Friday, 22 August 2014

Why you MUST review your UK final salary pension before November 2014

What's changing? Why review now?
In this years budget announcement the UK government announced a raft of changes to UK pension schemes. For most clients this will result in more flexibility, however, for those with final salary pension schemes it has resulted in more restrictions. It is important for anyone with a UK final salary pension scheme to review the options available to them. As this new legislation comes into effect for the new 2015/1016 tax year  in April you MUST begin the review process before the end of November 2014 to allow time for the review (and if appropriate the transfer process) to be completed before the new rules take effect. 
It is also important to only take advice from a FCA regulated firm that can advise on both onshore (UK) and offshore transfer choices. From April 2015 only FCA regulated firms will be able to advise on final salary transfers.

Most people will be better off after the changes, in particular UK residents. They will have freedom of choice in terms of how to take their benefits at retirement age. Unfortunately members of Defined Benefit (final salary) schemes will lose this flexibility.

It seems likely that members of defined benefit schemes (particularly those from public sector schemes) will lose the ability to transfer their pension to something more flexible from April next year. It sort of makes sense because public sector final salary schemes are expensive for the government. If people are locked into them in the future they can, in subtle ways over time, alter the benefit structure inside the schemes and therefore reduce the cost to provide pension income to members.

Looking at the Private sector people transferring out of their Deferred Benefits / final salary schemes is good news because it takes the liability away from the scheme, most of which are in a negative position anyway. The consultation document proposes that the private sector may well be treated in the same way as the public sector, with either a ban on the ability to transfer out, or heavy restrictions on it. We expect the provision of benefits from the fund would be restricted. That makes consideration of transferring out of Deferred Benefits / final salary pensions, for both public sector and private sector deferred benefits, extremely important because if you transfer those benefits out now, before April 2015 you know what the position is going to be. If you wait till after 2015 you will have no idea what the tax position or options are going to be and there is a good chance the options will be worse than now.
What are my options?
Where to transfer? There are lots of options for transferring a UK final salary defined benefits scheme. If non-uk resident and living offshore a QROPS scheme could be a good place to move, equally if UK resident or intending to return to the UK within a few years then a UK based SIPP could be the answer. Why these options?
Firstly some people like to have the option of taking their benefit earlier than is allowable in the UK, say from the age of 50, and QROPS pension scheme will allow that.
Secondly – and this is a key driver for most people – people don’t like the thought that after they die their loved ones will have to pay a lump of UK tax, in particular when they actually die after they have taken benefits from a final salary scheme. If you transfer to a QROPS or SIPP, you don’t have the lump sum death benefit charge. We know the UK are looking at reducing the level of the charge, but we think they will likely reduce it from 55% to 40%; whereas with a QROPS or SIPP you have the certainty of knowing there will be no tax on the pension fund. (in some circumstance tax may be payable depending on full estate, discuss this with your adviser).
The Third reason is really a point about investment flexibility. QROPS and a SIPP allow people to have much more investment flexibility than a defined benefit scheme does.
A QROPS uses the individual’s tax certainty in relation to how the benefits will be dealt with in their own country of residence.         
As a company (and personally) regulated in the UK, EEA and Internationally i can advise people to transfer to a UK SIPP in exactly the same way that i can advise people to transfer to QROPS. For expats it’s usually the case that QROPS are a more compelling argument for non UK residents.
QROPS - Qualifying recognised overseas pension scheme (regulated by HMRC)
SIPP - Self Invested Peronal Pension
Pensions are a complex area. Speak to a specialist and get advice relevant to your own personal situation. If you have an individual questions please contact me. Have a great day.
Andrew Lumley-Holmes

Monday, 18 August 2014

Is it important to diversify my assets?

Diversification is one of the most basic principles of investment and investing. The reason it is important to diversify your investments is because the investment markets can be very difficult to predict. By being well diversified you can protect your downside risk and hopefully reduce the volatility or swings in value within your investment portfolio.

Depending on how much risk you want to take with your investments will constitute what kind of assets you will want to hold in your investment accounts and what kind of assets you want to buy. Lets look at the table below, detailing investment returns over the last 10 years from several of the key asset classes.


