Misleading online adverts

IFA Promotion recently disclosed that some distribution firms and lead generation sellers are misleading consumers by placing sponsored adverts on the internet. They want the FSA to step in and stop these practices which often mislead the consumer.

It is very easy now to set up online adverts with the likes of Google. This sponsored links appear on the top and right hand side of the page. All of these adverts are paid for and are shown according to the phrase or words you type in to the Google search box.

As there is no real regulation, lead generation companies will advertise “independent advice” or “independent financial advice” when in fact they cannot provide this service. They will sell the details of any enquirer on to other companies who will then contact you. We think this system is unfair and does need investigating.

The better companies will be upfront when explaining what they do rather than hiding important facts.

Enhanced Wealth Limited is an independent financial adviser (IFA) but only offers advice on mortgages and protection products such a life cover. If someone approaches us for pension’s advice or independent investment advice then we would be able to refer them to an IFA who is part of a small network of IFAs who we work closely with. Each IFA has a specialist area of independent advice and we ensure clients are passed to the best IFA based on what they need.

So, the next time you search on the internet just be a little cautious about the websites that are advertising their services. Check them out first before you pass over any personal details.

The need for specialist independent financial advice

It is common to find financial advisers who state they are specialists at everything. The likelihood is that they have a good level of knowledge about most things but very little in depth knowledge around specialist subjects such as pension transfers or inheritance tax.

In the most part these types of advisers will be able to help most people whose financial affairs are not too complicated. But when the need arises for something more complicated then its best to find an IFA who has the relevant experience and knowledge to help.

You could use the internet to search for IFAs or ask family and work colleagues for recommendations. Once you are in contact with an IFA don’t be shy, ask them direct questions about how familiar they are with what you want.

You should feel happy that they recognise your needs quickly and are confident about how to resolve them.

Providing complex financial advice can take time so allow your independent financial adviser to do their job. Most will be able to give you an idea of how long the process will take and the costs involved. Expert financial advice is rarely free and these advisers are professionals in their field.

Small Business Advice Guide

Introduction

Competition, recruitment, tax, investment, profit and growth – these matters are uppermost in the mind of every successful employer. Trustworthy expert independent financial advice has a valuable role to play in many of these areas, saving hard-pressed directors’ and employers’ time and money while delivering financial security to employees through the provision of financial advice.

Financial advisers help businesses achieve or remain in their best possible shape in numerous ways, for example by making sure they stay on top of the ever-changing tax rules and obligations to provide access to pension plans and other employee benefits. Then there is the tricky territory of providing pensions for employees which is set for another shake-up in the next few years. Financial advisers ensure firms have the right protection to cope with all eventualities but, equally, are getting good value from their insurance plans. They can also help those in charge of human resources consider the latest tax-friendly incentive schemes which could attract, motivate and reward staff. And people, as every business knows, are its most valuable asset.

Independent financial advisers and employee benefit consultants work alongside businesses and make financial planning recommendations to both employers and employees to help achieve stated objectives.

With the huge array of financial products available and the many routes that can be taken to find financial advice, how can a company be absolutely confident that the course of action that is being recommended to provide employee benefits or financial planning advice for the company is entirely in the company’s own best interests?

Financial decisions are far reaching and can impact on a firm’s bottom line for years to come. So how does a firm go about ensuring the advice it is getting is utterly impartial, is exactly tailored to its individual needs and, crucially, is only being recommended after the adviser has searched the whole of the market?�
Why Independent Financial Advisers (IFAs) and Employee Benefit Consultants are well placed to give impartial advice

The best financial advice can be summed up as: impartial, affordable, suitable and transparent.

The advice a business receives depends on who is giving it and how impartial they are. Do not confuse sales of financial products with financial advice, although both are important and must be paid for. It may be that your business just needs advice on the existing financial products it has in place and does not need to pay for additional financial products.  

Employers must know the status of their financial adviser as this will help them assess the value of the advice and its impartiality before committing to taking action based on it.

Currently there are three types of financial advisers: 

• Tied agents can only offer product recommendations from one financial services provider;
• Multi-tied agents can only advise on the products of a restricted range of providers;

And

• Independent financial advisers (IFAs) and employee benefit consultants who search the whole of the market for their clients.

The Financial Services Authority has proposed changes to the current system under its Retail Distribution Review (RDR).  We will therefore update this guide to reflect industry changes as and when they are introduced.

Financial advisers of all types are required to give a clear and up-front explanation of the services they offer and how they charge for their services.

Employers will, of course, have to pay for the advice they receive. The choice is to allow your financial adviser to take commission from the products they arrange for you and your company or for a fee to be paid to cover the time taken, similar to how you pay your accountant or lawyer. The solution may be a combination of a reduced fee offset by a commission payment from the product providers. The impartiality of IFAs means they are obliged to offer this choice of being able to pay by a fee, tied agents are not. The important point is that you will know what is being charged and what exactly is being paid for.

