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Many self employed business people use the proceeds from the sale of their business for their pension. But is this the best way to fund your retirement income?

To help you consider the options available we have put together a comparison between paying into a pension to fund your retirement and selling your business. I always think that putting you’re eggs in one basket can be dangerous so using a combination of the 2 methods is a safer bet. However speaking to a financial adviser could help you decide which is the best method for you.

Relying on your business

Investing in a pension

How you choose to plan is up to you. You should ask a financial adviser to do a financial health check to ensure you will have enough to retire.

These days there is no such thing as a job for life. Today’s school leavers can expect to have as many as 12 jobs within their working life. If you start a new pension every time you move employers, then before long you will have lots of different pensions all over the place. Many of these preserved pensions may be forgotten about and keeping track of how much each is worth and what they could be worth when you retire can be a nightmare.

There are many reasons why you may want to transfer you’re pension to another provider although consolidation of lots of pension pots is a common reason. Each of the reasons why transferring a pension could be beneficial will be looked at below:

Investment Performance – Ultimately the performance of your pension will have a massive impact on how much you will have at retirement. If you have several different plans with no overall investment strategy then you may find many are underperforming and unsuitable. By transferring all your pensions to one plan you can benefit from a single tailored investment strategy.

Lower Charges – Due to the economies of scale the charges on one big pension is likely to be smaller than those of several smaller ones. Many older plans also have much higher charges than the more modern alternatives. One thing to consider though is the cost of transferring. Some providers have market value adjusters. A financial adviser will check on this before a pension transfer carried out.

Flexibility – Older pension may not have much or none investment choice. Many of the with profit pensions are seriously underperforming. Newer modern pension have unlimited flexibility some with a self invested element and others with massive fund choices.

Venture Capital Trusts were brought out in 1995. This was to encourage people to invest in unquoted companies. It is now possible for VCTs to invest in smaller companies that are quoted on the Alternative Investment Market. A Venture Capital Trust is a company that is listed on the stock exchange that you buy shares in. Its main purpose is buying and selling of smaller companies shares with the aim of making both capital and income.

This form of investment is high risk however with risk comes larger potential reward.  It is a type of pooled investment because the shares are spread throughout other companies.

• At least 70% of the underlying investments must be held in qualifying companies.
• Only 15% of the trusts investments can be held in 1 single company.
• As with an Enterprise Investment Scheme the Venture Capital Trust can only invest in companies that is worth less than £7 million before investment and £8 million after.
• Tax Advantages of Venture Capital Trusts
• Income tax relief at a rate of 30% is given on VCT investments up to £200,000 in any single tax year. The shares need to be held for 5 years.
• Capital Gains Tax relief is given but shares need to be held for 5 years.

It’s not often you get something for nothing, but we do with a pension. It’s one of the most efficient ways to save. Why don’t you let the government help your money grow faster?

The main advantage of a pension plan is that the government will help you with your payments. A pension is a savings plan that will give you tax relief while you save (the value of this depends on your own financial circumstances). A financial adviser will let you know how much you will get. This is based on the current tax law and HM revenue and customs practice which may change.

Basic Rate Tax Payer Pensions

£200 for every £1000 saved is paid by the government.

Your Payment                  £800

Tax Relief                            £200

Total in Pension               £1000

Higher Rate Tax Payer Pensions

If you pay higher rate tax then you can claim back another 20% through your annual tax return. This way you pay £600 into your plan and the government will make it to £1000. You see where we get the term money for nothing now.

Your Payment                  £800

Tax Relief                            £200

Tax Relief You Reclaim   £200

Cost to You                         £600

Total in Pension               £1000

Long term benefits of Tax Relief

Graph 1 Shows The total Paid In to Pension

Assumptions £100 per month Net  Basic Rate Tax 20% higher rate Tax 40%

Graph 2 Shows The Maturity Value

Assumptions £100 per  month net Annual Management Charge of 1%  growth rate of 7% Basic Rate Tax 20% higher rate Tax 40%

All figures are for illustration purposes only and are not guaranteed. The graphs are used to show you the tax efficient benefits of pensions. Tax year 2009 - 2009.  Figures from Aegon Scottish Equitable Your financial adviser can help you set up your pension plan.

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As a mortgage adviser, over the last 6 months I have seen fixed rates for 90% loan to value products move very little. For example,  I saw a first time buyer in July of 2008 and offered a 90% LTV product with Nationwide of 6.59%. Today if I looked for the same product for a firsttime buyer with a 10% deposit I would get 6.09% with C&G. Only 0.5% difference. The Nationwide’s product was a 2 year fixed and now the C&G is requiring a first time buyer to fix the rate for 5 years.

