Please click the link below for our latest monthly figures for the five model portfolios. The figures show the performance of our model portfolios versus various indices over the month of June.
Frequently, I am asked about death benefits and Self Invested Personal Pensions (SIPPs). I detail a few pointers below and recommend you contact your adviser if you require further information on this area.
What happens to my SIPP if I die?
Death benefits can be paid to beneficiaries as a lump sum or used to generate an income through drawdown or by the purchase of an annuity.
Who are my beneficiaries?
Frequently, we note that SIPPs do not have a death benefit nomination form attached to them. We strongly recommend you complete a death benefit nomination form as this will advise your scheme administrator as to whom you would like benefits payable to in the event of your death. The nomination is not usually legally binding but it tells your provider your wishes, which they must consider prior to allocating the death benefits.
Who can I nominate?
You can nominate whoever you like to receive your benefits on your death, which can also be split among several beneficiaries. These could be your spouse, children or grandchildren or you can nominate someone unrelated to you if you wish. You can also leave some, or all, of your SIPP to charity.
How are death benefits paid?
Beneficiaries of your pension will normally have the choice of taking the pension fund as a lump sum or leaving the fund invested and using it to provide an income. We suggest a beneficiary gets advice prior to deciding the best course of action to avoid any costly mistakes.
If they choose to leave the pension fund invested, they can take income as and when required. Any funds left invested will continue to benefit from being in a tax-advantaged pension wrapper.
What about tax?
This can be complex, but in summary, on death before age 75, the death benefits are normally paid tax free regardless of whether you have taken benefits from your pension or not.
Beyond age 75, any lump sum or income payments to beneficiaries will be liable for income tax at their own standard rates on any payments made.
Death benefit lump sums are usually free of Inheritance Tax (IHT) but can be subject to IHT in certain instances. HM Revenue & Customs reserve the right to subject a pension fund to an IHT charge if they feel it has been used for tax avoidance purposes.
What happens to the SIPP when the beneficiary dies?
If your beneficiary has not withdrawn the entire pension fund before their death, any remaining funds in the SIPP can be passed on to a further beneficiary. Your own beneficiary will be able to nominate their personal successors to whom they want the funds to go to following their death.
It is possible to have unlimited successors, so your pension fund could be passed on for generations, providing funds remain in the SIPP. This can be a complex area and we strongly recommend you discuss these death benefits with your adviser to ensure you get the correct outcome for you.
The information in this article is correct as at 1 July 2019.
Please click the link below for our latest monthly figures for the five model portfolios. The figures show the performance of our model portfolios versus various indices over the month of May.
A number of our clients have contacted us for reassurance that they are not affected by the suspension of the high profile Fund Manager’s flagship fund, and we are pleased to be able to confirm that this fund is not included in any of our model portfolios.
The fund was suspended on 3 June following a raft of redemptions as investors lost patience with the fund’s under-performance and the managers found it difficult to sell enough of their holdings to repurchase units from clients.
Neil Woodford had built a reputation as a star manager when he ran a number of income funds for Invesco Perpetual in the early 2000s and earned further praise for how he guided his clients through the financial crisis in 2008, so that both retail and institutional investors followed him in large numbers when he left Invesco Perpetual to set up his own management company in 2014.
Despite his reputation for always being on the right side of markets, our biggest concern was the unlisted part of his portfolios. These are companies that are not listed on any major stock exchange and therefore can prove difficult to obtain accurate valuations on, as well as the possibility of it proving difficult to sell them when you wish to do so. His initial allocation to these companies was 5% but we became increasingly concerned when it grew to around 10% of the portfolio towards the end of 2015. Further concerns were raised when it became clear that the valuations of these holdings had not been reduced when the markets experienced a significant dip around that time.
Since early 2016 the Woodford fund has fallen in value by almost 15% whilst the UK Equity Income sector is up 28% over the same period. In terms of funds under management, Woodford had £10 billion of assets two years ago but had fallen to £3.7 billion today. This was clearly unsustainable and the inevitable has now happened.
