Monthly Archives: April 2014

Our 7 Step Investment Action Plan – Part 1 – Diversification

2013 was quite a year in investment terms – many clients will have portfolios in need of some serious spring cleaning in 2014. We have put together a 7 step action plan for 2014 – part one is below. Stay tuned for more over the next week or two.

The old saying goes, “don’t put all your eggs in one basket” and it has long been the case that when considering an investment portfolio, diversification across different asset classes is of the upmost importance in order to manage risk and return.

While diversification across asset classes is as important now as it always has been, given the increasing speed of change in both the political and regulatory environment, it makes sense to diversify across product types as well.

For example, pension plans offer highly generous tax reliefs to investors as well as tax efficient fund growth, however they also have restrictions in terms of the amount that you can save and the age at which you can gain access to the funds.

Pensions are especially prone to legislative change and recently seem to have become a politically easy target for the government to extract further taxation from more wealthy savers. As such, while a pension plan will form the bedrock of most retirement plans, it makes sense to include some other “product types” to lessen the impact of an adverse change in pension planning rules. An increase in the minimum pension age (from 55 to 60) for example would throw many retirement plans off course. Holding a suitable range of other “product wrappers” such as ISA’s and investment bonds will mitigate this risk.

The tax treatment of product types is also prone to change. There has been talk in the media of government plans to reduce the level of tax relief available or further limit the total allowable lifetime savings within a pension plan. Conversely, there is pressure to increase the amount of tax-advantaged savings allowed in an ISA each year to encourage the public to save and invest.

Given that the time horizon for some investments is 30 years or more, it seems almost inevitable that some form of taxation or legislative change will impact on the plan before it completes. It is vital to review your plans on a regular basis to ensure that they remain suitable for your circumstances over time.

From Pensions To Property

Following on from my post last week about taking the benefits from your pension plan as cash, I would also like to touch on the growing number of media outlets that are suggesting that people use their pension pot to purchase a buy to let property.

In the same format as last week, I have run a couple of very simple examples to show the tax implications of drawing money out of a pension in order to fund property purchase. For simplicity I am assuming that our subject has £100,000 in a pension pot and is considering purchasing a buy to let property that would have a 5% rental yield after expenses. We will also assume that the pension fund could generate a 5% return after fees. We will assume our subject has £20,000 per annum of other lifetime income.

 

Option 1 – Take all of the pension pot as cash and purchase a buy to let property

£100,000 pension pot could be taken as:

£25,000 Tax free

£75,000 will be subject to income tax as follows

£21,865 @ 20% = £4373 tax

£53,135 @ 40% = £21,254 tax

The client would receive £74,373 in cash and pay £25,627 in tax

£74,373 is then invested in a buy to let property and a 5% income is drawn from the property.

The income would be £3719 per annum ( this would reduce to £2975 after tax)

 

Option 2 – Leave the money invested and draw an income from the pension

£25,000 could still be drawn from the pension tax free (however this money is no longer needed to purchase a property and can be used as income)

£25,000 will provide income for 8.4 years based on £2975 per annum (as the property would produce above)

£75,000 remains invested and earns 5% per annum return on average for the 8.4 years mentioned above.

The £75,000 is now worth £111,793 (approximately).

5% income on this amount is £5589 per annum which would be £4471 after tax.

The client could also choose to draw larger amounts from the capital as well if required.

 

While property can form an important part of a retirement portfolio it would be wise to consider the tax consequences before taking the plunge!

 

 

 

Don’t Fall Into The Pension Tax Trap

I have been having numerous conversations with clients’ in the weeks since the budget who are proposing to withdraw their entire pension fund as cash (as per the new budget announcements) and simply invest the proceeds in the bank or another form of taxable investment.

While I did write about this very topic a few weeks ago, I thought it sensible to mention it again so that people are aware of the consequences of such actions. As such I have prepared a simple worked example to compare the difference between withdrawing a 100k pension fund as one lump sum in cash and investing this in the bank and taking the income gradually from the pension over a number of years. This example is for illustrative purposes only and should not be construed as advice to act. If you are unsure about your own pension provision, you should seek advice from a chartered financial planner.

For the purpose of this exercise I am making a few assumptions:

– The client has £20k per annum in other retirement income from final salary and state pensions.

– The client would like to take a further 10k per year of income to make a total of £30k

 

Option 1 – Take the whole pension as cash on retirement

£25,000 will be paid tax free

£75,000 will be subject to income tax as follows

£21,865 @ 20% = £4373 tax

£53,135 @ 40% = £21,254 tax

The client would receive £74,373 in cash and pay £25,627 in tax

Any income that the money generated would possibly be subject to further income tax or capital gains tax.

 

Option 2 – Take the tax free lump sum and then £10k per annum as required

£25,000 will be paid tax free

£10,000 per annum will be taxed at £20% = £2000 tax

The total tax paid on the original £75,000 remaining fund will only be £15,000

The client would receive £85,000 – a difference of £10,627!

