Are you investing for growth, income or for both?

You should consider whether you are primarily investing for growth, income or both. Read more…

Selecting assets that behave in different ways

When deciding whether to invest, it is important that any investment vehicle matches your feelings and preferences in relation to investment risk and return. Hence your asset allocation needs to be commensurate with your attitude to risk. Another key question to ask yourself is: ‘How comfortable would I be facing a short-term loss in order to have the opportunity to make long-term gains?’ If your answer is that you are not prepared to take any risk whatsoever, then investing in the stock market is not for you. Read more…

What are you trying to achieve with your investments?

There are different types of risk involved with investing, so it’s important to find out what they are and think about how much risk you’re willing to take. It all depends on your attitude to risk (how much risk you are prepared to take) and what you are trying to achieve with your investments. Read more…

Gap between the cost of care and what local authorities are prepared to pay is growing

Many families with elderly relatives in care could find themselves in a situation of falling house prices, low interest rates and rising care home fees. For those families, the situation may be further exacerbated by local authority cost cutting.

The gap between the cost of care and what local authorities are prepared to pay is growing, requiring some families to step in and pay the difference between the council’s set rate and the care home fees once their elderly relatives run out of money.

In the past five years, the gap between the income families have available to pay for care and the fees charged by homes has increased by 600 per cent for those in residential homes, according to figures from FirstStop show. For those in nursing homes, the affordability gap has widened by 200 per cent over the same time as fees for care homes have increased by more than 20 per cent since 2005.

Five years ago, fees for nursing homes were £29,851 a year on average; now they are £36,036, an increase of 20.7 per cent, according to healthcare analyst Laing & Buisson. Costs for residential care have risen from £21,546 a year to £25,896 on average, a 20.2 per cent increase.

Figures from the Department for Works and Pensions show that the income a 75-year-old can expect to receive has been reduced by 27 per cent. Their average income is now just £15,574 against an average £19,843 in 2005.

The cost of care
Full-time residential care costs from £30,000 a year, depending on location, the quality of home and the medical care needed. Anyone in England or Northern Ireland with assets worth £23,250 or more pays for their own care.

Those with assets between £14,250 and £23,250 receive help on a sliding scale. In Scotland the limits are £14,000 and £22,750. In Wales there is no sliding scale; the state pays for everything once assets are less than £22,000.

These means tests apply whether you need help to stay in your own home or require residential care. Your home is not counted as an asset if a spouse or close relative aged 60 or over lives there. If you live alone and need to move into residential care, the house will come into the equation after your first 12 weeks in care.

Local councils, who make the assessments, can also check on gifts made in the years prior to applying for care. This is to prevent older people giving away wealth to beat the means test.

Common estate planning terms

Administration
Dealing with the affairs and estate of a person who has died, including collecting their assets, paying their debts and paying the residue to the people who are to benefit.

Affidavit
A document giving evidence which is sworn in front of a solicitor or other person who can administer oaths.

Agricultural Property Relief (APR)
Relief from Inheritance Tax for the agricultural value of some farms and farmhouses (the value if the land and buildings could only be used for agricultural purposes and not the open market value). Various conditions apply, including a minimum ownership period.

Beneficiary
A person or organisation who will receive assets from the estate of the deceased.

Bequests and Legacies
Bequests and legacies are names for gifts left in a will.

Business Property Relief
Relief from Inheritance Tax for businesses; a minimum ownership period applies and the business or interest in the business must fulfil the conditions.

Capital Gains Tax
This is tax which may be payable on a disposal (for example, when you sell an asset) if you make a chargeable gain. Usually you have made a gain if the asset is worth more at disposal than it was when you acquired it. A disposal is not only a sale for money’s worth. You will only pay Capital Gains Tax on capital monies (monies that you received) that do not form part of your income. The tax applies not to the value of the asset but to the increase in value.

Caveat
A notice entered at the Probate Registry – for example, if you have entered a caveat you will be warned before any Grant of Representation is issued.

