"Wealth is not his that has it, but his that enjoys it"
"Wealth consists not in having great possessions, but in having few wants"
"Time is the most valuable thing a man can spend"
- Laertius Diogenes
"The glow of one warm thought is to be worth than money."
"I don't care too much for money for money can't buy me love"
- The Beatles
"Simple, genuine goodness is the best capital to found the business of this life upon. It lasts when fame and money fail, and it is the only riches we can take out this world with us."
-Louisa May Alcott, Little Men
"And though I have the gift of prophecy, and understand all mysteries, and all knowledge, and though I have all faith, so that I could remove mountains, and have not charity, I am nothing."
"Not he who has much is rich but he who gives much"
"Life is what happens to you while you are busy making other plans"
"I pity that man who wants a coat so cheap that the man or woman who produces the cloth shall starve in the process"
A Guide to Wealth Protection: Retirement Funds & Pensions
- Pre-Retirement issues around death
- Protecting your Pension
- Post-retirement issues
Pre-retirement issues around death
The most consistent element of government policy is that it has been – inconsistent! The biggest outcome from this haphazard approach to pensions and the constant legislation shifts is that there are any number of different types of pension scheme floating around and held by investors. Personal pensions, stakeholder schemes, section 32 buy outs, protected rights, final salary schemes, auto-enrolment and many more besides make up the various pension types that any individual may hold. And many may hold more than one type! It is a confusing picture, because different schemes or plans may have different rules applying. Not enough attention is given to the type of pension you may have and its structure. This is important because the situation and treatment of the pension on death before
retirement could be very different depending on the type of scheme. There are three ways this may be important to you:
- Do you know who the residual pension value will be paid to should you die before you retire? This is especially important for single unmarried people, for those who have been divorced, for those who have children with different mothers or fathers, for those who may be facing bankruptcy and for anyone with specific requirements for money to be dealt with, in a particular way, on their death.
- Do you know how the pension will be paid out? Will your beneficiaries receive a lump sum, a monthly pension or a combination of both (or possibly nothing at all???) and if so how does this relate to the value at the date of death?
- Do you know how any payout will be taxed? Will Inheritance Tax be applied, will your beneficiaries pay income tax on the benefit they receive etc.? It is simple to deal with all this: get the position reviewed and if there is something you are not happy with it is highly likely that you can amend the position exactly to your requirement with the use of simple trust forms or nomination forms. The use of such forms in these cases means that you can direct what you want to happen within the confines of relevant legislation.
We help clients review their pension position and view what would happen on death to the pension. From there we can advise on any suitable measures, such as putting a trust wording in place and/or adopting a suitable nomination form to ensure that the value of the pension is paid out in a timely fashion, to the desired people and in the most tax efficient way. Further to this we can then keep this under regular review in future years to ensure that the requirement is in keeping with any changing circumstances and legislation.
Protecting Your Pension
The investment strategy you adopt within your pension is key to the twin objectives you are likely to have: to grow your pension and to protect it. These are often seen as separate requirements, even, in many cases, conflicting requirements. Is it possible, however, that they are complementary?
PENSIONS INVESTMENT: RISK CONTROLLED RETURNS... ACHIEVABLE
Too often investment planning (remember this section is about pensions - investment planning within pensions) is over-simplified by many commentators. For example, the trade off between risk and reward. To get better rewards you have to take more risk is the age- old and assumed underpin to most investment considerations. There are many investment experts who believe this is fundamentally wrong. Yes, often, high flying investments (in the sense that they aim for high double digit year on year percentage returns) are racier. Think Commodities and Emerging Markets for example. Yet these same investments are subject to long down periods and/or sudden downturns of some magnitude. If you review the long term (and what is a pension? A long term investment structure) then over time it is more often than not the steadier, less racy investments that win the day. Investors (and their advisers) rarely time the fluctuating prices of volatile, high risk investments, leaving them vulnerable to the downturns.
The lesson from this? Relatively reliable, but unspectacular, holdings generally do the trick and often end up producing higher returns. They are less volatile as well, suggesting lower risk. Pensions are an ideal vehicle to build a balanced asset allocation investment portfolio, where risk is controlled but returns are still achievable. There is no reason to sacrifice risk for reward or reward for risk.
We believe that the central task of a good financial planner is to help their client find the right risk/reward ratio for their investments. Pensions are special in a number of ways: they are often crucial to future retirement income, they are inaccessible during the savings years, and they have special tax treatment. Balancing this together we work on specifically targeting the best mix we can find between growth (and income - depending on age) and protecting the value of the fund/plan. Our strategies seek out high levels of protection but with good potential returns, in a way that is designed for the appropriate circumstances.
Pensions have special rules applying to them and specific tax treatments and these vary depending on status and whether the pension is pre or post retirement point.
The driver for most people after retirement is to balance a number of different factors:
- to preserve their wealth
- to have a retirement income
- to ensure tax efficiency
- for dependents to be looked after once they die
As with the earlier section on how to invest within a pension there is a misconception about these requirements: they do not necessarily clash. It is perfectly feasible to construct a plan which protects the value of the money both for the pension holder and their dependents, to do so tax efficiently and to enjoy a good income in retirement. In many cases this is a reality, it is no utopia. The key is a good structure. Too many people imbalance their positions via the structure of their post-retirement plan. For example many pensioners have to decide what structure their pension should be held and managed in. Historically, the majority plumped for annuities. There is strong anecdotal evidence that suggests this was often done without an examination or appreciation of all possible alternatives.
It is back to due diligence again; getting an appraisal of all possible options, the advantages and disadvantages, comparing and contrasting these. An annuity may be the best option, but it often comes with a destruction of one of the key factors in the list above: the money is not properly preserved for dependents and/or the income is stuck at a level and is inflexible. The object of the exercise is to match the requirements and factors against each other, balanced against the individual’s own circumstances, risk tolerance, requirements for income and tax position. Getting a perfect blend for such situations is normally achievable. The current pension legislation suggests that, for many people, pensions will be seen, in the future, as more than a “retirement income generator” for the individual pension investor. Pensions, because of their new tax treatment on death, can be viewed as a family pot, where the value can be used for the pension investor in their lifetime – to support their income needs – but the pot survives beyond this to provide a valuable inheritance for the next generation.
Getting this post-retirement balance can normally be achieved for our clients through careful appraisal of a number of key factors. We stress that in this area there is often too little time spent on the various options and the way that these are measured. We spend many hours looking with our clients at these options and balancing points, aiming to construct a clear-cut plan which most commonly starts with preserving wealth.
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Interface Financial Planning started providing independent financial advice in 1992. From the beginning it had the aim of providing professional advice and quality service to people with modest income and wealth. Its key value was putting people before profit, and contribution before reward. This mission statement has been our torch to light the path ahead and has been the reason that we have endured for over 24 years. Alan has lead the company with his personal values of: Integrity, Compassion, Respect, & Loyalty, and he is proud that over the years he has worked with clients who share similar values. Like him they want to help others and make the world a little better. Contact us.
Readers should not rely on, or take any action or steps, based on anything written in these guides without first taking appropriate advice. Interface Financial Planning Ltd cannot be held responsible for any decisions based on the wording in these guides where such advice has not been sought or taken.
The information contained in these guides is based on legislation as of the date of preparation and this may be subject to change. We will aim to keep them up to date but inevitably there may be a time delay so current legislation should always be checked.