HMRC’s Tax Health Plan is a new initiative aimed at professionals to encourage them to get their tax affairs in order and keep them that way.

New powers take effect in April that will allow HMRC to force third parties to provide them with information on additional income sources received by self employed individuals regardless of the source or its legitimacy.

As of yesterday, Her Majesty’s Revenue & Customs are offering GPs and Dentists a 90% discount on normal penalties in exchange for them providing information on the totality of their income and investment gains as they are set to become the first profession to come under scrutiny from HMRC in this manner.

In an article on the new initiative in the Sunday Times it highlighted that a special Barrister Unit has been set up strongly suggesting they (and possibly their clerks) are the next profession on the hit list.

It does not mean, however,  the amnesty discount will be offered beyond the initial target of medical professionals.

This is the latest in a series of moves that the Revenue has taken in order to maximise its tax take. Last year saw the passing of a deadline offered to individuals with offshore bank accounts in which non taxed interest was being received and not disclosed.

With a large, and growing, budget deficit they will be keen to get every penny they can.

As the self assessment deadline looms it would certainly be wise for self employed barristers and partnerships to disclose all income sources (including investment income) to HMRC to avoid being hit with a penalty. More information on self assessment can be found at http://www.hmrc.gov.uk/sa/your-tax-return.htm.

If you would like assistance in ensuring your investments are as tax efficient as possible contact Chartered Financial Planner Andrew Neligan on 01483 274566 or emaillegal@icl-ifa.co.uk.

While this is not necessarily incorrect it is like starting a journey before you now where you are going.

How much should you be contributing and for how long? How should you be investing? It is difficult to answer these questions without having an idea of what you are trying to achieve.

A common management phrase is ‘start with the end in mind” and with financial planning it is certainly logical.

-Why do you need a pension?
-What are you looking to achieve?
-Have you thought about the life you want to live now and in the future?
-What are your financial circumstances currently?

By answering these questions first you can piece together the route map of your future to determine (amongst other things) what your pension needs look like.

The former world heavy weight boxing champion George Foreman has been quoted with saying “The question is not at what age do I want to retire but at what income” It is this focus on an objective that allows us to build a financial plan that will ensure we achieve what it is we want in life when we want it.

Financial planning, therefore, can be seen as a process in which we start with describing in as much detail as possible what we want to achieve; the acronym SMART is a common reference point here (that is, any objective should be Specific, Measurable, Achievable, Realistic and Time framed).

Objectives that aren’t SMART are easily left unrealised as it is difficult to determine how and when they will be accomplished.

Once our objectives are set the necessary steps can be put in place to ensure we meet our goals. The steps required will vary depending upon the goal but some basic principles should be followed.

1. Clear Debts – They erode wealth

2. Manage Risks – Death & Disability

3. Be Tax Efficient – Use allowances first

4. Decide on a Funding Strategy – Make it a habit

5. Decide how much investment risk is appropriate – Too much or too little render goals futile

6. Review – Goals will go off course if Financial Plans are not regularly reviewed.

One’s needs should be attended to first because they are likely to be more numerous and have the greater influence on one’s immediate life.

Examples of needs would be to have sufficient disposable income to cover day to day costs or ensuring loved ones are financially secure on death, disability or redundancy.

Once the Needs segment is taken care of one can consider one life’s goals; the age you want to retire or the house you want to live in. The financial plan can then be constructed to focus on these goals.

Finally, the pinnacle of the financial planning triangle is one’s dreams. All of us dream about what we wish to accomplish with our lives and while they may vary in their nature it is unlikely they will be realised without a structured financial plan.

Financial independence is the ability to live off assets and income that is self generating and so does not require any other individual or any institution to provide it; i.e. as salary or fee income.

It is a goal for many and one would hope that in retirement it is likely but without suitable planning it is easy to walk into a retirement that is spent penny pinching because no plan was put into place and the cost of retirement (exaggerated by inflation) was not accounted for.

In his book, The Number, American author Lee Eisenberg explains how everyone will have their own personal number. That is the unique personal wealth that will ensure financial independence for life. It is unique because everyone’s lifestyles will differ and therefore the rate of capital erosion by expenditure will vary.

One important variable is how early in one’s life financial independence can occur. Some people live to work and so can spend longer doing what they enjoy and earn over a prolonged period of time. Others may want to stop work as soon as possible and therefore need to build up a larger net worth sooner.

