Pensions Update

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Pensions Update

• Peter Brewill
• Financial Planning Consultant

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Summary of Pensions Simplification (April 2006)

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

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But what if I have more than the SLA?

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

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The Recovery Charge
EXCESS
SLA
At some point in the future, Ray Tiring has a
fund of 3m at his SRD. The SLA is now at
2m. Transitional protection is not involved.
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The Recovery Charge (1) - the lump sum option
EXCESS
A lump sum less 55 deducted at source
SLA
1,000,000 less 25 750,000 750,000 less
40 450,000
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The Recovery Charge (2) - the pension option
EXCESS
A pension with 25 deducted at source
SLA
The reduced pension is then taxed at the
individuals marginal rate of tax
The pension option only looks attractive to those
who can avoid tipping into Higher Rate!
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To protect or not to protect !

• The first key question .. of many !
• Two forms of protection
• Primary Protection
• Enhanced Protection
• Or .. No protection !

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Primary protection

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

SLA is Statutory Lifetime Allowance ..The cap
!
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Primary protection

• Allows further contributions into registered
  arrangements post A day
• Must be registered within 3 years of A day
• Beware interaction with overall limit, still
  applies !

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Primary Protection
Fund value on A Day is 2m
Personal Allowance
1.5 m initial limit
6/4/06
SRD
The Recovery Charge will be levied on the real
return achieved
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Primary protection

• Who is likely to opt for Primary protection ?
• Those with fund over 1.5m now but want to make
  additional contributions or retain future
  pensionable service of the NHS Pension Scheme

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Enhanced Protection

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

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Enhanced Protection
Personal Allowance
6/4/06
SRD
No Recovery Charge will be levied on the real
return achieved
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Enhanced protection

• Who is likely to opt for Enhanced protection ?
• Those with fund over 1.5m now with assets that
  may grow quickly
• Those who have funds under 1.5m with assets that
  may grow quickly

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Enhanced protection NHS Pension Scheme

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

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Retirement Planning Alternative Investments

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

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Example for NHS Pension Scheme

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

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Retirement Planning Alternative Investments

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

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Retirement Planning Alternative Investments

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

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What you need to consider when investing

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

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Risk v Reward
10
5
1
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Investment

• Steps to a successful portfolio
• Growth
• Income
• Access
• Risk / Reward
• Inflation
• Budgeting

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Asset Classes

• Cash
• Fixed Interest
• Equity
• Property

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Cash

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

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Cash v inflation
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Fixed Interest

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

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Fixed interest v cash v inflation
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Equity

• Higher risk
• - Market
• - Specific
• - Different stocks different risks
• Higher expected return
• Return comes from
• - Dividends - typically increasing
• - FTSE100 3.2
• - Capital appreciation
• Easily realisable

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Equity

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

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Equity v cash v inflation
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Property

• Medium/higher risk
• - Economic (UK) (Sectors)
• - Default
• Variable return
• Returns from
• - Rental Income (NB Costs, voids etc)
• - Capital Appreciation
• Highly illiquid

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Property

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

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

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Investment for Income

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

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Investment for income

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

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Investment for income

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

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Investment for income

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

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Investment for growth

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

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Investment for growth

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

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Investment for growth

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

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Investment for growth

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

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Summary!!

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

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• Questions ?

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Risk Warnings

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