Overseas assets

 Investors should not delay in disclosing their assets

With the latest HM Revenue & Customs (HMRC) campaign aimed at targeting investors with overseas assets, some investors could be worried about the impact this could have on their overseas investments, and others could be put off from investing overseas altogether. However, it’s not all doom and gloom. Once assets have been appropriately disclosed, there are ways in which the investments can be restructured, or new investments made, to make them more efficient going forwards.

Minimise the administrative burden
There has been a genuine market available for people to invest overseas for many years, and people should not be discouraged from this method of investing in the fear that it is somehow not above board. Providing assets are disclosed accordingly (and for new investors the investment will likely be coming from an already disclosed source), there are many ways in which assets can be structured to minimise the administrative burden and tax liability.

Once assets are disclosed, they become visible to the UK authorities and investors will need to start reporting on the assets every year via their tax return. Tax will have to be paid on an arising basis; therefore, any proposed active management by the investor will lead to more onerous tax reporting via self-assessment, as investment decisions will need to be balanced with tax considerations.

Greater control
This particular tax and reporting scenario can be delayed if the assets are restructured into a single premium offshore bond. Once the assets are held within the offshore bond, the investor gains much greater control over the timing and nature of any events that are chargeable to tax. All taxes are deferred within the structure (except for any withholding taxes that cannot be reclaimed on income or dividends received), and only on a planned encashment would a tax situation arise.
Investors are then able to use the advantages the offshore bond brings to manage any tax events, by using features that work uniquely well for offshore bonds, such as assignment, change of tax residence and top slicing. However, the biggest area which many investors may see a tax advantage is with regards to Inheritance Tax (IHT) planning.

New disclosure requirements
Investors often believe that money held offshore will not fall into the UK IHT net; however, this is not correct. Whilst assets held offshore have always been subject to IHT, these assets were not necessarily visible to the UK authorities and hence not always disclosed. All this is now changing as new disclosure requirements take hold. These assets will become visible and completely open to scrutiny by the UK tax authorities.

This could severely impact estate planning for some investors, as UK IHT is set at a substantial flat rate of 40%. Placing an offshore bond into a trust can help reduce this IHT liability and help with estate planning and tax mitigation. Trusts can also ensure the right people get the right proportion of assets at the right time, helping with succession planning, and can enable funds to be paid out on death without any delay as the need for probate is removed.

The value of investments and income from them may go down. You may not get back the original amount invested. This information sets out the basics of portfolio diversification. It is not designed to be investment advice and should not be interpreted as such. Other factors will need to be taken into account before making an investment decision. The value of an investment can fall as well as rise and is not guaranteed. You may get back less than you put in. Past performance is not a guide to future performance.

Enjoy the time of your life

Have you given full consideration to your long-term pension investment strategy?

Reviewing your 
retirement planning
Having a pension today is recognised as just one important step along the path to achieving your dreams once you have stopped working. Now, not only must you carefully consider where you actually invest your pension money and how you are going to use your pension, but if appropriate you should also review other forms of retirement savings. Reviewing your retirement planning is critical, and probably the single most important decision you can make to help you realise your long-term goals.

Different investment choices produce different results. It’s essential that you review all your retirement investments to make sure they are heading in the right direction. If your circumstances change, some investments may no longer be appropriate. It’s important to get these things right as you will be relying on the provisions you make now to generate income after you retire.

Factors that will 
determine your strategy
When building or reviewing your pension portfolio there are a number of factors that will determine your strategy, including the level of risk you are willing to take. This is likely to change throughout your life, which means your investment strategy will also need to change. Receiving professional financial advice plays a vital role in helping to make sure that your pension holdings match your risk profile and your investment goals.

Typically, people in the early years of the term of their pension may feel they have time to take more risks with their investments to increase the potential for higher returns. As they approach retirement and the duration of the investment is shorter, they may prefer more predictability to start to plan for their future after work. Alternatively, if they have reached their pension age and are still investing part of their fund while drawing benefits, they may prefer to keep an element of greater risk in return for higher potential growth.