Independent financial advisers will inform you in writing at your first meeting how you can pay them and the likely amounts involved. It is becoming increasingly popular for IFAs and Employee Benefit Consultants not to take commission from product sales but to charge on a fee basis. The implications of each route – fees, commission or a combination will be explained to you before you decide what is best for your company.

Remember that only IFAs and employee benefit consultants can access the widest range of financial products available giving them an unequalled capability to provide holistic advice on all areas of financial planning for a business.

It may be that you want an expert to look at your existing financial arrangements and employee benefits package. After highlighting any areas it may make sense to review, he or she can pinpoint what precise actions would be appropriate. Normally a comprehensive report will be prepared by the IFA or employee benefit consultant which will contain a professional opinion about your current position and the future implications of any financial arrangements in place or about to be recommended. 

The constant flow of new legislation from government and the strict compliance obligations to be met mean that no business can risk losing touch with its responsibilities. As well bringing firms up-to-date with regulatory changes, an IFA or Employee Benefit Consultant will help employers and staff to secure the best outcome from any financial decisions they make.

Now you have a clearer understanding of how the advice market works, try answering the series of questions in the decision tree at the end of this guide and discover what type of advice you would prefer for your business.
Pension responsibilities and choosing the right package

Alarmists may call pensions a minefield; what is sure is no one finds pensions easy and specific expertise in knowing what is available from the entire market can make the difference of thousands of pounds at retirement.   Pensions are a particular area where employers could do themselves an enormous favour by warding off disruption further down the line and getting to grips with the pension changes arriving in 2012. This is when workplace contributory plans for lower paid workers called Personal Accounts will be introduced.

Designed to respond to continuing concerns that we are not saving enough for our old age, these will be low-charge personal plans for every worker who does not already have access to a pension. They will co-exist, replace or evolve from existing stakeholder pension schemes.

With no alternative in place, employers and workers will be obliged to open and automatically enrol in Personal Accounts. Those wanting to opt out have actively to do so. Employees will contribute 3 per cent of their pay with employers putting in 4 per cent. The cost burden falling on businesses will be considerable: increased administration requirement to set up and run the schemes as well as more funds to pay contributions if the firm does not have a pension system in place already. Fixed penalties are anticipated for non-compliance. Taking independent financial advice in advance on Personal Accounts and the best way to set money aside to fund them is highly advisable. �
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Stakeholder pension legislation currently compels businesses with five or more employees to provide their employees with access to a pension plan which falls within the regulations. These are designed as low-cost, flexible plans with annual charges pegged at 1.5 per cent. Members must be able to transfer funds in and out of schemes whenever they choose without penalty. An array of pension providers offer stakeholder products and employers can pick from a wide selection.

There is more to complying with the stakeholder regulations than simply picking a pension scheme and employers should make sure that they take all the necessary steps. Under the stakeholder guidelines, employers must consult staff before choosing a pension scheme. Once a scheme is designated, employers must inform their employees of the available pension options and provide information about the scheme.

In addition, employers are responsible for ensuring that their chosen pension scheme meets the stakeholder rules and the scheme provider has registered the designation of the scheme with the Pensions Regulator. Enlisting the help of an IFA can save time as he or she can check these details on your behalf.

Stakeholder pension schemes are not the only option available to businesses. Instead a more sophisticated personal pension or occupational pension scheme can be offered to employees and/or directors. IFAs will look closely at the varying needs of retirement funding for individuals, and consider benefits such as death in service and waiver of premiums, while directors may want to take early retirement.  Regular reviews are important to ensure that any plans to deliver employee benefits are doing so as expected.

To avoid making an important pension decision by yourself a discussion with an IFA can help you choose from the hundreds of options available from all the pension providers, enabling you to select the best solution for the company itself and for its employees.

Under a group personal pension plan, for example, employers will be exempt from the requirements of stakeholder pensions if they offer to contribute at least 3 per cent all employees’ salaries. One of the best incentives for employees to join a pension scheme is employer contributions, something Personal Accounts underlines. There are other plus points for group personal pensions as they offer more options than stakeholder ones, such as a larger choice of investment funds, although group personal pensions may be more expensive. This is where an IFA can help decide what is right for you. 

The pensions landscape is further complicated by the nitty gritty of the pension schemes on offer and the changing pension rules. For example, employers may currently be providing a final salary scheme, which provides a pension at retirement, based on a proportion of an employee’s earnings at retirement linked to their length of service. A decision may need to be taken as to whether a final salary scheme continues being available to all employees who wish to join or whether a new money purchase scheme is offered to employees, based on contributions paid and the performance of the fund/s where the contributions are invested. Pension simplification has made some choices easier for employers but in some cases it has made pension financial choices more complex through measures such as lifetime limits and the annual allowance.

Insurance – picking the right policy to protect you when you need it most

Businesses need to ensure they have the right policies in place so should the worst happen they can be put back on a sound financial footing with minimal difficulty.

