The last post...

I'm delighted that Jane Smith Financial Planning's new website, including our blog, is now up and running. You'll now find all future blogs at www.janesmithfinancial.com, and hope that you continue to enjoy the information provided.

Forestalling - a tax bolt from the blue?

The next tax bill from the Revenue could come as a bit of a bolt out of the blue for some. This might be the last chance to avoid a nasty surprise!

Unless your relevant income was below £130,000 for all three years ending 5th April 2010, you may have to pay a special annual allowance tax charge on any unprotected pension input amount in excess of the £20,000 special annual allowance, or the £30,000 enhanced special annual allowance (if applicable).

31st October 2010 will be the first opportunity for many clients to tell the Revenue about this. This is because, if a client is submitting a paper tax return for 2009/2010, they will normally need to get it to the tax office by 31st October 2010.

How does an individual report a special annual allowance charge?

It's actually surprisingly difficult! There's no obvious clue on the return but the answer is to tick the yes box at the end of the question 9 on the second page of the tax return.

You or your accountant must enter the amount of any pension saving that is in excess of the special annual allowance in box 9 on the back page of the additional information pages.

What are the consequences of not reporting a special annual allowance charge correctly?
The Revenue may make an incorrect assessment of a client's liability to tax if they're not made fully aware of the client's position.

Let's take a look at three possible scenarios:

a) If the charge arises because of an individual's contribution

If the relevant income for 2009/2010 is £130,000 or more and if their pension contribution is more than £20,000, it's likely that the Revenue will automatically calculate a special annual allowance charge on the excess contribution over £20,000 when they process the tax return.

The Revenue should enquire as to why the excess wasn't reported. They may launch a full investigation.

Of course, the Revenue's calculation may be wrong, perhaps because the individual is in fact entitled to an enhanced £30,000 allowance, or maybe because their pension contribution is protected, or for a number of other reasons?

Either way any tax bill and Revenue correspondence are likely to come as a bolt out of the blue. This would cause them a fair amount of anxiety - and extra accountancy fees.

b) If the charge arises because of an employer contribution, or because of a defined benefit scheme accrual
Even if the contribution is paid by an employer, it's always the member who's liable to pay the special annual allowance charge. But how will the Revenue pick up that there should be a special annual allowance charge in this situation?

It's a good question. There's nowhere on the tax return to report employer pension contributions or defined benefit scheme accruals. So it appears that if the individual or their accountant fails to report it correctly there isn't another obvious mechanism for the Revenue to pick it up.

However, it's highly likely that the provider or the scheme administrator will have sent correspondence to the member informing them of the pensions anti-forestalling rules and restrictions to higher rate tax relief. So the individual should be aware of their potential liability and their responsiblity to report any charge.

It's possible to get pension input amounts from scheme administrators. This is particularly useful for defined benefit schemes. And advisers' help in calculating the excess will be invaluable.

c) If the charge arises because the individual's relevant income was £130,000 or more in 2007/2008 or 2008/2009 how will the Revenue pick up that there should be a special annual allowance charge if the client's relevant income is less than £130,000 in 2009/2010?
This is another good question? It will require the Revenue to look back a thte client's previous two returns. In theory, they should pick this up, but we will have to wait and see how successful they are in practice.

If an individual completes an incorrect tax return, they may incur a penalty and interest will be charged on any underpaid tax. It could result in the client, and possibly their advisers, being liable to prosecution.

Pensions and divorce - preparing for a new start

It is a sad fact of modern life that one in three marriages now ends in divorce. Even divorce amongst older couples in on the rise, but in this case, the financial impact can actually be even greater than it is for perhaps younger, less established couples.

The main issue for women is pensions provision. Statistically, women are likely to have much smaller pension pots than men, for two main reasons – they on average earn less than men and they are also more likely to have spent time out of the workplace raising children. In the event of a divorce, therefore, it is as important to consider the fair split of pension provision as it is the division of any other assets. If one spouse has no pension savings because they have stayed off work to support either house or family, while the other has worked and built a substantial fund, this should be taken into account when determining the settlement.

