatever your priorities, we can help you use your wealth by ensuring it’s working for you now and is structured to be flexible for the future.

Immediate access to your pension funds, allowing you to take out what you want, when you want it

As your wealth grows, it is inevitable that your estate becomes more complex. With over 400,000 people now expected to reach age 75 each year [1], more and more people could be faced with a 55 per cent tax charge on any money left in their pension fund when they die.

Free of any death tax
Money saved via a pension can be passed on to a loved one, usually outside the pension holder’s estate and free of any death tax, provided the pension fund has not been touched and the pension holder dies before age 75. People fortunate enough not to need immediate access to their personal pension may therefore decide not to touch those savings for as long as possible.

However, once someone reaches age 75, the death benefit rules change dramatically and their entire pension fund may become subject to a 55 per cent tax charge on death. This means it can become a race against time for many individuals to reduce the impact of this charge.

Flexible drawdown lifeline
It can take years to move money out of the 55 per cent death tax environment using capped income withdrawals due to the set limits on the amount that can be withdrawn each year. A lifeline can, however, come in the form of flexible drawdown. Flexible drawdown can provide people with immediate access to their pension funds, allowing them to take out what they want, when they want it. Flexible drawdown is only available to people who are already receiving £20,000 p.a. minimum guaranteed pension income – which can include their state pension entitlement.

For individuals who wish to leave as much as possible to their beneficiaries, taking income from their pension and gifting it to their beneficiaries under the ‘normal expenditure’ rules will allow certain amounts of money to be passed to their beneficiaries outside their estate.

Passing money outside the estate
This may be more tax-efficient than suffering the 55 per cent death tax charge, or the 40 per cent inheritance tax charge if the money is simply brought into their estate. Any money taken out under flexible drawdown will be subject to income tax, so higher rate tax payers need to be careful to ensure the money is either passed on outside their estate tax-effectively or that their estate is within the annual IHT allowance of £325,000 (2012/13).

This may be particularly relevant for people who are approaching, or who have already reached, their 75th birthday, especially as many older pension arrangements will not allow pension savings to continue to be held beyond that date.

Younger people who have accessed their pension fund, even if it’s just to take the lump sum cash, could also be at risk of the 55 per cent death tax, and could benefit from moving funds out of this environment as efficiently as possible.

Are you prepared for the financial needs and challenges that may lie ahead in the future?

Almost 15 million people across the UK (31 per cent of the adult population) are not currently making any efforts to save for the future, while eight million people (17 per cent) have no savings to their name at all, according to Scottish Widows’ seventh annual Savings and Investment Report.

Managing to put something away

Although 63 per cent of Britons are managing to put something away, nearly a third (32 per cent) have a total pot of less than £1000, which is less than the UK average combined monthly mortgage and council tax costs (£1009). In addition, almost one in five of those who expect their financial priorities to change are seriously concerned about job security
for the coming year.

These statistics paint a bleak picture of people’s ability to cope with financial shocks that could hit now or in the future.

Families shoulder the burden
A 25 per cent of respondents with families have loaned ‘a substantial amount’ to their children, often to simply help them meet daily living expenses. Support is also provided for higher education and property purchases, with an average loan of almost £15,000 – an 11 per cent increase from the amount reported last year.

Interestingly, when asked what they’d rather give their children money for, parents opted for helping them get on to the housing ladder (63 per cent) over university fees (21 per cent).

A stark impact on parents’ finances
This level of support is having a stark impact on parents’ finances with a quarter (24 per cent) cutting back on their savings and almost one in ten (8 per cent) stopping saving altogether.

However, it isn’t just parents funding their children; whole families are pulling together to support each other. The report shows that grandparents are helping their grandchildren; children are lending money to their parents, and siblings are also supporting each other. Specifically, on average grandparents have lent £3,665 to their grandchildren, 6 per cent have lent to their parents with an average amount of £4,371 exchanging hands and 9 per cent of people have lent an average £3,485 to their sibling.

