Putting it off could mean that your spouse receives less

It’s easy to put off making a will. But if you die without one, your assets may be distributed according to the law rather than your wishes. This could mean that your spouse receives less, or that the money goes to family members who may not need it.

If you and your spouse or civil partner own your home as ‘joint tenants’, then the surviving spouse or civil partner automatically inherits all of the property.

If you are ‘tenants in common’, you each own a proportion (normally half) of the property and can pass that half on as you want.

A solicitor will be able to help you should you want to change the way you own your property.

Planning to give your home away to your children while you’re still alive

You need to bear in mind, if you are planning to give your home away to your children while you’re still alive, that:
gifts to your children, unlike gifts to your spouse or civil partner, aren’t exempt from Inheritance Tax unless you live for seven years after making them if you keep living in your home without paying a full market rent (which your children pay tax on) it’s not an ‘outright gift’ but a ‘gift with reservation’, so it’s still treated as part of your estate, and so liable for Inheritance Tax following a change of rules on 6 April 2005, you may be liable to pay an Income Tax charge on the ‘benefit’ you get from having free or low-cost use of property you formerly owned (or provided the funds to purchase) once you have given your home away, your children own it and it becomes part of their assets. So if they are bankrupted or divorced, your home may have to be sold to pay creditors or to fund part of a divorce settlement if your children sell your home, and it is not their main home, they will have to pay Capital Gains Tax on any increase in its value

If you don’t have a will there are rules for deciding who inherits your assets, depending on your personal circumstances. The following rules are for deaths on or after 1 July 2009 in England and Wales; the law differs if you die intestate (without a will) in Scotland or Northern Ireland. The rates that applied before that date are shown in brackets.

If you’re married or in a civil partnership and there are no children
The husband, wife or civil partner won’t automatically get everything, although they will receive:

– personal items, such as household articles and cars, but nothing used for business purposes

– £400,000 (£200,000) free of tax – or the whole estate if it was less than £400,000 (£200,000)

– half of the rest of the estate

The other half of the rest of the estate will be shared by the following:

– surviving parents

– if there are no surviving parents, any brothers and sisters (who shared the same two parents as the deceased) will get a share (or their children if they died while the deceased was still alive)

– if the deceased has none of the above, the husband, wife or registered civil partner will get everything

If you’re married or in a civil partnership and there were children

Your husband, wife or civil partner won’t automatically get everything, although they will receive:

– personal items, such as household articles and cars, but nothing used for business purposes

– £250,000 (£125,000) free of tax, or the whole of the estate if it was less than £250,000 (£125,000)

– a life interest in half of the rest of the estate (on his or her death this will pass to the children)

– The rest of the estate will be shared by the children.

If you are partners but aren’t married or in a civil partnership

If you aren’t married or registered civil partners, you won’t automatically get a share of your partner’s estate if they die without making a will.

If they haven’t provided for you in some other way, your only option is to make a claim under the Inheritance (Provision for Family and Dependants) Act 1975.

If there is no surviving spouse/civil partner
The estate is distributed as follows:

– to surviving children in equal shares (or to their children if they died while the deceased was still alive)

– if there are no children, to parents (equally, if both alive)

– if there are no surviving parents, to brothers and sisters (who shared the same two parents as the deceased), or to their children if they died while the deceased was still alive

– if there are no brothers or sisters then to half brothers or sisters (or to their children if they died while the deceased was still alive)

– if none of the above then to grandparents (equally if more than one)

– if there are no grandparents to aunts and uncles (or their children if they died while the deceased was still alive)

– if none of the above, then to half uncles or aunts (or their children if they died while the deceased was still alive)

– to the Crown if there are none of the above

It’ll take longer to sort out your affairs if you don’t have a will. This could mean extra distress for your relatives and dependants until they can draw money from your estate.

If you feel that you have not received reasonable financial provision from the estate, you may be able to make a claim under the Inheritance (Provision for Family and Dependants) Act 1975, applicable in England and Wales. To make a claim you must have a particular type of relationship with the deceased, such as child, spouse, civil partner, dependant or cohabitee.
Bear in mind that if you were living with the deceased as a partner but weren’t married or in a civil partnership, you’ll need to show that you’ve been ‘maintained either wholly or partly by the deceased’. This can be difficult to prove if you’ve both contributed to your life together. You need to make a claim within six months of the date of the Grant of Letters of Administration.

Isn’t it time you assessed your estate’s potential liability?

In the event of your premature death, unless you plan carefully your family could end up paying a sum in Inheritance Tax (IHT). Have you recently assessed your potential liability to IHT? If so, and you have a potential liability, have you planned to reduce it? We can help you ensure that more of your hard-earned assets go to the people you want them to rather than falling into the hands of the taxman.

