THE MIDDLE ROAD FOR PENSIONS!

For the last few years those with personal pensions have found that they have a wide freedom of choice as to how they can take their pension benefits from age 55.

The new Flexi-Drawdown Pension arrangement allows you to keep your pension fund invested indefinitely and still have the option of taking out money from the pension at any time – whether that means taking it all at once, or monthly, or annually, or just bit by bit as needed. By leaving it invested in this way there is a chance of making a good return on your pension investment so that it lasts longer (although the value of the fund can go down as well as up, so it could also shorten the time the pension fund lasts).

The traditional way of taking pension income – the Lifetime Annuity, is also still available. In this way you can secure an income for life by exchanging some or all of your pension fund for a guaranteed income for life with a fixed rate of return. This provides the certainty of income for those who need that sort of certainty, but does mean that the lump sum used to “buy” the annuity is gone forever. There is a middle road option which not everyone is aware of. This is the “Fixed Term Annuity”.

This arrangement guarantees an income for a period of time – usually 5 years – with a guaranteed lump sum at the end of the fixed term. This provides the certainty of income for the fixed period which, for example, might be needed to cover a shortfall of income until one’s State Pension comes into payment. Additionally it guarantees a fixed lump sum on maturity. At that point you have the chance of making your choice all over again – whether that choice is to put the lump sum in a Flexi-Drawdown pension or purchase a Lifetime Annuity, or even purchase another Fixed Term Annuity. So this middle way provides some of each – guaranteed (!) – some income and some lump sum.

All of these choices have their advantages and disadvantages and so it is important to choose the one that best matches your income and investment needs. We can assist you to choose the option that best suits your situation.

UNDERSTANDING ANNUITIES

Another benefit of being older!)

The older you are, the higher the lifetime income you can buy with your pension fund!

In the past when you reached “pension age” – usually 60 for women and 65 for men, you could take your tax-free cash but then the only option you had for the rest of the money was to purchase an “annuity”. An annuity is an income guaranteed for life.

The annuity rates have generally gone down in the past decade or two and the new pension freedoms have led many people to taking other options. However, it is still worth knowing what your options are as regards annuities as they can provide a guaranteed level of income for as long as you live.

Annuity providers work out what they can offer based on how long a person can be expected to live. Detailed records are kept as regards how long people live and what they die of. This allows the providers to work out pretty precisely a person’s life expectancy. Generally people are living longer due to better diets and the medical treatments available. While that is good for us, it is not good news for the annuity providers as that means they will have to pay out the income they have undertaken to provide for a longer time. Do remember that annuity providers are businesses so there needs to be an element of profit for them.

If you have a sum of money in your private pension, you can find out what sort of return you are likely to get by just asking for quotes. Quite a bit of information is needed for precise annuity quotes including:

1) your date of birth

2) details of any medical conditions and treatment you have (or have had in the past)

3) information about serious medical conditions your immediate family may have suffered or died from before age 60

4) whether you are a smoker or have been in the past, and the level of smoking

In asking for an annuity quote you will also need to specify whether you want the income that is paid

remain the same, or increase over the years; to continue to be paid to a spouse if you die before them; and how frequently you want the income paid, e.g. monthly, quarterly or annually. The more “bells and whistles” you want, the lower the starting level of the income will be. While normally an annuity stops on the death of the person concerned, it is possible to arrange an option whereby it will be paid out for a specified number of years whether or not the person concerned is alive or not. As a rough guideline, for someone in good health here are some approximate levels of income that can be bought with money from your pension (shown per £10,000 of purchase price for a male and with no spouse’s income). You can compare the return on your annuity investment against other investment options. Do remember that annuity income is taxed in the same way as earned income.

Age                 Level Annuity                Annuity Increasing by 3% p.a. (Starting Level)

55                   £434 per annum (4.3%)          £259 per annum (2.5%)

60                   £473 per annum (4.7%)          £300 per annum (3.0%)

65                   £534 per annum (5.3%)          £358 per annum (3.5%)

70                   £610 per annum (6.1%)          £430 per annum (4.3%)

STRIVING TO MEET EXPECTATIONS

By survey what our clients value, and why they continue to come back to us, is our independent and unbiased advice on financial matters and mortgages, utilising our extensive knowledge and know-how gained over the last 35 plus years.

Here are a few recent client comments:

“Thank you so much for being super quick and efficient and guiding us through this. I have already recommended your services to 2 of my friends and am sure we will have some more work coming your way in the near future.”  – Mr RW and Ms NF of Kent

“Many thanks for all your patience, guidance and expertise in arranging this for us, your help is much appreciated.”  – Mr & Mrs PL of Redhill, Surrey

“Usual thanks and best wishes for excellent service.” – Mr IB of Leeds

“As ever your advice is clear and constructive; we will certainly come back to you as and when we decide to take the next step.”   – Mr & Mrs AM of Uckfield, East Sussex

 

EXPERIENCE AND EXPERTISE COUNT!