Protection comes in a multitude of forms covering every aspect of a firm’s daily activities. These include damage, loss or theft of physical assets like buildings, contents, machinery, IT equipment and vehicles, as well external risks such as flooding. Credit and bad debt cover will be required as well as requisite public and product liability insurance to protect against legal action from customers, suppliers or the public. Cover to resolve a dispute such as interruption of production or supply or employment issues may also be necessary. Legal expenses cover, more common in an increasingly litigious age, should take account of any costs or expenses that might be awarded.
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Employers’ responsibilities are set down in the Health and Safety at Work Act, but they might also consider potential actions arising from other sources like tax probes courtesy of HM Revenue & Customs, National Insurance enquiries, investigations from Trading Standards and Companies House. Company shareholders and directors face more demanding compliance standards these days with the Companies Act. Those that stand as trustees can be personally liable if they fail in their duties as a trustee, so indemnity cover is also worth exploring.

But trawling through such a multitude of policies and their small print takes time businesses can ill afford. However just as crucial as getting the right cover so you have what is needed, is being clear about what is not included. An IFA is ideally positioned to sift through all the conditions so you get the right cover at the right price.

Employees are a business’ top resource, ultimately driving its success or failure. Therefore it could also pay to assess whether or not other forms of personal insurance should be taken out.  For example, some companies rely heavily on a handful of key staff members. If one of these individuals should die, the company may lose profitable contracts, be unable to continue with a vital project or even forced to close. Key man insurance (life assurance taken out by the company on the life of an essential employee) can protect against such threats that could jeopardise the livelihood of many others. Similarly share protection insurance can provide cash at the right time to ensure a company’s shares remain with the company and do not pass to the deceased shareholder’s beneficiaries who may have no relevant experience or knowledge of the business.

Employers can also arrange group life assurance, critical illness, income protection or private medical schemes for employees. These plans pay out to the employee or their dependents in the event of death, serious illness, loss of earnings due to ill health or accident, and can also pay for private medical treatment. Employers who set up insurance for their staff will usually benefit from tax breaks and an IFA or employee benefits consultant can advise on the advantages.

Commercial mortgages

Purchasing their own premises can be a very smart move for most businesses. A business can thereby gain from rising property prices, save on rent and enjoy tax advantages, thus putting it onto a more stable financial footing and helping it to grow stronger and potentially expand..

To purchase your own business premises, you will need a commercial mortgage, which can be used not just to buy property and land, but as a potentially cost-effective way to raise money for capital expenditure such as purchasing machinery. hiring extra staff or acquisitions.

Depending on your business objectives, an IFA can assess whether borrowing in this way is the best option, by looking at the context of the business as a whole. He or she can determine whether alternatives like leasing or invoice discounting may serve a firm’s purpose better. Where raising money is concerned a mixed solution is often the best. An IFA is in the right position to achieve that and can present a persuasive, informed case to lenders.

Commercial mortgages are more expensive than home loans as they involve higher risks for lenders and work on different principles taking in a variety of factors pertinent to the actual business wanting to do the borrowing. Businesses need to be on a secure financial footing with an established track record. Such are the specifics of lending criteria it is not unusual that two similar properties in the same street would get different answers from lenders as it really comes down to the businesses themselves.

Criteria include the amount of the loan to the value of the property to be bought, how good a business might be at servicing this kind of debt and, vitally, what kind of industry sector it operates in. Some sectors may need as much as a 40 per cent deposit. Another factor that may influence lenders is the potential for cross-selling to the business, for example where a lender could also take over the daily business banking as well in the deal.

Generally commercial loans require at least a 20 per cent deposit. Rates are higher than residential mortgages – usually 2 to 4 per cent above the Bank of England base rate. However in developing areas and enterprise zones more competitive rates can be achieved. 

Commercial mortgage specialist IFAs are invariably confident that their ability to source and compile mixed packages from the entire market results in better rates than if a business made a direct approach to say a bank.
Employee perks

Competition for skills is getting hotter, so employers may well want to consider providing incentives to help attract and retain staff. Employee perks can range from private health cover to company cars, gym membership or even financial packages including death in service benefits for beneficiaries.

However an increasing number of businesses are realising the latest range of employee share option schemes include significant tax and national insurance cost advantages. In these employees can receive free shares, options to buy them at specified prices after a period of time or buy shares directly, sometimes matched with free ones. IFAs can have a highly valuable input here, assessing each plan’s pros and cons, and then handling the set-up and management so businesses find making a decision not just profitable but time effective too.

HM Revenue & Customs approved schemes are the ones with tax and National Insurance benefits. Taxed plans do not, but may have other aspects that make them more suitable for a particular firm.

Revenue approved plans include CSOP (Company Share Option Plans up to £30,000) and EMI (Enterprise Management Incentives up to £100,000 per individual) are for smaller, younger, higher-risk companies to help them keep selected employees with scarce skills willing to invest their time and expertise in helping such ventures achieve their potential.