IHT facts
If you are single or divorced, current UK legislation allows the first £325,000 (2010/2011 tax year) of your estate to be free from IHT, or £650,000 if you are married or have entered into a civil partnership or are widowed (providing no previous gifts were made by the deceased spouse). Under current legislation the taxman could take 40 per cent of everything you leave over the threshold (known as the nil rate band) and this includes properties, personal effects, cars, savings, investments and insurance – collectively known as your estate.
There is a range of allowances that you can use to mitigate a potential IHT liability. The major ones are as follows:

Annual Exemption – everyone is entitled to give away £3,000 exempt from IHT in any one tax year. If not previously used, then this allowance can be backdated one tax year, so in effect £6,000 could be given per donor to begin with, thereafter £3,000 per annum (optional).

Marriage Gifts Exemption – each parent can give wedding gifts of up to £5,000 to each of their children. Grandparents can gift up to £2,500 to each grandchild. Also, you can give up to £1,000 as a wedding gift to anyone else. These gifts must be given before the wedding day. You can make gifts utilising more than one of the above allowances to the same person.

Small Gifts Exemption – any number of gifts to different people up to a value of £250 each can be made in a tax year. If the total value of gifts to any one person exceeds £250, then all gifts to that person must be deducted from the £3,000 Annual Exemption mentioned above. All of the above have the effect of reducing the estate upon which the IHT can be levied.

In most cases, any direct gift amount made either direct or into an absolute trust by any one person over the exempt gift allowances is a Potentially Exempt Transfer (PET). This means that you, as the donor, need to live for seven years from when the transfer is made for the gift to fall outside your estate. During the seven-year period the amount of tax payable on death reduces each year. This is known as ‘taper relief’. However, this relief applies only to the part of a gift that is in excess of the nil rate band.

Gifts to Trust – this method allows the placement of monies in a suitable investment and then this is wrapped within a trust, of which you and other people of your choosing can be trustees. The monies remain in trust and all, or amounts of this, can be distributed when you choose.

Life Assurance Policy – this is used to insure the liability with a ‘whole-of-life policy’. Under some circumstances, this can be a cost-effective way of providing for the eventual bill and can be reasonably simple to set up. The ‘whole-of-life policy’ has a sum assured which is paid to the beneficiaries on death; due to the fact it is written under an appropriate trust, it can be paid prior to the rest of the estate being released and can, therefore, be used to contribute towards or pay for the IHT bill for the estate.

Steps you can take to catch up on a shortfall

If you are in your fifties, pension planning has never been so important, which is why there are a number of steps you should take to improve your pension prospects if you discover you have shortfall. Planning for retirement is one of the biggest financial challenges people face and the one you can least afford to get wrong.

In the final ten years prior to your planned retirement date, to begin with you need to calculate what you are worth. As a starting point establish what your likely state pension entitlement will be. You should also contact the pension trustees of your current and previous employers, who will be able to provide pension forecasts, as will the companies managing any private pension plans you hold.

Next you need to look at how much income you will need in retirement. It’s important to be realistic. You may spend less if you are not commuting to work, but don’t forget to include holidays, travel and any debts you may still have.

If you are currently on target to receive less than you will need, you should obtain professional advice about how you could make up a shortfall. During the final ten-year period in the run-up to your retirement, it’s crucial that you maximise savings. This may not only mean contributing to pensions but into other investments that may include Individual Savings Accounts (ISAs). You also need to consider whether options such as retiring later or working part-time beyond your retirement date may be a more realistic way of meeting your retirement goals.
It is not only how much you save but where it is invested that can make a difference, so you should also review your investment strategy. Use this opportunity to carry out an audit of existing pension plans; look at where they are invested, how they have performed and what charges are levied on them. Don’t forget also to find out whether there are guarantees on any plans.

As part of your review, look at the diversification of your assets, as this can help protect against sudden market movements. With a ten-year time frame, investors need to weigh up the risks of equity investments against safer cash-based products.

Generally, the nearer to drawing your pension you are, the less investment risk you should take. But over this period it is reasonable to include equities within a mixed portfolio, particularly given the very low returns currently available on cash. Bonds, gilts and some structured products may also provide a halfway house between cash and equities.

When you enter the next phase of your retirement planning – five years or less to go – you need to review your specific retirement goals. Obtain up-to-date pension forecasts and review your retirement plans.

Consider moving stock market-based investments into safer options such as cash, bonds or gilts. If there is a sudden market correction now, you may have insufficient time to make good any losses.

If you’ve lost details of a pension scheme and need help contacting the provider, the Pension Tracing Service may be able to help you trace ‘lost’ pensions and other investments.

