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Month: July 2020

Looking at the big retirement picture

Considering making contributions ahead of the tax year end?

Investing for the future is vital if you want to enjoy a financially secure retirement, and it requires you to look at the big picture. Although pensions can be complicated, we will help you get to grips with the rules if you are considering making contributions ahead of the tax year end. Here are our top pension tax tips.

Annual and lifetime limits
Getting tax relief on pensions means some of your money that would have gone to the Government as tax goes into your pension instead. You can put as much as you want into your pension, but there are annual and lifetime limits on how much tax relief you receive on your pension contributions. Please note that if you are a Scottish taxpayer, the tax relief you will be entitled to will be at the Scottish Rate of Income Tax, which may differ from the rest of the UK.

Provided that you stay within your pension allowances, all pensions give you tax relief at the rate that you have paid on your contributions. For personal pensions, you receive tax relief at the basic rate of 20% inside the pension. That means for every £800 you pay in, HM Revenue & Customs (HMRC) will top it up to £1,000. If you’re a higher or additional rate taxpayer, you can claim back up to an additional 20% or 25% on top of the 20% basic rate tax relief through your self-assessment tax return.

Benefit from tax relief
For workplace pensions, your employer normally takes your pension contribution directly from your salary before Income Tax so that the contribution is not taxed at source like the rest of your employment income, and therefore the full benefit is received inside your pension immediately. If your employer does not handle your contributions before tax, then these would benefit from tax relief in the same way as for a personal pension contribution.

You’re still entitled to receive basic rate tax relief on pension contributions even if you don’t pay tax. The maximum you can pay into your pension as a non-taxpayer is £2,880 a year, which is equivalent to a £3,600 contribution once you factor in tax relief.

Total amount of contributions
The annual allowance is a limit to the total amount of contributions that can be paid in to defined contribution pension schemes and the total amount of benefits that you can build up in a defined benefit pension scheme each year for tax relief purposes.

Taxpayers can pay in up to 100% of their income, up to an annual allowance of £40,000. Any contributions you make over this limit won’t attract tax relief and will be added to your other income, being subject to Income Tax at the rate(s) that applies to you.

Your annual allowance will reduce from £40,000 if your income plus your pension contributions totals £150,000 or more. For every £2 in excess of £150,000, your allowance will reduce by £1, until it reaches a minimum allowance of £10,000.

Carry forward unused allowances
You can also carry forward unused allowances from the previous three years, as long as you were a member of a registered pension scheme during this period.

If you choose to take a taxable income from a personal pension other than via an annuity, your annual allowance will be reduced to £4,000 or 100% of earnings, whichever is lower, and you won’t be able to carry forward previous unused allowances.

Paying tax on the excess
As well as the annual allowance, there’s also a maximum total amount you can hold within all your pension funds without having to pay extra tax when you withdraw money from them, known as the ‘lifetime allowance’. The standard lifetime allowance is £1,030,000 (2018/19), but some people have a higher allowance. The standard lifetime allowance is inflation linked, so it’s likely to increase each year.

If the value of your pension savings is higher than this, and you have not secured protection from HMRC against the changes in the lifetime allowance at the point that they reduced, you will pay tax on the excess. So, if you’re approaching this limit, be careful about contributing too much.

There’s no immediate tax charge once your pension fund grows beyond your lifetime allowance. It’s only when you choose to take your pension benefits over your lifetime allowance that you pay a tax charge, and the charge only applies to the benefits taken over your allowance.

Freedoms give greater flexibility
Commencing 6 April 2015, under the new ‘pension freedoms’ rules, you can now access your savings from your defined contributions pension scheme once you reach age 55. You cannot make withdrawals from a pension before you’re 55, moving to 56 in 2019 and 57 by 2028. If you’re due to reach retirement this year, you could take up to 25% of your pension fund as a tax-free lump sum if you want to, but the remaining 75% will be liable to Income Tax.

Previously, most pensioners purchased an annuity with their pot, which paid a guaranteed income for life. The pension freedoms give greater flexibility over retirement funding. But you’ll need to plan any withdrawals you make carefully, as taking large sums from your pension can boost your income in a particular tax year, pushing you into a higher rate of tax so that you pay more tax than you need to.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

Market exposure

Build a portfolio that meets your needs

The earlier you commit to an investment strategy, the longer your money can work in the market. However, the world is an uncertain place at the moment.

Investing should be for the long term. Why? Because markets and the economy have a tendency to rise over time. For investors, this should mean a return on investment for people who can ride out the ups and downs along the way – a reward for the extra risk they’re taking.

Key drivers of long-term returns
Fundamentals and changes in value are the key drivers of long-term returns, and they are possible to forecast with a degree of accuracy rather than trying to time the markets or second-guess rises and falls in prices.

