eSmart Money 25 by Steve Wright

esmartmoney The DIGITAL personal finance magazine

MARCH / APRIL 2009

Creating wealth during an economic downturn Savers experience the lowest savings rates in more than 100 years

How tax-efficient are your finances? Give yourself a makeover before the end of tax year

Get your ISA skates on Time is running out if you havenâ&#x20AC;&#x2122;t used your allowance

Turning your pension savings into an income

Give yourself plenty of time to think through the options

Tackling a potential IHT issue

Now is a great time to discuss your problem with us

YOU'VE PROTECTED YOUR MOST VALUABLE ASSETS... but how financially secure are your dependents? Timely decisions on how jointly owned assets are held, the mitigation of inheritance tax, the preparation of a Will and the creation of trusts, can all help ensure your dependents are financially secure. Contact us to discuss how to safeguard your dependents, wealth and assets, donâ&#x20AC;&#x2122;t leave it until itâ&#x20AC;&#x2122;s too late.

CONTENTS

16 20

Inside this issue 06 08 10

Creating wealth during an economic downturn… Savers experience the lowest savings rates in more than 100 years.

Get your ISA skates on… Time is running out if you haven’t used your allowance.

A social, moral or environmentally responsible agenda… Striking a balance between principles and making a profit.

Turning your pension savings into an income… Give yourself plenty of time to think through the options.

12 15 16 18

Self-Invested Personal Pensions… Tax-efficient wrappers that provide greater control over your pension savings.

Tackling a potential IHT issue Now is a great time to discuss your problem with us.

Investor confidence… Down but not out.

Pensions reform has changed the retirement landscape… Simplified set of rules ends the previous tax frameworks for pensions.

20 22

Self-Invested Personal Pensions… Your questions answered.

Open-Ended Investment Companies… Collective investment vehicles with a twist.

How balanced is your investment portfolio?

Maximise your income potential…

Limit any losses to take advantage of the upside.

Planning is the key.

EDITORIAL

Inside this issue

elcome to the latest issue of our digital personal finance and wealth management magazine, featuring articles designed to help you accumulate and protect your wealth during this official recession. We look at the Bank of England’s announcement on 5 March 2009 to cut the base rate to an unprecedented low of 0.5 per cent. This was the sixth consecutive reduction in the cost of borrowing and, as a result, savers are now experiencing the lowest savings rates in more than 100 years. On page 6, we have provided some alternative solutions that may fare better during this period of economic downturn. If current finances permit, contributing more towards your pension before the end of the current tax year on 5 April 2009 will enable you to benefit from more generous tax relief and from the tax-efficient treatment of pension funds. On page 26, you can find out more about how we’ve been helping recession-hit savers and pensioners to make use of the existing tax rules. Time is running out if you haven’t already discussed with us how you could take advantage of your tax-efficient 2008/09 Individual Savings Account (ISA) allowance. We have provided answers on page 8 to some of the most frequently asked questions we receive from clients. At the time of publishing, the global financial crisis and events are changing very quickly, and some further changes are likely to have occurred by the time you read this issue. A full content listing appears on pages 3 and 5.

NeeD MORE INFORMATION?

10 11

PLEASE CONTACT US WITH YOUR ENQUIRY

Content of the articles featured in this publication is for your general information and use only and is not intended to address your particular requirements. They should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

08 26

Inside this issue (continued) 25

Are your investments as tax efficient as they could be? Understanding your tax position and making the most of the tax breaks.

25 26

Saving makes sense… Report endorses the message.

How tax-efficient are your finances? Give yourself a makeover before the end of tax year.

28 28 29 29

Recession paralysis… Consumer confidence in making financial decisions without expert advice has plummeted.

The fundamental foundation that underpins all financial planning strategies.

New personal accounts… Pension provision will become compulsory for employers.

Term insurance… Did you know?

When was the last time you reviewed your protection portfolio?

Propping up the tattered banking system… Taking on hundreds of billions of pounds of extra bank liabilities .

Could you be eligible for a savings-tax refund? You can reclaim tax going back five years.

WEALTH CREATION

Creating wealth during

an economic downturn Savers experience the lowest savings rates in more than 100 years The Bank of England’s monetary policy committee cut its key rate by half a percentage point to 0.5 per cent on 5 March 2009 and unveiled a programme under which it will buy up to £150bn in government gilts and corporate bonds. It is also going to pump £75 billion of newly created money into the economy over three months in a process known as ‘quantitative easing,’ in an effort to secure an economic recovery.

WEALTH CREATION

Savers are now experiencing the lowest savings rates in more than 100 years, with some accounts actually paying zero interest. Faced with this scenario, we have provided some alternative solutions that may fare better during this current economic downturn. To start with, much will depend on the amount of risk for return you are prepared to take, how much accessibility you need to your money and the amount of time over which you want to save or invest. It is important that any savings or investment vehicle matches your feelings and preferences in relation to investment risk and return. The higher up the spectrum of risk, the greater the opportunity for significant capital growth and, conversely, the greater potential for loss. Depending on your own situation and if appropriate, a mix of assets with varying degrees of risk is probably the best solution. If you are a taxpayer, it may be prudent to utilise your 2008/09 tax-efficient cash Individual Savings Account (ISA) allowance of £3,600. For couples, this can add up to a further £7,200 of tax-efficient savings this financial tax year. Cash ISA savers can also invest into equity ISAs, with the current combined annual tax-efficient allowance totalling £7,200, of which a maximum of £3,600 can be held in cash. So a couple could have

a combined tax-efficient savings amount of £14,400 sheltered from tax. Children aged 16 and over are also eligible to save in a cash ISA. Non-taxpayers, including children, do not have to pay tax on any savings income up to their annual personal allowance of £6,035 in the current tax year. Non-taxpayers should complete HM Revenue & Customs R85 form, available from banks and building societies, to ensure interest is paid gross.

of the credit crunch, it may also be appropriate for some investors to consider looking to generate income by diversification outside the UK. Looking overseas may also yield investors better returns, particularly to areas benefiting from the strength of the euro, such as Greek and Irish stocks, although it’s important to remember that the guarantee is with the respective governments. If you are looking for income, some European equity funds have

Savers are now experiencing the lowest savings rates in more than 100 years, with some accounts actually paying zero interest.