SIPs (Share Incentive Plans) and Save as You Earn (SAYE) plans are tax efficient ways to reward all employees. SIPs involve the giving of free shares, buying partnership ones and receiving matching shares all held in a trust. SAYE schemes allow employees to save between £5 and £250 a month for up to seven years with a bonus on completing the plan.

An IFA can help employers find an incentive scheme that is suitable to their needs and fits within their budget. They will also crunch the numbers to identify the most cost-efficient means of providing such incentives, as well as advising businesses on any relevant tax breaks. They may settle on a combination, for example with an Enterprise Management Incentive scheme for directors and a Share Incentive Plan for other staff. They can also advise if the tax conditions change.

The value of the advice from an IFA or an employee benefits consultant in employee benefits and employee share option schemes can be extremely useful to a business.

An IFA can broaden your investment horizons

Although the idea of investing to provide for your future financial security is gaining wider acceptance, for the would-be investor, finding the most appropriate investment can be a daunting prospect.

Consulting an Independent Financial Adviser (IFA) will be an obvious first step for many, particularly those who are looking at the various types of collective investment vehicles available rather than planning to invest directly in shares.

Most of us now recognise the need for some kind of retirement funding, but there is an increasing emphasis on the need for the individual to take out some kind of private provision across a broad range of areas, from healthcare to education.

But while retirement funding is obviously a basic need, a pension plan need not be the only route to providing for your future.

As well as savings vehicles designed for specific purposes – such as school fees provision – there is also a whole range of opportunities open to the investor wishing to generate extra income or build up a capital sum for the future. Additionally, the investor can address the need to provide for dependants in the event of an unexpected loss of earnings.

Direct investment

All the forms of investment open to UK investors can, broadly speaking, be split into two main categories – direct investments, such as stocks & shares, or collective investment schemes.

Firstly, direct investment. For the majority of UK investors, this generally means shares or bonds or gilts. Although the spread of share ownership has widened considerably in Britain since the early 1980s, and with it public awareness of what share ownership means, it is worth reiterating the basic principles.

The price of a company’s shares is determined by the value of its assets and its potential to generate further revenue. If shareholders begin to see the estimates of future revenue as unduly optimistic, or if the value of the company’s assets declines, they are likely to sell their shares and this may cause the share price to fall. If the reverse happens, demand from buyers will increase – thus pushing the share price up.

The trade in stocks and shares, facilitated by market makers whose role is to quote both a buying and selling price for listed stocks and shares, is known collectively as the stockmarket.

Public Limited Companies (PLCs) in the UK are listed on the FTSE All-Share index, with the 100 largest listed on the FTSE 100. Companies wishing to issue shares but lacking the financial muscle for a full market flotation, or new start-up companies, may opt for the Alternative Investment Market (AIM), which means that, in most cases, companies listed on

AIM carry higher risk than those listed on the main stockmarket. For the investor, the drawback to investing in AIM stocks is their lack of liquidity. Market makers will constantly quote buy and sell prices for FTSE stocks, but as trading volumes on AIM are much lower, transactions are conducted using a process known as “matched bargain”. This means the buyer or seller approaches the designated broker who finds a counter party for the deal. However, this in turn means the price agreed by the broker may be some way off the last quoted trading price.

Bond and gilt investment

The second principle form of direct investment is bonds and gilts. Bonds are basically chunks of debt. In buying a bond, the investor is effectively lending money to the bond’s issuer. The investor knows in advance what sort of return they will get on their investment and bonds are generally regarded as a much lower risk category of investment than shares.

Gilts are bonds issued by the UK government – the name derives from the term “gilt-edged stock” – so by buying gilts the investor is lending money to the UK government. As the UK is regarded as a safe bet to honour its commitment to buyers of its government stock, gilts are in turn regarded as one of the safest forms of nvestment. The issuer – in this case the government – is guaranteeing to repay your capital at the end of the bond’s term, (if there is a redemption date) and you also get a guaranteed coupon return throughout its life.

A bond with a face value of £100 will also pay a pre-set figure in interest every year to the holder – the coupon rate. When the rate is set it must be competitive with current interest rate levels but these may change, thereby rendering the return on your bond relatively less attractive than cash deposits. So bonds are traded in the market to reflect this. For example, a bond may be issued at a time when 6 per cent is an attractive interest rate return and as a result your £100 bond may pay a coupon rate of 6 per cent. So you have paid £100 to get £6 per year plus your original investment back at the end of the bond’s term.

But if interest rates jump to 9 per cent your coupon rate starts to look a bit weak. You therefore sell your bond in the market, but no-one will pay £100 to get only £6 a year so you have to sell at a lower figure that builds in the difference in rates.

Of course you can take comfort from the knowledge that you will get your capital back at the redemption date, in this case from the UK Treasury.

But it is not just governments who issue bonds. Corporate bonds work in a way that is broadly similar to government bonds – they are issued by companies as a way of raising money from investors. Again, they pay a coupon rate coupled to a pledge to repay the capital at the maturity date. Like gilts, they can be traded on the market if investors want their capital back before the maturity date.

