Therefore the search for income has taken on a new level of popularity. So here is a quick guide to how income is taxed and what you can do to avoid it.

Dividends are paid by companies to their shareholders. Individuals are liable to 10% tax on dividends at the basic rate of income tax, 32.5% for higher rate taxpayers and 42.5% for additional rate taxpayers.

However, if you hold equity funds (funds that invest in companies) via an ISA or Pension then you are not liable to any tax on these dividend at all. There is a 10% tax deducted at source though that cannot be reclaimed. That means if you hold investments through an ISA and receive dividends from the equity funds you invest in, you will not actually pay tax on that income. In fact, you do not even have to declare the income to HMRC.

Interest can be paid on holdings of corporate bonds or Government gilts. As these are effectively loans to a company or the Government you are owed interest by investing in them. This will be taxed at 20% for basic rate income taxpayers or 40% for higher rate taxpayers, and 50% for additional rate taxpayers. This is in the same way as you would be taxed on interest earned on cash savings in the bank or building society.

However the good news is that if you hold these ‘fixed interest’ funds via an ISA or Pension, the same rules apply as outlined above.

An important point to note if you are buying funds is that you will often have the choice of buying ‘Inc’ or ‘Acc’ units in a Unit Trust or OEIC. The selection you make is very important. If you are buying these funds outside of an ISA or Pension then the tax implications are crucial.

With ‘Acc’ or accumulation units, any income generated by the fund you have invested in will automatically be reinvested to buy more shares within the fund. That is, the income will never leave the fund. This helps to increase the value of your units.

With ‘Inc’ or income units, the income will technically leave the fund and be paid to you. Now you might never see this income because it can either be paid out to you or be automatically used to buy more units in the fund. However the point is that it did technically leave the fund which means it counts as income you have earned and will therefore be liable to income tax.

There are reasons for holding either or both types of units so you should get specialist investment advice before buying.

To remind you, passive funds aim to track an index such as the FTSE 100 and nothing more. They will use systems to do this and so can run their funds in a fairly low cost way. What you get is the market rate of return minus their costs. Active funds will be a bit pickier about what they invest in, in an attempt to beat the index. To do this they need to undertake a lot of research which costs money and therefore the funds cost more to hold.

To me, in simple terms, costs are a certainty whereas performance is not. If you put aside the research that suggests that good active funds fail to outperform the market for extended periods of time, and bad ones never get around to outperforming the index at all, then costs alone matter.

Essentially, with an index fund you are accepting the market rate of return and paying a low cost fund to achieve that for you. With an active fund you are paying sometimes far more in the hope that the fund you or your adviser has chosen will do the job.

Even if you decide active management is for you, then you have to pick the funds that actually will outperform in the future, not the ones that have outperformed in the past. With more funds than shares in the world (a bizarre statistic) there is quite frankly a massive choice.

Financial advisers have traditionally given it a good go at picking those funds that will perform well for you and I will leave it to you to decide what sort of job they have done if that applies to you.

In the past, if we set aside one’s investment philosophy, then active funds with their higher charges have always kind of suited everyone too. The annual management charge the fund manager levies has been used to feed the mouths of various different interested parties including financial advisers, fund platforms and supermarkets and yes, the fund manager too.

This, in my opinion, is set to change. Now that financial advisers have to agree with their clients what they will charge for the advice and ongoing service they provide, they have no ‘convenient factor’ attached to the commission previously received from actively managed funds with their higher charges.

This leads many to believe lower cost funds will suddenly become more popular or palatable as a recommendation (funny that) as advisers and platforms can no longer bundle their charges into one simply annual charge in the name of the fund manager.

Watch this space!

I would liken it to watching Zinedine Zidane or David Ginola play football. When you watch them play as effortlessly as they do with either foot it shows you how much they must love playing and practicing the art of what they do. They have not opted for the lazy option of just being great with their right or left foot as probably 95% of footballers do. No, to be a true professional they have thought about adding flare to their game, doing things differently enough to make them stand out as someone who loves what they do. In short, they play with both feet.

