Personal Finance Blog -- Pensions & Investments Management Services

NEST- The National Employment Savings Trust

Philip Church — Fri, 03 Sep 2010 09:21:26 +0000

This new way of forced saving for our retirement looks set to be in place by 2012.

Employers will need to automatically enrol their eligible workers into a qualifying pension scheme and make contributions to it. Workers will be able to opt-out of their employer’s scheme if they choose not to participate.

Workers who give notice during the formal opt-out period will be put back in the position they would have been in if they had not become members in the first place, which may include a refund of any contributions taken following automatic enrolment.

Contribution limits, There will be an annual contribution limit of £3,600 into NEST. This will be uprated by earnings year on year. This limit will be reviewed in 2017.

NEST will provide people with access to a simple low-cost pension scheme. The charges are expected to be:

· A 2% charge on the value of each contribution to cover NEST’s start-up costs; and

· An annual management charge of 0.3% of the value of the fund.

Existing Schemes and Group Plans

The main question we are asked is ‘ will I still have to put my staff into NEST, even though I do contribute to another plan/scheme for them?

No, as long as the scheme or plan meets the minimum contribution rate test and it operates auto-enrolment for eligible employees. If it does not meet this test, or does not operate auto-enrolment, you are not exempt from enrolling into the National Employment Savings Trust (NEST) those employees who meet the eligibility conditions, i.e. are aged between 22 and State Pension Age and earn a minimum amount (around £5,000 pa).

If you are an employer and want further deatailed information please contact us direct and we can provide full information.

For employees, your employer should be in touch with you soon regarding this important matter.

Rental Market Remains Strong

Philip Church — Fri, 27 Aug 2010 13:01:55 +0000

The rental market is continuing to grow with increased tenant demand and a shortage of properties pushed rents higher last month, according to the Royal Institution of Chartered Surveyors (RICS).

Individuals in the main are still struggling to secure a mortgage. The continued gloom of a possible double dip in the housing market coupled with the large deposits required by lenders are the main factors.

Buy to let mortgage fees are in some instances prohibitive and putting investors off, this may lead to a lack of supply of quality rental properties and further fuel demand of existing stock.

Annuity Rates and Solvency II

Philip Church — Fri, 13 Aug 2010 16:12:13 +0000

As we already are fully aware that annuity rates are not as good as they were in the past, the future could see rates fall considerably.

A recent change in European law-Solvency II, could force life companies from 2012 to value their annuity liabilities using government gilt rates, rather than the current preferred option of corporate bonds, which give a higher yield.

Life companies will have to hold more capital to meet their annuity pay-out liabilities - and the knock on impact is that annuity rates will fall, this may between 20 per cent and 30 per cent. Those anticipating the move to annuity may be wise to look at their pension policies for an early exit.

You need to consider the potential loss during the deferral period and any subsequent drop in income. Some insurers that are normally sitting high in the annuity comparison tables are dropping back, possibly building up their capital reserves.

Private Sector Pension Indexation Change

Philip Church — Fri, 13 Aug 2010 16:10:44 +0000

Goal posts have moved again and for some the news is not good. The government will revalue defined benefit DB schemes in line with Retail Prices instead of Consumer Prices and will reduce the value of occupational pensions in the future according to some analysts.

This move will bring into line the indexes used for determining increases for all occupational pensions and payments made by the Pension Protection Fund (PPF) and Financial Assistance Scheme (FAS).

If we look back in time we can see that had pensions in payment today had been linked to CPI instead of RPI for the last twenty years they would now be 14 per cent lower. CPI is on average half a per cent less than RPI because it is calculated in a different way.

Those large employers still running defined benefit schemes will no doubt welcome this change potentially reducing their future liabilities.

Best ISA Transfer Rates

Philip Church — Fri, 13 Aug 2010 16:09:09 +0000

With interest rates still at the same level as last year, savers are attracting to locking in some of their ISA money and secure a higher rate.Halifax,Nationwide and Dunfermline are all offering in excess of 4% gross as long as you tie the money up for 4 years or more from as little as £500.

Instant Access up to 2.70% can still be achieved with the Newcastle and Cheltenham and Gloucester

Why Transfer- like most savings accounts banks and building societies give you an initial attractive rate for a year or so then the rates rate lowers and they do not tell you. Yes even existing customers of the best rate on the market need to walk into to their branch and say – is this the best rate you have got?, if not I will move it. It pays to continually change your bank accounts and it does not take that long to do so. If not, your helping the financial institution and not yourself.

