George Osborne’s much awaited first budget delivered plenty that affects most of the population, but how much of this will affect those considering equity release?

The slide of interest rates to historically low levels has seen more than 8 million pensioners’ monthly income fall by nearly 25% over the last 12 months, according to figures from SHIP (Safe Home Income Plans), the equity release trade body.

SHIP’s figures show that, in April 2008, the average pensioner received £158 per month from their savings. This was in addition to their pension and accounted for 28.62% of their total income.

What is income protection insurance? The name has been muddied by companies advertising redundancy/sickness plans and naming them ‘income protection’. There are major differences and it is important that these are understood..

Power of Financial Planning

 

So, what is Financial Planning, who is it for, and why do we think that it is important?

The funny thing is that the finance part of it is not the most crucial element. The most important element is the planning side. And plans are pretty useful things. All great achievements have plans behind them - all great businesses have their business plans, all great explorers have their expeditions mapped out, all successful generals have their stratagems and a great financial future is no exception. Of course, you can have a great financial future without putting in place a plan, but we feel that putting in place the plan increases the likelihood of securing that great future.

What we at Capital seek to do when we first meet with you is to help to elucidate those things that matter most to you in your life, the goals that you have, when you want to achieve them and how much they cost. This is the discovery stage of our process.

We then create your own bespoke plan. Our expertise on the finance side of things then comes into play in the review of your existing situation, the creation of the plan and its subsequent implementation. All your investments, pensions, insurances, mortgages and tax planning will now begin to work in harmony and will be aligned with your goals. This is the planning and implementation stage of our process.

Just as businesses continually review their business plans to ensure that targets are met and that its performance is up to scratch, so you and your Financial Planner should continue to monitor the plan over the years to make sure that all is on track to meet your goals and make appropriate adjustments as circumstances or goals change. This is the monitoring stage of our process and we hope that our relationship with anyone we work with will evolve into a fruitful long term partnership.

In terms of who Financial Planning is for - we feel that everyone can benefit from Financial Planning - not just the rich, and that there is no time like the present to begin your Financial Planning - the sooner the better. You can build a Financial Plan on your own or work with a Financial Planner to help you. The important step is to begin to focus on what it is that matters to you in life and incorporate those desires into a plan. If you don't create a plan, you run the risk of drifting through life and not seeing your most important goals realised.

We think that the benefits of good Financial Planning may include the following:

• Giving you the freedom not to worry about financial matters
• Giving you a better quality of life by allowing you to concentrate on the things that are important to you
• Increasing or preserving your wealth and reducing your tax
• Permitting you to have a much clearer view of your future
• Creating a greater level of interest and knowledge in financial matters
• Educating and empowering you to feel in control of your life

And what have we been able to do for our clients? Well, take one of our clients, a partner at a City law firm, as an example. When he came to us, we helped him and his wife to formulate their goals, which included:

• Early retirement
• Maintaining their existing standard of living throughout their lifetime
• Ability to provide for their children's education and to help them onto the property ladder
• Not being a financial burden on their family in the future
• A review of their existing financial arrangements

We were able to:

• Provide peace of mind that retirement could be taken at age 55, with a higher standard of living than currently enjoyed
• Increase the budgeted amount to be provided to the children for help on the property ladder
• Reduce tax bills
• Create more tax efficient income in retirement
• Give peace of mind that they would not be a burden on their family in the future

So ask yourself this question: have you in the last few years reviewed your existing situation and thought of your plans for the future, plus how best to achieve these? If not then perhaps it is time to start investing in "you" by taking time out to create your own Financial Plan.

Alan Smith
Director
Capital Asset Management
27 Great Queen Street
London
WC2B 5BB

Tel - 0207 831 9108
Fax - 0207 242 7169

email: alan@camfinancial.co.uk
web: www.camfinancial.co.uk

Self-invested pensions in the Credit crunch

With the country in recession directors and business people tend not to be thinking of pension provision – apart from when they have the nasty surprise of looking at their latest statement. There may however be ways in which their pensions could assist their businesses.