It’s also important to maximise savings. Save what you can, utilising pensions, ISAs and other investments. Also don’t forget to consider your spouse’s pension. If you have maximised your pension contributions it is also possible to contribute into a partner’s pension plan.
Higher earners and those in final salary schemes should ensure any additional pension savings do not exceed the lifetime allowance, as this could mean you end up having to pay a tax bill.

Don’t leave it until the last minute to decide what you will do with your pension plan. Some people fail to consider their options properly and simply buy the first annuity offered by their pension provider. This can significantly reduce your income in retirement and there is no second chance to make a better decision.

There are now many more retirement alternatives, from investment-linked and flexible annuities to phased retirement options, as well as the conventional annuities and income drawdown plans. To find out what is most appropriate for your particular situation, you should obtain professional advice.

Strategies that pay dividends

For UK savers investing for income, it is important to strike a balance between hunting out good dividend paying shares, robust corporate bonds, well-managed funds or just the best savings account. Investing for income for most requires a mixture of investments, to balance risk with returns.

Historically low interest rates have left many UK savers searching for real returns, but the obligatory warning that past performance is no guide to how markets will perform in future always applies.

Utilising UK equity income funds that pay good dividends can have an integral part to play in a well-structured income portfolio. When looking to generate an income from UK equity funds, the objective is to select funds that invest in businesses that have the potential to provide sustainable long-term dividend growth.

The sector is divided in two, making it easier to select a suitable fund. Funds in the UK equity income sector must aim for a yield at least 10 per cent higher than the FTSE All-Share index, whereas UK equity income & growth funds must aim for a yield of at least 90 per cent of the All-Share.

If you invest in a UK equity income fund where the growth potential is not reflected in the valuation of its shares, this not only reduces the risk, it can also increase the upside opportunity.

In the short-term, UK equity income fund prices are buffeted by all sorts of influences, but over longer time periods fundamentals come to the fore. Dividend growth is the key determinant of long-term share price movements, the rest is sentiment.

Even when UK investors don’t need an immediate income from their portfolio, steady and rising dividend yields from UK equity income funds, together with the potential for capital growth, can play a central part in an investment strategy. In addition, dividend income may be particularly relevant as the UK hauls itself out of the economic doldrums we’ve experienced over the past few years.

For UK investors requiring income in retirement, it’s all about the compounding of returns over the long term. UK equity income funds look to invest in businesses that can demonstrate consistent returns on invested capital and visible earnings streams.

Companies with a high and growing free cash flow will typically attract UK investors. These are companies with money left over after paying out for capital expenditure, as this is the stream out of which rising dividends are paid. The larger the free cash flow relative to the dividend payout the better.

As with any investment strategy, diversification is the key to diminishing risk, which is particularly important for UK income-seekers who cannot afford to lose capital. Also, don’t forget to utilise tax shelters, which can deliver tax-free income, or a pension, where contributions attract initial tax relief.

Selecting assets that behave in different ways

Investment is intrinsically linked with risk and return – they go hand in hand. Which is why it’s important that any investment vehicle matches your feelings and preferences towards risk and return. There are a wide variety of different asset classes available in which to invest and there are commensurate risks attached to each one.

By diversifying, investment risk can be mitigated as part of your overall investment portfolio. In addition, spreading your investments over a wide range of asset classes and different sectors enables you to reduce the risk that your portfolio becomes overly reliant on one particular asset’s performance.

Depending on your risk profile, this will determine the mix of investments you choose. It’s important that you only invest in what you can afford to lose and have savings to cover any short- to medium-term needs. As an absolute minimum, you should consider holding at least three to six months’ earnings in a savings account that offers immediate access, in case of an unforeseen emergency.

The key to diversification is selecting assets that behave in different ways. Some assets are said to be ‘negatively correlated’. This may include bonds and property, which often behave in a contrarian way to equities by offering lower, but less volatile returns. This provides a ‘safety net’ by diversifying many of the risks associated with reliance upon one particular asset.

It is also important to diversify across different ‘styles’ of investing, such as growth or value investing, as well as diversifying across different sizes of companies, different sectors and different geographic regions. Growth stocks are held as investors believe their value is likely to grow significantly over the long term, whereas value shares are held because they are regarded as being cheaper than the intrinsic worth of the companies in which they represent a stake.

By mixing styles that can out- or under-perform under different economic conditions, the overall risk rating of your investment portfolio is reduced. Your attitude to risk for return is determined by your circumstances, age, goals and other factors and these will help you decide what type of investments to hold.

