November/December 2015

LifetimeAllowance

FLAT RATEREFORMS

How to achievea comfortable retirement

� Lifestyle Protection � Creating Wealth � Tax Rules �

How will mypension be

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MoneyMatters

McHardy Financial – Independent Financial AdvisersAberdeen Edinburgh Kirkcaldy

13 Bon Accord Crescent, Aberdeen, AB11 6DE 10a Rutland Square, Edinburgh, EH1 2AS 3 East Fergus Place, Kirkcaldy, Fife, KY1 1XT

Tel: 01224 578 250 Fax: 01224 573583 Email: enquiries@mchb.co.uk www.mchb.co.uk McHardy Financial is a trading style of McHardy Financial Ltd which is authorised and regulated by the Financial Conduct Authority.

We are entered on the FCA Register Number 126147. www.fca.gov.uk Registered Office as above. Registered in Scotland No. SC105200

Are you ready?

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Flat rate reforms

The new flat rate pension comes into effect asof April 2016. This could be a problem for the12 million who will miss out on the flat ratereforms, however, the government has ascheme that will soften the blow and will offermillions the chance to buy up to £1,300 a yearof extra state pension.

Savers can buy between £1 and £25 extra aweek by paying Class 3A voluntary nationalinsurance contributions, this offer closes onApril 5, 2017. It is open to men born beforeApril 6, 1951, and women before April 6,1953, who live in the UK and already receive astate pension or are entitled to one. 

Some 265,000 are expected to take up theoffer before it closes in April 2017. So far,around 17,000 have registered an interest. It works like this: for every additional £1 ofextra pension from the government you pay£890 if you are 65. 

The full £25 extra pension per week costs£22,250, working out at 5.84 per cent. The benefits are more generous if you buy at70, here the cost drops to £779 for each £1 ofweekly pension, which is £19,475 for the full£25 a week, a 6.67 per cent return.

It is thought the biggest beneficiaries will bethe self-employed and women. 

Until now, they have not been able to makeany contributions to build up extra years ofadditional state pension for a bigger payoutwhen they retire. 

The precise return will be calculateddepending on an individual’s age

A 65-year-old would need to pay £8,900 foran extra £10 pension a week for life; a 75-year-old would have to pay £6,740 for thesame £10 of pension.

For those who are healthy and expect toenjoy an average lifespan or even longer it is a

good deal because the payouts rise in line withinflation.

The top-up is likely to be particularlyattractive to women, who tend to live longerand so will get a better return for theircontributions.

It will also help the self-employed, whocurrently qualify for only the basic statepension.

The top-up is inflation-proofed, however itwon’t suit everyone. Longevity is key, as yourestate won’t get anything when you die.Whereas investing a similar amount in a SIPPwill see your loved ones benefiting from itshould you die.

If you are single or in bad health, thechances are this state pension top-up will be a poor deal. You could shell out the lump sumand die without reaping the benefits.

For most, the top-up offer will provide bettervalue than a similar annuity product boughtprivately, as once it has been paid, the capitalwon’t be returned.

The extra state pension also offer back halfof the additional income to be paid to a spouseupon the purchaser’s death automatically.

Historically women have earned less thanmen and taken time off to have children, causinggaps in their National Insurance payments.

As a result, they have lower state pensions.Currently, the average weekly state pension is £148 for a man and £131 for a woman.About 2.8million women receive less than £80a week and 4.2million self-employed qualifyfor only £110.15 a week.

Call 0345 600 4270 or visit gov.uk/statepensiontopup for further details.

The current lifetimeallowance is soon tochange ….So what will thismean for you? The lifetime allowance is a limit on the totalyou can hold in pensions before being taxedup to 55% on the excess, when you takebenefits. The lifetime allowance is currently£1.25m until April 2016.

How can we ensure we are ready for thechanges, are there more ways to prevent a55% tax charge on pensions at retirement?Here we explain some options which couldbe particularly relevant to investors who areapproaching retirement.

Make sure you remember the 20%reduction in the value of yourlifetime allowance, which starts inApril 2016.The lifetime allowance, which is currently£1.25m, is reducing to £1m in April 2016.

Many people will not be lucky enough toget close to the lifetime allowance. But forthose close to retirement with pensionsvalued just over £1m, there is a window ofopportunity before the new rules begin.

Some investors may decide it is beneficialto start taking their pension before April2016. This is because the lifetime allowanceis measured at the point of retirement. This check starts when you begin to take

money out of your pension (when you taketax-free cash and/or income) or reach age75, whichever is sooner.