In reality, of course, you may not actually split the pension fund itself but instead, offset your rights to it against the value of something else - perhaps some investments, business assets or even the marital home. Particularly where children are involved, for example, the marital home may be a more precious asset to ensure minimum upheaval in the short term. However, the benefits of this then just need to be weighted against something more formally related to retirement.

If a more formal arrangement over pension assets is required, there are a couple of options. The first might be to earmark a portion of your ex-spouse's pension fund, deferring receipt of that benefit until they retire. However, such earmarking leaves one partner dependent on the other, reducing the chance of a clean break. You may have to wait years before benefiting – and, if your ex-spouse dies before retirement, you could end up with no formal provision at all.

However, it is also now possible to split a pension at the time of divorce. A dependent ex-spouse is now entitled to a portion of the main breadwinner’s pension, allowing them to move their share away from the original pension fund. This is a much “cleaner” approach, enabling both parties to move on and also allowing them full control over their share. If the main pension holder dies or either remarries, all retirement rights remain protected.

If you ever find yourself in such a position, it is vital to take both legal and financial advice before making any decisions. Whatever your personal circumstances, it is worth talking to your financial adviser up front, to ensure that, whatever the future might bring, you are well prepared.

Finding help in an emergency

We are becoming increasingly familiar with the effects of an ageing population on pensions funding and the shortfall in State benefits. However, there is another serious issue that is not considered as often – the older we get, the more healthcare we potentially need. Indeed, just when the State is getting increasingly concerned by the demands on its funds, the costs of long-term care is rising. Many people are therefore looking for ways to help prepare for such an eventuality – either by a pre-funded policy or, if the situation has already arisen, by using an immediate care plan.

At the moment, what few pre-funding options exist are being rejected by many in favour of other priorities. As a result, the vast majority of people reach the emergency category without any specific funding provision. This may not be a problem if your income is sufficient, or you have significant savings - you may be able to make the payments from existing resources. In the case of short-term requirements, this could indeed be the most appropriate course. However, there are other considerations, particularly if your needs are long-term.

For example, what happens if your payments for care increase quicker than your income? If you are using your savings, how long will they last? Could they run down before your needs run out? What if you live much longer than expected? These are common concerns for anyone facing an immediate need for care. However, there is another option to consider - you can purchase an ‘immediate care plan’. This can guarantee to cover any shortfall between what you can pay and your actual care fees for life – or for as long as you need them, whichever is sooner.

Finding a lump sum may be difficult but thanks to house price rises, there may be equity in your house. This brings its own considerations – you may have to fund mortgage payments or sell the house and lose the family home from your estate. There are also some risks, primarily the that you die earlier than expected and therefore lose out compared with paying the fees yourself. In exchange for this risk, the provider takes on the happier possibility you will live longer than expected and therefore need more money than you invest. An adviser can help you through the maze - although, speak to a suitably qualified adviser and be aware that the FSA does not regulate some forms of Long Term Care and Estate Planning.

Speeding up the process

Recent investigations by the Office of Fair Trading (OFT) show that ISA savers may not be getting a fair deal. Around 11% of Cash ISA holders switch their deposits to a new provider each year. However, following a ‘supercomplaint’ from watchdog, Consumer Focus, the OFT found that cash ISA transfers take an average of over 26 calendar days (against industry guidelines currently set at 23 working days).

Having to wait nearly five weeks after you have made a decision is a long time. In addition, over this period, the OFT found that consumers not only miss out on the higher rates which pushed them to transfer in the first place, there is also a period of up to five days during which they receive no interest at all! The OFT has, unsurprisingly, deemed this unacceptable and has now reached agreement that transfers and interest rates on cash ISAs become more transparent. From 31 December 2010, the OFT recommends that transfers take no longer than 15 working days. Consumer group Which?, however, wants to cut this further, to no longer than 10 days, and also wants a fully electronic transfer system to be set up.

