Category Archive Savings

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Offshore Investment Bonds

Offshore Bonds are collective investments in which the investments of many individual investors are pooled. They are technically single premium life assurance contracts and therefore normally have nominal life cover attaching, however they can also be written on a capital redemption basis without a life assured. A wide choice of funds is available ranging from managed to specialist funds.

A number of companies market offshore life policies, particularly single premium bonds. The most popular are those issued by subsidiaries of well known UK life offices in countries such as Luxembourg, the Republic of Ireland, the Channel Islands and the Isle of Man.

The income and gains of an offshore bond fund will normally be free of tax in the relevant jurisdiction. Hence they are often referred to as benefiting from “gross roll-up”.

Whilst there will normally be no tax in the particular tax haven that the insurer is based, the fund is likely to suffer some withholding taxes on its underlying investments. There may be scope to reclaim some of the tax under double taxation agreements but it is unlikely that an offshore fund with equity content will ever be truly gross.

The ability to defer tax is greater under an offshore bond than an onshore bond, therefore the longer it is held the greater the compounding effect of the tax deferment. All things being equal an offshore fund will create a greater return than an onshore one over the longer term. However, the greater the level of withholding tax and management expenses (an offshore fund has no tax from which it is able to deduct management expenses) the less an individual will benefit from gross roll-up.

To be eligible to invest in an investment bond, an individual investor must be 18 years of age or over. The investment can also be made on a joint basis, or by a company or trustee(s). The nominated life (lives) assured is usually the applicant/investor but could also be an individual aged under 18.

The minimum lump sum is usually £5,000 but this may be higher or lower depending on the provider. The maximum limit will be set by the provider.

Offshore bond gains are liable to tax and the rate will depend on the policyholder’s personal tax position. The personal allowance, the starting rate band for savings income and the personal savings allowance can all potentially be offset against offshore bond gains to receive some or all of the gains tax free.

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Bymapfinancesadmin

Onshore Investment Bonds

An investment bond is technically a single premium life assurance contract although the life cover aspect is only nominal.

Bonds are collective investments in which the investments of many individual investors are pooled. This pooling enables relatively small investors to benefit from the economies of scale made available to institutional fund managers.

A wide choice of managed, general and specialist funds are available offering investment opportunities in equity, property and fixed interest securities. Bonds enjoy the facility to switch between these internal insurance company funds at a reasonable cost if desired. Although classed as single premium investments, ‘top-up’ facilities are offered, allowing further amounts to be invested either on a regular or ad-hoc basis.

To be eligible to invest in an investment bond, an individual investor must be 18 years of age or over. The investment can also be made on a joint basis, or by a company or trustee(s). The nominated life (lives) assured is usually the applicant/investor but could also include an individual aged under 18.

The minimum lump sum is usually £5,000 but this may be higher or lower depending on the provider. The maximum limit will be set by the provider.

The underlying funds of Investment Bonds are subject to tax within the fund on income and gains (after indexation). Any ‘income’ you need is achieved by selling units.

Investors also benefit from the ‘5% rule’ which allows them to withdraw up to 5% of the initial premium each year (until such time as all of the original investment has been withdrawn) with no immediate personal tax liability, making it particularly attractive to higher and additional rate taxpayers.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Structured Products

Structured products is the name given to a group of investments designed to deliver a known return for given investment circumstances and combine two or more underlying assets in order to offer growth or income potential, whilst usually offering some degree of capital protection.

Such investments normally share the following characteristics:

  • Fixed terms, meaning they are not as liquid as deposit accounts or investments in equities;
  • All of the return or interest only is linked to the performance of stock market indices;
  • Enhanced returns available because of the additional risk taken;
  • Growth or income options, or both, are available;
  • Can be held within a variety of product wrappers including ISAs;
  • Varying degrees of capital protection may be available; and
  • Offered only for a limited period and for a limited amount of funds.

A structured product can take two forms – a structured deposit and a structured investment. Structured deposits and structured investment products with some capital protection are often purchased by those looking for alternatives to saving accounts and other deposit-based products.

These products offers growth linked to stock market performance – usually via an Index, such as the FTSE 100 Index, although the amount of return you may receive is sometimes capped.

Some structured products expose your capital to risk, although these plans are often set up with a “safety net feature”, which means the stock market can fall by a certain percentage without affecting your capital return.

You should not invest in structured products if you might need access to your funds during the term of the product. If you do encash prior to maturity, heavy penalties will be incurred and you will receive back significantly less than you have invested.