If you think your pensions, including anyfinal salary schemes, will be worth more thanthe lifetime allowance by the time you retireor reach age 75, you might be able toregister for protection.

Use the “small pot rule”Those aged over 55 with a pension potworth less than £10,000 can ask for theirentire pension to be paid to them in cash.Under the ‘small pot’ rule, the payment isnot measured against the lifetime allowance.

You can only receive payments using thesmall pot rule from personal pensions threetimes. If you are able to take your pension inthis way, 25% of the payment will normallybe tax free and the rest subject to incometax. Tax treatment will depend on anindividual’s personal circumstances and bothpension and tax rules can change in future.

Use SIPPsA further consideration is the way futurecontributions to SIPPs (Self Invested PersonalPensions) or other money purchase pensionsare treated once the small pot rule has beenused. By taking pots under £10,000 in thisway, future contributions to pensions are notfurther restricted in the same way as theyare when you flexibly take withdrawals froma pension through drawdown or lump sumsdirectly via UFPLS (Uncrystallised FundsPension Lump Sum).

Lifetime allowanceinside

2

Need more information?Simply complete and returnthe information request onpage 12

Flat rate reforms... Are you ready? Page 2

Lifetime Allowance Page 3

Five ways to invest forchildren Page 4

How to achieve acomfortable retirement

Page 5

Tax freedom Page 6

Why funds are a good placeto start investing Page 7

Routes to retirementprosperity Page 8

What do annuities offerinvestors at retirement?

Page 9

Will you really make moneyfrom the stock market?

Page 10

When I retire … How will mypension be taxed? Page 11

Unemployment InsurancePage 12

Reader Reply… Personalisedreply section Page 12

Not all financial advisers will have regulatory permission to advise on every product mentioned in these articles. Certain products mentioned in this magazine may require advice from otherprofessional advisers as well as your financial adviser and this might involve you in extra costs. The articles featured in this publication are for your general information and use only and are notintended to address your particular requirements. They should not be relied upon in their entirety. Although endeavours have been made to provide accurate and timely information, there canbe no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such informationwithout receiving appropriate professional advice after a thorough examination of their particular situation. Will writing, buy-to-let mortgages, some forms of tax and estate planning are notregulated by the Financial Conduct Authority. Levels, bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.

Taking professionalfinancial advice is most important

The lifetime allowance is a veryimportant consideration; you shouldthink very carefully beforeproceeding. This is one area where itmight be extremely beneficial totake professional financial advice.

Pension decisions are lifechanging. Therefore, we stronglyrecommend you understand youroptions and check your chosenoption is suitable for yourcircumstances: take appropriateadvice or guidance if you are at allunsure.

This article, like our service, is notpersonal advice. We offer a range ofinformation to help you plan yourown finances and financial advice ifrequested. Alternatively, PensionWise, the government’s newpension guidance service, provides afree impartial service to help youunderstand your options atretirement. You can access theservice online atwww.pensionwise.gov.uk, by calling030 0330 1001 or face-to-face.

Five ways to invest for children

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Regular savings plans can help path the way toyour child’s financial future. We highlight howmonthly investing can solve some commonproblems for parents and grandparents wheninvesting for a child.

Start earlyMost parents do not have access toconsiderable sums of money when they firststart a family. Having a child means there aremany additional costs to bear that can all beexpensive. A common misconception, however,is that you need a large amount of money tostart investing. In fact a regular small savingsplan offers an affordable way to build adecent-sized portfolio from as little as £25 amonth. Over many years such small amountscan accumulate into sizeable pots of money.

Investing in volatile marketsThe impact of recent events in China on globalstock markets have once again highlightedthat investing in the stock market can have itsdowns as well as ups. A common mistake ofparents is to track the market and makeinvestment decisions based on short-termmovements. Children usually have time ontheir side, which allows the parent to ride outthe peaks and troughs of the stock market. Aregular savings plan takes the emotion out ofinvesting in a volatile market as the money is

automatically taken from your account andinvested on your child’s behalf every month.

The best time to investWith a regular savings plan, investors canbenefit from ‘index averaging’. This means theyare buying from the market at different timesand benefiting from both lower and higherstock prices. In falling markets, this meansinvestors can buy more of the investment atlower prices. If the market rises, on the otherhand, investors profit from the increasing valueof investments already held, although there areno guarantees.