A general rule is that the greater the risk you’re prepared to take, the higher the potential returns could be. On the flip side, any losses are potentially greater. If you are unwilling to take any risk with your money, you may be better off putting your savings into cash, but you should be aware that inflation can eat into the value of your money.

Why film investing is still one of the few remaining tax breaks on the market

Film investing through the government’s Enterprise Investment Scheme (EIS) is very high risk, but for the sophisticated speculative investor it offers unique tax breaks. For high net worth investors, it is one of the few remaining tax breaks on the market.

When it comes to film investing, investors need to be clear about what part of the process they are investing in and at which point the money will be paid out. EISs are not only restricted to the film industry, there are also many other investment opportunities available, across a number of different sectors such as renewable energy, health care and pharmaceuticals.

Following the changes announced in various Budgets, the EIS is the only tax-efficient investment offering a capital gains tax deferral. Capital gains tax on the disposal of other assets can be deferred by reinvesting the proceeds in EIS shares.

This relief is slightly different from the basic EIS relief, as there is no limit on the gain that can be reinvested in this way. However, the tax on the original gain will become payable once the EIS investment is sold. The reinvestment can take place up to three years after (or one year before) the original disposal.

The maximum that can be invested in an EIS in the tax year 2010/11 is £500,000 and the same amount can be carried back to the previous year provided the limit in the previous year was not reached. EIS shares are also exempt from capital gains tax once they have been held for three years. Investors in an EIS cannot get their money out before the fund has been wound up and are unlikely to find a buyer if they want to sell their stake early as there is no secondary market.

EIS funds fall into two distinct camps: those that wind up after the three years that investments must be held to qualify, known as ‘planned exit EISs’, and those that carry on until investors agree that a wind-up makes commercial sense. As high-risk investments, EISs may only be suitable for wealthier investors as part of a diversified investment portfolio.

For EIS funds and portfolios, the manager may not be able to invest as quickly as hoped. This may reduce the return on your investment, and the investment may lose its EIS status or tax relief may be delayed. The past performance of an EIS is not a reliable indicator of future results and you should not subscribe to an EIS unless you have taken appropriate professional advice.

Investments in these smaller companies will generally not be publicly traded or freely marketable and may therefore be difficult to sell. There will be a big difference between the buying price and the selling price of these investments. The price may change quickly and it may go down as well as up.

Understanding the jargon

Accrual Rate
The factor used to calculate benefits in a defined benefit scheme. For example, a scheme with an accrual rate of 1/60th will provide 1/60th of pensionable salary for each year of pensionable service.

Active Member
An occupational pension scheme member who is earning new defined benefit scheme benefits or paying defined contribution scheme contributions.

Actuarial Reduction
A reduction made to a pension paid early to the member of a defined benefit scheme.

Actuarial Valuation
An assessment of a defined benefit scheme’s ability to meet its liabilities. Carried out by the scheme actuary at least once every three years.

Actuary
The individual appointed by the trustees of an occupational pension scheme to carry out valuations and advise on funding matters.

A-Day
6 April 2006 – the effective date of pensions simplification, when HMRC introduced a single tax regime for all UK pension schemes.

Added Years
A provision of some defined benefit scheme for building extra pensionable service in return for additional contributions.

Additional Pension
The earnings-related part of the state pension, paid
in addition to the basic state pension.

Additional Voluntary Contribution (AVC)
A facility provided by occupational pension schemes for members to boost retirement savings.

Alternatively Secured Pension (ASP)
Allows a pension scheme member to defer purchasing an annuity at age 75. A defined level of income can be drawn on the invested funds until the member decides to purchase an annuity or dies.

Annual Allowance (AA)
The maximum pension input (earned in a defined benefit scheme and contributions paid into a defined contribution scheme) a pension scheme member is allowed each year without giving rise to a tax charge.

Annual Management Charge (AMC)
The administration fee levied each year on a defined contribution scheme, a personal pension plan or a stakeholder pension scheme.

Annuity
A policy that provides an income in retirement.

Basic State Pension
The benefit provided at state pension age to those with a sufficient National Insurance Contribution record.

Career Average Revalued Earnings (CARE) Scheme
A type of defined benefit scheme that calculates retirement benefits using the average of revalued pensionable salaries over the member’s pensionable service.

Cash Equivalent Transfer Value (CETV)
The amount offered to a member of an occupational pension scheme who wants to transfer to another pension scheme.

Class 1 National Insurance Contribution
Contribution paid by the employed (not self-employed), calculated as a percentage of pay.

Class 2 National Insurance Contribution
Flat-rate contribution paid by the self-employed.

Class 3 National Insurance Contribution
Voluntary contribution paid to improve basic state pension entitlement.