There are no specific limits on the level of investment other than those that may apply to the wrapper (i.e. ISA or SIPP) for the investment. Also, providers may set their own minimum levels of investment per application.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Investment Trusts

Investment trusts are a type of collective investment. They are structured as companies and exist purely to invest in a portfolio of shares and securities in other companies to make money for their own shareholders.

They pool investors’ money and employ a professional fund manager to invest in the shares of a wider range of companies than most people could practically invest in themselves. This way, even people with small amounts of money can gain exposure to a diversified and professionally run portfolio of shares, spreading the risk of stock market investment.

Investment trusts are what is known as closed-ended funds. This means that the amount of money which the trust raises to invest is fixed at the start by issuing a set number of shares to investing shareholders. Every selling shareholder must first be matched to a potential buyer via the stock market before a transaction can take place. Having a fixed pool of money enables the fund manager to plan ahead.

Trusts often specialise in particular sectors and types of company. Some might specialise, for example, in communications companies, or alternative energy producers. Others specialise in companies from different parts of the world.

Trusts also specialise in what they aim to give their shareholders. Some try and maximise income. Others aim exclusively for capital growth over the long term. Some trusts aim to provide a combination of income and capital growth. All trusts have investment objectives that will be clearly stated in their literature.

Investment trusts can borrow to purchase additional investments. This is called ‘financial gearing’. It allows investment trusts to take advantage of a favourable situation or a particularly attractive stock without having to sell existing investments. The idea is to make enough of a return on the investment to be able to pay the interest on the loan, repay it and then make a profit on top of that. Obviously, the more a trust borrows, the higher risk it’s taking – but the greater the potential returns.

To be eligible to invest in an investment trust, an individual investor must be 18 years of age or over. An investment can also be made by a company or trustee(s). The minimum monthly contribution is normally £100 and the minimum lump sum £500-£1,000. There is no maximum limit.

Most investment trusts allow shares to be sold at any time. You can make partial withdrawals or encash your full investment. The tax treatment is described above.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

GIAs, Unit Trusts and OEICs

General Investment Accounts (GIAs), Unit Trusts and Open-Ended Investment Companies (OEICs) are collective investment schemes which allow individuals to participate in a large portfolio of assets by pooling their money together with other investors.

This gives the individual access to a much wider spread of holdings than can normally be achieved with smaller sums of money, which in turn reduces the risk.

The fund is divided into units or shares, which are valued on a daily basis and reflect the underlying value of the fund. This value will fluctuate on a daily basis with market conditions.

GIAs, Unit Trusts and OEICs are a flexible and relatively cheap way to invest in the stock market. To be eligible to invest in a unit trust/OEIC, an investor must be 18 years of age or over. An investment can also be made by a company or trustee(s). The minimum monthly contribution is normally £25-£50 and the minimum lump sum is £500-£1,000; there is no maximum limit.

When a holding is surrendered, if there is a gain, this is subject to capital gains tax. However, each individual has an annual allowance, and as long as the gain together with any other gains you may have in the same tax year is less than the allowance, there is no tax to pay.

Any gain in excess of the annual allowance will be taxed at a rate of 10% if, after adding the net taxable gain to your taxable income in the relevant tax year, the total falls within the basic rate income tax band. A tax rate of 20% applies to gains or parts of gains which exceed the upper limit of the basic rate income tax band.

The majority of these types of investments can be sold at any time, however some assets such as property may have a notice period; you can make partial withdrawals or encash your full investment.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Junior ISAs

Junior ISAs (JISAs) became available from 1st November 2011 and are the child equivalent of an ISA. Children can hold up to one cash and one stocks and shares JISA concurrently.

The qualifying investments for both cash and stocks and shares JISAs are the same as for the adult equivalents:

  • Stocks and shares – in the form of either individual shares or bonds, or pooled investments such as open-ended investment companies, unit trusts, investment trusts or life assurance investments; and
  • Cash – usually containing a bank or building society savings account.

All UK-resident children under the age of 18 who do not have a Child Trust Fund (CTF) are eligible for JISAs. This includes children born before the launch of the CTF (the CTF was available to children born between 1st September 2002 and 2nd January 2011). Anyone with parental responsibility for an eligible child can open a JISA for that child.

Eligible children will be able to open JISAs for themselves from age 16, and between ages 16 and 18, they can hold one of each type of JISA plus an ‘adult’ cash ISA. Previous years’ JISA subscriptions can be transferred in whole or in part subject to the child not having two accounts of the same type at the end of the transfer process.