But throughout history, we have seen periods of extreme volatility when there have been rallies and sell-offs time and time again for a variety of reasons. With long-term investing, you can expect cycles – periods of falling prices followed by a recovery. A key to successful investing is being comfortable knowing that there will be falls as well as rises in the market.

Cyclical in nature and prone to volatility
Many people will remember the dot-com bubble of 2001 and the global financial crisis of 2007. However, stock markets are cyclical in nature, and although prone to volatility, markets and wider economies have a tendency to rise over time. This applies to everything from share prices and earnings to wages and the price of household goods.

On the other hand, short-term returns are driven by changes in valuation and investor sentiment. These are impossible to forecast consistently, and trying to time the markets can also mean potentially locking in losses and missing out on gains.

Returns generating more returns
Compounding is one of the reasons long-term investing has the potential to give such great returns. This is the snowballing effect of your returns generating more returns. In the stock markets, compounding is usually a result of reinvesting dividend income. Companies are collectively owned by their shareholders, and their board members may agree to pay investors their share of the profits through a dividend.

Dividend-paying shares are a staple of most income-seeking investors’ portfolios. But when the income is reinvested, we can see a significant increase in total return over time. This makes them ideal for investors who are seeking growth – especially as a stable and growing dividend is seen as a sign of good corporate governance.

Political uncertainty or volatility
When people feel nervous about investing – perhaps due to political uncertainty or volatility in the stock market – a common reaction is to sell their investments and keep their money in cash. Cash is seen as a ‘safe’ asset, but it does leave investors open to the risk of inflation. Inflation erodes the buying power of your savings over time. Your account balance doesn’t change, but you can buy less with your money.

Although markets have been volatile and there remains uncertainty over the global political future, there will always be reasons not to invest and scenarios to worry about. However, you must remember that every period of time spent out of the stock markets is a period of time potentially missing out on returns.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

You have one life, so invest wisely

Identifying multiple risk profiles for multiple goals

Throughout our lives, we will have many different lifestyle and financial goals that we would like to achieve. Although we all have different goals, there are some key goals that we’ll have in common, especially when it comes to retirement.

What do you want from your investments? Supplementing your income? Building your retirement pot? It’s essential we tailor your investments to suit your goals. To understand your personal investing goals, you need to take into account all the needs and preferences that may shape your financial life.

When setting goals, you are forced to think hard about the various life aspects you care about and how much they will cost in future. This helps to put your expectations in perspective, so that you can align your savings with future requirements. It also prevents you from underestimating the amount of money you require for the future or being misled about your savings ability.

Increasing your chances of achieving your goals

The simple act of writing your goals down and sharing them with others increases your chances of achieving them. What are your objectives for the money you’re investing? Do you want to accumulate money for a longer-term goal, such as a child’s or grandchild’s university education, or perhaps a comfortable retirement for yourself?

You might even have several goals, and each of those goals may require different investment approaches to achieve them. Before you decide to invest your hard-earned money, it is important to fully understand why you are investing and what you want to achieve.

Prioritising your investment goals

Growth: how much investment growth is appropriate and realistic to accomplish your objectives and meet your needs?

Cash flow: your portfolio ideally must sustain the ability to generate sufficient cash flow throughout your retirement.

Combination of growth and cash flow: you would like your portfolio to have the necessary growth to provide consistent cash flow. As with the pure growth goal, it’s vital to understand what potential returns to expect.

Capital preservation: this aspect of goal-based investing refers to preserving the nominal value of your assets. Nominal values aren’t inflation-adjusted, and this goal may be more appropriate for shorter-term cash flow needs than for longer time horizons, as capital preservation over a long period can mean watching your purchasing power diminish.

Capital preservation and growth: these two goals are inherently at odds. Realistically, these cannot be pursued at the same time, as terrific as that may sound. Growth cannot be achieved without putting investment capital at risk. It will be necessary to segment the investment monies to nominate the required amount to be set aside with a view to capital preservation, with an amount being maintained separately for investment with a view to achieving growth potential.

Maintain or improve lifestyle: you have worked hard for your retirement and may wish to maintain or enhance your current lifestyle in your retirement years. This means growing your purchasing power over time. Ultimately, this goal requires a growth strategy that must offset the erosive effects of inflation.

Depletion, or spending every pound: although spending every pound before you die isn’t a common goal among retirees, it does exist. But as you might guess, it is a risky proposition. There is no way to accurately predict your lifespan. And should you live longer than you expect, you could run out of money sooner than you had planned.

With your goals in place, you then need to know how much risk you can tolerate. Along the way, there will inevitably be periods of ups and downs – and while the former are celebrated, the latter can be frightening, even to the most seasoned investor.

When you know exactly what the money is for, the time you have to achieve those goals and your tolerance for risk, you can construct your investment portfolio accordingly.

Pensions shake-up

Getting away from the stresses of everyday life

For many, the idea of retirement means getting away from the stresses of everyday life. But with living costs rising and interest rates low, people need to think about how to generate extra income from their savings in retirement.

