e-Update Pensions 2011
The basics of a pension plan The doom mongers keep repeating that an impoverished retirement lies ahead for us all unless we get saving now. But how many of us really understand what a pension is and
Welcome to our latest pensions e-newsletter,our briefing on some important pension planning issues.
what we need to do? A pension is a long-term savings plan and its sole purpose is to provide you with a secure retirement income. Essentially, a little money goes in each month throughout your working life - and by retirement, this should have built into a tidy sum. That sum is then (most commonly) used to purchase an annuity, which will pay you back a fixed,
With momentous changes on the horizon,such as the scrapping of compulsory annuitisation,now is the time to review your own personal provision.
regular amount, perhaps monthly and thereby support your dotage.
Contact Us: To encourage you to start saving, the Government provides tax breaks on contributions. For example, basic rate tax payers take home £80 for every £100 earned (not including national insurance). However, if that £80 is then placed in a pension, the Government refunds the £20 tax paid, allowing the full £100 to be invested. Similarly, subject to maximum limits, higher rate taxpayers get £100 invested for laying out only £60 of their take home pay . There are two basic types of pension - a personal pension, started by an individual, and an occupational scheme, organised by an employer. The latter then breaks down further to 'defined contribution', where a set amount goes into the scheme and the payout depends on the growth of assets, and 'defined benefit' (now increasingly rare), where contributions vary but the amount the scheme pays out is agreed in advance.
Jeff Bromley Atlas Advisors, Rowlandson House, 289/293 Ballards Lane, London, N12 8NP Tel: 0845 120 8117 Email: firstname.lastname@example.org
An overview of SIPPs The popularity of the Self-Invested Personal Pension (SIPP) has increased dramatically in recent years. Costs have come down, many investment providers have launched SIPP-friendly products, and the UK government has ensured many different types of investments qualify for inclusion within a SIPP wrapper. A SIPP is a tax-efficient wrapper - a particular type of pension - which sits around your retirement fund, allowing you to select from a wide range of investment choices. It gives you great control and flexibility over the investment decisions you make, allowing you to tailor your SIPP portfolio to precisely match your requirements and readily move those investments around as markets and your circumstances dictate. If you are employed, your employer can also pay into the plan to help boost its value. Contributions, subject to some annual and lifetime limits, receive income tax relief at your highest rate, and all investments are free of income or capital gains tax (CGT) whilst they remain within the plan. A SIPP also allows flexibility once you reach retirement, whether you buy an annuity immediately or opt for phased or deferred retirement. However, while there are benefits for those interested in the flexibility, SIPPs are not for everyone. There are set-up charges, and annual management charges which need to be weighed up against the benefits. You will also need to consider whether you need the full investment flexibility provided or whether the increasing range of fund links offered by more conventional plans would actually be sufficient.
A little at a time In an environment of low interest rates, new options have appeared which allow you to avoid chancing your entire hard earned pension fund on the annuity rates available on a single day. If you plan to work beyond retirement, perhaps part time, you could consider phased retirement, ie: a series of mini-retirements which enable you to use parts of your pension in smaller portions over an extended period of time - perhaps right up to age 75. The effect is that you start with a low income (and small tax free lump sum) and increase this, bit by bit, as your needs dictate. It is not appropriate for everyone but you only retire once and need to make the most effective use of your hard-earned pension fund.
Avoid surprises The investment decisions you make about how to invest your pension could have a significant impact on your final income in retirement. Regardless of how wide the choice, however, fundamentally you have to decide how to blend the four main asset classes â€“ equities, property, bonds and cash â€“ to meet your risk/reward objectives. Equities have provided the highest return over the long term, but are the most volatile, whereas at the other end, cash preserves capital but does little to protect against inflation and offers zero capital gain. It is common therefore to start with a greater proportion in equities, to maximise the growth potential long term, but then switch those gains into less volatile assets as your retirement date approaches.