In financial advice I would bring that back to the run of the mill advisers that see a person’s money rather than the actual person. They see products to fit the solution rather than a solution to match the need. I think that’s laziness, borne possibly out of a culture of having to hit targets. Targets to sell x amount of x type of product each month, targets to bring in x amount of money in investments each month. That tends to focus the mind of the adviser on the wrong thing. When you walk through the door the adviser sees your bank balance rather than a person standing before them.

Concentrating on only the money and forgetting about the person does only half of the job in my eyes. Just like playing with only your right foot seriously restricts what you can do on the football pitch.

To be a true professional and to want to raise standards, in my opinion, is to want to do the whole job, and well.

It probably comes as no surprise to learn that saving for retirement is woefully low on the list of priorities for most people in the UK. In one sense it is understandable. The cost of living is high and getting higher, saving to buy your first home has arguably never been more difficult, and starting out on your career path after graduating from University with thousand’s of pounds of debt to your name is not ideal.

Some of today’s retirees have been lucky or foresighted enough to work for employers that offered final salary pension schemes. You work for the same employer until you retire, and they give you a pension to live off for the rest of your life. You did not really need to think about saving for retirement yourself.

I think that is part of the problem we have today. It is a relatively new phenomenon to have to make your own provision for retirement income knowing no one else will help you to any great extent, if you want a nice lifestyle when you are older and do not want to work anymore.

For me the three most important aspects of saving for retirement must be:

• a) wanting to retire;
• c) having access to your money;
• b) using tax efficient long term investments.

Wanting to Retire

Before considering how to invest for retirement you must first decide that you do actually want to retire. People spend money on the things they want to, rarely if ever on the things they need to. So if you want to retire then surely it makes sense to spend some money on getting there as quickly as you can.

Having access to your money

I think people can be put off from the fact that they cannot access money that is put into a pension before they reach 55 years of age. To someone in the 20′s or 30′s that’s a long way off and anything could happen in the meantime. That is where an ISA could prove a useful investment for retirement.

Money that you invest in an ISA can be accessed anytime.

What is more, you can earn tax free income in retirement from your ISA,

something you cannot do with your Pension.

Using tax efficient long term investments

So whilst an ISA is great while you are younger because it promises to offer access to your money anytime you need it, what it does not do is offer tax rebates on contributions going in to your pension. That you can only do with a Pension. If you invest £80 into a Pension the Government will rebate £20 to make your overall contribution up to £100 into the Pension. If you are a higher rate taxpayer you can also claim a further £20 tax relief via your tax return.

Summary

The obvious route therefore would be to use an ISA while you are younger and a basic rate taxpayer to ease your way into retirement savings, and then consider putting your ISA savings into a Pension when you are older, and perhaps a higher rate taxpayer to get maximum benefit from the tax relief available on Pension contributions.

So is an ISA or Pension best for your retirement savings? Probably both!

Of course this convenience comes at a price and we all know that if you shop around you should be able to get a much better deal every year than the price quoted on the renewal letter.

Exactly the same can be said for your annuity letter that comes through the door when your pension reaches its normal retirement date.

When you take out a pension you will set the date at which you want to retire. This is no big deal as you can change it any time, or push it back when you reach that age. However what happens when your pension provider thinks you are ready to ‘take your pension’ i.e. cash in your pension for an income for life (an annuity), is that they send you that all too convenient letter stating what income you will receive from your annuity.

For clarification, an annuity is the product that you pay your pension into and that pays you an income for life in return.

However, just like the insurance example above, if you just shop around you could get yourself a much, much better deal. The truth is that if you buy insurance for a year at a slightly higher price than you could have got it for, it is mildly annoying. If you settle for the annuity that your pension provider is offering without shopping around, you might be stuck with a lower level of income than you could have got for the rest of your life. That is because once you take out an annuity it cannot be changed or transferred.

It is therefore very, very important that you take advice or at the very least shop around for yourself to get the best annuity rates for your pension.

