Financial Planners Elite Financial Planning Articles

Some good news for savers at the end of 2010? Well, possibly!

Keith Churchouse — Tue, 21 Dec 2010 11:50:48 GMT

2010 and the end of 2009 has not been a vintage season for savers with the Bank of England’s base rate remaining at 0.5% for all this year and part of last year. An unprecedented period of around 20 months (05 March 2009 to 0.5%) has elapsed since the based rate sank to this low level. With inflation on the rise (the Consumer Prices Index (CPI) rose to 3.30% in November 2010 from 3.20% in October 2010) the real capital value of savers deposits in most cases is falling in real purchasing value.

For those with higher levels of deposit, there is also the problem of maintaining levels of deposit that enjoy the current deposit compensation/protection limit of holdings below £50,000 in the UK. Those deposit taking institutions that use the European protection system see those limits increase to €100,000, which is about £70,000 in sterling, although this fluctuates all the time with currency movements.

From 31 December 2010, The Financial Services Authority (FSA) has announced this month (December 2010) that the current UK deposit guarantee/compensation limit is to increased to £85,000, from £50,000. This will at least have the beneficial effect of reducing the need to open various accounts and spread deposit funds around for those investors with significant funds to invest wishing to stay below this limit.

Further details of this announcement can be found at the Financial Services Authority website here: http://www.fsa.gov.uk/pages/Library/Communication/PR/2010/181.shtml

The way you deal with your deposit funds is a key point to financial planning and this planning needs to be considered carefully, especially with this new deposit protection limit change in mind. A regular review of savings strategy is always worthwhile to ensure that the best is being made of your capital with historically low bank base rates and rising inflation. The beginning of a New Year might be a good opportunity based on your circumstances and needs?

At the same time, you may wish to check your position with regards to the use of this year’s Cash ISA allowance of £5,100, if you have not used this in full.

With this in mind, it should be noted that we are all different and your savings strategy will be individual to your needs, such as access and your overall tax position. Therefore, this article should not be seen or used as individual advice.

Seek Independent Financial Advice (IFA) for your circumstances. Have a great New Year.

Keith Churchouse
Director of Churchouse Financial Planning Limited

Churchouse Financial Planning Limited is authorised and regulated by the Financial Services Authority. The Financial Services Authority does not regulate taxation advice.

Business Continuity - Shareholder Protection

Paul Gorman — Sat, 06 Nov 2010 07:25:36 GMT

Recent research amongst British Chamber of Commerce members showed that only 4% of the business owners questioned had any shareholder protection in place.

Amid the time-consuming, complex business of running a company, unfortunately very little attention is paid to what might happen if a shareholder dies, or becomes seriously ill, and the above figures bear this out. To a point this is understandable, as business owners primary focus is the success of the company. Sadly though success can quickly and easily turn to failure if a business owner dies or is seriously ill.

So who should be responsible for raising the awareness of what can go wrong ? To my mind, this should rest with the company’s professional advisers - be they financial planner, accountant or solicitor, after all each one has a vested interest in a company’s continued success.

A business comprised of major shareholders will be aware that the long-term success of their business will depend on their contribution. But they may not have thought through the potential disastrous implications that could ensue if one dies or becomes seriously ill.

A company’s Articles of Association deal with the issues of transferring and selling shares. In most cases the deceased or critically ill shareholder’s shares pass to their beneficiaries who obviously have a right to their inheritance. After inheriting the voting rights, the beneficiaries have the right to a say in the running of the business.

This can cause problems as the beneficiaries may not have the necessary skills and experience to take on a role within the company. They may not share the same aspirations and objectives the surviving shareholders have for the business. They may not get on with the surviving shareholders and are likely to prefer a cash sum rather than shares.

The surviving shareholders may prefer to continue in business on their own and prefer to purchase the shares, but may not have sufficient capital available. Without the necessary capital an outside third party, potentially hostile bidder, or even a competitor, could purchase the shares.

The likelihood is that the surviving shareholders will want to retain control of the company and the beneficiaries will want a cash equivalent value for the shares. Many companies adopt a pre-emption clause in their Articles of Association which allow the shareholders the right to buy the shares of the deceased or critically ill shareholder. Companies without any Shareholder Protection in place often try to borrow the money from banks to do this but not only can this create a large debt for the company, the banks can be reluctant to lend if they feel that the deceased or critically ill shareholder was key to the running of the business.

Shareholder Protection overcomes all of these potentially disastrous scenarios as it provides the funds necessary to allow for the beneficiaries to receive cash in lieu of shares and the surviving shareholders to continue in business on their own without any inexperienced or unwanted involvement and without any threat from third parties.

It is essential that the solution is implemented correctly, the protection plans are written to match the business set up, the right associated agreements are in place and the appropriate amount of cover is provided and thus it is usually advisable for the business owners professional advisers to communicate and confer to make sure this is the case.

Probably not such an Equitable Life 'Henry'!/ Compensation looms

Keith Churchouse — Tue, 19 Oct 2010 10:11:46 GMT

It is nearly 10 years since the demise of what was declared the ‘oldest mutual organisation in the world’, first formed in 1762. And in a variation to many of the ‘Henry’ clients portrayed in the television adverts, it turned out not to be such an Equitable Life after all. Sadly, it is estimated that some 50,000 policyholders have died waiting for any form of compensation to be paid since 2000(Source/Report: Daily Mail, July 2010).

Finally, this week, it is reported that the details of a £1.5 billion compensation package will be announced and finalised by the Coalition Government after nearly a decade of delays, enquiries, arguments and disagreements, including investigations by the Parliamentary Ombudsman. This is way short of the £6.0 billion package that many felt was required. Although this announcement will be a momentous occasion in itself, I am not sure it will make the top headlines it deserves because it will come in the Comprehensive Spending Review that will have many other (mainly negative) headlines of its own. Wednesday the 20th October 2010 will be a day of history whatever happens.

And what now for the policyholders? Bearing in mind that the with-profits fund at the end of 2000 had an estimated value of around £26 billion (source: Wikipedia), you might see that the proposed £1.5 billion in the big picture may not spread very far, although admittedly something is better than nothing! I understand that they may start to provide compensation to those who have or are suffering ‘hardship’ and this might, as an example, include those that took out a with profits annuity which has seen the income first projected fall away over the years. Others who have not suffered any ‘hardship’ but seen their investment bond, pension (executive pensions/ Section 32/retirement annuity) or income drawdown go down in value may find themselves lower down the pecking order of compensation payments. I have no doubt that the devil will be in the detail on this one, but I believe that the principal of priority list is correct.

We are likely to know after Wednesday. I am only sad that it has taken so long to get this far.

Whatever the outcome of the Equitable Life compensation scheme and its subsequent effects, it is always worth seeking independent financial advice (IFA) to ensure that you are getting the best from your financial planning.

This article should not be treated as individual advice. Individual advice is only available based on your individual circumstances. Further information, advice and contact details are available at our websites, www.churchouse.com or www.planmypension.co.uk

Keith Churchouse, Chartered Financial Planner
Director of Churchouse Financial Planning Limited

Churchouse Financial Planning Limited is authorised and regulated by the Financial Services Authority.
www.planmypension.co.uk is a trading name/style of Churchouse Financial Planning Limited.

Why you should overpay on your debts

Dan Woodruff — Thu, 30 Sep 2010 12:08:05 GMT

Debt is a fact of life for most people. However, paying your debt on time should not be seen as financial maturity. You really should work towards being debt-free as quickly as is possible. Don’t forget that we class debt as someone else’s asset, so by continuing to owe money, you are actually feathering someone else’s nest rather than your own.

Your debts are someone else’s assets

Debt may be a necessity for most of us, mainly to buy a home, but the interest repayments are hampering your ability to save towards your financial goals. The sooner you can be debt-free, the sooner you can work towards your financial independence.

The company that loaned you money wants a steady income from your debt, so it is often not in their interests to help you to repay the debt sooner. Nevertheless, you can usually may extra payments towards debts, which will help you to pay the capital owed off sooner.

Compound interest

If you save £100 and add interest of 10% on this, after 1 year you will have £110. If in year 2 you add another 10% interest, you will have £121. Thus, your interest will be earning interest. This is compound interest in action. With debts this force of nature is working in someone else’s favour, not yours, so you need to reduce the power of the compound interest as quickly as you can afford to.

Some debts are more expensive than others

It goes without saying that this is true. In general, the less risky you are as a borrower, the cheaper the debt will be, and if the debt is secured against an asset, then this makes it even safer, and therefore cheaper.

The downside is that you lose control over your asset. To give you an example, you do not own a mortgaged house - your mortgage company does (which is why some hold the deeds). It only becomes fully your asset once the loan is repaid.

In general, mortgages are fairly cheap in percentage terms, personal loans are more expensive, and credit cards are even more expensive. However, you need to take into account the term of the loan, as you can end up paying more in the long run with a cheaper long-term loan than an expensive short-term loan. This is the power of compound interest.

Making minimum repayments

It is common, especially with credit cards, for a provider to insist that you make minimum debt repayments. It can seem attractive to simply make these repayments because they keep your outgoings low. However, in the long run this will make you pay more interest.

For example, it is typical for a credit card to require repayments of 2% to 3% per year. This payment would result in only a small proportion of the debt being repaid, the majority being interest. This can mean that you would take many years to clear the debt. When you consider the very high interest rates on credit cards, this can mean thousands of pounds in extra interest.

The effect of overpaying

If you can overpay on your debt, even by a small amount each month, this can reverse the effect of compound interest. The overpayment (if allowed by your contract), will reduce the balance quicker, leading to less interest being paid.

You should always bear in mind that your debts may have penalties to redeem the balance. We advise that you examine your contract carefully!