Pensions offer a number of important advantages that will make your savings grow more rapidly than might otherwise be the case. However, changes announced in April 2015 have lead to a complete shake-up of the UK’s pensions system, giving people much more control over their pension savings than ever before.

Different pension schemes
The term ‘private pension’ covers both workplace pensions and personal pensions. The UK Government currently places no restrictions on the number of different pension schemes you can be a member of. Providing you don’t save more than your Lifetime Allowance into all of your pension funds combined – currently set at £1,030,000 (2018/19) – you won’t be penalised by the taxman for having lots of pensions.

So even if you already have a workplace pension, you can have a personal pension too, or even multiple personal pensions. These can be a useful alternative to workplace pensions if you’re self-employed or not earning, or simply another way to save for retirement.

Any UK resident between the ages of 18 and 75 can pay into a personal pension – although the earlier you invest, the more likely you are to be able to build up a substantial pension pot.

Tax relief on pension contributions
A private pension is designed to be a tax-efficient savings scheme. The Government encourages this kind of saving through tax relief on pension contributions.
In the 2018/19 tax year, pension-related tax relief is limited to either 100% of your UK earnings, or £3,600 per annum.

The current pension tax relief rates are:
Basic-rate taxpayers will receive 20% tax relief on pension contributions
Higher-rate taxpayers also receive 20% tax relief, but they can claim back up to an additional 20% through their tax return
Additional-rate taxpayers again pay 20% tax relief, but they can claim back up to a further 25% through their tax return
Non-taxpayers receive basic-rate tax relief, but the maximum payment they can make is £2,880, to which the Government adds £720 in tax relief, making a total gross contribution of £3,600

If you are a Scottish taxpayer, the tax relief you will be entitled to will be at the Scottish Rate of Income Tax, which may differ from the rest of the UK.
Limits on the amount that can be contributed

The Annual Allowance is a limit on the amount that can be contributed to your pension each year while still receiving tax relief. It’s based on your earnings for the year and is capped at £40,000 (2018/19).

If you exceed the Annual Allowance in a year, you won’t receive tax relief on any contributions you paid that exceed the limit, and you will be faced with an annual allowance charge. This charge will form part of your overall tax liability for that year, although there is the option to ask your pension scheme to pay the charge from your benefits if it is more than £2,000.

In April 2016, the Government introduced the tapered annual allowance for high earners, which states that for every £2 of income earned above £150,000 each year, £1 of annual allowance will be forfeited. However, the maximum reduction will be £30,000 – taking the highest earners’ annual allowance down to £10,000.

It is worth noting that you may be able to carry forward any unused annual allowances from the previous three tax years. If you have accessed any of your pensions, you can only pay a maximum of £4,000 into any un-accessed pension(s) you have. This is called the ‘Money Purchase Annual Allowance’, or ‘MPAA’. The MPAA applies only if you have accessed one of your pensions.

Exceeding the Lifetime Allowance
What counts towards your Lifetime Allowance depends on the type of pension you have.

Defined contribution – personal, stakeholder and most workplace schemes. The money in pension pots that goes towards paying you, however you decide to take the money.
Defined benefit (also known as ‘Final Salary’) – some workplace schemes. This can be 20 times the pension you get in the first year plus your lump sum – but you’ll need to check this with your pension provider.

Your pension provider will be able to help you determine how much of your Lifetime Allowance you have already used up. This is important because exceeding the Lifetime Allowance will result in a charge of 55% on any lump sum and 25% on any other pension income such as cash withdrawals.
This charge will usually be deducted by your pension provider when you access your pension.

Protecting your pension pot
It’s easier than you think to exceed the Lifetime Allowance, especially if you have been diligent about building up your pension pot. If you are concerned about exceeding your Lifetime Allowance or have already done so, it’s essential to obtain professional financial advice.

It may be that you can apply for pension protection. This could enable you to retain a larger Lifetime Allowance and keep paying into your pension – depending on which kind of protection you are eligible for:

Individual protection 2016 – this protects your Lifetime Allowance to the lower of the value of your pension(s) at 5 April 2016 and/or £1.25 million. You can keep building up your pension with this type of protection, but you must pay tax on money taken from your pension(s) that exceeds your protected lifetime allowance.

Fixed protection 2016 – this fixes your Lifetime Allowance at £1.25million. You can only apply for this if you haven’t made any pension contributions after 5 April.

Passing on your pension to beneficiaries
Finally, it is worth noting that there will normally be no tax to pay on pension assets passed on to your beneficiaries if you die before the age of 75 and before you take anything from your pension pot – as long as the total assets are less than the Lifetime Allowance. If you die aged 75 or older, the beneficiary will typically be taxed at their marginal rate.
However, not all types of pension can be passed on in such a tax-efficient way. Some older-style pensions may not be able to offer all the new death benefit options available. If this flexibility is important to you, in this instance and if appropriate, you may want to consider transferring to a pension scheme that does.

