SOME IMPORTANT DATA ON PENSIONS

If you are employed or a company director, the maximum your company can put into your pension in the current year is £50,000, although you may be able to take advantage of earlier years if you had made a contribution smaller than that in those years. If you are making contributions on your own, the maximum you can contribute is up to 100% of your earnings for that year – subject to the £50,000 maximum. Note: The maximum total you are allowed to have in pensions is £1,500,000 – admittedly not something that most of us have to worry about!

Contracting out of SERPS (now the State Second Pension Scheme) will stop on 6 April 2012 for everyone. You then automatically go back into the State Second Pension Scheme. You do not have an option.

Compulsory pensions! From October next year all employees will be required to join a pension scheme provided by their employer and both employee and employer will be required to make contributions.

MORE ON ANNUITIES

When you are dealing with pensions, it is important that you understand the concept of an annuity. An annuity refers to the income you are paid from your pension – as opposed to the Tax Free Cash. You buy an annuity like any other commodity. There is an open market where you can seek out the best deal. The older you are, the more you will get for your money. This is simple to understand. If you are aged 55 and want an annuity, the pension providers will look at the statistics and see that you are probably going to live another 30 years or more. If you come to the provider with the same amount of money and you are 65, you will get a higher income because they can see statistically they are only likely to have to pay it out for 20 years. So £50,000 would buy a man aged 55 an income of £2960 per annum, and a man age 65 £3400 per annum. Once you purchase the annuity, you cannot change it in the future. If this does not suit your circumstances, investigate the other pension options available.

There are a few bells and whistles to know about when considering annuities. First, you can opt to have an income that would still be paid to your wife if you go before she does. Secondly, you can opt to have an income that starts lower but increases each year to counter the effects of inflation. And thirdly, if you are in poor health or have a difficult medical history, you should look at Enhanced Annuities. Basically these give people with medical problems more for their money – on the basis that they are not going to live as long as someone who is of the same age but in good health.

Junior ISAs - New kid on the block

The Coalition Government has now confirmed details of the long awaited savings plan analysts had been expecting since the withdrawal of Child Trust Funds (CTF) last year. The Junior ISA will be launched in November and will extend to under 18s the same tax benefits which parents (and all adults) already enjoy. Their exact structure is subject to final legislation that may change, but this is the plan so far.

The Junior ISA will allow parents to open up a specific account in their child’s name, into which they, their family and friends can contribute a total of up to £3,000 a year. These contributions will then be invested in a chosen mixture of cash and/or stocks and shares and the benefits locked up until that child reaches 18. Anyone under 18 born before September 2002 or after January 2011 (i.e.: those who do not have a CTF) will be eligible for a Junior ISA (and for those with CTFs, the annual limits are expected to be brought in line).

The Junior ISA could provide a significant step up for children whose family and friends get together for their benefit. Final values are subject to growth rates but just to give you an idea, assuming an average of 5% pa (net of charges), that £3,000 pa could leave the lucky beneficiaries with a contribution of over £80,000 towards their world trip, first house or those hotly debated university tuition fees.

Reviewing Cash ISAs - Losing out to inflation

Low interest rates are great news for borrowers but for savers, they can have a devastating effect. With inflation currently running far in excess of base rates, even though the value of your capital may be safe, you need to keep a close eye on the interest rates you are earning to stop, or at least limit the rate at which the buying power of your money is being eroded. Nowhere is this more apparent than with Cash ISAs. In a recent survey for watchdog, Consumer Focus, over 80% of Cash ISA holders were found to be earning less than just 0.5% a year on their savings. In most cases, the attractive introductory rates which lured savers in had come to and end and been replaced by very low "standard" rates. In some cases this change had even gone unnoticed. Whilst it is true that, whatever the conditions in the market, most people should hold at least some money in an easy access, readily available deposit account, simply to make sure they can cover unforeseen emergencies and short term needs, any saver with longer term plans should be alarmed by findings like this. At the very least, you should do a review of the market and see if you can find an account paying more. In response to the findings, Consumer Focus suggested that: "...customers who have not switched their [ISA] savings may be losing one to two per cent in interest. In total this could amount to as much as £1.5 billion to £3.0 billion per year…” With those potential gains at stake, it is certainly worth shopping around.

What our clients say...

We would just like to say a big thank you for all your help in arranging our mortgage and sorting out our life insurance policy, we certainly know where to come for any future financial advice.
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M. D., West Sussex

I thought you were brilliant at explaining everything and will recommend you and Sovereign to everyone I know!
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We have used them [Sovereign Finance] on several occasions for mortgages, pensions etc. and each time they have provided excellent services.
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MORTGAGES – DON’T PAY MORE THAN YOU HAVE TO!

The residential property market is still relatively quiet. Lenders are being forced to bring out new offers to tempt borrowers to move or remortgage. Our general advice for those on their lenders’ standard variable rate is to remortgage to a fixed rate for between 3 and 5 years. There is generally money to be saved and peace of mind to be gained. We will be happy to review your options for you. Note: those who still have interest-only mortgages should take immediate advice to ensure that they either move over to a repayment type of mortgage or have sufficient resources to pay the mortgage when it falls due.

PENSION RULES – A SUMMARY

Current pension options and regulations in 2011/2012:

1. You can contribute into a pension an amount equivalent to 100% of your earnings up to a maximum of £50,000 in any one year. If you want to contribute more, then you are allowed to bring forward any unused amounts of potential contribution from the previous 2 years. For each £1.00 you contribute, the Government adds 25p if you are a Basic Rate Taxpayer. If you are earning over £42,575, you end up getting 50p benefit for each £1.00 you contribute. Those earning over £150,000 get still more tax relief.
2. From 2012 the maximum total pension you are allowed to have had tax relief on in your working life is being reduced from £1.8 million this year to £1.5 million from 2012 onwards.
3. You no longer have to purchase an annuity (an income for life) by age 75. There is now no age limit.
4. From age 55 onwards you can take up to 25% of your pension savings as Tax-Free Cash and take your other pension benefits. You have a number of options for taking the other benefits such as the following:
a) You can take your Tax Free Cash and use the remainder to buy a guaranteed lifetime annuity (an income guaranteed for life).
b) You can take your Tax Free Cash and leave the remainder invested and draw an income from the invested funds – up to a maximum set by the Government. This is called a Capped Income Drawdown.
c) You can take your Tax Free Cash and leave the remainder invested and take out as much as you want as long as you have a guaranteed pension income of at least £20,000. This is called a Flexible Drawdown.
d) You can take your Tax Free Cash and use the remainder to buy a Temporary Annuity which gives you an income usually for 5 years and then you have the option to choose again how to use the remaining pension fund.
5. If you die and have not taken any pension benefits from your pensions, the value of the pension becomes part of your estate and is shared out according to your Will.
6. If you die and have started taking pension benefits, your estate will receive 45% of what is left in the fund with the Government taking 55%.
7. From 2012 people who contracted out of SERPS (State Earnings Related Pension Scheme now called the State Second Pension) many years ago will no longer receive an annual amount paid into their pension by the Government. Instead they will be credited with a year of contribution to the State Second Pension (this will increase the total State Pension one receives at State Retirement Age).