Also, different contracts will calculate interest in different ways, so you need to be careful in your calculations. Each loan will give a comparative indicator, called the APR (annual percentage rate). This will give a percentage annual rate based on the total charges for the scheme.

Which debt to repay first?

The general advice is to pay the minimum allowable on each debt, and then to combine all your remaining resources into the repayment of one debt at a time, to repay this as quickly as possible. Normally, we would recommend that you repay the debt with the greatest interest first.

Some examples

In these examples we have assumed that interest is applied monthly and there is no penalty for making regular overpayments.

Credit card balance: £5,000

Interest rate: 25%

Minimum repayment: 2.5%

Monthly repayment: £125.00

Total interest: £5,862.28

Total repaid: £10,862.28

Paid off in: 7 years and 3 months

Example 1

Extra monthly repayment: £25.00

Interest saved: £2,236.78

Paid off: 2 years 5 months early

Example 2

Extra monthly repayment: £125.00

Interest saved: £4,326.86

Paid off: 5 years early

Equivalent tax-free growth

If you were to calculate the amount your overpayments would have to grow by each year to generate the interest saved, this equates to a tax-free growth figure. In the case of example 2, this equates to a growth of 57%. There are few ‘investments’ that could promise this level of ‘growth’.

Dan Woodruff is an Independent Financial Adviser and Certified Financial Planner with Woodruff Financial Planning, based in Colchester, Essex. Click here to read about financial planning or investment management.

Protecting your current and future lifestyle with your financial plan

Dan Woodruff — Tue, 21 Sep 2010 04:30:16 GMT

Many people forget about protection in their financial plan, partly because they do not wish to face such issues, and partly because protection does not necessarily advance their goals. However, we see this as a vital foundation for your future financial prosperity, because if something goes wrong this can be devastating on your future financial stability. At best, this can take time to recover; at worst, it can completely derail your financial plans.

What is family protection?

This part of your plan should examine the likely effects on your finances is some sort of disaster happens to the family. Usually, this means protecting the family against the effects of the death or serious illness of one of the breadwinners.

This needs to be balanced because family protection will be an expenditure (which could otherwise go towards your goals), but ultimately your plan should aim to provide a safety net should the worst happen.

The main risks

These will focus around:

Death of a breadwinner

If someone within the family dies, most people would want security for their family’s home, so paying off debt should be a major priority. However, the future needs of the family should also be considered. For example, if one member of a couple dies, how will the child care arrangements be addressed? Some families may need child care to be paid for, thus allowing the surviving partner to work. If so, an ongoing income may be required.

Illness of a breadwinner

This can be extremely debilitating. Imagine how you would cope if one of the breadwinners became too ill to work for an extended period. How would this affect your income? Of course, with a reduced income, this could ultimately affect your ability to meet your goals.

Unemployment

Another risk is that a breadwinner is made redundant. Again, think about how your family would cope if an income stops.

Possible solutions

The following methods may be used to protect your family against the main disasters:

Emergency fund

The basic protection should be a fund to cover the main family expenses for 3-6 months, which should be available in an instant access account. This should tide you over through most short-term problems. Don't spend your life chasing the best rate, just find a convenient account.

Life assurance

This is a form of insurance which pays out a lump sum in the event of the death of a breadwinner. Many people use this to cover their mortgage, but you can also use it to provide a fund for future family income.

Family income benefit

This is a form of life assurance which pays out an income in the event of the death of a breadwinner. The income would be paid for a specific term, perhaps until the children are old enough to leave home.

Critical illness cover

This is a form of insurance which pays out a lump sum in the event of a serious named illness of a specified severity. This can be used to provide cover against debts, for income, or to provide a lump sum to make alterations to the home in the event of disability.

Income protection

This is a contract which pays out an income after an initial period for as long as the insured is too sick to return to their former work. Thus, an income can be replaced while you are too ill to work, but will cease when you are well enough to return.

Unemployment cover

Employed people can cover their major expenses for a limited period (say 12 months), if they are made redundant by their employer.

Private medical insurance

You can provide cover for non-emergency operations through private healthcare. This can mean that you are seen more quickly than on the NHS, which could mean a quicker recovery; this might be particularly useful for the self-employed.

Other areas to consider

Wills

Everyone should have a will as this ensures that you will know how your assets are distributed on your death. Most people do not have a will, and many are not regularly updated to take account of changing circumstances. The only way to be sure of providing for your family is to make a will with a qualified professional.

Lasting powers of attorney

This is a legal document which allows a trusted person to take control of your finances if you are incapacitated for some reason. This could mean mental illness, but could also be something like a serious car accident, which puts you in a coma.

Business agreements

If you own a business you should think about making plans for succession and how your assets are treated in the event of serious illness or death.

Next steps

Find out what levels of cover you may already have in place. This may be personal insurance policies, cover through work like death in service, or sickpay arrangements, plus lump sums from pensions etc.

If you need more information on financial protection for your family, orfinancial planning or investment management, visit our website at www.woodruff-fp.co.uk.

Your assets versus your liabilities

Dan Woodruff — Tue, 14 Sep 2010 10:21:29 GMT

Over time, we all build up assets as well as liabilities (debts). The general purpose of your financial plan should be to build up enough assets so that you can choose to live off them, to be able to fund your desired lifestyle, whatever that may be. In simple terms, your assets will be offset by your liabilities, but it can me more complicated than that.

Why measure your assets and liabilities?

Put simply, your assets can help you to achieve your future financial goals, and your liabilities will hold you back. Assets can help you grow your income, and liabilities will grow your expenditure. Not only that, but your liabilities could also hold back your ability to grow your future assets, and thereby affect your future income!

What are your assets?

You should be able to list all your assets. This would include the following, but could be anything of value:

Property
Pensions
Investments
Bank accounts
Businesses

Therefore, it should be relatively easy for you to estimate how much each of these categories are worth.

Good assets and bad assets

This is where a lot of people fall down in their planning. You need to think about how your assets affect the rest of your financial life.

Your house

When we ask most people what is their biggest asset, what do you think is their response? You would probably say your house. Well, as far as we are concerned, your house is your biggest liability.

OK, we realise that a house is an asset in the traditional sense, but it is also a huge drain on your resources. Think about it for a minute. If you have a mortgage, where do you think your bank puts your mortgage/house? That’s right, in their assets. That makes it a liability for you. Also, if you want to cash in that asset, where will you live? Well, you will need to buy another house, so it doesn’t really count for financial planning purposes. Of course, if you downsize you could release some equity, but how many people actually choose to do this? Along with a house comes a lot of expenditure - council tax, mortgage, utilities, maintenance etc.

Your pensions

Another big asset for many people are their pension funds. The trouble with pensions is that the Government tells you what you can and cannot do with them. You cannot take benefits until at least age 55, and only 25% can be taken back from the fund; the rest buys and income. For some people this inflexibility means that pensions are not as desirable as other asset types. Of course, pensions do have a place in your plan, with excellent benefits such as tax relief.

Your business

Your business may have a value (although how much does depend on what someone else may be prepared to pay for it). However, it can be dangerous to assume that your business will grow at a uniform rate until you come to sell. Your business may be worth a lot less than you think. We prefer to think of businesses as cash generation tools for income, which can go towards creating more of the correct asset types below.

Readily realisable, income producing assets

These assets are the holy grail of financial planning. You need to work on building up assets which could be cashed in at any point and spent on your lifestyle. This gives them flexibility to be used when you might need them, and also diversifies away from less flexible assets as outlined above.

If you then combine these assets with income generating capability, this will only serve to increase your future income, thus growing your future assets. This is the power of compound interest in action, working for your benefit. Good examples of such assets might be:

Rented investment property
Shares/ISAs/other investments
Bank accounts

What are your liabilities?

In modern times is virtually unheard of to be completely debt free, and indeed this can come with some problems. The trouble is that this affects your ability to grow enough assets (of the right type) to be able to fund your future lifestyle without having to work.

Typical liabilities include mortgages, credit cards and loans.

What to do about (bad) liabilities

Our suggestion is that you should always aim to pay off debts as quickly as possible. This will serve you well in the long term as the interest saved can be put towards your lifestyle now in the form of expenditure, or to building assets for your financial future. Generally speaking, debt costs more than the gains from savings or investments.

Remember that your liabilities are someone else’s assets. The sooner you pay off your debts the better off you will be.

'Good' liabilities

In certain cases, it can be good to have debts. If someone else is paying that debt (such as with a rental property) then this can be a good long term strategy towards capital growth. However, this does come with risks so be careful to understand them.

Next steps

You should put together a list of all your assets, plus all your liabilities. Then you can break these down into good and bad types, focusing on reducing debts, and increasing readily realisable income producing assets.

For more information on preparing your comprehensive financial plan, visit our website.

Understanding the relationship between your income and expenditure

Dan Woodruff — Fri, 10 Sep 2010 05:42:10 GMT

One of the most vital parts of your financial plan is the relationship between your income and expenditure. Put simply, your income is what drives your lifestyle; your outgoings are what drains your lifestyle (although of course, they fund your everyday living). This article should help you to understand this relationship.

Why measure your income and expenditure?

You should understand the relationship between the two elements so you can work out a plan to best use any excess income towards your financial goals.

Ultimately, this is about analysing your income and expenditure, not necessarily making a budget. Although, having a budget is probably a good place to start for most people, as it will be some sort of framework to work towards.

Project into the future

You should also think carefully about how your income and expenditure may change over time. For example, you may hope for pay rises each year; your expenditure will also change as prices go up, and your circumstances change.

Most people expect to retire one day. You need to plan for how your income and expenditure will change at that point of your life. Your income may be different: perhaps less from earned sources, and more from investments and pensions. Your expenditure may be different: perhaps more on leisure and hopefully less on things like mortgages!