Of course an annuity is not the only option you have at retirement. You could take different forms of annuity or even elect to go into drawdown (which is a whole other subject but please feel free to call on 01604 211234 if you need to discuss).

Even if you decide to go for the annuity, you then need to choose very carefully what options you go for as, again, this will impact the amount of income you receive for the rest of your life. So things like, single life or joint life, guaranteed period or not, level or increasing income etc. They all matter.

So to get the very best annuity income you can please be very careful before making any decisions about your pension.

Whether you should dabble in the art and science of timing the markets yourself, or invest for time in the markets, is a bit like asking whether you want to live a life of short term relationships or be married.

Porn is exciting, enticing and gets you all hot under the collar. Not dissimilar to the markets really. But married life, the stuff that is of real value to you when you grow old and look back on your life, is more like the slow and steady game of investing for the long term.

The truth is that slow and steady really does win. Warren Buffet does not make billions because he is at his computer every day shouting “buy, buy, buy, no, no, sell, sell, sell”. That is for people who make money from buying and selling investments. Chasing returns is a convenient investment strategy for those that make money from constantly changing investments. No, Warren Buffet makes money by identifying what investments have real long term potential and then holding them for a very long time.

This classic chart shows you how hard it is to try and work out which investment sector will be the best next year. (Click on the chart for a better view).

Source: Index Fund Advisors

The figures are based on US data but are relevant for all investors. They show how volatile each individual sector can be in terms of performance and ranking. Trying to navigate your way through each year is literally a full-time job, one that you may or may not get paid for.

Holding a balance of all of these sectors in the proportions that are right for your desire and need for returns, and then holding those through thick and thin really is the most reliable way to earn returns.

Consumers are still blissfully unaware that the commission culture that is slowly dying out never meant that the advice they received was free. Research regularly compiled by various sources shows that consumers still largely believe financial advice to be free. I guess this comes from the fact that most people still go to their bank for advice and walk away not knowing how much they have just paid for the products they purchased.

Aside from the fact that the commission has always been funded from the premiums you pay or the investments you make, there remains the truism that ‘there is no such thing as a free lunch’.

Even if advice were completely free and the commission paid to your adviser was nothing to do with you and the products you have purchased, do you honestly believe that the adviser would be completely unbiased when Product A pays £2,000 commission and Product B pays £1,000 commission?

The truth is that wherever commission is present the temptation for bias is not far behind. I think that is human nature.

If, on the other hand, you agree to pay a fee for the advice you receive and there are no commissions anywhere to be seen, then your adviser has no choice other than to be on your side, and recommend what is genuinely right for you.

After all you work for the person that pays you do you not?

If your adviser is paid by a product provider who are they genuinely working for? If your adviser is paid by you to advise you, who are they now genuinely working for?

If you want genuinely high quality advice and recognise the cost of commissions in the long run then paying a fee for financial advice simply makes sense.

It is a natural question to ask I think. If you are wise enough to spend money on the thing you probably want most (retirement), i.e. not to have to work again, then you are most likely going to use a pension to do this.

So if you are going to put lots of money into a pension plan that cannot be easily accessed until you reach age 55 then you probably want to know what happens to the money if you die before you take an income from it, or even after you do. Here is a quick rundown of the rules as things stand. Of course if you think you would benefit from a little investment planning advice then please do contact us for help.

Not taken your Pension (before 75)

If you hold assets in a pension plan, having never taken any benefits from it (known as uncrystallised benefits) and die before the age of 75 then the entire amount of those assets will pass to your nominated beneficiary free of inheritance tax and free of any pension tax charge. The assets will pass to your beneficiary as a lump sum outside of the pension wrapper.

Not taken your Pension (after 75)

If you hold assets in a pension plan, having never taken any benefits from it, and die after the age of 75 then the value of your pension will again pass to your nominated beneficiary, minus a 55% tax charge, in the form of a lump sum of cash. There will be no inheritance tax implications as above.

