Thousands of people could end up with bigger pensions as new rules will force insurers to inform customers about better annuity options. The Association of British Insurers’ (ABI) new code of conduct forces insurers to give more information about how consumers can ‘shop around’ for a better deal, while ensuring that those with health problems receive a higher income as a result.

Buying the wrong type of annuity
Currently, according to the ABI, more than half of all investors who buy an annuity – which pays a fixed income for life – simply buy the default annuity deal from their current pension provider. As a result many end up buying the wrong type of annuity or effectively locking into an uncompetitive pension deal for the rest of their lives. Shopping around for the best annuity deal could increase the size of a pension by over a third. A recent report from the National Association of Pension Funds claimed that this was costing pensioners more than £1bn in lost retirement income.

Benefits of shopping around
The new rules stop insurers from including an application form in the information pack sent to customers approaching retirement, making it less likely that people will simply buy the first annuity they see. These ‘retirement packs’ have been redesigned to place greater emphasis on the benefits of shopping around. Crucially, where insurers are selling an annuity to one of their existing customers, they will be required to ask about their circumstances and medical conditions before providing a quote.

A pension is a long-term investment. The fund value may fluctuate and can go down as well as up. You may not get back your original investment. Past performance is not an indication of 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.

It’s easy to think “it won’t happen to me,” but if the worst should happen, your critical illness insurance could help provide financial security at an emotional and difficult time. Whether it helps pay off your mortgage, funds a relaxing holiday to recover from treatment, or just help you cope with the bills and expenses, the lump sum pay-out from critical illness insurance cover could relieve worries and let you concentrate on getting better.

Most home buyers purchase life assurance when they arrange a mortgage, but only a minority obtains critical illness insurance. Critical illness insurance pays a tax-free lump sum on the diagnosis of any one of a list of specified serious illnesses – including cancer and heart attack.

Your questions answered

Q: What is critical illness insurance?
A: Critical illness insurance pays out a tax-free lump sum if you are diagnosed as having one of the specific life-threatening conditions defined in the policy. Policies often offer combined life and critical illness insurance. These pay out if you are diagnosed with a critical illness, or you die, whichever happens first.

Q: What conditions are covered?
A: All policies should cover seven core conditions. These are cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. They will also pay out if a policyholder becomes permanently disabled as a result of injury or illness.

But not all conditions are necessarily covered. In 2011 the Association of British Insurers introduced a set of best practice guidelines.

The rules include clarification on when policies will pay out if a claimant suffers ‘total permanent disability.’ All policies automatically include reduced cover for children but the new rules spell out when it will not apply – for example, if the condition was present at birth.

Q: When should I have a critical illness insurance policy?
A: Your need to be covered by insurance against the diagnosis of a critical illness will largely depend on your life stage and your particular circumstances. These might include having a family to support, being a homeowner and paying a mortgage, those who have paid off their mortgage, or those who have separated from their partner and have dependant children.
If you are about to start a family (or have one already), a critical illness insurance policy is an essential way to plan for the entire family’s protection from the outset.

Q: I have already paid off my mortgage, so why do I need critical insurance?
A: If you have paid off your mortgage, and your mortgage protection policy included critical illness insurance, but you still have dependants – you should have a separate critical illness insurance policy. It will enable you to continue to protect your family should the unthinkable happen to you.

Q: Why do I need critical illness insurance cover as I’m separated from my partner?
A: If you are unfortunate enough to have to go through divorce proceedings but are awarded custody of the children, you could ask your former spouse to take out a critical illness insurance policy. If your former partner is required to pay maintenance costs but is unable to work, the money spent on the children may even stop.

If you set up a critical illness insurance policy, the money could be paid into a trust fund from which the children will benefit directly. The policy cannot be in the name of the children, however.

The article is for your general information and use only and is not intended to address your particular requirements. No individual should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation.

The need for long-term care and how it should be paid for is arguably one of the greatest causes for concern among our growing elderly population. Almost half a million people are now in residential care homes, nursing homes and long stay hospitals.

Each year you can deposit your savings into a tax-efficient Cash and/or Stocks and Shares Individual savings Account (ISA).

The overall limit for the tax year ending 5 April 2012 was £10,680 and this has gone up to £11,280 (or £940 per month) for the 2012/13 tax year starting on 6 April 2012. Of the £11,280 overall limit, up to £5,640 can be saved in a Cash ISA.

Following the publication of price inflation figures for September 2011, the ISA limits are now increased each year in line with the increase in CPI. For ease of planning, the limits are then rounded up to be easily divisible by 12. This makes it easier to calculate the monthly allowance.
The higher ISA allowance represents good news for savers and investors who want to protect their returns from tax and aim to achieve a net return to keep pace with high levels of price inflation.

