Pensions Update

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PKF Financial Planning Limited areauthorised and regulated by the Financial Services Authority

PKF Financial Planning Limited

Pensions Update

Peter BrewillFinancial 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

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.

EXCESS

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The Recovery Charge (1) - the lump sum option

SLA

EXCESS A lump sum less 55% deducted at source

£1,000,000 less 25% = £750,000 £750,000 less 40% = £450,000

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The Recovery Charge (2) - the pension option

SLA

EXCESS A pension with 25% deducted at source

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!

Type the proposal name here

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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

SLA

Growth

6/4/06 SRD

Personal Allowance

The Recovery Charge will be levied on the real return achieved

£1.5 m initial limit

Fund value on A Day is £2m


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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

SLA

Growth

6/4/06 SRD

Personal Allowance

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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• 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 individual’s 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).

Retirement Planning – Alternative Investments


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Example for NHS Pension Scheme

Value of Scheme @ 6th April 2006

38 years Membership and Pensionable Pay of £120,000

• Pension @ 6th April 2006 = £57,000

• Lump Sum @ 6th April 2006 = £171,000

• £57,000 x 10 + £171,000 = Opening Value £741,00

Value of Scheme @ 5th April 2007

39 years Membership and Pensionable Pay of £160,000

• Pension @ 5th April 2007 = £78,000

• Lump Sum @ 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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• 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 individual’s attitude to risk from Cash funds to Managed funds to Global Equity funds.



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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

HighRisk

Medium Risk

Low to MediumRisk

MinimalRisk

10

1

5


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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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PKF Financial Planning Limited • 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

Cash


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Cash v inflation

Bank of England BASE Rate (IN) UK Retail Price Index (IN)

Percentage Growth Total Return, Tax Default, In LC

20 Years From 31/03/1986 To 31/03/2006

Per

cen

tag

e G

row

th

-25

0

25

50

75

100

125

150

175

200

225

250

275

300

325

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

318

101


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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


- Interest rates (expectation)

- Upgrades/downgrades


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Fixed interest v cash v inflation

UK Retail Price Index (IN)Bank of England BASE Rate (IN)

IMA UK Gilt (IN)IMA UK Corporate Bond (IN)


20 Years From 31/03/1986 To 31/03/2006

Per

cen

tag

e G

row

th

-50

0

50

100

150

200

250

300

350

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

338

318

274

101


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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

UK Retail Price Index (IN) Bank of England BASE Rate (IN) IMA UK All Companies (IN)


20 Years From 31/03/1986 To 31/03/2006

Per

cen

tag

e G

row

th

-100

0

100

200

300

400

500

600

700

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

660

318

101


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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


- Long term – economic growth

- Short term – supply/demand

- Quality of tenant

NB: Direct versus indirect


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Property v cash v inflation

Bank of England BASE Rate (IN)UK Retail Price Index (IN)

Halifax Property Seasonally Adjusted (IN)ABI UK Pension Fund - Property-Pen (IN)


20 Years From 31/03/1986 To 31/03/2006

Per

cen

tag

e G

row

th

-50

0

50

100

150

200

250

300

350

400

450

500

550

600

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

560

353

318

101


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Fund performance over 20 years

IMA UK Corporate Bond (IN)IMA UK Gilt (IN)IMA UK All Companies (IN)

Halifax Property Seasonally Adjusted (IN)Bank of England BASE Rate (IN)ABI UK Pension Fund - Property-Pen (IN)


20 Years From 31/03/1986 To 31/03/2006

Per

cen

tag

e G

row

th

-100

0

100

200

300

400

500

600

700

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

660

560

353

338

318

274


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Annual compound return

IMA UK Corporate Bond (IN)1

IMA UK Gilt (IN)IMA UK All Companies (IN)2

Halifax Property Seasonally Adjusted (IN)Bank of England BASE Rate (IN)3

ABI UK Pension Fund - Property-Pen (IN)

Annual Compound Return Total Return, Tax Default, In LC

20 Years From 31/03/1986 To 31/03/2006

An

nu

al C

om

po

un

d R

etu

rn

0 0

1 1

2 2

3 3

4 4

5 5

6 6

7 7

8 8

9 9

10 10

11 11

1

7.7

6.8

2

10.7

7.8

3

7.4

9.9


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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 (ISA’s)

• National Savings Certificates

• Guaranteed Income Bonds

• Cash (building societies and banks)


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Investment for income


Low to medium Risk Examples

• Gilts/Corporate Bonds

• ISA’s

• Distribution Funds


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Medium Risk Examples

• General Unit Trusts/Open Ended Investment Companies (OEICs)

• ISAs

• Managed Investment Funds


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Higher Risk Examples

• Investment Trusts

• Individual Shares

• Specialist Unit Trust/OEICs – Japan, Gold etc

• ISAs


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Investment for growth


Minimal Risk Examples

• Bank / building society deposits

• National Savings certificates

• National Savings pensioners g’teed income bond

• Guaranteed growth bonds


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Low Risk Examples

• Government securities (gilts)

• Distribution bonds

• Guaranteed income plan


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Medium Risk Examples

• Distribution Bonds

• Guaranteed income plan

• With Profit bonds

• Managed bonds

• Unit trusts

• ISAs


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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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• 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.

Risk Warnings

Documents

Pensions Update