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How can you strike a balance between retiring when you want to, receiving the income you need and not paying more tax than you have to? Peter Watters spoke to McPhersons Financial Solutions to find out more.

Drawdown could be an answer. mcphersons financial

What is drawdown?

For those currently aged 55 and over, drawdown is one of the main alternatives to an annuity. If you don’t need all of your pension to provide a secure income immediately, you can use drawdown to keep your pension invested while drawing an income as and when you want to. There is no maximum limit to the income you can withdraw; which you can stop, start or change at any time to meet your needs.  You also have the option to buy an annuity at any point in the future if you wish to.

It is the flexibility of drawdown which makes it appealing.

It offers the potential to increase your pension value through investment growth and the chance to protect your income from inflation. Your loved ones can also continue to withdraw the remaining pension after you die, as an income, or alternatively as a lump sum, and tax free in many cases.

The amount you draw down should depend on how your investments perform and how long you would like your pension to last. Drawdown is higher risk than an annuity; there are no guarantees and your income is not secure. If your investments perform poorly, you withdraw income too quickly or you live longer than expected, you could run out of money.

The tax advantage

The main tax advantage of drawdown is when you don’t need to use all of your pension pot to provide an income. There is no requirement to use your entire pension fund in one go or to draw it at its earliest point.

Partial, or phased, drawdown can be used to maximise this tax advantage; which simply means splitting your pension into parts and converting each part to drawdown at different times, as and when you need the income.

Each time you convert a part of your pension to drawdown you can usually take up to 25% of that amount as a tax-free lump sum up front.

For those who don’t need immediate income, it is possible to just withdraw the tax-free cash for the time being and leave the rest invested to provide a taxable income later on.

This is a strategy favoured by many who are already using drawdown. These investors have taken their tax-free cash and are keeping their pension fund invested for future growth.

You may wish to use this tax-free cash to add to other sources of income. This could be particularly useful if you reduce your working hours or perhaps take on part-time work during retirement. The tax-free cash can supplement your earnings, without increasing the tax you pay.

For example, if you earn £11,000 a year, and you move £30,000 of your pension into drawdown, you could take up to £7,500 (25%) as a tax-free lump sum up front; boosting your annual ‘income’ for that tax year to £18,500. Assuming you receive no other taxable income in that same tax year, the whole £18,500 would be tax free. The £22,500 remaining in drawdown could be left invested to draw a taxable income from in later tax years.

You can move more money into drawdown as many times as you like, until you have exhausted the tax-free cash part of your pension. You could repeat this process while you transition into full retirement, replacing any reduction in your earnings with tax free cash or taxable income from your pension.

It’s important to remember tax rules can change and benefits depend on individual circumstances.

Please get in touch now to arrange your free meeting on 01424 730000 or info@mcphersonsfs.co.uk. 

What you do with your pension is an important decision. Therefore, we strongly recommend you understand your options and check your chosen option is suitable for your circumstances: take appropriate advice or guidance if you are at all unsure.The government’s Pension Wise service can help. Pension Wise provides free impartial guidance on your retirement options.

 

 

 

The state pension was first introduced in May 1908 by the then recently appointed Prime Minister, H.H. Asquith.  The Old Age Pensions Act received royal assent in August of that year and the first payments were made to pensioner in January of the following year.

At that time eligible people over the age of 70 were entitled to a maximum payment of five shilling per week – in today’s term’s this is the equivalent to £20.

Comparing the first 100 years of the state pension it’s clear to see why the government’s pension budget is now under strain. In 1908, there were 500,000 pensioners – in 2008 there were 12 million. The £20 per week payment had increased to £90, and the ratio for surviving to age 100 had increased from 1:200 to 1:4. The government decided to push an initiative for us to save for our own retirement to compliment the state provision.

In 2008, a revised Pensions Act was made for all eligible employees to be automatically enrolled into their company pension. The membership of this scheme runs between October 2012 and February 2018 by which time every organisation of any size will need to offer a workplace pension to their workers.

Employees – will you be automatically enrolled?