We do seek to use our experience and expertise to maximise the help we can give our clients. Here are what a few clients have to say about their experience with us:

“My expectations were met and exceeded. The prospect of sorting out an annuity was very daunting but Sovereign Finance came to my rescue. The world of annuities and pensions were explained to me in an uncomplicated way, which made my decisions a lot easier. I genuinely don’t think anything could have been done better.”

– Mr GD of East Grinstead

“I am writing to thank you for your expert guidance. Despite the government simplifying pensions it is still a very complex area and your experience proved invaluable in progressing this matter.”

 – Mr & Mrs PB of Horley

“Such courtesy is not often found in many companies nowadays.”

 – Mr BB of Crawley.

WHAT GUARANTEES CAN I GET ON MY INVESTMENTS?

Some guarantees are still possible. The dilemma for many is that they want to get a reasonable income from their investments but they do not want to take much of a risk.

The investment return on cash deposits is currently very limited – 1 to 2%. Better returns are available with annuities but lifetime annuities generally mean a loss of the cash in exchange for the income. But there are guaranteed funds which can provide a guaranteed income for life while still maintaining access to the capital. A client of ours, who is 70 has taken advantage of such guarantees, and has seen her £100,000 investment increase over the last 9 years to £120,000 while also having her guaranteed income for life increase from 5.0% per annum  originally to 6.5%. The funds are invested for growth in stocks and shares and are reviewed annually. If the fund values have improved above a certain point, the guaranteed income for life is increased, while she is still able to access the capital. If the fund values have gone down in that year, the income stays as it was. If she withdraws capital, then her income would reduce proportionately but would still have the lifetime guarantee. The theoretical worst case scenario is that her fund reduces to nil but she would still have the guaranteed income for life.

If you would like to discuss such a guaranteed investment approach to see if it would suit you, contact us.

A NEW RETIREMENT MENU FOR PERSONAL PENSIONS!

RETIREMENT MENU

Minimum age 55

(Note: different rules apply to Final Salary/Defined Benefit Pensions and some other schemes)

Cash please

You can have it all as cash but only 25% of it tax-free. You will be taxed on whatever else you take out in the same way as if you had earned it in that Tax Year.

Income please Option 1: You can still get an income guaranteed for life (Annuity -see further

notes below)

Option 2: If you have health issues you may be entitled to a higher guaranteed income for life (Enhanced Annuity)

Option 3: Draw an income from your pension fund itself (Drawdown)

Option 4: Use a guaranteed fund to protect your investment but still be able to take an income (Guarantees).

State Pension please  The State Pension is increasing but the State Pension age is also going please up. To find out when you will receive your State Pension go to www.gov.uk/calculate-state-pension.

“Side Dishes”

You may have other sources of income to help in retirement. This might be investment income, or rental income from an investment property or income from letting out one or more rooms in your home  (Rent-A-Room scheme allows you to earn up to £7500 tax-free).

More on Annuities 

There are a variety of annuities available. The general concept is that you use all or some of your pension fund to buy a guaranteed income for life or for a specified period. The older you are, the more income you will get for your money. The guaranteed income can be for the person with the pension and a spouse or partner – to go on for as long as the last survivor is alive. The annuity can provide a level income or an increasing income. There are also annuities which are linked to investments so they can go up or down.

More exotic dishes

The pension rules are different for other types of pensions. If yours is not a personal pension, do feel free to contact us for guidance.

MORE PENSION CHANGES

The Government has announced its intention to further review pensions and how they are treated tax-wise, and they are starting to crack down on pension benefits for the higher earners.

These restrictions on what higher earners can put into their pensions will come into effect from next April. While the annual maximum amount of pension contribution most people can put into their pension will remain at £40,000, those earning in excess of £150,000 will have this reduced on a sliding scale. Those earning in excess of £210,000 will have a maximum pension contribution allowance each year of only £10,000. The Government is also introducing a reduction in the pension Lifetime Allowance (the maximum one can accumulate in pension over his lifetime) from a total of £1.25 million down to £1 million from 6 April 2016.

The Government also announced it will be delaying its plans for setting up a market to allow individuals the freedom to sell their annuities. They have put back the planned starting date until 2017 to allow further studies to be done. There are further changes as to how pensions are taxed on death. Please contact us if you have any questions on these changes as they are somewhat complicated. Note: It is a very good idea to complete a letter of instruction to lodge with your pension provider to specify to whom you want the money paid in the event of your death.

