You’ve worked hard for this; now’s the time to enjoy it

Start your retirement by celebrating your newfound freedom

Some pensions allow you to switch your money into lower risk investments as you near retirement date, which can help to protect you from last-minute drops in the stock market. However, doing this may reduce the potential for your fund to grow, plus your fund cannot be guaranteed because annual charges may reduce it.

Obtain an up-to-date pension forecast
With only months to go before you start accessing your pension, it’s important to get a very clear view of the level of income you can expect to receive. Contact your pension provider or providers for an up-to-the-minute forecast of your tax-free lump sum and income. You should also request a State Pension forecast, which will come complete with details of your basic State Pension and any additional State Pension you will receive. In addition, find out when you’ll be eligible to take your State Pension in the light of changes to the State Pension Age.

Also think about other sources of income you might be likely to get when you retire. These could include income from investments, property or land, part-time employment or consultancy, or an inheritance. Having as full a picture as possible will enable you to make detailed and practical final decisions about exactly how you want to take your pension income, as well as allowing you to make more accurate plans for your new lifestyle.

Choose how to take your pension
Although you may already have given some thought to how you want to take your pension benefits, it’s worth reviewing your plans at this point. Circumstances can change – for example, you might have received a significant inheritance or you may have been diagnosed with a medical condition, and former plans may no longer be quite appropriate.

You can either take your pension as an annuity, as income drawdown or as a combination of the two. With any of these options, normally you’ll also be able to take up to 25 per cent of your fund as a tax-free lump sum.

Additionally, now that the compulsory maximum annuity age no longer applies, you can decide to defer taking your pension. By keeping your pension pot invested there is an opportunity for further growth. However, you should think about the risks involved and look to de-risk as much as possible at this point. Investments can go down as well as up and your pot will be affected by the ups and downs of the markets. There can also be tax benefits but, as this is a complex decision, you should obtain professional financial advice – and remember, you may get back less than you invest.

Tax matters
Most people pay less tax when they retire, but it’s worth considering your tax position at this stage. Although you can normally take up to 25 per cent of your pension fund tax-free, any income you receive from it will be subject to tax under the Pay As You Earn (PAYE) system.

Meanwhile, if you’ve taken the option of income drawdown, you may be able to adjust the income you take to minimise the tax you pay. For example, if you plan to do some consultancy work or continue working in a part-time capacity, you could think about reducing your income withdrawals to stay within the basic rate of tax. Bear in mind that tax regulations can change and tax benefits depend on your personal circumstances.

Additionally, keep your savings and investments as tax-efficient as possible with products such as Individual Savings Accounts (ISAs) and offshore bonds.

You’ll also stop paying National Insurance contributions when you reach State Pension age. If you decide to continue working, whether full-time, part-time or on a consultancy basis, it’s a good idea to contact the tax office to make sure contributions aren’t still being deducted.

Prepare for life after work
As well as sorting out your finances, don’t forget to think about how your life will change when you retire. Even if you intend to keep working part-time, you’re going to have much more free time to enjoy.

Planning these first few months will help you set the tone for your future. Perhaps there’s somewhere, or someone, you’ve always wanted to visit. Maybe you want to learn a new sport or leisure activity, but have always had too many commitments. You might even want to start the search for that perfect retirement bolthole. The financial planning you’ve been doing for years all starts to bear fruit now.

Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor.

New higher flat-rate state pension

One of the biggest overhauls of Britain’s pension system in decades

The Government recently announced that up to 400,000 more Britons will qualify for a new higher flat-rate State Pension and they’ll introduce the reform a year earlier than expected. The simplified scheme will provide a weekly flat-rate payment of £144.

The date has been moved forward to April 2016, and is one of the biggest overhauls of Britain’s pension system in decades. The current system includes a basic pension, a State Second Pension and/or some means tested pension credit. From 2016 this will all be merged into the universal flat-rate payment.

FOOL’S GOLD

Demystifying some of the key fund management concepts

We understand that the fund management industry has an array of jargon that can confuse both the novice and well-seasoned investors. Here we aim to demystify some of the key concepts.