Drawing down all the options When it comes to thinking about your retirement, the low interest rate environment, combined with the past few years of stock market turmoil, may have you considering just how much you will actually receive. Under normal circumstances, you would look at your pension fund, compare a few of the best annuities on offer and then just choose the best one. However, what happens when none of them seem to offer you very much at all? The good news is, there are now a number of options for your retirement fund which can at least help to maximise your prospects - and each of these should at least be considered. Afterall, your pension took a long time to build up so you need to make sure you make the most of it. One of the options available is commonly known as income drawdown or, more technically now, as an unsecured pension. Rather than buy one of the annuities on offer right now, this route allows you to defer your decision â€“ but in the meantime, draw an income direct from the pension fund itself. This means the fund can stay invested whilst you either research annuity rates to find the best deal or until age 75, at which point your needs must be reviewed. The main advantage of this option is the flexibility it provides over when and how you uy an annuity and, subject to a Government maximum (defined by their Actuary and reviewed every 5 years), you can in the meantime, take whatever amount of income you need. So, if you want to continue working, you could initially draw a smaller pension but increase the amount slowly as you reduce your hours. Or, you could take your tax free lump sum but leave taking any income until further down the line. Alternatively, if you think annuity rates might improve - either because interest rates might rise or because you are siply getting older, this allows you to simply defer the actual purchase. Of course, there is no guarantee that rates will rise but at least you get some breathing space to make sure and, in the meantime, you will retain control over how the money is invested. There are drawbacks. On buying an annuity, the charges for pension provision normally stop. However, with an unsecured pension, the charges continue because the fund remains invested. In addition, there are administration fees for carrying out regular reviews. These can mount up and need to be considered relative to the potential gains. In addition, because the fund remains invested in the market, the value of your pension could actually fall. Regardless, you only retire once so consider everything because you must make sure you make the right decision.
All the options On retirement, the choice of annuities may seem overwhelming. You can simply buy a level annuity, offering a fixed amount of income every year for life. However, current life expectancy means this may have to last 20 years and inflation could eat away at its value. So you have a choice. First, there are index-linked annuities, which increase with inflation, protecting your income's worth. Or there are escalating annuities, increasing at a pre-set rate (say 5% a year). Finally, for the adventurous, there are investment-linked annuities, where income is based on asset performance. Each has its merits but, as you can't change your annuity once you've bought, it is sensible to take a care full look at them all before buying.
Issued by Atlas Advisors which is authorised and regulated by the Financial Services Authority. The contents of this newsletter do not constitute advice and should not be taken as a recommendation to purchase or invest in any of the products mentioned. Before taking any decisions, we suggest you seek advice from a professional financial adviser.
Comparing the options With increased life expectancies, many investors are concerned about their retirement income. Some are now looking to boost their pension funds, either by maximising their contributions, or by using alternative vehicles. One such vehicle is the Individual Savings Account (ISA) which could help to ensure your retirement income is as healthy as possible.
ISAs and pension plans are both seen as tax efficient investment vehicles. However, there are big differences between the two. For example, when you put money into your pension plan, the contribution qualifies for a tax rebate at your marginal rate which, for a higher rate taxpayer, can add a significant amount to their investment. However, in exchange for this benefit, you must keep your money invested until at least age 55 and, on retirement, the income you receive back will taxable, as it counts towards your personal allowances. With an ISA, the money you invest comes from taxed income and no rebate will be given. However, ISAs have no minimum term - so you can withdraw the proceeds or an income at any time you like. In addition, any income you do withdraw will be tax free and will not count towards any personal allowance. Which approach is best for you depends entirely on your personal situation. Perhaps the healthiest way to approach it is to combine the two.
Beware of inflation When buying an annuity, one issue you should always consider is the long-term effect of inflation. If the rate of inflation increases, the value of your income will fall because, as prices rise your money is able to buy less. One way to safeguard against this is to buy an index-linked annuity, which is linked to the Retail Price Index. By doing so, you ensure that, as inflation rises, so does your income. Similarly, escalating annuities, where your income increases each year at a rate set by you, also help combat the effects of inflation. However, do be aware these annuities start at a lower income level than a flat rate annuity - as they balance out some of that expected future growth.