Increase in State Pension Age Should Be Delayed

Philip Church — Fri, 13 Aug 2010 16:06:35 +0000

The Government’s plans to increase the retirement age so soon will mean those in their mid to late 50s who have already made retirement plans are unable to change their savings and private pensions to make up for the loss of a year’s state pension. This will hit the pocket of a number of our clients and some of them have been voicing their opinion. Those individuals now in their mid to late 50s have taken time to fund for their income in retirement and they may be unable to make the change at such short notice to their savings to cover the state pension they will lose. Six years is not enough time after a life time of planning.

Further government thinking is urgently required, particularly for those with private self employed pensions that have to suffer the lower annuity rates and are still recovering from the falls in stockmarket values.

We hope that this can be deferred to say 2020 as it gives a more realistic savings window to fund for the gap.

Emergency Budget June 2010

Philip Church — Thu, 24 Jun 2010 09:16:39 +0000

Income Tax

The personal allowance for those under 65 will be increased by £1000 from April 2011,this is more than a 15% increase.The higher rate threshold will be frozen up to and including 2013/14. With the Government aiming to increase the personal allowance up to £10,000 over their Parliamentary term.

The 50% additional rate of income tax will remain, for a while anyway.

How this could affect you

The slow increase in the nil rate band, starting from 6 April 2011, fits well with the aims of the coalition to encourage work and employment. This will help the lower paid to manage increases in the cost of living.

Business Taxation

Good news for our corporate clients is that starting April 2011 the Main Rate of Corporation Tax will reduce from 28% to 24%. The Lower Rate will reduce from 21% to 20% in April 2011,we await details of any further rate cuts for smaller companies.

The effect of the increase in employer National Insurance will largely be reversed by increasing the threshold by £21 a week above indexation.

How this could affect you

Business owners should welcome these changes and may help much needed future growth.

Child Allowance

Child benefit will be frozen for the next three years. The family element of child tax credit will continue for families receiving income of £40,000 per year, instead of £50,000.The child element of the child credit will rise by £150 above inflation.

How this could affect you

Child benefits for higher earning families will effectively not be inflation linked. The effect of this change and increases in VAT will result in an increase in the cost of living.

Capital Gains Tax

With immediate effect, CGT- Capital Gains Tax will increase to 28% for higher rate taxpayers, but will remain at 18% for basic rate taxpayers. The £10,100 allowance will remain and will increase with inflation. Entrepreneur’s lifetime allowance will increase from £2m to £5m.

VAT

Standard Rate VAT will rise to 20% from 4th January 2011.

How this could affect you

This is a significant increase in indirect taxation, although this will affect not only luxury goods but essential goods also. This is likely to have a big impact on every family budget.

Savings

The Government has asked the Consumer Financial Education Body-CFEB to develop a new annual family financial health check. They also confirmed they will index link the annual ISA subscription limit from 2011-12.

How this could affect you

We look forward to hearing from the CFEB and savers will be happy as ISAs look to continue to be a tax-efficient method of savings and likely to be suitable for the majority of clients.

State Pension

Basic State Pension will increase by the greater of:

Earnings (AEI)
Prices (CPI)
2.5%

In April 2011 the increase will be RPI if this is higher. This is seen as a way of reducing the impact of means testing on saving.

The Government is reviewing when state pension age will rise to 66. A consultation will follow on when the default pension age will be phased out altogether.

How this could affect you

The reintroduction of the earnings link should be well received by pensioners as the majority will see their income in retirement increase. Some clients will need to consider the impact of a delay in drawing a basic state pension.

Retirement Income Planning

The Finance Act 2010 Pension Tax legislation will be repealed when the Government has considered what it will do to replace it. In the meantime the Anti-Forestalling rules still apply. It is suggested the annual allowance might be reduced from £255,000 to around £30,000 to £45,000 to raise the same amount of revenue.

The rules effectively requiring annuity purchase by age 75 will be abolished from April 2011. As an interim measure the age limit is immediately increased to 77 provided the scheme member had not reached 75 before 22nd June 2010. The penal tax charges on post 75 death benefits and the stricter maximum and minimum withdrawal limits will immediately no longer apply to members aged between 75 and 77.

How this could affect you

Although changes are subject to industry consultation, these changes will create greater freedom for clients in drawing their pension. For most people annuities are the most effective way of providing replacement income and an annuity purchase will remain the right choice to make. For those who need to maximise their income in retirement the debate remains about ‘when to annuitise’ not ‘if to annuitise’

Pension Tax Relief

On pension income tax relief, the Government will work with industry to consider alternatives to the restriction for those earning over £150,000. Potentially, subject to consultation, this could include a lower annual allowance of between £30,000 - £45,000.

How this could affect you

We look forward to seeing the Government’s proposals for simplifying complex legislation following the Finance Act 2009. The current rules really only affect individuals with total income in excess of £130,000.