By comparison a second time buyer who requires a 75% LTV product would have been offered a rate in June of 6.45% with Nationwide for a 2 year fixed rate. Today the same applicant would be offered a rate of 4.49% for a 2 year fixed rate with C&G. This gives a drop of 1.96%.

 I am not suggesting that the rates should be the same. However until the gap between the two  loan to values shortens then we will still see house prices falling. High interest rates where firsttime buyers are forced to fix the rate for 5 years are discouraging couples and singles from entering the housing market. In addition whereas a year ago a first time buyer could purchase a property with a 5% deposit now they need a minimum of 10% thus they are being hit on three sides, higher rates, higher deposits and longer term fixed rates.

Until lenders make things easier then house purchases from first time buyers will remain low. However once the banks ease the situation and give first time buyers a fair deal we will see the housing market and house prices stabilise and begin to increase again.

According to the Nationwide Building Society, last year house prices dropped by an average of 15.9%. In their press release December 2007 the average UK house price was £182,080 and in December 2008 they reported the average at £158,442. Leaving the average UK homeowner, a massive £23,638 worse off, than they were at the beginning of the year.

Here at Needing Advice we blame it on the banks being over cautious with lending criteria for first time buyers. Unfortunately lenders now require a minimum of a 10% deposit to get on the property ladder. Understandably banks need a cushion in case the borrower defaults and house prices have dropped. But because the banks need such a high deposit they are actually fuelling the house price property crash.

Unfortunately this causes a vicious circle, first time buyers cannot get on the property ladder, so 2^nd and 3^rd time home buyers cannot sell their homes. This causes market demand to drop and thus house prices to lower.

Until the banks and building societies ease lending criteria and allow first time buyers to get on the ladder we predict that house prices will continue to drop in 2009. Being at the forefront of the lending process over the last 4 months I personally have seen 7 people with 5% deposits ready and looking to put offers on smaller cheaper properties. These people have all had excellent credit ratings and would normally been accepted for mortgages. However due to lenders requiring 10% deposits they had to put their plans on hold.

I am not suggesting that lenders take on risky mortgages. However for those with good credit histories and previous credit that has been paid well then a 95% mortgage with a 5% deposit should be offered. Once the number of first time buyers increases then property prices will begin to stabilise.

Figures from http://www.nationwide.co.uk/hpi/

Gilt Edged Securities or Gilts are British Government securities and issued by the government to raise money. Gilts are considered safe because the government will not default on interest and capital repayment.

Many large organisations such as pension companies life companies and other financial organisations to small individual investors use Gilts as a large portion of their portfolio. As a result there is a large market of people trading gilts. Because of this sometimes they can be bought and sold for amounts above or below there face value.

• Par Value – This is the face value that is paid when the it is paid back.
• Redemption date – This is the date at which the government will pay back the Par Value.
• Coupon – The percentage rate that will be paid throughout the Gilts term. Interest is paid twice a year and is based on the par value rather than its current price.

Investment trusts are public limited companies and are listed on the stock market. They invest in other companies shares or sometimes property. Investors can then buy and sell shares on the stock exchange receiving dividends and potential capital growth.

Features of Investment Trusts

This type of pooled investment offers access to an expert fund manager, diversification of funds and all for a very low cost compared to direct share investment. This is because the cost of management and research is shared through all the investment trust investors.

• Number of shares is fixed and this can create a supply and demand situation.
• Normally investment trusts have more flexibility than Unit Trusts and OEICs in terms of investment choices. For example investment in Venture Capital (new companies) is possible.
• Investment Trusts are normally organised by sector or geographical regions. The Association of Investment Companies has made 38 categories.

Enterprise Investment Schemes (EIS) were brought out in 1994 and replaced the governments previous Business Expansion Scheme. The goal of which is to encourage investors to invest in small and unquoted companies.

These are high risk as the investment is going to smaller, newer companies with little or no track record. Normally the investor is buying direct rather than a pooled investment. Although as an alternative it is possible to invest through a EIF Fund or Enterprise Investment Scheme fund. These funds raise money from investors and then on a defined date close and buy stock in a pool of qualifying companies.

Companies requiring funding only qualify if they meet the rules. There assets need to be less than 7 million before investment  and less than 8 million after.