Lets look at the average annual returns from each of these asset classes from '04 to '13, in order:

11.14% pa - Event Driven Equity Funds
11.13% pa - Real Estate Investment Trusts (reits)
10.42% pa - S&P 500
9.79% pa - Global Equity Fund
9.51% pa - International Equity Fund
8.54% pa - Hedge Funds
7.56% pa - Long / Short Equity Funds
5.60% pa - Bond Funds
3.63% pa - Managed Futures Funds
1.81% pa - Cash
0.72% pa - Commodities Funds
-0.27% pa - Equity Market Neutral Fund
-0.79% pa - Currency Fund
-5.57 % pa - Short Equity Bias Fund

Immediately you can see that if you want to make real returns above inflation then equities need to form some part of your portfolio. Despite the fact most of these equity funds posted losses of around 40% of their value during the 2008 market crash, they have shown the ability to bounce back.

The traditional buy and hold equity funds have produced much stronger average returns than the newer classes such as long/short, market neutral and short bias funds.

But coming back to diversification, what does this mean? As you can see from the table above its very difficult to predict which asset class will perform the strongest from year to year. With several asset classes jumping from top to bottom from one year to the next. This difficulty in prediction is exactly why diversification is important. As an example. Had you invested your money equally into each of the 14 asset classes above you would have ended with an overall return of 5.23% per year with a maximum draw down of -21.69% in 2008. Because we reduce the risk and the volatility the return becomes lower but more predictable. But lets look at a typical example of a balanced investment portfolio. Typically we would take cash out of the equation as that should be safe and liquid in a bank account. On an investment of say $100,000 we might decide to put together a balanced portfolio that looks something like this:

International Equity - 10%
Global Equity - 10%
S&P 500 - 10%
Hedge Funds - 10%
Commodities - 10%
Real Estate Investment Trust - 10%
Bonds - 40%

We have several different asset classes above so the volatility of the account should be lower than usual while still providing good, solid returns. As an example the portfolio above would have returned 7.25% per year with a maximum draw down of -23.55% in 2008 (the only year that produces a negative investment return on the portfolio shown).

So use your head when investing. Spread your risk across different asset classes within your attitude to risk. If you want to use a high risk / high potential return investment strategy or a safe, secure investment strategy to help provide an income then do so, just make sure to spread your risk by using diversity to your advantage.

Have a great day, Andrew Lumley-Holmes.

Friday, 8 August 2014

£3.4bn UK Inheritance Tax Bill for 2013/2014 - Don't get caught!

More and more people are falling into the trap of having a large inheritance tax bill to pay upon the passing of someone close to them. In 2013-2014, £3.4bn was paid to HMRC in inheritance tax. A significant rise over the last two years in particular. But why is this? Its partly down to the rising asset values (of property in particular) in the UK recently. More and more people are finding themselves with a liability and there has been a growing trend of British Expats getting caught in the trap more often since the change to the rules determining domicile. Particularly where they have assets in multiple countries around the world. There is a big difference between domicile and residency of a country, its important to understand the difference:

Domicile: the country that a person treats as their permanent home, or lives in or has a
substantial connection with.

Residency: the act of living in a place

This is an important distinction, an expat may well have lived outside their home country for 10
years but may still be classed as domiciled there, particularly if they maintain assets there like
a residence or bank accounts, etc. Failure to plan their taxation exposure can result in
some hefty bills dropping through the letterbox while they are alive and when they pass on.


So how can you and / or your family members avoid the tax trap that so many are falling into?

Firstly, it pays to get professional advice from a financial adviser as there can be many pitfalls, however, there are basically several options to reduce or remove an inheritance tax liability:

1) Make a will - this is the number one most important thing to do. If you are an expat get a specialist international will writer to do it for you. If you don't know one contact me and i can point you in the right direction.

2) Transfers between spouses (husband/wife) are often exempt. However, be aware, if you are British and your partner is of a different nationality you may not receive the spouse exemption.

3) Give away the liability - you can give away the excess money over and above the tax threshold, thus reducing your taxable estate. Some gifts may not qualify so get advice on how, to whom and where you can gift your money to.

4) Use trusts. There are many different trust options available, these can be a very cheap and effective way of reducing your inheritance tax liability while still being able to retain access to income or capital should it be required, however some tax may still be payable. Speak to an adviser on the most suitable option.

