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Mowatt Financial Planning: February 2009

Friday, 27 February 2009

Private Pensions

I've attached below my latest article on the Easingwold Advertiser. If only we all had as decent a pension as Fred Goodwin........

Will

Private Pensions

By this I mean any pension which you will have outside of the State Pensions covered in the last article. If the State Pensions give you the basic foundation, then your private pensions will hopefully help you maintain the standard of living that you have been accustomed to.

While pensions have a tax advantage when you make contributions, when you start to receive your pension, it will form part of your taxable earnings.

Now private pensions will either be a pension that is provided by the company that you work for or alternatively be a pension that you have taken out and contributed to yourself. In order to keep this relatively simple, I have focussed on the two types of pension you can get.


Defined Benefit

This is where you have a company pension and when you reach retirement, the pension scheme will provide an amount of pension which will be paid to you each year. This would commonly be a final salary pension. I was recently doing some planning with some long serving individuals from a Middlesbrough based company who were getting a decent final salary pension. I explained to them that this is as good as it gets. The next generation won’t be as well provided for.


Defined Contribution

This is where you have accumulated a pot of money either through a company pension scheme or through an individual plan such as a personal pension. When you want to take income, you need to either convert the pot of money into an annuity or alternatively take income through a mechanism known as an unsecured pension (often known as drawdown). The key difference is that an annuity will be guaranteed throughout life whereas under an unsecured pension the money still sits in a pool of investments and you effectively take income from this fund and take the risk that the fund may run out yourself.

When you get to your financial plan and you are looking at your income needs in retirement, the type of pension you have and how you choose to take your income will be important considerations.


Defined Benefit

In this case, the decisions are simpler. You will be able to take a defined benefit from a set retirement age. It will normally be possible to take your pension earlier (where your pension is normally reduced) or later (when it would normally be increased). When you take your pension, you will normally have the option to take a tax fee lump sum in return for a reduced pension.

The main considerations in deciding whether or not to take this lump sum are as follows:

  • Do you need the cash for a specific purpose? E.g. to pay off a debt.
  • What is your state of health, E.g. if you have suffered an illness that will significantly reduce your life expectancy then it might be more valuable to take the cash.
  • Are you getting fair value for the pension that you are giving up? E.g. If you are getting £13 of cash for every £1 of pension you are giving up, is this really giving you a fair price for the pension you are giving up?

This is an area where it will often make sense to seek advice to make sure that you are making the right decision.


Defined Contribution

Here you will have a pot of money that at some point you will want to take income from. The traditional route was to take an annuity but it is now possible to take income through an unsecured pension, as mentioned above,


In the case of an annuity, it is bought from an insurance company with the retirement pot and will provide a guaranteed income for life. By contrast, an unsecured pension allows income up to a maximum set by the Government Actuary’s Department (really, there is one) to be taken each year. In this case the risk that you outlive your fund lies with you and is not insured as in the case of an annuity.


In general, if your retirement funds are small and required to support your day to day living then an annuity would be the most appropriate route. Whereas if you have significant funds and more than enough to support your day to day living then an unsecured pension is an option. I have avoided being specific on numbers since the decision will be unique to each individual being based on both overall wealth and attitude to risk. Indeed it's possible to mix and match and also to do either in phases giving a lot of flexibility although the mechanics can get quite complicated. Whether to take an annuity, an unsecured pension or phase your retirement is a decision where it would be sensible to seek advice.


If you are going to take an annuity, then there are a number of factors that you should take into account:

Do you want to take a tax free lump sum?

If you have dependants, do you want the annuity to continue to be paid to them on your death?

Do you want the annuity to increase once it starts being paid?

If your health means that your life expectancy has been reduced, then you can get a better annuity than for someone with “normal” life expectancy.

Does your contract offer a guaranteed annuity option which could give you more income than you might get by shopping around?

These are important considerations as they will affect the level of income you will get from the annuity that you buy.


However, if you are taking an annuity make sure that you shop around. Around 2/3rds of people just take the annuity offered by their pension provider but it is often possible to get a better deal by shopping around. In a comparison carried out by Scottish Equitable the difference between the best annuity and worst annuity you could get was 11% and that affects the income you will get for the rest of your life. The FSA site Money Made Clear allows you to compare annuities between different insurers (www.fsa.gov.uk/tables).

Where you have a private pension, this will be an important part of you retirement plans and it is important that you make the right decisions.


The complexity of your situation will determine the amount of advice that you need but as a minimum make sure that you don’t just take the first annuity that you are offered.


Finally, if you are in the situation that you worked for a company that you can no longer trace then it is possible to get some help in tracing your “lost” pension through the Pensions Tracing Service:

On-line at http://www.thepensionservice.gov.uk/atoz/atozdetailed/pensiontracing.asp

Phone 0845 6002 537

or write to

Pension Tracing Service
The Pension Service
Tyneview Park
Whitley Road

Newcastle upon Tyne
NE98 1BA

Hope this helps to shine some light on pensions and the decisions that you will face at retirement.

Will

Sunday, 15 February 2009

From Strategy to Balloons II

And here they are..........



Thursday, 12 February 2009

From Strategy to Balloons

I thought I'd vary the blog and share the lighter side of becoming an IFA. Last Friday I went to the York Chartered Insurance Institute (CII) dinner and met up with a number of old colleagues. It was an enjoyable evening.