Encouragement for investment is given through tax relief. These terms are complex but in brief are outlined below:

• The investor must be qualifying i.e. They cannot be connected to or previously connected to the company.
• The shares must be new ordinary shares and cannot be redeemed in the 1^st 3 years.
• The company must be qualifying i.e. it must be an unquoted company with business wholly or mainly in the UK. This can include companies listed on the AIM.
• The minimum investment is £500 unless it is made through a investment fund.

Enterprise Investment Schemes EIS and Income Tax

Income tax relief of up to £400000 for investment made on or after 6^th April 2006. Before that date the limit was £200000. The tax receive is given at the lower of the amount of tax payable by the investor or 20% of the amount invested.

Enterprise Investment Schemes EIS and Capital Gains Tax CGT

If the shares are held for 3 years then no CGT tax is payable. Any capital loss can be offset against other capital gains.

Unit Trusts are a type of collective or pooled investment. An investor can contribute to a Unit Trust by either a lump sum or by regular contributions or a combination of the two. The Unit Trust is divided into units with each unit forming a tiny fraction of the total assets. Trusts are open ended which means that a fund manager can create more units if demand dictates. The fund manager is obliged to buy back units from investors.

In order to ensure that Unit Trusts have a wide variety of shares a trust cannot hold more than 10% of it’s value in any one share. In addition only 4 companies can have shares up to the 10% limit. Shares in other companies must  not exceed 5% of the fund value.

Bonds are similar to gilt’s but instead of being issued by the government they are issued by Corporations or Local Authorities. Yields on bonds tend to by higher than that of gilt’s because unlike gilts bonds are not guaranteed by the government. In the main bonds can fall into three categories Local Authority Bonds, Corporate Bonds and Eurobonds.

Interest on Bonds is paid net of 20% income tax. Non tax payers and lower rate tax payers can reclaim overpayments.  Higher rate tax payers have a further 20% tax to pay. Capital gains on bonds is usually free of tax, however convertible loan stock is subject to CGT.

Types of Bonds that exist are explored in depth below:

Debentures – The loan is secured on the companies assets either fixed on a specific  asset  or floating on the assets in general. The Bonds debenture holder has priority over creditors in the event of company wind up.

Loan Stock – Securing loan stock against assets is common.  As a result the risk is higher and yields higher.

Convertibles – A debenture or loans stock with the option to convert to a companies shares at a set time and set price.

Preference Shares – Part of the share capital of the company. Normally ranking before ordinary shares but after bonds for dividends. Dividends normally fixed.

Deep Discount Bonds – Issued by companies and pays a very low coupon during the term. They are issued and traded at a discount to the par value typically 20% from the market value. Types of bonds that are deep discount are usually callable which means the company can by it back before the end of the term.

Zero Coupon Bonds – As deep discount bonds but with no interest during the term. The par value is repaid on redemption which means  the investor is buying a potential capital gain that might be as much as 100%.

Junk Bonds – These types of Bonds are for companies that have been rated as having a poor financial strength. Normally pay a higher yield due to the higher risk involved.

Payment protection insurance or PPI cover has the function of covering the policy holders credit payments if they are out out work through accident sickness or unemployment. A policy which covers these would be known as a ASU policy. Whereas a policy known as LASU would cover you for Life Accident Sickness and Unemployment. The amount of cover cannot be set for more than the total monthly payments you pay out to credit or loans.

Most people who have a payment protection insurance do so because they took it out when they got a loan or mortgage. Unfortunately many loan companys have charged excessive amounts for this cover trying to make bigger profits. This has given the PPI product a bad name and has scared many people who need the product away from purchasing it.

However by setting the appropriate waiting period or deferment period and the right amount of coverage many people can really benefit from what a payment protection insurance policy can provide. A specialist broker like us can provide equivalent cover to that of many mortgage and loan companys at a fraction of the cost.

Who are Offset Mortgages most suitable for ?

• People who have significant savings earning a lower interest rate than the mortgage rate.
• Those who are planning to save in the future.
• People who may need instant access to their savings in the future.

When is the best time for a Offset Mortgage ?

• When a you have savings that are not likely to be used in the near future..
• When you may need access to savings.

What to watch for ?

• Investigate to see if a better return can be had on investing savings elsewhere.
• A set up or booking fee may outweigh benefits to people with smaller savings.
• Try to get a goof interest rate or a deal like a fixed rate too.

The offset mortgage is very similar in most ways to a flexible mortgage. The main difference is that your savings and mortgage are held within one account. Your savings are then offset against the mortgage which means you only get charged interest on the balance. The savings ca be withdrawn at anytime.

While the offset mortgage sounds good it’s only of value to those who maintain a significant consistent amount of savings.