As a worker you will fall into one of three categories, one of which automatically places you in your workplace pension. This most common category covers all UK workers aged between 22 and state pension age who earn over £10,000 per year.

If this means you – contributions to your pension will begin at the next pay day after the company’s ‘staging date’ (or after a maximum 3-month postponement period if this has been utilised by your employer). Although you have a right to opt-out, this can only be done once you have been assessed for eligibility, i.e. after staging date.

Pension contributions are based on a qualifying band of income (£5,824 – £43,000 for this tax year). Initially you will pay 1% including tax relief, rising to 5% in April 2019. Your employer will pay 1% of your qualifying earnings, rising to 3% in April 2019. These are minimum amounts and you are normally able to increase your contributions if you wish, however your employer is not obliged to follow suit.

Employers – Is your company ready for auto-enrolment?

Choosing a pension scheme for auto-enrolment is a complicated and time consuming process. There are a number of steps your company will need to go through; starting with finding out your company’s staging date, assessing your workforce, keeping them up-to- date with the pension changes, and informing the Pensions Regulator that you have met your obligations. Once the pension scheme is up and running you then need to make contributions and manage opt-outs and new joiners.

Furthermore, there are a number of other issues that you will need to consider to practically implement the regulations:

  • Which product solution will best suit
  • Which product solution will best suit your company’s needs?
  • What will you choose as your default investment and contribution level?
  • How the costs and admin burden affect your business?
  • How will you retain and maintain your records?
  • How will you notify your eligible jobholders?

Can McPhersons help?

The Pensions Regulator has stated that 7/10 employers are seeking advice on meeting their Auto-Enrolment obligations. If you require assistance, Aron Gunningham is our pension specialist and an independent financial adviser. Aron will be happy to help answer your questions and guide you through your duties.

The Pension Regulator has issued financial penalties for company’s who do not comply by their staging date, or for errors in the scheme once it has been setup. Coupled with the admin involved in meeting your duties, it would be prudent to speak to a financial professional.

Although we can be excused for thinking that our National Insurance contributions should be paying for our retirement, inevitably the state provision will not be sufficient. Under the newly formed ‘single-tier’ state pension, retirees in 2016/17 are entitled to a full pension of £155.65 per week. Rarely is this seen as enough to live on. Like it or not, we must find alternative ways to supplement our retirement income. Auto Enrolment, although not a perfect solution, is the Governments way of forcing us to think more carefully about funding our retirement.

Just call 01424 730000 or email info@mcphersons.co.uk to arrange your free meeting.

On Wednesday 16th March Chancellor George Osborne will deliver the Budget plans to members of Parliament in the House of Commons.

Although the Autumn Statement happened back in November 2015, it was another update on the Chancellor’s economic forecasts. The Budget this week will contain more detail and will happen at 12:30pm and last approximately an hour.

Pension changes were not covered in the Autumn Statement, so some expect changes to this in the Budget on Wednesday. Some have said Osborne may reduce the amount that people can save into their pension.

Although nobody knows what George Osborne will deliver in the Budget, many think that it could be possible for him to introduce a new flat rate on tax relief on contributions of between 25% and 33%.

The Chancellor has admitted that he may have to impose further austerity measures. This could mean more reductions in the budgets of non-protected government departments. He also warned that more savings will be needed due to the worsening of the economic backdrop.chancellor

The recent Budget contained good news for pension investors. The amount of tax relief that can be received on pension contributions has just increased for some.

What is pension tax relief?

To encourage everyone to save for retirement, some pension contributions receive up to 45% tax relief:   The government automatically pays 20% of your contributions, regardless of your tax rate and higher and top-rate taxpayers can reclaim more through their tax return, up to an extra 20% or 25% depending on individual circumstances.

Imagine you pay £8,000 into your pension, the government will add £2,000 to make it £10,000 in your pension. A higher-rate taxpayer can reclaim up to a further £2,000 and a top-rate taxpayer up to a further £2,500. £10,000 in a pension can in effect cost as little as £5,500.  To receive the full 40% or 45% tax relief you must pay enough tax at that rate.