Current years’ JISA subscriptions must be transferred in full. This means that part transfers of JISA investments can only be made to a JISA of a different type (cash or stocks and shares). A transfer from a cash JISA to another cash JISA or a stocks and shares JISA to another stocks and shares JISA must involve the transfer of the entire contents of the ‘old’ JISA. The end result must mean that the child still has no more than one of each type of JISA. Savings in Child Trust Funds can also be transferred to JISAs.

Any person or organisation can contribute to a child’s JISA. The overall contribution limit of a JISA is much less than an ‘adult’ ISA and is usually indexed annually by CPI.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

ISAs

Anyone, who is an income tax payer and has some money to save or invest should know about Individual Savings Accounts (ISAs). ISAs are wrappers within which a wide range of savings and investment products can be held, free of UK income and capital gains tax by anyone aged 18 or over (16 or over for cash ISAs).

ISAs serve as a ‘wrapper’ to fully protect savings from tax, allowing individuals to invest monies up to maximum limits (by way of regular or single amounts) each tax year in a range of savings and investments and pay no personal tax at all on the income and/or profits received. The main ISA benefits are:

  • No personal tax (income or capital gains) on any investments held within an ISA;
  • Income and gains from ISAs do not need to be included in tax returns; and
  • Money can be withdrawn from an ISA at any time without losing the tax breaks.

There are five types of ISA:

  • Stocks & Shares – in the form of either individual shares or bonds, or pooled investments such as open-ended investment funds, investment trusts or life assurance investments;
  • Cash – usually containing a bank or building society savings account;
  • Innovative Finance (IF-ISA) – in the form of loans made through peer-to-peer (P2P) platforms;
  • Lifetime (LISA) – for those aged between 18 and 40 designed to help them save up for their first home or retirement; and
  • Help to Buy – aimed at helping first-time buyers save for their mortgage deposit.

All of your annual allowance can be invested in either stocks & shares, cash, innovative finance ISAs or lifetime ISAs, or you can split it between more than one type, up to the overall annual limit of £20,000 with either the same or a different provider. However, the maximum annual amount you can save in a lifetime ISA is £4,000.

You are also able to transfer money saved in previous years’ cash ISA holdings to stocks & shares ISAs and vice versa without affecting your current year’s annual allowance. Innovative Finance ISAs cannot be transferred to other ISA wrappers, however it is possible to transfer existing ISA funds into IF-ISAs.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Pension Drawdown

Pension drawdown is the process of taking money out of your pension, i.e. drawing down from it, without purchasing an annuity. A pension should really only be used in a person’s retirement, but they are accessible from age 55 onwards, so can provide an emergency fund of sorts if required.

There are many reasons why someone would go into drawdown:

  • Deferring an annuity purchase, thus avoiding being locked into low annuity rates which may apply at the time of retirement;
  • Enabling the policy holder to buy an annuity when it best suits them and hopefully when annuity rates are more favourable or provides an opportunity to avoid purchasing an annuity altogether where appropriate;
  • Enabling investors to retain control over their pension investments and allows them to continue to be invested in the markets, and hopefully make gains on their existing money; and
  • Allowing income to be varied within allowable limits thus giving valuable flexibility, which is useful for tax planning or where other income may have changed.

There are two different types of drawdown contract you can own – capped drawdown and flexi-access drawdown.

Capped drawdown allows you to withdraw income, within limits, from your pension fund without purchasing a lifetime annuity. This was the traditional method of drawdown but has been superceded by flexi-access drawdown. No new capped drawdown arrangements can now be created, however it is still possible to transfer from one capped arrangement to another and, in some cases, for additional pension funds to be added to the capped drawdown plan.

The maximum amount of income that can be drawn is 150% of a comparable lifetime annuity based on tables published by the Government Actuary’s Department. It is not however necessary for any income to be taken. Any amount of income from zero income through to the 150% maximum can be selected. The plan and maximum income will be reviewed every three years up to the anniversary of entering drawdown until the 75th birthday and annually thereafter.

Flexi-access drawdown is very similar to capped drawdown but does not have as many limits with regards the income which can be withdrawn from your pension fund; it is flexible with regards the money which can be taken out.