The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Past Performance is not a guide to future performance.

Figures published by the Association of Investment Companies (AIC) show that £330 million (value of new shares issued), was raised by the Venture Capital Trust (VCT) sector during the 2011/2012 tax year compared to £365 million in the 2010/11 tax year and the sixth highest amount since VCTs were first launched in 1995.

A range of small higher-risk trading companies
VCTs are designed to encourage individuals to invest indirectly in a range of small higher-risk trading companies whose shares and securities are not listed on a recognised stock exchange, although they can be AIM (Alternative Investment Market) listed. So, if you invest in a VCT, you spread the investment risk over a number of companies. There is a risk that these companies may not perform as hoped and in some circumstances they may fail completely. Recent Budget changes have reduced the maximum size of company that VCTs can invest in, meaning that VCT shares issued now may carry a higher risk than those issued in the past.

Meeting certain conditions
VCTs must be approved by HM Revenue & Customs (HMRC), and to gain approval they, must meet and continue to meet certain conditions. This approval enables investors to qualify for certain tax reliefs, but does not guarantee the safety or success of any investments you make in a VCT. If you invest in them you may be entitled to various Income Tax and capital gains tax reliefs, and VCTs are exempt from corporation tax on any gains arising on the disposal of their investments.
Ian Sayers, Director General, Association of Investment Companies said:

“This is the third year in a row that the VCT sector has surpassed the £300 million mark, and the sixth highest amount raised since VCTs were first formed in 1995, reflecting strong demand from investors.

“Capital raised by the VCT sector is filling an important funding gap for UK smaller companies, and supporting UK enterprise.”

‘Qualifying’ after three years
VCTs must meet certain conditions to be approved by HMRC including that at least 70 per cent (by value) of the total assets must be ‘qualifying’ after three years. If a VCT ceases to have approval as a VCT all tax advantages will be lost.

For the current tax year 2012/13 Income Tax relief at 30 per cent is available on investment in VCTs of up to £200,000 to be set against any Income Tax liability that is due, whether at the lower, basic or higher rate, but relief will be limited to the amount that reduces the investor’s Income Tax liability to nil, and the tax credit on dividends received cannot be reclaimed.

New ordinary shares
To qualify for Income Tax relief, the shares must be new ordinary shares and must meet certain other conditions to be eligible. You can get this relief for the tax year in which these eligible shares were issued to you, subject to certain conditions including that you hold them for at least five years.

Dividends from ordinary shares in VCTs are exempt from Income Tax for both newly issued and second-hand shares (provided the total of both added together is less than the annual investment allowance in the tax year purchased).

Disposals of ordinary shares in VCTs (both newly issued and second-hand) are exempt from CGT (Capital Gains Tax) on gains.

VCTs are higher risk investments and are generally considered to be long-term investments. They are complex products and are not suitable for all investors. If you have any doubts as to the suitability of a particular VCT, or VCTs in general, or you require advice of any kind, you should seek professional advice. Do not invest in a VCT unless you have carefully thought about whether you can afford it and whether it is right for you.

In amongst the technical papers issued by HM Revenue & Customs (HMRC) on the back of the Budget 2012 changes, Skandia has discovered a hidden gem. An alteration in the formula for calculating tax-free cash for pre 6 April 2006 (A-Day) members of occupational pension schemes could lead to people receiving more tax-free cash when they retire.

Occupational pension scheme legislation
Prior to A-Day, occupational pension scheme legislation determined the level of tax free cash available to members of such schemes. Since A-Day, the level of tax-free cash has been set at a maximum of 25 per cent.

Pre A-Day members of occupational pension schemes have been allowed, under HMRC rules, to protect the tax-free cash rights they held at A-Day that were greater than 25 per cent. In such cases the tax-free cash entitlement can further increase over time, based on two calculations introduced by HMRC:

1. The A-Day protected tax free cash entitlement is automatically increased by the increase in the Lifetime Allowance up to 6 April 2012, an increase of 20 per cent. All members with protected tax-free cash receive this uplift regardless of how well their occupational scheme investment has done since A-Day.

2. The tax-free cash entitlement is further increased by 25 per cent of any positive growth in the value of the pension fund since A-day.

Discounted investment growth
Prior to 6 April 2012, the level of investment growth was discounted by 20 per cent of the pre A-day fund value to take account of the increase in Lifetime Allowance from £1.5m to £1.8m up to 6 April 2012. From 6 April 2012, this discount no longer applies, resulting in a higher tax-free cash allowance for many people, provided they have seen positive investment performance since April 2006.

