TAKING THE BENEFITS – THE RETIREMENT MENU Minimum Age 55

Cash please: You can take a maximum of 25% of the value of your pension funds. For example, if you had a pension with a value of £50,000, you could take £12,500 free of tax. (Note: this applies to personal pensions; the rules are different for Final Salary Schemes where the benefit is based on the salary and years of service.)

All as cash please! In fact you can withdraw the total value of your pensions as cash. The downside is that the amount you take, over and above your 25% tax-free element, is subject to tax as if you earned it in the Tax Year you take out the cash. This can result in a very substantial tax bill so do check out the tax ramifications before acting!

Income please (after you have taken your tax-free cash) Option 1: Take a guaranteed income for life (Lifetime Annuity). Option 2: Take a guaranteed income for life but at a higher level if you have a serious medical condition or problematic 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 of the term so you can then review your options again (Temporary Annuity). Option 4: Transfer your pension fund into a Flexi-Drawdown Pension. You can then leave the money invested at any risk level that suits you and you have the option to withdraw a regular amount of income or take an occasional lump sum. (Note: For all of the income or cash withdrawals listed above, once you have had your tax-free cash, will be taxed as earned income.)

“RETIREMENT” PLANNING

A majority of the work we are doing currently concerns “retirement”. It is not a word we care to use
as it implies a person will give up useful work and do little or nothing. We prefer to view it as a change of operating basis – of being able to move away from what one has had to do to make money, to other activities which one simply wants to do. Of course, there still does need to be adequate money available which is the reason why you should plan for this changeover.

Pensions are the source of income in later years for most people. They start with the new State Pension which currently pays £168.80 per week for those who have put in at least 35 years of work (and paid National Insurance in those years or were credited with years – for example, when raising children).

For the employed there are also occupational or workplace pensions. While the days of the best company pensions have faded into the past, they can still provide an excellent source of income in retirement with both the employer and employee having contributed. The self-employed need to establish their own pensions and make adequate payments if they are going to have their pension providing a reasonable amount of income. With people moving jobs more frequently there is often a number of smaller pensions from one’s work history. The main advantages of pensions is that you receive tax relief on what you invest into it (up to an annual maximum amount). For the Basic Rate taxpayer for example, the £1.00 they put into their pension will get 25p more added by the Government so it turns £1.00 to £1.25 overnight without risk. And a Higher Rate taxpayer gets even more tax relief.

OPENING THE CAGE!

The last several years has seen the arrival of many new options for those who had not been able to obtain a mortgage due to their age. Standard residential mortgage lenders generally now allow borrowing up to age 70 for those who are relying on earned income – whether employed or self-employed. For those who have guaranteed income into retirement such as pensions and investment or rental income, it is possible to borrow up to age 85 or even 90.

Other Solutions - The Lifetime Mortgage – A New Flexible Mortgage Tool for the Older Generation

In many ways the new Lifetime Mortgages provide the sort of flexibility that was a feature of mortgage borrowing many years ago.

The level of borrowing is determined in most cases not by affordability calculations, but by just the borrower’s age and value of the property. The older you are and the more the property is worth, the more you can borrow.

This can provide an escape from an older interest-only mortgage arrangement. It can also open the door for using the value in the property for any other reason – whether it is for one’s own projects or to help family with problems they may have. The Lifetime Mortgage interest rates have also been inching downwards in the last few years as competition has increased. Past credit problems also usually do not present a barrier.

News

It is still early days but there is a surprising resilience in the property and financial markets

following the BREXIT vote. Residential property prices have remained reasonably stable

and mortgage rates remain at the lowest levels on record.

Pensions and taking the benefits from them, however, remain a complicated area. To help understand

the options here follows: A New Retirement Menu for Personal Pensions. We know that the subject

of pensions is confusing to most people, so do feel free to contact us with your questions. Do note

that the “Retirement Menu”  relates to Personal Pensions only. The regulations for Final

Salary Pensions where the benefit is linked to years of service and salary are different.


Menu to follow ......

FREEDOMS AND REPONSIBILITIES

The new pension legislation provides the freedom to access your pension savings from age 55.

