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Pensions Update

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ALL pensions count - NHSPS pension x 20 plus lump sum ... At some point in the future, Ray Tiring has a fund of 3m at his SRD. The SLA is now at 2m. ... – PowerPoint PPT presentation

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Title: Pensions Update


1
Pensions Update
  • Peter Brewill
  • Financial Planning Consultant

2
Summary of Pensions Simplification (April 2006)
  • Fund limit - Statutory Lifetime Allowance (SLA)
    of 1.5m (2006) increasing to 1.8m (2010)
    Treasury to review after 2010.
  • ALL pensions count - NHSPS pension x 20 plus lump
    sum
  • Contribution limit - Annual Allowance of 215,000
    rising to 255,000 in 2010
  • Factor of 10 x increase in pension year on year
    to calculate deemed contribution for NHSPS plus
    actual amount paid to private pension
  • Personal relief only granted on personal
    contributions up to amount of earnings

3
But what if I have more than the SLA?
  • A recovery charge is applied
  • Take as lump sum - 55 charge on excess
  • Take as pension - 25 charge on excess (but pay
    marginal rate of tax in income drawn)
  • Transitional rules available to help protect
    those who have/expect to have more than SLA at A
    day
  • National Audit Office did not envisage problem
    for NHSPS members but that was before the
    expected improvements in NHSPS benefits mentioned
    earlier

4
The Recovery Charge
EXCESS
SLA
At some point in the future, Ray Tiring has a
fund of 3m at his SRD. The SLA is now at
2m. Transitional protection is not involved.
5
The Recovery Charge (1) - the lump sum option
EXCESS
A lump sum less 55 deducted at source
SLA
1,000,000 less 25 750,000 750,000 less
40 450,000
6
The Recovery Charge (2) - the pension option
EXCESS
A pension with 25 deducted at source
SLA
The reduced pension is then taxed at the
individuals marginal rate of tax
The pension option only looks attractive to those
who can avoid tipping into Higher Rate!
7
To protect or not to protect !
  • The first key question .. of many !
  • Two forms of protection
  • Primary Protection
  • Enhanced Protection
  • Or .. No protection !

8
Primary protection
  • Only permitted if total funds are in excess of
    1.5 million at A day
  • Protected maximum fund is indexed in line with
    increases in the SLA
  • Recovery charge is levied on growth over
    increase in SLA

SLA is Statutory Lifetime Allowance ..The cap
!
9
Primary protection
  • Allows further contributions into registered
    arrangements post A day
  • Must be registered within 3 years of A day
  • Beware interaction with overall limit, still
    applies !

10
Primary Protection
Fund value on A Day is 2m
Personal Allowance
1.5 m initial limit
6/4/06
SRD
The Recovery Charge will be levied on the real
return achieved
11
Primary protection
  • Who is likely to opt for Primary protection ?
  • Those with fund over 1.5m now but want to make
    additional contributions or retain future
    pensionable service of the NHS Pension Scheme

12
Enhanced Protection
  • Permitted on any level of fund
  • Complete protection against recovery charge
  • Member must leave pensionable service pre A day
    (Does not apply to NHSPS)
  • No post A day contributions to any pension plan
  • Must be registered within 3 years of A day

13
Enhanced Protection
Personal Allowance
6/4/06
SRD
No Recovery Charge will be levied on the real
return achieved
14
Enhanced protection
  • Who is likely to opt for Enhanced protection ?
  • Those with fund over 1.5m now with assets that
    may grow quickly
  • Those who have funds under 1.5m with assets that
    may grow quickly

15
Enhanced protection NHS Pension Scheme
  • Enhanced Protection is designed for those
    members who believe that the growth in their
    pension fund will be greater than the increase in
    the LTA. If a person applies for Enhanced
    Protection, they normally cannot pay further
    pension contributions to a Registered Scheme.
    However, this does not apply to the NHSPS, but
    does apply to any associated MPAVCs, FSAVCs etc
    that the member may have.
  • In summary Enhanced protection removes the
    recovery charge completely but is subject to
    several important conditions
  • Benefits at A-Day must also be subject to a test
    against the current pre A-day Revenue limits.
  • Members cannot continue to pay contributions to a
    defined contribution scheme, including money
    purchase additional voluntary contributions
    schemes.
  • Members can continue to pay contributions to a
    defined benefit scheme, such as the NHS Scheme,
    and can continue to build up Scheme membership.
  • The further permitted increase to benefits is
    subject to a ceiling known as 'Relevant Benefit
    Accrual (RBA) possibly 5.