However, companies can default on corporate bonds, so return of capital is not guaranteed. Corporate bonds are therefore risk-graded, with higher risk bonds paying a higher coupon to attract buyers.

Guaranteed return of capital is clearly an attraction, although it has to be weighed against the potential for higher returns offered by the stockmarket. But while recent years have seen the long-term appreciation of prices in the stockmarket as a whole, the investor cannot rely on every individual company seeing an increase in the value of its shares.

This is the major potential pitfall of direct share investment – any company is at the mercy of conditions in its own particular business sector, and even companies in generally profitable sectors can fall victim to bad times. Correctly identifying which companies to invest in is therefore vital for direct share investment. Warning against putting all your eggs in one basket may seem a little obvious, but relevant in this context.

You should keep a close eye on how your investments are doing. Potential investors often find the prospect of constantly keeping tabs on their share portfolio too daunting and for this reason – as well as those outlined previously – many opt to take their first step into these markets via collective investment schemes rather than direct stocks and shares investment.

Pooled investment schemes

In the UK there are three principal types of mainstream collective or pooled investment schemes – unit trust, investment trust and Open Ended Investment Company (OEIC).

All three will take the pooled monies of a large number of investors and put them in the hands of a professional fund manager. He or she will choose a broad spread of instruments in which to invest, depending on their investment remit. The main asset classes available to invest in are shares, bonds, gilts, property and other specialist areas such as hedge funds or ‘guaranteed funds’.

There are key differences between the three types of scheme structure.

Unit trusts

An investor in a unit trust ‘buys’ a number of units, while an investor in an investment trust or OEIC ‘buys’ shares. Unit trusts are open-ended, which means that units can be issued as demand requires. The price of these units is dependent on the value of the underlying assets, and they can be sold back to the fund managers by the investor. Most UK collective investment schemes are authorised by the Financial Services Authority (FSA).

Investment trusts

Investment trusts are structured as companies so their shares are traded in the same way as any other limited company’s shares. Investment trusts offer a wide range of investments.

Open Ended Investment Companies (OEICs)

The OEIC is structured along similar lines to the unit trust, but it differs as it has no bid/offer spread. This means buyers and sellers get the same single price. Additionally, the OEIC has an “umbrella” structure allowing numerous sub-funds investing in different types of assets, so the investor can switch easily between different investment funds.

Given the range of options of unit trusts, investment trusts or OEICs, the choice can be confusing – consulting an Independent Financial Adviser could help simplify your investment choice.

Index trackers and active management

Among the various types of fund management, two definite methods have emerged – active management and index tracking.

Proponents of these two approaches debate over their respective merits, but many observers have concluded that a “horses for courses” attitude is appropriate for investors.

Through research and analysis an active manager will seek to identify companies which he or she believes will perform better than their rivals, or whose current share price makes them a bargain buy. Potential returns depend on whether the manager gets it right or wrong.

An index tracker fund tracks a stockmarket index. Having decided which recognised market index is most appropriate for the tracker fund, the manager (often a computer rather than a person) will invest in such a way as to replicate the make-up of that index. In times of good stockmarket performance tracker funds are attractive.

But the critics of tracker funds point to two potential drawbacks. Firstly, if the index falls, the fund must go with it. Secondly, the cost of running the fund – administration fees, management fees, etc, can mean that tracker funds’ performance is just below that of the index itself.

Active managers argue that their skills allow them to produce better returns than the market average, and hence the index, as well as to avoid the worst of any market falls by switching away from the worst-affected shares. “Ah yes…”, say the trackers, “…but how often do the active managers actually beat the index?”

The debate rages on, but the argument serves to reinforce the importance of getting good independent financial advice.

There are hundreds of collective investment schemes to choose from. The services of an Independent Financial Adviser can greatly simplify the investment process.

Investment. The profits and perils

So why should the saver, who has been content to build up a nest egg in a deposit account, move into the riskier area of investment in equity or bond markets? Well, the main reason is the chance of a higher return than can be obtained from deposit accounts. If the investor is prepared to be patient, mainly types of investment are not for the short term, over time he or she should be able to expect a higher return.

The investor must also consider the question of risk. In a low interest rate environment the return on your deposit account may decrease, but there is no threat to your capital. Investing in shares is different. Potential returns can be much greater than those offered by cash deposits. But if the shares in which you have invested were to fall in price, there is a real threat to your capital itself. If you are forced to sell your shares at a time when they are performing poorly, you could actually end up with less money than you started with.

An Independent Financial Adviser can help establish what level of risk you should take with your investments.

Direct investment 

Direct investment in shares is conducted through stockbrokers who will buy or sell shares on your behalf for a commission. Terms will vary from one stockbroker to another but commission will be charged as a flat fee or a set percentage.

If you intend to actively manage your share portfolio by regularly buying and selling different shares then the commissions will start to stack up. The shares which offer the greatest potential for high returns may also present the greatest risk to your capital. So unless you intend to invest directly in a broad range of stocks and shares, you should probably consider a collective investment scheme instead.