The ex-Norwich Union table now rivals the Norwich Union table for number of attendees. Going round the ex-NU table, we now have representation at Axa, Clerical Medical, HBOS, Just Retirement, Skipton, SimplyBiz, Scottish Widows, NU (not all ex) and Results Financial (me). Not a bad network to begin with.

The format of the evening was a meal and various speeches. The main speaker was a guy called John Simonnett who I didn't think was that funny. His line with me was...

We have some Scottish people in the audience, and where are you from sir? (I was wearing a kilt)

Wick

Where?

WICK!

Alright then sir I'll speak slowly for you.

However, the magician who was called Alan Hudson was fantastic.

He had a great act and one of the funniest bits was seeing the Director of Strategy at Norwich Union/Aviva with a bag over his head popping baloons whilst Alan guessed the colour of the balloon being popped with a bag over his head. And he got them all right! Maybe you needed to be there but I'll see if I can get a photo.

Will

Wednesday, 4 February 2009

What pension will I get from the State?

Below is my latest article from the Easingwold Advertsier. Sorry it's a bit dry.

Will

What pension will I get from the State?

Moving on now from sorting out your expenses, I’m going to look at the income side of retirement. In this article I’m looking at what the State provides. There is not enough space here to go into all the detail but Age Concern and Help the Aged have both got useful information on their websites.

Pensions from the state can be made up of the following elements:


Basic State Pension

State Earnings Related Pension/ State Second Pension

Graduated Pension


Basic State Pension

The full basic state pension in the 2008/9 tax year (i.e. from 6th April 2008 to 5th April 2009) is £90.70 per week for a single person and £145.05 for a couple. Equivalent to £4,716 and £7,542 respectively. There are conditions in order to qualify for the full amount of basic state pension. Broadly for a man to have paid National Insurance Contributions for 44 years and for a woman 39 years. This is changing to 30 years from 5th April 2010.


State Earnings Related Pension/ State Second Pension

As seems to be the way with pensions, these are a bit complicated to explain but are broadly pensions over and above the basic state pension based on earnings. The State Earnings Relate Pension applied from April 1978 to April 2002 and was then replaced by the State Second Pension (S2P) from 2002.


Graduated Pension

The Graduated Pension (also called Graduated Retirement Benefit) is based on graduated contributions paid on earnings between 1961 and 1975. You will receive it when you claim your Basic Pension but it can also be paid at pension age even if you don’t qualify for a Basic Pension. The amount depends on your earnings and is usually quite small.

All of these benefits are payable from state pension age. Currently state pension age is quite simple – 60 for women and 65 for men. However, from 2010 its starts to get more complicated as the age gradually rises to 65 for women by 2020 and to 68 for men and women by 2046. Remember 75 is the new 65 – you heard it in the Easingwold Advertiser first!


Pension Credit

In addition to the state pension benefits outlined above, there is also a Pension Credit which provides people with a minimum level of income and gives extra cash to people with modest incomes who have made savings for their retirement. There are two elements, the “guarantee credit” and the “savings credit”.


The guarantee credit is available to people aged 60 or over. It tops up someone’s income to a set level. The guarantee credit is set at standard amounts; from April 2008 it is £124.05 a week for a single person and £189.35 for a couple. The amounts are higher for some disabled people, carers and homeowners with certain housing costs.


The savings credit is available to people who have reached the age of 65. The maximum amount is £19.71 a week for a single person and £26.13 for a couple. The actual amount paid is based on both the income being received and the income deemed to be received on savings above £6,000. Of course it’s a bit more complicated than this.


By this time you are probably in one of two camps:

A) I knew all this anyway – in which case good luck and please share the benefit of your wisdom with your friends and neighbours who could do with a bit of help.

B) What does it mean?

In this case there is some help at hand…….

Speak to a knowledgeable friend or relation and then use the following contacts:


How much will my state pension be?

Ring up or go online to the Pensions Forecasting team:

State Pension Forecasting team

Telephone 0845 3000 168

Textphone 0845 3000 169

www.thepensionservice.gov.uk

They will be able to give you a forecast of your state pension.


Should I make up any missing contributions?

Estimates are that 90% of men and 35% of women are entitled to the full basic state pension.


If you don’t have the full basic state pension, there is the option to top up your qualifying years to increase it. For some time it has been possible to make up the shortfall within six years from the end of the tax year for which contributions were due. However, from 5th April 2009, it will be possible to make up to an additional 6 years of missing payments for those retiring before April 2015. This is an area that is definitely worth consideration as it can be very good value. Note that if you are likely to get Pension Credit this would be reduced if your state pension goes up. If you’re unsure whether it’s worth topping up or not, it’s possible to get advice from the likes of Citizen’s Advice Bureau as well as from financial advisers.

If you need more help in terms of whether to make up any missing contributions to top up your basic state pension, the following contact should be of use:

Hambleton Citizen’s Advice Bureau

0845 122 8689 - Advice Line


Am I entitled to a Pension Credit?

Department of Work and Pensions help with Pension credits

Pension Credit helpline on 0800 99 1234 or textphone 0800 169 0133


And finally both Age Concern and Help the Aged have some useful information on state pension and benefits.

Age Concern

http://www.ageconcern.org.uk

Freephone Information Line: 0800 00 99 66

Help the Aged

http://www.helptheaged.org.uk/

Freephone Senior Line: 0808 800 6565

 
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