Charity
A charity is an organisation that has as its aim purposes which are exclusively ‘charitable’ (as recognised by law), such as the relief of poverty or promoting education. Charities can be structured in a variety of ways – for example, as a company with a board of directors or as a trust fund with a board of trustees. Charities must be for the public benefit. Most charities must register with the Charities Commission. Charities are strictly regulated.

Chattels
Assets of a person other than land – for example, jewellery, ornaments, clothes, cars, animals, furniture and so on.

Codicil
An addition to a will which may change, modify, delete, extend or add to a will.

Deed of Variation
A document that can vary the division of a person’s estate after they have died, either by changing their will retrospectively or altering the persons entitled on an intestacy (where there is no will or the beneficiaries no longer exist). This must be done within two years of the person’s death.

Discretionary Trusts
A trust where the trustees can choose which beneficiaries (if any) should receive income and/or capital.  They are a flexible way of setting property aside for the benefit of one or more persons.

Domicile
Your domicile will affect whether you pay Inheritance Tax on particular assets and can affect how much Inheritance Tax you pay. Domicile is not the same as residence.

Estate
All the property and assets of the person who has died.

Executor
This is the personal representative (see below) who has been appointed by the will or codicil.

Guardian
A guardian will have parental responsibility for any child (under 18) of whom they are named guardian. Parental responsibility means legal authority to act in relation to a child on such matters as medical care, where they are to live, their education and what surname they should be known by. Guardians may be appointed by a parent who has parental responsibility, an existing guardian or the Court. If you name a guardian in your will, the appointment may not take effect if your child has a surviving parent with parental responsibility.

Inheritance Tax
A tax on the value of a person’s estate on their death and also on the value of certain gifts made by an individual during their lifetime. You may be subject to Inheritance Tax on all your assets everywhere in the world if you are domiciled in England & Wales. Inheritance Tax also applies to most types of trust and may be charged when assets are added to or leave the trusts and on the ten-yearly anniversaries of the trust’s creation.

Intestate/Intestacy
The rules that govern where a person’s estate is to pass and who can deal with the estate in the absence of a will.

Joint Tenancy
A way of co-owning land and other property. On the death of one of the co-owners, the other takes their share by survivorship. For example, if you and your spouse own your home as joint tenants it will automatically pass to the surviving spouse when one of you dies. Your share of your house will not be part of your estate as it passes automatically.

Letters of Administration
A grant of representation where there is no valid will, or there is a will but no executor appointed.

Life Tenant
This is a person who is entitled to benefit from a trust during their lifetime. They cannot have the capital in the trust fund; they are entitled only to the income or enjoyment of the property. For example, if the trust fund was a house, the beneficiary would be entitled to live there.

Personal Representative
The person who is dealing with the administration of the estate of the person who has died.

Potentially Exempt Transfer (PET)
This is an outright gift by an individual to another individual or certain types of trust. If the giver (donor) survives the gift by seven years, it will become completely exempt from Inheritance Tax and will be outside the donor’s estate for the purposes of calculating Inheritance Tax.

Power of Attorney
This is a formal document giving legal authority from one person (the donor) to another (the attorney) so that the Attorney may act on behalf of their principal. Power of Attorney may be an ordinary General Power or it may be a Lasting Power of Attorney.

Lasting Power of Attorney
A Lasting Power of Attorney can relate to your property and affairs or your personal welfare, i.e. decisions about your medical treatment. In order to make a Lasting Power of Attorney you must have mental capacity to do so, which must be certified by a certificate provider.  An ordinary General Power of Attorney will come to an end if you lose your mental capacity but a Lasting Power of Attorney will not.

Probate (Grant of)
The ‘Proving’ of a will by sending it to the Probate Registry.

Residue
The remainder of the estate of the person who has died after all their debts have been paid and any specific gifts they made under their will have also been paid.

