Managing Wealth

November 2018

Focused

Wealth Management

STOPPING THE

SCAMMERS keeping your pension safe

10 things to know about self-invested pensions

Also in this issue...

UK interest rate rises Pensions freedom The consultant’s view

www.mattioliwoods.com

Alex Brown wealth management director

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Welcome

Hello, and welcome to the October 2018 edition of Focused Managing Wealth, the newsletter created exclusively for you, our clients.

Made up of content from wealth management consultants across the company, we hope you find it useful, informative and of interest – you are the heart of what we do here at Mattioli Woods, so have put this together with your best interests in mind.

If you have any queries or questions on anything within this newsletter, please contact your consultant. Alternatively, you can email info@mattioliwoods.com or telephone 0116 240 8700.

We would value your feedback on this newsletter, too, which you can send to marketing@mattioliwoods.com.

Our contributors

Michael Fryer wealth management consultant

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Michael Hulse wealth management consultant

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Jack Smith wealth management consultant

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Our principal services include:

• wealth management – pensions, investments, financial planning and protection

• employee benefits – pensions, flexible benefits, healthcare, financial education

• asset management – portfolio management, Structured Products Fund, cash ISAs, EIS, SEIS, VCTs and OEICs

• property fund management – real estate investment trust, syndicated property and Private Investors Club

• professional adviser services – SIPP, SSAS and trustee services

New home for Leicester office

In exciting news, the Leicester office of Mattioli Woods has moved to its brand-new building in the heart of the city’s centre.

Based at the well-known New Walk development in Leicester, the five-floor building features modern and flexible collaborative workspaces, training rooms geared towards employee learning and development, and a stunning Sky Lounge on the top floor for staff and client networking events.

The new building will not only help us continue to put the client at the heart of what we do, but also continue with our plans for future growth while giving our people a workspace designed with health and wellbeing in mind.

If you’re ever in the area and want to look around the new office, or you want to organise a meeting with your consultant there, get in touch with them – we look forward to showing you around!

UK interest rate rises

The Bank of England raised the bank rate to 0.75% in August, the first time the overnight rate of interest has been higher than 0.5% since April 2009.

In reaction, press headlines warned of financial disaster, as homeowners with a variable interest rate mortgage will now have to pay up to 50% more in interest. However, the mortgage market is very different today compared to February 2009, said Ben Wattam, an investment director at Mattioli Woods.

“Around 70% of all mortgages in 2009 were linked to the Bank of England bank rate; today it’s around 33%,” he said. “Plus, 66% of mortgages are on fixed rates, meaning most homeowners won’t be immediately affected by this news.

“In fact, more than 90% of all new mortgages are now on fixed rates, and the average fixed rate mortgage is now cheaper than the average variable mortgage for the first time since 2007. This 0.25% increase shouldn’t lead to ruin for those affected, with mortgage arrears running at very low levels of 1% compared to 3.5% in February 2009.”

The concern, he said, would be if the 0.25% rate rise is the first of many to come, which could have a material impact on disposable income.

“We don’t think this is a concern you need to worry about, however,” said Ben. “The Bank of England is being very cautious about the potential of raising interest rates and the impact this has on UK businesses and the consumer – however, the Bank expects interest rates to go up a bit more than investors think. Indeed, the Governor of the Bank of England Mark Carney stated in interviews his best ‘guidance’ was to expect one 0.25% rise per year for the next few years. While it does mean some borrowers will now have to pay more in interest, savers should be rejoicing.”

Don’t get your hopes up for an instant uplift in your savings interest rate, though. “Banks are notoriously poor at passing on higher interest rates to savers,” said Ben, “and savers suffer from inertia when it comes to current account banking.”

Since the rise, on 1 November, the Bank of England voted to keep the bank rate at 0.75%, in line with market expectations.

Stopping the scammers

The Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) have joined forces to urge the public to be on their guard when receiving unexpected offers about their pension after figures revealed victims of pension scammers lost an average of £91,000 each in 2017.