Income - gross and net

Most people, when asked will tell you what they earn in gross terms: ‘I earn £50,000 per year’. This is true, but does not tell the whole story. You need to understand the link between gross and net earnings. As far as we are concerned, tax is simply another cost you have to bear. For example, the typical personal in a job on the salary mentioned will pay Income Tax & National Insurance. Add to this other taxes such as VAT and Council Tax.

The net amount received after tax for someone earning £50,000 pa might be around £36,000 (depending on the prevailing tax situation). This is a cost to you of £14,000 per year (or 28% of your gross earnings). So, to buy that £1,000 TV you actually need to earn £1,388.

We’re not saying that tax is a bad thing. After all we all need roads and hospitals. However, thinking about how it affects our income certainly focuses the mind on our spending habits.

Debt

Many people spend a large proportion of their income on debt payments. While this may be necessary, it is not desirable in the long-term. If your debt payments are 25% of your gross income, you could be spending over half of your money (including your tax) before you even get a chance to buy essentials like food.

Expenditure analysis

If you take the time to work out what you actually spend your money on, it can be a sobering experience. It is very easy to waste money on small purchases, but these soon mount up. For example, if you spend £5 a day on your lunch, for 48 weeks of the year, this will cost you £1,200 per year.

If you break down your expenditure you can soon start to work out what is necessary and what is not. Then you can prioritise.

Be realistic!

We often see clients who are not honest with themselves when it comes to their spending. If, when you analyse your income versus your spending, you find you have a larger surplus than expected, you are probably underestimating some of your spending habits.

Aim to live within your means

It sounds simple, but many if not most of us fail to live by this simple mantra. But most people who have succeeded in becoming millionaires have lived by this all their life. If you can spend less than you earn you can use the excess towards your financial goals. The reverse, spending more than you earn can only lead to debt and disaster.

So when you have analysed your spending, you should be able to see a clear picture of what resources you currently have to put towards achieving your goals.

Conclusion

Many people find that undertaking this exercise is actually quite motivating. As you gain some control over their budget, you can start to feel some control over the rest of your life. You may then find that you work harder on other areas of your financial life - perhaps to spend less, perhaps to earn more.

Next steps

You need to start with an analysis of your income situation. List all your income sources, and then work out the difference between your pre and post tax income. You should find this information in documents like your payslips.

You can then analyse your income. We have produced a handy form for this purpose, which should help you to be systematic in your approach, and not forget anything.

Take your time to do this. It will be hard work, but worth it.

Want some help?

We work closely with our clients to develop and maintain their financial plans. If you would like some help in preparing your plan, please contact us. We help our clients to plan for their financial future by analysing their fundamental needs rather than by selling products. See http://www.woodruff-fp.co.uk for more information.

A Summer of Change

Keith Churchouse — Thu, 09 Sep 2010 10:41:37 GMT

With the new coalition Government now settling into their stride, there seems to be many changes ahead that will affect many individuals and businesses as we move into the Autumn months of 2010 and into 2011. Financial Planning is no different and, as an example, you may have seen the maximum retirement age to which pension benefits can be drawn has increased to age 77 from age 75, with a current consultation in progress to review this further, with the details to be announced in April 2011. You may remember that at the beginning of this tax year we saw the minimum retirement age also increase from 50 to age 55.

Another issue is the changing of regulatory power with the Financial Services Authority (FSA) and the proposal that the Bank of England will soon take over some of their responsibilities.

One additional example of proposed change is the proposals for increses in pensions, detailed below.

Increases in pensions reduced to CPI from RPI

Some readers will have also seen that the Government is proposing that pension increases in the future will be based on the Consumer Prices Index (CPI) rather than the current arrangement, based on the Retail Price Index (RPI). For many concerned about the effects of inflation on the purchasing power of their money, action may be required and some will consider how to mitigate the effects of these changes and the effects of inflation increases.

Although not guaranteed, it has been common practice in the past for Bank of England base rates to be used as the tool of choice to control inflation. As you will see from the rate decision in September 2010, these are still on hold.

However, if this was employed in the future, with its current level of 0.5%, we could see the Bank of England’s base rate increase in future times.

As always, then seek Independent Financial Advice (IFA). This is not designed to provide individual advice.

Keith Churchouse

Director, Churchouse Financial Planning Limited
Churchouse Financial Planning Limited is Authorised and Regulated by the Financial Services Authority

How the future will shape your financial plan

Dan Woodruff — Tue, 07 Sep 2010 07:41:57 GMT

Your financial plan is designed to project into the future, so you need to think about how that future will pan out. With this in mind, you need to make certain assumptions about how certain things will change over time (inflation, investments, expenses etc). This article describes the areas you should consider, and why they are important.

Why are assumptions important?

We all know that life moves on, and prices never stay the same. You therefore need to take account of changes to things like inflation because otherwise your plan will not be accurate.

Be cautious

It is better to be cautious and underestimate things (thus having more than is needed in the future). The alternative would be to overestimate effects, which could leave you with less than planned, or having to take more risk.

You should also think about how things have changed in the past over the long-term, rather than what is happening at the moment, as this might be outside the general norm.

Assumptions to consider

Inflation

Think about the price of goods 10 years ago. How far would £100 have gone then, compared to now? Generally, prices increase over time, so you should factor this into your calculations. This is important because £100 saved now won’t be much good in 20 years time. Also, if you want to provide an income for the future in today’s terms, you need to work out what £20,000 now will be in 20 years time. See the Retail Prices Index in the UK.

Earnings

You may base your future ability to plan on your earning capacity. If you overestimate this you might not get back as much as you thought. See the National Earnings Index in the UK.

Expenses

Your earnings will probably rise, but so will your expenses. Don’t forget to factor this into your plan. Of course, some expenses will have a finite period -for example your mortgage will hopefully be paid off in the future.

Investment returns

Different assets perform differently. You therefore need to assume that they will grow at different levels. For example, you can expect cash to grow differently to shares, and differently to property. You also need to think about the growth of the underlying assets (the capital), and the income returns. For example, bank accounts have zero capital growth, and low income returns.

Charges & interest rates

Don’t forget to include product charges into your calculations as these will reduce the value of your savings over time. You should also consider future changes to interest rates on your borrowings.

Attitudes to consider

Your general attitudes towards your goals will affect how you approach solutions to your goals. We concern ourselves with monitoring future risks to your financial well being. Here are some important factors to consider:

Investment risk

Generally, risk is linked to reward over time. On average, over time, the greater risk you take with your money, the greater return you should hope to make. But this comes at a cost of short-term fluctuations, which can risk you losing capital.

You should think about how much risk you are prepared to take with specific aspects of your finances. For example, you should probably take no risk with your emergency funds, whereas you might be prepared to take more risk with longer term savings like pensions, which you could make up at a later date.

Mortality and morbidity risk

This measures the risk to you or your family of financial loss due to death or ill health. We can measure the likelihood of these events happening using statistical evidence. You should also consider your attitudes towards these risks. Are you concerned about the risk to your family’s lifestyle should you or your partner die, or be unable to work due to illness? Think about the likely effects of these events, and the impact on your lifestyle. If you have assets to enable you to weather the storm you may not be concerned. However, if not, you may wish to consider insurance to cover these issues.

Next steps

Work out your estimates for future financial change in important indicators such as inflation and earnings. This will have an important bearing on your future plans.

Measure your risk tolerance. This should be your first step in understanding your attitudes towards investment risks. Don’t forget to test both you and your partner if you are a couple.

You may also wish to consider the financial loss to your family if you or your partner dies or gets too ill to work. This may affect your future ability to achieve your financial goals.

Want some help?

We work closely with our clients to develop and maintain their financial plans. If you would like some help in preparing your plan, please visit our financial planning website.

My business is my pension...

Dan Woodruff — Fri, 27 Aug 2010 06:06:59 GMT

When we first talk to business owners about financial planning they usually reply: ‘My business is my pension.’ Equally this applies to many employees - ‘My house is my pension...’ This is a poor place to start with your financial planning, and may leave you far short of your ultimate goals.

Why your business is not your pension!

OK, your business might prove to be your pension, but it might not. By saying that it will provide you with a future income you are leaving your retirement plans in the lap of the Gods.

By saying that your business will provide you with an income, what you are really saying is that you will sell up in the future, and someone will come in and give you enough money to retire on.

Will you be able to sell your business?

Any asset is only worth as much as what someone else is prepared to pay for it. You might not actually have a business that someone wants to pay for.

We meet many business owners who are actually just self-employed consultants. They have swapped the employee life for self-employment, but the business would not run without them. With this in mind, without them there is probably no business, so who would pay for that?

The best kind of business runs without the owner. Financial planning is about getting to financial independence - i.e. being able to survive without the income from the business. If you run your finances well, you can eventually become an investor. This means you rely on your money to do the work, not you. If you do this well enough, you can choose not to work, and live off your independent income.

How much do you actually need?

You should first work out what you need to be able to fund your future lifestyle, and work backwards from there. If you know how much you need you can build a plan to achieve that worth for your business, and more importantly build the business in such a way that someone else will be prepared to buy it.

You could work closely with other business advisers such as an accountant or business coach to plan for your exit strategy.

Think of your business as a cash generation tool

You should be able to earn income from your business, either as salary or dividends. Hopefully you can also sell it at a later date for a lump sum. These streams of cash should be used towards your ultimate aim of independence.

Don’t forget tax!

When you sell your business you will need to pay capital gains tax at 10% or greater.

Why your house is not your pension!

You may be able to use your house to supplement your future income. However, in my experience this is rarely desirable for most people.

Downsizing?