The Small Self-administered Scheme (SSAS) has been a favorite pension and tax-planning tool for advisers with corporate clients particularly small to medium sized firms.

 

The original remit of such schemes was to attract shareholding directors into making pension contributions rather than just investing in their own business by allowing a degree of self-investment and it has been very successful. Since their introduction in 1989 Self Invested Personal Pensions [SIPPs] have also become very popular.

Pension simplification in April 2006 was supposed to remove the distinction between SIPPs and SSAS however the reality is slightly different. True the existing differences in contributions and benefits are removed but some differences remain on investments and constitution. For the Inland Revenue (HMRC) there is still a distinction between company-sponsored schemes, which for ease we will continue to call SSAS and provider sponsored which we will call SIPPs.

Loanbacks from the fund to the sponsoring employer albeit now secured can be made by a SSAS. A SIPP has no sponsoring employer and therefore cannot make any loanbacks to any connected business without being hit with a minimum 55% tax charge.

So how could a pension loan work?

A company director needs finance for his business - he could try a bank or his pension fund. He can transfer his existing funds into a SSAS set up for him by a specialist trustee company like us. The scheme can then lend to his company up to 50% of the fund for up to 5 years, although this must be secured by a first charge on assets of either the company or its directors. A suitable interest rate of at least 1% over base rate is charged and at least annual repayments of capital and interest made.

The result - the business can get an important loan, the director a good return on the money in his pension fund - there is obviously a risk in concentrating pension assets into the company but many directors feel more confident of this type of investment than they do in Insurance companies etc.

Although a SIPP cannot lend to a company connected to the scheme it is worth remembering both a SIPP and a SSAS can lend to 3rd parties. So a pension fund can be used for business angel type investing.

For share purchase a company-sponsored scheme e.g. SSAS is limited to buying 5% of the shares in its sponsoring employer. For a SIPP as there is technically no sponsoring employer the fund could invest 100% in the directors own company shares. There are however some very complex rules that block purchasing shares in your own business except in a few cases but again 3rd party investments are fine for those willing to take a high risk but investing in unquoted businesses.

As long as it is done commercially there is no problem with pension plans buying assets from their members or their members companies. The allowed assets are usually commercial property and quoted shares or other investments.

For example a company that owns its commercial premises but is struggling for cash could sell all or part of the building to its director’s pension scheme(s).

Or a sole trader might sell some shares they own personally to their own SIPP thus releasing cash from their pension scheme.

Also remember that if you are over 50 (rising to age 55 in April 2010) it is usually possible for you to access your pension fund and take benefits and after April 2006 you can take the tax-free lump sum and not draw income. Although it is usually best to defer drawing benefits until you really need to taking all or part of the lump sum to clear some expensive debt, for example may be a worthwhile option.

Finally remember that pension plans need to be invested carefully – some of these ideas can help both the business and the pension but equally could cause a large loss. For those that do not want to get involved in these more esoteric areas (even some SIPP providers are not flexible enough to do some of them – one of the reasons why we have our own in-house SIPP and SSAS) you should still review your pension provision in these unstable times. Review your arrangements to get a reasonably charged plan and a good mix of investments.

Ian Smith BA (Hons), APMI, FPFS, IMC, CFP.
Director & Chartered Financial Planner
Central Wealth Management Limited
Unit 36 East Moons House
Oxleasow Road
Redditch
B98 0RE
 
Also at 29 Harley Street
London W1G 9QR
Tel 0845 0066 204
Fax 0845 0066 254
www.centralinvest.co.uk www.centraltax.co.uk
ian@centralinvest.co.uk
 
Central Wealth Management Limited is an appointed representative of Central Financial Planning Limited which is authorised and regulated by the Financial Services Authority.

 

Wealth Management - Importance of Diversified Portfolios

In the 1950s academics such as Harry Markowitz and Bill Sharpe proved that using a diversified portfolio for different types of investments would greatly reduce risk, often with little or no reduction in investment performance. Whilst some of their other conclusions that using mathematical formula to predict returns and the absolute relationship between risk and return are still debated within investment and academic circles, the use of a diversified portfolio to reduce risk and maximise returns is almost university accepted.