The OFT has therefore recommended that research be done to see whether an electronic transfer system is feasible. They also believe the new rate of interest should be paid from day 15 of the transfer period – even if the transfer remains incomplete – and that interest rates be published on statements (from 2012). Despite the final disagreements, after so many years delaying the process, it is good to see that something is finally going to be done.

Extending the lifetime limit

As expected, the Chancellor of the Exchequer raised the rate of capital gains tax (CGT) in the Emergency Budget in June. CGT rose from 18% to 28% for higher rate taxpayers only, with immediate effect. However, the Chancellor also decided to alleviate the pain of higher CGT for small business owners by increasing Entrepreneurs’ Relief on business disposals. They now qualify for a reduced CGT rate of 10% on the first £5 million of lifetime gains made through the set up and disposal of small businesses, claiming Entrepreneurs’ Relief as many times as they like until this limit has been reached.

The coalition government used this as a way to demonstrate its support for smaller companies, and the new measures were broadly welcomed by their owners. However, some business groups were critical, believing the measures to be too limited; for example they did not extend to private-equity style investments, and general employees will not qualify for relief on any shareholdings they build in the companies they work for.
In order to qualify, entrepreneurs must have held the relevant assets for at least a year, must be an officer or employee of the company, and must have an equity ownership stake of 5% or more in the business. This means that, for some small companies, only the major stakeholders will benefit, and highly successful entrepreneurs who realise more than £5 million from the sale of businesses could actually end up worse off, as any excess will now be taxed at 28%.

Global market update

July saw a huge re-embracing of risk assets after the weakness in June. This was prompted at first by better economic news – though this had started to wane by the end of the month – and there were also some high-profile corporate earnings announcements, which gave equity markets a boost.

Equities were the top-performing asset class in July, with the UK the place to be. US equities also did well, while European equities performed roughly in line and Japanese equities saw weaker performance. Corporate bonds were largely flat and government bonds fell slightly on the month.

Equities were initially given a boost by an International Monetary Fund report that raised global growth forecasts from 4.2% to 4.6%. The UK was one of the few countries where growth prospects were downgraded, but the change had been largely expected on the back of the ‘austerity’ Budget in June. There was also better news from Europe where PMI data showed improved confidence in the manufacturing sector while the weaker euro finally seemed to be feeding into positive growth for companies in the region.

But the good economic news did not hold up. Mid-month, Federal Reserve chairman Ben Bernanke said economic conditions were “unusually uncertain” and the struggling banking sector and near-collapse in the Greek economy were delaying a US recovery. And so it proved at the end of the month when US GDP growth figures came in behind expectations – the economy grew at an annualised pace of 2.4%, compared to expectations of 2.7%.

There was also bad news from China as the announcement the country’s growth had slowed to “just” 10.3% – from its previous level of 11.9% – spooked economists. The more optimistic pointed out this was a natural consequence of Beijing’s strategy of withdrawing its stimulus packages and tightening monetary policy, but it still raised fears of a double-dip.

Back in Europe, the much-anticipated banking stress tests proved something of a damp squib. There were few surprises and most analysts thought them insufficiently rigorous, which means they essentially failed in their primary aim – of restoring confidence in the sector.

So why did equities hold up? Principally, the strength of corporate profits continued to support prices. July saw the start of the second-quarter reporting season and early signs were promising. Shell and Exxon, for example, saw a near-doubling of profits, which helped ride out the worsening economic news.

Inflationary pressures rise

UK interest rates have now remained at their all-time low of 0.5% for over a year. The UK appeared to creep tentatively out of recession but the new Government is now anxiously looking at ways to cut costs without derailing a still fragile recovery.

However, the UK Consumer Price Index was still 3.1% in July. In his most recent open letter to the Chancellor of the Exchequer, in May, the Governor of the Bank of England (BoE), Mervyn King considered these levels to be the result of “temporary factors” and suggested inflation will fall back below the Government-set target level of 2% "within a year". Even taking King’s explanation for the rise into consideration, it is worth remembering the rate of inflation has almost doubled since November 2009. Indeed, only a few months ago, deflation seemed the more credible risk. In normal circumstances, the BoE would increase the cost of borrowing in order to cool inflation. However, rates are unlikely to rise in the short term because policymakers fear higher interest rates could endanger that economic recovery.