Fund types
Funds exist to enable many investors to pool their money and invest together. This allows them to achieve economies of scale when buying stocks and diversify their exposure to a variety of stocks, rather than buying each one individually.

Funds are often known as ‘collective investment schemes’. These come in a number of guises, but largely fall into two key categories: ‘open-ended’ or ‘closed-ended’. In the UK, the most common types of open-ended funds are unit trusts and investment companies with variable capital (ICVCs), also known as open-ended investment companies (OEICs). Unit trusts and OEICs have different legal structures: one operates under trust law and issues ‘units’; the other operates under company law and issues ‘shares’.

However, they share a common characteristic: the number of units (or shares) is not fixed, but expands and contracts depending on the level of investor demand – hence the name ‘open-ended’.

Another name for this kind of investment scheme is ‘mutual fund’, a term which is commonly used in the US. Because these funds are open-ended, the price at which they can be bought and sold relates directly to the underlying value per share of the entire portfolio.

Investment trusts are an example of a ‘closed-ended’ investment scheme. The defining characteristic of these is that the number of shares on offer does not change according to investor supply or demand, but is limited to the amount in issue. These investments are bought and sold on the stock market and can trade at a premium or discount to the underlying value per share of the portfolio depending on the level of supply and demand for the shares.

Investment concepts
‘Long only’ is one of the most common investment styles in fund management. It refers to buying a basket of stocks and/or bonds with the aim of generating returns through an increase in the price of the underlying holdings and from any income generated by these holdings.

‘Absolute return’ is a style of investment which aims to produce a positive return in all market conditions. It involves quite sophisticated strategies, including the use of derivatives to create short positions where the manager seeks to profit from a fall in the price of an underlying security.

Asset classes
Investments can usually be made in a number of different asset classes, such as stocks, bonds, currencies and cash.

Multi-asset funds may adopt ‘long only’ or ‘absolute return’ strategies. Typically they invest across a number of different asset classes, especially those that do not move in correlation, and thereby attempt to reduce the volatility of returns.

Active management involves trying to select a range of investments with the aim of outperforming a particular benchmark index. The ultimate aim of active managers is to generate positive ‘alpha’, i.e. invest in stocks that outperform the market and return more than is expected given the perceived level of risk the shares carry.

Passive management involves trying to replicate the performance of a particular index, such as the FTSE All-Share. Tracker funds are a form of passively managed fund.

Not putting all your eggs in one basket
Diversification is the technical term for ‘not putting all your eggs in one basket’. In theory, stock-level risk can be reduced by holding about 20 to 30 different stocks, so that a downturn in the fortunes of one holding may be mitigated by the performance of other holdings in the fund.

Additional diversification across countries, sectors and asset classes is needed to reduce macroeconomic and political risk.

Channelling investments
Asset allocation involves channelling investments across asset classes, geographic regions and/or market sectors. A weighting toward bonds might be increased to boost a portfolio’s income, for example, or greater investment might be made in emerging markets for those seeking growth who are prepared to accept a higher level of risk.

Company share prices
A ‘bottom up’ approach focuses on the prospects and valuations of individual shares while a ‘top down’ approach focuses on broad economic issues or market themes that have the potential to influence company share prices. Many managers may incorporate both into their investment processes, but usually have an emphasis on one or the other.

Investment biases
Growth and value describe certain investment biases adopted by funds and fund managers. A growth manager will look for stocks with good earnings momentum, but be careful not to buy when expectations are too optimistic (i.e. stocks are highly priced). Small and mid-sized companies from flourishing industries tend to be good growth candidates. A value manager ideally looks for attractively priced businesses that have fallen out of favour with the market and have been neglected, but whose fortunes are expected to change. ν

Past performance is not necessarily a guide to the future. The value of investments and the income from them can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.

Striving to look at market opportunities in a rational way

Even in challenging markets there are opportunities to be found

Post the credit crunch of 2008, the banking crisis, concerns over the Eurozone and continuing low interest rates have tested even the most unwavering investor. There is no doubt that these are some of the toughest economic conditions we have seen for many years.

Even in challenging markets there are opportunities to be found and investing in shares or bonds (fixed interest assets) over the long-term presents a greater opportunity than not investing at all, for several good reasons.