Some assets are highly correlated and move in similar ways in different market conditions. Obviously an investor investing in shares in four banks is only slightly more diversified than an investor with one bank share. Investing overseas will help but with the advent of globalization many markets now move in similar ways. To obtain real benefits from diversification completely different types of assets should be chosen where historically their movements have not been correlated. This has however been severely tested in recent markets as Investment banks and hedge funds dumped assets to raise cash investments of all types seemed to be falling.

The type of asset that could be included in a portfolio for wealth investor is indeed diverse and even in these recent most troubled times asset classes like government bonds and gold rose.  The spread of assets is an important area.  There are still some very respectable investment groups that only asset allocate into shares and fixed interest securities.  Whilst this may provide a better spread than just using a single asset class it is hardly a diversified portfolio.  For our own clients even when investing in collective investments i.e. unit trusts, investment trusts or open ended Investment companies (OEICs) which are typically suitable for portfolios up to £200,000-£250,000 we would typically split investments according to the client's risk profile across the following asset areas;

Cash, fixed interest securities, share based funds in UK, Europe, North America, Far East, Japan and emerging markets, property funds (although not in the current market) and commodity funds. The availability of fund supermarkets that act as an administration platform and give access to a wide range of funds from many different managers allow a diversified portfolio to be created for small values so even a single ISA can have a spread of funds.

The idea of a hedge fund that can make money even in falling markets is attractive but scandals like Madoff and the general lack of regulation makes most sensible investors cautious. Luckily there are now a number of properly regulated funds from major investment companies that use the same techniques and this adds to the diversity of a portfolio.

With cash returns so low a return to a spread of investments is a move many investors will have to make but care needs to be taken to ensure they are getting genuine diversity and regular reviews and rebalancing.

 
Ian Smith BA (Hons), APMI, FPFS, IMC, CFP.
Director & Chartered Financial Planner
Central Wealth Management Limited
Unit 36 East Moons House
Oxleasow Road
Redditch
B98 0RE
 
Also at 29 Harley Street
London W1G 9QR
Tel 0845 0066 204
Fax 0845 0066 254
www.centralinvest.co.uk
ian@centralinvest.co.uk
 
Central Wealth Management Limited is an appointed representative of Central Financial Planning Limited which is authorised and regulated by the Financial Services Authority.

Long Term Incapacity is something that happens to other people, or is it?

People understand that the State is unable to provide enough financial support during incapacity, but do they fully understand the limitations involved?  Many do not financially plan for this risk, which may be a big misconception - Incapacity and Disability benefits are low and in addition, the claimants would have to pass strict tests to qualify for long-term benefits.  

People also fail the Personal Capability Assessment, meaning the individual would not qualify for the Incapacity Benefit and would have to find a means of income from elsewhere. Not everyone is entitled to the benefits either; it is dependent on their personal circumstances and whether they have contributed enough National Insurance.  Even if they do qualify for the benefit, the payment may not even cover the weekly shopping bill, let alone all the other every-day financial commitments.

Of course, in the event of incapacity there are other options that may help, like utilising savings or looking to family for support, but it is very unlikely that they would be in a position to provide hassle free long-term adequate support for you.  

In the event of long-term sickness or an accident, how would you cope with the majority of your income disappearing? How would you pay the bills for shopping, telephone, gas electricity, your car, your mortgage and all the other household items as well things like days out and holidays?  An Income Protection Plan could pay up to 60% of your gross earnings, tax free, to help in covering these costs.

Fortunately there is a solution to such a major problem and to describe it as major is not to exaggerate, if you do not have a fallback position. The answer is Income Replacement Cover (known as Permanent Health Insurance). Allow me to explain some of the details of Income Replacement Plans.