When it comes 
to retirement planning
Your 40s is ‘the golden decade’ when it comes to retirement planning. This is when you should be putting as much as possible into your pension to give your contributions time to grow.

In your 50s you may want to start making decisions about your retirement. If you are going to convert all of your retirement funds into income the moment you retire, you may wish to start reducing risk now. If you expect to keep it mainly invested, you may wish to keep a good weighting in investments based on shares. After all, with the growing trend towards taking work in retirement, many people may feel they can afford to keep their pension invested for longer while drawing an income.

Delaying the start of your retirement provision will have an obvious impact on the potential growth of your pension. Not only will the time period for growth potential be reduced, but you could also be passing up the opportunity for valuable tax relief.

Streamlined pension regime
Pensions have always provided a highly tax-efficient environment for long-term retirement investments. However, in April 2006, a streamlined pension regime introduced a number of extra benefits, including the potential to contribute larger sums into your pension fund when the timing is right for you.

Since the rules were simplified, pensions have become easier to navigate. Whether you have occupational pensions, personal pensions or both, you now have one overall annual and one Lifetime Allowance for pension savings. You can save as much as you like into any number and type of registered pension schemes and receive tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year towards a pension from which you benefit from tax relief is subject to the ‘Annual Allowance’. The Annual Allowance 
for the tax year 2013/14 is £50,000.

Excess taxed on income
The Lifetime Allowance, the amount you can save in total in all your pensions, is for most people £1.5 million in the current tax year 2013/14. It applies to all the pensions you have, excluding your State Pension. In 2014/15 the Lifetime Allowance will reduce to £1.25 million. If you save more than this, you will be taxed on income from the excess at an effective rate of 55 per cent if taken as a cash sum, and 
25 per cent if taken as pension benefits. These charges are on top of any income tax due on the pension payments.

Consolidating funds
Another feature of pensions is that you can consolidate payments from one UK registered pension scheme to another. This could be either to access different benefit options or simply to consolidate your funds in one place. It is important to note that there are costs involved, and obtaining professional financial advice is essential to ensure that you take the appropriate course of action for your specific situation.

If you have more than one pension plan in your name, there could be a number of advantages to consolidating all your plans into one. Having one pension can make it much easier for you to keep track of funds, monitor performance and change strategy if necessary. Consolidation may also cut down on paperwork and could make estate planning simpler.
Again, it’s possible that consolidating pension funds may not be beneficial for your particular circumstances. You should always receive professional financial advice before deciding if it is the right course of action for you.

Post-retirement
The array of post-retirement options is vast and will need to be considered carefully. The best option for you will depend on factors such as the size of your fund, your ongoing involvement, the risk you are willing to take and the level of benefit flexibility you want.

Annuities have long been the mainstay of turning your retirement pot into income. When it comes to buying a pension annuity you can choose from any provider in the market, with the option of inflation-proofing it or buying a guarantee so that it continues to pay out for a set period of time. You might also want an income to continue for your spouse after your death. All these options will reduce the amount you initially receive.

You have other options besides buying an annuity, such as using a drawdown facility and leaving your pension invested but receiving an income from the fund. If you do this, you can still take your 25 per cent tax-free lump sum out of your pension.

There are many choices to make during the pre- and post-retirement years. However, these choices are some of the most important you will ever make, so careful consideration is essential in order to safeguard your financial future and give you the retirement you are dreaming of. We can provide professional help and advice on retirement planning, so please contact us to arrange a meeting.

Some occupational schemes may not be able to offer you all the options referred to within this article. While annuities are generally guaranteed to be paid, remaining invested and using drawdown means that the value of your pension, and the income from it, can go down as well as up. Therefore there is a chance that you may not get back as much as you would by using an annuity. Drawdown is a high-risk option which is not suitable for everyone. If the market moves against you, capital and income will fall. High withdrawals will also deplete the fund, leaving you short on income later in retirement. The value of investments and the income from them can go down as well as up. You may not get back as much as you invested.

