Author: Ray Prince
Source: download
Let's look at a recent client we worked with, James, a
45 year old dentist who had ฃ500 per month to invest.
James was confident that he could invest this money
until his retirement at age 60, in 15 years time.
He has a mixture of PEPs and ISAs, with an NHS Pension
and a buy to let property.
Looking at this as one investment against another, we
need to look at a like on like projection. So we will
use a growth figure of 6% net of charges for both
investments.
Because of the tax relief available for James at his
highest rate (40%), the amount he can invest into a
pension fund is ฃ835 pm compared to the ฃ500 pm to an
ISA. Using projections of the future fund values over
15 years we get figures of:
Pension - ฃ238,810
ISA - ฃ143,000
It appears there is no contest, however, let's look
at the figures a little closer.
The ISA fund is all available as tax free cash, whereas
the Pension fund rules say a maximum of 25% of the fund
can be taken as tax free cash which is ฃ59,702.
So if we calculate ฃ143,000 minus ฃ59,702 = ฃ83,297,
this is the amount of tax free cash we have over and
above the Pension route. The remaining ฃ179,107 in the
Pension fund has to be used to buy a pension called an
annuity. So the question now is what pension amounts
could be available for James?
Taking an average example and using today's rates, a
level pension of ฃ9,117 per annum would be achievable.
However, will James be a higher or lower rate tax payer
in retirement? This changes the picture somewhat, as the
following after tax pensions would be applicable:
Higher rate tax payer - ฃ5,470 per annum
Lower rate tax payer - ฃ7,111 per annum
So to compare this to the ISA, we need to see how many
years the pension needs to pay out to reach the ฃ83,297
value of the ISA fund, allowing for growth on the ISA
fund at the same 6%, net of charges.
The answer is 17 years for the basic rate payer and 30
years for the higher rate payer! Not only is this is
a massive difference between the two, but it also helps
towards the decision whether to invest into a pension
tax wrapper or an ISA.
Other considerations
-We have ignored any "pension drawdown" option
-The amounts you can contribute to pensions is currently far more generous than that available to ISAs
-Annuity rates, income tax bracket, on pensions may improve or reduce in the future
-The government may change the rules on either pensions or ISAs or even abolish the tax favourability on one or both
-Financial Advisers/Salespeople are often paid higher initial commission on pensions than ISAs so make sure your adviser is taking these factors into account, and not just selling you a policy that pays him/her the highest commission.
So what did we advise James to do?
In his case it all came down to the picture painted
by his cash flow model. This enabled us to see how
James's wealth would look in the future.
What was clear was that his NHS Pension would in itself
take James into the higher rate tax bracket, and that a
tax free cash fund was more attractive to him than more
income that would be taxed at 40%. It would also aid
James to gift money to his 2 children, to both help them
financially and reduce his likely Inheritance Tax liability.
Therefore, James invested monthly sums into an investment
Maxi ISA.
The Financial Tips Bottom Line:
In effect, there is no clear cut right or wrong. It always
comes back to balancing the pros and cons of all the options
available and making your decision based on thorough research.
Ray Prince is an Independent Financial Planner with Rutherford Wilkinson plc, and helps doctors and dentists get the best deals on mortgages, protection and investments, as well as helping them achieve their financial objectives.
Get your free retirement planning guide, exclusively for UK Resident Doctors and Dentists. Just visit http://www.financialtipsonline.com/ea3. You'll also receive the twice-monthly email newsletter 'Financial Tips' that will enable you to keep posted of all financial issues affecting doctors and dentists. He can be contacted on 01670 505522.
Rutherford Wilkinson plc is authorised and regulated by the Financial Services Authority.
Showing posts with label pension. Show all posts
Showing posts with label pension. Show all posts
Wednesday, December 23, 2009
Friday, November 13, 2009
Uncle Sam's Snake Oild
Author: James Burns
Source: download
Uncle Sam and his band of merry-men, better known as Congress, have been pushing snake oil on the unsuspecting public in the form of retirement plans. But wait, isn't a pension plan one of the perks we look to when shopping for an employer? Well, not all pension planning is created equal and in most cases, quite disastrous.
Distributions from all qualified plans must begin no later than April 1st of the calendar year following the year that the participant attains age 70 1/2, or the calendar year in which the employee retires. Special rules apply if the distribution is made to a 5 percent owner of the business. The purpose of minimum distribution rules for retirement plans is to force the owner or participant of the pension plan to withdraw money from the plans, thus triggering an income tax on these monies. On April 16, 2002, the Internal Revenue Service issued final regulations as to these distributions.
Generally, the idea pursuant to the regulations is to have the owner or participant of the pension plan begin taking the money out of the pension plan beginning at the later of when he finishes working or age 70.5. One purpose of this is to insure that these monies will be subject to income tax prior to the death of the owner.
Based on the current system the government has created with pension plans, the average retired couple will pay eight to twelve times more in taxes on their IRAs and 401(k)s during their retirement years than they saved during their contribution and accumulation years. Generally, it is understood that you put money into your pension plan and tax is deferred and this is a great thing. Unfortunately, you may well be in a higher tax bracket if your pension accumulation is done right.
In addition to a higher tax bracket upon reaching retirement, many people find themselves with a free and clear home; they no longer have mortgage interest deductions to offset income tax. Many Americans find they are now paying back everything they saved in taxes during their accumulation and contributions years within the first two years of distributions. Therefore, there is an insidious income tax awaiting most people and if they didn't plan their estates, double taxation in the form of both income and estate tax.