Class 4 National Insurance Contribution
Profit-based contribution paid by the self-employed in addition to the Class 2 contribution.

Closed Scheme
An occupational pension scheme where the membership is no longer open to new employees.

Combined Pension Forecast (CPF)
A statement that shows both estimated pension scheme and state pension benefits. Issued voluntarily by pension schemes.

Commutation Factor
Used to calculate how much pension from a defined benefit scheme is given up in exchange for a tax-free lump sum.

Concurrency
The principle allowing someone to pay into more than one pension scheme at the same time.

Contracted-Out Deduction (COD)
The deduction applied to a person’s SERPS entitlement for the period they were contracted out between 1978 and 1997.

Contracted-Out Employments Group
A part of the DWP, it administers pension scheme members’ contracting out records.

Contracting Out
The facility to opt out of the state additional pension and build up benefits in a pension scheme.

Crystallisation Event
An event where pension benefits become payable, i.e. annuity purchase, death, starting an unsecured pension etc, and at which time a test against the Lifetime Allowance is carried out.

Deferred Member
An occupational pension scheme member who has left service with a deferred pension or fund.

Deferred Pension
The benefit awarded to a defined benefit scheme member who has left service early.

Defined Benefit (DB) Scheme
An occupational pension scheme that provides benefits based on accrual rate, pensionable service and pensionable salary.

Defined Contribution (DC) Scheme
A scheme that provides retirement benefits based on the build up of a ‘pot’ of money, accumulated through the investment of contributions paid by both the employee and the employer.

Department for Work and Pensions (DWP)
The government department with overall responsible for the rules governing pension schemes and the administration of the state pension.

Dependant
An individual who is eligible to receive retirement benefits, i.e. pension and/or lump sum, following the death of a pension scheme member.

Early Leaver
An occupational pension scheme member who leaves service before reaching their normal retirement age.

Early Retirement
The payment of retirement benefits from a pension scheme before a member’s normal retirement date.

Earmarking
Provides a spouse with a share of a pension scheme member’s pension rights on divorce. Spouse’s share is paid when the member draws their benefits.

Employer Access
Employers with five or more staff but with no pension arrangement in place must designate a stakeholder pension scheme and offer access to qualifying employees.

Employer Funded Retirement Benefit Scheme (EFRBS)
Previously known as FURBS and UURBS. These are unapproved schemes with no tax reliefs that an employer funds to provide a member with a lump sum and/or income.

Enhanced Protection
If a member is worried their pension rights exceed, or may exceed, the Lifetime Allowance, they can safeguard them against a tax charge.

Equivalent Pension Benefit (EPB)
A non-revaluing pension built up while contracted out of the state graduated pension scheme through an occupational pension scheme.

Escalation
The increments applied to a pension in payment.

Executive Pension Scheme (EPP)
An occupational pension scheme for selected directors and senior staff.

Expression of Wish
Notification by a member to their pension scheme of how they wish their lump sum death benefits to be paid.

Final Salary Scheme
An occupational pension scheme that provides benefits based on accrual rate, pensionable service and pensionable salary.

Financial Assistance Scheme (FAS)
A government-funded scheme, operated by the DWP, set up in 2005 to pay compensation to wound-up occupational pension scheme members who have lost pension rights following an employer’s insolvency.

Financial Services Authority (FSA)
An independent, government-funded body that regulates the financial services business in the UK.

Financial Services Compensation Scheme (FSCS)
An independent, levy-funded body that compensates consumers who cannot complete claims because their provider is insolvent.

Fraud Compensation Fund (FCF)
Levy funded and operated by the PPF, this fund compensates occupational pension schemes that have suffered financial injustice as a result of dishonesty.

Free-Standing Additional Voluntary Contribution (FSAVC)
A facility provided by insurance companies for members to boost their occupational pension scheme savings.

Funded Unapproved Retirement Benefits Scheme (FURBS)
Now known as an EFRBS. These are unapproved schemes with no tax reliefs that an employer funds to provide a member with a lump sum and/or income.

Group Personal Pension Plan (GPP)
A collection of personal pension plans provided by an employer to its staff.

Guaranteed Minimum Pension (GMP)
The benefit built up in a defined benefit scheme as a result of being contracted out of the state additional pension.

Home Responsibilities Protection (HRP)
Available to carers and those looking after children, this benefit reduces the number of qualifying years required for the basic state pension.

Hybrid Scheme
An occupational pension scheme that calculates retirement benefits as some combination of two alternatives, defined benefit scheme or defined contribution scheme.

Ill Health Early Retirement
If an occupational pension scheme member is unable to work as a result of a medical condition, they may be entitled to draw retirement benefits early (sometimes enhanced) at any age (no later than 75).