Long-term view
Markets have survived events such as the Great Depression of the 1930s and the recession of the early 1990s. Short-term movements in the price of stocks and shares are smoothed out over the long term, putting dramatic losses and sudden gains into perspective. Staying invested can increase the likelihood that your investment will benefit from rebounds in the market and minimise the overall impact of volatility on your potential returns.

Cash or shares?
In a volatile environment it is tempting to transfer investments to a more secure asset class such as cash, waiting to reinvest when the market settles. However, you could miss the opportunity of a market rebound. In addition, although cash retains its capital security, over the long-term it will suffer the erosional effects of inflation, especially if interest rates remain at current lows.

Keeping invested
Negative commentary often results in investors taking flight in difficult markets, with investments being sold when the price is falling and bought when the market is rising, which can be a costly strategy. The current investment environment still presents many opportunities with many good-quality companies. We can advise you how to identify these opportunities.

Focus on your goals
A key challenge for investors is to decide which is the greater risk: potentially losing money over the short term or not achieving investment goals at all. With life expectancies increasing and retirements sometimes lasting as long as 20 or more years, planning ahead and investing for the future is becoming more and more important.

Making the right choice
With such a wide choice of funds on the market to choose from, making the right choice can be daunting, particularly as even very similar funds can deliver significantly different returns. If you want to invest but are unsure where, we always recommend you seek professional financial advice. Past performance is no guide to the future. The value of an investment can fall as well as rise, may be affected by exchange rate variations and you may get back less than you originally invested.

Glossary

A guide to the jargon of protection

Assured
A person or persons who are insured under the terms of a protection policy.

Convertible Term Assurance
A term assurance plan that gives the owner the option to convert the policy to a whole-of-life contract or endowment, without the need for medical checks.

Critical Illness Cover
Critical illness cover is an insurance plan that pays out a guaranteed tax-free cash sum if you’re diagnosed as suffering from a specified critical illness covered by the plan. There is no payment if you die. You can take out the plan on your own or with someone else. For joint policies the cash sum is normally payable only once, on the first claim.

Decreasing Term Assurance
A term assurance plan designed to reduce its cover each year, decreasing to nil at the end of term. Decreasing term assurance cover is most commonly used to cover a reducing debt or repayment mortgage.

Deferred Period
A period of delay prior to payment of benefits under a protection policy. Periods are normally 4, 13, 26 or 52 weeks – the longer the period, the cheaper the premium.

Family Income Benefit
A term assurance policy that pays regular benefits on death to the end of the plan term.

Guaranteed Premiums
This means the premiums are guaranteed to remain the same for the duration of the plan, unless you increase the amount of cover via ‘indexation’.

Income Protection
This insurance provides you with a regular tax-free income if, by reason of sickness or accident, you are unable to work, resulting in a loss of earnings. Income protection is also known as permanent health insurance (PHI).

Indexation
You can arrange for your insurance benefit and premiums to increase annually in line with inflation or at a fixed percentage. Premiums are normally increased in line with RPI (Retail Prices Index) or NAEI (National Average Earnings Index).

Insurable Interest
A legally recognised interest enabling a person to insure another. The insured must be financially worse off on the death of the life assured.

Joint Life Second Death
A policy that will pay out only when the last survivor of a joint life policy dies.

Key Person (Key Man) Insurance
Insurance against the death or disability of a person who is vital to the profitability of a business.

Level Term Assurance
A life assurance policy that pays out a fixed sum on the
death of the life assured within the plan term. No surrender value is accumulated.

Life Assured
The person whose life is insured against death under the terms of a policy.

Life Insurance
An insurance plan that pays out a guaranteed cash sum if you die during the term of the plan. Some term assurance plans also pay out if you are diagnosed as suffering from a terminal illness. You can take out the plan on your own or with someone else. For joint life insurance policies the cash sum is normally payable only once, on the first claim.

Long-term Care
Insurance to cover the cost of caring for an individual who cannot perform a number of activities of daily living, such as dressing or washing.