Who can now receive more pension tax relief?

A £40,000 maximum annual allowance untaxed usually applies to pension contributions each tax year, from all sources into your pension pot. Contributions over this allowance effectively do not receive tax relief.

In the budget, a new £40,000 allowance was introduced for contributions made from 9 July 2015 to 5 April 2016.  This means anyone who made contributions from 6 April 2015 to 8 July 2015 might be able to invest more this tax year as they have the £40k allowance starting again from 8th July 2015 and receive more tax relief. Anyone who hasn’t made contributions still has the same allowance – £40,000 for contributions up to 5 April 2016.

Contributions registered from 6 April 2015 to 8 July 2015 will reduce this new allowance, but only if they exceeded £40,000.  Pension contributions made in the previous tax year could also count; your provider should be able to inform you.

Qualifying for extra tax relief

To receive tax relief, the total value of your contributions this tax year should not exceed your earnings. For instance, to contribute £60,000 in total this tax year you should earn at least £60,000.

If you wanted to invest more than your earnings in any tax year, you could ask your employer to make an employer contribution, possibly set off against future earnings.

If you decide to use your new allowance, remember money in a pension can normally only be accessed from age 55, rising to 57 from 2028, usually 25% of this pension pot is tax free and the rest taxed as income.  Tax rules can change in the future

Need more help?

This feature aims to give some informal hints and tips. Our tax department and McPhersons Financial Solutions are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters p.watters@mcphersons.co.uk or call our Head Office on 01424 730000 for a free consultation at McPhersons’ London, Bexhill or Hastings offices.

Every month the directors at Mcphersons share some useful financial tips especially for Business in Hastings readers.  This month Ashley Gill looks at  how you could retire at 55.

  • Use you share of the £35 billion the taxman gives pension saversholidays

When you put money in a personal pension the taxman also contributes. Imagine you pay in £1,000. The taxman automatically adds another £250, so your pension pot receives £1,250. If you pay 40% or 45% rate tax, as a higher rate taxpayer you get even more.

  • Start a pension

It is thought that as many as four in ten British adults don’t have a pension. If you wish to retire at 65 on 65% of your salary, divide your age when you start your pension savings by two and contribute this as a percentage of your earnings. For example, if you’re 25 you should aim to save 12.5% of earnings.

  • If your employer offers you a pension at work, take it!

Over the coming years all UK companies will have to offer a pension to their employees. If you opt out, you could be missing out on ‘free money’ from your employer.

  • Check where your pension is invested

Half of the UK population have no idea where their pension fund is invested, but it is important to know because you could be missing good returns if you didn’t.

  • Make small regular increases

Take a person aged 30 contributing £150 net to his pension every month. If every year that person increases that amount by 5% or £7.50 a month for the first year, at age 65 he could find himself with an extra £190,642 in his pension, assuming basic tax relief and that the fund grows 4% a year after charges.

  • Trace old pensions

If you recall joining more than one pension but don’t have the details to hand, you can trace them for free with the Pension Tracing Service.

  • Approaching retirement?

Retirement rules are changing as of April 2015. If you are 55 or over, you will have a lot more freedom and flexibility on how you can draw your private pensions. Choosing how to draw your pension is one of the most important financial decisions you will have to make. Remember you may need it for 20, 30 or even 40 years. So ensure you find out about the new rules and opportunities available by speaking to McPhersons Financial Solutions on 01424 730000.

And remember, the value of pension and the income they produce can fall as well as rise. You may get back less than you invested.

 

 

 

 

 

 

 

 

 

Every month, Peter Watters, ACA, shares some useful financial tips especially for Business in Hastings readers. This month, he looks at investments. Which is the right investment vehicle for you to consider?mcphersons-logo

As each has its own features, choosing the one – or even two or three – that’s right for you could bring additional benefits to your investment strategy.  

SHARES 

If you invest directly in shares you are holding a small part of a company and will benefit financially if it is successful, through an increase in the share price or by dividends.