5) Insure against the tax liability. For example if you know you have a tax liability of £100,000 then take out life insurance to cover that liability. This will result in the estate being settled quicker and can be a cheap way of negating a future inheritance tax payment for your family.

As always, if you have any questions, let me know!

Have a great day, Andrew Lumley-Holmes.


Monday, 4 August 2014

Retirement Planning - how much should I save?

Whats Your Number?

One of the key things i help clients with is retirement planning by working out what they need to do now so they can retire when they want, with the income they require. While this is often done individually depending upon a clients exact situation, needs and timings for their retirement planning, I have put together a tabular guide for you below to show you what you need to do NOW to get where you want to be in the future. 

All the figures are in dollars but the currency is irrelevant. Its the numbers that matter.

Retirement planning is never simple but there are two key questions you need to ask yourself first:

- At what age do i want the option to stop working? (or how long do i have left until retirement?)
- How much income do i need / want to retire? (Assume you retire tomorrow, how much income would you want / need?)

Simple Retirement Planning

You can then use the table below to work out how much you need to save, each month, to achieve your retirement planning goal:

Notes: 
- Assumes an inflation rate pre-retirement of 3% per annum. So $20,900 is 25 years time would buy the same as $10,000 would buy today.
- Pay days remaining gives you an idea of how many paychecks you have left before retirement.
- Retirement fund required is based upon a fixed income drawdown of the annual income each year. Assuming this income is kept constant and the remaining fund invested cautiously achieving returns of 3% per annum the inflation adjusted income will be produced for a period of 30 years. Or, more simply, if you have a fund of $232,000 (using the 5 year data) you can produce an income of $11,600 per year from that fund for a period of 30 years if the remaining fund is returning 3% per annum.
- No consideration has been made for taxation. This does not constitute individual advice. If advice is required on the retirement planning structures and tax advantages available speak with an adviser.
- The retirement planning figures below assumes there are no existing savings. Where existing savings need to be taken into account the calculation is more complicated. If you need help drop me a message and i can produce the numbers for you.



So - lets look at a couple of examples:

Client A wants to retire in 15 years with an annual income of $30,000 per year in today's terms. He has a reasonably high appetite for risk so 9% is not an unreasonable assumption of returns. Therefore client A needs to save:
$2,553 per month

Use the 15 year data: saving $851 per month at 9% growth will bring him $10,000 per year today so he needs to triple this figure.


Client B wants to retire in 25 years with an annual income of $40,000 per year in today's terms. She has a reasonably high appetite for risk so 9% is not an unreasonable assumption of returns. Therefore client B needs to save:
$1,584 per month

Use the 25 year data: saving $396 per month at 9% growth will bring her $10,000 per year today so she needs to quadruple this figure.

As you can see, retirement planning for a comfortable future requires a certain amount of thought and commitment now. The earlier you start to save, the easier it will be. 

As an example below i will also demonstrate a more complex calculation still utilising the table for your retirement planning:

Client C wants to retire with an income of $50,000 per annum in 20 years time. He has existing savings of $100,000 and expects to receive another $200,000 on the day of his retirement. The $100,000 is invested returning 9% per annum. The $200,000 will increase in line with inflation at 3% annually. How much does he need to save??

- To produce an income of $50,000 per annum in 20 years time Client C will require a total fund value of $1,810,000 on his retirement date. (Using 20 year data he needs $362,000 for each $10,000 of income produced therefore we need to multiply $362,000 x 5).
- His existing $100,000 will be worth $560,441 in 20 years (at 9% per annum growth)
- His $200,000 retirement bonus will be worth $361,222 in 20 years

Therefore his existing retirement savings will be worth $921,663
Required fund $1,810,000 minus existing savings of $921,663 leaves us with a shortfall of: $888,337

We need to divide this figure by the fund required to produce $10,000 on the table, therefore:

$888,337 / $362,000 (the fund required to generate $10,000 in 20 years) = 2.46
Monthly saving @ 9% x factor above will show us the monthly saving required to produce the shortfall in the clients planning and is equal to $567 x 2.46 = $1,394.82

Therefore including his existing retirement funds, Client C needs to save an additional $1,394.82 per month at returns of 9% per annum to reach his retirement savings goal. 


I hope this perhaps helps one or two of you to better understand what you require to achieve your goals. As always if there are any questions then let me know!

Have a great day. Andrew Lumley-Holmes.