There are three components to an Income Replacement Plan. Firstly, the Deferred Period chosen before income commences, secondly, the amount of Benefit required and thirdly the Selected Retirement Age.

The level of premium for the required amount of benefit will depend on the type of plan and the company chosen.  Some companies' offer guaranteed fixed premiums; other plans reserve the right to review premium levels. For a slightly higher premium the option is normally available to have the level of benefit automatically increased each year, in order to provide protection against the effects of inflation.

An important aspect of the plan for a claim to become payable, is the basis on which it will be considered. An own occupation basis is clearly preferable to a definition of disability that requires the inability to carry out any occupation. There are other definitions, which can also apply. The two other main factors affecting premiums are the deferred period chosen before benefit can commence and the selected retirement age. The deferred period options are typically 1, 3, 6 or 12 months (or split periods), and the selected retirement ages are between 50 and 65, with a few companies offering age 70.

The most important advantage of an Income Replacement plan is that once it is in force, it cannot be cancelled (assuming you continue to pay the premiums) and you can claim on as many occasions as necessary. Potentially a plan can pay out benefit, index linked each year continuously through to the retirement age of the life assured. Even a modest plan could potentially pay out a significant amount of money over its term.

The original question was:
Long Term Incapacity is something that happens to other people, or is it ?

The main question to ask yourself is:

How will I cope without an adequate income ?

Whether you are employed or self-employed, if you would like to know more please get in touch, naturally without obligation.

David Barnett IFA MIFP

DPB Independent Financial Services
David P. Barnett MIFP Principal    
Tel/Fax No. 020 8958 9938
21 Highview Avenue,
Edgware,
Middx,
HA8 9TX    
Mobile No. 07956 227 691
e-mail: ifa@DPBarnett.com
www.investments-in-mind.com

  DPB Independent Financial Services is an Appointed Representative of Sesame Ltd.,
  which is authorised and regulated by the Financial Services Authority.

Equity Release and the Credit Crunch

It seems impossible to turn on the TV or radio without hearing of doom and gloom of the credit crunch, falling house prices, rising unemployment and ailing banks.

So, how has this affected Equity Release?

Perhaps less than you might imagine.

All of the major Equity Release providers are still very much around.

Whilst a few companies have withdrawn from the market, it is fair to say they were bit part players anyway. Most Equity Release plans are lifetime mortgages and here we have seen little impact. You can release pretty much the same percentages as before.

Although the Equity Release sector appears to be more resilient than the mortgage market, it may be affecting some potential clients.

It seems that some people are standing still, even it they're not quite sure why. The constant bad news makes them uncertain. Uncertainty breeds inactivity.

Is this the right approach?

Possibly not. With the cost of living ever rising, the need for equity release is greater than ever.

Drawdown plans
Our typical client uses Equity Release to provide a certain amount for today with a drawdown facility they can call upon in the future.

For example -
In 2007, Mrs Jones was 70 years old and wanted £30,000 from Equity Release plus the facility to release more if she wants to in the future. Her house was worth £300,000.

She could have released the £30,000 and have a further £60,000 to drawdown in the future as and when she chooses. Now in 2009, having delayed taking Equity Release her house is worth £250,000 and she is 72. She can still release her £30,000 but the drawdown facility has reduced to £50,000.

So the total amount available to her has reduced from £90,000 to £80,000 - this makes no difference to her current plans - she can still have the £30,000 she needs now with the facility for plenty of extra money for the future.

 

 

 