Shares are purchased through a stockbroker or an online share dealing service and charge around £10 plus stamp duty of 0.5 per cent of your investment. However, shares listed on the Alternative Investment Market (AIM) are free of stamp duty from 6 April 2014.

Advantages

• You can choose which company shares to buy.

• As a shareholder you usually have the opportunity to vote on some company decisions.

Disadvantages

• Lack of diversity – unless you hold a portfolio of shares your investment is concentrated in one company.

• Dealing charges can make this an expensive way to invest if you are a small investor.

INVESTMENT FUNDS 

Funds such as unit trusts and Open-Ended Investment Companies (OEICs) are collective investments which allow investors to pool their money together to create a large fund that invests across a range of different shares and/or other assets such as bonds or property. This is run by a professional manager in line with the fund’s objectives.

You buy units with minimum investments as low as £500 or £25 a month, and there are no restrictions on when you sell. Charges vary depending on the type of fund, but are typically an initial charge of up to 5 per cent with an Annual Management Charge (AMC) of up to 1.5 per cent.

Advantages

• Instant diversification without a large upfront investment by you

• Investment decisions are taken by an experienced financial adviser

• Thousands of funds to choose from investing in equities, bonds and property as well as other types of assets

Disadvantages

• Management charges can be high.

• The manager doesn’t always get it right.

INVESTMENT TRUSTS 

An investment trust is a form of collective investment, you buy shares in a company, which then uses the money raised to invest in a range of assets on your behalf.  There are some key differences between trusts and funds. Trusts are more sophisticated, and therefore slightly riskier,

investment than funds. Investment trusts are able to borrow money, known as gearing, which can help to increase profits but can also magnify any losses in a falling market.

Additionally they are closed-end. This means that a finite number of shares are available, so the share price will be affected by supply and demand as well as the value of the underlying assets. This means the shares can trade at a discount or a premium to the net asset value.

Advantages

• Instant diversification without a large investment.

• Gearing means gains can be magnified, although the same also applies to losses.

• Normally lower annual management charge than an equivalent fund.

• Returns can be enhanced if you buy on a discount and it narrows as the trust becomes more popular.

Disadvantages

• Dealing charges can make this expensive for a smaller investor.

• More sophisticated and potentially more risky investment than a fund.

PENSION FUNDS 

A pension fund operates exactly the same as a fund, a manager investing according to the fund’s objectives, but because it is a wrapper specifically for pension investments, there are some important tax advantages. Subject to earnings and the annual “lifetime pension allowance”, anything paid into a pension fund receives tax relief at the basic rate, effectively topping up an £80 contribution to £100. Higher-rate taxpayers receive tax relief at their highest marginal rate. Additionally, although you cannot reclaim the 10 per cent tax credit on dividends, all income and gains in the fund are tax-free. However when you come to take benefits, either as an annuity or when drawing income from a personal pension, these are subject to income tax.

Advantages

• Instant diversification.

• Tax breaks.

Disadvantages

• Money cannot be accessed before age 55.

VENTURE CAPITAL TRUSTS 

A venture capital trust (VCT) is a trust which invests in fledgling companies that are looking to develop their business. The nature of these companies means that this is a higher risk investment.

Due to the risk there are a number of tax incentives to encourage investment. These include tax-free income, dividends and gains and an income tax rebate of 30% of your initial investment into new VCT shares, providing you have paid sufficient income tax that year and you hold the shares for at least five years.

Advantages

• Generous tax breaks.

• Opportunity to invest in very small companies.

• Income payouts make them very attractive for retired investors.

Disadvantages

• Higher risk and more suited to sophisticated investors.

The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Please contact us for further information or if you are in any doubt as to the suitability of an investment.

The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Please contact us for further information or if you are in any doubt as to the suitability of an investment.

Every month, Peter Watters, ACA, shares some useful financial tips especially for Business in Hastings readers. This month, he looks at Saving for Retirement with our Financial Solutions expert, Daron Beacroft. With major changes being made to Britain’s pension system, we all should be encouraged to save in a tax efficient pension.