Impaired Life Annuity
A member of a defined contribution scheme may be able to claim an immediate annuity on enhanced terms if they are suffering from poor health, such as high blood pressure, diabetes, heart condition, kidney failure, certain types of cancer, multiple sclerosis and chronic asthma.

Income Drawdown
Also known as an unsecured pension. Allows a pension scheme member to continue to invest a fund while drawing a limited income. Available to under 75s only.

Income Withdrawal
Also known as an unsecured pension. Allows a pension scheme member to continue to invest a fund while drawing a limited income. Available to under 75s only.

Lifestyling
An investment strategy on defined contribution schemes where a member’s investments are switched automatically as they get older to more secure holdings, such as cash.

Lifetime Allowance (LA)
The maximum value of fund a pension scheme member can accumulate without incurring a tax charge.

Lump Sum
The tax-free lump sum paid to a member of a pension scheme when their benefits come into payment.

Market Value Reduction (MVR)
An adjustment made to the value of a With-Profit fund to reflect the difference between the market and actuarial values of the fund.

Money Purchase Scheme
A scheme that provides retirement benefits based on the build up of a ‘pot’ of money, accumulated through the investment of contributions paid by
both the employee and the employer.

National Employment Savings Trust (NEST)
A new, simple, low-cost pension scheme to be introduced from 2012 as part of the workplace pension reforms.

National Insurance Contribution (NIC)
Payments deducted from pay or declared through self assessment, used by the DWP to fund the state pension and other state benefits.

National Insurance Contributions Office (NICO)
A part of HMRC. They administer the collection of National Insurance Contributions.

Normal Retirement Age (NRA)
The contractual age at which retirement benefits are paid from an occupational pension scheme.

Normal Retirement Date (NRD)
The date that an occupational pension scheme member reaches normal retirement age.

Occupational Pension Scheme
A scheme set up by an employer to provide retirement and/or death benefits to employees.

Offsetting
A member’s pension rights are offset against other assets as part of a divorce settlement.

Open Market Option
A provision of defined contribution schemes allowing members to transfer funds at retirement to draw an immediate annuity with another provider.

Pension Credit
A means-tested benefit that boosts a pensioner’s state pension to ensure they have a minimum level of income.

Pension Earmarking
Provides a spouse with a share of a pension scheme member’s pension rights on divorce. Spouse’s share is paid when the member draws benefits.

Pension Guarantee
Incorporated into a pension once put into payment. It ensures that pension instalments for a specified period are paid, even if the member dies before the period expires.

Pension Protection Fund (PPF)
An independent, levy-funded body that compensates members of occupational pension schemes who have lost pension benefits as a result of an employer’s insolvency.

Pension Sharing
Provides a spouse with a share of a pension scheme member’s retirement benefits on divorce. Spouse is given a credit to put towards his or her own retirement benefits.

Pension Simplification
The name given to the changes introduced by HMRC on A-Day. One single tax regime was introduced to replace the previous eight.

Pensionable Salary
Earnings used to calculate retirement benefits in a defined benefit scheme.

Pensionable Service
Length of qualifying time in a defined benefit
scheme used to calculate retirement benefits.

Personal Pension Plan (PPP)
A type of defined contribution scheme. Provides retirement benefits based on the build-up of a ‘pot’ of money, accumulated through the investment
of contributions.

Preserved Pension
The benefit awarded to a defined benefit scheme member who has left service early.

Protected Rights (PR)
The fund built up in a defined contribution scheme from rebates paid as a result of being contracted out of the state additional pension.

Qualifying Recognised Overseas Pension Scheme (QROPS)
An overseas pension scheme that meets HMRC rules that allow overseas transfers.

Qualifying Year
A year in which an individual has paid, or is treated as
having paid, National Insurance contributions.

Record of Payments Due
Produced by an employer, it records how much they and their employees will contribute to the designated stakeholder pension scheme.

Retail Price Index (RPI)
Used by pension schemes to calculate pension increases. It is the average measure of change in the prices of goods and services bought in the UK.

Retirement Annuity Contract (RAC)
The predecessor of the personal pension plan. Available before April 1988 to the self-employed and those in employment who did not have access
to an occupational pension scheme.

Revaluation
The increase, normally in line with inflation, of a deferred pension between the date the member leaves service and their Normal Retirement
Age (NRA).

Salary Sacrifice
An arrangement between an employer and an employee where the employee forgoes part of their pay for a corresponding employer contribution to the
pension scheme.

Salary-Related Scheme
An occupational pension scheme that provides benefits based on accrual rate, pensionable service and pensionable salary.

Schedule of Contributions
Produced by the scheme actuary, it shows the trustees of a defined benefit scheme how much the employer and employees will contribute.