About our Expert.info Publishing Service Expert.info articles are published on the yourmoney.co.uk site by Independent Financial Advisers (IFA) on topics which they professionally advise on. These articles are NOT advice nor are they a substitute or an alternative to advice. Personal financial advice is only possible from an adviser who has conducted a fact find to establish not only your priorities but also your present position. Expert.info articles are a useful aid in helping you to better understand what can be very complicated matters and regulations. The authors details are always included along with their full contact information should you wish to follow up any of the points raised with the authors. To paraphrase the much maligned Mr Donald Rumsfeld. The facts and information that really prove dangerous are "unknown unknowns" -- the things we don't know we don't know. Hopefully, the general information in these Expert.info articles will help you in knowing what you do not know and making an informed decision about taking advice. Recognising an Expert.info article You will recognise an Expert.info article as you travel around the site as they are laways clearly ibdentifed with the header below. You can also see a list of Expert.info articles published in date order here. Or you can subscribe to our RSS feed of articles here. IFA Publishers of Expert.info articles Any IFA who would like to join our panel of IFA article writers on yourmoney.co.uk please should first compelte the Expert.info request form here. We will then send you a guideline document explaining what we require, how you submit articles how we categorise them etc etc. We will also be happy to talk on the telephone with any potential writer.

 

Retirement Options

When you approach retirement, you have an important decision as to how to switch on income from the pension funds you have accumulated during your working life.

Some people will have final salary schemes that were arranged through an employer. These pay a pension income that is dependent upon your length of service and final salary.

Most people, however will have accumulated pension funds through a money purchase arrangement. This is where the amount of pension you receive is dependent upon the size of your pension fund and other factors such as your age, gender and benefits that you choose to build in to your retirement income.

Historically, low interest rates and increased life expectancy has significantly reduced the income you can expect to receive from your pension when compared to a decade ago. It is therefore important that the decision you make is the right one.

At retirement you do not have to purchase your income from the same company or companies with whom you have built up your pension funds. You have the right to an Open Market Option, which is the ability to transfer your pension funds to the provider offering you the highest income or most appropriate contract to meet your retirement needs.

You then need to consider how you want to draw your income. There are a number of options available, which include:

• Conventional annuity
• With profit annuity
• Investment annuity
• Temporary annuity
• Income Drawdown (now known as Unsecured Pension)
• Phased Retirement

The most appropriate option will depend on a number of factors including whether your retirement needs are fixed or flexible, your attitude towards investment risk, the structure of your other income and assets and the size of your pension funds. For those with larger funds, a combination of the options available may be suitable.

 

The main options are:

Annuity

An annuity is effectively the exchange of a lump sum of capital in return for a regular income.

In pension terms, you will normally be entitled to 25% of your pension funds as a tax free lump sum. The remaining 75% is then used to provide a regular income. There are a number of options you need to carefully consider when deciding how to structure an annuity, which include:

• Single or joint life
• Level or escalating income
• Guaranteed period

A single life annuity will cease on the annuitant's death (notwithstanding any outstanding guaranteed period). Many married people will need to ensure that their spouse is provided for should they pre decease them. This is done by building a widow or widower’s pension in to the annuity calculation (typically 50% or 2/3rds of the main annuitant’s income). A joint life annuity will be lower than a single life annuity because of the risk to the annuity provider that they will need to pay the annuity for a longer period of time. The appropriate level of survivor’s annuity will depend on a number of factors such as other pensions, income from other assets and income requirements should the main annuitant die first.

The choice of whether to choose a level or escalating income is difficult. On the one hand, the choice of an income that rises each year to ensure that one’s income keeps pace with inflation makes perfect sense. However, the way annuities are structured can make such an option unattractive to a lot of people. For example, an index linked annuity will typically start at around 65% of the income available from a level annuity. It takes around 11 or 12 years for that income to catch up with the level annuity, and a further few years to make up for the 11 or 12 years of shortfall. In other words, someone retiring at 65 may have to wait until their late 70’s or early 80’s before they are better off with an escalating annuity. A process known as demographic spending patterns suggests that as most people approach their 80’s, their pace of life tends to slow and therefore they do not need as much income as they become less active. However, depending on individual circumstances and preferences, it can be re-assuring to have some of protection against inflation”. This is therefore an important decision, and you need to consider your income needs, not just now, but also in the future.

A guaranteed period provides a minimum guaranteed period that the annuity will be payable for, in the event that the annuitant dies prematurely. A guaranteed period of 5 or 10 years can provide peace of mind that a pension fund built up at great expense over a number of years will at least provide some value to beneficiaries in the event of early death. This is typically inexpensive to build in to an annuity in comparison to either a joint life annuity or escalating income.

