Accessing cash in hard times

Many commentators are predicting that we are about to enter into a recession, as a consequence of which unemployment is likely to rise. With the housing market still in decline and credit being in short supply alternative sources of funds need to be found.

For the over 50’s there is a source of funds in the form of the tax free cash sum from accumulated pension funds. Most private pensions allow policyholders to draw a lump sum of up to 25% of the value of the fund. This can currently be taken from age 50 although from 5th April 2010 the minimum age will rise to 55.

It is not always necessary to draw a pension at the time when the tax free cash lump sum is taken. Instead the remainder of the fund can be allowed to continue to be invested according to the level of risk that the policyholder wishes to take. If an income is required this can be taken from the fund subject an upper limit, which is reviewed every five years, or in the form of an annuity which can provide a guaranteed income for life. The income is normally paid net of UK tax although expats can arrange for it to be paid without deduction of UK taxes but subject to tax where they reside. If the policyholder is trying to maximise the amount of cash in the short term they could take their entire first year’s entitlement to income from the fund as a single payment at the beginning of the year.

Potential funds from which benefits may be taken early include personal pensions, stakeholder pensions, retirement annuities, final salary (defined benefit) schemes and additional voluntary contributions (AVCs and FSAVs). In the case of final salary schemes and AVCs the policyholder needs to have left the service of the employer with which they built up the benefits. The proceeds from several different pensions of all varieties can be brought together in a single arrangement in order to allow the withdrawal of tax free cash.

Take a case where funds of say £80,000 have been accumulated in a variety of plans. Once they have been transferred, £20,000 can be paid out as a tax free lump sum. In addition a further £3880 gross (£3104 net of basic rate tax) could be paid as an upfront income payment from the fund.

This facility is not just useful to help clear debts. The capital released in this way can be used towards new business ventures or even as a deposit for people wanting to take advantage of the drop in house prices by investing in properties which they will rent out.

This article, of necessity, has been abbreviated in order to keep things simple. One should not forget that the primary purpose of pension funds is to provide an income when the policyholder or member no longer works. If benefits are taken early this will be at the expense of later income in retirement. Some private pensions provide guaranteed annuities, which can be forfeited if the policy is transferred elsewhere. Where benefits are transferred from a final salary pension scheme this could result in a smaller longer term retirement income and guarantees could be lost. These are just some of the issues that may need to be considered. Due to the complexities involved it is most important that advice is sought from a properly qualified pensions specialist before entering into any transactions.

In these times of financial stress, how well protected are your investments?

Given the current turmoil in the world markets with banks going bust and insurance companies needing emergency loans to keep afloat you could be forgiven for worrying about the security of your money. However, all is not lost.

In the UK when an insurance company, bank or broker goes bust there is an organisation called the Financial Services Compensation Scheme (FSCS) which provides compensation to investors and policyholders who have lost out. The FSCS is funded by levies on the companies authorised to trade in the market place. The levels of compensation that it can pay depend on the type of arrangement that you hold and have been set out below:

Deposits: £35,000 per person (for claims against firms declared in default from 1 October 2007). 100% of the first £35,000.*

Investments: £48,000 per person.
100% of the first £30,000 and 90% of the next £20,000.

Mortgage advice and arranging: £48,000 per person (for business conducted on or after 31 October 2004).
100% of the first £30,000 and 90% of the next £20,000.

Long-term insurance (e.g. pensions and life assurance): unlimited.
100% of the first £2,000 plus 90% of the remainder of the claim.

General insurance: unlimited.
Compulsory insurance (e.g. third party motor): 100% of the claim. Non-compulsory insurance (e.g. home and general): 100% of the first £2,000 plus 90% of the remainder of the claim.

General insurance advice and arranging: unlimited (for business conducted on or after 14 January 2005). 100% of the first £2,000 plus 90% of the remainder of the claim. Compulsory insurance is protected in full.

Summary
In summary, if hold cash with a bank or building society the maximum compensation amount is now £35,000 per customer at each bank. The maximum compensation for insurance policies is effectively 90% of the value of the claim (100% of the first £2000). Whilst insurance companies provide a greater degree of investor protection this relates to the surrender or claim value NOT what you paid for it. If your policy is invested in the markets it will certainky have reduced in value. If it is held in back deposits and the underlying banks go bust - you loose your money. The above levels of compensation relate to individual investors and policyholders - not institutions.

Whether you are worried about the solvency of the insitutions with which you hold money or about the effect of the markets on your investments you should not act in haste as this could trigger penalties or merely crytalise investment losses. Seek professional advice from an independent financial adviser who can provide you with impartial professional advice.

If you would like further information on the FSCS click here

Useful Changes to Contracting Out Rules

The government has just introduced new rules which will improve the choices available to millions of pension policy owners. The rule changes, which will come into effect on 1st October 2008, affect those with Protected Rights Benefits. These are acquired when an employee person opts out (known as Contracting Out) of the State Second Pension S2P (previously known as the State Earnings Related Pension Scheme- SERPS).

Protected Rights can be acquired in a number ways:
1. Via a Personal Pension or a Stakeholder pension. Employees pay the full rate of National Insurance Contributions. After the end of each tax year the Revenue work out how much has been paid and rebate a part of this into the employee’s plan (something I am frequently asked about and the subject of a later blog).
2. Via Contracted Out Money Purchase Schemes (known as COMPs). These are employer sponsored pension schemes. The employees pay reduced National Insurance Contributions and the employer makes minimum contributions to the scheme.
3. Via Final Salary Pension Schemes (also known as Defined Benefit Schemes). These are schemes that provide a promised level of benefits to members when they retire, typically based on their final earnings and years of service. Where the scheme has opted out of S2P, these are expressed in the form of a pension but they can be expressed as Protected Rights or converted especially if the benefits have been transferred.
4. On divorce or termination of a Civil Partnership where a Pension Sharing Order is made. In such circumstances the pension benefits of one of the spouses/civil partners is allocated under a Court Order to the other. The benefits can be provided within the same scheme but more typically the scheme will require that they be transferred out.