You could choose to downsize, but who wants to work hard all their life to get the house of their dreams, to then sell up to someone else so you can live more easily?

Equity release?

You could choose to release equity from your home through a complex mortgage product. However, for most people this is expensive, complicated and risky.

Surely it would be better to have some financial discipline now and prepare for the future with your eyes wide open?

What is comprehensive financial planning?

Dan Woodruff — Fri, 06 Aug 2010 08:21:19 GMT

What is comprehensive financial planning?

Financial planning is about building an objective plan for your financial future. You should follow these principles to ensure that every aspect of your financial life is covered, and therefore build a solid foundation to meet your goals.

Your goals will depend on your own personal situation and what you want for the future. For example, you might want to plan for retirement, buy a second home or send your kids to private school. The list is only limited by your imagination.

This is all based on a common sense approach. Anyone can do it, you just need to be methodical and objective.

What about financial advice?
Unfortunately, most financial advisers do not offer comprehensive financial planning. Most of them are glorified sales people. This is proved by the fact that they usually sell products rather than financial plans.

If your financial adviser starts by talking products he is thinking about himself rather than your future!

Of course, there is a place for products, but only at the end of a comprehensive analysis of the reasons why you need that solution. What’s more your financial plan might reveal that you do not need further products!

What should be in your plan?
Here are the main areas which need to be covered. There may be other areas, depending on your own circumstances.

Gathering data
You need to think of your plan as a whole because your financial decisions are inter-linked. For example, if you have an expensive mortgage this may impact on your ability to save for the future.

You will need to get together data on every aspect of your financial situation.

Setting goals
Without an end in mind, it will be difficult to evaluate your progress. Therefore you should think carefully about what you want your future to look like. These goals should be measurable.

Income and outgoings
This is fundamental to building your plan. If you spend less than you earn, you have a chance to affect your financial future. If you spend more than you earn you will have limited options and could spiral into debt. Understanding tax is a big part of this.

Assets and liabilities
You need to build up assets to underpin your financial future. And more importantly you need to build up the right kinds of assets. The sooner you can be debt free (unless it is the ‘right debt’), the sooner you can be in control. For planning purposes we ignore certain types of assets.

Emergency funding
Making sure you can cope with short-term crises is vital. We recommend that you set aside 3-6 months worth of outgoings.

Protecting what you’ve got
You should think about what happens if things go wrong. This includes all types of insurance to ensure your lifestyle is defended from catastrophes. You should also consider making wills and powers of attorney etc.

Paying off debt
Generally, any debt is a barrier to your future prosperity. The sooner you become debt free, the sooner you have control over your future. Remember that your bank manager includes your mortgage as one of his assets!

Saving for the future and investing wisely
You need to work out how much will be needed to fund your future goals, how much risk this requires, and the effect of external forces such as inflation, charges and future legislation.

Tax
While this should not drive your plan, it is certainly an important part of the equation. Understanding how tax affects your life should run throughout your plan.

Monitoring your progress
Financial planning should be much like servicing your car. You wouldn’t spend £20,000 on a new car and then never take it to the garage for a service. Likewise, you should regularly review your plan to ensure your remain on target to meet your goals.

Of course, your circumstances will also change over time, so your ultimate goals may also need a tweak from time to time.

Conclusion
As you can see, a proper financial plan should be extremely detailed, and will take some work. However, the rewards will really benefit you as you will be back in control of your life.

Want some help?
We work closely with our clients to develop and maintain their financial plans. If you would like some help in preparing your plan, please contact us.

About Dan Woodruff
Dan Woodruff is a Certified Financial Planner with Woodruff Financial Planning, Independent Financial Advisers based in Colchester, Essex.

It’s a big Pensions news day….but are the reasons good?

Keith Churchouse — Wed, 04 Aug 2010 07:12:33 GMT

Thursday, July 29th, 2010

As you will have seen from the paper and TV/Internet the headlines today, it’s a big pensions news day, facing up to some of the realities of funding future pension benefits, although many will have their own view on whether this is good or bad.

In general, the UK public is living longer than its predecessors and this is putting pressure on pension funds to keep paying for longer. Taking this and other factors into account, it is not suprising that the headlines feature the following headlines:

‘Plan to axe fixed retirement age’ (BBC) confirming that employers will no longer be able to force employees to retire at 65 from October 2011. Many will welcome this opportunity to continue to contribute to the UK workforce for as long as possible.

Also,

‘Warning on local councils pensions’ (BBC) confirming that the liabilities of the Local Government Pensions Scheme (LGPS) were rising and that action was needed to control the future situation. The proposals include increasing employee contributions, increasing the retirement age and possibly adjusting the benefits paid out.

This news, coupled with the rise in proposed State pension benefits age, the switch in increases to the Consumer Price Index (CPI) from Retail Price Index (RPI) clearly suggests the pressure that pension funds are seeing as time and liabilities move forward.

If you plan to review your pension planning in light of these proposals and changes then seek Independent Financial Advice.

Keith Churchouse Director of Churchouse Financial Planning Limited

Churchouse Financial Planning Limited is authorised and regulated by the Financial Services Authority. No individual advice is provided in this comment and you should seek independent financial advice for your own needs.

Churchouse is a registered Trademark of Churchouse Financial Planning Limited.

Why You Should Run Away From 'Wealth Managers'

Andy Jervis — Tue, 03 Aug 2010 06:46:15 GMT

Many financial advisers describe themselves as 'wealth managers.' This isn't a term that we like to use in our practice.

We are financial planners. The definition of a plan is 'a series of actions designed to achieve a stated result.' Without a Plan in place, any work that we do with you to 'manage your wealth' is likely to be meaningless.

Think about it. What's the purpose of money? Is it to simply accumulate, to achieve ever greater levels of wealth? Or does money have an intrinsic purpose that needs to be clearly expressed if it is to work effectively for you?

Maria Nemeth, a leading clinical psychologist and creator of the 'You and Money' course, calls money 'congealed energy.' In itself, money has no purpose. It is neutral. It only acquires the purpose that we, as individuals, ascribe to it. That purpose will be different for different people.

But the purpose that you choose - and it is very much your choice - is crucial to the way that you relate to money, and your success in acquiring, gathering and managing it. It also determines to a large extent the peace of mind that you gain from your money decisions.

That's why we always begin our conversations with discussion of your values and goals. Understanding the link between what's truly important to you and your money decisions is the first and easily most important step towards your success. That's because the biggest factor in that success will be your own actions - not whether your financial adviser or some money manager can 'outperform' some random and irrelevant benchmark.

Yet that's where almost all 'wealth managers' begin their conversations. They'll want to explain their investment process and the managers that they use. They'll probably be very keen to talk about esoteric concepts such as 'active' versus 'passive' investing strategies, and how they have 'unique' sources of insight and information that gives them the edge in investing your money.

Above all, they'll talk about exactly that; investing your money. Of course, to the uninitiated, that's great! It's why you're there. You want to know this stuff.

But a lifetime of helping people to achieve their goals has led us to the stark and simple realisation that none of this really matters. Or at least, it matters so little that it certainly shouldn't be the basis for your own investment strategy.

What does matter is how you manage your own behaviour, because the evidence shows that’s what will determine whether you ultimately achieve your goals or not.

It's whether you get sucked up in the latest 'bubble' just before it bursts. It's staying with your strategy when everything looks hopeless and the economy is shot to pieces. It's continuing to save in the down times, and to manage your spending in the good. And it's about having your eggs in different baskets so you won't get wiped out when the unexpected happens (a point investors in Equitable Life, RBS, Bear Stearns, Northern Rock, Woolworths etc., etc., wish they'd followed).

It's these behaviours that investors practice daily on themselves that can destroy or multiply their wealth.

You don't need a wealth manager. What you need is a Financial Planner who understands you, your values and your goals, and who recognises that their role is about more than just managing your money. One practitioner I know refers to his role as a 'Behavioural Investment Counsellor,' and that just about sums it up for me.

Because he knows what all great Financial Planners know. He knows that what we all need is a money coach to tell us when we're being foolish. If you think that you're much too sophisticated to require this, then good luck to you. But my guess is that if I asked you about your money history and the decisions that got you to where you are today, you would prove to yourself that you need a money coach too.

And here's the strangest thing. When you find that person, and you work with him or her over a long period of time, one day you'll look back and realise that you are on track. That you have achieved your goals. And that your investments have actually substantially outperformed those of the poor beleaguered clients of that 'wealth manager' you spoke to all those years ago.

Or whatever he calls himself these days.

Andy Jervis is a Certified Financial Planner and Director of Chesterton House Financial Planning Ltd which is authorised and regulated by the Financial Services Authority. Chesterton House work with clients with assets of at least £250,000. Andy specialises in helping clients with at least £2m in investable assets. He can be contacted on 01509 610472 or at www.chestertonhouse.co.uk.

What would happen to your mortgage costs if interest rates rise?

Dan Woodruff — Wed, 14 Jul 2010 06:59:29 GMT

We recently reported that the Bank of England kept interest rates at 0.5% for another month. Interest rates have been at this record low point for over a year, so we are concerned that people might get overly confident that these rates are here to stay. However, this is unlikely as in recent years the average has been somewhere around the 5% mark. See here for more information.

The only way for interest rates is up - so you should think about this if you have a variable rate mortgage or a tracker mortgage. If you have a fixed rate mortgage, you will be fine during the fixed rate period, but you should also think about the consequences once the fixed rate comes to an end. Since many households fix for short periods, such as 2 years, this could come around sooner than you realise.

What does an interest rate rise mean for you?
Let's take a mortgage of £150,000 with 20 years remaining. If we assume that you are on a standard variable rate with a high street lender, you might be paying 3.5% (this is the Halifax rate based on today's website).