Low interest rates are generally good news for borrowers, but are bad news for savers, who have already endured a year of exceptionally low interest rates. Returns on cash are meagre and relatively high inflation is eroding the real value of cash. At least in the short term, Britons face the combined problems of high inflation and rising taxes, both of which will put additional – and unwelcome – pressure on disposable income.

Funding a decent income

When making plans to start any pension plan, the first thing to consider is how much income you think you will need. Few people need as much income in retirement as they do while working – the mortgage may be paid off, children will likely have left home and day-to-day expenses will probably fall. However, with more leisure time available, you may have some ambitious plans for travel. All this needs to be considered so you can set some realistic expectations. Once this target figure has been determined, you can then begin to decide how much needs to come from a pension and how much can come from other means. For example, the state pension is £97.65 a week (for 2010/11), plus you may have money in ISAs or from rent from second properties. You may also decide to work part time or take some other type of temporary paid employment. Pension plan savings are then the first step in working out how to make up the difference. Unless you already have a significant work or personal pension arrangement in place, some form of additional saving will be required to meet your target. Just to give you an idea, using annuity best buy tables published in April 2010, because interest rates are at very low levels, £10,000 worth of annual income for a male aged 65 (with no guarantees built in) will require a pension fund valued at over £150,000. For females - or for those wanting to retire earlier than 65 - the fund required will be even higher. Hence the need to start planning and the earlier you start, the easier reaching your target will be.

Emergency Budget Snapshot 2010

The Chancellor has announced today the Coalition Government’s first Budget.
This is not intended as an in-depth analysis of the Budget speech (we will leave that to the real experts) but we hope this quick snapshot helps you gain a quick grasp on the key points:

Tax
VAT to increase to 20% from 4 January. Current zero-rated items to remain exempt for whole of current Parliament.
CGT to increase for higher-rate taxpayers to 28% from 23 June 2010. CGT to remain 18% for basic-rate taxpayers and the CGT tax-free allowance to remain £10,100 this year.
The CGT entrepreneurs rate of 10% to be extended to the first £5 million of lifetime gains.
Personal income tax allowance to be increased by £1,000 in April 2011 to £7,475. Higher rate threshold to remain frozen until 2013.
The April 2011 introduction of taper on higher rate tax relief on pension contributions by high earners to be reviewed.
Insurance premium tax to be increased from 2011. Higher rate to be 20%, standard rate 6%.
Councils that propose low council tax increases to be offered additional funds to allow them to freeze the tax for one year from April 2011.

State benefits and pensions
Benefits, tax credits and public service pensions to be increased in line with CPI rather than RPI from 2011.
Basic state pension to be linked to earnings from April 2011.
Pensions guaranteed to rise in line with earnings, prices or 2.5%, whichever is greatest.
The increase in the state pension age to 66 to be accelerated.
Child benefit to be frozen over the next three years.
Tax credits to be reduced for families earning over £40,000 from 2011.
Child element of the child tax credit to be increased by £150 above indexation in 2011.
Sure start maternity grant to go to the first child only.
Cap on housing benefit to be introduced - from £280 a week for a one-bedroom property to £400 a week for four bedrooms or larger.
Medical assessment for Disability Living Allowance to be introduced from 2013 for new and existing claimants.

Businesses
Corporation tax to be cut to 27% in 2011 and by 1% a year over the following three years to 24%.
Small companies rate to be cut to 20% in 2011.
Employer’s NI threshold to increase by £21 a week above indexation in April 2011.
Tax relief for video games industry to be scrapped.
Bank levy to be introduced in January 2011 to apply to balance sheets of UK banks and building societies and UK operations of foreign banks.

Duties
No increases in fuel, alcohol and tobacco duties.
Planned increase to duty on cider by 10% above inflation reversed.