The benefit of such mortgages can sometimes be outweighed as they charge slightly higher rates of interest than the lenders standard variable rate. Although due to competition lenders sometimes will offer offset mortgages at fixed discounted or capped rates.

In the main there are 2 types of mortgage protection insurance. The first sort covers you for loss of life and the other covers you for unemployment, accident and sickness or a combination of all 3. Lets now look at what benefits each one gives and how they can help you.

Mortgage Protection Insurance in it’s basic form is just a life insurance policy. However unlike it’s brother the term life policy it’s payout value decreases throughout the mortgage term. For example lets examine a £100000 mortgage. Normally a mortgage will be taken over a 25 year period therefore the cover will last for the same length of time. The amount outstanding or owing on the mortgage will decrease and the amount of life insurance offered through the mortgage protection insurance will decrease along with the mortgage balance owed.

This means the cost of such polices is minimised as low as possible. However this type of life cover is only suitable for certain mortgage repayment types. Generally if you have a repayment mortgage or a capital and interest mortgage then this life cover will be suitable. If you have kids and your partner or spouse would need a lump sum on top of the mortgage being clear then a term policy or a combination of the two may be more suitable.

The other form of mortgage protection insurance covers your monthly mortgage payments in the event of accident and sickness or one or the other whichever options you see most suitable. For example you are a civil servant with full sick pay for 6 months and half for the remainder, you have worked for the company for 2 years. This person may need mortgage protection insurance for both accident sickness and unemployment as these are limited for a 12 month period. However the person may have a large amount of savings and so protection is not required.

This type of life insurance has no investment element. Instead it is one of the most inexpensive forms of life cover available. At the beginning of the policy the applicant decides how long they would require the cover for. For example you are aged 25 and have just had a child. You can expect the kid to stay at home and be dependent for the next 20 years so this may be a suitable term. During this time if you should die then the total sum will be paid out on a level term insurance policy but for a decreasing term cover the policy amount payable decreases as time goes by.
Variants of the cover exist. Cover can be sought for single, joint or even a group basis. Businesses often use this type of cover to cover partners or key persons. Usually the cheapest way to get cover is to take out the policy while you are young and fix the term for a long period. Short term life insurance is available and may be required in certain situations. Some policies pay out a tax free monthly benefit instead of a one off lump sum. This may be suitable for a family who may lose the main earner and when the spouse that is left alone is not that financially savvy.

Many employees have worked for their employer for 20 or 30 years or even more. If they are made redundant then they can expect to receive the equivalent of 2 or 3 years wages. Some employees such as soldiers and some police officers and many private sector personnel also get full sickpay for a year or even more. This kind of person wouldn’t normally need income protection insurance as their income would remain the same whether they are suffering from an accident or sickness or have been made unemployed through a redundancy.

On the other hand the majority of people have very limited sick pay, such as a month full and then statutory sick pay. Most people have only worked for their employer for a year or two and thus they have a real need for income protection insurance due to limited redundancy pay. In addition self employed people are normally the most vulnerable when it comes to this type of insurance.

Income protection insurance will pay normally a maximum of 70% of your normal salary. It kicks in after a deferment period which is chosen at the outset. If a person receives full sick pay for 3 months then they may choose a 3 month waiting period.

People who’s income goes up or down due to bonuses or self employed people who get paid bigger amounts throughout the year.
People who expect to make overpayments throughout the term.
People who are in total control of their finances.
When is the best time for a Flexible Mortgage ?

When a persons incomings are bigger than outgoings.
When you expect to be making overpayments.
When a you expect that you may need a drawdown facility in the future.
What to watch for ?

Watch out for high arrangement fees or booking fees.
Be careful that the early redemption charge is suitable and will no hinder any future plans of a home move or remortgage.
Make sure you can afford the payments if interest rates rise.

The flexible mortgage is a recent product introduced in the UK. It has been around now though for about 10 years or so. It is difficult to define as the features and benefits that it contains vary from lender to lender.

To be classed as a flexible mortgage though at  least the 3 basic ingredients. 

•  Interest calculated on a daily basis.
• The facility to make overpayments anytime you want without incurring any penalty or if required underpay.
• The facility to take payments holidays.

Normally restrictions are set on underpayments and payment holidays as it normally is dependent on the number of overpayments prior.

Many flexible mortgages contain many other features such as, drawdown facilities which can be accessed through cheque books, debit cards or online access. A drawdown facility allows you to borrow up to a predetermined limit without applying for a further advance. The borrowing limit is usually set at about 75% of the LTV (Loans to Value) although higher LTVs or 80%, 85%, 90% can be found.