Collective investments

• Unit trusts and OEICs can be bought directly from the provider of the fund or more commonly, through an Independant Financial Adviser.

• Investment trusts are most commonly bought through a stockbroker, but again an IFA can also advise on their purchase.

Details of funds and fund providers are published in a range of specialist financial publications as well as sections of the national press.

Investing online

Use of the internet has opened up another access route for investors. Many providers now offer their funds via websites. However, given the range of investments and the amount of information available it is a good idea to seek professional, independent financial advice before proceeding.

Tax efficiency

If you are looking to invest directly in shares or bonds or collective investment schemes, a tax-efficient method of doing so is through an Individual Savings Account (ISA).

An ISA is not an investment in itself – it is a tax-efficient “wrapper” which you may use to hold a range of investments.

As the UK’s principal tax-efficient investment plan, an ISA can incorporate a stocks and shares element within which you can invest up to £7,200 for the 2008/2009 tax year. Up to £3,600 of this allowance can be saved in cash with one provider.  The remainder of the £7,200 can be invested in stocks and shares with the same or another provider.

Within the stocks and shares element of an ISA you may invest directly in shares or bonds or collective investment funds.

It makes sense to take advantage of all the existing tax allowances and your IFA will be able to help you do this.

Offshore investment

In specific cases, offshore investment may be worth considering. From the UK perspective, offshore funds have traditionally been used mainly by expatriates. Because UK expatriates do not generally pay UK income tax, it makes sense for them to invest in funds based in a low-tax centre such as Luxembourg or the Channel Islands. However, some funds, accumulation funds in particular, can offer a tax efficient use of offshore funds to the UK resident.

If you are a UK expatriate intending to return only on retirement when your tax status will be more favourable, there are benefits in keeping your investments offshore.

Funds based in an offshore centre are generally not covered by the regulations which govern their UK-based equivalents. This means the investor does not always enjoy the same level of protection offered in the UK. Funds based in several of the larger offshore centres are deemed to meet UK regulatory standards where that centre has been granted “designated territory” status by the UK. Such funds can be marketed in the UK, as can funds based in the European Union and approved under the EU’s UCITS (Undertakings for Collective Investments in Transferable Securities) regime. If this all begins to look like a minefield, that serves to highlight the importance of getting independent financial advice.

As well as offering tax advantages, lighter regulation in offshore centres means funds can invest in a much wider range of markets than most onshore vehicles – a big attraction for the more adventurous investor.

But do remember that capital and income values may go down as well as up and you may not get back the amount invested, also exchange rate variations may cause the value of overseas investments to increase or decrease. Past performance is no guarantee of future performance.

But the offshore sector presents all manner of pitfalls for the unwary, so for investors considering a move in this direction, getting specialist advice is of paramount importance.

Here the services of an IFA with specialist knowledge of the offshore market can prove invaluable.

Questions and answers

Whatever the nature of the investments you are considering, the starting points should be the same. An Independent Financial Advisor will be able to help you identify the type of vehicle best suited to your needs, based on your own preferred balance between risk and return.

Most obvious among the questions you should ask is “How much will it cost?” All collective investment schemes have built-in charges, but these vary, so ask your IFA to explain. For the newcomer, the charges can be difficult to understand so it is important that this is explained properly.

Another key factor is how long you intend to invest. Make sure your IFA understands your wishes clearly when it comes to short, medium and long-term investments. Lastly, make sure you understand all the risks of your chosen investment.

Why should you save for your retirement?

Saving for your Retirement

Retirement might seem like an awfully long way off, especially if you’re still paying off your student loan, furiously saving to get a foot on the housing ladder, or have a young family which are burning a rather large hole in your pocket. But you could end up spending more than 30 years in retirement, so it’s essential to make plans to save into a pension, keep a close eye on how much you’re saving, what investments you are choosing and what level of income in retirement you will get.

Before looking at providing for yourself you should check what your entitlement is for the State Pension and what you may get from any employer schemes you belong to now or have belonged to in the past.

What can you expect from the State

The basic state pension from the government will give you a start, but you can’t rely on it! The current full weekly allowance for a single person is £90.70 and £145.05 for a couple (up until April 2009). This adds up to around £393 a month if you’re on your own. Think about how much you’re earning now. The state pension isn’t much is it?

However, not everyone actually qualifies for a full state pension. It depends on how much National Insurance (NI) you’ve paid during your working life. A woman with a working life of 44 years will need 39 qualifying years of making NI contributions for a full state pension, and a man with a working life of 49 years will need 44 qualifying years.

The good news is that from 2010 the number of years of NI contributions that need to be paid to gain a full state pension will be cut to just 30, for both men and women.

The government has also taken note of how much longer people are living nowadays and will be increasing the state pension age so people will have to work longer before they get their state pension.  (For more details see ‘Pensions have gotten a lot simpler’).