Drip feed moneyA key benefit of monthly investing is you don’tneed to worry about forgetting to save for yourchild’s future. When you arrange a regularsavings plan, the money is automatically takenfrom your account via direct debit. Once it’s setup, the money will drip feed in every monthand build into a considerable portfolio overtime providing the markets go up over the longterm.

FlexibilityWhen parents and grandparents arrange amonthly contribution, they can usually beamended to cater for changing circumstances.For example, you will normally be able to

increase, decrease or even suspend the amountyou wish to contribute on a monthly basis.

Tax-efficiencyJunior ISAs have quickly become a popular wayfor family and friends to build up tax-efficientsavings and investments to help with the costof university, provide a deposit for a house orsimply give a child a great start in life. Similarto adult ISAs, Junior ISAs offer considerable taxbenefits, there is no income tax to pay and nocapital gains tax. But remember, tax rules canchange and the benefits depend on your child’scircumstances.

Be aware that all stock market investmentscan fall in value as well as rise so they shouldbe held for the long term and you could getback less than you invest. Tax rules can changeand the value of any tax shelters will dependon a child’s circumstances. This article is notpersonal advice so, if you are unsure about thesuitability of an investment for yourcircumstances, please contact your professionalfinancial adviser. Also note unlike adult ISAsyou cannot open a series of Junior ISAs withdifferent providers each year. Instead investorsuse each year’s annual allowance with thecurrent provider or transfer to a new providerfirst before making use of the allowance.

How to achieve a comfortable

RETIREMENTAccording to recent research a‘comfortable’ retirement requires anincome of £23,000 a year. So what sizedoes your pension pot need to be, andwhat might you need to pay in, to achievethis?

Typically someone wanting to retiretoday at age 55, might need a totalpension pot of about £675,000 to generatea secure income of £1,916 a month, whichwould equate to £23,000pa and taking£168,750 (25%) of their pension pot astax-free cash. This is an example based ontoday’s money and assumes the personbuys an annuity, a secure income for life, ofcourse in reality inflation will affect this forthose looking to retire in later years andannuity rates can change.

How can you achieve a comfortableretirement?It is thought that only 56% of people arecurrently saving enough for retirement. It has never been more important to makesure you are on track for the retirementyou want, so where do you start?

If you are employed, your workplacepension is the first place to look. With theintroduction of automatic enrolment, most people now have a pension via work,into which their employer also contributes..Some employers offer a final salary ordefined benefit pension. This will usuallybe mostly funded by the employer,although it is likely that theemployee will need to add somecontributions. A defined benefitpension will pay a guaranteed incomebased on a percentage of your finalearnings.

Though it may not be enough to fund a‘comfortable’ retirement on its own, thereare other ways to boost your total pensionincome.

The State Pension is also a vital part ofmost people’s plans. The full new StatePension will not be less than £151.25 aweek (if you retire after 5 April 2016 andare born after 5 April 1951 for a man or 5 April 1953 for a woman). This amountsto be an annual income of £7,865, but itdoes depend on your National Insurancerecord.

How else can you boost your pensionfund?Starting a SIPP (Self Invested PersonalPension) which is a personal pensionrunning alongside your workplace andState pensions to ensure you meet yourdesired retirement income. SIPPs provideyou with the flexibility to choose your owninvestments and manage your ownseparate pension.

You can choose from a wide range ofsectors and types of investments, keep aclose eye on how your portfolio isperforming and switch out of investmentsthat are not performing that well.

Don’t forget to consider other forms ofsavings to fund your retirement such asISAs and savings accounts. You might alsowant to consider your house and thepotential to downsize when you reachretirement. This can free up additionalmoney to provide financial support whenyou have stopped working.

Pension rules of thumbOne approach of wisdom with pensions

is to pay in half your age as a percentagewhen you start saving. So a 30 year oldstarting a pension might pay in 15% oftheir earnings to get the pension theywant, and a 40 year old might pay 20%.

Another wise move is to start saving fora pension as soon as you can; the longeryou contribute, the longer your moneygrows. As your salary increases over theyears increase your contribution level, thisbecomes easier over the years as childrengrow up and move out and you pay yourmortgage off.

The value of your investment and the income from it can go down as well as up and you maynot get back the original amount invested. Past performance is not a reliable indicator forfuture results. Levels, bases and reliefs from taxation are subject to change and their valuedepends on the individual circumstances of the investor. Please contact us for furtherinformation or if you are in any doubt as to the suitability of an investment.

