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Reducing the risk of acquiring wealth

If you require your money to provide the potential for capital growth or income, or a combination of both, provided you are willing to accept an element of risk pooled investments could just be the solution you are looking for. A pooled investment allows you to invest in a large, professionally managed portfolio of assets with many other investors. As a result of this, the risk is reduced due to the wider spread of investments in the portfolio. 

Various funds available are based on:

Income or growth needs, such as: –

income funds providing high dividends
capital growth funds
balanced funds which aim to achieve a mix of both

Geographical allocation, such as:

UK funds

international or specific regional funds (e.g. Far East)

Specialist funds which invest in a specific type of company, such as a property or technology fund.

The main vehicles for pooled investments are:

unit trusts
open-ended investment companies (OEICS)
investment trusts
insurance company funds

Pooled investments are also sometimes called ‘collective investments’. The fund manager 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’.

Benefits of pooled investments include:

Professional expertise – you arrange for an investment expert to pick investments for you, to watch those investments daily and judge when to sell them.

Spreading your risk – even if you have small amounts to invest, you can spread your money across a wide range of investments. You reduce the impact on your investment if, say, one company performs badly. Pooled investments will invest in one or more asset class.

Reduced dealing costs – if you want to buy a range of different investments directly, you would probably only be able to invest a small sum in each. This means dealing costs could reduce your profits significantly. By pooling your money, you make savings because of bulk buying.

Less administration – the fund manager handles the buying, selling and collecting of dividends and income for you. They also deal with foreign stock exchanges and brokers.

Choice – there is a very wide choice of funds so that you can pick one – or many – that suit you individually.

Most pooled investment funds are actively managed. The fund manager researches the market and buys and sells assets with the aim of providing a good return for investors.

Trackers, on the other hand, are passively managed, aiming to track the market in which they are invested. For example, a FTSE100 tracker would aim to replicate the movement of the FTSE100 (the index of the largest 100 UK companies). They might do this by buying the equivalent proportion of all the shares in the index. For technical reasons the return is rarely identical to the index, in particular because charges need to be deducted.

Trackers tend to have lower charges than actively managed funds. This is because a fund manager running an actively managed fund is paid to invest so as to do better than the index (beat the market) or to generate a steadier return for investors than tracking the index would achieve. However, active management does not guarantee that the fund will outperform the market or a tracker fund.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

Make sure that your numbers add up

School fees planning is something that requires a great deal of early thought and preparation. The earlier you start planning, the greater the potential to benefit from investment gains and the greater the choice available about how you can invest in your child’s future education. Having decided to educate your child or children independently, it is important to take appropriate advice to ensure the continuity of their education.

It is also essential to be fully aware of the ongoing financial implications and to be confident that you can afford the fees throughout the selected term. You may currently be looking to spread the cost of fees, either by paying for the fees by investing a lump sum or arranging a regular savings vehicle to provide funds to cover future fees.

There are a number of schemes available that are designed to help you spread some or all of the school fees. The purpose of these plans is to improve your cash flow and hence make school fees more affordable.

If you find yourself in the position of having a lump sum that you could invest specifically to meet the cost of future school fees, there is a range of plans open to you. Early investment of capital may at best avoid the need to use income for providing for school fees in later years, or at worst go a significant way towards reducing reliance on income.

The tax efficiency, flexibility of approach and your attitude to investment risk are important considerations. In addition, there could be opportunities for the effective use of trusts as part of the planning process.

Regular savings for school fees can also help pay for future costs and should be started as soon as possible. The longer you save, the less impact there will be on income when school fees fall due. There are many plans available that can be tailored to your individual requirements, leaving you with the flexibility to use funds at your discretion.

Trust planning can also be useful for grandparents who wish to make provisions for school fees and achieve inheritance tax benefits at the same time. However, trust planning is not suitable in every situation. Trusts offer the benefit of transferring the tax liability on future income and capital gains to the children to utilise their personal annual allowances. Chargeable gains on life policies may also be re-assigned, which could avoid a higher rate tax charge. It is important to take professional advice on the correct trust arrangements for the investments held.

It may also be possible in some circumstances to transfer an existing capital gain to the trust, avoiding the need to settle the tax bill on transfer. The capital gain will later be assessed against the beneficiaries or the trustees; however, indexation relief will be lost.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

Navigating through the minefield of choices

If you’re thinking of retiring soon, we can help you navigate through the minefield of choices that you are likely to face and ensure that you receive the pension and other benefits you are entitled to.

You may be entitled to a basic State Pension (and an additional State Pension) if you’ve reached State Pension age and you, or your husband, wife or civil partner, have paid or been credited with sufficient National Insurance Contributions.

If there are gaps in your contribution record, then you might want to consider paying extra contributions to get more State Pension. If you have taken time out of paid work to have children or care for someone, your right to the State Pension may be protected during these periods by Home Responsibilities Protection.

Usually, you will get an invitation to claim your State Pension four months before you reach State Pension age. If you haven’t received this three months before you are due to retire, get in touch with the Pension Service.
You can delay claiming your State Pension when you reach State Pension age, or choose to stop claiming it after you have already claimed. This allows you to build up extra income or to get a taxable lump-sum payment.
How and when you get your work pension depends on what type of pension scheme you belong to, so find out from your employer what you have. This could be an occupational salary-related (also called defined-benefit or final-salary) scheme, an occupational defined-contribution (or money-purchase) scheme, or a Group Personal or Group Stakeholder pension plan.

Remember that if your pension is directly dependent on investment returns, it will affect the level of income you’ll get in retirement.

You can draw a pension from your employer’s occupational scheme and carry on working, so long as the scheme rules allow this.

You may have a personal or stakeholder pension if you were self-employed at any time or if your employer didn’t offer an occupational scheme. Both are money purchase pensions and are dependent on investment returns, so this will affect the level of income you’ll get in retirement. You don’t have to stop work to start drawing a personal or stakeholder pension.

If you’ve worked for other employers or may have other private pension schemes, such as a personal or stakeholder pension, contact the companies involved. If you’ve lost track of a pension you had, you can contact the Pension Tracing Service.

If you’ve contracted out of the State Second Pension (formally SERPS) you could have a personal or stakeholder pension into which your rebates have been paid.

If you’ve been working and saving into a personal or work pension, you will have the option to take some of it (up to 25 per cent) as a tax-free lump sum when you retire or to leave it invested in your pension fund. If you take a lump sum, this will reduce the amount of money left to provide you with your income in retirement. Think about whether you want to take it and what you plan to do with it.

After deciding whether to take any tax-free lump sum, you then usually have to convert what’s left of your pension fund into income. For most of us, this will mean buying a lifetime annuity. If you have a wife, husband or civil partner who depends on you, you will need to consider whether you want to buy a joint-life annuity.
If you have a salary-related pension scheme, you don’t have to buy an annuity, as your pension will be paid to you direct.

If you’re ready to buy an annuity, talk to us so that we can discuss with you what your pension provider is offering and then shop around and compare annuity rates to find any other better deals that may be available.
The income you get from your pension fund is usually taxable. You may pay less tax once you retire, so check you’re not paying more than you have to.