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Independence plan

Least financially resilient group delay life milestones due to financial insecurity

Life can get complicated when you hit your early thirties, which means your finances are starting to get serious. You might be in the middle of countless transitions, like moving up in your career, starting a business, buying a home, getting married, having children…and a whole lot more.

A study[1] reveals that people in their early thirties are putting off life milestones, such as having children or buying a home, due to being one of the least financially resilient groups in the UK. A quarter (24%)[1] of the 30 to 35-year-olds in the study, of which there are 4.7 million in the UK, feel worried about the financial impact of life milestones – double the national average (12%)[1]. Nearly one in six (17%)[1] say they’ve put off major life milestones because they don’t feel financially mature enough.

30 years or more from retirement 
The great advantage of being in your thirties is your age – you may still be some 30 years or more from retirement and have plenty of time to right the excesses of your twenties. The potential downside, however, is that if you don’t act now, these mistakes could colour your future financial health. Worryingly, seven out of ten under-35s believe their youthfulness will last forever[3], so they don’t properly prepare for risks the future may hold.

The study also found that more than seven in ten (73%)[1] of this age group fall short of the Money Advice Service (MAS)[2] recommended amount of savings to be financially resilient, versus a national average of 56%[1].

Unable to work due to illness or an accident
The research revealed a further one in five (22%)[1] in their early thirties don’t know how long they would be able to cope financially if they found themselves unable to work – for instance, due to illness or an accident. Despite this, fewer than one in twelve working adults (7%)[1]
have their own Income Protection insurance in place.

These findings – that many of those in their early thirties are delaying major life milestones because they feel worried, unconfident and ill-prepared financially – are very concerning. And it is worrying that so few can withstand the financial effects of an unexpected income shock – they have no Plan A, nor a Plan B.

Little provision to handle a financial crisis
With low financial confidence and little provision to handle a financial crisis, there is a clear need for a safety net – a form of ‘independence plan’. There are multiple reasons this age group isn’t properly preparing for financial risks. A universal emphasis on the importance of ‘staying young’ means many people are in a state of denial or avoidance when it comes to facing up to the future. We also tend to talk within – rather than across – generational groups, which encourages us to focus inwardly on the present, not the future.

Previously, younger generations would likely inherit their parents’ estate while relatively young, but increased life expectancy means this is no longer the case. By not giving proper weight to their financial status, this group could be at risk of finding themselves with a significant level of responsibility without adequate financial preparation or protection.

Source data:
[1] Methodology for consumer survey: YouGov, on behalf of LV=, conducted online interviews with 8,529 UK adults between 20–26 June 2018. Data has been weighted to reflect a nationally representative audience.
[2] Methodology for recognised benchmark of financial resilience: Money Advice Service (MAS) guidelines for financial resilience state that ‘people should hold an emergency fund of three months’ income’. LV= identified the ‘least financially resilient’ groups based on the combined factors of how respondents fared against the MAS definition and how confident respondents reported to feel about being able to manage a financial crisis.
People in their early thirties were identified as one of the least financially resilient groups using the following methodology: 30 to 35-year-olds were identified as the least financially resilient age group, with 73% falling short of having 90 days’ worth of outgoings in the bank against the national average of 33%. Within this age group, 43% lack confidence in handling a financial crisis, versus the national average of 34%.
[3] Dr David Lewis, ‘Life Unlimited – Peak Performance Past Forty’, to be published late 2018

Relationship breakdowns

A pension could well be the biggest single asset in the relationship

What is likely to be a divorcing couple’s most valuable asset? The family home will spring to most people’s minds first. But the value of a pension could well be the biggest single asset in the relationship.

When and how pensions are divided on divorce depends on the circumstances of you and your family. If your marriage has been short and both of you are in your twenties or thirties, then your pensions may not need to be divided formally at all, although their value may still be taken into account in other ways.

Central part in negotiations
If you and your partner are in your 50s, pensions are likely to play a far more central part in your negotiations or the decision a court has to make. It will be necessary to look at them within the overall context of your family finances.

New research[1] shows that a fifth of people with pensions in the UK (20%) have no idea who will inherit their pension pot when they die. Surprisingly, 17% of divorcees don’t know who stands to inherit their pension, even though this could be their ex-partner. This figure rises to 28% among people who are separated from their partner.

Update personal information
Of those who were formerly in a relationship that has since broken down, just 24% say they updated their pension policy immediately, while half (50%) said they had no idea they needed to update their personal information. A further 16% did eventually update their policy, but waited for over three months to do so, with men more likely to update a pension policy when a relationship ends. More than a quarter (28%) of men do so straight away, compared to just 20% of women. Three fifths of women (60%) don’t know they should be updating a policy, compared to 42% of men.