Taken your Pension via Drawdown (any age)

If you have taken your pension in the form of a drawdown arrangement and you die with any amount of assets still held within the pension, then those assets can be passed on to your nominated beneficiary for them to hold the drawdown pension just as you did and for them to benefit from the income. The alternative option is for your beneficiary to use the value of the pension to buy an annuity. With either of these options there would be no tax charge or inheritance tax implications. However if your beneficiary chooses to take the value of the assets within the pension as a lump sum payment then there will be a 55% tax charge, regardless of the age at which you pass away.

Taken your Pension via an Annuity (any age)

If you decide to use your pension to purchase an annuity then the situation is lightly different in that you will have already chosen what you want to happen after you have gone when you applied for the annuity. Typically you can choose to have a proportion of the income you were receiving payable to your spouse or dependent(s). You can also choose to have the income under the terms of your annuity payable for a minimum number of years, known as the guarantee period.

Hopefully that helps to clarify the situation if you were wondering. One very important aspect of this that I have mentioned throughout is the need to nominate a beneficiary. Most pension plans are set up under the entity of a trust. You do not need to do anything, that is just how they are legally set up with the provider. However what you can do is indicate to the trustees how you wish the value of your pension to be passed on upon death. This is normally done via a Nomination or Expression of Wishes form. The pension provider will usually have one for you to complete. It is important that you complete one of these so that you know exactly what will happen to your assets upon death and to make sure they go to the right person, quickly and easily.

If you do need any Investment Planning Advice for your Pension please click on the link below.

Not a lot of people know the difference between an annuity and a pension. This is probably why pension advice is the most popular need for advice in the UK. A ‘pension’ is the generic term used to describe retirement income. It is also a type of investment plan used to save towards retirement. For that reason you can easily come across a pension when discussing both saving for retirement and then taking income in retirement.

For the purpose of this article I shall be referring to a pension as the investment plan you use to save towards retirement. Because once you get there, that is when you purchase an annuity.

An annuity is something you buy with the money you have built up inside your pension plan. Whether you have a Stakeholder Pension, Self Invested Personal Pension or normal Personal Pension, once you reach retirement age you will have the choice of buying an annuity with the money you have built up.

This is all too often, all too sadly a route taken by the majority of people in this situation. Most often people opt to take the annuity offered by the pension provider. The truth is that you could earn so much more by shopping around for the best annuity rates, just like any other investment or product in fact.

However, the choice of whether to buy an annuity with your pension provider or whether to buy one with another provider is far from the only choice. The fact is that annuity rates (the level of income paid in exchange for your pension lump sum) have fallen dramatically over the past few years as the chart below shows (the black line at the bottom).

That is why the option to even take an annuity should be seriously considered. There are many more options you can consider that could make a very big difference to the income you receive for the rest of your life. That is because once you take out a conventional annuity it can never be changed, ever.

For more information and help on choosing the right annuity please click on the link below.

You probably know that the pensions rules are always changing and I guess that is why you are reading this. Speaking to a financial adviser for pensions advice without them trying to sell you a new pension is damn near impossible. It is not always easy to work out what you can and cannot do, or perhaps more importantly what you should and should not do with your pensions.

Here is a quick run down of the latest pension rules:

• You can invest up to £50,000 each tax year into a pension subject to your own level of earnings.
• You can actually invest up to £200,000 each tax year into a pension.
• That is because you can use up any unused allowance from the previous three tax years which all now have an effective allowance of £50,000 each.
• You do need to have been a member of a pension scheme for each of those years in order to use them, and of course your contribution allowance cannot exceed your earnings.
• You will receive tax relief at your highest income tax rate. So a 20% tax payer will get a 20% tax rebate on any contributions made to a pension. A 40% or 50% tax payer will receive a tax rebate of 40% or 50% of contributions made to a pension.
• Your tax rebate is subject to the amount of tax paid.
• The first 20% of the tax rebate is paid directly into your pension. The remaining rebate, if applicable can be claimed via your tax return.
• You can pay in up to £3,600 into a pension even if you have no earnings at all.

For information and advice on your own personal situation please click on the link below.