Public sector pay
Two year public sector pay freeze to be introduced on staff earning more than £21,000.
People earning less than £21,000 to receive a flat pay rise worth £250 in each of the two years.

Internet
Planned landline tax to be scrapped.

If in doubt, disclose

When taking the decision to buy any type of protection policy, you do so to gain the peace of mind that, should something happen, your income or your family will be covered. However, we are continually hearing that policy providers find ways to turn down claims - and always this happens just when the people concerned needed the money most. So why would a provider turn down a claim? The primary reason will be that the insurer finds some incorrect, missing or incomplete information on the original application forms. This is called 'non-disclosure' and examples include details such as claiming to be a non-smoker, reducing your weight significantly, not checking the status of a dangerous hobby (sailing, skiing or maybe even horseriding) or simply not owning up to an existing medical condition, even if you thought at the time it was irrelevant. If such details are uncovered, they can make any policy you thought you bought in good faith, completely invalid. For this reason, particularly for any sickness related plans (eg: critical illness or income protection), it is sensible to seek Independent advice. Such plans may all carry the same name but the conditions they cover and the exact definitions they use for those conditions can vary widely. Covering yourself against any unforseen circumstance can appear to be an expensive business when you first start the conversation. It is therefore absolutely vital that you get the type of cover right - and don't give your insurer any reason to be able to get out of your claim should you ever have reason to need it.

Use your tax breaks

Benjamin Franklin's view that nothing is certain except death and taxes has yet to be disproved. However, using the tax allowances granted by the Government can at least help mitigate the tax side. At the basic level, there is a personal income tax allowance, an annual exemption from capital gains tax plus numerous tax credits dependent on your circumstances. Schemes like Gift Aid offer tax relief on donations to charity and there is also an Inheritance Tax (IHT) threshold below which nothing is due. Alongside, there are tax efficient investment products, such as Individual Savings Accounts and pensions, which provide relief from both income and capital gains tax (CGT) to differing extents. In addition, some individual assets are specifically exempt from CGT - your home, your car, certain personal jewellery, antiques and UK Government bonds (gilts). In terms of IHT, for the 2010/11 tax year, the threshold is £325,000 (£650,000 for married couples and civil partners) and the value of your estate above this is liable to tax. This can leave beneficiaries having to sell family heirlooms to pay the tax bill. However, there are exemptions available from this tax as well, and a little bit of planning can help you access the range of annual exemptions and allowances in advance. This can help you reduce the liability as far as is practical – or provide the means with which your beneficiaries can pay it without having to sell items of sentimental value.

Planning for a market downturn

As an investor, you understand that different asset classes and industry sectors are liable to turn against you from time to time. Despite equities' long-term potential, both the meltdown of the 'dot.com' boom and, more recently, the credit crunch fallout demonstrate things are much less certain in the short term. Similarly, bonds are viewed as medium to lower-risk investments, particularly when economic growth is on the wane. However, holders of some bonds over the period since the crunch first hit would have suffered. Many investors, faced with such downturns, tend to panic. They see only the shortterm loss on their portfolio balance sheet and forget their reasons for investing. Sadly, this is the worst thing they can do – and it is why planning at the outset of any investment is worth every minute spent. If you know why you are investing and understand fully the risks involved, market downturns should never have such an impact. If you are far-sighted and have a degree of nerve, they can even be an opportunity. Such downturns can be wide-ranging and indiscriminate, meaning the share prices of high-quality companies can suffer alongside lower-quality peers. This gives canny investors the opportunity to add to their portfolio at bargain prices. However, for most, the best strategy is simply to protect yourself while the market settles down. Nothing in a portfolio is more valuable than the time you spend achieving balance, diversification and cementing that long-term objective.