The table below shows the effect of various interest rate rises, none of which take us up to the 5% rate which is the Bank of England's 'normal' rate.

Rate	Repayment basis	Additional cost	Interest only basis	Additonal cost
3.5%	£870	£0	£438	£0
4.5%	£949	£79	£563	£125
5.5%	£1032	£162	£688	£250
6.5%	£1119	£249	£813	£375
7.5%	£1209	£339	£938	£500

This information was provided using the calculator at Money Made Clear - an initiative provided by the Consumer Financial Education body. Click here to put in your own details and work out the effect of interest rate rises on your personal situation.

The message here is clear - you should prepare for future interest rate rises on your mortgage and give some thought as to how you might pay the extra cost if you are on a standard variable rate mortgage.

An end to self certified and interest only mortgages?

Dan Woodruff — Wed, 14 Jul 2010 06:58:29 GMT

The Financial Services Authority (the body which currently regulates the Financial Services sector), has today launched a consultation paper on Responsible Mortgage Lending. Their main theme seems to be that "the existing regulatory framework had been ineffective in constraining particularly risky lending and unaffordable borrowing."

Assessing affordability for mortgages
The FSA rightly says that lenders have been too keen to allow more risky lending in the past. This has been evidenced with self certification products, as well as 'fast track'.

Self certification mortgages were originally designed for those people who could not prove their income such as the newly self-employed. Fast track is still used by many lenders where the loan to value is lower than 75% of the value of the home, and the risk to them is deemed to be low. Income is still assessed, but documents are not checked.

What ended up happening with these types of loans was that o they became so called "liar loans" - people used the system to inflate their income so that they could justify bigger loans. Lenders were not concerned about this practice so long as house prices rose. Of course, eventually this ground to a halt, and the practices were exposed. Also, many mortgage brokers have been caught out supporting their clients through what is effectively mortgage fraud.

The regulator is concerned that the banks should have more robust methods for establishing affordability for loans. Therefore, they have proposed that all new lending should be assessed for affordability. This would effectively ban self certified and fast track mortgages.

Interest only
The regulator has been concerned for some time that interest only is becoming much more widespread - probably as a result of the increasing cost of housing. People have set up loans with no mechanism in place to repay the original capital, and this could end up being a massive problem in the years to come, as they struggle to repay this debt.

The proposal is to assess affordability as if a repayment mortgage is being taken out, even where interest only is the preferred vehicle. We suspect that the FSA would like to outlaw pure interest only mortgages on main residences, where there is no savings vehicle in place to repay the capital.

Our view
Overall, we would broadly support more responsible lending since this would help to keep the housing market more stable, and encourage the public not to over-extend themselves financially. We need to get out of the belief that your house is your biggest asset, since this holds back the finances of millions of people who struggle to afford bigger mortgages while ignoring other financial needs. People need to realise that their home is not an asset in the traditional sense since it cannot be cashed in (you always need somewhere to live).

We have been worried for some time that interest only is becoming the norm, especially in younger buyers.

What all this means for the self employed is that they should seriously consider their lending needs before starting a new business, since in the future it may be very difficult to get funding for such people without full accounts, and enough income to justify the loan.

Appointing a Pension Transfer Specialist

Heather Dunne — Sun, 11 Jul 2010 05:11:15 GMT

To enable you to offer advice on Pension Transfers, which are those from Occupational Schemes, you need to have access to a Pension Transfer Specialist. This includes transfers from which include Final Salary, Deferred Annuity, Money Purchase, SSAS, EPP and S32

There are basically three methods by which this is generally achieved:

1. Appointing a Full Time Pension Transfer Specialist or employing someone who has the appropriate qualifications to undertake this role as part of their work.
2. Referring cases to another firm which specialises in this type of business.
3. Obtaining the services of a Pension Transfer Specialist on a contract basis.

There are of course merits and difficulties with all three options. We must be clear at outset that our preferred route is the final option and it is on this basis which we have worked for the last seven or so years. In the last couple of years, we have added the facility of offering the second option where suitable.

1. Appointing a Full Time Pension Transfer Specialist

The first option requires you to locate an individual who has the necessary experience and qualifications to satisfy our regulator the Financial Services Authority. Additionally it means ensuring they remain up to date and also supervising their work.

That individual then has a disproportionate power over the company especially within a smaller firm, as they know that they must be replaced and can demand a higher remuneration package. If such an individual is receiving work from other colleagues, they can have difficulty ensuring work is up to satisfactory standards as they do not have the power or position of the Compliance team. This is especially difficult if they are being passed cases by a supervisor or manager.

If the individual in question is also expected to produce their own business, they may struggle to work efficiently on pension transfer work which is less lucrative for them. This may also mean they have insufficient cases to remain fully au fait with changes in the market place. They will not have the time to create formal structures and systems and so may work in a more ad hoc manner.

If this individual leaves, invariably the firm reviews the situation. We have found over the years that new clients have turned to us when such a situation has arisen and rarely reverted to the in house alternative.

2. Referring cases to another firm which specialises in this type of business

This requires the initiating firm to pass across client details and allow another firm to deal with this specific piece of work for them. This may mean there is a lack of impetus to complete work, which appears to result in delays in many cases. This does frequently seem to mean there is a need to chase through progress of cases.

It also means that the commission is paid to that other firm which may then pay a proportion back to the introducing firm. That does affect cash flow for the introducing firm. Additionally, certain firms set the way the commission is to be generated and this may exclude renewal commission for the introducing firm. The actual level of commission can be significant.

Additionally the case has to be transferred back to the originating firm at the end of the transaction, which involves further paperwork and follow up with the client.

We also understand that some of our competitors are less able to deal with variations in ceding scheme i.e. they can assist easily with Final Salary or Defined Benefit cases, but have significantly more difficulty with money purchase including SSAS, EPP etc. Furthermore, the costs quoted for such situations appear to be extremely high.

This option does have the benefit of removing any liability for the transfer advice, but that is at the expense of the control with regard to the advice.

We have in recent years picked up several clients who have previously used these alternatives and come to the conclusion they prefer our methodology and working practices, which involve a clear and simple charging structure which depends on the number of plans involved as against the types of contract.

We do now offer this referral basis via one of our long term clients, where our clients are unlikely to undertake sufficient cases to make our preferred method viable financially due to the FSA fees incurred. This referral option incurs a higher the fee per case and requires additional paperwork completed by our adviser client and their client as well as ourselves.

We have based our systems for this firm (HDIFA) on those we use internally and so sub contract the actual pension transfer work to HDC Limited. It means that whichever route our client uses they receive the same high standard of service and compliance with regulatory standards.

3. Obtaining the services of a Pension Transfer Specialist on a contract basis.

This is our preferred system for working with our adviser clients. This gives you the access you need to the technical support you require both in relation to actual transfers and also in respect of other more technical pension areas.

You only pay for the work undertaken on your behalf by HDC Limited. If at any time you are not satisfied you can walk away and appoint an alternative PTS or use one of the other routes.

Many of our clients have been concerned about the costs:

The one charge we cannot assist with is the FSA adviser fee, which is imposed for adding Heather to the firm’s consultant list. We understand that this is in the region of £1,500 to £2,500 and appears to vary depending on the type of firm and the permissions already granted. This is the fixed cost, which means a certain number of cases need to be processed in a year, to make the appointment financially viable.
The other fear is the Professional Indemnity Insurance Premium. Over the years, the majority of our clients have confirmed that once their PI Insurers have been provided with our detailed explanation of how we work and our PI Insurance Certificate they make little or no extra charge for extending the cover.
Our fees are generally set on a fixed basis, though we do negotiate hourly rate fees for certain more specialist work.

The application process is another concern and over the years we have become very familiar with this. A detailed explanation of this process and all the required documents are available on our website and we will assist you with any concerns or clarifications required.

There are other competitors in the market place and we recommend you look at some alternatives before making a final decision. That will enable you to consider who suits your firm’s systems and mentality best. Our industry is based entirely on trust and as such you need to be certain the person you choose fits you and so is more likely to have a similar mentality and understand your clients’ needs and wishes as you express them.

If you decide you do wish to use us, we look forward to working with you.

What's in a Critical Yield

Heather Dunne — Sun, 11 Jul 2010 05:10:17 GMT

What is the Critical Yield?

Note that the cash equivalent transfer value offered by the scheme is supposed to reflect the cost of providing the benefits due at retirement for that particular member.

The Critical yield is the growth required, if the transfer value is applied to the alternative personal pension to match the benefits due from the scheme at Normal Retirement Date.

The Transfer Analysis can supplement this with a similar calculation assessing the growth required to match the scheme benefits at the Early Retirement Age.

All things being equal, as the transfer value assesses the cost of buying benefits and the Critical yield assesses the growth required on that cost to match the benefits, the investment return required by the actuary on the fund should match the Critical Yield calculated within the analysis.

Of course, it is not that simple: the Critical Yield is invariably higher than the discount rate the actuary used. The differential is due to the various assumptions required in the two calculations. We therefore need to be aware of and understand how those assumptions impinge on the Critical Yield to understand the validity and relevance thereof.

To explain this we shall consider how a Transfer Value and a Critical Yield based on that value is actually arrived at. We will then review the assumptions and explain why we feel the Critical Yield is only one of many aspects to consider and not a major one at that.

Transfer Values

The Transfer Value is intended to reflect the cost to the scheme of providing the benefits due at Normal Retirement Age. In simple terms this means the transfer value is calculated as follows:

1. Assess the benefits due at date of leaving service i.e. the pension (assuming cash is created by commutation of that, which is the case in most private sector schemes)

2. Revalue that pension to the Scheme Normal Retirement Date. The scheme will use the revaluation they apply, which is usually Statutory Orders i.e. RPI/5% per annum (reduced fro leavers after May 2009 to RPI/2.5% per annum). The Actuary will therefore estimate a figure for the long term growth in RPI.

