Venture or Adventure?

Posted on February 20, 2012 by Ross Glanfield FPFS

We live in uncertain times where the best form of investment can often be disinvestment,  normal returns are now the new norm and the concept of risk-free return is as likely as a fully subscribed Greek bond auction. Financial markets that once were driven by company performance now fluctuate wildly on the slightest political gaffe and fear makes market-timing an impossibility. So, in the midst of turmoil, where can a modicum of certainty be found? Perhaps it is time to venture out!

The humble Venture Capital Trust (VCT) was conceived by Kenneth Clarke in 1995 and its purpose was to facilitate the raising of capital for UK start-up companies. The carrot of generous tax-breaks, including initial Income Tax relief and no exit taxes, encouraged the growth of the market. Today VCT companies attempt to raise in excess of £400m each tax year in total to fund new ventures.

In the early years, the allure of the tax relief and the prospect of high returns encouraged many to invest in what were highly speculative ventures, many of which eventually failed. Since the VCT boom created in 2004 by the temporary increase in tax relief, companies have sought to innovate and create products that deliver – and this is backed up by the performance figures. A recent search of the Allenbridge database shows there are still 100 active VCTs launched in or after the 2005/6 tax year. Of those, 15 have a positive total return, 51 are returning over 90% of the initial investment and rest are valued at over 70%, i.e. none show a negative return to the investor when the tax relief has been taken into account.

The performance is probably unsurprising when one considers the current levels of expertise in some companies and some of the risk management techniques currently employed – the Albion investment team have been working together in this market for 16 years and Octopus employ a “Dragon’s Den” approach to investment selection. So there may be a case for investing into a VCT just to secure the tax relief in the knowledge that, even if the manager performs badly, you should at least be able to get your money back.

There are, however, downsides which include a lack of transparency of the investments: the manager claims to have a deal-flow but cannot, for obvious reasons, disclose the actual investments; the high costs – 5 to 6% initial charges and running costs of up to 3.5% per annum; and lack of liquidity – there is no effective second-hand market and no tax relief on “used” VCTs.

The initial income tax relief (30%) and the tax-free returns are compelling reasons to invest, as is the potential return, and in an economic climate where banks are still not lending to small companies, a myriad of opportunities exists for venture capitalists. Additionally, VCTs can provide diversification in a portfolio as private equity performs very differently from equity markets and tax-free dividends are a useful planning tool.

Current thinking categorises VCTs fall into four camps: generalist, AIM, limited life and specialist. Generalist and AIM VCTs are open-ended and the manager has ultimate discretion on the style of investment. The reason for investing into these types of VCT would generally be the long-term tax free dividend stream and the diversification they add to a portfolio. My pick in this sector is the Albion VCT, which is a top-up to seven existing VCTs with a mature portfolio of 60 diverse companies and an existing dividend stream of 5% per annum.

Limited-Life VCTs aim to do what the label states – return capital within a five to six year time frame. However this gives the manager little time to invest and usually the good managers of these VCTs can return 90-95p in the pound. In recent years, Downing have demonstrated that they can create these returns in difficult markets and they are currently seeking funds; Puma also have a good track record and are worth consideration.

Specialist VCTs invest in niche markets. The flavour this tax year, until the Government poured cold water on the schemes, was the feed-in-tariffs for solar panel installations. Octopus is still raising funds for these ventures and, if the client is prepared to accept the additional political and technological risks, this VCT is worth consideration.

Investment into a VCT used to be a roller-coaster adventure and the outcome was never certain. Today the market has matured and, if one can get over the charges and the lack of transparency, VCTs can have a place in a diversified portfolio for the sophisticated investor. Their performance has held up during one of the most volatile periods of investment history and they are well-placed to benefit from any green shoots of recovery. It is time to venture out.

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Back to the Future: Pension Carry Forward

Posted on December 30, 2011 by Joel Adams CFP FPFS

Prior to the current Tax Year an individual could technically contribute £255,000 per year into their pension fund. However, the ability to do so on a tax efficient basis was significantly restricted by the introduction of the restrictions for so called ”high earners” (those with total incomes of more than £130,000pa).  The original proposal was that higher rate tax relief would be withdrawn for these high earners altogether from the 2011/2012 Tax Year.

Thankfully the Conservative Government reversed this change and introduced a much more workable regime whereby everyone was given a level playing field and allowed tax relief at their highest marginal rate (50% for those with incomes of over £150,000) on contributions of up to £50,000 per year. At the same time, a provision was introduced to allow any un-used relief from the previous 3 tax years to be carried forward.

In order to benefit from Carry Forward, the individual must have been a member of a registered pension scheme during the year for which an allowance is carried forward.  Note that there is no requirement for contributions to have been made – simply being a member of any pension scheme is sufficient (even members of most employer’s Death in Service schemes would qualify).

When calculating the increased annual allowance, the current year must be fully utilised first then the unused allowances are used up starting from the earliest.  For tax years 2008/09 to 2010/11 inclusive, a notional annual allowance of £50,000 is used in determining any amount available to carry forward (ie ignoring the fact that some people may actually have been able to contribute more or less than that figure in those years).

Carry Forward Example

John is a member of a SIPP, which is his only pension plan with a pension input period end date of 5 April each year.  He has Relevant UK earnings of £120,000 in tax year 2011/12 and paid a contribution of £75,000 gross. During tax years 2008/09 to 2010/11 he had made the following contributions:

2008/09       £70,000
2009/10       £30,000
2010/11       £20,000

John’s potential carry forward relief is:

Tax year Pension input Deemed annual allowance Unused allowance
2008/09 £70,000 £50,000 Nil
2009/10 £30,000 £50,000 £20,000
2010/11 £20,000 £50,000 £30,000

Although John’s gross contribution of £75,000 in 2011/12 exceeds his Annual Allowance of £50,000 by £25,000, he is able to carry forward his £20,000 unused allowance for 2009/10 and £5,000 of his unused allowance for 2010/11, so that there is no Annual Allowance Charge to pay.  His remaining unused relief of £25,000 for 2010/11 will be available to be carried forward should his pension input in tax year 2012/13 and/or 2013/14 exceed his Annual Allowance for those years.

Hopefully this example clearly illustrates the mechanics of Carry Forward. However, special provisions do apply to those who are members of final salary schemes and care needs to be taken when calculating the allowance with reference to “Pension Input Periods” (which can and do differ from the Tax Year).

In this example, John would clearly be able to boost his pension fund significantly. However, he would potentially also be able to bring his taxable income below £100,000 for two years, thereby reclaiming his Income Tax Personal Allowance in those years by doing so. This in turn means that he can achieve an effective rate of tax relief of 60% on part of his contribution, which is clearly very attractive.

Specialist advice is needed before any strategy is formulated. Please contact us on info@LIFT-Financial.com for more information.

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Equity Release – Friend or Foe?

Posted on November 15, 2011 by John Brown

For those fortunate to have accrued sufficient assets to sustain them in later life, the thought of having to mortgage the family home is not one they usually relish.

However, for many people, the need for additional income is very real due to the prolonged period of low interest rates the UK has suffered, combined with the record low annuity rates and inflation we are currently experiencing.

SHIP, the equity release provider trade body (representing over 90% of the market in terms of volume), recently announced market figures for the third quarter of 2011, revealing a rise in customer numbers and a huge increase in lending figures.

SHIP members made new advances of £206.2m in Q3 2011, up 12% on the previous quarter (£184.9m), and the highest level of lending seen since Q1 2010 (£213.4m). The number of equity release customers also grew by over 10% from 3,710 (Q2) to 4,148 (Q3). This growth shows that consumers are becoming increasingly aware of the benefits of accessing the money tied up in their home, to help them have a more comfortable retirement.

Andrea Rozario, Director General of SHIP comments “This has been an excellent quarter for the equity release market. Considering the wealth locked up in a property as part of general financial or retirement planning is essential, as it will continue to be the greatest asset most people have as they approach retirement.

Equity Release has been used for a wide variety of purposes ranging from cosmetic surgery, funding grandchildren through university, world cruises to the more conventional home improvements. It is also commonly used to provide capital or income to supplement other resources and generally make retirement more comfortable.

However, it may be that funding domiciliary care is going to be a big area of increased demand in the years ahead.

LIFT-Financial has a number of advisers who are specifically qualified to advise in this area. For advice relating to retirement planning, or equity release more specifically, please contact us at info@LIFT-Financial.com.

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Pension Death Benefits – Are They Tax Free?

Posted on November 14, 2011 by Hannah Creighton MCSI FPFS

Pension and life assurance policies that are written under a trust are usually free of Inheritance Tax when death benefits are paid. This is ideal, particularly when combined with the fact you can usually change your beneficiary, if required, with a nomination form.

We often choose our spouse or partner to receive the benefits as we want them to be financially secure if we were to die unexpectedly. This makes sense, but this then inflates the value of their estate, creating a potential Inheritance Tax charge when they subsequently die. This can give rise to what could be a much larger tax bill for the children for a benefit the family were expecting to be tax-free. Whilst your benefits pass free of tax when you die, the taxman is waiting to collect on the bigger estate on second death. Thankfully, this situation can be mitigated with proper planning.

A suitable trust to receive all your death benefits can be drafted. The trust would be established with your spouse, children, grandchildren and others as beneficiaries, giving  your spouse access to the funds during their lifetime, but importantly leaving residual funds to pass down a generation, largely tax-free. The fund is never in your spouse’s estate and therefore is not subject to Inheritance Tax.

This is a complex area that requires financial advice. If you require help or assistance please speak to your usual adviser, or contact us for further guidance.

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Pensions: Higher Rate Tax Relief to End?

Posted on November 10, 2011 by Ian Morrison CFP FPFS

The past few months have witnessed a revival of one of the longest-running scare stories in the tax annals: the potential abolition of higher rate (and, now, additional rate) tax relief on pension contributions. The story first appeared in the Sunday Telegraph several weeks ago and was rapidly taken up by the rest of the media, with varying degrees of credulity.

The author of the original article was Michael Johnson, a research fellow at the Centre for Policy Studies (CPS) and one time secretary of the (then opposition) Conservative’s Competitiveness Policy Group. While the CPS says on its website that it is ‘independent of all political parties’, it is often seen as a Conservative think tank. The CPS’s founders, Keith Joseph and Margaret Thatcher, could hardly lay claim to political independence. Some of the CPS’s recent policy proposals, such as an end to the requirement to buy annuities and the introduction of Junior ISAs, have already become government policy. Thus when the CPS floats an idea, it cannot be dismissed as academic whimsy.

The financial case for limiting tax relief on pension contributions to basic rate only is quite simple: it would save the Exchequer about £7bn a year. Government borrowing is forecast to be around £120bn for the current financial year, so the extra cash flowing into the Treasury’s coffers would be a useful addition, although not game-changing. Alternatively, the government could – as Michael Johnson suggests – use some or all of the money to smooth the path of its planned reforms to state pensions.

Not likely, at least not yet…

There are plenty of reasons why removing higher and additional rate relief is unlikely, at least for now:

  • The previous government had proposed restricting relief to the basic rate for high earners via the high income excess relief charge, which had been due to start last April. Mr Osborne repealed that legislation after widespread protests about its complexity.
  • The Government has already introduced measures which restrict the ability to make large pension contributions, such as April’s reduction in the annual allowance from £255,000 to £50,000. The Treasury is reported as saying it has no plans for further changes, but, in those immortal words, it would, wouldn’t it.
  • An increase in net contribution costs would trigger further unrest in the public sector, where high earners are already facing substantial increases in their occupational scheme pension contributions and reductions in benefits.
  • With the start date for pensions auto-enrolment and the National Employment Savings Trust (NEST) little less than a year away, it is hardly an appropriate time to begin another significant revision to pension rules. Once quasi-compulsory contributions are in place, it might be a different matter, not least because tax relief may not be seen as a necessary incentive

In the longer term, there must be a good chance that higher/additional rate relief will disappear. It is too tempting a source of revenue, especially when the options for stealth taxes have largely been exhausted. 

ACTION

If your retirement planning adopts the “do-it-later” principle, the latest rumours are a warning of the risks of delay. In any event, the changes to pension contribution rules that took effect in April have constrained last-minute pension planning markedly.

For information of advice relating to your planning please contact your usual consultant or info@LIFT-Financial.com.

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Annuity Rates Tumble to Record Low

Posted on October 25, 2011 by Ian Morrison CFP FPFS

Pension annuity rates have plummeted to near record lows, forcing pension savers and those close to retirement to consider their retirement options carefully.

In August, the typical annuity income a 65-year-old male could expect to buy with a £100,000 pension fund fell by 5 per cent, or more than £300 per year, according to new figures released last month (source FT.com 8th September 2011).

This means £9,000 less income over a 30-year retirement for a pension saver who purchased an annuity rate in August, instead of July.

One of the reasons for the sharp decline in annuity rates (from an already low starting point it must be said) is the record low returns that insurers can secure from Gilts.  As investors seek “safer” homes for their cash (given low banking interest rates, highly volatile equity markets and the ubiquitous debt crisis) the result has been reduced gilt yields as investors seek to buy UK bonds.

Investors approaching retirement are of course suffering a double-whammy as
the stock markets have been incredibly volatile in August and September.  This has therefore reduced the value of many pension funds at the time the annuity is to be purchased.  Thus, less money is available to provide income, using a much lower annuity rate.

Even with this current position, the majority of UK pensioners still choose to purchase an annuity on retirement.  This may not be the best option in the current climate and anyone approaching this time of their life needs to consider all the options available to them and to apply them to their specific situation.

Broadly those options are as follows:

·         Delay retirement.

·         Understand the underlying investments and their risk.

·         Shop around to buy the best annuity rate available.

·         Consider Enhanced or “3rd way” annuities where appropriate (increase in income from 20-300% depending on health and lifestyle etc).

·         Consider Capped Drawdown – maintaining the investment while drawing an income directly from the pension account.

Each of these strategies has a plethora of underlying options each with their own pros and cons.  Every individual case is different and there can be no standard answer.  It is crucial therefore to seek  professional advice as early as possible and not to delay until retirement itself is imminent.  The choices you make 20-30 years ahead of retirement can impact on your pension income equally as much, if not more so, as the choices made at retirement.

For information on the services we can provide to those approaching retirement, please e-mail us at info@LIFT-Financial.com.

 

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Pensions – a one-way bet

Posted on October 21, 2011 by Ross Glanfield FPFS

Gambling is a mug’s game and anyone who claims to be in  profit at the bookies is almost certainly a bookmaker or a fantasist. If you  are not convinced, the next time that you pass William Hill, count the number  of Ferraris and Porsches parked outside – I guarantee that you will not need a  calculator to do the sums.

Assuming that you are now on my side, there is a  cast-iron method of a bet coming in at evens and, for those with a longer  timeframe, a two-to-one certainty.

At the start of this tax year, the rules regarding  pension funding were changed creating a significant but probably short-lived opportunity to make a large contribution to a pension fund and receive Income Tax relief at 50% for those with incomes over £150,000.

The annual allowance for pension contributions is now £50,000 but any unused allowances in the previous three tax years can be  carried forward and tax relief will be given at the current marginal tax rate.  So if we take the example of an employee who will earn £250,000 this year and has made pension contributions of £25,000 per annum over this and the previous three tax years, that individual has the opportunity to fund £100,000 gross into a pension in this tax year at a cost of only £50,000.

The situation gets even better when you consider that a tax free lump sum of 25% can be taken from the scheme at age 55 as this means that a £75,000 pension fund will have cost only £25,000.

The reason that this opportunity may be short-lived is that recently there have been discussions at all the main party conferences about pension tax relief and the perceived inequality of the system. The concern is that, if the Civil Service strikes regarding increased contributions to Superannuation go ahead this autumn and the current protests in the City continue to refocus the attention on remuneration in the financial sector, the
political debate on pensions is likely to build up a head of steam. In this scenario, change is highly probable if not inevitable and 50% relief will have been a window of opportunity missed by many.

So rather than leave your pension planning to the nag in the 3.30 at Chepstow, take the racing certainty and let HMRC double or treble your stake.

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Market Recovery – Are we there yet?

Posted on October 19, 2011 by Hannah Creighton MCSI FPFS

With the ever-increasing problems that are coming out of the Eurozone, first Greece and now Spain and Italy falling under the spotlight, it is fair to say that the positivity the markets were demonstrating earlier on in the year has been crudely undone. The downgrade of the US credit rating has only added a further concern. They have reduced their growth forecasts which enforces the reality that the recovery process will be harder and longer than first thought.

But what does this mean for investors? It would suggest that the question we need to concern ourselves with is one of how to deal with the volatility that the global crisis has created, rather than how long will the recovery take. By focusing on how to invest during difficult times rather than when to get in or out of the markets, investment opportunities arise.

Within extended periods of market volatility it is when rallies often occur and the lack of any clear answers regarding the global credit crisis does suggest timing withdrawals from and investments into the markets could be a dangerous game.

Instead, care and diligence needs to be shown in ensuring asset allocation calls are sound and the underlying assets are exploiting the opportunities that invariably arise during these periods. Balance sheets become undervalued, the importance of dividend income increases and the traditional defensive sectors come into their own. The opportunities are there – but only by remaining in the markets will you benefit from the rises that are likely to come.

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Options at Retirement: A Bewildering Choice

Posted on September 12, 2011 by Joel Adams CFP FPFS

Having taken the decision to save hard during your working life, the options available to you when the time comes to draw benefits from your pension plans can be bewildering. We have produced a Guide to the various Retirement Planning Options which is available to download.

Retirement Planning Options Guide (September 2011)

The Guide explains the many options that are available, however judging whether any of these options are suitable for an individual requires an independent assessment of your wider financial circumstances and long term objectives. Professional advice is essential – if you have any questions or want to give your retirement options a LIFT please contact us at retirement@LIFT-Financial.com.

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Financial Planning – Where do you start?

Posted on August 31, 2011 by Neil Sadler FPFS

A basic financial planning exercise has to start with a thorough review of current income and outgoings and then the likely changes as their lives develop. Most people rarely do this and as a result only ‘get by’ month to month, leaving such major questions as how much income they will need in retirement or how much capital they will require to pay for their children’s education unanswered. The result is likely to be a failure even to think about planning ahead, thereby leaving their  success down to chance.

Even at a more mundane level, a thorough read of bank statements and credit card bills can point out simple ways that savings can be made, e.g. by cancelling a gym membership that never gets used. It can also simply prompt the question ‘’ where does all that disposable income go?’’ providing reassurance that they can commit to putting some money aside after all.

Once a process becomes established, often with the help of a third party, people tend to enjoy getting control of their finances and will focus much more on everyday expenditure. There are plenty of budgeting tools available online or from your adviser.

A logical progression from the budget stage is then to project the current financial position forward to see if goals really are achievable and then to consider methods of  closing any gaps. For example, if I want to buy a holiday home by the seaside in 10 years for £X and am saving £Y towards it with a growth rate of Z% and I see there will not be enough then I know that I will need to increase the time required, increase the growth rate by taking more risk or reduce cost of the property by looking at somewhere cheaper. The same process can be applied to any goal and, by using cash flow modelling tools, it possible to run scenarios showing the impact of making a small change today  on many competing goals, taking account of factors such as inflation and tax.

True financial planning at this level will make someone re-evaluate their life and finances, making their  most important objectives clear  and much more likely to be achieved.

For information about our financial planning services, please contact us at info@LIFT-Financial.com

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