Q&A: Your money queries
Your money queries are answered by Peter Rutherford, senior director of Rutherford Wilkinson Ltd, Chartered Financial Planners.
Q: For some years I have been contracted out of the State Second Pension Scheme but my pension provider has recently written to me saying they think I would be better off contracting back in. What is your opinion?
A: Contracting out means that some of your National Insurance contributions are redirected to your personal pension arrangement. In the past the Government offered quite attractive incentives to do this but their value has been eroded.
It has come to the point where it is extremely unlikely that by contracting out you will beat the state secondary pension. That is why insurers are writing to investors to advise them they would be better off contracting back in.
However, it is not as simple as that. There is no guarantee that the state secondary pension will be paid at all when it comes to your own retirement. It may well have been replaced by a higher old age pension or reduced on the grounds of affordability. Further, we do not know exactly when you will get the benefits even if they are not tampered with by future governments. Currently the state pension age is 65 but we know that that will become later and later.
By contracting out you take control of what may well be a lower benefit but it is at least yours to decide upon. The above said, this is now all rather academic as the government has confirmed that contracting out of money purchase pension arrangements will be abolished from April 6, 2012.
Q: I am attracted by the benefits of venture capital trusts but nervous of the risks of investing in them. They seem to me to be very high risk.
A: VCTs offer a very attractive incentives such as 30% income tax relief on the investment as well as tax-free growth and tax-free dividends. However, you are right that they can be high risk. This is because you are generally investing in what are early stage companies. The expectation is that they will grow rapidly but as we all know not every business survives. The good news is that there are some attractive low-risk options where the VCT invests in companies with lower risk business models and also they use other tools such as credit insurance or a particular deal structure to protect the capital.
This makes the offering less vulnerable to market cycles and any potential economic downturn. There is one in particular that I am generally happy to recommend which aims to return 105p for every 100p invested, net of all charges and fees.
When this target of minimum return is combined with the 30% income tax relief it equates to 7.8% per annum net return over five years. A 40% tax payer would have to achieve 13.1% per annum before tax to have the same result.
Q: My wife and I are comfortably off and have a reasonably sized estate. However, we are putting off taking action because the Conservatives have said that when they get in they will raise the inheritance tax threshold to £1m. Do you think we are right to do so?
A: Firstly I would say that there is no guarantee of a Conservative victory. At the moment there is much talk of a hung parliament. In addition, even if the Tories do get in it does not mean to say that they will actually follow through on their promise quickly, if at all.
Further, you may have other considerations but would suggest that you should take advice because you may wish to benefit your family in certain ways. Consequently, things like trusts may need to be considered. In a nutshell do not put off action, take advice and review.
To request a free Investor's Guide and with any questions you would like answered contact Rutherford Wilkinson Ltd, Northumbria House, 21/23 Brenkley Way, Blezard Business Park, Newcastle, NE13 6DS. See www.rwpfg.co.uk Telephone 0191 217 3340, email peter.rutherford@rwpfg.co.uk
Rutherford Wilkinson Ltd is authorised and regulated by the Financial Services Authority.
Share