3. Capitalise that pension i.e. assess the fund required to purchase a pension. In practice, few schemes buy annuities, they generally pay pensions out of incoming contributions or investment return. Again the Actuary will set a capitalisation factor, which will allow for assumed proportions of married couples and death in deferment and the cost to them of providing the benefits.

4. Discount that capitalised value allowing for investment return likely to be achieved between now and the scheme Normal Retirement Date. This factor takes into account the actual underlying investments and so will usually be a weighted average of the current proportions applicable to the scheme. This is again an assumption fixed by the Actuary in consultation with the Scheme Trustees.

5. This results in the transfer value available, which may then be adjusted to allow for any scheme deficit.

The benefits at date of leaving are fixed at that stage, unless of course the legislation changes allowing individuals to draw more as cash as against pension as occurred on 6^th April 2006. That is unusual and we will set that aside for the moment.

The revaluation is usually based on actual RPI until the date of calculation and so is based on historical fact. However if the scheme assumes future RPI of 2.5% the projected benefits will be lower than if they assume 2.6%. This is magnified by compounding over longer terms.

The Capitalisation Factor should really vary from scheme to scheme reflecting the actual membership, but may be biased by that particular Actuary’s views.

The Discount rate will depend on what the actuary thinks the underlying assets will return. The higher expected return the lower the subsequent transfer value and vice versa. This is again even more significant over longer terms.

Adjustments in the Transfer Value reflecting a deficit will reduce the sum available. This reduction is again set by the Actuary and the Scheme Trustees and will be scheme specific.

How is the Critical Yield calculated?

There are again various steps to this:

1. Accurately assess the benefits being provided by the scheme. This is subdivided into two parts; the Scheme Design and the Individual Member benefits. Under our process:

We issue an Information Request to the administrators in relation to Scheme Design, which runs to some thirteen questions each of which includes several sub questions. We also request documents including the Scheme Accounts, Trustee Reports, Actuarial Reports and Scheme Booklets.

The same request asks a further seven questions in relation to the actual member under consideration. Again these also include sub queries about the intricacies of various aspects.

When we obtain a response we ensure that the details are not contradictory, which unfortunately they frequently are and double check those aspects, to ensure we have a clear understanding of how the scheme has interpreted the various requirements and altered the scheme over the years.

This then means we have as an accurate an assessment as we can obtain.

2. We then enter these into our Transfer Analysis System.

In common with most firms including the majority of providers, we use the O&M Transfer software to undertake the analysis. This system calculates the Critical Yield and prepares a report. The accuracy of that report and the associated Critical Yield is determined by the accuracy of the information entered.

Alongside the Transfer Analysis the system produces an exceptions report. The first time the report is run, it will almost certainly include “problems” as well as “warnings”.

· Problems will prevent the software from producing a report. Once the missing data has been obtained the report will work. This is where inaccuracies can creep in, as the user can make assumptions, rather than request the missing data, which is quicker, but may of course be wrong.

· Warnings can be overlooked, but if there are several, they will affect the accuracy of the report. We work very hard to ascertain all we can from the scheme, but where necessary i.e. when deadlines are short or the schemes are very unhelpful, our experience enables us to make informed judgement or interpretation of the information which has been provided. Where this is necessary it is explained in the report, as there is a facility to add explanatory notes.

A small change in the scheme benefits e.g. revaluation of the deferred benefits or the increases due on pensions in payment, will affect the Critical Yield. This is why if you send scheme details to three differing providers they will produce reports using the same system, but frequently show differing results.

3. The alternative plan: We prepare our transfer analysis using a no charge plan as the alternative. This ensures that all the Critical Yield is measuring is the cost of matching the scheme benefits and is not biased by the new plan charges.

4. Now all the fixed aspects have been defined, the system will undertake a similar calculation to that used to assess the Transfer Value available and provide the Critical Yield:

Using the benefits due at the date of leaving (as detailed by the scheme) assess the benefits due at Retirement allowing for the revaluation applied by the scheme. In this calculation, the assumptions for RPI are prescribed by the Financial Services Authority (FSA). More on that later.

Those benefits are capitalised, again using assumptions set by the FSA.

The investment return required on the Transfer Value offered to match that cost is assessed and termed the Critical Yield.

We therefore have a Critical Yield, which reflects the growth required to match the scheme benefits at Normal Retirement Age.

We then double check the Critical Yield:

We will revisit the details entered in the software to check for errors omissions and verify data provided by the scheme.

When appropriate, we will then contact the scheme to ask them to double check their calculations. This sometimes (but rarely) results in an increase in the Transfer Value.

We have therefore confirmed that the Transfer Value being offered is reasonable and that the Critical Yield we have assessed is calculated correctly.

Why is the Critical Yield, usually higher than the parameters many firms set as acceptable to proceed with transfers? Furthermore, why may we still feel the transfer is viable?

To answer these questions, we need to explain how we assess the Critical Yield.

Assessing the Critical Yield

We are still frequently asked what Critical Yield is acceptable and some advisers are somewhat confused by the answer that is depends on the personal situation of the client. This is because the Critical Yield, despite the fact it is a numerical assessment, is like all the other factors subjective.

When assessing the Critical Yield we need to consider the differential in assumptions in the two calculations, which can be explained as follows:

When undertaking a TVAS, the basis to be used is defined by legislation (i.e. the FSA) and is significantly different from that set by the Trustees for the purposes of paying transfers.

So the Scheme Actuary uses their assumptions and we use those set by the FSA. To complicate matters further, the new plan providers also use assumptions prescribed by the FSA, but they differ for those purposes. So we are comparing chalk with cheese and then looking at it yet another way for the future investment. This may explain why we feel the actual numbers are all subjective.

The TVAS Assumptions prescribed by the FSA

The FSA adopted a method of setting the various assumptions for RPI and associated revaluation and indexation, which relies on one underlying factor the Annuity Interest Rate. The differential between the various assumptions does not alter; it is the underlying value of AIR which is adjusted.

This underlying factor used to be reviewed on a regular basis, but for some time now has been fixed for each tax year. The AIR for the current tax year (2009/10) is 4.1% at the mid rate of return. This was also the same in the previous tax year (2008/9). The lower rate and higher rate calculations also included in the analysis are therefore also based on a fixed differential from the standard AIR figure.

In addition to AIR, the capitalisation factors are prescribed based on mortality.

We shall now consider these two aspects in more detail.

1. Annuity Interest Rate

The Annuity Interest Rate (AIR) is the rate of interest used as a basis for valuing future pension payments. The AIR reflects the yield to redemption on high yield coupon medium and long term gilt edged securities.

The AIR calculation is based on the real yield on the FTSE Actuaries Government Securities Index-linked Real Yields over 5 years assuming 5% inflation and on the real yield on the FTSE Actuaries Government Securities Index-linked Real Yields over 5 years assuming 0% inflation.

The Real Yields to be used in the calculation are the yields as published on 15^th February each year, or, where necessary, the most recent day. The rate of return must be updated on 6^th April each year and used up to and including 5^th April of the next year.

A higher AIR would discount future pension payments at a higher rate; the capitalised value of the Scheme Pension and associated annuity rates at the date of Retirement would therefore be lower. A higher AIR would therefore reduce the critical yield required to accumulate the transfer value to the capitalised value at retirement.

Thus a higher AIR will produce a lower Critical Yield and vice versa. There has been no change in this to reflect the alteration in the Transfer Value calculations or the current base rates, which are very different from those in place when the actual figure was last altered.

In other words, the assumptions used within the TVAS are artificially high as compared with the current situation, meaning that the Critical Yields provided will over state the growth required to match the scheme benefits.

2. Capitalisation Factors

The Financial Services Authority also prescribed assumptions with regard to the conversion of the fund at retirement into pension. The description is as follows:

The Mortality Basis which must be applied to all Pension Transfer Analysis reports is stipulated by the Financial Services Authority - Full Handbook [new Conduct of Business Sourcebook: Preparing product information (COBS 13 Annex 2) Projections]. The Mortality Tables are PMA92 and PFA92 (www.actuaries.org.uk), using the medium cohort projection on year of birth mortality rates.

PMA92 and PFA92 are mortality tables for males and females respectively based on mortality of pensioners in 1992. Pensioners statistically live longer than those with no pension, which is appropriate.

Again the differential between the TVAS and Scheme Actuary assessment of the CETV can be summed up by the following explanation: The cost to provide £1 of pension under the TVAS basis is higher than under the Trustees’ basis.

In other words whilst the FSA continue to use annuity rates which do not reflect those used by schemes or indeed those available in the market place, the Critical Yield calculated will be higher than the true cost of matching the scheme benefits.

Our View

Having considered all these factors, it is our view that the Critical Yield is purely an indicator and has to be viewed with an experienced eye. It is on this basis that we place significantly more weight on the other factors such as potential death benefits and flexibility in retirement.

The important aspect with a Transfer is the same as with any other piece of advice – the suitability of that advice to the client.

PCLS Does not always equal as much as 25% of the fund

Heather Dunne — Sun, 11 Jul 2010 05:08:09 GMT

Background

Following Simplification Tax Free Cash acquired a new name, which many of us are still struggling to familiarise ourselves with. Pension Commencement Lump Sum seems such a misnomer, because one no longer actually has to take pension to draw Tax Free Cash.

There have been many articles and discussions about Protected Cash and this has tended to focus on the situation where an individual is worse off in relation to Tax Free Cash after A Day. We have looked at a huge number of cases where the salary and service deficiencies have actually meant 25% of the fund is better either immediately or in the longer term.