The diagram below maps the relationship between age and accumulated net worth that can determine at what point financial independence is possible. If expenditure is greater than income in retirement net worth will be eroded such that an unfortunate individual may be forced to reduce their lifestyle to avoid poverty in old age.

If you would like to understand more about Financial Planning or to have your own personalised Financial Plan produced please email us at hello@icl-ifa.co.uk or call us on 01483 274566.

Anyone who will be 50 before the beginning of the next tax year will have to make the decision whether it is appropriate to take their retirement benefits in whole, in part or to wait for up to a further five years.

Changes to the minimum pension age will mean the loss of access to pension benefits until age 55 with people at or approaching age 50 the most affected.

This article outlines the advantages of taking retirement benefits now plus warnings about doing so.

Advantages

1. Access to a Tax Free Lump Sum

Under current rules benefits from a pension scheme include a tax free lump sum equivalent to 25% of the fund value at retirement. This can be of great benefit where a capital expenditure is required, for example for home improvements, or to buy that dream car or, perhaps more prudently, to reduce a debt such as a mortgage.

2. Flexible Income

Contrary to popular belief an annuity is not the only income available from a pension. Unsecured Pensions (USP and also known as Income Drawdown) provides pension income that is more flexible.

It is possible to receive an income between nil and 120% of a rate set by the Government Actuary’s Department (the GAD rate). This rate is correlated to the yield available on Government Gilts and the individual’s gender and age.

This option is beneficial to those who require a capital sum but don’t want to receive any taxable income, those who want to start receiving a supplementary income and also to those who want the higher income than available via an annuity.

3. Continued Investment Growth

Unlike annuity purchase USP provides the opportunity to benefit from further fund growth because the pension fund stays invested. This can provide a higher level of annuity income when it is finally purchased.

4. Keep Contributing

Some USP contracts allow for pension contributions to continue despite having taken the tax free lump sum and income. This allows individuals to make use of the lump sum but to continue to build up their pension fund from which to take the guaranteed annuity income.

Contributions will continue to attract tax relief at 20% for basic rate tax payers with a further 20% reclaimable for higher rate tax payers.

Those earning £130,000 gross per annum or more should take note of the changes to tax relief announced in the 2009 Budget and Pre Budget Report.

Warnings

1. Worse Death Benefits

One significant disadvantaged of taking retirement benefits is worse benefits on death. Prior to taking benefits the pension fund can be passed to a nominated beneficiary as a lump sum free of any tax. Under USP this fund is taxed at 35%.

Worse still where an annuity has been purchased the pension fund can be lost entirely to the annuity provider. This can be mitigated against by adding options to the annuity that provide a dependants pension and guaranteed periods where the balance of payments continue to be paid for a maximum of ten years. However, when these options are added the starting income is reduced.

2. Loss of Tax Advantaged Growth

It is unwise to take the capital sum if it is not to be used. If the capital is only to be saved or invested it will have been transferred from an environment that grows free of tax (with the exception of a non reclaimable 10% tax credit on UK dividends) to one where both interest and capital gains are taxed.

3. Adding to Taxable Income

Unless an income is required any additional pension income (via any means) will simply increase the tax that is charged on total income at either 20% or 40% (and potentially 50% from April 2011).

4. Income erodes capital

If a USP contract is entered into and income is taken there is a risk that the income taken is greater than the investment growth received each year.

This will have the effect of eroding the capital value of the pension fund, which if occurs regularly or significantly in any given year, can be extremely detrimental to the final fund value used to purchased a guaranteed annuity income.

5. Loss of Purchasing Power

Annuity rates are determined by one’s life expectancy. The younger an individual the longer they will expect to live and therefore the greater income needed for life.

The result of this is a lower annuity rate offered by the annuity provider (they don’t want to pay more out in income than the original fund value they have received).

If a guaranteed income is relied upon for a long period of time (possibly for over forty years if bought at 50) the loss of purchasing power will be substantial over time as inflation reduces the value of £1.

This can be controlled by purchasing an annuity that increases each year either at a set percentage (3% or 5%) or by increasing in inflation (as measured by RPI). The disadvantage of this is that the initial annuity income provided is considerably less.

In fact, it can be in excess of ten years before an increasing income is equal to that of a level income.

This tax year therefore marks a key date for many and taking retirement benefits in any form can be extremely useful. However, care must be taken before irrevocable decisions are made.