Section 32 Plan
An insurance policy designed to accept transfers from defined benefit schemes.

Selected Pension Age (SPA)
The age chosen by a personal pension plan member to draw retirement benefits.

Self-Invested Pension Plan (SIPP)
A type of personal pension plan that gives an individual more investment control.

Short-Term Annuity
A temporary annuity that runs for no longer than five years. Allows an individual to draw an income while deferring purchasing a full annuity.

Small Self-Administered Scheme (SSAS)
An occupational pension scheme, usually for small businesses, that gives members more investment control.

Stakeholder Designation
The process followed by an employer who is not exempt from the employer access requirements. The employer must choose a stakeholder pension scheme and provide access to their employees.

Stakeholder Pension Scheme
A type of personal pension plan, offering a low-cost and flexible alternative and which must comply with requirements laid down
in legislation.

State Additional Pension
The earnings-related part of the state pension, paid in addition to the basic state pension.

State Earnings-Related Pension Scheme (SERPS)
Alternative name given to the state additional pension between April 1978 and April 2002.

State Graduated Pension Scheme
Alternative name given to the state additional pension between April 1961 and April 1975.

State Pension Deferral
On reaching state pension age, a pensioner can defer taking their state pension in exchange for a higher pension or lump sum in the future.

State Pension Forecast
An illustration provided by The Pension Service giving an estimate of what state pension an individual may receive at state pension age.

State Second Pension (S2P)
Alternative name given to the state additional pension since April 2002.

Tax Relief
Incentive given to those contributing to pension schemes. The government pays tax relief at the investor’s highest marginal rate;
that is, a basic rate taxpayer will receive 20 per cent tax relief, a higher rate tax payer 40 per cent and a 50 per cent tax payer 50 per cent relief of a member’s gross contribution.

Tax-Approved Scheme
A pension scheme that has been approved to operate by HMRC.

The Pension Service
A part of the DWP. Responsible for administering and paying the state pension.

The Pensions Advisory Service (TPAS)
An independent, government-funded body that provides general information about pensions to the public and also helps resolve pension disputes
through mediation and conciliation.

The Pensions Regulator (TPR)
A government body that regulates the
running of occupational pension schemes.

Transitional Protection
Comes in two forms – primary and enhanced. Allows an individual to protect accrued pension rights that may exceed the Lifetime Allowance, thereby avoiding a tax charge on the excess.

Unfunded Unapproved Retirement Benefits Scheme (UURBS)
Now known as an EFRBS. These are unapproved schemes with no tax reliefs that an employer funds to provide a member with a lump sum and/or income.

Unsecured Pension
Also known as Income Drawdown or income withdrawal. Allows a pension scheme member to continue to invest a fund while drawing a limited income. Available to under 75s only.

Winding Up
The process of terminating an occupational pension scheme, usually by transferring member’s benefits to individual arrangements.

Winding Up Priority Order
The order in which members’ benefits are distributed on the winding up of a defined benefit scheme with an insolvent employer and a funding shortfall.

Keeping your pension funds invested beyond your normal retirement date

Income Drawdown or Unsecured Pension (USP) 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 (previously this was from age 50). Tax rules allow you to withdraw between 0 per cent to 120 per cent (2010/11) of the equivalent relevant annuity you could have bought at outset. These limits are calculated by the Government Actuaries Department (GAD) and the rates are reviewed every five years. There’s no set minimum, which means that you could actually delay taking an income and simply take your tax-free cash lump sum. The amount of yearly income you take must be reviewed at least every five years.

Under current rules, from age 75, Income Drawdown is subject to different government limits and becomes known as Alternatively Secured Pension (ASP). If you’re already receiving income from an Income Drawdown plan and have not yet purchased an annuity, currently when you reach the age of 75 it will become an ASP.

You will still be able to receive a regular income while the rest of your fund remains invested, but 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.

It is important to be aware that 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 ASP. Instead, Income Drawdown would continue for the whole of your retirement, although the proposed withdrawal limits are significantly less than for ASP and the vast majority of people may be better off purchasing an annuity.

As an interim measure (and until ratified in the Finance Act), the government is to increase the age by which an annuity must be purchased to 77, for those aged under 75 as at 22 June 2010.

The new rules are likely to take effect from April 2011 and, 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, but 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. In this way you will not be eating into your capital.

Since 6 April 1996 it’s been possible for Protected Rights money – funds accrued from contracting out of SERPS or State Second Pension (S2P) – 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 generally be prepared to adopt 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.