Good news for many people
This is really good news for many people who have a protected tax-free cash entitlement in an occupational pension scheme they joined prior to 6 April 2006. The new calculation can greatly enhance the amount of tax-free cash these people can take at retirement.
Many people may not know whether they have a protected cash entitlement from their service up to A-Day in these schemes, so it is essential to check with those schemes to establish what their tax-free cash entitlement was at A-Day.

Please note: this improvement does not apply for those who have applied for fixed protection. Their revaluation of A-Day cash is still on the pre 6 April 2012 basis which subtracts the A-Day fund value increased by 20 per cent from the current fund value to determine whether there is any additional tax free cash entitlement.

Britons face an income gap of £411 per month between their current net income and what they feel would allow them to live comfortably, according to a new report from Aviva. The Times of our Lives report1 found that this additional desired income would be equivalent to an extra £7,236 per year (gross).

Highest earners want the most
Times of our Lives also found that those with the highest current household income think that they need the most additional income.2 The 25-34 age group have a monthly net income of £2,287, but feel they need an extra £627 per month net, equivalent to an annual gross increase in income of £12,003. This is followed by the 35-44s who want an average of £596 extra per month, or £10,762 per year.

Squeezed middle age
This “squeezed middle age” group of 35-44s have a high level of debt and are the most likely to have a young family, increasing the financial pressures they face. In addition, when asked about their worries, this group were more concerned than most others about making ends meet and being able to pay for unexpected costs, with a third (34 per cent and 33 per cent) listing these as key troubles, potentially explaining the income gap.

In contrast, the over 65s feel they need the least additional income – just £23 per month – reflecting the findings of the report which indicate that wealth and contentedness increase as we get older.

Older, wiser, wealthier
Indeed, net wealth increases with age and is highest among the over 65s, at which point the average homeowner’s real ‘wealth’ is £308,317, and the average non-homeowner’s ‘wealth’ is £75,834.3
Property value is the largest element of accumulated total wealth, and the gap between homeowners and non-homeowners illustrates the importance of getting on the housing ladder – the research highlighted that people feel this should be achieved, ideally by the age of 25. Other important constituent parts of wealth include earnings, savings, cars, home contents and personal possessions, minus mortgage and other debts.

Simon Warsop, Business Development Director at Aviva, said: “It is clear that the pressure on the household purse is as great as ever, and even those that have the highest income feel they need the greatest increase to feel comfortable – to the tune of around £600 a month.

“This income gap is understandable, as people in the middle age groups see average household income drop and often face the additional costs of raising children, while debt remains high. It’s no surprise then that the 35-44 age group feel the most financially squeezed, with making ends meet, dealing with unexpected costs like car repairs or boiler breakdowns, and job security among their top worries.

“But while the worries might peak in the middle ages, net household wealth grows steadily through life, rising to £308,317 for an average homeowner aged 65 plus. Unsurprisingly homes are the biggest source of wealth and the importance placed on possessions and protecting them also comes to the fore, with home insurance the least likely item they would give up after their car.”

Protecting our wealth and making cutbacks
The value of home contents and possessions also rises as people get older, but peaks in the 55-64 age group at an average £37,893, before falling away after retirement. It is therefore not surprising that almost one in five people over 35 said that home insurance was one of the last things they would give up if they were forced to make cutbacks, along with their car.

Spending on luxuries such as socialising (48 per cent), satellite television subscriptions (21 per cent) and holidays (31 per cent) would be the first payments people would give up if they had to make cutbacks.
Simon Warsop added: “It’s important that people understand that all their assets, whether it’s their home, car, belongings or finances are properly protected throughout their lives so that if the unexpected happens, they’re covered.”

1. Based on 2,024 UK adults interviewed by ICM between 10th and 13th February 2012.

2. The Times of our Lives report asked the respondents what their household income is currently (from all sources including salary, benefits etc) and how much extra income they feel they need to be financially secure and calculated what the equivalent annual gross increase in income would be.

3. The Times of our Lives Report has calculated net wealth at different ages of life by working out the value of people’s total assets (net income, savings and investments, contents sum insured, car value, property value) minus their total liabilities (unsecured debt and mortgage outstanding).

Change to retirement age
The Chancellor confirmed in Budget 2012 that he would increase the state pension age and that we should brace ourselves for having to work much longer in the future. There are already two increases to the state pension age scheduled for 2019 and 2026. If after 2026 the state pension age increases in line with our changing life expectancy, we could expect that someone who is currently 37 won’t be able to start drawing their state pension until they are 70 and someone who is
21 won’t receive it until they are 75.