16
Retirement Planning Alternative Investments
  • Personal Pension Plans contributions not
    restricted to percentage of earnings can now be
    up to earnings subject to overall annual limit of
    215,000.
  • Funds invested in Personal Pensions can be
    tailored to suit individuals attitude to risk
    from Cash funds to Managed funds to Global Equity
    funds.
  • Beware complicated calculation based on a factor
    of 10 x increase in pension year on year to
    calculate deemed contribution for NHS Pension
    Scheme and Statutory Lifetime Allowance (enhanced
    Protection).

17
Example for NHS Pension Scheme
  • Value of Scheme _at_ 6th April 2006
  • 38 years Membership and Pensionable Pay of
    120,000
  • Pension _at_ 6th April 2006 57,000
  • Lump Sum _at_ 6th April 2006 171,000
  • 57,000 x 10 171,000 Opening Value
    741,00
  • Value of Scheme _at_ 5th April 2007
  • 39 years Membership and Pensionable Pay of
    160,000
  • Pension _at_ 5th April 2007 78,000
  • Lump Sum _at_ 5th April 2007 234,000
  • 78,000 x 10 234,000 Closing Value
    1,014,000
  • Deemed Value of Increase to Scheme
  • 1,014,000 - 741,000 273,000 for 2006/07

18
Retirement Planning Alternative Investments
  • Individual Savings Accounts (ISAs)
    contributions restricted to 7,000 per tax year
    and are guaranteed to run until at least 2010.
  • There are two types of ISAs - Maxi ISA and Mini
    ISA. An individual can only subscribe/contribute
    to either one Maxi ISA or up to two Mini ISAs
    (one for each component), each tax year. Money
    cannot be invested in both a Mini and Maxi ISA in
    the same financial year.
  • The table shows the maximum amount that can be
    invested into each component.
  • MAXI ISA MINI ISA
  • Stocks Shares up to 7,000 up to 4,000
  • Cash up to 3,000 up to 3,000
  • If the maximum amount is invested in this
    component then no more money can be invested in
    the other component in that financial year. 
  • Funds invested in ISAs can be tailored to suit
    individuals attitude to risk from Cash funds to
    Managed funds to Global Equity funds.

19
Retirement Planning Alternative Investments
  • Whilst not an exhaustive list, other investments
    to be considered are
  • Investment Bonds 5 Tax deferred income
    withdrawals
  • Venture Capital Trusts - tax relief at 30 - on
    investments of up to 200,000 per tax year
  • Enterprise Investment Schemes - tax relief at 20
    is available on investments of up to 200,000.
  • Beware Investment Risk and accessibility of
    capital

20
What you need to consider when investing
  1. What risk you are prepared to take
  2. What your objectives are
  3. What timescale do you have short, medium or long
    term?
  4. Do you have any specific requirements
  5. Are there any restrictions i.e. Ethical
    investments?

21
Risk v Reward
10
5
1
22
Investment
  • Steps to a successful portfolio
  • Growth
  • Income
  • Access
  • Risk / Reward
  • Inflation
  • Budgeting

23
Asset Classes
  • Cash
  • Fixed Interest
  • Equity
  • Property

24
Cash
  • No risk
  • - No danger of Capital Loss
  • - No danger of Capital Gain
  • Relatively low return (inflation)
  • Return comes solely from interest
  • Easily accessible and divisible
  • Influencing Factors
  • - Inflation Interest rates

25
Cash v inflation
26
Fixed Interest
  • Range of risk, but considered low risk
  • - Government stock (Gilts)
  • - Corporate loan stock
  • Return comes from
  • - Capital appreciation
  • - Interest
  • Easily realisable
  • Influencing Factors
  • - Interest rates (expectation)
  • - Upgrades/downgrades