Save as much as you can,as soon as you canThe value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past

performance is not a reliable indicator for future results. Levels, bases and reliefs from taxation are subject to change and their value dependson the individual circumstances of the investor. Please contact us for further information or if you are in any doubt as to the suitability of aninvestment.

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Tax Freedom

Personal savings allowanceBasic-rate taxpayers will benefit from a newpersonal savings allowance that gives themtheir first £1,000 of savings interest tax-free,provided the interest is paid after April 6next year.

For 40 per cent higher-rate payers, thelimit is £500; 45 per cent additional ratetaxpayers do not qualify for the newallowance.

From next April, interest will be paidautomatically with no tax deducted, whichmeans you won’t have to claim back the taxand will no longer have to fill in an R85 formto have it paid before tax.

ISAsAt 3 per cent interest, savings of £33,000will bring you very close to that £1,000 limit.Savers with substantial sums should look to

use their cash ISA allowance. If interest ratesrise in the future, your personal allowancewill be used up more quickly.

Moreover, some couples who have beenusing ISAs since their inception will havebuilt up large funds, which can be drawn ontax-free.

Married couples and civil partners shouldalso remember the new rules which wereintroduced on December 3 last year, bywhich widows and widowers continue toenjoy the tax advantages previously held bytheir partner.

The nil-rate savings bandIn addition to the personal savingsallowance, those who receive an annual

income, whether from pension or work,below £11,000 need pay no tax on the first£5,000 of interest.

In order to take advantage fully of thisallowance, some couples may be able toallocate savings to the lower earner, whileretirees can choose to limit the income theirdraw from their pension, as opposed toother sources like dividends or ISAs.

Personal income tax allowanceMost taxpayers know very well that they canearn up a certain amount of income annuallybefore they start to pay tax. The personalallowance rises to £11,000 from April 2016.

While 40 per cent tax payers rate will seetheir allowance increase to £43,000 nextyear from £42,385, taking thousands ofpeople out of the 40 per cent bracket.

The dividend tax shake-upAll taxpayers will have a tax-free dividendallowance of £5,000 from April 2016, whichmakes life better for many small investorsseeking income from their shareholding.

After this amount, the rate of tax payableon dividends will depend on taxable income.If your dividend income takes you from oneincome tax band into the next, you will thenpay the higher dividend rate on that portionof income.

Married couples (and registered civilpartners) should spread their taxableportfolios between them to make fulluse of each person’s allowance. Theyshould also make full use of personalallowances and basic rate tax bands,

where applicable, so that taxable dividendsare paid in the name of the spouse who paysthe lowest tax rates.

Those with dividend income in excess of£5,000 a year will see a tax increase of 7.5per cent. This makes sheltering taxableinvestments in an ISA all the more importantas unlimited dividends can be withdrawnfrom an ISA tax-free.

There is also no capital gains tax to pay inan ISA. £15,240 worth of existinginvestments can be sheltered in an ISA inthis tax year.

Pensions freedom and tax changesPensioners can now keep their moneyinvested in a fund for longer and, instead oftaking a lump sum tax-free when they start,can take 25 per cent tax free every time theymake a withdrawal from their pot.

Separately, higher earners can boost theirtax-free pension contributions up to atemporary £80,000 annual limit before thisallowance gets slashed next April.

This potentially allows people to massivelyboost payments into a pension

during the current tax year,assuming you can afford

to do so, and meetcertain conditions.

The concept behind an investment fund issimple. It pools together savers’ money andinvests it for them across a range of differentassets, offering the investor the chance toinvest more, or withdraw money from thepot, when they like. This makes investmentfunds a good place to start for new investorsor an option for those already investing whowant an easier life. 

The investors will hopefully see theirwealth grow as the value of the assets theyhold together rises and can potentially takean income if the fund pays out dividends.

Putting your money together with others’is one of the easiest ways to tap into that long-term power to generate growth.

What do funds do? Funds invest in a portfolio of assets, usuallyeither in shares or bonds, or some invest inboth.

You may also find popular funds thatinvest in property, while others targetspecialist areas. The job of picking shares orbonds falls to a manager, or team of experts,who spend their time researching andmonitoring assets and deciding whereinvestors are being offered the bestopportunities. All you do is decide how muchto invest. The fund’s manager makes all theother decisions, such as when it’s time to buyor sell more shares and the companies,sectors or regions to target.

