Flexible retirement planning solutions

Take the legwork out of your retirement planning

People are living longer and the number of retirees is growing. Longevity should be a blessing but many investors are worried they will outlive their savings. So it is essential to consider saving for retirement as early as possible and to decide where best to invest for your requirements.

Deciding how to plan
There is a bewildering choice when deciding how to plan for your retirement, and it is important to weigh up the cost and complexity against the potential returns. If appropriate, one option to consider is a Self-Invested Personal Pension (SIPP). Originally designed for people with higher-value pension funds, they've become more prevalent since the UK pension simplification legislation of 2006.

SIPPs are tax-efficient wrappers within which you can select your own pension investments from a wide variety of sources and choose how to spread your money among a whole range of different investment types subject to both HM Revenue & Customs rules and any limits set by the SIPP provider.

Tax-efficiency
A SIPP offers the same tax benefits as other personal pension plans, with personal contributions eligible for Income Tax relief and investments within the SIPP able to grow free of Capital Gains Tax.

Investment choice
You can invest in a wide range of investments and this includes any number of approved funds. Most SIPP providers allow you to select from a range of assets, including:

• stocks and shares quoted on a recognised UK or overseas stock exchange
• government securities
• unit trusts
• investment companies
• insurance company funds
• traded endowment policies
• deposit accounts with banks and building societies
• National Savings products
• commercial property (such as offices, shops or factory premises)

Retirement flexibility
A SIPP allows you to choose from the full range of options at retirement, from purchasing an annuity to taking a managed income withdrawal from your fund.
The SIPP wrapper is separate from the contents and, as such, has distinct, often fixed charges. Because you can now accumulate a number of pensions over your working life, consolidating them all into a SIPP means that you have one company carrying out your pension administration. This could reduce your reporting and paperwork; however, you should ensure that the additional investment options a SIPP provides are required, as it can cost more to administer than a normal personal pension plan.

SIPPs are appropriate for people comfortable with making their own investment decisions and are not a risk-free product. The capital may be at risk due to the investments held within this pension arrangement; the value of investments can go down as well as up and you could get back less than you invested. Tax reliefs will also depend on your personal circumstances and the pension and tax rules are subject to change by the government.

Information is based on our current understanding of taxation legislation and regulations. A SIPP is a long-term investment, and the fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

 Different risk characteristics

There are many different assets in which you can invest, each with different risk characteristics. While the risks attributable to assets cannot be avoided, when managed collectively as part of a diversified portfolio, they can be diluted. The main assets available are shares, bonds (also referred to as ‘fixed interest’), cash and property. While individual assets have a bearing on the overall level of risk you are exposed to, the correlation between the assets has an even greater bearing. The aim is to select assets that behave in different ways, the theory being that when one is underperforming, the other is ‘outperforming’. Fixed interest investments and property, for example, behave differently to share based investments by offering lower, more consistent returns. This provides a ‘safety net’ by diversifying away from many of the risks associated with reliance upon one particular asset.

Spreading investments across different assets

Keeping track of lots of individual assets can be a daunting task. A much simpler solution is to acquire investment funds containing those assets and leave the diversification worries to professional management. By purchasing a fund that invests in, say, large blue chip companies, another that invests in smaller growth companies and others that invest overseas, you can spread investments across hundreds of different assets.

Reduce share-specific risk by diversifying

By diversifying within assets, you can spread your investments into different shares or bonds to ensure your portfolio is exposed to lots of different types of investments rather than, for example, having shares in just a few large companies. In this way, share-specific risk can be reduced should one of those companies experience difficulties.

Different sectors perform in very different ways

It is just as important to spread your investments across different sectors – areas of the economy where businesses share the same or a related product or service, for example, pharmaceuticals, telecommunications or retail – as well as different companies. Companies are classified by the sector in which they reside, which is dependent on the goods or services they sell or provide. For many reasons, companies within different sectors perform in very different ways. By diversifying across sectors you can access shares with high growth expectations without over-exposing your portfolio as a whole to undue risk.

Greater geographical diversification can help

It’s natural to feel more comfortable investing a portfolio in your home market but this is not necessarily the most sensible option. Because investments in different geographical economies generally operate in different economic cycles; they have less than perfect correlation. That’s why greater geographical diversification can help to offset losses in a portfolio and help to achieve better returns over time.