The two regulators have launched a new “ScamSmart” advertising campaign targeting pension holders aged 45-65, the group most at risk of pension scams. This comes as a new poll commissioned by the regulators reveals that almost a third (32%) of this group would not know how to check whether they are speaking with a legitimate pensions adviser or provider.

According to the FCA and TPR, cold calling is by far the most common method used to initiate pension fraud, with other scam tactics including promises of guaranteed high returns and downplaying of risks, and the offering of unusual or overseas investments that aren’t regulated by the FCA, such as overseas hotels, forestry, green energy schemes.

“The size of individual pension pots makes pensions savings an attractive target for fraudsters,” said executive director of enforcement and market oversight at the FCA Mark Steward. “That’s why we’re urging anyone who is thinking about transferring their pension to check who they are dealing with and only use firms authorised by the FCA.”

The regulators recommend four simple steps to protect yourself from pension scams:

1. Reject unexpected pension offers whether made online, on social media or over the phone.

2. Check who you’re dealing with before changing your pension arrangements. Check the online FCA Register or call the FCA contact centre on 0800 111 6768 to see if the firm you are dealing with is authorised by the FCA.

3. Don’t be rushed or pressured into making any decision about your pension.

4. Consider getting impartial information and advice.

If you think you’ve been a victim of a pension scam, report it. You can also visit www.fca.org.uk/scamsmart to find out more.

Pensions freedom –all it’s cracked up to be?

A big change in legislation in 2015 saw people having better access to their pension pots. Wealth management consultant Michael Fryer puts this decision under the spotlight.

“What then is freedom?” asked Marcus Tullius Cicero, one of Rome’s greatest orators and prose stylists. “The power to live as one wishes.”

While I’m certain Cicero wasn’t referring to UK pensions legislation in his statement – considering it was expressed during the Consul of Rome in 63BC – however, it nevertheless seems apt when you consider former Chancellor of the Exchequer George Osborne’s change to pensions legislation back in April 2015.

The introduction of so-called “pension freedom” – where defined contribution scheme members could access their funds freely – gave individuals the freedom to tailor their pension income to their specific needs in retirement. Sure, this can be particularly helpful when members have unexpected life events, or circumstances change – but is it without a catch?

Change for the better?

Prior to April 2015, those with defined contribution pensions commonly withdrew 25% of their fund as a tax-free lump sum and then purchased an annuity – a guaranteed income for life. However, while an annuity offered a secured income, it did not provide an option to alter the level of income drawn if circumstances changed in retirement.

Sure, if some element of flexibility was required, capped drawdown could also have been used – however, the income that could have been withdrawn was limited to the level imposed by not just Government Actuarial Department rates, but also the size of the fund and the age of the member.

Since April 2015, the pension income market has been revolutionised, mainly thanks to ‘flexi access drawdown’ – a type of pension freedom for defined contribution pension scheme members who require access to their pension funds.

Here, the member has complete freedom to draw as much of their pension fund as they wish. Of course, the tax-free lump sum element is still limited to 25%, but this can be taken in whole or phased to meet a members’ capital or income needs.

The remaining 75% continues to be invested, with the aim of providing capital growth and or income to the pension scheme. When these funds are subsequently drawn as income, they are subject to income tax at the member’s highest marginal rate.

If this applies to you, it is important to note that once you withdraw income, you will become subject to the money purchase annual allowance, meaning you may only contribute up to £4,000 per tax year to money purchase pension schemes. However, this does not apply if you only take tax-free cash.

The good

Flexi access drawdown undoubtedly offers unprecedented access to money purchase pension schemes. In fact, as you may already know, it is possible to take the whole pension fund in one go – subject to income tax at marginal rates on 75% of the fund. However, it is best used to draw a variable level of income sufficient to match an individuals’ needs at that time. It can be particularly helpful if you wish to phase your retirement or take a variable level of income – perhaps you have income from other sources, or you simply wish to bridge the gap until you reach state retirement age.