Co-habitees are also leaving themselves exposed, as there is no guarantee a partner would receive pension savings if they are not named as a beneficiary on the policy. Over a quarter (28%) of co-habitees are unsure who will inherit their pension if the worst were to happen.

Sorting out your pension
A relationship ending can be a really stressful time, and sorting out your pension may not be the biggest priority. However, it is important that you know who stands to inherit a pension when you die – for all you know, it could be an ex from many years ago.

Likewise, just because you and your partner live together and are in a committed relationship, there is no guarantee they’ll receive your pension savings when you die unless you make specific requirements.

Staying on top of your finances
1. Make sure you know who stands to inherit your pension pot when you die.
2. If you are co-habiting, many pension policies will require you to name that person on your policy as the beneficiary upon your death.
3. Periodically check all finances, including pension pots, bank accounts and insurance schemes, and ensure the right dependents and beneficiaries are named.

Avoid the mad March rush

Get a head start on your tax planning resolutions

Although the current tax year does not end until 5 April 2019, tax planning shouldn’t be a mad March rush. Now is the perfect time get a head start on your tax planning resolutions to enhance your own, your family’s or your company’s tax-efficient plans for the future.

We have set out some tax tips and actions that may be appropriate to certain taxpayers. Reviewing your tax affairs now will ensure that available reliefs and exemptions have been fully utilised, together with future planning which could help to reduce your tax bill.

It is important to ensure that, if you have not done so already, you take the time to carry out a review of your tax and financial affairs to identify any tax planning opportunities and take action before it’s too late. Personal circumstances differ, so if you have any questions or if there is a particular area you are interested in, please contact us.

Here are our tips to help you get ahead on managing your tax affairs in 2018/19

Pension contributions – spouses and children – consider contributing up to £2,880 towards a pension for your non-earning spouse or children. The Government will add £720 on top – for free.

Individual Savings Accounts (ISAs) – fully utilise your tax-efficient ISA allowance. The allowance for 2018/19 is £20,000 per person, whilst the Junior ISA allowance is now £4,260 for children under 18.

Capital gains – use the capital gains annual exemption of £11,700 (2018/19) to realise gains tax-free. The allowance cannot be transferred between spouses or carried forward.

Pension contributions – maximise contributions amount and tax relief. Take full advantage of increasing pension contributions by utilising the annual allowance, which is £40,000 (tapered if you earn over £150,000) or the value of your whole earnings – whichever is lower. Unused annual allowances may also be carried forward from the previous three tax years.

Remuneration strategy – if you run your own company, it’s a good idea to determine your pay and benefits strategy sooner rather than later. For 2018/19, the dividend nil-rate band is reduced from £5,000 to only £2,000 – it’s really important to consider the tax implications of your chosen approach to salary, benefits, pensions and dividends.

Gifting – you can act at any time to help reduce a potential Inheritance Tax bill when you’re no longer around. Make use of the Inheritance Tax annual exemption that allows you to give away £3,000 worth of gifts outside of your estate. If unused, the exemption can be carried forward one year.

Transfer income-producing assets – consider transferring income-producing assets between your spouse or registered civil partner in order to use the Income Tax personal allowance and lower Income Tax bands of the transferee.

Overpayment and capital loss claims – submit claims for overpaid tax and capital loss claims for the 2014/15 year before 5 April 2019, after which such claims will be time-barred.

Landlords – for 2018/19, the restriction on deductibility of mortgage interest and other finance costs doubles from 25% to 50%. If you plan to take steps to mitigate the impact (such as incorporation, for example), you may save more tax by taking those steps earlier on in the year. In future years, the restriction will apply to 75%, and then from April 2020, 100% of finance costs incurred by individual landlords.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES, OF AND RELIEFS FROM TAXATION, ARE SUBJECT TO CHANGE.

Diversified portfolio

Effective tool for reducing risk and volatility without necessarily giving up returns

When you start investing, or even if you are a sophisticated investor, one of the most important tools available is diversification. Whether the market is bullish or bearish, maintaining a diversified portfolio is essential to any long-term investment strategy.

Diversification allows an investor to spread risk between different kinds of investments (called ‘asset classes’) to potentially improve investment returns. This helps reduce the risk of the overall investments (referred to as a ‘portfolio’) underperforming or losing money.

With some careful investment planning and an understanding of how various asset classes work together, a properly diversified portfolio provides investors with an effective tool for reducing risk and volatility without necessarily giving up returns.

Investment decision process
Understanding investment risk and determining what level of risk you feel comfortable with before you invest is an important part of the investment decision process. Your potential returns available from different kinds of investment, and the risks involved, change over time as a result of economic, political and regulatory developments, as well as a host of other factors.

Your overall asset allocation needs to reflect: your future capital or income needs; the timescales before those capital sums are required or the
level of income sought; and the amount of risk you can tolerate.