Employer pensions are becoming less generous

One more thing to think about on top of the lowly state pension is that pension schemes provided by employers are on the whole becoming less generous. While your parents and grandparents probably benefitted from a final salary pension scheme (also known as a defined benefit scheme) at the companies where they worked, changes in regulation, volatility in investment markets and longevity increases have made it difficult and expensive for employers to continue offering them.

The pension income paid by a final salary scheme is calculated as being a percentage of your salary multiplied by your years of qualifying service. But these pension schemes are now few and far between and the final salary schemes that do exist are rapidly closing to new members.

The type of employers pension scheme that is replacing final salary schemes is called a defined contribution pension scheme (also known as a money purchase scheme).

A defined contribution pension scheme places the responsibility on you, and if applicable, your employer, to pay contributions into the scheme. You can’t rely on the guarantee of knowing what the value of your pension benefits will be as provided by a final salary scheme. You have to choose the funds or assets your pension fund is investing in and you need to ensure that you are paying enough into the scheme to be fairly sure that a sufficient pension will be paid to you when you retire.

17% of people don’t know what pension their employer provides, according to Towers Perrin research, so make sure you’re not one of them!

Ask your employer what pension schemes they offer. If you can join a final salary scheme you may be best served doing so. If you are able to join your employer’s defined contribution pension scheme you need to decide where contributions  into the scheme are invested and find out if your employer will pay money into your pension. 

If you’re in pension scheme where the onus falls on you to make the decisions about how to invest the contributions, this may sound daunting. You should talk to an independent financial adviser to help guide you through your choices.

Remember, turning down employer’s contributions which would be paid into an employer’s occupational pension scheme is akin to turning down a pay rise, so think carefully before you make a rash decision and decide there’s no point joining

To find out where you stand in terms of making pension provision, your first step should be obtaining a state pension forecast from the Department of Work and Pensions’ Pension Service by calling 0845 3000 168, and then have a look at ‘How can you save for your retirement’ for details of different pension and savings vehicles available to help you plan for your retirement. A visit to an experienced and qualified IFA will help you with your pension choices and will explain what you need to do with your financial plans to have a comfortable retirement.

How can you save for your retirement?

So if you want to save for yourself, instead of relying on the State or your employers, what can you do?  There are two main ways you can save, in an Individual Savings Account (ISA) and a pension plan, both of which have advantages.  With the former you can take the money out for say a deposit on a home, and with the latter, as you cannot access the finds when you want, your will have the peace of mind that a pension fund will be there for your golden years.  It makes financial sense to get the best of both worlds and save in ISAs and a personal pension.

ISAs

Individual Savings Accounts (ISAs) are a great way to save. They are available to individuals who are UK resident for tax purposes. The minimum contribution levels are low and ISAs are available to those aged 16 and over for a Cash ISA or aged 18 or over for a Stocks and Shares ISA. You can contribute up to £7,200 a year into an ISA and gain gross interest.  You can also withdraw money from the majority of ISAs whenever you want.

There are two types of Individual Savings Accounts, a cash ISA or a stocks and shares ISA.  You can invest up to £7,200 in stocks and shares in the 2008/2009 tax year in an ISA.  Up £3,600 of this amount can be saved in cash with one provider.  The remainder of the £7,200 can be invested in stocks and shares with the same provider.

Personal Pensions

With a pension plan you can contribute up to 100% of your salary into it (to a maximum of £235,000 for 2008/2009) and receive tax relief.

The tax relief is generous as for every 80p a basic taxpayer contributes to a pension, the government will add 20p. For a higher rate taxpayer, they will receive 40% tax relief, meaning they will pay just 60p for it to be topped up to £1 by the government.

It may be that you have to make your own pension provision. If so, you should consider saving in a personal pension plan. You can also save into a personal pension plan if you are a member of an employer’s pension scheme.
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A straightforward personal pension plan is a “stakeholder” personal pension plan which is a type of low-charge pension in which you can save from as little as £20.

Or you could choose a personal pension which often offers a wider investment choice than what’s available with a “stakeholder” personal pension. But do be aware that personal pension plans often have higher minimum contributions and the charges could be higher too.

Self invested personal pensions (Sipps) are another type of personal pension plan which are for more sophisticated pension investors as there are very few restrictions on what you can invest in. But do be aware that SIPPs can have high fees because of the width of the investment choices. There are well over 50 Sipp providers so speak to an Independent Financial Adviser to see if a “stakeholder” personal pension plan, a personal pension plan or a self invested personal pension plan is right for you.

How much should I save?
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The earlier you start to save, the more potential your pension savings have to grow. It’s far better to pay a realistic percentage of your earnings into a pension as soon as you start earning, than to suddenly panic when you get to the age of 50 and realise that you will have to pay in hundreds of pounds every month if you want to get a half-decent pension.

Of course you need to be careful to strike the right balance in how much you save. Think carefully about how much income you might need before you retire – have you factored in children’s university fees, what you would do if you were suddenly made redundant?