Whilst we are pleased that our due diligence on the funds we hold in our portfolios means that we have avoided the direct problems with the Woodford funds, their announcement that they were suspending dealings raised concerns about liquidity across the market with the prices of some of the Woodford holdings being heavily marked down. This could impact the performance of other funds and we are closely monitoring any potential issues that could arise as a result.
The government is looking to make pensions more flexible for senior doctors and will consult on this matter.
In recent months, fears over staff attrition in the NHS have increased due to the tax implications of breaching the lifetime or annual allowance.
Under the proposals now put forward, known as a 50:50 plan, the government argues high-earning clinicians would be able to take better advantage of pension provision and working patterns by building their NHS pension more gradually, with steadier contributions to avoiding significant tax charges on a regular basis. By halving pension contributions in exchange for half the rate of pension growth, the government argues that doctors would be able to take on additional shifts or fill rota gaps with less concerns over the tax implications.
Health and social care secretary Matt Hancock said: ‘Each and every senior consultant, nurse or GP is crucial to the future of our NHS, yet we are losing too many of our most experienced people early because of frustrations over pensions.
“We have listened to the concerns of hardworking staff across the country and are determined to find a solution that better supports our senior clinicians so we can continue to attract and keep the best people.”
The government said the new pension flexibility would be available to ‘senior clinicians who can demonstrate they expect to face an annual allowance charge’, which would mean doctors who have built up more than £40,000 of benefit in their NHS pension in a year, or those who have an adjusted income of over £150,000.
If you are concerned about the impact of tax charges on your Public Sector pension, please get in touch to discuss with one of our consultants.
Please click the link below for our latest monthly figures for the five model portfolios. The figures show the performance of our model portfolios versus various indices over the month of April.
Establishing a regular savings plan using surplus income can be an extremely effective route to building wealth and achieving your financial goals over the medium to longer term.
There are a number of benefits to “drip-feeding” even modest sums into an investment portfolio each month via a direct debit, as outlined below.
First, regular contributions can help in achieving smoother returns and mitigate timing risk. Part and parcel of investing is the fact that investments go up and down in value. Investing after prices have fallen means buying into your portfolio at a lower level and bringing down the average price you have paid since the start of the investment. This is known as “pound-cost averaging” and through regular investing, the peaks and troughs will be ironed out or ‘smoothed’ over the longer term.
Second, market timing is extremely difficult and even investment professionals do not have a crystal ball and cannot predict, with any certainty, which direction markets will move in the short term. Regular investing helps take the guess work out of when to invest, as investments will be made automatically on a given date each month. Empirical evidence indicates that the average investor tends to follow the crowd – allowing the herding instinct to displace rational thinking – investing more when the markets rise and disinvesting when it falls; this can lead to inferior long term rewards.
Third, investing smaller sums on a regular basis could enable you to start investing sooner than if you were to wait for a lump sum to build up. This gives you more time to take advantage of the growth potential of compounding investment returns.
Fourth, you do not have to commit to a fixed amount each month; you can change the amount invested as required, to suit your circumstances. Even investing a relatively modest sum each month can lead to a significant pot over the long term, as shown in the following table, which assumes net investment returns of 4% per annum.
|Monthly Investment||10 Years||20 Years||30 Years|
Fifth, and finally, you will not forget to invest, as the investments are made automatically and you will come to view the contributions as part of your regular monthly spending. Indeed, after time, the regular debits will become of no consequence – and when that happens, it is possibly time to raise the ante!
When it comes to investing, we highly recommend that you seek financial advice and we are happy to discuss your requirements with you.
By Elliot Gothold, Consultant.
Current pension rules limit the amount of tax relievable pension inputs that can be made into a pension scheme in each tax year. This is known as the Annual Allowance. Exceed this Allowance and you are likely to face a tax liability, known as the Annual Allowance Excess Charge.