Successive governments have imposed restrictions on the way in which Protected Rights may be paid out. Quite a few rules have been removed in the last few years and the remainder should disappear all together from 2012. However, for now, benefits must be taken from age 50 (55 after 5th April 2010) and these must include a spouses/dependents benefit. It is also currently a requirement that they only be invested in insured pension arrangements.

On 1st October 2008 the new rules will allow Protected Rights Benefits to be transferred into a Self Invested Personal Pension (SIPP). Until recently these types of schemes were not regulated and as a consequence transfers of Protected Rights into them were prohibited. SIPPs allow investment in a wide range of assets including stocks and shares, investment funds and commercial property. It is also possible to borrow 50% of the value of the assets in the fund to assist with the purchase of new investments, such as buildings.

The ability to invest in commercial buildings is particularly useful to business owners wanting to invest in new premises. SIPPS can even be used to buy the premises already owned by the business, thereby releasing the capital locked up in the building. The proceeds received by the business can be used to help finance expansion, or even to simply pay off accumulated debts.

If the SIPP buys trading premises for the business, the business is required to pay a market rent which is fully relievable against its taxable profits but received tax free by the scheme. As the scheme does not have to pay tax on its rental income all of it can be used to reduce its borrowings. This results in the earlier repayment of the borrowing which means less interest will be paid.

A group of SIPPS owned by different individuals can collectively purchase premises. This is a method used by quite a few professional firms such as lawyers and accountants as well as doctors and dentists.

This is not just an opportunity for new investments but also for top-ups to existing schemes. These can be used to make additional investments. Alternatively the additional funds can be used to reduce scheme borrowings.

As with any transfer of benefits it is important that professional advice is taken from an appropriately qualified independent financial adviser. They will be able to review all of your options for you as well as make sure that you are fully aware of any adverse consequences of transferring your benefits.

Shop Around when you retire

BBC Breakfast on Saturday 21st June featured a piece on the importance of shopping around to ensure that you get the highest possible income when you retire.

This applies to those of you with private investment linked pensions. These operate on the basis that you make contributions during your working life to create a pot which you use to support yourself in retirement. At that point, you can typically take 25% as a tax free cash sum and the rest must be used to provide an income in one of a variety of ways. For most people of relatively modest means the most appropriate option is likely to be an annuity.

Annuities come in all sorts of shapes and sizes. They can be paid monthly, quarterly, half yearly and yearly, in advance or arrears. Payments in arrears tend to be greater than in advance. For example a pension yearly in arrears will be better than a pension monthly in advance. They can be level or escalating and can include various levels of provision for spouses and dependents. They can also include a degree of capital protection so that the fund is not all lost should you die shortly after retiring. Enhanced annuity rates are available to smokers as well as to people in poor health.

A key aspect of annuities is that once you have made your choice and the annuity has been put into force, you cannot change your mind. It is therefore critically important that you carefully consider your requirements – and those of your dependents- before you commit yourself. If you suspect that your health may qualify you for a better rate check out enhanced rates.

The Financial Services Authority, the body which regulates the financial services industry, has produced a useful booklet which summarises your choices on retirement. You can access it here

The thrust of the BBC piece was that a large number of people do not appreciate that when they retire they do not need to buy an annuity from the company with which they built up the pension fund. All pension providers are required to offer what is known as the ‘Open Market Option’, which is the facility to take the fund to another company where an improved annuity can be provided. As a consequence they are losing a substantial amount of money.

The importance of checking out the Open Market Option cannot be overstated. Most pension companies do not offer good annuity rates. Prior to retirement they issue a pack of information containing a range of options and this will mention the open market option. However too many people ignore this to their cost.

So how do you find out more about the Open Market Option? See an independent financial adviser. They will not only be able to shop around for you but they will also be able to advise you on which on the other benefits you should include such as a spouses/dependents pension, escalation etc. They will also be able to liaise with the various companies involved to ensure that your pension comes into payment with a minimum of delay.

As a practitioner I can assure you that this is not merely a theoretical exercise. Barely a month goes by when I don’t help someone shop around for the best rates. Most recently this has resulted in a pensioner increasing their income by some £3000 per year.



Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you

Waiting Longer for the State Pension

A little known fact is that the government have fairly quietly increased state pension ages for men and women so that for all people retiring after 2024 will increase from age 65 to age 68. What does this mean to you?

Well, if you were able to retire now you would receive £90.70 per week plus any increases due to the State Second Pension (previously known as SERPS)This equates to £4716 per year. Therefore if you are one of the unlucky ones you could be loosing out on £14,149 over the three years.

The Pensions Service have put together a useful little calculator on their website so that you can find out how much extra you will have to wait for your state pension. If you would like to find out, click here


What can you do about it? Well… the starting point is to have a plan. Of course, the state pension should only be a part of your income when you retire. You need to assess what you require to maintain a comfortable standard of living and then compare this with the level of income which you think you will get. If there is a shortfall, something needs to be done.

Alternatively you could consider making use of a financial planner who can prepare a cash flow based model for you which will show you where you stand and help you to create a plan to make sure that you don't descend into penury when you retire.