For flexi-access drawdown, you can choose how much income you want to withdraw without reference to any rates or limits other than the size of your pension fund. If you or your spouse is relatively young, a secured pension (lifetime annuity or scheme pension) would be less attractive due to the lower mortality factor and, in addition, there is a longer timescale to take advantage of the potential investment rewards and risks of a drawdown pension. However, the levels of income provided may not be sustainable, so in other words, your pension fund may run out.

Irrespective of what drawdown contract you have, taking withdrawals may erode the capital value of the fund, especially if investment returns are poor and a high level of income is being taken. This could result in a lower income if/when an annuity is eventually purchased, or no fund at all if fully withdrawn.

Most drawdown contracts allow for the first 25% of a withdrawal to be taken tax-free; everything thereafter is fully taxable at source.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Pension Annuities

Otherwise known as a lifetime annuity, a pension annuity pays a guaranteed income for your life from the funds you have built up in your pension plan. Your annuity provider will pay you a regular income taxed in the same way as earnings.

The amount of income payable is dependent on your age and health, the size of your pension fund, economic factors, the type of annuity and the options you select.

You should also be aware that once you have purchased an annuity you cannot cash it in or make changes to your selected options. Also, an annuity must be purchased using funds from your uncrystallised rights held in a money purchase pension or from drawdown funds.

Some annuity providers offer annuities which pay you a higher than normal income if you have a medical condition(s) which can affect your normal life expectancy. These are called impaired life annuities. An enhanced annuity may be available if you smoke regularly, are overweight, if you have followed a particular type of occupation or live in certain parts of the country.

Annuities can be set-up to be single-life or joint-life. A joint-life last survivor annuity pays out until the second life dies, normally so long as financial dependency can be proven with the second life. Single life on the other hand is just that – it pays to a single life and dies with that person.

You can normally select at outset how often you want to receive your income payments from an annuity. Most people choose monthly, but you can be paid quarterly, half-yearly or annually. Also, income can be paid in advance or in arrears.

You can also decide whether the annuity should be level, escalating or decreasing:

  • A level annuity pays the same amount of income year after year;
  • An escalating annuity is designed to increase each year, meaning because it needs to be able to grow, the initial income will be lower; and
  • The opposite of an escalating annuity is a decreasing annuity whereby the income starts off higher and gradually lessens.

Pension annuities allow for fixed and guaranteed income and whilst this does not provide any flexibility, it does provide safety.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Defined Benefit Pension Transfers

A Defined Benefit (DB) pension, otherwise known as a final salary scheme, is a type of workplace pension scheme in which an employer promises a specified pension payment, lump sum (or a combination of both) on retirement.

The benefits payable are predetermined using a number of factors, typically including an employee’s earnings history, tenure of service and age, as opposed to relying directly on individual returns. A typical DB pension scheme usually continues to pay a pension to a spouse, civil partner or dependents (for a restricted period) when the member dies.

There are advantages and disadvantages to DB schemes, and in most cases, the advantages far outweigh the disadvantages.

Advantages:

  • Your pension lasts as long as you do so there is no risk of you having no pension income.
  • Although each scheme varies, there will be something for your surviving spouse/civil partner/dependants. Typically a survivor’s pension is half of your pension income and will be paid for the duration of your spouse’s/civil partners lifetime. However, a dependants pension may only be paid for a limited period, i.e. until they reach the age of 23.
  • Some protection against inflation is provided to help you maintain your spending power.
  • Your pension does not rely on the ‘rise and fall’ of the stock market, thus making it much more secure than a personal pension.

Disadvantages:

  • The death benefits of a DB scheme are extremely rigid – if you are not married and have no financially dependent children, your fund may die with you.
  • If you are concerned with your life expectancy, your DB pension scheme may offer you a poor total capital return.
  • It is not possible to vary the level of income you receive from the scheme, thus making it largely inflexible.
  • If your employer becomes insolvent, there may not be enough assets in the pension scheme to pay your pension, although The Pension Protection Fund (PPF) may provide compensation.

Our regulator, the Financial Conduct Authority (FCA), is clear that we should start by assuming that any transfer of a DB pension into a personal pension would most likely not be suitable. Also, you cannot transfer from a DB pension scheme if you are already taking your pension. There are also some types of DB pension schemes where transfers are not possible, for example, public sector schemes for teachers, nurses and civil servants.

If your pension savings are worth £30k or more, you will be required to seek financial advice before even considering transferring a DB pension. If you leave your DB pension scheme, the benefits you’ve built up still belong to you and they can remain there until you retire or you can transfer them to a different type of pension scheme.

Past performance is not a reliable indicator of future results