Tread carefully

If the idea of drawdown is appealing to you, it’s understandable you may be tempted to withdraw a high level of income in the early years of retirement when perhaps leisure, travel and lifestyle are a priority. However, if this becomes the norm, be warned – the yield from the residual fund may not keep pace with the income being withdrawn from the pension, leading to – in the long term – erosion of the fund. That’s why it is important you have regular reviews with your wealth management consultant to a) ascertain the sustainability of the pension fund, b) understand the impact of the withdrawals already made and c) learn of the effect of investment returns on the residual fund.

Using flexi-access drawdown can also help you minimise income tax liabilities, as the amount drawn can be continually altered in accordance with your overall income tax exposure and the availability of allowances. However, if a substantial withdrawal is taken, it could push you into a higher tax bracket, which only further highlights the need for advice and careful planning.

In the event of your death during flex-access drawdown, your pension death benefits can be paid to dependents or a nominee, who can inherit the residual fund. If your death occurs prior to age 75, the residual fund can be paid as an income or lump sum to beneficiaries free of any tax. The right to purchase an annuity is retained, and if this is exercised, your beneficiaries will receive a tax-free income for life.

If death occurs post age 75, your residual fund can still be paid to beneficiaries as an income of lump sum – however, the recipient will be liable to income tax at their marginal rate.

Weighing things up

While the availability of flexi-access drawdown is undoubtedly a better fit than capped drawdown or annuity purchase for the majority of clients – including you – it must be stressed that having free reign to access a pension fund does come with great responsibility.

The level of income withdrawn must be balanced, not only against the size of the fund, but also investment returns and life expectancy. This will ensure it is nor depleted prior to death.

Ten things to know about self – invested pensions

There is a greater need for flexibility in terms of when and how benefits are drawn and this flexibility needs to be reflected in our pension arrangements. Wealth management consultant Michael Hulse talks us through one such option…

At its simplest, a self-invested personal pension (SIPP) is an investment ‘wrapper’ designed to help you accumulate savings tax efficiently that are then used to provide an income in retirement.

In reality – and unlike a traditional company pension or insurance company pension – a SIPP offers far more, and not just when it comes to investment choices and how benefits are drawn. Here are some of the key things you should know…

One: investment freedom

A SIPP provides a large amount of flexibility allowing individuals to invest in a wide range of assets including:

• quoted UK and overseas stocks and shares

• unlisted company shares, subject to criteria (for example private limited companies and limited liability partnerships)

• collective investments such as unit trusts and open-ended investment companies (OEICs)

• investment trusts

• land and commercial property

• deposit accounts with National Savings and Investments (NS&I) and banks and building societies

Such investment flexibility allows individuals to tailor their investments to their own needs, rather than being dictated to by the choice available from an insurance company. Not all SIPPs offer the same level of investment flexibility and careful research should be undertaken to ensure the SIPP will meet your needs both now and in future.

Two: retirement flexibility

A SIPP can take full advantage of the new pensions flexibilities – whether that’s in drawing the tax-free lump sum as a single payment or over several years, or the ability to take a flexible level of income.

This flexibility really comes to the fore when you reflect on modern retirement strategies – quickly disappearing are the days when retirement was a single day in time when you moved from full-time work to not working at all. Instead, retirement is now more of a transition period potentially lasting many years, with individuals reducing their working hours – maybe even starting at an earlier age – while continuing to work for longer and using a flexible income from their SIPP to meet their changing needs.

Three: cost transparency

A SIPP offers a transparent charging structure, making it quite clear what fees are a) levied for the SIPP wrapper itself, b) related to investments and c) related to consultancy. Within traditional insurance company and company pension schemes, charges are a single figure, so there is no clear explanation as to what the cost provides, or how the cost is split.

Four: death benefits

In the event of death prior to age 75, the benefits of a SIPP can be distributed to the nominated beneficiaries, normally taxfree. Given the tax efficiency of a pension, it is more common for the benefits to remain within the pension and withdrawals taken to meet the needs of the beneficiary rather than a single lump sum. With that in mind, the investment freedom and flexibility become more important.

Death benefits can also be paid to a pension death benefit trust rather than a named individual(s), the benefit being their retention within a trust enables the original member to retain control from ‘beyond the grave’.