Alternatively, passive funds, like trackers,simply follow a share or bond index and buyall the companies within it.

Investors pay an annual managementcharge to the company that runs the fund.

Funds can work out cheaper for smallinvestors, as they can easily access asubstantial number of shares at home andabroad, without the high share-dealing ifbought as individual stocks.

The importance of diversityDiversity is probably the most importantaspects of investing.

Having a range of investments that dodifferent things, spreads risk. This helps yourportfolio navigate volatile markets andmeans that you are not hit too hard if anindividual company you are invested in fails.

Fund managers can help do this byspreading your money and risk, acrossdifferent shares or bonds.

Some funds hold more than 100 shares orbonds, while others are much more focussedand may hold only 20 to 30 companies.

Many investors choose to spread theircash across more than one fund, which alsoimproves diversification and allows them toallocate their assets across shares andbonds, and different strategies, regions andrisk levels.

Active vs passiveThere are two main types of fund, active andpassive.

An active fund has a manager buying andselling assets in an attempt to beat aparticular benchmark or market. 

In comparison a passive fund doesn’tinvolve any share or bond picking. Insteadthese tracker funds simply buy the shares orbonds in the index it is meant to follow toreplicate the performance.

5 things to know1. Active funds are more expensive than

passive funds, because managers sayyou are paying for their skill andexpertise.

2. You will not grow more than theindex with a passive fund, but thereis no guarantee that an active fundwill either.

3. You do not have to invest in onlyactive or passive funds. You canchoose a combination of both. Maybe using passive funds for big well-known markets where it isharder to outperform, such as the USstock market and active funds forsmaller less understood markets.

4. It is also important to regularlymonitor your fund to check it is doingwhat it is meant to, that yourmanager is adding value, and that itsoutlook still matches yours.

5. With an investment fund, you willgenerally be offered two options - an income version (inc) and anaccumulation version (acc). Theincome version regularly pays out adividend as cash, while the accversion rolls up payments into thefund to buy more assets, increasingthe value of each unit or share youown.

In return, you will either have to paythe platform to hold your investments.This is typically either through a flat fee ora percentage charge linked to the size ofyour holdings.

This is on top of the annual managementcharge of any funds or other investmentsyou hold in there.

From next April 2016 there are new and extended allowances that could mean you pay much less tax on savings andinvestments.

Chancellor George Osborne announced this year that families could benefit from a significant windfall in freedom from tax, even if the income from their savings and investments amounts to tens of thousands of pounds, by using traditionalshelters efficiently and taking advantage of new tax-free benefits.

Many basic rate taxpayers remain unaware that a new allowance means that interest earned up to £1,000 from normalsavings accounts will soon be untaxed.

Then there is the new treatment of dividends, which allows £5,000 in income from shares to be earned tax-free.Combine these with the shelters of ISAs, capital gains allowance and new pension rules, and savers could be looking at

a significant windfall.The changes will be of most benefit to those with large amounts saved in pensions, ISAs and investments but most

households will be able to make significant tax savings from April 2016 if they make use of these six tax-free allowances. With the added bonus of not having to deal with HMRC. 

Why funds are agood place

to start investing

The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Levels, bases and reliefs from taxation are subject to change and their valuedepends on the individual circumstances of the investor. Please contact us for further information or if you are in any doubt as to the suitabilityof an investment.

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Routes to retirement prosperityHigher earners face losing thousands of poundsover the next few decades as a result of thereform in pensions tax relief announced in thebudget.

From April next year, higher earners on morethan £150,000 a year will have their annualpension contributions reduced which will qualifyfor tax relief and those on £210,000 or more willlose the most.

When you save into a private pension, thegovernment contributes into your savings pot.

A basic rate taxpayer saving £1, only has to put away 80p, if you are a higher rate taxpayer, you have to put away 60p tosave £1 and if you are a top-rate taxpayer, then just 55p.Currently, anyone paying into a pension is entitled to tax reliefon contributions of up to £40,000 a year. However, from nextyear this will be tapered down, starting from anyone earningabove £150,000. For those earning more than £210,000 thetax-free limit will be just £10,000.

For those being affected there are ways which could saveyou thousands of pounds over the next few decades, but theycould come at a cost. So what can you do now and in thefuture to limit your exposure.

Save more before the changes are implemented Ensure you carry forward unused pension contributions fromthe previous three tax years.

In addition to the current year’s contribution of £40,000, you could contribute up to £40,000 for last year and £50,000each for the two years before that, giving a possible total of£180,000.