How do you feel about investment risk?

Philip Church — Mon, 24 May 2010 11:14:12 +0000

One of the difficult things in the client adviser relationship is assessing their attitude to losing and or growing capital. What you believe your shares or investments can do for you may be far from the mark.
We now have a range of ways of assessing your risk profile and shown below is the simplest of the forms we use others are three page questionnaires.
Most investors look for a better return than cash and inflation but how much of your hard earned capital would you be willing to lose 5% ? how about 25%. Markets do swing from one extreme to another and as shown in the returns in the previous article can range from a positive year all round but previous years have produced the same figures but in negative returns.

Our advice is at least every year you should consider what access to capital you need in the next 12 -24 months.Think of what you want out of your investment i.e. inflation plus 2%. Then take stock of what you would be willing to accept as a loss and invest in the assets the will deliver the desired returns.
No one knows exactly what will happen in the economy but there are calculated and informed ways of avoiding certain areas or being overweight in others in order to either safeguard what you currently hold or capitalise on certain opportunities.

Risk Assessment form
(circle the most suitable number)

I would feel comfortable if my investments could easily rise and fall by a quarter (25%) or more in a year

Strongly Agree-4- Somewhat Agree-3- Somewhat Disagree-2-Strongly Disagree-1-

If my investments fell significantly in value I might see this as an opportunity to buy more at a cheaper price

Strongly Agree-4- Somewhat Agree-3- Somewhat Disagree-2- Strongly Disagree-1-

I would not feel comfortable if my investments could fall in value at all

Strongly Agree-1- Somewhat Agree-2- Somewhat Disagree-3- Strongly Disagree-4-

I prefer the security of bank accounts to stock market related investments

Strongly Agree-1- Somewhat Agree-2- Somewhat Disagree-3- Strongly Disagree-4-

I can sleep at night knowing that my investments might rise and fall quite rapidly in the short term

Strongly Agree-4- Somewhat Agree-3- Somewhat Disagree-2- Strongly Disagree-1-

After you complete your answers, the total amount is used to assess how risk averse you may be.

A low score shows you are conservative - cautious , a high score adventurous - speculative.

You can of course be adventurous with some investments and say cautious when it comes to your pension plan.

State Pension- Erosion

Philip Church — Mon, 24 May 2010 10:37:03 +0000

The Basic State Pension BSP increased by 2.5% recently but the average couple will have seen their household inflation edge up by 4.1% This is not good news for those with a level annuity income to supplement the BSP.
The Liberal-Conservative Coalition plan to restore the average earnings link for the State Pension is welcome but it won’t take effect until next year.
I don’t like writing doom and gloom stories but we have all felt the creeping up of fuel prices and as well as cuts in the rates savers receive and put together does not make good reading for many householders.
If you are retiring soon then building in some increase to the pension may make sense for the years ahead it would mean less money today when you are fit and active for higher income when you are less likely to spend as much on foreign holidays etc.
An annuity for a male aged 65 and spouse aged 62 with a £100,000 fund could enjoy a level pension of £6,084 a year. Alternatively building in a 3% escalation from the outset may give a hedge against inflation now but the income would start at £4,056 a year and take around 14 years to compound up and merely be equal in payment.
Our advice would be to analyse all your assets and review with the mind that to make some small changes in order to boost income now with scope of future inflation beating increases;
• Cash at the bank , establish what rate your accounts pay and shop around
• Switch to shares/funds that pay you income now rather than reinvesting
• Start taking income from your cash or investment ISA holdings which will be paid tax free
This should be a regular annual review as banks do tend to abandon you after the headline rate and bonus have gone. There are shares and unit trusts that over the years have been shown to be ideal in the fight against inflation.

Emerging Markets

Philip Church — Mon, 24 May 2010 10:04:15 +0000

For the last twelve months, Russia’s equity market has performed strongly. The optimism looks set to continue as both economic and corporate earnings news continue to improve.
Stockmarkets in other emerging economies; China, Brazil, and several other emerging economies, have delivered outstanding returns over the same period up to 80% in some instances. Traditional investors looking to use up their stocks and shares part of an ISA would have a bias towards the UK (shares and gilts) and Europe but this has been to the detriment of growth of late but the question is will investors realise that the future lies in these new economies in the meantime and reallocate accordingly? The figures below give a snapshot of what asset classes and regions have returned.
Performance over last 12 months ( Source Investment Week 17 May 2010) all data to 10 May 2010.
The average and highest return on a unit trust/OEIC for;

Region/Asset Class % average return
UK all companies 21
Property 20
UK Gilts 4
UK Corporate Bond 25
Europe 15
Emerging Markets 36
Global Growth 24
Global Bond 16