Mortgage Protection
‘Mortgage life assurance’ or ‘repayment mortgage protection’ is an insurance plan to cover your whole repayment mortgage, or just part of it. The policy pays out a cash sum to meet the reducing liability of a repayment mortgage. You can take out the policy on your own or with someone else. For joint policies the cash sum is normally payable only once, on the first claim.

Paid-up Plan
A policy where contributions have ceased and any benefits accumulated are preserved.

Permanent Health Insurance
Cover that provides a regular income until retirement should you be unable to work due to illness or disability. Also known as Income Protection.

Renewable Term Assurance
An ordinary term assurance policy with the option to
renew the plan at expiry without the need for further
medical evidence.

Reviewable Premiums
Plans with reviewable premiums are usually cheaper initially; however, the premiums are reviewed regularly and can increase substantially.

Surrender Value
The value of a life policy if it is encashed before a claim due to death or maturity.

Sum Assured
The benefit payable under a life assurance policy.

Term Assurance
A life assurance policy that pays out a lump sum on the death of the life assured within the term of the plan.

Terminal Illness
Some life policies include this benefit free of charge and this means the life insurance benefit will be paid early if you suffer a terminal illness.

Total Permanent Disability Cover
Also known as permanent health insurance or income protection and sometimes available as part of a life assurance policy, this pays out the benefit of a policy if you are unable to work due to illness or disability.

Trusts
Many insurance companies supply trust documents when arranging your policy. Placing your policy in an appropriate trust usually speeds up the payment of proceeds to your beneficiaries and may also assist with inheritance tax mitigation.

Waiver of Premium
If you are unable to work through illness or accident for a number of months, this option ensures that your cover continues without you having to pay the policy premiums.

Whole-Of-Life
Unlike term assurance, whole-of-life policies provide life assurance protection for the life of the assured individual(s). Cover may either be provided for a fixed sum assured on premium terms established at the outset or flexible terms which permit increases in cover once the policy is in force, within certain pre-set limits, to reflect changing personal circumstances.

Business protection

Don’t overlook your most important assets, the people who drive your business

Every business has key people who are driving it forward. Many businesses recognise the need to insure their company property, equipment and fixed assets. However, they continually overlook their most important assets, the people who drive the business – a key employee, director or shareholder.

Key person insurance is designed to compensate a business for the financial loss brought about by the death or critical illness of a key employee, such as a company director. It can provide a valuable cash injection to the business to aid a potential loss of turnover and provide funds to replace the key person.

Share and partnership protection provides an agreement between shareholding directors or partners in a business, supported by life assurance to ensure that there are sufficient funds for the survivor to purchase the shares. It is designed to ensure that the control of the business is retained by the remaining partners or directors but the value of the deceased’s interest in the business is passed to their chosen beneficiaries in the most tax-efficient manner possible.

If a shareholding director or partner were to die, the implications for your business could be very serious indeed. Not only would you lose their experience and expertise, but consider, too, what might happen to their shares.

The shares might pass to someone who has no knowledge or interest in your business. Or you may discover that you can’t afford to buy the shareholding. It’s even possible that the person to whom the shares are passed then becomes a majority shareholder and so is in a position to sell the company.

The shareholding directors or partners in a business enter into an agreement that does not create a legally binding obligation on either party to buy or sell the shares but rather gives both parties an option to buy or sell, i.e. the survivor has the option to buy the shares of the deceased shareholder and the executors of the deceased shareholder have the option to sell those shares.
In either case it is the exercise of the option that creates a binding contract; there is no binding contract beforehand. This type of agreement is generally called a ‘cross-option’ agreement or a ‘double option’ agreement.

These are essential areas for partnerships or directors of private limited companies to explore.

Different forms of protection

Key person insurance – compensates your business up to a pre-agreed limit for the loss or unavoidable absence of crucial personnel, including the owner-manager. It is especially appropriate if your business depends on a few employees.

Critical illness cover – pays a sum of money to specific employees or the business owner in the event of a serious illness, such as a heart attack or stroke.

Income protection insurance – protects individuals by paying their salaries while they’re unable to work.

Private health insurance – funds private healthcare for specific employees. As well as being an extra benefit of employment, it could help them to return to work more quickly after an illness by paying for rehabilitation treatment.