Investing is all about risk and return. Not only does asset allocation naturally spread risk, but it can also help you to boost your returns while maintaining, or even lowering, the level of risk of your portfolio. Most rational investors would prefer to maximise their returns, but every investor has their own individual attitude towards risk.

Investment characteristics
Determining what portion of your portfolio should be invested into each asset class is called ‘asset allocation’ and is the process of dividing your investment(s) between different assets. Portfolios can incorporate a wide range of different assets, all of which have their own characteristics, like cash, bonds, equities (shares in companies) and property.

The idea behind allocating your money between different assets is to spread risk through diversification and to understand these characteristics, and their implications on how a portfolio will perform in different conditions – the idea of not putting all your eggs in one basket.

Looking into the future
Investments can go down as well as up, and these ups and downs can depend on the assets you’re invested in and how the markets are performing. It’s a natural part of investing. If we could look into the future, there would be no need to diversify our investments. We could merely choose a date when we needed our money back, then select the investment that would provide the highest return to that date.

Moreover, the potential returns available from different kinds of investment, and the risks involved, change over time as a result of economic, political and regulatory developments, as well as a host of other factors. Diversification helps to address this uncertainty by combining a number of different investments.

Asset classes
When putting together a portfolio, there are a number of asset classes, or types of investments, that can be combined in different ways. The starting point is cash – and the aim of employing the other asset classes is to achieve a better return than could be achieved by leaving all of the investment on deposit.

Cash
The most common types of cash investments are bank and building society savings accounts and money market funds (investment vehicles which invest in securities, such as short-term bonds, to enable institutions and larger personal investors to invest cash for the short term).

Money held in the bank is arguably more secure than any of the other asset classes, but it is also likely to provide the poorest return over the long term. Indeed, with inflation currently above the level of interest provided by many accounts, the real value of cash held on deposit is falling.

Your money could be eroded by the effects of inflation and tax. For example, if your account pays 5% but inflation is running at 2%, you are only making 3% in real terms. If your savings are taxed, that return will be reduced even further.

Fixed Interest Securities
Fixed Interest Securities (also called ’bonds’) are effectively IOUs issued by governments or companies. In return for your initial investment, the issuer pays a pre-agreed regular return (the ‘coupon’) for a fixed term, at the end of which it agrees to return your initial investment. Depending on the financial strength of the issuer, bonds can be very low or relatively high risk, and the level of interest paid varies accordingly, with higher-risk issuers needing to offer more attractive coupons to attract investment.

As long as the issuer is still solvent at the time the bond matures, investors get back the initial value of the bond. However, during the life of the bond, its price will fluctuate to take account of a number of factors, including:

Interest rates – as cash is an alternative lower- risk investment, the value of government bonds is particularly affected by changes in interest rates. Rising base rates will tend to lead to lower government bond prices, and vice versa.
Inflation expectations – the coupons paid by the majority of bonds do not change over time. Therefore, high inflation reduces the real value of future coupon payments, making bonds less attractive and driving their prices lower.
Credit quality – the ability of the issuer to pay regular coupons and redeem the bonds at maturity is a key consideration for bond investors. Higher-risk bonds such as corporate bonds are susceptible to changes in the perceived credit worthiness of the issuer.

Shares
Shares, or equities in companies, are regarded as riskier investments than bonds, but they also tend to produce superior returns over the long term. They are riskier because, in the event of a company getting into financial difficulty, bond holders rank ahead of equity holders when the remaining cash is distributed.

However, their superior long-term returns come from the fact that, unlike a bond (which matures at the same price at which it was issued), share prices can rise dramatically as a company grows.

Returns from shares are made up of changes in the share price and, in some cases, dividends paid by the company to its investors. Share prices fluctuate constantly as a result of factors such as:

Company profits – by buying shares, you are effectively investing in the future profitability of a company, so the operating outlook for the business is of paramount importance. Higher profits are likely to lead to a higher share price and/or increased dividends, whereas sustained losses could place the dividend or even the long-term viability of the business in jeopardy
Economic background – companies perform best in an environment of healthy economic
growth, modest inflation and low interest rates. A poor outlook for growth could suggest waning demand for the company’s products or services. High inflation could impact companies in the form of increased input prices, although in some cases companies may be able to pass this on to consumers. Rising interest rates could put strain on companies that have borrowed heavily to grow the business
Investor sentiment – as higher-risk assets, equities are susceptible to changes in investor sentiment. Deterioration in risk appetite normally sees share prices fall, while a turn to positive sentiment can see equity markets rise sharply

Property
In investment terms, property normally means commercial real estate – offices, warehouses, retail units and the like. Unlike the assets we have mentioned so far, properties are unique – only one fund can own a particular office building or shop.

The performance of these assets can sometimes be dominated by changes in capital values. These unusually dramatic moves in capital value illustrate another of property’s key characteristics, namely its relative illiquidity compared to equities or bonds. Buying equities or bonds is normally a relatively quick and inexpensive process, but property investing involves considerable valuation and legal involvement.