However, first you have to have saved up some pension savings to have access to (!) and secondly you need to exercise responsibility and judgement as to how you apply these freedoms to your own personal situation.

If you are approaching age 55 and have pensions and are looking to work how to use them, here are six useful steps to take:

1. Check what the value of each of your pension pots is;

2. Gather information and speak to experts so that you understand your options. Ensure you understand the risks involved and establish your own attitude towards investment risks; (Note: there are some pension funds that come with guarantees.)

3. Work out how long the money needs to last. Even if it is not the most pleasant of subjects, it does mean you need to give some thought to your life expectancy;

4. Work out what your expenses will be in retirement;

5. Understand the tax implications of taking income or lump sums out of your pension;

6. Shop around for the best deals or take on a professional adviser who can do this for you.

The Government has established free sources of guidance to help you with the above. The help

can be on-line (www. pensionwise.gov.uk), face-to-face at a Citizens Advice Bureau, or over the phone, The Pensions Advisory Service. Once you have had “guidance” you may wish to have “advice” and that is where we would come in. We can provide impartial advice based on our extensive expertise and knowledge of the subject.

WHY TAKING OUT THE MAXIMUM MIGHT NOT BE THE BEST IDEA!

1. The first reason obviously is that you will have to pay tax on what you take out over and above the first 25%.

2. The other reason is that money in a pension fund can pass to a beneficiary, and, indeed, down a line of beneficiaries – all free of Inheritance Tax. And once a beneficiary receives entitlement to the inherited pension fund, the money they take out is ALL tax-free. (Note: if the person with the pension fund dies aged over 75, the rules are slightly different; contact us if you need more information on this.)

So, if you have other alternatives to provide you with the income you need, you may wish to consider preserving the pension fund as an efficient means of providing an inheritance.

RETIREMENT MENU

RETIREMENT MENU
Minimum age: 55


Cash please


You can have a maximum of 25% of the value of your pension funds (This refers to personal pensions; 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.






More 'Menu' to follow next week

How to Make the Most of What You Have! (Understanding Your Pension Options)

Pensions can be complicated and difficult to understand, particularly as Governments are forever making changes to pension rules. If you have any pensions that you would like to review, please contact us. We have the expertise and experience to help you understand the options and action your choices. If you are not already in receipt of your State Pension, it is also worth finding out how the coming changes will affect, when you will receive it and how much it will be.

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.

The Value of Experience and Expertise!

By survey what you want from us is our advice on financial matters, utilising our extensive knowledge and long experience going back over 30 years. We enjoy helping in this way and continuing to assist our clients and their friends and their children. Those that have used us do know they can rely on us again and again. In recent service questionnaires when asked why they chose to use Sovereign Finance we received answers such as the following: “We dealt with Sovereign Finance before and found them of good service, reliable and honest. Always.” Mr GS of Ashford “Thank you so much for making it all happen so fast. Brilliant!” Mrs SR of London “Mr Shuster is dedicated to getting the right result.” Mrs HT of West Sussex “We had previously used Sovereign and had confidence in the advice given. We expected a good service and that’s what we got.” Mr KH of Eastbourne “The service I received was excellent with regular correspondence and home visits. Good work. Keep it up”! Mr MB of Pembury

Pensions Update

Meanwhile, according to Scottish Widows’ ‘Women & Pensions Report’, 43% of women will rely on joint savings with their partners in order to fund their retirement. Only 17% of women believe their own savings will be sufficient to fund their retirement, compared with 30% of men. Yet one in three UK marriages now end in divorce within 15 years and so it is important women take charge of their own retirement plans. After all, alongside accepting the inevitability of old age, we should also accept the possibility of unforeseen events.


At the same time, women are saving an average of £776 a year less than men for their retirement. Scottish Widows calculates a 30-year-old woman who maintains this average annual rate of saving will save £29,800 less than her male counterpart by the age of 65. More worrying still, 26% of women are saving nothing at all for their retirement, compared with 19% of men.

