Take AIM with New Portfolio Pension
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uinoxhalf yearly investment magazine Dull to dazzling - a pensions revolution Pension death changes provide exciting tax boost Front Cover Competition Winner Take AIM with new Mike Harrison portfolio April 2015 PLUS: Stirk takes golf by storm | In Profile: Debbie Jukes | Supercar hire provides thrilling drives Welcome For the first time in history, the FTSE 100 has finally broken through the 7,000 barrier and stock-markets world wide continue their march upwards. With markets rising so quickly, it’s important not to be complacent and our approach, as always, is one of diversification and making sure that our portfolios do not take on too much risk in any one market, fund or sector. The new pensions reforms that were revealed in last year’s Budget have now come into force. These really do present some exciting opportunities and possibilities, some of which are covered in this issue of Equinox. The relaxed rules mean much greater flexibility when taking your benefits and the improved death benefit position means that pension funds can now well and truly be part of a lasting legacy for intergenerational planning purposes. I hope you find the articles interesting! I’d be delighted to hear from you if you have any comments or queries. You can call me on 0161 486 2250 or email me at [email protected]. Colin Lawson Managing Partner 01 Equilibrium | Magazine Contents Articles Investment Portfolios Statistics Commentary 03 Dull to dazzling - 27 Views from the Frontline 36 Sector Performance 38 Model Portfolio Returns a pension revolution 29 Investment Review 39 Sector Portfolio Returns 06 Take AIM with new 6 Monthly Review portfolio 40 Market Returns 09 Financial ‘Times’ 41 Ideal Funds 11 Equinox cover competition 13 Pension death changes provide exciting tax boost 17 In Profile: Debbie Jukes Equilibrium 19 Supercar hire provides thrilling drives Contributors Colin Lawson, Debbie Jukes, Mike Deverell, 21 Stirk takes golf by storm Neal Foundly, Tim Cooper, John Warburton, Margaret Brade 23 Property or pensions Editor Gaynor Rigby 25 Age UK Stockport Design Exesios BDD celebrates 70 years Print Fine Print 02 Dull to dazzling - a pensions revolution The new reforms have made pensions exciting again. Take advantage before they become more restrictive. By Colin Lawson If you still think pensions are boring tax-free, was equally sensational. Even and something to avoid, then where after age 75, it can stay in a pension and have you been over the last 12 months? your beneficiaries will only pay tax on Pensions are now exciting, which is not the withdrawals at their marginal rate of a description you often hear about a income tax. financial product. In short, the reforms give total freedom The game changer was the rule allowing to spend as much of your pension as you savers to withdraw as much of their want while you are alive; and to pass it pension as they want, whenever they on to future generations when you are want, from age 55. The subsequent gone. announcement that if you die before age 75, you can pass the whole pension on 03 Equilibrium | Magazine An“ increase of 50% on his money with no risk whatsoever. That is what I call exciting. Here are a few examples to illustrate just how exciting pensions have become. Steve is 59 and has never liked pensions for all the usual reasons. But he is retiring next year and has heard about the changes so is considering making a pension contribution. Steve earns £90,000 and therefore decides to make the maximum £40,000 contribution. He receives higher rate tax relief on it all, so it only costs him £24,000 net. When he takes the money out of his pension on retirement - assuming no growth on the fund or other income - the £40,000 will break down as follows. £10,000 Tax Free Cash (25%) £10,600 Tax Free Income (Personal Allowance) Fiscal year 2015-16 £19,400 Taxable at 20% = £3,880 Steve’s net income will therefore be £36,120. So Steve paid in £24,000 and got back £36,120 with no growth on his fund at all. An increase of 50% on his money with no risk whatsoever. That is what I call exciting. Steve could decide to leave the money in the pension for future generations. We look at the effect that could have in another article, on page 15, which explains the new rules on death benefits and strategies to maximise your legacy. 