Part of this relates to the age old problem of drawing lower salaries and higher dividends, and thereby reducing NI costs to the smaller employer. The new methodology for cash and pension removes that difficulty and so Controlling Directors can draw their remuneration in a tax efficient manner and not affect their pension rights.

Some also relates to the ability to draw 25% of the Protected Rights fund as Tax Free Cash. Many individuals had large Protected Rights funds relating to transfers from Defined Benefits Schemes accrued after April 1997 and some had actually accrued as much from contracting out as from other sources. For them the new rules mainly improved their overall cash allowance.

Defined Benefits

There remains one area where the 25% rule is not quite that simple, which is in relation to Defined Benefits Schemes. The cash is limited to 25% of the cost of providing the Defined Benefits.

As you will be aware, HMRC value all deferred defined benefits by multiplying the pension due by 20. On that basis the cash allowance should simply be 20 x pension due x 25%.

Commutation Factors

Very few schemes actually assess the value of their pensions using a factor of 20; they use the Commutation Factor, which depends on the age of the individual and the format of their scheme benefits. This factor is set by the scheme actuary and is the conversion rate of pension to cash, and was traditionally used to assess the value of the pension foregone to provide cash.

The Commutation factors are now used in assessing the amount of cash a scheme will offer at retirement. These factors will usually differ for men and women and in relation to pension earned before or after April 1997, reflecting indexation payable on the pension. Differing factors apply for various ages too.

There are a set of HMRC standard factors, but each scheme has complete discretion in this respect and so could alter this now very significant variable at any time.

This ability to alter commutation factors means the scheme can alter the amount of cash they will offer members in return for pension. This can be used to encourage members to draw cash and so reduce long term scheme liabilities. Many schemes now adjust these factors annually, quarterly or even monthly.

This also means that it is not always easy to assess what the cash allowance is to compare with that due from a personal pension at the time of a transfer. The only comparison which can really be made is in the estimated figures, which is based on the assumption the factors will not change.

Even schemes which traditionally provide cash separately e.g. Civil Service or NHS, now use commutation factors and allow members to commute additional pension to the new maximum cash.

In the majority of the cases we have seen the new rules allow the member to have more cash than under the old rules. Furthermore the transfer and potential tax free cash available at retirement via a Personal Pension is higher again in many cases.

Assessment of Cash

As the cash relates to the cost of providing the pension due, the cash assessment results in various equations, which are manipulated to result in the following formula:

Tax Free Cash = Pension x Commutation Factor

1 + (0.15 x Commutation Factor)

Pension is the Full pension available at intended retirement age (i.e. before commutation)

The Commutation Factor is set by the scheme and used for calculating the reduction in pension for each £ of Tax Free Cash

This means that when assessing the value of the scheme benefits an individual has it is important to ascertain the commutation factors alongside all the other data required to evaluate their potential benefits.

A rough rule of thumb is that the higher the commutation factor, the higher the cash so a commutation factor of 15 will be better than one of 12. The higher commutation factor will also cost the client less in terms of initial pension foregone to draw cash.

Retirement Age

The pension due at Normal Retirement Age will normally be subject to Early Retirement Factors, these reflect the fact the scheme will have to pay benefits earlier and probably for longer, meaning the cost of those benefits will be higher. This is just like a Money Purchase scheme which will also produce a lower income at an earlier age. The commutation factor will usually also be higher at the early retirement age reflecting the higher value of the pension being foregone.

The reduced pension and increased commutation factor counteract one another and generally, the effect of the reduced pension is more significant than the increased commutation factor. The lower pension due at the earlier retirement age will still mean that the cash available will generally remain much lower in monetary terms than that available at Normal Retirement Age.

Schemes may offer higher commutation factors and so better cash to encourage members to draw cash as against pension and reduce the scheme’s long term liabilities. With scheme funding generally in deficit this is the current trend. However, this could be reversed if funding improves or the short term costs of providing cash at retirement become more of a concern to the scheme.

Summary

The aspects you need to be aware of:

The cash available from a defined benefits scheme is 25% of the cost of providing benefits,

This usually exceeds the Protected Cash, especially as that increases from A Day in line with the Lifetime Allowance, which has is frozen from next tax year for the following five years

On most occasions 25% of the fund, based on the transfer value is higher again

The commutation factors used to make this calculation can be reviewed at the discretion of the actuary/scheme trustees.

The comparison on Early Retirement will also be affected by the Early Retirement Factors, which reduce the pension available.

The scheme cash on this new basis will increase in line with the revaluation based on the pension.

The Personal Pension alternative depends on investment performance

Over the longer term, investment performance will usually outstrip inflation

Have you reviewed the position for your clients and are they aware that despite the “guarantees” in their existing scheme the trustees may adjust this one variable and significantly alter the structure of their benefits at any time.

How secure are Defined Benefits?

Heather Dunne — Sun, 11 Jul 2010 05:06:43 GMT

One of the main reason advisers worry about recommending transfers from Defined benefits or final salary schemes is the concern about guarantees. This article considers the value of those guarantees in practice.

Deficits

The first point of call is the actual scheme fund. The majority of final salary schemes are now in deficit which simply means there is not enough money to cover the expected liabilities. This is of course all based on various assumptions including those relating to the investment return, Retail Prices Index, salary rises and annuity rates. As we all know each and every one of these factors impinges on the final cost of the benefits due and the value of the fund available to meet those benefits.

In October 2008 schemes changed back to a scheme basis as against the artificial Minimum Funding Requirement Basis for calculating Cash Equivalent Transfer Values. In other words the Scheme Actuary now sets the assumptions, not the government via legislation. This resulted in a marked increase in transfer values, which was good news for those members who were revisiting figures supplied before that deadline. Conversely this means that schemes which have undertaken valuations since then have generally shown larger deficits, which have been exacerbated by the very unusual market conditions.

If the Actuarial Report shows a deficit the Scheme Trustees have to agree a Recovery Plan with the company, in other words, setting out the additional contributions which will be made and when, to reduce the deficit. These plans have a ten year maximum term. This means the next review will fall due long before that timescale has ended and the Recovery Plan is renegotiated and restarts. In other words the ten year period will never actually finish.

The guaranteed benefits are therefore subject to the scheme having sufficient monies to provide those benefits.

Dealing with Deficits - Wind up or Reduce Benefits

One question which is frequently raised is why schemes do not actually wind up. The simple answer is that when the scheme winds up the actual deficit is crystallised and becomes a debt on the employer. Due to the comparative size of such deficits as against the value of the employer, this could create a major problem for the employer. So Scheme Trustees defer wind up and take other action to reduce the deficit.

During the period of the Recovery Plan period, the Scheme Trustees will also be obliged to consider other options there are two main alternatives increase investment performance and reduce benefits. All the other factors are outside the Trustees’ control. Increasing investment return is a very risky alternative and requires Trustees accepting the potential liability created by any losses. This is therefore the least likely route and reducing benefits has to be considered.

All schemes have been undertaking these reviews and this has resulted in significant changes. Some schemes and employers have had more difficulties British Airways has suffered strikes and that is likely to have affected the underlying business. The BBC has announced changes and it appears likely some form of disruptive action will follow. We are all aware the Civil Servants are being warned cuts will occur to their benefits, which is marginally different in that the shortfall in current requirements is made up by us the tax payer, as there is no fund, but follows the same principles.

The simplest and most effective is closing the scheme to new members. That simply means no further liabilities will be incurred. However it does also mean that the membership is maturing and the average age is getting closer to retirement when the liabilities have to be met. This can therefore increase the need to resolve the issues in a shorter timeframe which can increase the deficit.

The next options involve reducing future benefit accrual for existing scheme members. One option is to reduce the scheme accrual rate e.g. from 1/60^th to 1/80^th. Additionally the associated benefits such as spouse’s death in deferment and retirement may be reduced. Other benefits which can reasonably easily be reduced and create savings are those relating to increases in payment of the pension. It may be that this is also associated to an increase in member contributions. The most misunderstood is the conversion to CARE or career average. This is simply adjusting the definition of pensionable salary from final salary to an average of salary throughout employment. For someone who is a member of CARE (Career Average Revalued Earnings) for a long time and has significant increases in salary during that period this will reduce their benefits. For those staff that tend to be in the same employment e.g. factory staff this will probably make little difference, but for sales and senior employees this can make a huge reduction in possible benefits.

The second more drastic version of this is to close the scheme. This means no-one accrues any further benefits, which of course stops liabilities increasing. This also indirectly reduces the benefits actually already promised to members. Whilst a member is in pensionable service i.e. in the scheme, the benefits accrued in previous years increase in line with salary. Once the member is converted from active to deferred, which is what happens when the scheme is closed, benefits are subject to revaluation. All revaluation is required to do is ensure the benefits do not reduce in comparison to Retail Prices Index. In the past, the minimum revaluation was the lower of RPI and 5% per annum. With effect from 6^th April 2009 this requirement was reduced to the lower of 2.5% and RPI. At present an individual who leaves service after April 2009 has two portions of benefit – pre and post 2009 and the two sets of revaluation are applied. This is not therefore a significant saving at this time, but as time passes will become more relevant to schemes and indeed members. Either way, it is generally accepted that salaries usually increase faster than prices and so the member of a closed scheme will earn lower eventual benefits than one in an open scheme. This of course reduces the scheme liabilities which is the intention.

The actual benefits promised are therefore subject to change, depending on the Company and Trustee decisions with regard to the scheme.