Next make use of the extra contributions allowance of£40,000 for this year, which the government has introduced inrecognition that the changes may cause confusion.

Even if you have made a maximum payment of £40,000 intoyour pension this tax year, you can make another contributionof up to £40,000, but be careful of the date ranges involved.

Also be aware of the changes to the Lifetime Allowancewhich is being lowered to £1 million from next April from thecurrent £1.25 million position.

Individuals can also use part of their salary to fund pensioncontributions for their spouse, who could be a basic or higherrate taxpayer in their own right.

How much will a pension costnow?Higher earners will not see the newregime of pension savings as anattractive savings vehicle.

A 40-year-old on a salary of £210,000could currently claim tax relief onpension contributions worth up to£40,000 a year, as it only costs him£22,000 from his net pay to save£40,000 each year. Under the currentsystem, over the next two decades hecould have claimed £378,000 in taxrelief, meaning that saving a total£840,000 (the maximum allowed overthis period) would only cost him£462,000 from his net pay.

Under the new rules that same saverwill only be able to claim tax relief of 45per cent on annual contributions of up to£10,000 a year. The opinion ofprofessionals is that, if he wants to savethat same amount of £840,000 over 20years, it will now cost £745,000 from hisnet pay, which is £283,000 more.

What alternatives are there? Higher-risk investors could choose aVenture CapitalTrust (VCT) or EnterpriseInvestment Scheme (EIS), which offer taxrelief. These are riskier options andprofessional financial advice should betaken before investing.

VCTs allow people to put up to£200,000 each tax year into small,unquoted companies. There is a 30 percent income-tax refund on the moneyyou invest, provided you have paid atleast as much in tax as you invest.

An investment of £10,000 wouldeffectively cost £7,000 after tax relief.There are also future benefits. Dividendsare free from income tax and there is notax on capital gains when the investmentis sold, provided the shares have beenheld for five years. EISs are similar. Theycan be held for just three years but aretypically seen as slightly higher risk.

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What do annuitiesoffer investors atretirement?An annuity remains one of the fewways of turning a pension into aguaranteed income for life. The valueof a secure lifelong income streamshould not be underestimated, forpaying those essential bills and livingexpenses that tend to last as long asyou do.

You can add features to the annuityto suit your circumstances. For examplethe annuity could increase each yearto track inflation, or you can chooseone which continues to pay to yourspouse or partner if you die beforethem.

The amount of income you receivewill depend on the features you selectand what type of service you use tofind your annuity, as well as the size ofyour pension fund.

If you go to your pension provideryou are likely to just receive an in-house annuity rate. Unless yourpolicy offers guaranteed rates, it’s likely you can get a better rateelsewhere. It’s true that headlineannuity rates on offer are low, butthere are two steps you can take thatcould mean a higher income.

• Firstly you can use an openmarket annuity service, where youcan search the whole annuitymarket for the best rate.

• Secondly it’s important to confirma few details about your healthand lifestyle to see if you couldreceive more income (mostpeople qualify for a higherannuity by declaring additionalinformation, even confirming yourheight and weight can help).

The value of your investment and the income from it can go down as well as up andyou may not get back the original amount invested. Past performance is not a reliableindicator for future results. Levels, bases and reliefs from taxation are subject tochange and their value depends on the individual circumstances of the investor.Please contact us for further information or if you are in any doubt as to thesuitability of an investment.

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How will my pension be taxed?

How much of a pension is tax free?Up to 25% of a personal pension is usuallytaken tax free from the age of 55 (rising to57 in 2028). How this effects you will dependon how you have decided to draw yourpension.

Pension funds used to purchase a secureincome for life via an annuity, or used todraw income directly via drawdown, up to25% of the fund can be paid as a tax-freelump sum. This is payable when the pensionis moved into the annuity or drawdown,then, any income is taxable.

Since April 2015 another option is to takelump sum payments directly from a pension,without having to go into an annuity ordrawdown. This is known as taking anuncrystallised funds pension lump sum(UFPLS). Here, up to 25% of each lump sum

should be tax free and the rest taxed asincome. You can take the whole fund in onelump sum but it’s important to understandthe tax implications, because it is here wherethe tax pitfall and tax sting lies. Taking suchlarge withdrawals could mean hefty tax bills.