PENSION FREEDOM AND RESPONSIBILITY

From the 6th of April the various new pension rules come into effect. They allow those with personal pensions from age 55 to take money out of their pension as much as they want, and when they want. The general rule still applies that only the first 25% of the fund can be taken tax-free. If more than that is drawn out, it will be taxed as if it were earned income in the Tax Year in which it is taken. You will still have the option to use your pension fund to secure a guaranteed income for life by purchasing an annuity or using a Drawdown Pension to keep your money invested with or without guarantees.  

This “pension freedom” approach has been in effect in Australia for many years and generally people have made sensible decisions with their pensions – with a minority taking it all out to splurge on a world cruise or buying a fancy car. With the freedom to access the money, comes a need to assess how you will use it. Pensions generally are intended to replace earned income as one grows older and works less, or gives up paid work all together. This means some forward planning will need to be done including working out how long you are likely to need to draw on the pension fund and what your budget is now, and what it will be in the future. This planning will be different from person to person.
 

The level of tax you will have to pay on the money you take out may well determine how much you take out and when. To repeat what we said before, the first 25% of the pension fund can be taken free of tax. The balance of any additional money taken out will be added to any other taxable income you have in the Tax Year and you will pay tax accordingly. If we look at the Tax Year beginning 6 April 2015, you have your Personal Allowance which means, for most of us, that the first £10,600 of income will not be taxed at all.The next £31,785 you earn will be taxed at 20%. After that you will pay tax at 40% for the next £107,615, and any income taken above that will be taxed at 45%.

 

THE BUDGET – PROMISES, PROMISES!

Besides the announcements of the increase in Personal Allowances and tax thresholds, there was very little of immediate interest.

There were many possible future changes announced but most will not come into effect until much later - either from this Autumn or from April 2016. There is little to gain in seeking to comment on these possible future developments at this point because they are little more than promises which will be subject to various reviews and changes and all of which rely on the results of the May election. We would particularly draw attention to the Government’s announcement about wanting to make it possible for those taking annuities to exchange them for a cash lump sum. This is still only a proposal and it will be long after the 6th of April, if ever, that this becomes a real possibility.

NEW PENSION PRODUCTS

The financial services providers are bringing out more and more new products to cater for the

changes that have been announced.

For example, for those who want to access their money now and have an income but also want the option to take it all after next April, there are now one year annuity products. These allow you to take your Tax Free Cash immediately but also allow you to exit the annuity after April next year so you can access more of your pension fund. In addition to short term temporary annuities, there are also investment-based annuities, and enhanced annuities for smokers and those with medical conditions. We would be happy to go over the options that may be available to you.

Income Please

Income please


After you have taken your tax-free cash

Option 1 Take a guaranteed income for life (Annuity).

Option 2 Receive a higher guaranteed income for life due to an adverse medical condition or medical history or history of smoking (Enhanced Annuity).

Option 3 Take a fixed income for a period of time (usually 5 years) and have a guaranteed amount left at the end so you can then review your options (Temporary Annuity).

Option 4 Get an income which can possibly increase depending on the underlying investments (Investment Based Annuity).

Option 5 Leave your monies invested with the option to draw an income from the fund itself (Drawdown). There are two possibilities here.

The first is called Capped Drawdown. With this one the maximum you can take is based on your age and the value of the pension fund. The second is called Flexible Drawdown. This allows you to take out as much as you want from your pension fund – but only if you already have a guaranteed pension income of at least £20,000 per annum (this can be made up of the State Pension and Private Pension income but cannot be made up of other earned income or investment income).

TAKE ADVANTAGE OF THE VALUE IN YOUR PROPERTY

As more and more older people need to take advantage of the value in their residential properties to help supplement income or for home improvements, the Equity Release market is growing. With the increased competition there is more choice and better interest rates. If you are in a position where you may need to consider this, we will be pleased to assist in researching the options for you without cost or obligation. Just give us a ring on 01342 313302 or email us. Note: the minimum age for Equity Release is usually 55. In the case of a married couple, the younger of the two would have to be at least 55 years of age.

OTHER OPTIONS FOR INCOME IN RETIREMENT

While pensions are traditionally the way most people will provide for themselves in their later years, they are not the only option. Many people have greater faith in property and will build up a portfolio of residential investment properties producing a net rental income and the possibility of an increase in the property values. Mortgages for Buy-To-Lets have become very competitive and still can be done on an interest-only basis in order to maximise the income produced. Please contact us if you require any further information about Buy-To-Let mortgages. Other savings such as Individual Savings Accounts and stocks and shares generally can also provide an income in retirement. The return on cash investments is not very good currently but has been better in the past. The income from shares in the way of dividends can provide a very useful source of retirement income, for those who understand the risks and are willing to take them. Pretty much a last resort for income or a lump sum in retirement are Equity Release Plans. They are available from age 55 (note: for a couple the qualifying age is determined by the younger of the two). Interest rates and costs for these options have been going down, so they are worth reviewing if needed. We would be happy to provide quotes and clarify the options for you.