An Independent Financial Adviser will be able to help pinpoint how much you should save so you can have a comfortable retirement, but without leaving you short in the meantime.

If you want to get an idea about how much your savings could be worth when you retire, or if you want to find out what you should be putting away and the impact of delaying starting saving for a few years – then have a look at our useful Cost of Delay tool.

Pensions have gotten a lot simpler

Much has changed recently, and will be changing over the next few years, that will impact your savings plans and retirement.  Here we highlight the major changes.  Remember if you have any doubt over what is the best course of action for you, visit an independent financial adviser.

Pension Simplification and what it means to your pensions savings

From 6th April 2006, so-called “A-Day” or pensions simplification, life got simpler for retirement savers as the government brought in a new simplified set of rules, effectively shelving the eight previous tax frameworks for pensions.

One change is that all pension policyholders will be able to take 25% of the value of the fund as a tax-free lump sum, when they come to take benefits. This levels the playing field between different pensions.

It’s a good idea to re-consider which pension arrangements are the most attractive to you with the help of an expert IFA.

Another new rule is that you and your employer will be able to pay up to one annual allowance into your pension. This amount is up to 100% of your earnings and for the tax year 2008/09 is capped at £235,000, with the limit set at £3,600 for low or non-earners paying into personal and stakeholder pensions.

A further move designed to encourage us to save more is the greater ease with which people can save into a number of different pensions at the same time under the new rules.

As well as the annual allowance, there is also a limit on your entire pension savings, including any private pensions, occupational pensions and free-standing additional voluntary contributions.

In the tax year 2008/2009 this amount is £1.65m, with the threshold expected to rise over the years to allow for the impact of inflation.

Introducing one lifetime limit for pension fund size effectively bins the sometimes complicated calculations savers could be forced to work through. If you exceed £1.65m, you will be hit by the new lifetime allowance charge, or recovery tax, which will be charged at up to 55%.

A pension fund of more than £1.65m might sound like the preserve of the very rich, but it is likely that more individuals than they realise will be in danger of breaching the lifetime limit.

If you have already breached the £1.65m threshold or are concerned about doing so, you are strongly recommended to seek professional advice.

Changes to the State Pension

The state pension system is also experiencing a considerable shake-up.

The Pensions Act 2007, which became law on 25 July 2007, made changes which will, generally speaking, affect people who reach state pension age on or after 6 April 2010.

At the moment, the basic state pension is paid to women at age 60 and men at 65.

But from 6 April 2020, the state pension age for both men and women will be 65. In 2024, it will rise to 66, in 2034 it will be 67 and then in 2044 it will reach 68.

However if you were born before 6 April 1950, the changes won’t affect you.
These rises are in response to the fact that people are living much longer, and it is becoming a burden for the government to support pensioners from the age of 65.

While working longer may seem like bad news, the good news is that the number of years’ national insurance contributions people will need to achieve a full basic state pension will reduce to 30, for both men and women, from 2010. This is a significant reduction from the current requirement of 44 years for men and 39 years for women.

Another change is a plan to re-link the state pension with earnings, rather than inflation, in 2012.

Because earnings accelerate faster than inflation does each year, the state pension will become more generous.

The fourth big change for state pensions is the move of the state second pension to a simple flat rate. If you think this may affect you, seek professional advice from an experienced IFA.

Personal Accounts – the new workplace pension plan from 2012

I hope you’ve digested all of that, because the government has proposed even more changes on top.

In the same year that the capital is hosting the Olympics, a new model of pension saving is planned, called personal accounts.

All employees aged 22 and over and earning more than £5,000 per year, who aren’t offered access to an employer pension arrangement, will be auto-enrolled into personal accounts in 2012.

You do have the chance to opt out, should you wish. But if you don’t let your employer know that you have opted out, you will automatically join the scheme and pay 4% of your salary into it.

Your employer will contribute 3% of your earnings, and an extra 1% from tax relief will be added in making a total of 8%.

So, if your employer doesn’t offer a pension scheme at present, they will have to offer personal accounts and it may be a good idea to stay opted in as you will receive employer contributions, a bit like a delayed pay rise.

However, as some means-testing issues have yet to be ironed out with regards to personal accounts, it may be worth seeking financial advice about whether you should opt out or not.

Finding A Pension IFA

The range of qualifications an IFA can have in order to be able to give specialist pensions advice is expanding, reflecting the changes taking place with pensions regulation. When choosing for an adviser to give you pensions advice, there are other qualifications for consumers to watch out for such as the advanced pensions paper, “G60”, or “AF3”, exams “J04” and “J05”, which deal with post-retirement planning, and the APMI pension qualification. There is also the pensions simplification paper CF9.

Those shopping around for independent financial advice should be sure to enquire about the qualifications an adviser has, but should also bear in mind it might be as helpful and meaningful to enquire about an adviser’s experience in certain areas.

Many IFAs offer the first half hour consultation free of charge, giving you an opportunity to find out more about their expertise and how they will be able to help you.