As returns from ordinary deposit savings products have been cut to very low levels, many savers are looking towards lower-risk bond funds offered by investment companies as an alternative home for their money. Bonds, more usually referred to as gilts, are issued by the government when it needs to borrow money. Although the yields of gilts have been dropping as inflation and interest rates fall and investors look for the safety of government-backed stock, on the upside index-linked gilts provide investors with the potential to hedge against inflation. With savings rates at such historic low levels, and Britain in the grip

been benefiting from the rising euro and this strength may increase even further if the British government is forced to print money, which could be a distinct possibility this year. If this does happen investors will need to be comfortable with the risk associated with an increase in sterling. Global gilt funds may also be worth considering, those

which invest in bonds issued by governments, public authorities and international organisations in any area outside the UK. Corporate bonds are an IOU issued by a company and they pay a fixed amount of interest for a set term and return your capital at maturity. Please note that changes in exchange rates will affect the value of investments that are not in sterling. Despite the economic gloom, some analysts also believe America could be the first to emerge from the current turmoil. President Barack Obama’s huge bailout package many believe will give the US economy a much needed boost. The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

We can help you identify the best approach that suits your specific needs, based on your own preferred balance between risk and return. To discuss your requirements or for more information about the other services we offer, please contact us.

WEALTH CREATION

Get your

ISA skates on Time is running out if you havenâ&#x20AC;&#x2122;t used your allowance Time is running out if you havenâ&#x20AC;&#x2122;t already discussed with us how you could take advantage of your tax-efficient 2008/09 Individual Savings Account (ISA) allowance. We have provided answers to some of the most frequently asked questions we receive from clients.

WEALTH CREATION

Q: What is an Individual Savings Account (ISA)? A: ISAs are tax-efficient and flexible wrappers. They don’t have to run for a fixed term to qualify for these concessions and they benefit from tax-efficient growth. You do not have to pay any income tax or capital gains tax when you cash in your ISA. An ISA doesn’t have to be mentioned on your tax return. Q: Who can have an ISA? A: Anybody over the age of 18 (16 for a cash ISA) is able to save using an ISA as long as they are a UK tax resident. You can also take out an ISA even if you are not currently working. You and your partner are both able to set up an ISA as you receive separate ISA allowances. You cannot take out a joint ISA with somebody; however, you could subscribe to an ISA on behalf of someone else, for example as a gift. Q: How much can I save in an ISA? A: There is an overall annual maximum investment limit for ISAs, and separate limits apply to each element. ISAs allow you to save up to £7,200 during the 2008/09 tax year. For this current tax year you can save up to £3,600 in a cash ISA with one provider. The balance of the £7,200 limit (£3,600) can be invested in stocks and shares with another ISA provider.

is also important to make sure that you leave yourself with an adequate emergency fund. Money on deposit with a bank or building society is normally taxed at your highest rate of income tax, but all interest is tax-free from a cash ISA. Q: W hy should I consider using a stocks and shares ISA? A: Over the long term, equities tend to outperform cash and bonds, but they are riskier. The stocks and shares component of an ISA can offer you a wide choice of investments to choose from. These include funds such as unit trusts, OEICs or investment trusts. You could also choose to invest directly into equities, gilts or corporate bonds. Q: W hat benefits do I gain by holding shares in my ISA? A: There is no immediate tax advantage for basic rate taxpayers, but if you are a higher rate taxpayer you benefit because you avoid the extra tax payable on dividends received outside ISAs. If you are a basic rate taxpayer you can still gain a tax advantage if you invest in corporate bond funds, because the 20 per cent tax on the interest can be reclaimed. You also have no capital gains tax to pay on any increases in the value of your investments. In

“ISAs are tax-efficient and flexible wrappers. They don’t have to run for a fixed term to qualify for these concessions and they benefit from tax-efficient growth.” ISA type ISA limits for the 2008/09 tax year Stocks and shares ISA Up to £7,200 Cash ISA Up to £3,600 Combined maximum £7,200 Q: Why should I consider using a cash ISA? A: If you are investing for less than five years, or are a cautious investor, a cash ISA may be the most appropriate option. However, you need to ensure that the interest rate is higher than inflation, otherwise the purchasing power of your savings will reduce. In this current low interest rate environment, if you have cash sitting on deposit in a bank or building society it may be more advantageous to place some of this money into a cash ISA. It

addition, you could benefit when you retire because the income from ISAs is not counted towards the age allowance. Q: H ow are the dividends from ISA stocks and shares taxed? A: I f you’re a basic rate taxpayer inside or outside an ISA, you pay tax at 10 per cent on dividend income. This is taken as a ‘tax credit’ before you receive the dividend and cannot be refunded for ISA investments. If you’re a higher rate taxpayer, you would normally pay tax on dividend income at 32.5 per cent. In an ISA you won’t get back the 10 per cent dividend tax credit element of this, but you will save by not having to pay any additional tax.

Q: In the current volatile environment, should I keep clear of stocks and shares? A: This will depend on your own attitude towards risk for return. However, by regular saving you can drip-feed your money into the stock market, which is a good way to help smooth out the effects of market volatility. Saving regular amounts not only avoids the risk of bad timing, but also removes the need to try and second-guess the stock market’s next move. This is called ‘pound cost averaging’, which means that when prices are high your monthly contribution may buy fewer shares or fund units, but when prices are low your investment buys more shares or fund units. This also assumes there will be a net increase in the investment value over time. The credit crunch may have led many ISA investors to give equities a wide berth, but some are now seeing this as a buying opportunity. Q: What should I do with my old ISAs? A: If you have a cash ISA that is now paying a poor rate of interest, or a stocks and shares ISA that has not been performing well, you could transfer your money elsewhere without any loss of tax concessions providing the transfer is arranged by the new manager. You should note that an old stocks and shares ISA cannot be transferred to a cash ISA. The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

To discuss your ISA options, or to look at how you could save and invest more tax-efficiently, please contact us for more information.

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INVESTMENT

A social, moral or environmentally responsible agenda Striking a balance between principles and making a profit Many investors are looking for investment vehicles that invest in companies with a social, moral or environmentally responsible agenda. They also require that each fund has its own set of criteria and rules about the types of companies in which it will and won’t invest. If you are considering this as an option for yourself, firstly you need to determine your attitude to risk. If you’re a low-risk investor, for example, you might want to avoid a collective investment fund that holds stocks and shares altogether, while only aggressive investors should sink their money into collective investment funds investing in high-risk companies such as renewable energy start-ups. You should also diversify to reduce risk. It may be appropriate to spread your investment between different funds, sectors and geographical areas around the world. There are plenty of ethical funds that invest throughout the UK, Europe, the US and Asia, and in sectors such as bonds. Most ethical investment funds can be held within the wrapper of your 2008/09 Individual Savings Account (ISA) allowance of £7,200, which would mean you mitigate most income tax and all capital gains tax on the money you make. There are also numerous pension companies offering ethical funds, and more experienced investors could consider a self-invested personal pension plan (SIPP). These free you to invest your pension in the full

range of UK-based investment funds, including many ethical funds. Socially responsible investment (SRI) funds are slightly broader in their investment approach than ethical funds. For example, an ethical fund might never invest in a company that practises animal testing, whereas an SRI fund might, but only if it was animal testing for life-saving medicines. Ethical and SRI funds are measured in shades of green. A ‘light green’ fund uses more relaxed investment criteria when selecting stocks than a ‘dark green’ fund, which has more rigid ethical or environmental requirements. Both ethical and SRI funds will ‘screen’ or vet companies before investing in them. Ethical funds work on negative selection, so they will exclude companies that invest in ‘unethical’ activities, such as making or selling arms or tobacco. They invest only in areas that fulfil the particular

investment company’s own ethical requirements for the fund. An SRI fund combines both negative and positive criteria when creating its portfolio, so it will pick both companies that it thinks ‘do good’, as well as those that might not instantly stand out as 100 per cent ethical with the aim of promoting change from within. Although the environment might play a part in the screening process for ethical and SRI funds, strictly speaking a climate change fund is a separate entity. A climate change

fund will invest in companies that are developing environmental solutions, such as building wind farms or utilising solar power. The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

