Investor Briefing
February 2010
This is the first edition of Investor Briefing, please click on the links below to read February's articles.
Scott-Moncrieff breakdown of the 2009 PBR
Retirement Benefit Options
Markets in 2010
An Opportunity to Manage Your Pension More Effectively?
When can pension benefits be taken?
We use the expression ‘retirement’ to mean the time when you would normally start to take your pension benefits. If you have a personal or stakeholder pension, you can do this at any time from age 50 to age 75, however, by 2010 the lower age limit will rise to 55. You don’t have to stop work in order to take your pension benefits
When it comes to taking benefits, in most instances, you will have to convert the majority of your pension fund into an income. You can take up to 25% of your fund in cash, as a tax-free lump sum. The remainder of the fund must be used to provide you with an income for life, which is taxable.
What is an annuity?
Most people buy a lifetime annuity with their pension fund. A lifetime annuity is a special type of investment because it pays you with a guaranteed income for the rest of your life. If you die within a short time after buying your annuity, you may not have received much from your investment. Lifetime annuities are available from insurance companies or other financial institutions.
Other options? - Unsecured Pensions (also known as income drawdown plans)
Income withdrawal is an alternative to buying an annuity when you retire. It allows you to draw an income from your pension fund while the fund remains fully invested. You can take up to 25% of your pension fund as a tax-free lump sum. You then draw a regular income from what is left and this is subject to tax. The maximum level of income you can draw is 120% of a level single-life annuity. There is no minimum level of withdrawal. Meanwhile, the balance of your pension fund stays invested in a favourable tax environment. Please remember, that you will be withdrawing an income from a fund that remains fully invested in asset-backed investments, such as stock and shares, property corporate bonds and gilts.
Can I use my tax-free lump sum to make further pension contributions?
Assuming you still have relevant earnings, it may be possible to reinvest some or all of your tax-free lump sum (TFLS) back into your pension fund. By doing so, your contribution stands to attract tax relief at your highest marginal rate – (subject to certain Inland Revenue restrictions).
Examples of how this might work: -
| Basic Rate Tax-Payer | Higher Rate Tax-Payer | |
| Value of Pension Fund | £70,000 | £70,000 |
| TFLS taken & reinvested | £17,500 | £17,500 |
| Tax relief @ 20% | £4,375 | £4,375 |
| Higher rate relief | £0 | £4,375 (claimed via self assessment) |
| Value of contribution | £21,875 | £26,250 |
| Resultant pension fund | £74,375 | £78,750 |
| Pension fund uplift achieved | 6.25% | 12.5% |
Important Considerations:
- The example is a way of boosting retirement income at the expense of your tax-free lump sum. As a result, the amount of tax-free lump sum available when you retire will be reduced.
- There are other ways in which to utilise your tax-free lump sum. The repayment or reduction of liabilities, such as your mortgage, could be a preferable alternative.
The Importance of Advice
Flexibility over the way in which you fund for retirement and take your benefits is a major consideration. In certain circumstances, it may be possible to use your existing funds more tax-efficiently, resulting in a substantial increase in your retirement benefits.
Speak to your Scott-Moncrieff Wealth Management consultant for more details.
After an “interesting” couple of years in 2008 and 2009, everyone would hope to see some stability in 2010 as the world moves into a more substantial recovery phase and some sanity returns to financial markets.
The optimist is therefore looking for substantial returns from equity markets as profits return, continued positive returns from corporate bonds with low default rates and, underpinning it all, sustained low interest rates and more money creation. In this world, commodity prices will continue to rise as demand increases and gold should falter as the risk to the dollar starts to fall away.
On the other hand, the pessimist has his glass a lot less than half empty and sees only chickens coming home to roost as a “double dip” recession takes hold. In this scenario, governments are in serious trouble as their deficits are too high to spend their way out and surely central banks can’t create more credit. Equity markets would therefore be over-valued having factored in profits which don’t actually materialise and corporate bond default rates would rise significantly. Demand for commodities falls away and only gold remains a good store of value.
Rarely over the last fifty years have there been two more divergent but also plausible views of the global economy. We have seen a substantial recovery in markets and the real economy through 2009 (even if the UK is lagging behind and not formally out of recession yet) but it is hard to see how things could have been any worse and, considering the amount of money that the central banks have thrown at the problem, it would have been a bigger surprise if asset prices hadn’t increased.
It is clear that the world has avoided another great depression but the danger of a great recession is certainly still there. Economies around the world have emerged from the first part of the recession but when central banks turn off the tap and the money stops flowing, there are no signs that the commercial banks are ready to step in and resume lending. The recent recovery may well have been simply driven by stimuli such as “cash for clunkers” and restocking after a dire early part of the year and without any increase in demand, there is a real danger that we fall back into recession again.
This danger is largest in the developed economies with the US and UK having huge deficits and little public appetite to through more money at what is seen as a failing system. More positive news comes from further east where the Asian economies and particularly China seem to be finding their own way to growth. Indeed, Australia has already had to raise its interest rates due to continued growth from commodities and it is becoming more and more common to hear of a two gear world where the East grows and the West stagnates.
Making investment predictions and recommendations in such an environment is, of course, very difficult. Indeed our oft repeated mantra of diversification, diversification, diversification continues to be the best advice we can give. If you don’t know which assets are going to double in value and which are going to plummet then the only sensible course of action is to have an exposure to all assets at levels determined by your risk tolerance.
For us, a whistle-stop tour of the various investment classes would look like this:
| Cash | safe within major UK institutions but record low interest rates UK Gilts |
| UK Gilts | short term low interest and risk of capital in longer term if sterling crisis materialises |
| Corporate Bond | good rates of interest but risk of loss of capital if recession bites again UK Equities |
| UK Equities | better prospects than UK economy with global diversity of companyearnings |
| Emerging Markets | they are the future but could already have the recovery priced in |
| Global Equities | reliant on avoiding a double-dip recession |
| Gold | riding high on the prospect of currency devaluation, could go anywhere this year |
| Commodities | demand from China picking up and lack of recent investment increasing prices |
| Property | rental yields now at attractive levels if you can avoid tenantdefaults |
Overall, 2010 is unlikely to be start of another bull market and the recovery seems to be well priced in but, assuming no catastrophic errors from central banks and politicians, we should see a year of consolidation rather than huge movements in markets.
Of course, having gazed into our crystal ball, all we need to do is wait a year and see how quickly we can be proven wrong.
For further advice contact Scott-Moncrieff Wealth Management