How to build your portfolio

The word 'portfolio' is simply a shorthand term for the collection of investments you own across all your accounts. Ideally this will be spread across a variety of assets - equities, bonds, property and cash - in a mix that has been determined by that your specific objectives. The process of deciding how much to invest in each asset class is known as asset allocation. For example, equities have traditionally offered higher returns over the long term but at the price of increased risk while, at the other end of the scale, cash has offered both security of capital and stability but with a fluctuating income and no chance of capital growth. Actual returns are dependant on many variables, such as the health of the economy in which you are invested, inflation, interest rates and market sentiment. The elements that impact each asset class vary and as a result, one asset might be doing very well at the exact same time another is doing badly. However, it is difficult to predict which one will be doing well - or badly - at any one time. Hence, if you mix the asset classes together and have a little bit of exposure to each, this can help balance out the peaks and troughs of the individuals. Your age, your financial position and your attitude to risk are all crucial considerations to make sure you get the proportions right and build the most appropriate portfolio. It is therefore helpful to speak to an expert who can more easily help you achieve the right mix.

Global Update

Volatility returned to global equity markets with a vengeance during May. Despite some encouraging economic data, sentiment was dominated by pessimism over prospects for economic growth in Europe, political uncertainty in the UK and worries about the possibility of slower-than-expected growth in China. Europe’s problems continued to dominate global investor sentiment amid ongoing concerns that, despite a €110bn (£93bn) aid package, Greece’s debt crisis might extend to other European nations. Unpopular austerity measures in Greece led to civil instability and raised concerns harsh spending cuts could stifle prospects for a sustainable economic recovery. Elsewhere, Germany caused surprise and controversy by announcing a ban on naked short selling (in which securities are sold that are not already owned or borrowed) without consulting fellow European nations, exacerbating fears of growing divisions between European leaders. In the UK, news was dominated by the general election, which led to Britain’s first hung parliament since 1974. A coalition agreement between the Conservatives and Liberal Democrats generated some relief, but the coalition’s pledge to cut the UK’s budget deficit led to renewed fears of stringent spending cuts that might impair prospects for economic growth. As with other major markets, UK share indices experienced some volatility resulting from Europe’s debt crisis. Meanwhile, shares in oil giant BP, one of the largest companies in the FTSE 100 index, continued to come under pressure amid ongoing controversy surrounding a major leak into the Gulf of Mexico. The US did not escape the fallout from the European crisis and share prices experienced significant volatility during May, exacerbated by fears that slower-than-expected economic growth in Europe might adversely affect US exporters. These worries were not helped by uncertainties surrounding the financial services reform bill and an alleged computer-trading error that led to sudden, massive intraday falls early in the month. Concerns over the outlook for Europe and fears of contagion also dogged Asian markets during May, and share prices of Japanese exporters were dragged down by concerns over the possibility of lower demand from European markets. Nevertheless, investors were cheered by the news Japanese exports had soared during April by more than 40% year on year, boosted by strong global demand for cars and semiconductors. Elsewhere, China’s central bank announced a third increase in banks’ reserve requirements, fuelling fresh worries that slower-than-expected economic growth could hamper corporate profits.

A new political dawn

After a couple of nail-chewing weeks, the UK finally has a new government. It may not be quite what markets would have wished for - equally it is not as bad as they might have feared. But this is unchartered territory with the UK coping with an economic crisis and a political set-up not seen for a generation. Do investors need to prepare themselves for a bumpy ride? Or are the new government’s policies likely to bring stability? First, it must be said that some measure of certainty is welcome. Markets hate uncertainty and the mere fact that a government has been formed has allowed them to concentrate on other areas (like the crisis in the Eurozone). The pound has seen a small rally against the Euro since the election, though this may be more a function of the potential weakness across Continental Europe than a vote of confidence in the new government. More certainty of government is good for gilts, as is the fact that all the major rating agencies said that the outcome of the election had not changed their view on the outlook for the UK. That said, many other problems remain: Over-supply continues to be an issue and the rating agencies may not look so favourably if credible steps are not taking relatively quickly to deal with the deficit. All eyes will be on the new budget on 22nd June. Coalition is not a disaster. Markets had expected a hung parliament and the current compromise is probably as good as they could have hoped for. The true extent of the compromise is unlikely to be seen until the first budget. Watch this space.