Pension inputs can take the form of monetary contributions in money purchase schemes or the ‘deemed’ contribution, in the case of a defined benefit scheme. The Annual Allowance is made up of all pension inputs you, your employer and/or a third party make to your pension.
If your threshold income remains at £110,000 or lower, then you retain an Annual Allowance of £40,000 for that tax year.
Where threshold income is in excess of £110,000 and adjusted income rises above £150,000 in a tax year, you lose £1 of your Annual Allowance for every £2 of adjusted income. By the time your adjusted income reaches £210,000, your annual allowance will be tapered down to the minimum level of £10,000.
The Annual Allowance Excess Charge will only apply if, in addition to using all of your Annual Allowance in the current tax year, you have also exhausted your unused annual allowances from the previous three years. This is known as carry forward. If, however, having accounted for all carry forward, you still have an excess tax charge and it arises on a money purchase pension, then you have the option to ask the Scheme to pay some or all of the tax on your behalf, out of your accumulated fund. Simple. There are some restrictions around this, which may differ on a scheme by scheme basis. But what is the position for Defined Benefit schemes, where there is no fund to pay from?
If you are a member of a Defined Benefit pension, such as a “final salary scheme”, again you have the option to ask the Scheme to settle this tax charge via “Scheme Pays”. This gives you an alternative to paying the tax due from your already taxed income, but the trade-off is that your eventual pension is reduced in retirement. The Scheme has paid the tax on your behalf after all.
The way it works is complicated, but think of it as similar to a loan that sits alongside your pension. It will likely attract interest at a rate equivalent to the Consumer Price Index (CPI) or higher. This interest is accumulated year on year. It has no impact on the accruing pension, until you choose to retire and crystallise the pension. At that point, the initial loan – equivalent to the amount of tax paid by the scheme – plus the accrued interest, crystallises. The Scheme actuary will then apply a “Scheme Pays” commutation factor to this sum and reduce your pension accordingly. This can often be advantageous, particularly for larger pension pots, where there are likely to be dependents.
The calculations to determine whether the scheme pays option is good value are complicated and naturally we would recommend you seek our advice about whether it may be appropriate for you. Everyone’s situation is different and therefore we review your pension on an individual basis.
Threshold Income is defined as an individual’s total income minus allowable deductions such as member pension contributions.
Adjusted Income is defined as an individual’s total income, less allowable deductions, but plus the total pension inputs arising in the tax year.
Last weekend our Managing Director, Adam Katten, appeared in the Saturday Times talking about pensions and the fact that it’s never too early to start financially planning your later years.
Coming not long after two successful lectures for final year students at the British College of Osteopathic Medicine, as a father of four children himself (aged 20-27 years) he understands the difficulty in conveying to a 22 year old the importance of putting aside money each month into a pension, especially when it can’t be touched until the ripe old age of 57.
When we also factor in living expenses, studying, potentially moving away from parents for the first time, pension planning for the younger generation is challenging although the figures clearly speak for themselves.
As Adam explained “The tax reliefs associated with pensions are generous, as they attract tax relief at source. Therefore £100 invested into your pension only costs £80 for a basic rate tax payer and £60 for those paying tax at the higher rate. The growth of your pension is tax free and when you reach retirement, 25% of the fund can be drawn tax-free.”
“The benefits of starting a pension aged 25 rather than 35 can be illustrated by comparing the projected pension fund at 65 based on an individual earning £50,000 per year with a growth rate of 4% above inflation. Starting at 25, this individual will achieve a pension fund of £741,000 at 65 years old whilst starting a pension at 35, would reach £437,000. Those extra 10 years made the pension fund almost 70% larger!”
As demographically we are living longer, it is more important than ever for younger people to recognise the importance of starting to save as early as possible and give themselves the opportunity to spend their money during retirement. We would even encourage parents or grandparents to start pensions for younger children as there are no minimum ages.