Most people have a tax free personalallowance of £10,600 this tax year. Incomewithin this allowance is tax free. Above thispersonal allowance, different tax bandsapply, rising to a rate of 45% tax on incomeover £150,000. The personal allowance of£10,600 will vary depending on yourcircumstances and starts to reduce onceincome exceeds £100,000, reducing to zerofor income of £121,200 or more. This means,the more you take in pension and incomecombined, you may lose your personalallowance benefits.

How to avoid the tax sting With sensible planning, investors can reducethe amount of tax they pay on pensionwithdrawals. There is no requirement to takethe pension in one go or by choosing justone option. You can mix and match theoptions or phase in your retirement to takethe tax-free amount and income in stages.

For instance, it may be possible tospread withdrawals over more than onetax year to make the most of taxallowances.

Investors should consider aprovider that offers full flexibility on howthey take their pension, including access

to the new pension freedoms withoutrestriction. Some firms, for instance, chargefor withdrawals and others allow investors towithdraw unrestricted lump sums or incomewith no withdrawal charges, unless thiscloses the account.

When might investors overpay tax?All pension providers are required to deducttax, where applicable, before paying anywithdrawals. Providers must deduct tax usingthe tax code confirmed to them directly byHMRC, or the code on a valid P45.Otherwise, providers must use a temporaryemergency tax code which will often result intoo much tax being paid initially.

A new tax break: more of yourpension can be passed on when you die

The rules also give a new tax break onpensions when you die. It is now possible foranyone you want to inherit your pension taxefficiently. If you die before the age of 75there is usually no income tax paid on thewithdrawals made by your beneficiaries. If you die after the age of 75 then thewithdrawals are taxed as income.

What you do with your pension is animportant decision: Make sure youunderstand your options and check they aresuitable for your circumstances. Alwaysconsider taking appropriate professionalfinancial advice or guidance. The government’sfree Pension Wise service can also help.

We all know the stock market might be risky,but we are told if you are prepared to stickwith the market over the long term ourprospects of good investment returns arehigh.

This seemed to be the case during the bullmarkets of years gone by, but the rockyperformance of UK stocks since 2000 made itmore challenging to make money on five-year and even 10-year investing plans.

The question now is: should we revise thistimeframe and be prepared to invest now for15 or 20 years, or consider investing for therest of our lives, since pension freedom allowsus to transfer our funds to invest anddrawdown schemes and leave anythingremaining to loved ones when we die.

The lesson from the ever increasingvolatility of the stock market over recentyears is that if you can afford to do withoutthe income from dividends, it is best toreinvest them. 

There are different ways to reduce the riskof market volatility devaluing your stockinvestments over shorter time frames.

Regularly drip feeding money into equityinvestments is better than depositing a lumpsum at what might turn out to be a bad time.This strategy pushes you to buy even duringmarket crashes when stocks are cheap, notjust during rallies when they are high andexpensive.

Another good strategy is to diversify yourinvestments to different equity sectors andregions, across asset classes to corporate andgovernment bonds and property. 

Consider using ‘active’ investment funds,where managers pick stocks for you with theaim of outperforming wider markets, ratherthan ‘passive’ index tracker funds, whichfollow the world’s biggest markets but don’ttry to outrun them.

Active funds often still underperformdespite charging a lot more, but supportersargue that the good ones are better value.

The reality for investing is the longer youinvest the more likely an equity investmentstrategy will work. If you invest for 20 yearsyou have a better chance of equities beatingother asset classes than you would just over10 years. With the absolute minimum in termsof investment should be around five years.

But if you are only investing for this shortperiod of time, you need to accept there is arisk that you are going to possibly lose money,but by reinvesting your dividends, howeversmall, it will have a big positive impact ontotal returns. This was seen over the recentbad 10-year period where the stock marketstill made money on a total return basis.

With the changes in pension rules and thenew pension freedoms lifetime investing isgaining more followers.

You don’t need investment time frameslike you used to unless you are looking for avery specific return like school fees.

With pensions now, you will no longer becashing in a fund on a set end date. It’s morelikely now with pension freedoms that youwill have a long term investment goal,moving continuously and possibly for life ifthat is what is right for you.

Pension freedom means retirees are nolonger required to buy annuities, whichprovide a guaranteed income for life, withmany opting instead for income drawdownschemes where you carry on investing intoyour old age. 

If you have a particular need for money ona date and it is within five years or less thenthis would be classified very short term andyou should question if investing is right forsuch a plan

The good thing about longer investinghorizons, they allow you to put your moneyin riskier assets. With a long-term approach,you can take more risk because you will rideout short-term fluctuations which getsmoothed out.

