Freedom Comes With a Health Warning

With all of the excitement and media comment surrounding the new pension freedoms, the 6th April itself seemed to pass without incident. While some providers have reported an increase in call volumes, it would appear that for the moment, there has not been a gold rush on the nations pension pots.

All of this new freedom and flexibility is fantastic for those who wish to use their pension pots to fund a lump sum purchase, a holiday or even a Lamborghini. However for those of us who still wish to generate an income for life with our pension funds, we have a tough choice to make. Do you purchase an annuity with the guarantee of an income for life, but with loss of your capital sum, or, do you opt for a drawdown pension and draw an income out of your invested lump sum.

While the latter option will be appealing to many, especially given the ability to pass on any unused funds to a beneficiary, it does come with a health warning.

You see the problem with this approach is that none us knows exactly how long we are going to live and therefore, how long this pot will need to last for. The main risk here is what we would call ‘sequence of return’ risk. That is to say, in what order do the returns on your fund occur. We all know that over the long term asset backed investments tend to out-perform cash, but they are volatile. The impact on your retirement of a 10% fall in your fund value during the first year will be very different to a 10% fall in year 10. It is very important to diversify and smooth the returns of the market as far as possible in order to protect your fund from sudden falls, especially in the early years.

This article from the Telegraph sums this up fairly well and is worth a read if you are considering taking a drawdown pension. While I am certainly in favour of the new flexibility rules, it is important that we consider all of the risks involved before taking the leap!

How To Blow Your Pension

You may have seen the Panorama programme on television on Monday night attempting to explain the new pension reforms. While the programme did highlight some of the potential pitfalls to be aware of, there were a couple of the sections that I felt were a little lacking:

  • At the beginning of the programme, the presenter looked at an average pension pot of around £32,000 and then proceeded to go on an imaginary shopping spree with the funds. The one problem was, he did not appear to account for the tax that would have been paid if you had taken this whole pension pot in full. Unfortunately, many people seem unaware that there is tax to pay on any pension withdrawal after the 25% tax free portion has been taken.
  • There was also a case study of a lady who had recently been ‘forced’ to purchase an annuity. The concept of a drawdown pension has now existed for over a decade and, since it’s introduction there has not been a ‘requirement’ to purchase an annuity. The sad truth is that many people did not understand the options available to them when making the once-in-a-lifetime decision about how to use their pension funds.

What the programme highlighted is the increased need to ensure that you are aware of all of the options available to you at retirement. A qualified Chartered Financial Planner can help you to do just that!

The Impact of Scottish Independence – Part 1

With just under a week to go before the results of the referendum, the most recent polls suggest that the contest between the No and Yes camps seems too close to call. Given the very real prospect of Scotland leaving the Union, many investors are concerned about how this will impact on them. Senior Paraplanner, Kevin Herron has written a series of articles about some of the potential issues. Today he looks at currency and regulation.


Probably the most important concern would be what currency the independent Scotland would use – despite the unequivocal rejection of the concept of a shared currency, the Yes campaign are keen to retain Sterling (either as a formal fiscal union, or as a new currency that is more informally linked to Sterling).

While this has a number of repercussions on a macroeconomic level, it will introduce a level of currency risk for investors. It is likely that any separation of currency will cause a great deal of volatility in both currencies in the short to medium term, which will greatly impact those who receive income in one currency but pay their bills in another.

Consider the example of a Scottish pensioner is receiving a pension of £100 per month which is the equivalent of £80 “McDollars” – if currency movements mean that this pension is now only worth £70 “McDollars”, how will this affect their ability to meet their daily living expenses.

One option could be that Scotland joins the EU and adopts the euro, but the recent comments from the President of European Commission, Jose Manual Barroso, suggest that this is highly unlikely.


Regulation and Governance

While recent reports seem to suggest that the Bank of England and Financial Conduct Authority (FCA) would retain certain elements of control if a formal fiscal union is agreed, it is clear that an independent Scotland would need to set up it’s own system of financial regulation.

If Scotland was unable to obtain membership of the European Union, how would this impact on the ability of people to obtain cross border financial advice? European legislation permits financial advisers to apply in their home state for authorisation to provide services in other EU countries.

As an independent country that is not a member of the EU, Scotland would have the same legal status as countries such as Norway and Iceland, and while it seems unlikely, it could mean that an adviser registered in England or Wales could no longer advise clients living in Scotland (and vice versa). It is probable that firms would be able to apply for registration in both territories, but the additional costs of two registrations, along with the difficulties of dealing with two regulators with different rules, may see many companies deciding to avoid these difficulties entirely.

Current investment wrappers such as NISA’s are eligible to UK residents only, so in the event of independence, would not be available to Scottish residents. While it is likely that similar types of investments would be introduced for Scottish investors, any provider looking to remain active in both jurisdictions is going to have to spend a great deal of time and money in marketing different products for each country, and ensuring that their existing customers are properly segmented as Scottish and English residents.

Our 2014 Investment Action Plan – Part 7 – Auto Enrolment

The end of 2012 saw the introduction of the government’s flagship Auto Enrolment pension legislation. The aim of Auto Enrolment is to require employers to set up a pension scheme for their employees and for them to make a specified minimum level of contributions. The government hopes that this will start to create a turnaround in the seemingly ever- decreasing levels of pension saving in the UK.