Investments styles to suit your needs

This is another important aspect to consider when building an investment portfolio. Some investment funds use a ‘passive’ strategy. This is an investment approach that aims to mirror or ‘track’ the performance of a financial index. This is normally done by either investing in the exact constituents of an index or by taking a representative ‘sample’ of that index. The managers of such funds have lower expenses than active fund managers, and the charges to investors are therefore lower. Other funds use an ‘active’ approach and aim to beat the index by using their own research and analysis to select shares they believe will achieve greater returns.

No matter what your investment goals are and how much you wish to invest, we can work with you to develop the best portfolio for you. To discuss your wealth creation objectives, please contact us.

• Equal tax treatment of residents and non-residents alike.
• Any distributions from the scheme must be reported for 10 years following the date of transfer.
• Clarification that the pension commencement lump sum (PCLS) withdrawal is limited to a maximum of 30% of the members funds with the residual amount used to provide a life time income.

Equalised Tax Treatment

The equalisation of tax treatment between residents and non-residents is a preventative measure to stop the perceived abuse of the system by certain jurisdictions. No longer can a jurisdiction rely upon double taxation agreement (DTA’s) provisions to in order comply. This created a challenge for some jurisdictions which like the UK - only taxed local residents. From April the pension income of both residents and non-residents must be taxed equally.

Ten Year Reporting

The increased reporting period for scheme trustees from five to ten years is another HMRC measure aimed at stopping the abuse of the QROPS legislation. It is important to note that this change should not be conflated with a client’s non-resident tax requirements which remain unchanged. In practice this means that any payments from the QROPS will now be reported for the first 10 years the pension is in force.

The non residency rule after 5 years still applies, anyone who has transferred to a QROPS and has been non UK resident for more than 5 years will be able to pass the fund to their beneficiaries as a lump sum without being subject to the 55% unauthorised payment charge applied to UK pensions.

Pension Commencement Lump Sum

The option of taking 100% of the pension as a lump sum payment is now prohibited. Under the previous legislation this practice was widely promoted by some advisers and jurisdictions such as New Zealand benefitted greatly. There has always been a question mark as to whether the practice adhered to the ‘spirit of the law’ and the uncertainty has now been removed by HMRC. Any QROPS from April will only be able to offer a maximum of 30% as a commencement lump sum with the remaining 70% of the fund used to provide an income for life.

Guernsey

Guernsey has been hit hardest by the changes; Guernsey amended its domestic pension law to introduce new provision to comply with the new legislation. However HMRC have failed to recognise the new pension scheme as it contravenes a clause in their most recent QROPS guidance, which states that any country or territory which "makes legislation or otherwise creates or uses a pension scheme to provide tax advantages that are not intended to be available under the QROPS rules" would find such schemes "excluded from being QROPS".

Guernsey pension providers will no longer be able to accept transfers of UK pensions unless the applicants intend to reside in Guernsey. For those people who already have a Guernsey QROPS their pensions will be unaffected but they will not be able to transfer any additional UK pensions to the current scheme.

 Malta

Malta is set to become the most popular QROPS jurisdiction despite being a relative new comer to the QROPS market. Malta has an advantage over other jurisdictions as a member state of the EU and with more than 50 double taxation agreements in place.  From an EU legislative position, Malta clearly has a strong argument, in addition, its low-tax environment and remittance tax basis is accepted within the EU, giving it an economic, political and legislative advantage.

Interestingly, Malta is not actually prescribed to meet the 70% rule either. This is because it qualifies as a QROPS jurisdiction by virtue of its full EU membership. Hence the jurisdiction has scope for significant innovation around pensions.

QROPS offer many advantages and the additional flexibility is the overwhelming reason why many people decide to transfer their pensions away from the UK. An important factor often overlooked is the tax implications in respect of your pension income. How and where your pension is set up can have a huge impact on the amount of tax you may have to pay.

The taxation of pension income is a complex area especially in Spain; Scottsdale is ideally placed to help. Scottsdale Overseas enjoys a close working relationship with Scottsdale Consulting; the highly respected UK based Independent Financial Advisers. This liaison means that you can be confident that your adviser understands UK pension tax and the taxation of pensions in Spain. We offer impartial advice as to whether or not a transfer to a QROPS or other overseas pension is the most appropriate way to maximise your pension income.