It’s important to know how long someonewants to invest for because it informsstrategy and asset allocation.

Someone with a five-year horizon mightput a third of their portfolio in equities, but someone investing for 10 years could risk60 per cent. Meanwhile, those who have 15-20 years could allocate 80-100 per centto equities, and put their money in riskierareas like emerging markets.

11

Will you really make money from

the stock market?

The new pension rules offer investors unprecedented freedomover how to take their pensions at retirement. However, it hasrecently emerged that the Treasury could receive a windfall ofup to £700m more tax than originally planned from the newrules. Only part of a pension is tax free, so what happens to therest? We explain more below.

Taxed at 45%

Personalallowance lost

entirely

Taxed at 20%

Taxed-free allowance

Taxed at40%

Personalallowancereduces

onceincomeexceeds

£100,000

£200,000.00

£150,000.00

£100,000.00

£50,000.00

£0.00

This article is based on our understanding of pension and tax rules as at 5 August2015. Please note: tax and pension rules are subject to change; if you are at alluncertain about the suitability of any option for your circumstances we stronglysuggest you seek personal financial advice.

The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Levels, bases and reliefs from taxation are subject to change and their valuedepends on the individual circumstances of the investor. Please contact us for further information or if you are in any doubt as to the suitabilityof an investment.

This magazine is for general guidance only and represents our understanding of the current law and HM Revenue and Customs practice.We cannot assume legal responsibility for any errors or omissions it might contain. Level and bases of, and reliefs from taxation are thosecurrently applying but are subject to change and their value depends on the individual circumstances of the investor. The value ofinvestments can go down as well as up, as can the income derived from them. You should remember that past performance does notguarantee future growth or income and you may not get back the full amount invested.

You voluntarily choose to provide your personal details. Personal information will be treated as confidential by us and held in accordance with the Data Protection Act. You agree that personal information maybe used to provide you with details and products or services in writing or by telephone or email.

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For more information on any subject that we have covered in this issue, or on any other subjects,please tick the appropriate box or boxes, include your personal details and return this section to us.

An unemployment insurance policy could helpthrough this difficult period. There are anumber of products available, all of which willpay out a monthly sum if the policyholder ismade redundant. However, there are concerns that smaller

insurers are beginning to refuse to offer coverto those in the public sector and as widespreadjob losses look likely, premiums may well risesharply. For those considering unemployment

insurance, they have the choice between twodifferent products. The first option is a policy called an Income

Protection Policy. This insurance is designed topay out if a policyholder is unable to workthrough ill-health, but it is possible to buy anunemployment add-on. The differences being that any claim for ill

health will be paid out until the person returnsto work, as there is not a 12 month cut off,although there is for unemployment cover.Premiums are also guaranteed for as long asyou hold the policy, ASU insurers could

increase premiums at renewal annually. Inmost cases the policies will pay out if ill-healthprevents you from doing your own job; withASU you are only likely to make a valid healthclaim if you can’t do any work at all, whichmeans far fewer claims will be paid out. Additionally, most ASU policies automatically

exclude claims relating to back injuries orstress, two of the most common complaintswhy people have prolonged periods off work. The second is known as Accident, Sickness

and Unemployment cover ( ASU). This is anannual insurance, as it is renewed every year,much like your home or car insurance. So youcan cancel it, if and when the economicsituation improves. If you are unable to work, either as a result

of ill-health or redundancy, these policies willpay out a fixed sum for one year. A form of this insurance, known as Payment

Protection Insurance (PPI), is often soldalongside loans, credit cards and mortgages.Basically it is the same, the only difference isthe payout only covers the interest payments

due on the linked loan and again usually justfor one year, but the payout is usually madedirectly to the credit provider. The cost is dependent on the monthly

benefit you are insuring and the “excessperiod”. Premiums can be lower if you opt fora 60 or 90 day deferral, which can be usefulfor those who know they will get a reasonableredundancy pay out. When buying ASU cover there are a number

of exclusions to consider. The most important one being that this

cover will not be valid if your employer hasalready announced a redundancy programme.Those working in the public sector need torecognise that if the school, NHS trust, localauthority or private company, has alreadyannounced a redundancy programme, then it istoo late to buy cover. If you do, any subsequentclaim will be rejected.

Unemployment Insurance

What can employees do if they areworried about losing their jobs?

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