Revocation (of will)
This is the process by which someone cancels or takes back a will (or codicil) made previously when they no longer intend that will to take effect. The Testator (person who made a will or codicil) must have mental capacity to revoke the will (or codicil). The effect of revocation is that any earlier will is resurrected and will take effect as if the later cancelled will does not exist. If there is no previous will, then the person revoking their will becomes intestate. Most new wills contain an explicit clause stating that they revoke any previous wills. There are formal requirements for revocation of a will as there are for making a will.

Statutory Legacy
If a person dies intestate with a spouse or civil partner, the statutory legacy is the amount of the deceased’s estate that their spouse or civil partner will receive. A common misconception is that the spouse or civil partner will automatically receive all of the estate of the person who has died intestate, but this is not necessarily the case if there are surviving children and it is therefore desirable to make a will to ensure that your spouse or civil partner inherits all that you intend them to take.

Testator/Testatrix
The person making a will (male or female).

A Trust
A legal relationship in which one or more persons hold property for the benefit of others (the beneficiaries). A trustee is the person who is acting in the trust and holds the property for the benefit of someone else.

A Will
The formal document known as a ‘testamentary disposition’ by which somebody confirms their wishes as to the division of their estate on death.

A pension wrapper that offers more freedom of choice

Self-Invested Personal Pensions (SIPPs) have been around since 1989, but after the introduction of Pension Simplification legislation on 6 April 2006, they’ve become more accessible.

If you would like to have more control over your own pension fund and be able to make investment decisions yourself with the option of our professional help, a SIPP could be the retirement planning solution to discuss with us.

What is a SIPP?
A SIPP is a personal pension wrapper that offers individuals more freedom of choice than conventional personal pensions, however they are more complex than conventional products and it is essential you seek expert professional advice.
They allow investors to choose their own investments or appoint an investment manager to look after the portfolio on their behalf.

Individuals have to appoint a trustee to oversee the operation of the SIPP, but having done that the individual can effectively run the pension fund on his or her own.
A fully fledged SIPP can accommodate a wide range of investments under its umbrella, including shares, bonds, cash, commercial property, hedge funds and private equity.

How much can I contribute to a SIPP?
Many SIPP providers will now permit you to set up a lump sum transfer contribution from another pension of as little as £5,000, and while most traditional pensions limit investment choice to a short list of funds, normally run by the pension company’s own fund managers, a SIPP enables you to follow a more diverse investment approach.

Most people under 75 are eligible to contribute as much as they earn to pensions, including a SIPP (effectively capped at £255,000 each tax year). For instance, if you earn £50,000 a year you can contribute up to £50,000 gross (£40,000 net) into all your pension plans combined in the 2010/11 tax year.

If your total annual income has reached £130,000 since April 2008, you may experience further restrictions on the amount you can contribute and obtain higher or additional rate tax relief.

The earnings on which you can base your contribution are known as Relevant UK Earnings. If you are employed, this would generally be your salary plus any taxable benefits. If you are self-employed, this would normally be the profit you make (after any adjustments) for UK tax purposes.

Even if you have no Relevant UK Earnings, you can still contribute up to £3,600 each year to pensions. Of this the government will pay £720 in tax relief, reducing the amount you pay to just £2,880.

Even if you have no Relevant UK Earnings, you can still contribute up to £3,600 each year to pensions. Of this the government will pay £720 in tax relief reducing the amount you pay to just £2,880.

Can I transfer my existing pension to a SIPP?
Before transferring to a SIPP it is important to check whether the benefits, such as your tax-free cash entitlement, are comparable with those offered by your existing pension. Make sure, too, that you are aware of any penalties you could be charged or any bonuses or guarantees you may lose.

If you have had an annual income of £130,000 or more since April 2007 and make regular contributions to a pension, changes announced in the 2009 Budget could affect you. Switching regular contributions to a new pension may mean future regular contributions are subject to a £20,000 limit.