04 kind enough to also invest the national insurance (NI), they would save as well. The calculation looks like this: Whatever“ your position, high earner or low, old £20,000 or young, pensions Gross Bonus could be the way to £2,760 put a bit of sparkle into Employer NI at 13.8% your savings. £400 Employee NI at 2% 60% tax relief - it just gets better If you earn £120,000, then unfortunately £9,000 you have lost your personal allowance. Income Tax at 45% However, by paying a pension contribution of £20,000, your allowance will be restored which means that the £10,600 £20,000 in your pension fund would only Net Bonus have cost you £8,003. This gives you tax relief of 60%. That is not the only way to get large However, the pension contribution would levels of tax relief. If you are an employed be the gross bonus of £20,000 plus the 45% taxpayer and about to receive employer NI of £2,760 giving a £22,760 a £20,000 bonus you could ask your pension fund instead of a net cash employer if you could invest it in a payment of just £10,600. This equates to pension instead. If your employer was 53% tax relief. …and better Not just high earners can benefit. Almost everyone from birth to age 75 should at least consider paying into a pension. Steve’s wife, who is 60 and has no earnings, could pay in £3,600. This would only cost £2,880 after basic rate tax relief. As she is not using all her personal allowance, she could then withdraw all the money and keep the whole £3,600, pocketing a profit of £720 a year. She is free to do this every year. Even infants can pay into a pension. Given the effect of compound growth - which Albert Einstein referred to as one of the wonders of the world - it is well worth considering. If you would like to see how investing just £11,520 for a four year old has the potential to generate an income of £28,000 in today’s terms at 65 then ask to see our guide: “Bill and Ben the pensions men”. Whatever your position, high earner or low, old or young, pensions could be the way to put a bit of sparkle into your savings. The rules are only likely to get more restrictive so take advantage while the tax relief lasts. 05 Equilibrium | Magazine Take AIM with new portfolio Equilibrium launches Alternative Investment Market Portfolio with a host of benefits. By Neal Foundly Equilibrium has launched its Alternative abolished last year and investors now Investment Market (AIM) Portfolio, which have permission to hold them in individual provides exemption from inheritance tax savings accounts. (IHT) once it has been held for at least two years. HMRC allows this exemption for all AIM stocks that qualify for Business What is the catch? Property Relief and we base our selection The performance of the AIM index has on those companies. compared poorly with the FTSE 100 and the other FTSE All Share indices. For example, over the three years to the end All grown up of 2014, the FTSE AIM All Share Index AIM started 20 years ago and currently returned 4% compared to 31% for the has 1,100 companies quoted on the FTSE 100. exchange. It was established originally to enable smaller companies to float and raise capital and was seen as a stepping Our secret sauce stone to a ‘full’ main market listing on the However, such compromise is not London Stock Exchange. Today, it is an necessary. We focus our AIM Portfolio established market in its own right with on dividend-paying stocks, because large companies seeking to remain with those companies have good, established the index. The two largest would be in the business models and generate more cash FTSE 100 if they were to list on the main than they need to pay down debt and fund market today. investment. They usually return this cash In addition to its IHT advantages, stamp to shareholders as dividends. duty on purchases of AIM stocks was 06 In addition, managements that pay dividends generally align their interests with shareholders rather than run them as personal fiefdoms. The new portfolio These stronger, more cash-generative “ businesses will be better investments in will provide a great the long run. We also use a ‘smart beta’ approach. This opportunity to make is a buzzword in the investment industry but all it means is that the portfolio is tax savings. constructed differently than the norm. The basis of good investing is to buy low and sell high. But the vast majority of funds tend to invest more in larger companies - the larger the company, the larger the investment. So when investors buy their fund, they are actually buying more of the stocks that have gone up the most. This is not buying low. To give an example, suppose there were only two companies and both were worth 100p but one company’s share price rose 20p to 120p and the other’s price fell 20p to 80p.