Desperately Seeking income

Yields have dropped across the asset classes, except

for equities

He may only have been in the job for just over six months, but Mark Carney, the Governor of the Bank of England, has already signalled his intention to do things differently and this is most noticeable in his concept of ‘forward guidance’.

Ongoing problem in the UK’s productivity levels

In the past, the Monetary Policy Committee minutes focused their thoughts on the current situation for the economy, the dangers for inflation and their plans for interest rates. However, Mark Carney has added in a commitment (albeit with a few caveats) that they won’t even consider increasing interest rates until unemployment drops below 7%. This is designed to help the Bank address an ongoing problem in the UK’s productivity levels, which appear to be well behind those of other developed economies.

An investor’s point of view

However, from an investor’s point of view, the consequences of this promise might be somewhat stark. Based on the Bank’s projections, it looks like rates could stay where they are until the third quarter of 2016 at the earliest. That said, these things are never quite as simple as they appear – and in this case, the market doesn’t appear to agree with the Bank. The UK’s borrowing costs continue to rise and many traders are predicting that rates will actually go up in late 2015.

Funding for long-term growth

There are now some indications the Bank may use quantitative easing to bring the market in line, but even if it doesn’t, investors could be facing two years of rock-bottom income from their cash investments. As a result, many are being forced to look further afield for a higher income and are discovering the benefits of equity income funds. These are funds that invest in established companies paying regular dividends. Investors can choose to have this income paid directly to them or reinvest it back into the fund for long-term growth.

Achieving a decent income

It’s easy to see the appeal of equity income in this environment. Equities are the only major asset class that has managed to increase its yields over the six years since the financial crisis started[1]. In addition, UK equities towards the latter part of 2013 were yielding 3.7%, which is significantly more than cash and UK government bonds did[2]. It is important to remember that this is not guaranteed and past performance is not a guide to the future.

Higher-yielding shares

Of course, the current market situation isn’t the only reason to choose a fund that focuses on higher-yielding shares. For a start, these shares actually tend to outperform lower yielding stocks over the years[3] – and their prices don’t tend to fluctuate in value as much. In part, this performance may be down to the dividends themselves. Companies don’t like to cut their dividends, so even if their share price is falling, they will try to maintain (or even increase) their payments, which helps protect an investor’s total returns.

Helping the share price rise again

What’s more, when the share prices of these companies fall, their yield (the dividend they pay, expressed as a percentage of the share price) goes up. A high dividend yield that is seen as sustainable can attract more investors and this interest may then help the share price rise again. It’s also the case that dividends are normally paid by larger companies and these businesses tend to be comparatively lower risk.

An option for long-term growth

When the income payments are reinvested, they provide investors with a second source of returns. Over the long term, compound growth can magnify these returns dramatically – nearly 60% of the total return from UK equities can be attributed to the reinvestment of dividends over the past 25 years[4].

Accessing this potential

There are two main types of equity income fund. Some focus on the UK, which has a long established dividend culture, while others aim to benefit from the greater opportunities offered by a global approach (as a rule, the global funds are considered riskier than the UK-focused ones).

Looking ahead

The start of 2014 could be a good time for investors to explore new options, particularly as inflation will be silently eroding the value of their savings if they leave their money in cash. Equity income funds could give you a steadier ride, while the dividend payments have the scope to provide an income or help boost returns through all conditions.

Source:
[1] Datastream 30.09.13
[2] Datastream 09.10.13
[3] Citigroup 30.09.13 in US$
[4] Datastream 01.09.88 to 30.08.13 based on the FTSE All-Share Index
Past performance is not necessarily a guide to the future. The value of investments and the income from them can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.