What does it mean?

What does our new coalition Government mean for your financial plans? The UK economy is running an unprecedented deficit so we can be sure that somewhere, one or two taxes will rise. In the spirit of compromise, there will be no imminent rise in the Inheritance Tax threshold and the priority is instead a rise personal income tax allowances. Alongside, however, the Prime Minister has given indications that there maybe changes to Capital Gains Tax coming. Rumour also has it there will be rises in VAT. Until we see the Budget Statement on the 22 June, we will not know anything for sure. However, now may be a good time to start a review of your own plans so you are ready to make a change should that be required.

The Coalition Government making its presence felt

An increase in capital gains tax (CGT) will be at the heart of any package of reforms. Currently, at a rate of 18% on "non-business assets", this is likely to increase to close to 40%.

The income tax threshold is likely to rise to £10,000 from April 2011, with plans to ditch the employee part of the proposed National Insurance increases.

The £1 million threshold on inheritance tax was always unlikely, while the Lib Dems have had to give up on their "mansion tax" on properties worth more than £2 million.

Public sector pensions are to come under scrutiny, with a commission to assess their sustainability.

Victims of the Equitable Life scandal in 2000 will benefit from a new compensation scheme that goes beyond that devised by the Labour government.

Save thousands with salary sacrifice

High earners should exploit salary sacrifice rules when planning their pension saving, allowing them to avoid some of the tax rises imposed by the Budget and pre-Budget report.

In brief, from 6th April a 50% upper rate of tax has been introduced for income over £150,000, and the personal allowance (the first slice of income on which no income tax is due) is also to be gradually removed. Currently staning at £6,475, this allowance will reduce and completely disappears for those earning approximately £113,000 or more. From 6th April 2011, National Insurance contributions will also increase by 1%, both for employees and employers.

These rises coincide with a wider range of changes that will make pension saving less tax efficient for those with high incomes. For the moment, those with incomes of more than £130,000 are to be hit, but are the government just lining up for further changes?

These changes make the option of salary sacrifice, where people give up some of their salary in return for an employer pension contribution, more attractive.

Abolishment of Contracting Out

On 16 March 2010, the government confirmed that contracting-out under defined contribution pension schemes will be abolished from 6 April 2012.

Angela Eagle, minister for pensions and the ageing society, said abolition was a simplification measure as contracting-out for defined contribution schemes was a complex issue. She said: "It has become increasingly difficult to determine that a scheme member would be better off by contracting-out of the additional state pension."

The announcement means after the 2011/12 tax year people in defined contribution schemes will no longer be able to contract-out of the second state pension (S2P). For those who are contracted-out through a personal or stakeholder pension, no further national insurance rebates will be paid to their scheme after the one for the 2011/12, which is likely to be paid by the Department for Work and Pensions around October 2012.

Those in contracted-out money purchase schemes will start to pay higher national insurance contributions from April 2012 onwards.

People who have been contracted out will start to build up entitlement to S2P from 6 April 2012 onwards.
Benefits built up by being contracted-out will remain in the pension scheme until the individual transfers these to an alternative arrangement or benefits are paid.

Any other contributions being paid to the pension scheme will not be affected.

Social Care White Paper is welcome but people entering care will continue to need proper financial advice.

The Social Care White Paper seeks to set up a National Care Service (NCS). However, even if Labour wins the next two elections, it will take at least 5 years to conduct a proper examination of the funding options and delivery of a NCS. This means that many of the people entering residential care homes in the next 4 years will have died by the time a NCS is established.

These people urgently need care funding advice now. This issue is significant with 130,000 people entering residential care homes in England each year, of which 41% or 53,000 people are wholly self funding. Of this number only 7,000 receive proper financial advice about how to fund their care needs.

And this does not include the 20,000 co-funders or the hundreds of thousands of people who require domiciliary care.

As the ageing population rapidly grows IFAs will continue to provide vital specialist financial advice, although as a consumer you should ensure that you seek out an adviser that is appropriately qualified, holding the CII CF8 qualification, or similar.