The more normal state of affairs is for rental income to be the main driver of commercial property returns. Owners of property can enhance the income potential and capital value of their assets by undertaking refurbishment work or other improvements. Indeed, without such work, property can quickly become uncompetitive and run down. When managed properly, the relatively stable nature of property’s income return is key to its appeal for investors.

Diversification
Diversification helps to address uncertainty by combining a number of different investments. In order to maximise the performance potential of a diversified portfolio, managers actively change the mix of assets they hold to reflect the prevailing market conditions. These changes can be made at a number of levels, including the overall asset mix, the target markets within each asset class, and the risk profile of underlying funds within markets.

As a rule, an environment of positive or recovering economic growth and healthy risk appetite would be likely to prompt an increased weighting in equities and a lower exposure to bonds. Within these baskets of assets, the manager might also move into more aggressive portfolios when markets are doing well, and more cautious ones when conditions are more difficult. Geographical factors such as local economic growth, interest rates and the political background will also affect the weighting between markets within equities and bonds.

In the underlying portfolios, managers will normally adopt a more defensive positioning when risk appetite is low. For example, in equities, they might have higher weightings in large companies operating in parts of the market that are less reliant on robust economic growth. Conversely, when risk appetite is abundant, underlying portfolios will tend to raise their exposure to more economically sensitive parts of the market and to smaller companies.

Pension freedoms

Taking responsibility for funding our own retirement

Although each generation will likely face different challenges and opportunities, achieving retirement readiness will require actions common to us all. We all know that our ageing population and increased life expectancy are putting a strain on government finances. Following pension freedoms, there’s greater choice than ever before in how you access and take your retirement benefits.

Now, more than ever, it is vital that we all take responsibility for funding our own retirement. But what if you’ve reached your 50s and you have little or no savings to speak of? Don’t panic. You can still build a decent pension. Here’s how:

Make the most of free money
The good news is that there’s still time to build a decent pension pot when you are in your 50s. For starters, many people of this age are at the peak of their career earnings, so can make the most of the tax relief available when contributing to their pension. You can put as much as you want into your pension, but there are annual and lifetime limits on how much tax relief you get on your pension contributions.

If you’re a UK taxpayer, in the tax year 2018/19 the standard rule is that you’ll get tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance – whichever is lower.

Any contributions you make over this limit won’t attract tax relief and will be added to your other income and be subject to Income Tax at the rate(s) that applies to you. However, you can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years.

But there is an exception to this standard rule. If you have a defined contribution pension and you start to draw money from it, the annual allowance reduces to £4,000 in some situations. Since April 2016, the annual allowance is also reduced if you have an income of over £150,000, including pension contributions.

Track down your workplace pensions
Launched in May 2016, the Pension Tracing Service is a free-to-use government initiative that searches a vast database of pension schemes to help you find a lost pension from companies you almost forgot you worked at, as well as private pension providers.

All you need is the name of the employer (or the pension provider) and the dates you worked there, and the system can locate it. What it can’t do is tell you if you do or do not have a pension there, or how much the fund is worth. However, with the details it provides, it can help ‘reunite’ you with pensions you may have forgotten you had.

Steps to take to trace your old pension:
Keep hold of statements, old emails or mail you’ve had from previous pension providers
Contact former employers for long-forgotten workplace pensions
Get in touch with the pension provider if possible
If you can’t, then track them down via the Pension Tracing Service
Get as much information as you can about those pension plans

Pension consolidation
If appropriate to your particular situation, having all your pension savings in one place could mean you’re clearer about your financial position, giving you the option to make more informed decisions. If you’ve had more than one job during your career, you could have more than one pension pot.

Pension consolidation means bringing a number of pension pots together into a single pot. This process will not be right for everyone, and it is essential to obtain professional financial advice before moving any pension monies.

You will need to compare the benefits from your current pension with the estimated benefits of your new pension, including any guarantees that you may be giving up or any exit penalties that may apply if you transfer out of a scheme. Transferring your pension may not be the best option for you.

If appropriate, consolidating your pension monies may reduce the money spent on multiple charges and could make managing one pension easier than looking after several. Instead of receiving statements from different providers at different times, you’ll only receive one statement that shows all of your pension savings.

By combing all of your pension pots together, you can also quickly and easily see how much you’ve got, if you’re invested in the right funds and how your pension is performing. This single view could make it easier to see if you’re on track to meet your retirement goals and to make changes if you need to.

It’s important to keep a close watch on the pension savings you’ve got, and consolidating them could mean you don’t lose track of your savings.

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

TAX TREATMENT DEPENDS ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN THE FUTURE.

Funding your golden years

Tax aspects require careful planning after recent government changes

Pensions have the reputation of being confusing, but they needn’t be. Private pensions are usually used by people who don’t have access to a workplace pension scheme, but you can also have one if you are employed or not working. They work in much the same way as workplace pension schemes, but you, rather than an employer, are responsible for choosing the provider and setting up your plan.