Enhanced annuities are available to those who may potentially have a reduced life expectancy because of either pre existing health conditions (cancer, heart problems etc) or lifestyle (i.e. smoking). Standard annuity rates are based on a combination of age, gender (men will typically receive better annuity rates than women because of a lower life expectancy) and gilt yields. It is usually necessary to provide details of pre existing medical conditions to an annuity provider to enable them to assess the level of enhancement they are prepared to offer.

Conventional Annuities

Conventional annuities offer a guarantee with regards to the security of the income that will be paid for the lifetime of the annuitant. They are therefore ideal for those who, having built up a pension fund they will rely on for life, do not wish to take any risk with their future income.

However, they are inflexible, and all of the decisions need to be taken at the time the pension fund is converted in to an annuity. For example, someone in good health at the time they purchase an annuity cannot then obtain an enhanced rate if they are later diagnosed with a medical condition that would have qualified for an enhanced annuity. If an escalating income is chosen at outset, it cannot be altered to a level income in the future. If a single life annuity is chosen, it cannot be altered to a joint life in the future.

Therefore, those who are prepared to take some degree of risk with their future income have more flexible options available to them.

With Profit Annuities

With profit annuities offer a more flexible option than a conventional annuity. The annuitant chooses a single or joint life and guaranteed period in the same way as a conventional annuity, but unlike a conventional annuity they do not choose a level or escalating income. Instead an Anticipated Bonus Rate (ABR) is selected. Government legislation allows ABR’s of between 0% and 5%, but the majority of annuity providers do not allow this level of flexibility within their own contracts. The level of ABR chosen influences the starting level of income received i.e. the higher the ABR the higher the starting income. If future bonus levels match the ABR selected the income remains constant. If bonus levels exceed the ABR income rises, and if bonus levels are lower than the ABR income falls.

 

With profit annuities allow the annuitant to change the ABR at selected times, which means that those with varying income needs can benefit from the flexibility this affords them. For example, a 60 year old male may well have more need for income from their pension for the next 5 years prior to the start of their State Pension than they will do thereafter. As such they may decide to use a higher ABR for this period to maximise their income, and then reduce the ABR (and income) at age 65 when they start to receive their State Pension. Many people like the idea of an escalating income, but are not prepared to accept the lower initial income necessary to facilitate this through a conventional annuity. Therefore they may decide to take a level of ABR that creates the same starting income as a conventional annuity with level payments in the hope that bonus rates will be sufficiently high enough in the future to provide a rising income. Of course there is the risk that if bonus rates are lower than required, then future income could actually fall.

With profit annuities also allow the annuitant to convert to a conventional annuity in the future (something that is not permitted the other way from a conventional annuity to a with profit annuity). This has to be done with the same provider with whom the with profit annuity is held.

Investment Linked Annuities

Investment linked annuities work on a similar basis to a with profit annuity, but rather than select an ABR to determine both initial and future income, instead it is the underlying investment returns that determine this.

There is the potential for income to rise in the future if investment returns are good, but there is also the risk that they could fall if investment returns are poor.

Temporary Annuities

Temporary annuities enable the annuitant to select a level of income from their pension fund for a fixed period of time, typically 5 years. The annuity provider will then use part of the pension fund to secure this income, and will provide a guarantee as to the value of the remaining fund at the end of the temporary annuity period.

At this point the annuitant can either purchase another temporary annuity, or select a conventional, with profit annuity, unsecured pension etc.

Temporary annuities enable the annuitant to defer the purchase of a lifetime annuity, which could be beneficial should they subsequently become eligible for an enhanced annuity.

Income Drawdown

Income Drawdown (or Unsecured Pension as it is officially known as) is a flexible way of drawing retirement benefits for those with larger pension funds (typically over £100,000), and who are happy to take a higher risk with their pension fund in order to take advantage of the additional flexibility Drawdown brings.