It’s still important to strike a balance between your principles and making a profit. Ethical or SRI funds are higher risk than other funds due to the restricted remit and availability of suitable investments. So it’s vital to consider the options available to you. To discuss your ethical requirements, please contact us.

RETIREMENT

Turning your pension savings into an income Give yourself plenty of time to think through the options Turning your pension savings into an income for the rest of your life is one of the most important financial acts you will ever make. Choosing the right deal may determine your income for perhaps the next thirty or more years, and possibly the wealth of your spouse after you die. There is usually only one chance to get it right and, with recent falls in stock markets, maximising income has become even more important. Retirement should come as no surprise, but too many people leave it far too close to the date they finish work to start detailed financial planning. If you have a personal pension or a company pension, other than a final salary scheme, you will eventually need to consider how and when you convert the fund built up into an income in retirement. Ideally, you should give yourself plenty of time and start thinking through your options some five years prior to your retirement. If you currently find yourself in this situation, we can help guide you through the minefield of choices you will have to make. It’s also important to remember that it is not a requirement that you have to take the annuity offered by the company you previously saved your pension with. The open market option provides you with the facility to shop around for a better deal. Depending on your circumstances, this could buy you a significantly higher income. In addition, advances in the way annuities are priced mean that you could qualify

for a higher rate because of previous poor health, your occupation or where you live. If you use your pension to buy a level annuity, you will receive an income fixed for life. Level annuities give you the biggest income from day one, but do not allow for inflation. An alternative is an escalating annuity that pays a growing annual income. The growth in your future income can be linked directly to the Retail Prices Index or it can be by a set sum annually.

Did you know? Annuities are linked to average life expectancy, with those likely to live the longest receiving a smaller income per pound of their pension fund. But insurers are becoming more sophisticated about the way they do their sums. Rather than simply giving average rates based on age and sex, insurers are turning to more individual pricing. Rates can be linked to occupation, health or even postcode. Even higher rates may be available for those who have had health problems such as diabetes or high blood pressure.

“There is usually only one chance to get it right and, with recent falls in stock markets, maximising income has become even more important.”

Enhanced annuity rates can offer significantly more income because a person’s life span is expected to be correspondingly shorter.

What will you do when you retire? Before April 2006, you had to buy an annuity once you reached age 75, but now there are fewer restrictions. Before you reach 75 you could opt for an unsecured pension, also known as ‘income drawdown’. This enables you to take a maximum of 120 per cent of the value of an annuity income. Or, you could leave it all invested if you don’t require the money at that particular point. You could also opt for ‘phased retirement’. Your pension policy is split into a number of segments. You open enough segments to draw enough ‘income’ for your needs during the year it is required. The ‘income’ is made up of a combination of the tax-free cash available for the segment and income from the remainder of the funds in the opened segment. The non-opened segments remain invested until you wish to draw another tranche of income. At age 75, you have to take your pension benefits but they can go into an ‘alternatively secured pension’. This is like an unsecured pension but the maximum you can take out is the equivalent of 90 per cent of an annuity income. With this option, when you die any remaining money goes towards a pension for your dependents rather than back into your estate.

If you are approaching your retirement and would like to discuss the options available to you, or for more information on how to maximise your retirement income, please contact us.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

RETIREMENT

Self-Invested Personal Pensions Tax-efficient wrappers that provide greater control over your pension savings Unlike a traditional personal pension, a Self-Invested Personal Pension (SIPP) may offer for appropriate investors far greater flexibility in terms of the assets that can be held within its taxefficient wrapper. A SIPP enables investors to spread investment risk across various asset options, but also to select investments that aim to meet any specific requirements and financial objectives set. Please note that any assets held within a SIPP will be owned by the pension fund rather than by you. SIPPs fall under the same basic rules for contributions and tax relief as personal pension plans. You may invest up to £235,000 in 2008/09 to receive tax relief up to 100 per cent of your earnings. There is a lifetime allowance for the maximum amount payable that is treated as tax-privileged, which is currently set at £1.65m for 2008/09. When you wish to withdraw the funds from your SIPP, between the ages of 55 and 75 (50 and 75 before

April 2010), you can normally take up to 25 per cent of your fund as a cash lump sum, free from tax. The remainder is then used to provide you with a taxable income. There are also significant tax benefits. The main benefit of contributing to a SIPP is the fact that basic rate tax payments on contributions will be rebated to the fund, which effectively means that, within pension funding limits, you can invest part of your income

gross. There have been a number of changes over the years and it is vital that professional advice is taken before considering this retirement planning option. You also need to balance the advantages of investing in a SIPP with the fact that the set-up costs and charges are likely to be more expensive than for a stakeholder or personal pension. In addition, SIPPs are unlikely to be suitable for smaller pension funds and can be complicated, making them more suitable for sophisticated investors. A vast array of investments can be held in a SIPP to meet the objectives of your investment strategy. Some of these funds are more common than others, and some are very complex. SIPPs provide the opportunity to invest in many different types of investments

including the usual types of investment funds. However this may vary widely between SIPP providers. Broadly, funds can be categorised into two main groups: Conventional funds, such as equity and bond funds, and Alternative funds. They can also be categorised by other criteria such as:

Types n Open-ended funds (OEICs) n Closed-ended funds n Exchange traded funds (ETFs) n Investment themes n Emerging markets funds n BRIC funds n ‘Frontier’ funds n Asset class/sector/theme n Specialist funds n Ethical funds n Gold n Oil

“SIPPs fall under the same basic rules for contributions and tax relief as personal pension plans. You may invest up to £235,000 in 2008/09 to receive tax relief up to 100 per cent of your earnings.”

RETIREMENT

Types of funds Open-ended funds Unit trusts and open-ended investment companies (OEICs) are the most common type of open-ended funds. Open-ended means that the number of units, or shares respectively, in these funds increases and decreases depending on the level of new investments and redemptions. When you buy into an openended fund, new units are created. Conversely, if you sell, those units are cancelled. The value of these units or shares directly reflects the value of the underlying portfolio.