Of course the money would also continue to be invested in a tax efficient environment and could well make substantial further gains over the time period in question.

The above is clearly a very simple example, however it illustrates the taxation implications of taking large pension pots in one lump sum.

 

The point I am trying to make is that the full withdrawal of a pension fund will generally be very tax inefficient and should only really be considered if the fund is very small or there are specific spending plans for the money.

If you would like to find out more about the options available to you at retirement please get in touch to request your discovery meeting.

 

Total Clarity On Advice Charges

On Monday the FCA (Financial Conduct Authority) published a ‘thematic review’ paper on ‘being clear about adviser charges and services’. The paper made for interesting reading, with the rather shocking finding that 73% of the 113 firms it investigated failed to provide the required information about the cost of their advice and the services that they provide.

I would like to discuss three of the findings in particular:

– 58% of firms failed to give clients clear upfront generic information on how much their advice might cost.

– 50% of firms failed to give clients clear confirmation on how much advice would cost them as individuals.

– 34% of firms failed to give clients a clear explanation of the service they offer in return for an ongoing fee and/or their right to cancel this service.

At Buckingham Gate we believe in being completely upfront  and open about our charges and services. You can view our service packages, along with ‘generic information on how much our advice might cost’ on our services and fees page.

Following an initial discovery meeting, which we provide at our expense and with no obligation on the part of the client, we will write to each client individually to detail the scope of the advice and service to be provided as well as the specific fee required to engage our services. This gives clients ‘clear confirmation of how much advice will cost them as individuals’.

Finally, we offer a range of ongoing service packages, designed to suit different types of clients, who each have unique needs. You can see the details of our service packages here.

We believe that our fees offer clients genuine value for money, which is why we send out a ‘value of advice’ statement each year. This shows, in pounds and pence terms, the tangible value that clients receive in return for their financial planning fee. In addition, many clients tell us that the intangible benefits of our service, such as increased financial security and peace of mind, far outweigh the monetary gains.

If you would like to find out how we could help you with your financial planning, as well as the fees for our services, you can get in touch here.

New (Tax) Year, New You!

Today marks the first working day of the new tax year. While the beginning of a new tax year is usually quite significant from a financial planning perspective, following the significant announcements made in the budget in March, this year is arguably more important than most.

Below you will find a summary of the main changes which are drastically different from previous tax years:

– Those clients in capped drawdown pensions can now withdraw up to 150% of the governments GAD (Government Actuaries Department) rate. This will mean a substantial increase in maximum income for some clients. A word of caution though, withdrawals at this new higher rate are unlikely to be sustainable for the whole of a retirement.

– Those who have £12,000 or more in guaranteed income from state pensions, occupational schemes or existing annuities, will now qualify for ‘flexible drawdown’. This system allows you to have complete access to your accumulated defined contribution pension pots. This facility will be available to all individuals from April 2015, so long as the budget gets through parliament successfully.

– Clients with smaller pension pots can now take up to 3 ‘small pots’ of up to £10,000 each in cash.

– People with total pension savings of below £30,000 can take the whole pot as cash under the ‘triviality’ rules.

– The above rules are a ‘stop-gap’ of sorts until the new pensions regime takes effect from April 2015.

– The government will consult on increasing the maximum age at which you can contribute into a pension from the current 75 and also consider whether to reduce the 55% tax charge on pensions on death.

– The ISA allowance for 14/15 is £11,880. This limit will increase to £15,000 when the new ISA (NISA) rules start to apply. Under the new rules, there will be no restriction on the amount you can save within a cash ISA (within the overall limit) and you will be able to transfer between cash and stocks and shares ISA’s.

– The junior ISA limit has now increased to £3,840 and will increase to £4000 on 1st July.

– The capital gains tax exemption is increased to £11,000.

If you would like to find out how the changes announced in the budget could effect your financial planning, please get in touch here.

Don’t (Not) Spend It All At Once!

One point I would like to pick up on following my discussion with Victoria Derbyshire earlier today on BBC Radio 5 Live, is the fact that although we have all been given the flexibility to withdraw our pension plans in one go, there is not any requirement to do so. In fact, for most individuals, this will do nothing more than land them with a large (and unnecessary) tax bill.

There is an argument to take the whole of a pension pot if you have a specific plan to spend the money, don’t have any other more tax efficient funds to spend, and have sufficient income to live off in retirement.

What is worrying however, is that some people seem to want to withdraw the whole pot, with no specific plan to spend it and then invest the money in a bank account or other investment. The problem here is that you will be removing money from a tax efficient environment (in the form of a pension), paying tax on the proceeds, and then investing the money in a potentially taxable home. This hardly seems like efficient tax planning.

Individuals should be aware that there is no obligation to take all of your pension fund in one go. In fact, you can simply withdraw what you need, and leave the remainder sitting in a nice tax efficient home, until such time as it is required. For many, this will be a far more sensible option than (not) spending it all at once.