When you pay into a pension, you receive tax relief on any contributions you make. People may turn to private pensions as a tax-effective way to bolster their retirement income. There are several different types of private pension to choose from, but in light of recent government changes, the tax aspects require careful planning.

As many schemes as you like
The term ‘private pension’ covers both workplace pensions and personal pensions. The UK Government currently places no restrictions on the number of different pension schemes you can be a member of.

So, even if you already have a workplace pension, you can have a personal pension too, or even multiple personal pensions. These can be a useful alternative to workplace pensions if you’re self-employed or not earning, or simply another way to save for retirement.

Any UK resident between the ages of 18 and 75 can pay into a personal pension – although the earlier you invest, the more likely you are to be able to build up a substantial pension pot.

Tax relief on pension contributions
Private pensions are designed to be a tax-efficient savings scheme. The Government encourages this kind of saving through tax relief on pension contributions. In the 2018/19 tax year, pension-related tax relief is limited to either 100% of your UK earnings, or £3,600 per annum.

The current pension tax relief rates are:
Basic-rate taxpayers will receive 20% tax relief on pension contributions
Higher-rate taxpayers also receive 20% tax relief, but they can claim back up to an additional 20% through their tax return
Additional-rate taxpayers again pay 20% tax relief, but they can claim back up to a further 25% through their tax return
Non-taxpayers receive basic-rate tax relief, but the maximum payment they can make is £2,880, to which the Government adds £720 in tax relief, making a total gross contribution of £3,600

If you are a Scottish taxpayer, the tax relief you will be entitled to will be at the Scottish Rate of Income Tax, which may differ from the rest of the UK.

Annual allowances can vary

The annual allowance is the maximum amount that you can contribute to your pension each year while still receiving tax relief. The current annual allowance is capped at £40,000, but may be lower depending on your personal circumstances

In April 2016, the Government introduced the tapered annual allowance for high earners, which states that for every £2 of income earned above £150,000 each year, £1 of annual allowance will be forfeited. The maximum reduction will, however, be £30,000 – taking the highest earners’ annual allowance down to £10,000

Any contributions over the annual allowance won’t be eligible for tax relief, and you will need to pay an annual allowance charge. This charge will form part of your overall tax liability for that year, although there is the option to ask your pension scheme to pay the charge from your benefits if it is more than £2,000.

It is worth noting that you may be able to carry forward any unused annual allowances from the previous three tax years.

If you have accessed any of your pensions, you can only pay a maximum of £4,000 into any un-accessed pension(s) you have. This is called the ‘Money Purchase Annual Allowance’ (or MPAA). The MPAA applies only if you have accessed one of your pensions

Lifetime allowances have shrunk
The lifetime allowance (LTA) is the maximum amount of pension benefit that can be drawn without incurring an additional tax charge. Since
6 April 2018, the lifetime allowance is £1,030,000.

Your pension provider will be able to help you determine how much of your LTA you have already used up. This is important because exceeding the LTA will result in a charge of 55% on any lump sum and 25% on any other pension income such as cash withdrawals. This charge will usually be deducted by your pension provider when you access your pension.

It’s possible to protect your pension
It’s easier than you think to exceed the LTA, especially if you have been diligent about building up your pension pot. If you are concerned about exceeding your LTA, or have already done so, you should talk to us.

It may be that we can apply for pension protection for you. This could enable you to retain a larger LTA and keep paying into your pension – depending on which form of protection you are eligible for:

Individual protection 2016 – this protects your lifetime allowance to the lower of the value of your pension(s) at 5 April 2016 and/or £1.25 million. You can keep building up your pension with this type of protection, but you must pay tax on money taken from your pension(s) that exceed your protected lifetime allowance

Fixed protection 2016 – this fixes your lifetime allowance at £1.25 million. You can only apply for this if you haven’t made any pension contributions after 5 April

Other ways to save
In addition to pension protection, if you have reached your LTA (or are close to doing so), it may also be worth considering other tax-effective vehicles for retirement savings, such as Individual Savings Accounts (ISAs). In the current tax year, individuals can invest up to £20,000 into an ISA.

The Lifetime ISA, launched in April 2017, is open to UK residents aged 18–40 and enables younger savers to invest up to £4,000 a year tax-free – and any savings you put into the ISA before your 50th birthday will receive an added 25% bonus from the Government. After your 60th birthday, you can take out all the savings tax-free, making this an interesting alternative for those saving for retirement.

Passing on your pension
Finally, it is worth noting that there will normally be no tax to pay on pension assets passed on to your beneficiaries if you die before the age of 75 and before you take anything from your pension pot – as long as the total assets are less than the LTA. If you die aged 75 or older, the beneficiary will typically be taxed at their marginal rate.

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

TAX TREATMENT DEPENDS ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN THE FUTURE.