27
Fixed interest v cash v inflation
28
Equity
  • Higher risk
  • - Market
  • - Specific
  • - Different stocks different risks
  • Higher expected return
  • Return comes from
  • - Dividends - typically increasing
  • - FTSE100 3.2
  • - Capital appreciation
  • Easily realisable

29
Equity
  • Influencing Factors
  • - Long term
  • - economic growth
  • - fundamentals
  • earnings, growth, P/E ratios, yields/earnings
    and dividend etc
  • - long term interest rate trends
  • - Short term
  • - sentiment (fear and greed)
  • - Mergers Acquisitions activity (Boots)
  • - short term interest rates
  • - technical analysis (charts)

30
Equity v cash v inflation
31
Property
  • Medium/higher risk
  • - Economic (UK) (Sectors)
  • - Default
  • Variable return
  • Returns from
  • - Rental Income (NB Costs, voids etc)
  • - Capital Appreciation
  • Highly illiquid

32
Property
  • Influencing Factors
  • - Long term economic growth
  • - Short term supply/demand
  • - Quality of tenant
  • NB Direct versus indirect

33
Property v cash v inflation
34
Fund performance over 20 years
35
Annual compound return
36
  • Some investments available

37
Investment for Income
  • How much risk are you prepared to take?
  • Minimal Risk Examples
  • Ready Cash
  • Individual Savings Accounts (ISAs)
  • National Savings Certificates
  • Guaranteed Income Bonds
  • Cash (building societies and banks)

38
Investment for income
  • How much risk are you prepared to take?
  • Low to medium Risk Examples
  • Gilts/Corporate Bonds
  • ISAs
  • Distribution Funds

39
Investment for income
  • How much risk are you prepared to take?
  • Medium Risk Examples
  • General Unit Trusts/Open Ended Investment
    Companies (OEICs)
  • ISAs
  • Managed Investment Funds

40
Investment for income
  • How much risk are you prepared to take?
  • Higher Risk Examples
  • Investment Trusts
  • Individual Shares
  • Specialist Unit Trust/OEICs Japan, Gold etc
  • ISAs

41
Investment for growth
  • How much risk are you prepared to take?
  • Minimal Risk Examples
  • Bank / building society deposits
  • National Savings certificates
  • National Savings pensioners gteed income bond
  • Guaranteed growth bonds

42
Investment for growth
  • How much risk are you prepared to take?
  • Low Risk Examples
  • Government securities (gilts)
  • Distribution bonds
  • Guaranteed income plan

43
Investment for growth
  • How much risk are you prepared to take?
  • Medium Risk Examples
  • Distribution Bonds
  • Guaranteed income plan
  • With Profit bonds
  • Managed bonds
  • Unit trusts
  • ISAs

44
Investment for growth
  • How much risk are you prepared to take?
  • High Risk Examples
  • Shares
  • Investment Trusts
  • Unit trusts
  • ISAs
  • VCTs
  • EISs

45
Summary!!
  • Start planning as early as possible
  • Look ay your outgoings
  • Use your tax allowances
  • Use tax efficient wrappers
  • Think about what you are trying to achieve
  • Think about what risk you are prepared to take
  • Seek advice like your patients do!

46
  • Questions ?

47
Risk Warnings
  • This presentation is intended for general
    guidance only and is not a substitute for
    professional advice which takes account of
    individual specific circumstances.
  • While this presentation highlights some of the
    opportunities for planning, it should be
    recognised that it is not a complete or
    exhaustive description of the opportunities or
    pitfalls which are personally applicable to your
    situation.
  • The information provided is based on our current
    understanding of the relevant legislation and
    regulations which may be subject to alteration as
    a result of changes in legislation or practice.
  • Past Performance is not necessarily a guide to
    future performance. The value of investments can
    go down as well as up.
  • Levels and bases of and reliefs from taxation are
    subject to change.
  • PKF Financial Planning Limited are authorised and
    regulated by the Financial Services Authority.
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