A SIPP will typically accept most types of pension, including:

– Stakeholder Pension Plans
– Personal Pension Plans
– Retirement Annuity Contracts
– Other SIPPs
– Executive Pension Plans (EPPs)
– Free-Standing Additional Voluntary Contribution Plans (FSAVCs)
– Most Paid-Up Occupational Money Purchase Plans

Where can I invest my SIPP money?
You can typically choose from thousands of funds run by top managers as well as pick individual shares, bonds, gilts, unit trusts, investment trusts, exchange traded funds, cash and commercial property (but not private property). Also, you have more control over moving your money to another investment institution, rather than being tied if a fund under-performs.

With a SIPP you are free to invest in:

– Cash and Deposit accounts (in any currency providing they are with a UK deposit taker)
– Insurances company funds
– UK Gilts
– UK Shares (including shares listed on the Alternative Investment Market)
– US and European Shares (stocks and shares quoted on a Recognised Stock Exchange)
– Unquoted shares
– Bonds
– Permanent Interest Bearing Shares
– Commercial property
– Ground rents in respect of commercial property
– Unit trusts
– Open ended investment companies (OEIC)
– Investment trusts
– Traded endowment policies
– Warrants
– Futures and Options

Once invested in your pension the funds grow free of UK capital gains tax and income tax (tax deducted from dividends cannot be reclaimed).

Why would I use my SIPP to invest in commercial property?
Investing in commercial property may be a particularly useful facility for owners of small businesses, who can buy premises through their pension fund. There are tax advantages, including no capital gains tax to pay, in using the fund to buy commercial property.

If you own a business and decide to use the property assets as part of your retirement planning, you would pay rent directly into your own pension fund rather than to a third party, usually an insurance company.
Ordinarily, a business property will, assuming that its value increases, generate a tax liability for the shareholders or partners. Unless, that is, you sell the property to your SIPP. Then the business can pay rent to your pension fund, on which it pays no tax, and any future gain on the property will also be tax-free when it is sold.

What are the tax benefits of a SIPP?
There are significant tax benefits. The government contributes 20 per cent of every gross contribution you pay – meaning that a £1,000 investment in your SIPP costs you just £800. If you’re a higher or additional rate taxpayer, the tax benefits could be even greater. In the above example, higher rate (40 per cent) taxpayers could claim back as much as a further £200 via their tax return. Additional rate (50 per cent) taxpayers could claim back as much as a further £300.

When can I withdraw funds from my SIPP?
You can withdraw the funds from your SIPP between the ages of 55 and 75 and normally take up to 25 per cent of your fund as a tax-free lump sum. The remainder is then used to provide you with a taxable income.

If you die before you begin taking the benefits from your pension the funds will normally be passed to your spouse or other elected beneficiary free of Inheritance Tax. Other tax charges may apply depending on the circumstances.

What else do I need to know?
You cannot draw on a SIPP pension before age 55 and you should be mindful of the fact that you’ll need to spend time managing your investments. Where investment is made in commercial property, you may also have periods without rental income and, in some cases, the pension fund may need to sell on the property when the market is not at its strongest. Because there may be many transactions moving investments around, the administrative costs are higher than those of a normal pension fund.

Surprise cut to NEST charges for some company pension savers

The new employer duties under the government’s workplace pension reforms will be introduced over a four year period from 1 October 2012. This staggered introduction of these duties is known as ‘staging’. Broadly speaking, the new duties will apply to the largest employers first with some of the smallest employers not being affected until 2016. As part of the new duties firms will be enrolled into the National Employment Savings Trust (NEST).

Last November NEST announced a surprise cut to the charges it will apply. NEST said that it would initially apply a 0.3 per cent annual management charge and a contribution charge of 1.8 per cent, after the former Labour government had indicated that the contribution charge would be 2 per cent.

The former government established NEST as part of pension reforms aimed at tackling a lack of adequate pension savings among low- and middle-income UK workers. The NEST’s investment strategy will be low-risk and there may be a possibility that, after five years, savers will be able to move their money out of the NEST into other pension schemes.