The savings shortfall spiral
The wider economic climate is also increasing the pressure on those struggling to save. 30 per cent of people report that they have been forced to cut back on their savings by rising costs, whilst a further 27 per cent are saving less than two years ago, principally due to a lower level of disposable income. Across the board, the majority (64 per cent) of people report that having no money available is a major barrier to saving.

Importance of building a safety NET
People clearly recognise the importance of saving something towards their future financial wellbeing, which is encouraging. The importance of building a safety net for themselves and their families is a priority, with 63 per cent of people reporting that they managed to save some money in the last 12 months. However, just a quarter of those people believed they were saving enough to meet their long-term needs, with a further 37 per cent saying they would definitely not be achieving this goal.

When we are faced with immediate financial commitments, such as mortgage payments and day to day living expenses, then it is absolutely necessary to give these pressing needs priority. However, taking a wholly short-term view of our finances will mean we are unprepared for the financial needs and challenges that lie ahead in the future.

Take a look at our checklist to see how we could help you

The closer you get to retirement, the greater the need to preserve your savings and ensure they will last all through your retirement. In addition, you’ll need to consider whether you need to make changes to your investments as you approach retirement.

With less than five years to go before retirement, there is still a lot you could do to maximise your eventual pension income. Take a look at our checklist to see how we could help you make the most of your pension pot.

Checklist in the run-up to your retirement

Request up-to-date statements for your personal and company pensions

Get an up-to-date state pension forecast at direct.gov.uk

Trace any lost pensions through the Pension Tracing Service at direct.gov.uk

Include any investments and savings when assessing your retirement income

Seek professional financial advice if there’s a significant shortfall, as delaying or phasing retirement could be an option

Reduce any potential investment risk to protect your pension from any downturns in the stock market as you approach retirement

If possible, augment your pension by increasing your contributions and/or adding lump sum payments

Take advantage of any unused pension tax allowance. Current rules allow you to carry unused allowances forward for three years

Think about whether you want to take your pension as an annuity or through income drawdown

If you want to take an annuity, decide which type. An annuity can, for example, increase by a set percentage or be linked to the rate of inflation

Look at impaired life annuities if you have any serious health issues

If appropriate, consider consolidating your pension or pensions to a Self-Invested
Personal Pension (SIPP) if you want to take income drawdown

Consider whether you want to take 25 per cent of your pension pot as a tax-free lump sum and think about how you might use this money

Write a will or review any existing will you have in place

Check what will happen to your pension if you die

Assess the value of your estate for inheritance tax (IHT) purposes and consider ways to reduce a potential liability

Seek professional financial advice if the value of your estate is significantly higher than the nil rate IHT band (currently £325,000) or your financial affairs are complicated ν

All figures relate to the 2012/13 tax year. A pension is a long-term investment, and the fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation. The Financial Services Authority does not regulate estate planning, wills or trusts.

The child benefit tax charge, introduced on 7 January, affects over one million families

A family with 2 children could soon see their annual spendable income drop by up to £1,752 p.a. in 2013/14, while those with 3 children could lose £2,449 pa. With prices rising faster than incomes, it is imperative for many families to know how they will be affected, and what options are available to help improve their situation.

What are the implications of the tax charge?
Benefit payments will continue to be paid in full to the claimant, but if the household’s highest earner’s personal taxable income exceeds £50,000 per tax year then the amount will be clawed back by way of a tax charge. Once taxable income exceeds £60,000 in a tax year, the charge will be 100 per cent of the benefit claimed i.e. the value of the benefit is wiped out. For incomes between £50,000 and £60,000, the tax charge is 1 per cent for every £100 income exceeds the £50,000 threshold. Overall, these people will benefit, as the tax charge will always be less than the benefit claimed.

For the 2012/13 tax year, the tax charge will never exceed 25 per cent of the yearly benefit claimed as the tax charge will only have been operational for one quarter of the current tax year. As such, the tax will be limited to £438 where benefit is being claimed for 2 children, or £612 for 3 children. Around 500,000 people will need to complete a tax return for the first time. The tax charge will be collected under self assessment; therefore, for those submitting online, the first return will need to be in by 31 January 2014. It is important to note that failure to do so could result in fines and late payment penalties.