This means that children born in 2012 are unlikely to get their state pension until age 80, if life expectancy at retirement rises in line with the last 30 years. This is a considerable change for everyone, but women in particular have to make a big psychological adjustment as their state pension age is leaping forward.

The two increases already planned for 2019 and 2026 will be followed by increases every five years thereafter. If you are thinking ‘this won’t really affect me, I’m still going to aim to retire at 60 or 65 anyway’, unless all of us save a lot harder, many people could still be working well into their seventies.

Pensions tax relief
The Chancellor did not make a change to tax relief on pension contributions. This valuable incentive encourages more people to save for their retirement years. Tax relief on qualifying contributions into private pensions means that a £100 investment made by a basic rate tax payer is automatically topped up to £125. And if you are a higher rate tax payer you can still claim the higher rate tax rebate too. This tax incentive encourages many to make the most of pension contributions now, so they can make the most of their retirement in the future.

No change on GAD maximum
The government did not make changes to the drawdown Government Actuary’s Department (GAD) maximum. People starting drawdown or who have reviewed it during the last year may have had their income affected by falling gilt yields caused by the Bank of England quantitative easing programme. At the same time annuities have also experienced a similar impact, but to a lesser degree as they are backed by a mix of corporate bonds and gilts.

Government ends salary sacrifice to fund employee’s spouse’s pension
The government announced the cessation of salary sacrifice to fund an employee’s spouse’s pension. This tax ‘idea’ involved an employee sacrificing salary or bonus and their employer paying this into the employee’s spouse’s pension up to the annual allowance, including carry-forward.

Introduction of a general anti-avoidance rule (GAAR)
The direction of travel towards a more limited form of GAAR was set out in the Aaronson Report in November last year. Those endorsing sensible tax planning should have nothing to fear if the recommendations in that report, which target schemes that are artificial or contrived, are implemented. Individuals implementing tried and tested routes to mitigate UK tax should not be affected.

Extension to IHT spouse exemption for European domiciled spouse
A consultation review of the restriction on the spouse/civil partner exemption was announced. In the last few years, EU law has had an increasing impact on UK Inheritance Tax (IHT). IHT reliefs and exemptions for agricultural property and charities have been extended to cover the European Economic Area in 2009 and 2010. The announcement is good news for those whose spouse/civil partner is from another country, meaning they are domiciled there rather than in the UK. It should remove a tax worry and layer of IHT complexity for mobile people with international connections.

Changes to discretionary trusts
One of the most complex elements of IHT, the ten-year charge and exit charge calculations for IHT in discretionary trusts, is to be simplified. This could be good news for trustees and beneficiaries of these trusts, of which there are thousands in the UK. HM Revenue & Customs statistics show that 101,000 of these types of trust were included in tax returns filed in 2009/10.

Laws and tax rules may change in the future. Information is based on our understanding in March 2012. Your personal circumstances also have an impact on tax treatment.

Four out of five new parents are risking their children’s financial futures by skimping on life cover, according to new research from Aviva.

Nearly six out of 10 retired people have become more concerned about their or their partner’s health since retiring, research* from MetLife shows.

The nationwide study it commissioned found 57 per cent of those questioned have started to worry about health issues in retirement – with that figure rising to nearly three-quarters (73 per cent) amongst those aged 75 and over.

Rising life expectancy is turning the spotlight on the issue of healthy life expectancy and MetLife is urging people to consider the growing number of new retirement income solutions such as fixed-term annuities which provide increased flexibility during retirement.

Government statistics** show the average 65-year-old man is expected to live to 83 and the average 65-year-old woman is expected to live to 85.6 years – however men can expect on average to spend more than eight years in poor general health while women could face 11 years in poor health.

People are clearly concerned about health in retirement and the potential impact on their finances. But it’s not a subject that many of us want to think about. Retirement planning needs to adapt to enable savers to be able to cope financially with ill-health.

* Research conducted by Vision Critical using an online methodology among 977 retired people between October 20th and 27th 2011

The annual Cost of a Child Report [1] from protection and retirement specialist LV=, reveals the cost of raising a child from birth to their 21st birthday now totals a record £218,024. This equates to £10,382 a year, £865 a month or £28.44 a day.

Overall cost
The report shows that the overall cost of raising a child has increased by 3.3 per cent in the last year, with education and childcare remaining the biggest expenditures, costing parents a massive £71,780 and £62,099 respectively. The cost of education, including school uniforms, after-school clubs and university tuition fees, has experienced the biggest rise, with a 5 per cent increase in spending over the past year.

The overall cost of raising a child has increased by 55 per cent since LV=’s first Cost a Child Report in 2003.