The reforms include the stipulation that from 2012 employers either pay a minimum contribution of 3 per cent into the scheme or automatically enroll workers in existing pension vehicles. NEST will launch its scheme for voluntary enrolment in the second quarter of this year.
The new two-part charge by NEST will work as follows: if a member has a fund of £10,000, they will pay £30, due to the 0.3 per cent annual management charge; if that same member makes a monthly contribution of £100, including tax relief, they will pay £1.80 on the sum, due to the 1.8 per cent contribution charge.

NEST also said that in the long term, once the costs of establishing the scheme had been met, the contribution charge could fall away, leaving a flat annual management charge of 0.3 per cent.

Making potential gains from the growth in value of company shares

Are you looking to make potential gains from the growth in value of company shares on the stock market but don’t have the time to manage a share portfolio yourself? If the answer is ‘yes’, then open-ended investment companies (OEICs) could be worth considering. They are stock market-quoted collective investment schemes. Like unit trusts and investment trusts, they invest in a variety of assets to generate a return for investors.

An OEIC, pronounced ‘oik’, is a pooled collective investment vehicle in company form. They 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.
Each fund is divided into shares of equal size. The price of each share moves in line with the fund’s underlying portfolio performance and is calculated daily. New shares can be created if more investors want to invest in the fund, or cancelled when investors decide they want to sell their holding. OEICs may also offer different share classes for the same fund.

By being ‘open ended’, OEICs can expand and contract in response to demand, just like unit trusts. The share price of an OEIC is the value of all the underlying investments divided by the number of shares in issue. As an open-ended fund, the fund gets bigger and more shares are created as more people invest. The fund shrinks and shares are cancelled as people withdraw their money.

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.

BRIC is an acronym for the combined economies of Brazil, Russia, India and China. The BRIC nations are increasingly providing investors turning to emerging markets with growth potential for their portfolios. The four BRIC countries are the largest emerging markets by population size.

While there are plenty of emerging market opportunities to invest in outside of the BRIC nations, Brazil, Russia, India and China are considered to be the driving force of the new global economies. These nations are rich in resources, are not saddled with debt and are home to a young and increasingly educated population. The BRIC economies are predicted to enjoy boom years for investors and many believe that these economies hold real potential, looking 5 to 20 years into the future, compared to Western economies.

If you want to invest in the BRIC regions, whether it is via a high-risk country-specific fund or a more generalist emerging markets fund, one way to do this is to drip-feed your money into a fund that gives you exposure to a wide range of equities. Regular savings can take some of the risk out of investing by allowing you to buy more when prices are low and less when they are rising.

In all cases you need to be comfortable with the wide range of risks, not just day-to-day volatility, but also markets closing, expropriation, currency risk and political turmoil, to name just a few. The fortunes of these economies can fluctuate, which results in big swings in stock markets. Investors also need to understand that there are political risks in some of these countries, which can have a negative impact on markets.

Few financial concepts have caught on as quickly as investing in the BRIC economies, which are well known as a symbol of the shift in worldwide economic power away from the developed G7 economies in the direction of the developing world.

Keeping your pension funds invested beyond your normal retirement date

Income drawdown or ‘Unsecured Pensions’, became available in 1995. It allows people to take an income from their pension savings while still remaining invested and is an alternative to purchasing an annuity. You decide how much of your pension fund you want to move into drawdown and then you can normally take a 25 per cent tax-free lump sum and draw an income from the rest.

Pensioners funding their retirement through income drawdown are permitted to keep their pension funds invested beyond their normal retirement date. They continue to manage and control their pension fund and make the investment decisions. There is also the opportunity to increase or decrease the income taken as they get older. However, the fund may be depleted by excessive income withdrawals or poor investment performance.

From 6 April 2010 you are now able to choose to take an income from your pension fund from age 55. Tax rules allow you to withdraw anything from 0 per cent to 120 per cent (2010/11) of the relevant annuity you could have bought at outset. These limits are calculated by the Government Actuaries Department (GAD). These GAD rates are reviewed every 5 years.There’s no set minimum, which means that you could actually delay taking an income if you want to and simply take your tax-free cash lump sum. The amount of yearly income you take must be reviewed at least every five years.