Five: contributions

A SIPP can accept personal contributions made net of basicrate tax relief. As an example, a relievable contribution of £1,600 would be grossed up at the current relevant rate to £2,000 within the pension scheme. If the contributor is a higher rate taxpayer or Scottish intermediate rate taxpayer, the balance of relief would be claimed via their tax return.Contributions can also be accepted from an employer providing complete flexibility. In today’s working environment there is no career for life, which leads to individuals changing employment not just from employers, but also into self-employment. A SIPP provides the flexibility to allow contributions both now and in the future.

Six: consolidation

A SIPP can also receive transfers from other pension schemes, subject to review. Having all your pension benefits in one plan makes reviewing and planning far easier while reducing the administrative burden. It also ensures a consistent investment strategy can be put in place encompassing all resources.

Seven: commercial property

A SIPP allows the purchase of commercial property, potentially permitting a member to utilise their pension within their business. Once acquired, the tenant – often the member’s own business – will pay a market rent to the pension tax-free, which in turn will build up within their pension to provide an income in retirement. Such planning minimises the ‘dead money’ spent on rent while providing a known income stream.

Eight: borrowing

A SIPP can borrow up to 50% of its net value for further investment. Such borrowing must be on commercial terms but the ability to ‘gear-up’ can assist with property acquisition where the rental income covers the borrowing repayments.

Nine: combine resources

A SIPP is typically considered an individual personal pension arrangement. However, it is possible to have a multiplemember pension scheme – e.g. a husband and wife can combine resources in a single pension.It is also possible to acquire an asset using several individual SIPPs, i.e. the directors of a business acquiring a joint asset in the form of their commercial premises using individual arrangements. The rent is then split in proportion to members’ ownership, but it allows the members to invest the balance of their pension without other scheme members’ involvement.

Ten: unquoted shares

Subject to a review, a SIPP can purchase shares in unlisted shares, including limited companies. This is a way of releasing funds from a pension to invest in a business while ensuring dividends and any capital growth in the share value is protected within the tax-efficient pension wrapper.A SIPP is an incredibly flexible investment tool that goes far beyond providing a means of saving for retirement. Future articles will consider in more detail some of the planning that can be undertaken to maximise the benefits from the flexibility we have summarised here.

The consultant’s view…

Opinions from the consultancy floor, by wealth management consultant Jack Smith

Goodbye buy to let?

Buy to let investors are feeling the squeeze lately – there’s the reduction in relief for mortgage interest costs, for one, as well as increased stamp duty on second homes and increased capital gains tax rates. So, is it still worthwhile?

Sure – you could move your portfolio into a company structure to retain the mortgage interest relief, but this comes at immense cost – not only 3% stamp duty, but also capital gains, solicitor and finance costs. Therefore, ultimately, you must a) accept higher costs and lower profits, or b) sell your portfolio and move onto something else.

Many of my clients are discussing this very dilemma with me, and they are often surprised about some of the innovate alternatives.

The first – commercial property or land held within a SIPP. This a tax-efficient solution with many benefits, including the ability to borrow within the pension and own property jointly.

Secondly, you’ve got venture capital trusts, tax-incentivised investments into smaller UK companies that benefit from potential high growth and tax-free dividend income, not to mention the 30% tax reclaim upfront.

Typically, I believe there is a great benefit from spreading wealth around various assets and structures – starting with pensions and ISAs before moving into capital gains portfolios, venture capital trusts, buy to let property and then offshore bonds and trusts. As well as being tax efficient, this also means you aren’t over exposed to one asset or structure – giving an element of protectionagainst changes in legislation.

Issue 1 was produced in November 2018 Mattioli Woods plc, 1 New Walk Place, Leicester, LE1 6RU

www.mattioliwoods.comAuthorised and regulated by the Financial Conduct Authority.

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The articles herein represent the views of the author and are not intended as a personal recommendation to make an investment. Investments can go down as well as up in value and you could get back less than you invested. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. Any investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances.