Retired

Rule changes for drawdown plans

HM Revenue & Customs (HMRC) has changed the rules over the transfer of capped drawdown plans. Some investors will now avoid drops of up to 55% of their income.

Changes to HMRC rules mean investors will no longer need to have their income limits reviewed after a transfer. This applies if they are on pre-April 2011 rates and five yearly reviews. The change affects those with drawdown anniversaries that fall on or after 26 March.

If a drawdown investor was transferring, it triggered a review of drawdown limits. With Government actuarial rates at an all-time low, that could have led to a drop of up to 55% in maximum possible income.

The new rules mean that those who wish to change providers can do so without concern.

Investors should consult an independent financial adviser before taking any decisions regarding their drawdown plans.

Financial planning for divorce

The festive season is now upon us.  While the extended holiday period is a great time to relax and catch up with friends and family, for some, it is a time when long festering problems can come to a head.

The average age of divorcees is increasing and the fastest growing group is those aged 60 +

This age group is more likely to have considerable assets and will need the help of a financial adviser to make sense of it all.  Whilst solicitors have legal expertise, independent financial advisers are finance experts. Where pensions are involved in a divorce case, the expertise of both is required to find the best solution for the client.

Solicitors often bring in a financial adviser to help with implementing a pension sharing order. Specific pensions qualifications are required to offer advice in this area and very few solicitors have those qualifications. For financial advisers this will normally be G60, AF3 or equivalent.

Opportunities can be lost if a financial adviser is not brought in until a relatively late stage. The solicitor may not find all the pension assets, may not get a fair valuation, or may choose the wrong pension plans to share.

Even if the eventual settlement does not involve a pensions sharing or attachment order, obtaining the fairest value of the pension assets is crucial.

The cleanest financial break following a divorce is to offset the value of the pension(s) against other matrimonial assets. This is usually the first option considered. However, a pension sharing order may allow both parties to retain some assets. It may also be the only way a non-earning spouse can build up any significant pension provision in their own right.

Divorce can also cause several future tax headaches, including the potential loss of tax credits, CGT and an IHT liability – dependent on your individual circumstances.

Consult your independent financial adviser to make sure you know the options available to you.

Long term care should be discussed

Life expectancy (80.4 years in 2010) is increasing in the UK meaning more people are living longer and entering an age when they may need care. The demographic shift is also being accompanied by changing social patterns: smaller families; different residential patterns and increased female labour force participation. These factors often contribute to an increased need for paid care.

Long-term care (LTC) covers the medical and non-medical needs of people with a chronic illness or disability who cannot care for themselves for long periods of time.  It may be needed by people of any age, although is most common for senior citizens.

Long-term care provides help with the activities of daily living such as dressing, bathing, and using the bathroom. Increasingly, it involves providing a level of medical care that requires the expertise of skilled practitioners to address the often multiple chronic conditions associated with older populations. It can be provided at home, in the community, in assisted living facilities or in nursing homes.

According to a recent study, four out of every ten people who reach the age of 65 will enter a nursing home at some point in their lives. And around 10 percent of the people who enter a nursing home will stay there five years or more.

In 2012, the average annual cost of nursing home care in East Anglia was £38,272; this varies across the rest of the country.  This is significantly more than the average pension!  So how can this be paid for?

Many individuals may feel uncomfortable relying on their children or family members for support, and may find that long-term care insurance could help cover out-of-pocket expenses. Without long-term care insurance, the cost of buying these services may quickly deplete the savings and other assets of the individual and/or their family.

Long-term care insurance generally covers home care, assisted living, day care, respite care, hospice care, nursing home and Alzheimer’s facilities.  If home care coverage is purchased, long-term care insurance can pay for home care, often from the first day it is needed.  It will pay for a visiting or live-in caregiver, companion, housekeeper, therapist or private duty nurse up to seven days a week, 24 hours a day (up to the policy benefit maximum).  Check the terms of your individual policy for specific terms.

Premiums paid on a long-term care insurance product may be eligible for an income tax deduction. The amount of the deduction depends on the age of the covered person.  Benefits paid from a long-term care contract are generally excluded from income.

Long term care is a subject that families need to discuss.  Independent financial advice should be sought in conjunction with any long term care financial planning.

The Chancellor’s Autumn Statement

The Chancellor George Osborne has today given his Autumn Statement the government’s commitment to addressing its finances should be welcomed by the financial markets.

Below is a summary of the key announcements made today.

Economy and Government Spending

  • The Office for Budget Responsibility expects GDP to contract by 0.1% in 2012, significantly down from forecasts of 0.8% growth in March. The OBR then expects the UK economy to grow by 1.2% next year.
  • The government’s fiscal consolidation programme is to be extended by another year to 2017/2018.
  • The UK budget deficit is set to fall from 7.9% last year to 6.9% this year.
  • National debt will not begin falling until 2016-17, a year later than previously expected.
  • UK unemployment is expected to peak at 8.3%, lower than initially expected, and employment is expected to rise every year moving forward.

Taxes

  • There is to be no new tax on property (“mansion tax”).
  • 40% tax rate threshold will rise from £41,450 to £41,865 in 2014 and then £42,285 in 2015.
  • Corporation tax will be cut by another 1% in 2014, taking the rate to 21%.
  • Capital gains tax allowances will rise by 1% in 2015 to 11,100
  • Inheritance tax  allowances will rise by 1% in 2015 to £329,000
  • Tax free allowance raise is to rise by £235 to £9,440.
  • Planned 3p rise in fuel duty not just postponed, but cancelled.

Benefits and Pensions

  • Most working-age benefits to rise by 1% per year over next three years.
  • Child benefits are also to rise by 1% per year over two years from 2014.
  • Tax relief on the largest lifetime pensions reduced from £1.5m to £1.25m starting in 2014-15, the annual allowance will now be £40,000 rather than £50,000.

To discuss how this may affect your own circumstances as always please do not hesitate to contact us to schedule a meeting.

Estate Planning and second families

Hitting retirement when second families are involved can pose a lot of questions.

However, they are questions which need to be answered to ensure that financial affairs are properly addressed and dealt with appropriately.

  • Is it simply a case of identifying who brought the most into the second relationship?
  • Does this need to go to their original children or split equally with the second family?
  • How much financial responsibility do you want to take for someone else’s children?
  • How much do you want to provide for your own children?
  • How should the Will be structured?
  • How do you avoid the potential for arguments and challenges to your Will?
  • If you have a business that involves some children but not others, do you want to leave the business to the ones running it but compensate the others by bequeathing them other assets?
  • How do you protect your own capital for your children without depriving your surviving spouse of the capital to provide an income?

Life policies and Trusts are a couple of the vehicles which are available to help you get the most from your financial plan.  Cash flow modeling can help explain and demonstrate whether there is sufficient income to support two families.  Openness about your financial affairs is always preferable and help from experienced financial planners essential.

Often it is as much about the individual people involved; more diplomacy than financial but, nevertheless, seeking independent financial advice at an early stage is critical.

STOP PRESS: The inheritance tax (IHT) nil rate band will increase by 1% in 2015-16 to £329,000, the government has announced.  IHT is charged at 40% on the amount over the nil rate band.

And don’t forget that from April 2012 anyone who leaves over 10% of their estate to charity can choose to pay a reduced rate of 36%.

Are you losing money in cash? Calculate your own personal inflation rate

With interest rates at an almost all-time low and taxes seemingly rising every year the effect on inflation on a persons savings and investments is having a larger impact as we go forward.

The rate of retail price index inflation in the UK rose to 3.2% in October up from the rate of 2.6 % the month before. However your own personal rate of inflation may not be the same as the recognised government published rates. It really depends upon your own personal circumstances and where your money is spent. Pensioners seem to be the hardest hit at present.

The BBC has a nice calculator for you to calculate your own personal rate of inflation so you can estimate if you are in fact losing money by keeping most of your money in cash. Simply put, if your personal rate of inflation is higher than the net return you get after tax from the interest you receive from your bank or building society you are in fact making a loss on your savings.

Calculate your own personal rate of inflation and then determine how much money you should keep in cash. It is possible today to get stock market type of returns on your money with a very low risk to your capital by seeing a experienced independent financial adviser.

You can invest for a fixed term of 5 or 6 years and the rate of return will depend upon stock market returns. If markets fall you will get no return at all but you will get all your original capital returned. So by tying up your money for a fixed period and taking the risk of no return at all you get could a significantly better rate of return should  stock markets rise over the next few years.

As always independent financial advice will depend upon your own personal circumstances so please call us should you feel that you would like to achieve a better rate of return on your money.

When should you buy an annuity?

All the major annuity providers recently cut their rates for guaranteed annuities as corporate bonds and gilts fell following the turmoil in the global financial markets, which has been caused by the European debt crises and concerns about the US economy.

The benchmark annuity rate has changed over the last 12 months. (The benchmark rate is male age 65, female 60, £100,000 purchase, joint life 2/3rds, guaranteed 5 years and level payments). Annuity and gilt yields fell at the end of last summer but picked up later in the year, but the ongoing economic turmoil is likely to have a further negative effect.

Enhanced annuity rates have also been cut because they too are priced in relation to the same yields.

In simple terms, this means an individual retiring now with a pension fund of £100,000 will secure a lifetime income of £115 per year less than a few weeks ago.