Whilst tax is unavoidable, reducing the amount of tax paid will allow you to enjoy a better income from your pension.  Our aim is simple; to guide you through the financial implications, opportunities and pitfalls that living abroad brings.

 The new rates of tax from 1st January 2012 are;

• The first €6,000 of savings income will now be taxed at 21% an increase of 2%
• The next €18,000 will be taxed at 25% a 4% increase on the previous year
• A new band has been introduced so that any savings income above €24,000 will be taxed at 27%

Unlike in the UK, savings income is treated totally separately from earned income and pensions, the two sources of income are not added together to push people into a higher tax band.

Whilst tax is unavoidable, reducing the amount of tax paid will provide you with a better return on your hard earned money. For example if you have €50,000 invested in a mix of bank accounts and investments and combined they gained 5% you would receive;

€50,000 x 5% = 2,500 less 21% = €1,975.

If your total savings & investment income in the year exceeded €6,000 then the tax would increase to 25% or 27%. The growth is taxed regardless of whether or not you actually decide to withdraw it.

The Alternative - a Spanish tax complaint investment will allow your monies to grow free from tax so you will not need to pay tax each year on any gains.  Instead, you can defer tax liability until you make a withdrawal or cash in the policy. This means if you don’t need the money for the next two years you will not be affected by the temporary changes to the savings tax.

But what if you need to draw an income to supplement your pensions or earnings?

A Spanish compliant wrapper will still provide a much more tax efficient home for your savings as you will only be taxed on the part which relates to investment growth, if we look at the example from above.

You invest your €50,000 within a Spanish Compliant tax wrapper and gained 5% growth and decide to withdraw the €2,500 profit as an income. The provider would deduct Spanish Tax at source on the profit part of the withdrawal calculated as €119.05, so in this case you would receive

 €2,500 less (119.05 x 21%)  €25 = €2,475 an extra €500

As before if your total savings & investment income exceeded €6,000 then the tax would increase to 25% or 27% but in this case as only €119.05 and not €2,500 is treated as investment income the chance of moving to a higher rate is reduced.

So there is now more reason than ever to consider using Spanish Compliant wrappers for savings,investment and pensions such as QROPS or QNUPS.

With investors struggling to restructure their portfolios following the recent market turmoil, deciding on a low-cost passive approach, with a conventional unit trust index tracker, or an exchange traded fund (ETF), has advantages.

Trackers and ETFs seek to shadow and offer the returns of an index, like the FTSE 100 for instance, but given that they all incur some form of management costs, they can never outperform the market. However, as they require no real active management, these passive funds usually have less than half the costs.

In the past much of the new money has gone into UK trackers, but now some is tracking shares in European, Global, Asia Pacific and US equity indices.

Financial commentators question the suitability of trackers in certain markets and the thinking is that passive strategies work best in very efficient or highly developed markets, like the US, and in the large-cap sector. Research suggests fund managers in efficient markets struggle to find the edge over each other and therefore fund managers have less effect where the passive strategies are more popular. In such markets paying the cost of a fund manager is not clear cut. The flip side to this is there are parts of the world where active strategies theoretically have an advantage. In less efficient markets, and in the mid-cap and small-cap sectors, the active approach is seen as having more value as there is less information, so managers have more chance to influence the fund.

Fund managers can do their own research on companies and sectors in areas which are not so well covered. Managers also add real value in new emerging areas of the markets, where there could be more economic risk. With such investing, a manager who can recognise the pit falls earns the fee.

It would be wise to reflect however and be reminded that passive trackers do not lag far behind active funds in less developed or less efficient markets. To monitor such results, advisers suggest benchmarking active managers against the closest passive fund performance. It is one thing to have a manager who can outperform but more important to have consistent outperformance. In markets
where managers struggle to have consistent outperformance, the result is exposure to passives.

When deciding on a fund, market cycles should be evaluated as there is a widely held view that passive funds do better in an upward  market because they are just tracking an index and it is generally accepted that actively managed funds generally do not beat the index in an upward market. It is thought that one in five actively managed funds will outperform the index in an upward market.

Ultimately any funds being selected have to suit an investors’ risk profile. If a person’s risk profile points towards using a passive fund then it would be worth using it, however, if the evidence suggests you would be better off in an active fund, then follow this approach. Remember though it is not ideal to limit yourself either way because you could restrict yourself from the best returns.

The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a guide to future