A HIGHER STATE PENSION ON THE WAY?

If you are doing some pension planning, it is worth knowing that the Government is proposing to bring in a flat rate State Pension from April 2017 which would be the equivalent to £148.00 per week now. Currently the Basic State Pension is £107.45 per week. The new flat rate pension is intended to simplify the system. It is intended to improve the "safety net" for British pensions, but it should only really be seen as part of an overall retirement plan.

Review your pensions

You may have pension pots in various places from previous employments or pension savings arrangements. Find out what the fund values are and what funds you are invested in. You can then look squarely at how much pension income you are likely to have available in your later years and act accordingly. We will be happy to help you work out what these might add up to eventually. Also, make sure that your various pension providers have your current address so they do not lose track of you.

A shake-up for UK pensions

2012 could well come to be seen as a watershed year for UK pensions thanks to the introduction of auto-enrolment. The scheme, which is intended to provide wider access to pension savings, has been described as "the biggest shake-up" in UK pensions for more than a century. According to the Department of Work & Pensions (DWP), approximately 13.5 million workers did not contribute to a pension during 2011 – the vast majority of them in the private sector. Pension saving has declined across all age groups, but the drop among 20-somethings has been particularly marked. People working in industries such as construction, distribution, hotels and agriculture are the least likely to have a workplace pension. Even pension saving in financial sectors has declined sharply. The DWP estimates up to 11 million people will qualify for auto-enrolment. From 1 October 2012, those between 22 and state-pensionable age, who earn more than £8,105 a year and who are not already enrolled in a qualifying pension scheme, will be enrolled in their workplace pension scheme. The worker and the employer will contribute to the scheme unless the worker decides to opt out. Eventually, workers will contribute 4% of earnings and the employer will contribute 3%, with a further 1% in the form of tax relief. The largest companies will start auto-enrolment first, with the whole process having to be completed by April 2017. Around 600,000 people are expected to be enrolled by the end of 2012 and as many as 4.3 million by May 2015.

Advance Warning

Some significant changes in financial services are to come into effect at the end of 2012. The Financial Services Authority will be replaced by two(!) new regulators – the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). Along with this change are requirements for higher standards for financial advisers and a move away from commission being paid for investment advice to advisers charging fees. Firms of advisers also need to decide whether they will provide advice from the whole market and qualify thereby as "independent" or will work with a specified set of suppliers and then be termed as providing "restricted advice". We will continue to provide independent advice. Contact us on 01342 313302.

Pensions – Looking For A Better Income

INCOME PLEASE – (after you have taken your tax-free cash)


Option 1: Take a guaranteed income for life (Annuity).

Option 2: Receive a higher guaranteed income for life due to an adverse medical condition or medical history or history of smoking (Enhanced Annuity).

Option 3: Take a fixed income for a period of time (usually 5 years) and have a guaranteed amount left at the end so you can then review your options (Temporary Annuity).

Option 4: Get an income which can possibly increase depending on the underlying investments (Investment Based Annuity).

Option 5: Leave your monies invested with the option to draw an income from the fund itself (Drawdown). There are two possibilities here. The first is called Capped Drawdown. With this one the maximum you can take is based on your age and the value of the pension fund. The second is called Flexible Drawdown. This allows you to take out as much as you want from your pension fund – but only if you already have a guaranteed pension income of at least £20,000 per annum (this can be made up of the State Pension and Private Pension income, but cannot be made up of other earned income or investment income.)

Pensions – Looking For A Better Income

ALL AS CASH PLEASE!


If you are aged 60 or older and the total value of all your pensions is less than £18,000, you can take it all as cash. 25% is tax-free and the balance is taxed as if it were income you had earned in that tax year. If you cannot take advantage of that option, but have a couple of very small pension pots (£2,000 or less), you can do the same with them – up to two such small pots per person.

Pensions – Looking For A Better Income

CASH PLEASE


You can have a maximum of 25% of the value of your pension funds (This refers to personal pension; the rules are different for a Final Salary Scheme where the benefit is based on the salary and years of service.). So, if your pension funds total up to £20,000, you can get £5,000 as tax-free cash. If they are worth £100,000, you can have £25,000 tax free.