Auto Enrolment requires all “eligible jobholders” to be enrolled into a qualifying pension scheme either on
or before a company’s “staging date”. The staging date is the deadline for complying with the new legislation and will vary depending on the amount 
of employees in the business and in some cases that employers PAYE reference number. Larger employers (who have over 500 employees) had staging dates towards the end of 2012 and throughout 2013. These larger employers generally have specialist HR and pensions departments to help them qualify with the rules and in many cases they will have had a suitable pension scheme in place anyway.

2014 is the year in which small and medium size business will begin to be affected by Auto Enrolment. In January employers with between 499 and 350 employees will have to comply and by October, those with as few as 60 employees.

In many cases these smaller businesses will have much more work to do than some of their larger counterparts. For starters, many smaller employers do not currently have a formal pension scheme in place. Although previous legislation has required all employers to designate a stakeholder pension scheme, the absence of employer contributions means that in many cases these are nothing more than an empty shell. Auto Enrolment will therefore see many employers dealing with the implementation of a pension scheme for the first time.

Smaller businesses will also need to get to grips with the categorisation of workers, making sure that their payroll software is suitable and also ensuring that they maintain compliance on an on-going basis. Add in the communication requirements, the categorisation of part time workers, sometimes on a monthly basis and the need to ensure that the scheme offers suitable investments and it is clear that Auto Enrolment can be a very time consuming and costly exercise.

The penalties for non-compliance are severe, and in some cases are up to £10,000 per day. Suffice to say, most smaller employers can ill afford these types of fines.

If you are an employer or business owner, it is recommended that you begin to plan for Auto Enrolment at least 6 months before your staging date. A planning window of a year or more would be ideal. A Chartered Financial Planner or Employee Benefits Specialist will be able to help your business comply with the legislation and will also free up your time to focus on your business.

While some employers will simply want to comply with the legislation with the minimum cost and hassle, others will see Auto Enrolment as an opportunity to engage with their employees, and use the newly formed pension scheme as part of a wider employee benefits package to increase employee retention and job satisfaction.

Our 2014 Investment Action Plan – Part 4 – Beware of Pension Tax Changes

As the current tax year draws to a close many individuals will be looking to take advantage of the generous tax relief available on pension contributions. While this is an effective form of planning for many clients, care needs
to be taken to ensure that pension contributions and overall savings remain within the permitted limits.

Pensions tax allowances have been an easy target for the government in recent years and 2014 is no different. Both
the Annual and Lifetime Allowance are set to be reduced once again.

The Annual Allowance is the amount of tax advantaged pension saving that an individual can make in a single “pension input period”, not to be confused with the tax year itself. A pension input period is normally 12 months and the actual dates are decided by the pension scheme. Each pension input period relates to a specific tax year. The annual allowance has been on the chopping block for a number of years now, looking something like this over the past few tax years:

10/11 – £255,000

11/12 – £50,000

12/13 – £50,000

13/14 – £50,000

14/15 – £40,000

You are able to carry forward any unused allowance from the previous 3 tax years, although there are special rules relating to this facility for the 10/11 tax year.

People who are members of a final salary pension scheme are particularly vulnerable to the annual allowance.
An increase in salary or a pensionable bonus could easily cause a breach of the allowance and the subsequent tax charge. A series of complex calculations are required to work out the deemed contributions for a final salary pension scheme member. The input amount is not simply based on the payments made by the member, as many people wrongly assume.

Individuals with personal pension schemes will have an easier time making the required calculations, but could
still find themselves over the annual allowance without proper planning.

The Lifetime Allowance is the lifetime limit on pension savings that an individual can accumulate. The allowance was previously £1.8m. This reduced to £1.5m on 6th April 2012 and will fall again to £1.25m this year.

The penalties on any excess pension savings over the lifetime allowance are particularly severe, with the maximum tax charge currently standing at 55%. Once again, members of final salary or career average pension schemes should check carefully where they stand. An annual pension entitlement of £40,000 is an indication that further planning may be required.

There is a range of different protection schemes available which can reduce the impact of the changing lifetime allowance. Care should be taken however, because these protections usually come with some rather restrictive caveats.

Professional advice should be taken to establish your position against the annual and lifetime allowance and to ensure that you take advantage of all of the protections available to you. It can take some time to accumulate all of the information required to provide comprehensive advice in this area so clients should act without delay. 

Our 2014 Investment Action Plan – Part 3 – Rebalance Investments

While the media painted a somewhat gloomy picture of the economy in 2013, on the whole, financial markets had a bumper year. Given the significant differences in performance across market sectors, it is likely that many portfolios will now be out of line with the intended asset allocation.

A priority for 2014 should be to ensure that portfolios are re-balanced back into line with the intended asset allocation and that a thorough review is conducted to ensure that the investments are still suitable for your needs and objectives.

Our 7 Step Investment Action Plan – Part 2 – Tax Allowances


The new year brings many resolutions of prudent financial management and plans to save and invest for our futures. Central to any of these plans should be the considered use of the available tax allowances and reliefs available to you on or before 5th April each tax year.

Many people leave the use of these allowances to the last minute which means that any decisions are usually rushed and ill thought out. It usually follows that the investments chosen are an afterthought and
do not get the attention or due diligence they deserve. Furthermore, investments made in haste often lack sufficient diversification and carry a far higher degree of risk than would normally be taken on by most clients.

By making early use of your tax allowances, not only will you benefit from a whole year of tax advantaged fund growth, you will also have sufficient time to really consider what your objectives are and how the various allowances can help you to achieve them. The result is the right tax wrapper for the right objective with the right investments, meaning you are far more likely to achieve your goals.


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.