Taking greater responsibility for your financial future

An annuity is a regular income paid in exchange for a lump sum, usually the result of years of investing in an approved, tax-free pension scheme. There are different types. The vast majority of annuities are conventional and pay a risk-free income that is guaranteed for life. The amount you receive will depend on your age, whether you are male or female, the size of your pension fund and, in some circumstances, the state of your health.

Your pension company may want you to choose its annuity offering, but the law says you don’t have to. Everyone has the right to use the ‘Open Market Option’, to shop around and choose the annuity that best suits their needs. There can often be a significant difference between the highest and lowest annuity rates available.

Some insurance companies will pay a higher income if you have certain medical conditions. These specialist insurers use this to your advantage and will pay you a higher income because they calculate that, on average, your income should be paid out for a shorter period of time.

Some older pension policies have special guarantees that mean they will pay a much higher rate than is usual. Guaranteed Annuity Rates (GARs) could result in an income twice or even three times as high as policies without a GAR.

A conventional annuity is a contract whereby the insurance company agrees to pay you a guaranteed income either for a specific period or for the rest of your life in return for a capital sum. The capital is non-returnable and hence the income paid is relatively high.

Income paid is based on your age, for example, the mortality factor, and interest rates on long-term gilts, and income is paid annually, half yearly, quarterly or monthly.

Annuities can be on one life or two. If they are on two lives, the annuity will normally continue until the death of the second life. And if the annuitant dies early, some or all of the capital is lost. Capital protected annuities return the balance of the capital on early death.

Payments from pension annuities are taxed as income. Purchased life annuities have a capital and an interest element; the capital element is tax-free, the interest element is taxable.

Types of annuity

Types of annuity include the following:

Immediate annuity
The purchase price is paid to the insurance company and the income starts immediately and is paid for the lifetime of the annuitant.

Guaranteed annuity
Income is paid for the annuitant’s life, but in the event of early death within a guaranteed period, say five or ten years, the income is paid for the balance of the guaranteed period to the beneficiaries.

Compulsory purchase
Also known as open market option annuities, these are bought with the proceeds of pension funds. A fund from an occupational scheme or buy-out (S32) policy will buy a compulsory purchase annuity. A fund from a retirement annuity or personal pension will buy an open market option annuity, an opportunity to move the fund to a provider offering higher annuity rates.

Deferred annuities
A single payment or regular payments are made to an insurance company, but payment of the income does not start for some months or years.

Temporary annuity
A lump sum payment is made to the insurance company and income starts immediately, but it is only for a limited period, say five years. Payments finish at the end of the fixed period or on earlier death.

Level annuity
The income is level at all times and does not keep pace with inflation.

Increasing or escalating annuity
The annuitant selects a rate of increase and the income will rise each year by the chosen percentage.

Some life offices now offer an annuity where the performance is linked to some extent to either a unit-linked or with-profits fund to give exposure to equities and hopefully increase returns.

Relaxing the law requiring everyone to buy an annuity
The Treasury has announced that it is looking to relax the law requiring everyone to buy an annuity by age 75. This follows the coalition government’s decision in the 2010 emergency Budget to end compulsory annuitisation by April 2011.

The aim is to revolutionise investor attitudes towards pensions and encourage greater retirement saving, so that we take greater responsibility for our financial futures. It will also mean that everyone who invests in a pension can retain control of their pension assets right through until the day they die.

The proposed law change is aimed at giving individuals greater flexibility over how they use the savings they have accumulated. This would see the replacement of some pension tax rules with a new system that gives people greater freedom and choice.

This consultation is a revolutionary change and also includes tax breaks available on pensions. It is expected that investors will have the choice of buying an annuity, as at present, and in addition they will have a choice of two drawdown options to select from.
Investors who can demonstrate that they have secured a minimum level of income will have the choice of taking money from a flexible drawdown plan at will. This means receiving it all back in one go as a cash sum if required. Income withdrawals will be subject to income tax.

For those investors with insufficient income to satisfy the ‘Minimum Income Requirement’, there will be the option of a capped drawdown. This capped drawdown will have fairly conservative income limits, designed to ensure that investors never run out of money.

Those investors who do not want to take the high risk involved with drawdown will still be able to convert their pension fund into an annuity, which will pay a secure taxable income for life.

The death benefit rules are changing and becoming simpler and the government has confirmed that it will be ending the Alternatively Secured Pension.

Taking more control over your pension fund investment decisions

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 greater 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.

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)
– Insurance 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 (OEICs)
– 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.

The tax benefits and governing rules of SIPPs may change in the future. The level of pension benefits payable cannot be guaranteed as they will depend on interest rates when you start taking your benefits. The value of your SIPP may be less than you expected if you stop or reduce contributions, or if you take your pension earlier than you had planned.