Tax free cash is available and taken at outset in the same way as with an annuity, and then the remaining fund is invested. An income is then drawn from the fund, which can be varied between £nil and what is known as maximum GAD (it is known as this because the figures are provided by the Government Actuarial Department). The maximum income is designed to be the same as that available from a single life annuity, but in reality is usually around 10-15% higher. If you do not require any or all of the tax free cash to which you are entitled, then Phased Retirement allows you a tax efficient way of mixing tax free cash and taxable income.

The value of the pension will fluctuate, rising where the growth of the underlying investments is greater than the income taken plus any charges, and falling where the investment return is lower than income plus charges. It therefore carries a higher risk than an annuity, and is only suitable for those who are happy to accept this higher risk.

The critical yield is a key factor when determining whether to choose an Income Drawdown arrangement over an annuity. This measures what the underlying investments of a Drawdown need to grow by each year to ensure you could still buy an annuity of the same level in the future (usually measured to age 75, where under current legislation an annuity or Alternatively Secured Pension needs to be purchased). The higher the critical yield, the more aggressive any investment strategy needs to be, and the less likely the prospects of the required investment return being achieved.

Income Drawdown provides a great deal of flexibility with regards to income levels and death benefits. Income can effectively be increased and decreased within the minimum and maximum permitted levels at any time, and these levels are reset every 5 years. Unlike an annuity, where death benefits such as dependent’s pension, guaranteed period or capital protection need to be built in at outset, with Income Drawdown no such decisions need to be made at outset. Should someone die whilst in Income Drawdown, their dependent has three options:

1. They can choose to continue with the Drawdown arrangement themselves utilising 100% of the remaining fund.
2. They can convert 100% of the remaining fund to purchase an annuity for themselves.
3. They can opt to receive a lump sum, but this is subject to a 35% tax charge.

Income Drawdown provides a great deal more flexibility and death benefits than other retirement options, but it does carry with it a higher level of investment risk.

Phased Retirement

Phased retirement provides a more flexible alternative for those who either wish to stagger their retirement, or alternatively do not intend to take any or all of the tax free cash to which they are entitled.

Typically at retirement tax free cash (usually 25% of the gross pension fund) will be taken and the remaining 75% is used to provide a retirement income, either through an Annuity or Income Drawdown (Unsecured Pension).

However, some people may wish to reduce their working week from say 5 days a week to 3. They may therefore need to start drawing benefits from some, but not all, of their pension fund in order to plug the income shortfall. Phased retirement enables part of the pension fund to be converted to income, via either an Annuity or Income Drawdown, whilst leaving the remainder invested until it is required.

Although the majority of people take the maximum tax free cash lump sum to which they are entitled at retirement, there are a minority who do not actually require this lump sum, and prefer instead to use all of the pension fund to provide an income. If the whole pension fund is converted in to either an Annuity or Income Drawdown, the income produced is taxable. Phased retirement enables the income produced to combine both tax free cash and taxable incomein order to maximise the tax efficiency of the income produced.

It also enhances the death benefits available from the pension. When an annuity is purchased, there are no death benefits except for those built in to the annuity at outset (widows pension, guaranteed period or capital protection). With Income Drawdown, a surviving spouse can continue with Drawdown or purchase an annuity using all of the remaining fund, or they can opt for a return of the remaining fund as a lump sum, but this is subject to a 35% tax charge.

With Phased retirement, any segments that have not yet been converted to income, are usually available to beneficiaries after death as a tax free lump sum.

There are a number of ways in which a retirement income from pensions can be taken, and there is no one size fits all approach. It is important that the consumer seeks independent financial advice to establish which option or options are right for them. Even if a conventional annuity is required, the difference between the top annuity provider and the worst can amount to several thousand pounds over a remaining lifetime, so it is important to seek advice to ascertain who is offering the best terms.

With careful planning you can ensure that your retirement is the enjoyable time you have worked hard during your working life for.

Ian Osang

Partner Ingard IFM LLP

01702-533438

www.ingardifm.com