What action can be taken?
This will very much depend on an individual’s personal circumstances and priorities. Making an individual pension contribution to reduce income to below £50,000 would wipe out the child benefit tax charge altogether, while higher rate tax relief would also be available on the contribution if it all falls in the higher rate band. Any contribution reducing income to a level between £50,000 and £60,000 will still result in a surplus of child benefit over the tax charge, and a tax return would still need to be completed.

A pension contribution by salary sacrifice is an alternative way of reducing taxable income. With the employer’s agreement, an employee can reduce their contractual income in return for an equivalent employer payment to their pension. The employee will also save NI at 2 per cent for payments over the upper earnings limit – if the employer agrees to pass their 13.8 per cent NI saving on to the pension then the contribution itself can be increased. Another alterative is to simply continue claiming the benefit and paying the tax, which is a more likely consideration for those families where the higher earner has adjusted net income between £50,000 and £60,000, when the benefit will still exceed the tax charge.

The important tenets of his investment philosophy and mythology

Warren Buffett is considered by many as the most successful investor of the 20th century and named “one of the most influential people in the world” by Time magazine in 2012. In this article we look at Buffett’s investment mythology and analyse some of the most important tenets of his investment philosophy.

Finding low-priced value
While evaluating the relationship between a stock’s level of excellence and its price, Buffett asks himself several questions to find low-priced value:

Has the company consistently performed well? 
He looks at a company’s return on equity (ROE) and determines whether or not they have consistently performed successfully, compared with others in the same industry. However, looking at the ROE of a company over the last year alone isn’t enough. To get a better perspective of historic performance, investors should view the ROE from the past 5-10 years.

Has the company avoided excess debt? 
Buffett also considers the debt/equity ratio of a company, as he would prefer to see minimal amounts of debt, meaning that earnings growth is being generated from shareholders’ equity and not from borrowed money. A high level of debt compared to equity will result in volatile earnings and large interest expenses.

Are profit margins high? Are they increasing? 
Not only does the profitability of a company depend on a good profit margin but also their margins consistently increasing. A high profit margin means that the company is not only executing its business well, but increasing margins means management has been efficient and successful at controlling expenses. Investors should look back at least five years to get a clear indication of a company’s historical margins.

How long has the company been public? 
One of Buffett’s criteria is longevity: value investing means looking at companies that have stood the test of time but are currently undervalued. He will usually consider companies that have been around for at least 10 years, meaning that he would not consider most of the technology companies that have had their initial public offerings (IPOs) in the past decade. Historical performance is also crucial – determining if a company can perform as well going forward as it has done in the past is tricky, but Buffett is very good at it.

Do the company’s products rely on a commodity? 
He will usually steer clear from investing in companies whose products are indistinguishable from those of their competitors; if they don’t offer anything different than another firm within the same industry, Buffett sees little that sets them apart. He uses the term ‘economic moat’ as a way of describing any characteristic that is hard to replicate; the wider the moat, the harder it is for a competitor to gain market share.

Is the stock selling at a 25 per cent discount to
its real value? 
The most difficult part of value investing is determining whether a company is undervalued, and is Buffett’s most important skill. Investors must analyse a number of business fundamentals, including earnings, revenues and assets, to determine a company’s intrinsic value, which is usually higher than its liquidation value.
Buffett will then compare it to its current market capitalisation. If his measurement of intrinsic value is at least 25 per cent, he sees the company as one that has value – the key to this depends on his unmatched skill in accurately determining this intrinsic value.

The proof is in the pudding
As you can see from the above examples, Buffett’s investing style reflects a practical, down-to-earth attitude. This value-investing style is not without its critics, but nobody can question the success it has brought. The thing to remember is that the most difficult thing for any value investor is in accurately determining a company’s intrinsic value.

Information is based on our current understanding of taxation legislation and regulations. Levels and bases of and reliefs from taxation are subject to legislative change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested.