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Contact us | www.future-financial.co.uk | E-mail your comments | Archive | |
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Pension statements About now, many people receive a statement of benefits relating to their pension benefits. Members of defined benefit (final salary) schemes - most of whom are in taxpayer-funded government schemes - have nothing to worry about; for the rest of us, there is an ?opportunity'. If your pension benefit statement shows that, despite you (and possibly your employer) having invested good money this year, your scheme is actually worth less than last year you are likely to be disappointed. But in fact, things are not necessarily as bad as you may think, unless you are just about to retire. Even then, you have some options that may make matters easier for you. Plenty of time to go? If you have five or more years to go to your chosen retirement date, there is time for your pension fund to recover from the recent downturn in equity markets. Most markets are currently significantly below their long term trend values (see 'Undervalued markets' opposite) so there is every possibility that fund values will recover as the market goes up.
It is also worth considering that fixed contributions made during recent months will have purchased many more shares (or fund units) than a year ago. The effect of so-called 'pound cost averaging' is actually beneficial when equity values start to rise again, because you will have more shares for your investment, than if values had simply continued rising steadily during the intervening period. An extra opportunity But low market values also offer a special opportunity for those in a position to make an investment now. Imagine, for a moment, that you earn £50,000 a year and have just inherited a similar amount. If you normally invest 10% of your income into your pension and your employer puts in 5%, you will be putting aside £7,500 a year. But new rules introduced in 2006 now mean that you can invest up to your entire earnings into a pension, plus anything your employer puts in, provided that together you do not exceed the annual allowance (which is £235,000 for 2008/9 and is set to rise in future years). This means that you could now contribute a further £45,000 into your pension fund (less 20% tax relief, so you actually only have to put in £36,000 to get the same investment value). In addition, as a higher rate taxpayer you could get back more relief, up to an extra 20% of the contribution, although you cannot get back more in relief than you would have paid in tax! With investment markets at long term lows, now could be just the time to take advantage. Retiring soon? If you are close to retirement and have seen your fund value drop significantly, there is one thing you might like to consider. Rather than using your fund now to purchase an annuity - effectively locking in the losses for ever - you might like to consider taking your 25% tax free cash now and using an "unsecured pension" (what was called drawdown) to leave the balance of your fund invested in equities, in the hope that values will recover and you can buy an annuity later. Of course there are costs associated with this approach and, as ever, you should take individual professional advice before making any decision relating to your personal finances. The value of investments can go down as well as up; you may get back less than you put in. Key points: > Many people have time for markets to recover > Now could be a time to top-up contributions > Taking an income can often be deferred |
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©futurefinancial This publication represents our understanding of law and Inland Revenue practice as at the date of publication. It does not provide individual tailored investment advice and is for guidance only. Rules may vary for Scotland and Northern Ireland. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. The value of land and buildings is generally a matter of a valuer’s opinion rather than fact. The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Your home may be repossessed if you do not keep up repayments on your mortgage. Loans are subject to status and written details are available on request. Always seek independent advice from a qualified financial adviser. Think carefully before securing other debts against your home. Fees for mortgage advice maybe charged and for details of these please contact us. The Financial Services Authority does not regulate all the activities undertaken by the company, including taxation advice and overseas mortgages. |
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