From age 75, income drawdown is subject to different government limits and become known as Alternatively Secured Pensions (ASPs). If you’re already receiving income from an income drawdown plan, currently when you reach the age of 75 it will become an ASP. But you will still be able to receive a regular income while the rest of your fund remains invested. The minimum amount you can withdraw is 55 per cent (2010/11) of an amount calculated by applying the funds available to the GAD table, while the maximum is 90 per cent (2010/11). These limits must be reviewed and recalculated at the start of each pension year.

The government is currently consulting on changes to the rules on having to take a pension income by age 75 and, following a review conducted in June 2010, plans to abolish ASPs. Instead, income drawdown would continue for the whole of your retirement. The withdrawal limits are significantly less for ASPs, and the vast majority of people will be better off purchasing an annuity.

The new rules are likely to take effect from April 2011. If you reach 75 before April 2011 there are interim measures in place. Under the proposals, there will no longer be a requirement to take pension benefits by a specific age. Tax-free cash will still normally be available only when the pension fund is made available to provide an income, either by entering income drawdown or by setting up an annuity. Pension benefits are likely to be tested against the Lifetime Allowance at age 75.

Currently, on death in drawdown before age 75, there is a 35 per cent tax charge if benefits are paid out as a lump sum. On death in ASP, a lump sum payment is potentially subject to combined tax charges of up to 82 per cent. It is proposed that these tax charges will be replaced with a single tax charge of around 55 per cent for those in drawdown or those over 75 who have not taken their benefits.

If you die under the age of 75 before taking benefits, your pension can normally be paid to your beneficiaries as a lump sum, free of tax. This applies currently and under the new proposals.

For pensioners using drawdown as their main source of retirement income, the proposed rules would remain similar to those in existence now with a restricted maximum income. However, for pensioners who can prove they have a certain (currently unknown) level of secure pension income from other sources, there will potentially be a more flexible form of drawdown available that allows the investor to take unlimited withdrawals from the fund subject to income tax.

As a general rule, you should try to keep your withdrawals within the natural yields on your investments. This way you will not be eating into your capital.

Since 6 April 1996 it’s been possible for protected rights money to be included in an income drawdown plan, but before A-Day protected rights couldn’t be included in a phased income drawdown plan.

For investors who reached age 75 after 22 June 2010 but before the full changes are implemented, interim measures are in place that, broadly speaking, apply drawdown rules and not ASP rules after age 75. These interim measures are expected to cease when the full changes are implemented. Any tax-free cash must still normally be taken before age 75, although there will be no requirement to draw an income. In the event of death any remaining pension pot can be passed to a nominated beneficiary as a lump sum subject to a 35 per cent tax charge.

As with any investment you need to be mindful of the fact that, when utilising income drawdown, your fund could be significantly, if not completely, eroded in adverse market conditions or if you make poor investment decisions. In the worst case scenario, this could leave you with no income during your retirement.

You also need to consider the implications of withdrawals, charges and inflation on your overall fund. Investors considering income drawdown should have a significantly more adventurous attitude to investment risk than someone buying a lifetime annuity.

In addition there is longevity to consider. No-one likes to give serious thought to the prospect of dying, but pensioners with a significant chance of passing away during the early years of their retirement may well fare better with an income drawdown plan, because it allows the pension assets to be passed on to dependants.

A spouse has a number of options when it comes to the remaining invested fund. The spouse can continue within income drawdown until they are 75 or until the time that their deceased spouse would have reached 75, whichever is the sooner. Any income received from this arrangement would be subject to income tax. By taking the fund as a lump sum, the spouse must pay a 35 per cent tax charge. In general, the residual fund is paid free of inheritance tax, although HM Revenue & Customs may apply this tax.