Closed-ended funds Investment trusts are an example of closed-ended funds. They typically issue shares which are then traded on a stock exchange. The number of shares is fixed. This means that the value of the shares reflects both the ‘net asset value’ of the fund’s underlying portfolio and the supply/demand for the fund’s shares. As a result, a closed-ended fund’s shares can trade either at a discount or premium to its underlying net asset value.

Exchange traded funds (ETFs) ETFs are funds designed to track indices. They are a hybrid between open-ended and closed-ended funds. They are open-ended as their number of shares is not fixed, but have characteristics of closed-ended funds, such as listing on an exchange and intraday dealing. They normally fully replicate the index they track, by holding all the constituents in their respective index weightings.

BRIC funds

Exposure to gold via funds

In fund management jargon, ‘BRIC’ stands for Brazil, Russia, India and China. BRIC funds generally have the remit of providing exposure to only these four emerging economies.

An investor can gain exposure to gold via ETFs designed to track the gold price, or via specialised funds investing in companies with gold exposure, such as mining companies.

‘Frontier’ funds

Exposure to oil via funds

Frontier funds allow investors to gain exposure to those economies classified as ‘frontier markets’. Frontier markets are generally defined as those markets that tend to have a smaller capitalisation, fewer traded securities and are less liquid than emerging markets. Countries within this frame can be at different levels of economic development, with gross domestic product per capita ranging from low, in countries such as Vietnam and Nigeria, to high, such as in the Gulf countries.

An investor can gain exposure to oil via ETFs designed to track the oil price, or via specialised funds investing in companies exposed to oil, such as exploration, development, production and servicing companies.

Specialist funds Funds can provide a way of outsourcing to a specialist investment manager. Specialist funds are funds that invest in a particular area or sector. For example, instead of buying a number of holdings in UK banks, an investor can buy a specialist financials fund managed by someone who may be better placed to try to select the best mix of bank and financial stocks from a global perspective.

Ethical funds Ethical, or socially responsible, funds typically either look for companies that are actively pursuing ways of improving health and the environment, or avoid companies that they consider have a negative effect on society.

‘Soft’ commodities ‘Soft’ commodities is another term for agricultural commodities, such as wheat, cotton, palm oil and orange juice. An investor can gain exposure to soft commodities via ‘agricultural’ funds. These can either invest in future contracts on soft commodities, or in companies that are involved in, related to, concerned with, or affected by agriculture and farming related issues. Investors can also gain exposure to individual soft commodities by buying ETFs designed to track the price of single commodities. The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

Emerging markets funds These funds aim to give investors exposure to stock markets in emerging economies, either on a global basis or in specific regions, such as Eastern Europe. Emerging economies are considered those that have a low-to-mid per capita income, have ongoing economic development and reform programmes, and are considered to be fastgrowing economies.

Planning for a successful retirement requires professional advice to ensure that you fully achieve your retirement goals. Many of the investments and funds featured in this article are also available through personal pension plans. For more information about the services we provide and the options available to you, please contact us.

Financial planning

is our business... weâ&#x20AC;&#x2122;re passionate about making sure your finances are in good shape for 2009. Our range of personal financial planning services is extensive, covering all areas from pensions to taxation and inheritance matters to tax-efficient investments. Contact us to discuss your current situation, and weâ&#x20AC;&#x2122;ll make a New Years resolution to get your finances in good shape.

WEALTH PROTECTION

Tackling a potential IHT issue Now is a great time to discuss your problem with us The fall in the value of assets such as shares, buy-to-let properties and holiday homes to their lowest levels in years, combined with capital gains being taxed at its lowest rate in 40 years, may be prompting more and more taxpayers to give away surplus assets to minimise future inheritance tax (IHT) bills. If you are considering tackling a potential IHT issue, now is a great time to discuss this with us. This current slump in asset values may present appropriate taxpayers with a rare opportunity to pass on assets while paying substantially reduced capital gains tax (CGT). The reduction in the CGT rate from up to 40 per cent to a flat rate of 18 per cent in April last year will also reduce the potential tax bill on assets gifted away. For lifetime gifts, the value of assets for IHT purposes is determined at the time they are given away, so while valuations are low, it is worth considering the advantages of gifting assets now. So long as the gift is an outright gift to an individual and the donor survives seven years after making the gift, there will be a significant long-term tax saving. And with the IHT rate at 40 per cent, the long-term tax saving could be very significant. If there is a risk that IHT becomes due on gifts made prior to death, it is important for taxpayers to consider making gifts while asset values are low. Lifetime gifts use up the nil-rate band first upon death within seven years. This will affect the allowances and the actual tax paid on the estate. The nil-rate band is the amount up to which an estate will have no IHT to pay and is currently £312,000 (2008/09) if you are single, or £624,000 (2008/09) are married or in a civil partnership.

Inheritance tax glossary n Assets Generally, everything that you own. n Beneficiary A person, or organisation, to whom you leave a gift in your Will. n Estate The total sum of your possessions, including property and money, left at your death once any debts have been paid. n Inheritance tax (IHT) The 40 per cent tax paid on an estate that is over the nil-rate band threshold. The current 2008/09 threshold is £312,000 for an individual. Married couples or those in a civil partnership have a combined threshold of £624,000. n Intestate The term for someone dying without having a Will in place. In this case the Rules of Intestacy will decide to whom your estate is passed. n Nil-rate band The amount of your estate on which IHT is not payable. For the tax year 2008/09 this is £312,000, and for married couples or those in a civil partnership £624,000. n Potentially exempt transfer A gift made during one’s lifetime that is exempt from IHT should the donor live for seven years after making the gift. n Trust An arrangement you can make in your Will to administer part of your assets after your death.

n W ill A form of instruction as to how someone wishes to dispose of their assets on death. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts

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If you wish to discuss how we could help you mitigate a potential IHT liability and safeguard the wealth of your estate for your heirs, now is the perfect time to consider the options available to you. For more information, please contact us.

INVESTMENT

Investor confidence Down but not out

Investor confidence took a dip between May and November last year as the credit crunch encouraged more caution among investors. However, given the severity of the falls in global stock markets in October, the fall in confidence was relatively modest.

These were the findings of the Investment Management Association’s (IMA) second bi-annual Great British Investor report, published on February 26, 2009, which looked at the behaviour, confidence, intentions and concerns of Britain’s retail investors as at November 2008. The survey also includes two indices, developed by IMA, to provide barometers of investor confidence and intentions:

The survey’s findings include: The percentage of investors who believe the economic climate has worsened increased from 39 per cent in May to 70 per cent in November. However, 38 per cent still see current conditions as creating opportunities for investment, this being particularly true of male and younger investors. 44 per cent of investors felt that if you see an opportunity to make a good return you should take the risk. Brand features more strongly in investors’ minds, with a notable 11 percentage point increase, to 19 per cent, of investors stating that they would only buy a product from a provider that they know and is well-established. The report splits investors into one of five groups: Discerning, Adventurous, Organised, Cautious and Casual.

Discerning investor These investors have a good knowledge of financial matters to the point where others will come to them for advice and help. They keep up

to date with financial news and matters. They look at their investments as an active hobby and believe that it is less satisfying to spend than it is to save.

Adventurous Investor These investors have good financial knowledge and are self proficient when making financial (and investment) decisions. They regularly look at financial websites and do not find financial matters confusing. They are good at managing their own portfolios, although they now seem less prepared to accept the same level of risk relative to the appetite for risk that they expressed in the May survey.

Organised Investor These investors may have a good financial knowledge but unlike discerning investors they do not treat their financial affairs as an active hobby. They regularly read the financial papers, are debt averse and have an entrenched savings culture.

Cautious Investor These investors have an average financial knowledge and are not prepared to accept any level of risk. They do not always follow financial news. For them, investing is seen as a necessity and they are not prepared to lose any money even if it may yield higher returns in the long run.

Casual Investor These investors are not financially organised and usually do not manage their financial

matters well. They do not follow financial news and find financial matters confusing. In turn they do not have good financial knowledge and turn to others to help them make financial (and investment) decisions.

The report found: Confidence has fallen most among Adventurous and Casual investors whereas confidence has been broadly stable among those who are more Discerning or Cautious. Adventurous investors are not willing to take on as much risk relative to their position in May. However, discerning investors were prepared to take on more risk than the other clusters as they understand that investing can carry some level of risk. All clusters except Discerning think that the uncertainty in the market will make them delay their investment plans; Discerning investors are neutral. Given the continuing falls within the property market, all clusters have little faith in property with discerning investors being the most negative toward this particular market.

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RETIREMENT

Pensions reform has changed the retirement landscape Simplified set of rules ends the previous tax frameworks for pensions From 6 April 2006, also called ‘A-Day’ or ‘pensions simplification’, life changed for retirement savers as the government brought in a new simplified set of rules, effectively bringing to an end the eight previous tax frameworks for pensions. All pension policyholders are now able to take up to 25 per cent of the value of their fund as a tax-free lump sum when they come to take benefits. This new rule has created a level playing field between different pensions. Another rule introduced is that you and your employer are now able to pay up to one annual allowance into your pension. During the current tax year (2008/09), this is capped at £235,000, with the limit set at £3,600 for low or non-earners paying into personal and stakeholder pensions. A further move designed to encourage us to save more is the greater ease with which people can now save into a number of different pensions at the same time under the new rules. As well as the annual allowance, there is also a limit on your entire pension savings, including any private pensions, occupational pensions and free-standing additional voluntary

contributions. In this current tax year, this amount is £1.65m. If you exceed £1.65m, you will be subject to the new lifetime allowance charge, or recovery tax, which will be charged at up to 55 per cent on any excess. A pension fund of more than £1.65m might sound like the preserve of the very rich, but it is likely that more individuals will be in danger of breaching the lifetime limit than they realise. The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

“All pension policyholders are now able to take up to 25 per cent of the value of their fund as a tax-free lump sum when they come to take benefits.”

If you are close to or have already exceeded the £1.65m threshold, please contact us to discuss the options available to you.

ACHIEVING A

COMFORTABLE RETIREMENT... do you need a professional assessment of your situation to make this a reality? If you are unsure whether your pension is performing in line with your expectations, and that you’ve made the right pension choices – don’t leave it to chance. Contact us to discuss these and other important questions, and we’ll help guide you to a comfortable retirement.

RETIREMENT

Self-Invested Personal Pensions Your questions answered It’s not something we usually contemplate during our working lives, but many of us could spend almost a third of our life in retirement. Even if your retirement isn’t on the near horizon it’s never too early to start planning. A pension is one of the most effective ways to save for your future because of the tax benefits they offer.

RETIREMENT

Changes to the pension rules in April 2006 (known as ‘A-Day’) enabled individuals to invest higher contribution levels and made it easier to set up a Self-Invested Personal Pension (SIPP), a tax-efficient wrapper into which you can put a range of investments chosen by you to achieve your future personal financial goals. SIPPs are personal pensions which allow more sophisticated investors to choose where you want your retirement savings to be invested, instead of leaving a pension company to make the decisions. You can hold a wide variety of investments in a SIPP, from investment funds and shares to commercial property and futures and options. When you reach retirement, you can take an income direct from your pension fund, in the form of a so-called ‘unsecured pension,’ which may give you greater control over how and when you take income from your fund. SIPPs share the same benefits as personal and stakeholder pensions. They enjoy tax relief at either basic or higher rate tax, your contributions will accumulate and from the age of 50 (or 55 after 2010) you can claim a tax-free lump sum and income from your SIPP. The tax treatment will depend on your individual circumstances and may be subject to change in the future. Q: Who can take out a SIPP? A: You can take out a SIPP even if you are already contributing to another pension, such as an occupational (company) pension scheme, providing you don’t exceed the maximum pension contribution limits. But it is important to be sure that you are really going to make use of the investment freedom a SIPP offers and that it makes financial sense for you to do so as some SIPPs could be more expensive than other types of pensions. Q: How much can I contribute to a SIPP? A: It is generally recommended that you should have an existing pension fund of around £50,000 to transfer or invest lump sums of several thousand pounds a year. Since April 2006, the maximum amount that you can contribute to your pension each year and qualify for tax relief is the equivalent of 100 per cent of your taxable earnings (called net relevant earnings), subject to an annual limit of £235,000 and an overall lifetime limit for your pension pot of £1.65m. (These are the limits for the tax year 2008/09 and will be increased in future tax years). A reason why people may wish to consider transferring their previous pension policies into a SIPP is to consolidate their retirement savings in one place and thereby benefiting from easier administration and the possibility of more costeffective charges. Q: What investments can I include in a SIPP? A: These are the main investments permitted, that can be included in a SIPP:

n D eposit accounts (in any currency providing they are with a UK deposit taker) n Government securities and other fixed interest stocks n Unit trusts n Open ended investment companies (OEICs) n Investment trusts n Insurance funds n UK stocks and shares including shares listed on the Alternative Investment Market (AIM) n Overseas stocks and shares quoted on a Recognised Stock Exchange n Unquoted shares n Commercial property n Ground rents in respect of commercial property n Traded endowment policies n Permanent Interest Bearing Shares (PIBS) n Warrants n Futures and Options Q: How much could I expect to receive from a SIPP? A: The amount of pension you receive at retirement from a SIPP will depend on how much you invest, the growth of your investments, how much is deducted in charges and annuity rates (if you decide to convert your fund into an annuity at age 75). SIPPs offer a wider range of investment options compared with personal and stakeholder pensions. You receive income tax relief on your contributions and the investments in your SIPP grow virtually tax-free. You can take a tax-free lump sum, plus an income from your SIPP between the ages of 50 and 75, although from 2010 the minimum age at which you can take retirement benefits increases to 55. Q: How can I invest in property via a SIPP? A: One of the attractions of SIPPs is that they can be used to invest and develop commercial property, such as offices, industrial units or shops. Your pension fund does not even have to be large enough to buy a property outright as you can borrow up to 50 per cent of the fund’s net value. It is not possible to invest directly in residential property via a SIPP, although a commercial property with a residential element such as a caretaker’s flat may be permitted. By far the greatest demand for property investment within a SIPP is from small business people who want to buy their own business premises. Changes to the pension rules in April 2006 mean such purchases are now possible even if the property is already owned by the investor or someone connected to them. Buying your own business premises within a SIPP can have several tax advantages. The rent paid into your SIPP is free of tax because it is a tax deductible expense. There will be no capital gains tax to pay on the property when it is sold within the pension fund and if you die before age 75 and before you start drawing your pension, your beneficiaries can receive the proceeds of the sale of the property free of inheritance tax.

Q: How do I move my existing pensions into a SIPP? A: If you contact your chosen SIPP provider and give them details of your previous pensions, they will arrange for the transfer of your funds into your SIPP. However, it is vital to take professional advice first. Your previous pensions may also include guaranteed annuity rates which could give you a higher pension than would be available if you were to switch, or there may be a large penalty for transferring. If you are considering switching from an occupational scheme, you may also be at risk giving up some valuable benefits such as spouse’s and dependants’ pensions as well as ill health and early retirement benefits. If part of your pension has been built up from National Insurance rebates as a result of being opted out of the State Earnings Related Pension Scheme (SERPs) or the State Second Pension (S2P), these funds cannot currently be transferred into a SIPP but must be invested into an insurance plan. Q: What are the alternatives to a SIPP? A: If your main concern is to be able to spread your pension savings among a variety of different investment groups rather than being tied to one set of funds offered by your pension company, a cheaper solution than a SIPP could be an ordinary personal pension where you are offered a wide choice of external managers. The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

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Planning for a successful retirement requires professional advice to ensure that you fully achieve your retirement goals. For more information about the services we provide and the options available to you, please contact us.

INVESTMENT

Open-Ended Investment Companies Collective investment vehicles with a twist Open-Ended Investment Companies (OEICs) are stock market-quoted collective investment schemes. Like investment trusts and unit trusts they invest in a variety of assets to generate a return for investors. They share certain similarities with both investment trusts and unit trusts but there are also key differences.

INVESTMENT

An OEIC, pronounced ‘oik,’ is a pooled collective investment vehicle, in company form. OEICs first became available in May 1997 and were introduced as a more flexible alternative to established unit trusts. An OEIC may have an ‘umbrella’ fund structure, allowing for many ‘sub-funds’ with different investment objectives. This means you can invest for income and growth in the same umbrella fund, moving your money from one sub fund to another, as your investment priorities or circumstances change. Some OEIC providers allow you to do this without charge as you stay within the same share class (with the same charging structure). OEICs may also offer different share classes for the same fund. You may invest into an OEIC through a stocks and shares Individual Savings Account (ISA). Each time you invest in an OEIC fund, you will be allocated a number of shares. You can choose either income or accumulation shares, depending on whether you are looking for your investment to grow or to provide you with income, providing they are available for the fund you want to invest in. Like unit trusts, OEICs provide a mechanism of investing in a broad selection of shares, thus aiming to reduce the risks of investing in individual shares. Therefore, you have an opportunity to share in the growth potential of stock market investment. However, do remember that your capital is not secured and your income is not guaranteed. You have access to your investment when required, although you should regard investing in an OEIC as a medium to long term investment. You may invest a lump sum make regular monthly payments. Through the OEIC structure there is the flexibility to switch easily between the investment funds provided by your OEIC manager. OEIC shares are bought and sold at a single price. All charges, such as the initial charge, are shown separately, making it easier to understand exactly what costs are involved. Funds with low or no initial charges may have a penalty exit fee for short term investors. This is to encourage people to keep their investment in the fund; the charges decrease the longer the time invested. Most funds have different charges for each share class. Your tax situation will depend on the type of distribution you receive, which in turn will depend on the type of OEIC you have invested in. If you have invested in an OEIC via a stocks and shares ISA, you will not have to pay any further tax. Income from investments held within ISAs does not have to be declared on your tax return. If you are holding an OEIC investment outside an ISA and you receive a distribution, you will receive a tax voucher from the fund manager showing both the amount that you are getting

and the amount of tax on the distribution that has been paid by the manager. OEIC funds invested in gilts, loan stocks and other interest-bearing investments pay out interest distributions. Outside an ISA, you will receive these distributions net of 20 per cent tax. You cannot register to have the interest paid gross but, if you are a non-taxpayer, you can reclaim any tax overpaid. Dividend distributions are paid net of 10 per cent tax. How much, if any, tax you will then have to pay will depend on your status, non-taxpayers may reclaim tax paid on interest but not on dividends, basic rate taxpayers will have no further tax to pay but higher rate taxpayers will face a further tax bill. On the sale of your investment in an OEIC there may also be a Capital Gains Tax liability. Subject to the annual exemption, £9,600 for the 2008/09 tax year the gain will be taxed at 18 per cent. Any OEIC investment held within an ISA would be sheltered from any further tax liability and there would be no tax to pay on disposal. Each OEIC has its own investment objective and the fund manager has to invest to achieve this objective. The fund manager will invest the money on behalf of the shareholders. The value of your investment will vary according to the total value of the fund, which is determined by the investments the fund manager makes with the fund’s money. The price of the shares is based on the value of the investments the company has invested in. Investment Trusts sometimes see their shares trade at a discount to the underlying value of the assets they hold. However, OEICs cannot fall to a discount. They always trade at a true ‘net asset value’ (NAV). The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

For more information about the investment services we provide and the options available to you, please contact us.

How balanced is your investment portfolio? Limit any losses to take advantage of the upside In this current economic downturn, it may be appropriate that you spread your portfolio over several different investments. This may help limit any losses, and conversely, if markets eventually rise, you may be able to take advantage of the upside. Make sure your investments are appropriate for your risk profile and if you have any concerns please contact us. If your portfolio isn’t balanced, it may be appropriate to consider a multi-asset fund. As the name suggests, multi-asset funds can be a useful diversification tool, as they invest in a wide choice of assets. This means that if one asset performs badly, you also have exposure to other assets at the same time which may not be affected by the downturn. The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance.

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WEALTH CREATION

Saving makes sense Report endorses the message

Research published on February 5, this year by the government, showed that saving makes sense as it substantially improves retirement income and is a positive step towards encouraging saving, according to the Association of British insurers (ABI). Maggie Craig, the ABI’s Director of Life and Savings, said, “The ABI has always said that saving makes sense. This report endorses the message that for most people, their workplace pension is the right choice. Joining your workplace scheme makes sense because you get free money from your employer and the government that you would otherwise not receive, and most importantly because it will bring you a higher standard of living in retirement. The government should build on this work by ensuring that the public is aware

Are your investments as tax-efficient as they could be? Understanding your tax position and making the most of the tax breaks In today’s environment, tax-efficient investing and making the most of any tax allowances you have is more important than it’s ever been. Tax planning is always important to maximise the proportion of your returns that you retain, but in the current economic climate when these returns are under pressure as a result of market volatility then investing tax-efficiently can make a significant difference to you. We can help you better understand your tax position and make the most of the tax breaks available to you, and to allow you to maximise your investment returns.

Talk to us about how we could help you to maximise from your tax allowances, and plan to mitigate a capital gains tax or inheritance tax liability.

of the benefits of saving and able to make informed decisions about it. “The ABI’s own research has shown that almost half of the working population, some 13 million people, are not saving enough for retirement, and that almost 75 per cent of people believe that the benefits of saving have fallen in the last year. The government’s new study should help to improve confidence in long-term saving by illustrating clearly that it makes financial sense. “In 2012, saving will be revolutionised by

the new system of automatic enrolment into workplace pensions. But right now, almost five million people could be benefiting from free money from their employer and the government, yet they haven’t joined their workplace pension. The government has a great opportunity to make sure that these people, and others who start working between now and 2012, can gain the benefits of pension saving, by allowing willing employers to use automatic enrolment as soon as possible. This report shows that saving pays – we urge the government to make it easier for people to reap the benefits of saving now.”

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Maximise your income potential Planning is the key If you are looking to maximise your income potential and invest for income generation, we can help you develop an investment strategy to ensure that you remain on track, so that if your situation changes, your income arrangements change too. If you have concerns about how you will be able to cope with your future income requirements, please contact us. We can advise you about the different products that may be appropriate for your particular situation when planning your income. As part of our service we will consider: nY our income sources, tax rates and allowances n Your financial goals n Your immediate and ongoing income requirements n Education costs for your children or grandchildren n Current or anticipated care fees n The amount you’ll need to fund your retirement

TAX

How tax-efficient are your finances? Give yourself a makeover before the end of tax year

TAX

If current finances permit, contributing more towards your pension before the end of the current tax year on 5 April 2009 will enable you to benefit from tax relief and from the tax-efficient treatment of pension funds. The total annual allowance for this tax year that you can utilise and receive tax relief upon is up to 100 per cent of your relevant earnings, capped at £235,000, with the limit set at £3,600 for low or non-earners paying into personal and stakeholder pensions. There is a limit on the value of retirement benefits that you can draw from an approved pension scheme before tax penalties apply. That limit is called the Lifetime Allowance. The Lifetime Allowance is £1.65m in the 2008/09 tax year. At the time of payment, a recovery charge will be applied to the value of retirement benefits in excess of the Lifetime Allowance. The amount will depend on how the excess is paid. You may also be able to top up your taxefficient pension contributions to a company pension scheme, or make Additional Voluntary Contributions (AVCs). AVCs could offer a costeffective way to increase your pension fund if you have a company pension scheme. Following the changes that became effective from 6 April 2006, there are now even more ways to pay extra funds into your pension. If you are a higher rate taxpayer, you may wish to consider saving tax by transferring money into a lower earning, or non-earning spouse’s or civil partner’s name. If appropriate to your situation, maximising personal tax allowances through non-taxpayers will enable them to claim tax back on bank and building society savings accounts, so that the tax liability on the savings is lower, or none. Fully utilising your annual Individual Savings Account (ISA) allowance, currently £7,200 (2008/09), will enable you to avoid tax by sheltering investments. It may be appropriate to consider moving savings from an ordinary deposit or savings account into an ISA. Friendly Society savings accounts or products from National Savings & Investments also offer taxefficient savings options. If you are single and have assets over £312,000 (2008/09), or are married or in a civil partnership with assets over £624,000 (2008/09), make sure

that you don’t leave an inheritance tax (IHT) bill charged at 40 per cent on the assets of your estate over these allowances behind for your heirs to pay on your premature death. Write your life assurance policies in an appropriate trust, utilise your IHT allowances and make a Will. If you have

Financial products are available that could help you to minimise or defer a capital gains tax liability. If you do have a CGT liability, you may also wish to consider using your allowance more efficiently by transferring assets between you and your spouse or civil partner to make the most of both of your CGT allowances. Giving to charitable good causes utilises taxefficient means of charitable giving, including using a deed of covenant, Gift Aid or payroll giving. If your child or grandchild was born on or after 1 September 2002, they are eligible for a child trust fund (CTF). This is a long-term savings and investment account where the child (and no one else) can withdraw the money when they turn 18.

“Fully utilising your annual Individual Savings Account (ISA) allowance, currently £7,200 (2008/09), will enable you to avoid tax by sheltering investments.” made an outright lifetime gift, the actual IHT rates and allowances could be affected, therefore it is important to receive appropriate advice before taking action. It’s important to check that you are paying the correct amount of tax. Check your tax code to make sure you haven’t been issued with an incorrect tax code and reclaim any amounts that may be wrong. Also make sure you’re getting your correct personal allowance. If you are a taxpayer and raising extra income by renting a room under ‘rent-a-room relief’, the rent is exempt from income tax on profits from furnished accommodation in your only or main home if the gross receipts received are £4,250 or less. Receipts over the £4,250 exemption limit are taxed on an alternative basis that may produce a lower tax bill. Make sure, if applicable to your situation, that you take full advantage of your annual capital gains tax (CGT) exemption limit. For the 2008/09 tax year CGT is charged at a flat rate of 18 per cent on chargeable gains over £9,600. Taper relief and indexation allowance are no longer applied.

Neither you nor the child will pay tax on income and gains in the account. A £250 voucher is given by the government to start each child’s account and then a further contribution of £250 to all eligible children at the age of seven. The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

If you would like to find out more about how we’ve been helping recession-hit savers and pensioners to make use of the existing rules, please contact us for further information.

NEWS

Recession paralysis Consumer confidence in making financial decisions without expert advice has plummeted The credit crunch and economic downturn has increased the number of consumers seeking professional financial advice according to new research published on February 17, 2009, from Unbiased.co.uk. n 34 per cent of people are in need of professional advice on their personal finances as ‘recession paralysis’ strikes. n 20 per cent increase in consumers seeking financial advice over the last four months. With the UK facing the worst recession since the 1930s, consumer confidence in making financial decisions without expert advice has plummeted. The research showed that, one in three (34 per cent) consumers say they would now feel less comfortable choosing a financial product without expert advice than 12 months ago. And

a similar share of the population (35 per cent) have been hit already by ‘recession paralysis’, admitting they won’t address any major financial decisions until things improve. Since the aftermath of the initial financial crisis in October last year, Unbiased.co.uk has seen a 20 per cent surge in searches carried out by consumers wanting details of professional advisers who can help them deal with their financial issues.

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“The credit crunch and economic downturn has increased the number of consumers seeking professional financial advice according to new research published.”

New personal accounts Pension provision will become compulsory for employers The government’s new personal accounts will come into force in 2012. The new pension scheme will be aimed at workers who do not have access to a company pension. The government hopes to provide employees with an automatic and straightforward way of saving in a pension, thereby reducing reliance on the State to fund their retirement. The new scheme means that pension provision will be compulsory for employers for the first time. The government is still devising

the details of the scheme, but it is expected to have about eight million members and receive £8 billion a year in contributions. From the age of 22 all employees earning more than £5,000 a year will be enrolled automatically in either their employer’s company pension scheme or a personal account. However, employees will be able to opt out. Under the personal account scheme, employers will have to contribute at least 3 per cent of a worker’s salary and the government will contribute 1 per cent in the

form of tax relief. Workers can also add their own contributions up to £3,600 a year. Personal accounts will be money-purchase schemes, with the maximum administration charge likely to be capped at 0.3 per cent. There will be a choice of investment funds, but there will be a default fund for those not wishing to make an investment choice. Workers already in company schemes will not be enrolled into a personal account automatically.

WEALTH PROTECTION

Could you be eligible for a savings-tax refund? You can reclaim tax going back five years

Term Insurance Did you know?

Term insurance is one of the simplest and cheapest forms of life insurance. It is also one of the most important because it provides basic life cover to your dependants if you die. For many people, it is the first type of life insurance they buy, often when they take out a mortgage for the first time.

There are four main types of term insurance:

income is paid to your dependants for the remainder of the policyâ&#x20AC;&#x2122;s term. The income can be paid monthly, quarterly or yearly. Some policies provide an income which increases each year at a fixed rate, such as 3 per cent or 5 per cent.

Level term

Gifts inter vivos

Premiums are relatively cheap, partly due to a highly competitive market, but also because of increasing life expectancy, due to healthier lifestyles and medical advances.

The amount of cover remains the same throughout the term of the policy. This type of term assurance is normally used to cover an interest-only mortgage or to provide family protection.

Decreasing term

The sum insured reduces each year, decreasing to nil at the end of the term. The cover can reduce by a fixed amount each year, or in line with a repayment mortgage to match the reducing debt.

Family Income Benefit

This type of policy is ideally suited to providing your family with a replacement income. If you die during the term of the policy, a regular

These policies are designed to cover the potential inheritance tax liability that can arise if you make a large gift to someone from your estate while you are alive. Such a gift is called a Potentially Exempt Transfer or PET. If you die within seven years of making a gift, it is possible that a liability for inheritance tax (IHT) could arise. A Gift Inter Vivos policy lasts for 7 years and the cover decreases in line with the potential IHT liability.

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HM Revenue & Customs (HMRC) estimates that some 2.5 to 3 million savers could be eligible for a refund because they have overpaid income tax on savings in the past. Basic rate tax at 20 per cent is deducted from savings interest at source (in other words, taken off by your bank or building society before it goes into your account). However, people whose income is below the personal allowance are eligible to have their interest paid gross. All you need to do is fill in an R85 form and send it to your bank and building society. Many people fail to do so, however, and HMRC estimates that they could be owed about ÂŁ250m in back tax. To claim your refund, you must fill in a separate form, R40. You can reclaim tax going back five years from the 31 January following the end of the tax year, though the time limit will be reduced to four years on or after April 2010.

When was the last time you reviewed your protection portfolio? The fundamental foundation that underpins all financial planning strategies Everyone with financial dependents and personal and business liabilities should consider having a sufficient level of financial protection to cover all eventualities. Simply having life assurance may not be enough. What, for instance, would happen to your financial situation if you contracted a near-fatal disease or illness? You may not be able to work and so lose your income, but you are still alive so your life assurance does not pay out. And to compound the problem, you may need expensive nursing care or to adapt your home, or even move. When was the last time you reviewed your protection portfolio? Donâ&#x20AC;&#x2122;t delay or put off addressing this fundamental foundation that underpins financial planning strategies. Talk to us, so that we can guide you through the different protection options available to you.

BANKING

Asset Protection Scheme Banks are being allowed to buy insurance from the government to protect themselves against losses against their portfolios of toxic assets.

Propping up the tattered banking system Taking on hundreds of billions of pounds of extra bank liabilities They are the most far-reaching proposals yet to prop up the tattered banking system. Yet it is far from certain that the government taking on hundreds of billions of pounds of extra bank liabilities will kick-start lending to firms and families. So what did the government announce and will it work? Asset Protection Scheme Banks are being allowed to buy insurance from the government to protect themselves against losses against their portfolios of toxic assets. It is estimated that up to £260bn may have to be underwritten. The scheme is modelled on America’s last November rescue of Citigroup. Analysts argue that it would be better to set up a so-called ‘bad bank’, which removes all the debts from firms’ books. Under Britain’s scheme, lenders will still nurse heavy losses because

the bad debts will remain on their balance sheets. Taxpayers will pay the bulk of the bill as and when borrowers default. Asset Purchase Plan The Bank of England will be empowered to lend directly to companies. It will buy up to £50bn of debts and will hopefully bring down the cost of borrowing for cashstarved companies. It finally brings UK policy into step with the US Federal Reserve, which has been lending directly to companies for months. It also paves the way towards what economists call ‘quantitative

easing’ by the Bank of England. This would involve the Bank printing money and lending it to firms. Mortgage Guarantee Scheme The government will guarantee sales of bundled up mortgages and other loans in the hope of kick-starting the lending markets. This acts on a set of proposals published by former Halifax Bank of Scotland chief, Sir James Crosby, under which he said the state should underwrite up to £100bn of so-called ‘mortgage-backed securities’. The government will

also extend a guarantee of £250bn of bank debt. Nationalised banks to lend more Northern Rock will stop ‘actively encouraging’ its customers to quit the bank when their current mortgage deals expire. In addition, the government will swap up to £5bn of ‘preference shares’ in RBS for ordinary shares that pay a less punitive rate. In return, RBS has pledged to bolster lending to firms and individuals. The twin moves are an attempt to plug the widening gap in Britain’s consumer loans market.

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