Many postpone the transfer of their qualified funds until age 59 ฝ in order to avoid the 10% tax penalty. Sometimes by delaying the payment of taxes, retirees will find themselves in a higher tax bracket after age 59 ฝ because Congress could raise tax rates because of a political change. Inevitably, one must pay the piper now or later.
What is the answer? Simple, investment grade life insurance. This type of life insurance is not the same as the one you get countless letters about in the mail. This is life insurance that is focused on building up a triple compound because it is tax deferred. The difference between the deferral that life insurance experiences and pension plans is that when it comes time for payout, life insurance is received as a loan. This is a powerful concept because the proceeds will not be taxed; loans are not a form of taxable income. However, as a loan you will have interest on the payments. Most people mistakenly think they are going to pay interest on their own money with life insurance. While in theory that is true, the best insurance carriers provide for zero wash loans where the interest, income tax bracket, basically is forgiven or taken out of the death benefit when a person passes on. We are talking about real life insurance not the typical death insurance that most people have because you use it while you're alive.
The best candidates for creating amazing wealth with investment grade life insurance are those in the age rages of thirty to fifty. Once committed and in the proper product it is foreseeable they will retire wealthy and without the annoying taxation that surrounds a pension plan. There are even strategies to start a contribution plan to your investment that only requires repositioning your current finances. To see a presentation on ways to finance your retirement go to www.abundantmoney.com.
If you are over fifty, I'm sorry we missed you. If you have children don't let another day go by without them starting a plan because 79 million people are heading for the social security hand out in the next few years. Despite Social Security getting a 2.7 percent boost next year (2005), Medicare will eat up much of the increase and when the 79 million qualifying Americans sign-up - look out below.
James Burns, Esq.
Law Office of James Burns
18662 MacArthur Blvd., 2nd Floor
Irvine, CA. 92656
Jambur64@cox.net
(949) 440-3243
James Burns is an attorney with 2 law degrees one in tax and has trademarked financial concepts to assist individuals in creating wealth, protecting it and eventually transferring it to loved ones.
Source: download
Uncle Sam and his band of merry-men, better known as Congress, have been pushing snake oil on the unsuspecting public in the form of retirement plans. But wait, isn't a pension plan one of the perks we look to when shopping for an employer? Well, not all pension planning is created equal and in most cases, quite disastrous.
Distributions from all qualified plans must begin no later than April 1st of the calendar year following the year that the participant attains age 70 1/2, or the calendar year in which the employee retires. Special rules apply if the distribution is made to a 5 percent owner of the business. The purpose of minimum distribution rules for retirement plans is to force the owner or participant of the pension plan to withdraw money from the plans, thus triggering an income tax on these monies. On April 16, 2002, the Internal Revenue Service issued final regulations as to these distributions.
Generally, the idea pursuant to the regulations is to have the owner or participant of the pension plan begin taking the money out of the pension plan beginning at the later of when he finishes working or age 70.5. One purpose of this is to insure that these monies will be subject to income tax prior to the death of the owner.
Based on the current system the government has created with pension plans, the average retired couple will pay eight to twelve times more in taxes on their IRAs and 401(k)s during their retirement years than they saved during their contribution and accumulation years. Generally, it is understood that you put money into your pension plan and tax is deferred and this is a great thing. Unfortunately, you may well be in a higher tax bracket if your pension accumulation is done right.
In addition to a higher tax bracket upon reaching retirement, many people find themselves with a free and clear home; they no longer have mortgage interest deductions to offset income tax. Many Americans find they are now paying back everything they saved in taxes during their accumulation and contributions years within the first two years of distributions. Therefore, there is an insidious income tax awaiting most people and if they didn't plan their estates, double taxation in the form of both income and estate tax.
Many postpone the transfer of their qualified funds until age 59 ฝ in order to avoid the 10% tax penalty. Sometimes by delaying the payment of taxes, retirees will find themselves in a higher tax bracket after age 59 ฝ because Congress could raise tax rates because of a political change. Inevitably, one must pay the piper now or later.
What is the answer? Simple, investment grade life insurance. This type of life insurance is not the same as the one you get countless letters about in the mail. This is life insurance that is focused on building up a triple compound because it is tax deferred. The difference between the deferral that life insurance experiences and pension plans is that when it comes time for payout, life insurance is received as a loan. This is a powerful concept because the proceeds will not be taxed; loans are not a form of taxable income. However, as a loan you will have interest on the payments. Most people mistakenly think they are going to pay interest on their own money with life insurance. While in theory that is true, the best insurance carriers provide for zero wash loans where the interest, income tax bracket, basically is forgiven or taken out of the death benefit when a person passes on. We are talking about real life insurance not the typical death insurance that most people have because you use it while you're alive.
The best candidates for creating amazing wealth with investment grade life insurance are those in the age rages of thirty to fifty. Once committed and in the proper product it is foreseeable they will retire wealthy and without the annoying taxation that surrounds a pension plan. There are even strategies to start a contribution plan to your investment that only requires repositioning your current finances. To see a presentation on ways to finance your retirement go to www.abundantmoney.com.
If you are over fifty, I'm sorry we missed you. If you have children don't let another day go by without them starting a plan because 79 million people are heading for the social security hand out in the next few years. Despite Social Security getting a 2.7 percent boost next year (2005), Medicare will eat up much of the increase and when the 79 million qualifying Americans sign-up - look out below.
James Burns, Esq.
Law Office of James Burns
18662 MacArthur Blvd., 2nd Floor
Irvine, CA. 92656
Jambur64@cox.net
(949) 440-3243
James Burns is an attorney with 2 law degrees one in tax and has trademarked financial concepts to assist individuals in creating wealth, protecting it and eventually transferring it to loved ones.
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