Dealing with Deficits - Reducing Administrative Costs

The Scheme Trustees will be paying a consultancy firm or there will be a department dealing with the pension administration and of course reducing those costs will release funds to reduce the deficit. One of the main administrative costs is related to supplying annual membership statements and dealing with queries from members. Thus reducing the membership can reduce these costs. The member they wish to remove are those in deferment i.e. who have benefits due at some stage but are not contributing to the scheme.

The simplest way of removing members is to undertake a “partial wind up”. This basically means organising a Trustees Bulk Buy Out under which each member will be granted a transfer to a Section 32 organised by the Trustees. When the Trustees do this they are obliged to give members the alternative to transferring to a plan of their choice and three months in which to consider that option. This therefore frequently results in members approaching advisers with a transfer package and asking what they should do. The transfer values may be the standard CETV due to each member, or one reduced in line with the deficit or indeed an enhanced one to persuade them to transfer. This final enhanced transfer value may be in the form of a cash incentive of an increased transfer value.

The transfer value offered will generally indicate whether the Trustees want members to take the funds away or move to the new plan they are arranging with the provider they have chosen.

The same process generally applies in the event of a full scheme wind up.

In this case the benefits will be converted from guaranteed defined benefits to money purchase benefits t the behest of the Trustees even if the member does not transfer. In this way the Trustees will have removed the guarantees applicable to those member’s benefits.

Company Solvency

We have already alluded to the fact that the scheme deficit is guaranteed by the company which is required to make up the shortfall by paying additional contributions. Obviously, the payment of additional contributions will require extra funds to be available within the company which are not required for running the business. Clearly large additional contributions may impinge on the company’s ability to continue trading. Other factors may also affect the company’s profitability.

Pension Protection Fund

In simple terms if the company is unable to continue trading it may pass into liquidation at which stage the scheme will usually pass to the Pension Protection Fund. The PPF will assess whether they are willing to take on the scheme and if they are, what level of benefits they will provide.

PPF-Level of benefits

The PPF provides limited benefits, which are adjusted each tax year. The actual level of benefits is capped based on a pension level set assuming a Normal Retirement Age of 65. If the scheme NRA is earlier, this monetary figure is actuarially reduced. Broadly speaking the Pension Protection Fund will provide two levels of compensation which are outlined below.

1. For individuals that have reached their scheme’s normal pension age or, irrespective of age, are either already in receipt of survivors’ pension or a pension on the grounds of ill health, the Pension Protection Fund will generally pay 100% level of compensation.

In broad terms and in normal circumstances, this means a starting level of compensation that equates to 100% of the pension in payment immediately before the assessment date (subject to a review of the rules of the scheme by the Pension Protection Fund).

The part of this compensation that is derived from pensionable service on or after 6 April 1997 will be increased each year in line with the Retail Prices Index capped at 2.5%. This could, potentially, result in a lower rate of increase than the scheme would have provided.

2. For the majority of people below their scheme’s normal pension age the Pension Protection Fund will generally pay 90% level of compensation.

In broad terms and in normal circumstances, this means 90% of the pension an individual had accrued (including revaluation) immediately before the assessment date (subject to a review of the rules of the scheme by the Pension Protection Fund) and revaluation in line with the increase in the Retail Prices Index between the assessment date and the commencement of compensation payments, this revaluation being subject to a cap of 5% in respect of service from April 1997 to April 2009, and 2.5% in respect of service thereafter. These caps apply in deferment.

This compensation is subject to an overall annual cap, which, as at April 2010, equates to £29,748.68 at age 65 after the 90% has been applied. (The cap will be adjusted according to the age at which compensation comes into payment).

Once compensation is in payment, the part that derives from pensionable service on or after 6 April 1997 will be increased each year in line with the Retail Prices Index, capped at 2.5%. Again, this could result in a lower rate of increase than the scheme would have provided.

In addition there will also be compensation for certain survivors.

PPF – Funding

The Pension Protection Fund is funded by

· Levies on the various existing defined benefits scheme and
· The investments acquired when schemes pass into the PPF.

The levies are in two parts: one which relates to the number of members (Scheme Levy) and one which depends on the current funding status of the scheme (Risk Based Levy).

The Scheme Levy will depend on the size of the scheme which is generally based on the number of each type of member; active, deferred or pensioner, because that affects the potential PPF Liability.

The Risk Based Levy is dependent on the size of the deficit and will therefore increase if the scheme is in deficit. This assessment is dependent on a differing actuarial report basis (S143) than that used to assess the deficit for other purposes. This is also adjusted in relation to the assessment of the solvency of the employer, based on a report by Dun and Bradstreet commissioned by the PPF on an annual basis.

The assets are held by the PPF and are invested to produce a return to assist in providing the benefits due under the PPF. Obviously the actual return achieved depends on the investments and returns available and not guaranteed.

The Pension Protection Fund has the ability to alter the levy to meet its liabilities. However, in extreme circumstances compensation could be reduced.

· Revaluation and indexation could be reduced by the Pension Protection Fund if circumstances required it.

· Levels of compensation could be reduced by the Secretary of State on the recommendation of the Pension Protection Fund.

The PPF is not subject to any underpin or funding from the government. It has already been announced that the fund is in deficit and so struggling to meet the liabilities which it has accepted from existing schemes. In other words, it is unlikely that the PPF will be able to maintain the level of benefits currently promised to members. It is unknown whether this will result in higher levies on the remaining schemes, which will affect the funding of the remaining schemes, or a reduction in the actual benefits being provided.

It is not possible to transfer from the PPF and so any individual who approaches you with concerns about the solvency of their employer should be advised to consider a transfer prior to the monies being passed to the PPF. It also has to be noted that there are various administrative requirements which may delay payment of benefits to those reaching the scheme Normal Retirement Age at the time a scheme is passed to the PPF.

Summary

The defined benefits offered by a scheme are only as secure as, the underlying scheme funding, the company solvency and finally the PPF position.

The benefits provided by the alternative Personal Pension are underpinned by the underlying funds and the provider. These are secured under the Financial Services Compensation Scheme. They are also subject to the advice regulation imposed by the Financial Services Authority and decisions made by the Financial Ombudsman Service. We would generally suggest that these requirements provide a higher level of security for the underlying monies, than those under the defined benefits regime. However the risk of investment return and annuity rates is passed to the member.

Funding in Excess of the Lifetime Allowance

Heather Dunne — Sun, 11 Jul 2010 05:05:51 GMT

This case study is based on a real life situation and how we managed to retain the right to an employer contribution without incurring the Lifetime Allowance Charge. The actual case occurred in late 2008, but remains relevant today.

Fred Jones is a higher earner whose pension funds exceeded £1.1 million as at A Day. Fred’s new employer offered to pay £7,500 per month to his pension. The company were not willing to provide this or even a proportion (i.e. allowing for the NI Cost) as additional salary and actually Fred had no need of the extra income. This meant Enhanced Protection would not be an option and his funds at A Day were not large enough to apply for Primary Protection. (Neither would be an option now, as the deadline for claiming them has passed)

Simply, by refusing the pension contribution he received nothing. By accepting it he would retain 45% of it even allowing for the full Lifetime Allowance Charge. We undertook some projections and came to the conclusion that he could continue to contribute for approximately three years without a problem. This was explained to Fred, who agreed and so the contributions were directed to his SIPP.

Then the Chancellor announced he was freezing the Lifetime Allowance and we had to review the figures. We now generally assume the figure will remain frozen and so if the Lifetime Allowance increases in future, we would need to review the case again. However a subsequent review would generally mean a higher contribution could be made or the potential Lifetime Allowance Charge would be reduced.

Fred indicated that he did not want to draw on his pension funds when he retired, as he wished to preserve the Inheritance Tax Free transfer of those funds to his children until age 75. This meant that though he would probably stop working and contributing, he would not be taking benefits for significantly longer than we had initially anticipated and the Lifetime Allowance was not going to increase. On reworking the figures this produced a strange anomaly indicating the contributions would need to cease this February to ensure no Lifetime Allowance Charge would be incurred when he took benefits at age 75.

We had already ascertained that the company were not willing to redirect the contributions in any way and that Fred was not keen to forego the £7,500 per month involved. We estimated that by drawing some of the Tax Free Cash in around three years time, it was possible to arrange for the remaining additional funding to proceed and not exceed the Lifetime Allowance.

If this case were occurring now we would need to consider the Special Allowance, which would create an additional tax charge to Fred in relation to the contribution exceeding £20,000 per annum. This would still be less tax than opting to draw it as extra income, if that had been possible in this particular case.

Having struggled to avoid the Lifetime Allowance, because the rate of funding was to be so high, we considered the alternative ways to invest that tax free cash including ISAs, which would generate a further tax free lump sum when required and retain a similar tax efficient growth. However, they are not as IHT friendly, which had been one of the concerns raised by Fred.

We then looked at other tax efficient investments like Venture Capital Trusts and Enterprise Investment Schemes. Both options gave a good tax incentive on investment, the VCT would grant 30% and the EIS 20%, which meant that the VCT looked the better option initially. However, the EIS also has the advantage of benefitting from Business Property Relief and so not creating additional IHT.

So the Tax Free Cash could be drawn from the SIPP and invested in an EIS resolving the funding issues, whilst retaining the IHT friendly investment. By using a spousal bypass trust for the remaining drawdown fund, we could also retain that IHT free facility, though we lost 35% tax on that, the 20% up front on the EIS reduced the effect.

This reconstruction of his benefits allows Fred to accept the funding available from his employer and retain IHT exemption and avoid the Lifetime Allowance Charge. This in itself evidences the need to be aware of the overall client position, not just the pension aspects.

This is one of our firm’s key differentials from many Pension Transfer Specialists. We work closely with our introducing firms to match the client needs, whilst providing fully compliant transfer reports. In this way, we support the whole advice process, not just the pension aspect in isolation.