20s Once you begin work, retirement is a distant thought. Other priorities tend to take precedence, like saving a deposit for a first home, paying down debts from student days or simply enjoying life.relaxed-workewr

The biggest influence on a comfortable retirement is the capacity to generate earnings. By starting a regular savings plan early, even if you can only spare small amounts, the returns will be much bigger. om student days or simply enjoying life.

Your earnings are generally low during this period but diverting the small amount left at the end of each month into a pension is likely to yield less than saving into an ISA, where the £15,000 tax-free annual allowance (from July 1 2014) will be more than sufficient.

The exception is your company’s pension scheme. Employers will pay on your behalf, for example, you might pay 5 per cent and the company 5 per cent.

30s During this period your earnings should start to increase, but you could have higher costs to possibly meet like getting married, starting a family or buying a first home.

You may need to create an ‘emergency fund’ to cover unexpected issues such as redundancy; a fund worth six months’ expenditure is generally the rule of thumb.

New parents may want to consider life assurance, which will protect family finances if anything happens to the main income.

Repaying mortgage debt will also take a large chunk of income. If you can afford to, invest as close to the £15,000 ISA limit as possible. You should also consider joining your company pension and consider increasing contributions if possible.

Pensions can help tax planning. Families where one parent earns more than £50,000 will start to lose their entitlement to child benefit.

Contributing to a pension can reduce your taxable earnings below £50,000 and preserve this benefit for your family.

40s If you haven’t started a pension type savings plan yet, it’s not too late. With up to 27 years before you collect your state pension and potentially more afterwards. Don’t be fooled into thinking your investment time-horizon is short; investments can still continue into retirement, for good returns.

During this period you may have school fees or other commitments to consider. Try to maximise the £15,000 ISA allowance, but don’t ignore the tax relief on pensions, though, which applies at your highest marginal rate. It costs a higher-rate taxpayer only £60 to put £100 into their pension.

Consolidate pensions sitting idle with former employers into a Self-Invested Personal Pension, or “SIPP”. These plans, which give access to thousands of investments in one place, are offered at low cost by different financial companies.

50s Saving for retirement should now become serious. From age 55 you will be able to access your pension. In theory you could retire then.

In reality, most people will continue working and plan carefully, saving as much as possible for the future as other expenses cease. Plan by working out how much income you’ll need when you eventually stop work. Pensions do work as tax-planning tools after your ISA allowance is used. Consider for every £2 you earn above 100,000, you lose £1 of your tax-free personal allowance (currently £10,000). Contributing to a pension can reduce your taxable income so you retain this tax break.

Focus though on the £1.25m lifetime cap on saving. Someone aged 50 with £525,000 in a pension would push past the lifetime allowance by age 65 if the fund grew at 7 per cent a year even without additional contributions, according to pension provider Standard Life.

There is a currently a £40,000 limit on annual contributions to pensions.

60s Many people will continue working, into their sixties. With the new rules from next April, you have instant access to your entire pension fund, how and when you withdraw becomes a major decision. An annuity will guarantee a stream of income payments for life, but the cost of purchase is high.

For example, current rates pay just £6,000 a year for each £100,000 of savings. Shop around for the best rates, as they do vary between insurers and declare all health conditions to obtain the highest income.

The main alternative to an annuity is to keep your pension invested in the stock market and take income as you need it. This runs the risk of the ups and downs of the stock market.

The capital should be protected, a well-diversified set of dividend-paying funds and shares can provide a decent income, so long as you can put up with the fluctuating value of the underlying capital.

With the introduction of the new flat-rate state pension, probably in 2016, you will need 35 qualifying years of National Insurance contributions to benefit from the full £155 a week (it is possible to “buy” extra qualifying years). Check with the Pension Service on 0800 731 7898 to ensure you have the full amount.

Need more help?

This feature aims to give some informal hints and tips.  Mcphersons are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters p.watters@mcphersons.co.uk  or call our Head Office on 01424 730000 for a free consultation at mcphersons’ London, Bexhill or Hastings offices. www.mcphersons.co.uk 

The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Please contact us for further information or if you are in any doubt as to the suitability of an investment.