Not protecting the family’s future
Some 50 per cent of parents don’t have any life cover or income protection in place. Just a third (32 per cent) of parents have life cover and only 11 per cent have both life cover and income protection.

Long-term picture
When considering ways to ease the family budget, it is important that you keep in mind the long-term picture. Cancelling life cover or income protection, for instance, as a short-term measure to save money can have catastrophic implications if either parent were unable to work or weren’t around in the future.

Parents don’t begrudge the money
Despite an uncertain UK economy forcing more pressure on the family budget, it’s clear that parents don’t begrudge the money they spend on their children, and would rather do without themselves than radically cut back on what they can provide for their children.

Source – [1] The Cost of a Child Report calculations, from birth to 21 years, have been compiled by the Centre for
Economics and Business Research (CEBR) on behalf of LV= in December 2011 and are based on the cost for the 21-year period to December 2011. The report also includes omnibus research conducted for LV= by Opinion Research from 3-5 January 2012. The total sample size was 2,119 UK adults. Results have been weighted to nationally representative criteria.

The need for long-term care and how it should be paid for is arguably one of the greatest causes for concern among our growing elderly population. Almost half a million people are now in residential care homes, nursing homes and long stay hospitals.

Insurance for long-term care means that you pay (either in premiums or a lump sum) for your provider to take care of costs for you. State provision is currently very complicated and typically only assists people once their personal assets have fallen below a certain level. The level of help also varies from one local authority to another.

Covering long-term care costs
There are a number of ways of paying for long-term care. This can be directly from income or out of assets including selling the family home or releasing equity from it. There are three main ways of covering long-term care costs: insurance-based solutions, annuity or the state.

Risk-based plans
Risk-based plans, which may be funded by single or regular premiums, pay up to a pre-determined monthly limit – usually until the policyholder dies or the care is no longer needed.
Benefit payments are triggered when you are judged to be incapable of performing an agreed number of ‘activities of daily life’ such as washing, dressing or feeding yourself and moving from room to room. Payment of benefits starts after a ‘waiting period’, which varies from policy to policy.

The cost of the policy depends on:

age, sex and state of health when the policy is taken out;
the level of benefit;
the number of ‘activities of daily life’ you are unable to perform before you can claim;
the waiting period.

Immediate care plans
Immediate care plans are enhanced annuity products with higher payments than conventional annuities due to the lower life expectancy of the plan holder. This means that you pay a single lump sum in return for regular payments, either to yourself or the care provider. They are bought by people already in care or about to need care.

Under the terms of an immediate care plan, the provider pays you a guaranteed income for the rest of your life, which is used to pay long-term care costs. Each annuity is individually underwritten and quotations vary widely from provider to provider depending on their actuaries’ views of your life expectancy. Typically you either choose to have your payments start straight away or defer them for up to five years. Choosing a deferred period is more cost effective and caters for those who can fund their care needs in the interim.

The payment is made up of taxable interest and a tax-free ‘return of capital’ element. The lower your life expectancy, the higher the return of capital element and the total level of benefit received. If the income is paid directly to the care provider, it is entirely free of tax.

It is also possible to guarantee payments for a minimum period of time (six months to five years), even if the annuitant dies in the interim, or link benefits to inflation – although such safeguards reduce the income yield on the annuity.

State cover for long-term care costs
The extent of state cover for long-term care costs varies between across the U.K – although it is always means tested.

In England, Wales and Northern Ireland, means testing is used to agree how much of a personal contribution is required towards the cost of care. This is done by tariffs.

In Scotland, the payments are split between the NHS and the local authority Residents of care homes can apply for either or both benefits according to eligibility – also assessed by means testing.

Means testing
In January 2011 the UK government froze the capital threshold limits for means-tested care, and is not planning to look at this again until the next local government finance review in autumn 2012.

However, you will have to pay for care if your combined assets are currently greater than:

England: £23,250
Wales: £22,500
Scotland: £23,500
N.Ireland: £23,250

People in receipt of state help for long-term costs must pay their occupational and state pensions and any benefits to the local authority. Certain categories of income, such as income from savings, are disregarded. Other categories, like pension income that is paid to a spouse not living in the same residential or nursing home, are partially disregarded.

Relevant assets include cash deposits, investments, bonds, premium bonds, National Savings, shares, unit trusts, property and the family home (unless a spouse or dependent occupies the property).

The family home is disregarded for 12 weeks before it is taken into account for means-testing. It may also be possible to enter into a ‘deferred agreement’ with the local authority to allow it to recoup an outstanding debt at a later date, although these are rarely granted.
The care recipient can keep a personal expense allowance (PEA), which is disregarded for means-testing.