Of course, it is not always easy to plan for the future, particularly in an environment of rising prices. Pressure on household budgets can make it a challenge to find additional cash that can be earmarked for retirement. Nevertheless, it is worth reviewing your current expenditure to see how your lifestyle would be affected by retirement. Most of us have a finite number of years in which to put aside money for our old age and it is never too soon to start.

Above all, you need to plan early to allow yourself as much time as possible to build your nest egg. Take control of your future – your financial adviser can help you to develop a suitable long-term savings strategy for you. The only thing you cannot afford to do is nothing.

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.

Workplace Pensions – Important

The bad news is that all employers (even if you have only one employee) will be required to set up a Workplace Pension with the automatic enrolment of the their employees, and they will also be required to make payments into their employees' policies.

The good news is that if you have 40 employees or less, you will not be required to set up your Workplace Pension until some time in 2015. The Workplace Pension is being phased in over 6 years in stages with the largest employers who had to begin it in 2012.

For further information and to establish your exact “Staging Date”, go online to www.thepensionsregulator.gov.uk/automatic-employment

Tom Shuster
Partner

SUGGESTIONS FOR THE NEW YEAR

Review your mortgage interest rate. If you find that you are on the Standard Variable Rate with your lender (4.25% to 5.0%), contact us for quotes as you should be able to save 1% to 2% and that can mean quite a bit of savings each month. Lenders are having to compete more for business now and that means a better deal for the borrower. 3 and 5 year fixed rates are looking very competitive. As independent mortgage brokers we can help you find the best deal.


Review your pension. By survey almost half of the working population have never reviewed their pension plans, even though the majority of those contacted did say that they considered it important to know how their pension funds were invested. A failure to review your pension can leave you exposed to inappropriate investments and also prevent effective planning for your retirement income when you reach your 60s and 70s. It is also valuable to get a State Pension Forecast. We are available to help with this.

Get rid of any credit card debts that are hanging around. The temptation to pay just the minimum payment is intense and the credit card balances then do not go away. It is much better to organise a loan over a few years with fixed payments and pay off the credit cards. That is not to say that a credit card cannot be a useful tool, but you need to be disciplined and pay the full balance off each month.

If you are a 40% taxpayer. Do take the maximum advantage of your pension contributions to reduce how much you pay in tax.

Take advantage of your Individual Savings Account Allowance – Particularly the Cash ISA, so that you build up a cash cushion (and generally get a better rate of interest on your savings).

If you have an interest-only mortgage - Review it carefully to ensure that it will not become a problem when you reach the end of the mortgage term. It is wise to act early rather than ignore the problem until it is close upon you.

Review your insurances. If your circumstances have changed since you last took out life assurance, you may need more, or less, life assurance to meet your needs. One immediate benefit, however, is that the minimum technical requirement for those advising on investment, pensions and annuity has been increased. While examinations are not necessarily a true measure of understanding and ability, they can have value. Another change is that investment, pensions and annuity advice will now be charged for on a fee basis, rather than being paid by commission, as was generally the case before.

The intention is to bring the profession in line with other professions such as solicitors and accountants. We will need to see how the public responds to this major change. Advisers in 2013 will also be split into two groups –those who provide independent advice from across the market and those who provide advice restricted to certain parts of the market. Sovereign will continue to provide independent advice.

For speedy, impartial advice, contact us on 01342 313302.

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.

WORKPLACE PENSION

The Government is trying to force us to make more pension savings. Starting in 2012 and coming in over the next several years is the Workplace Pension. With few exceptions everyone who is employed on PAYE will be automatically enrolled into a pension scheme his employer must provide. The employee and employer will be required to both make payments into a pension for the employee. It will phase in over several years starting with both employee and employer contributing 1% of their pay and building up until finally from October 2017 the employer must contribute 3% while the employee must put in 5% of his pay. Where an employer already has a pension scheme in place that provides benefits at least as good as the Workplace Pension, no changes will be required. The employee does have the right to Opt Out of the pension arrangements simply by notifying his employer. While we understand the Government’s wish to try to help people increase their savings for retirement, we do not believe that an effort to force people into saving will succeed in the long term. But we would encourage anyone who is not yet contributing into a pension to take advantage of any employee contributions on offer!

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

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.