The main reason for the sudden reduction in yields stems from the European and US debt problems. When investors are worried about global equities there is a strong demand for gilts. As the price of gilts rise, the yields fall – UK gilt yields are at their lowest level for many years.

What can be done about falling rates?

At times of falling annuity rates I am always asked, “Should I hold off buying an annuity until rates increase?” My stock answer is that individuals should take as much time as they need to decide which type of annuity to invest in and once that decision is made they should not necessarily delay because rates could fall even further.

Although it’s impossible to second guess the financial markets and accurately forecast future annuity trends, professional advisers and their clients can maximum the amount of lifetime annuity income by taking a few simple strategic and tactical steps in the right direction.

And remember, it’s important to separate the strategy from the tactics.

Strategy

It’s important to have a plan. And, strategically there are two important questions:

When is the best time to take tax free cash and income?

What type of annuity or drawdown?

The timing is important because two factors come into play; what is the trend for annuity rates and what are the income requirements?

If an annuity is a long term investment then investors should think about their longer term income requirements and, in particular the issue of inflation.

Many advisers and their clients are taking decisions about a long term commitment based on short term considerations e.g. who is paying the highest income? A more sensible approach is to consider investment linked annuities which provide the potential for future income growth and flexibility.

Tactics

In order to execute the plan it’s necessary to make the right tactical decisions. These include shopping around using the open market option to find the best highest paying annuity and, where appropriate, applying for enhanced annuities which take health into consideration.

Other tactical decisions include the timing of annuity purchase to try and strike when rates are at their highest. If there is concern about purchasing annuities when rates / yields are low, another possible consideration is an investment-linked annuity where the initial income is not pegged to gilt yields.

With conventional annuities, income is set for life at the point of annuitising, with no potential for future income growth. An investment-linked annuity has the opportunity to benefit from the highs and lows of the markets over a 20 year period, not just at a single point in time when rates and markets could be low.

My view

I have been following annuity rates for long enough to know that getting the timing right is difficult, if not impossible. My view is that our clients should take as much time as they need in order to decide on the strategy, but once a decision has been made it makes sense to arrange the annuity sooner rather than later because in my experience few people gain from deferring their annuity purchase.

State pension age to increase?

Work and pensions secretary Iain Duncan Smith has confirmed the state pension age will increase to 67 earlier than planned.

The retirement age was due to rise to 67 in 2036 and to 68 by 2046 but Duncan Smith said the timescale, set out by the previous government, was ‘too slow’.

‘We’ve always said that the timescale left by the last government was too slow,’ he told the BBC.

‘The [last] government left us with a deadline in the 2030s and we think that’s too late because people’s age levels have increased even since they made that announcement.
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Pensioners face drop in spending power

PENSIONERS retiring this year on a fixed income could lose 60% of their spending power over the next 20 years.

That means an average annual income of £16,600 will be worth a pathetic £6,700 in today’s money – effectively a £10,000 pay cut over the course of a 20-year retirement.

Figures from Prudential show pensioner inflation, or the Silver RPI as Age UK have dubbed it, is higher than the rate for the rest of us because retired people spend a much greater proportion of their income on goods and services that are subject to the highest rates of inflation.

Assuming inflation remains at its current level, retirement incomes will need to more than double in the next 20 years just to allow people to maintain their current standard of living.

This comes on the back of research from Age UK showing that the over 55s have faced an additional £984.28 per year in living costs since 2008.

This has been caused by Silver RPI averaging 4.6%, almost 50% more than the 3.1% average annual inflation recorded by the Retail Prices Index over the same period.

The figures are frightening when you consider how much today’s pensioners are struggling to make ends meet as escalating food and energy prices show no sign of easing – and things are set to get tougher.

That’s why it’s crucial that anyone approaching retirement, especially those who have saved their hard earned cash into a private pension, makes sure they get the best deal when cashing in savings and turning them into an income.

You only get one chance to get this right – get it wrong and you are stuck with your decision for the rest of your life.

Vince Smith Hughes from Prudential says: “Pensioners on a fixed income are particularly vulnerable when it comes to rising living costs, and our figures demonstrate the true extent to which Silver RPI impacts on the spending power of pensioners.”

There are alternatives to choosing a fixed income in retirement, such as options that increase each year in line with inflation to help boost spending power.

And millions of pensioners lose out on vital cash because they simply stick with the lifetime income offered by the pension firm they have saved up with, rather than comparing deals.

And millions more lose out again because they are unaware of what are known as enhanced annuities.

These offer higher rates to those who smoke or have health ­conditions that affect life expectancy.

Joanne Segars, chief executive of the National Association of Pension Funds, says: “This report shows the importance of inflation and the crucial need to shop around for the right annuity.

“While getting an ­inflation-proofed annuity will be more expensive than a ‘no frills’ approach, it is a decision that demands serious consideration.”