UK Pension Transfers

UK Pension Transfers

Immigrants from the UK and New Zealand residents who have worked in the UK usually find themselves leaving behind their locked-in pension funds when they arrive in New Zealand. This can present a number of difficulties.

Once you become eligible for payments from your fund, you will need to pay tax on those payments as well as bank transfer fees. You will also be exposed to exchange rate changes so that the amount you receive as a pension will fluctuate over time. If you pass away with your money still in a UK scheme, your spouse is likely to receive a pension worth only half of what you would have received, whereas New Zealand retirement schemes pay the whole benefit to your spouse or dependants. UK pension funds are classed as Foreign Investment Funds by Inland Revenue which means that if you are a New Zealand tax resident you may have to pay tax on the investment gains.

UK pensions can be transferred to New Zealand but can only be transferred to a Qualifying Recognised Overseas Pension Scheme (QROPS) without incurring tax. Up to 40% of any money you transfer may go into an unlocked fund and can be withdrawn before retirement age without tax liability if withdrawn more than six years after leaving the UK. By contrast, some UK pensions allow you to take 25% of your funds after the age of 55 without paying tax. Being able to withdraw funds can help with changing circumstances such as marriage, birth of a child or change in employment status.

Having your funds in New Zealand means it is easier to obtain information on how your investment is performing. The transfer is best done with the assistance of a financial adviser to avoid unnecessary penalties and to be aware of your options.

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The Eight Worst Credit Card Mistakes

Credit Card Mistakes

Credit cards are one of the most useful yet also one of the most dangerous modern financial inventions. Use them wisely and you can make money from them. Use them unwisely and you can lose everything you have. The worst mistakes you can make with your credit card are:

 

  1. Paying only the minimum balance. You will lose the interest free period on new purchases and it will take a long time to repay your debt.
  2. Having too many cards. It is much harder to keep track of your total debt when you have multiple cards.
  3. Using cards for non-essentials. Getting into debt to buy luxury goods will set you back financially.
  4. Not getting the best deal. There are big differences between cards when it comes to interest rates and features. Choose the card that is right for you.
  5. Forgetting to pay or paying late. You will add to your interest bill and your credit rating may be affected.
  6. Having too high a credit limit. The higher your limit, the more you may be tempted to spend and the harder it will be to pay off your bill each month
  7. Being tempted with low interest offers. Look at the fine print before you accepting an offer to get a new card at a low interest rate.
  8. Refinancing without reducing your limit. Increasing your mortgage to repay your card will reduce your interest if you are maxed out, but only if you stop spending on your card.

To use your credit card to advantage, set the limit to a level that you can afford to pay off every month by direct debit. For emergencies, have a second card with a higher limit which you keep hidden in a safe place (not your wallet or purse!).

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When Retirees Run out of Money

Retirement Blues

One of the biggest financial risks faced by retirees is that they will run out of money before they run out of time.  A pension is only enough for daily living costs and those who have just a small sum saved can run out of money once they have had to replace a car and pay for home maintenance. There are a number of options for retirees who need to supplement their retirement funds.

 First of all, check to ensure all available Government benefits are being received such as accommodation supplements and disability allowances. Check with the local council on eligibility for a rates rebate.

 If a large sum of money is needed, the cheapest option to consider is to borrow from family members. This should be done with the assistance of a solicitor to prevent any problems with gift duty or issues that might arise on death. Unfortunately, children don’t often have money to lend. Borrowing from a bank is a possibility and can usually be done by way of an interest-only loan. While this will help keep repayments small, they still need to made and this can be stressful.

 Selling the family home and buying a cheaper house is another way of getting access to funds. This can be an expensive option once all the costs associated with selling, buying and moving are taken into consideration.

 Home equity release schemes are proving to be very popular as a last resort option. If you need funds for home improvements, such as a new roof or painting, then taking out a loan will enable you to preserve the value of your house. Choosing a home equity release scheme is something that needs to be done with caution and is best done with independent financial and legal advice.

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Use Market Volatility to Make Money

Investment Markets

Investment markets move in cycles and it’s difficult to forecast when they’ll rise or fall. Moving your money in and out of the market during a downturn means you could potentially miss out on any positive bounce in a strong market recovery. Market volatility is what generates the return on your investment, and you can therefore use volatility to make money. With experience we find that most events in life that are volatile or uncertain still follow a reasonably predictable pattern over time. In financial markets, making observations about the way markets have behaved previously in similar conditions should enable you to take the right actions and to reasonably predict the outcome.

Markets move in cycles and as surely as the sun will rise every morning, markets that have dropped will rise again. The question is, how far will they drop in any downturn and how long will it take before they start to rise?

When markets are uncertain in the short term, there are some important principles to consider before you invest. More than ever, the two key principles of liquidity and diversification apply. In simple terms, that means you should aim to invest in things that can easily be converted to cash again (don’t put your money into investments that are locked in or for which there are few buyers and sellers) and spread your money among many different investments rather than trying to pick winners. One of the most effective ways of achieving this is to use another basic investment principle, called dollar cost averaging. That simply means drip feeding small amounts of money on a regular basis into a diversified investment. 

For long term investors, short term market volatility will seem of little consequence in years to come.

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When Sharemarkets Fall

When Sharemarkets Fall

It’s easy to invest when markets are running smoothly but when they fall your confidence can be sorely tested. More uncertainty in investment markets means more volatility and a need to review your investment strategy. Here’s what to do:

 

Start with the basics. Focus on your goals and objectives. If you have long term investment goals, remind yourself not to get too distracted with short term changes in the market. Reversing your strategy will cause you to lose value and lose time – both key ingredients for achieving your goals.

 Review your attitude towards risk and reassess whether your investment strategy is a good fit for your risk tolerance. When things are going well in investment markets it is easy to take on more risk than you should. Find the right balance between risk and return so that you can achieve your goals while taking an acceptable level of risk.

 Stay diversified. Markets can change quickly, and moving all your investments into one asset class might work in the short term, but it means you are taking on more risk by having all your eggs in one basket. Don’t sell in a panic or you will crystallise any paper losses. Selling up and putting all your money into very safe investments will lower your return, possibly making your goals harder to achieve.

 Evaluate all the options you have. This might mean getting more information from an expert who you trust. Make sure that any advice you get is from someone with a balanced or independent point of view who can point out the downsides as well as the advantages of different investment options.

 Confident investors have a long term plan that they stick to, they do their research, they aren’t swayed by emotions such as fear or greed, and they are successful at building wealth 

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How to Manage your Money in Retirement

Investing in Retirement

One of the biggest challenges in retirement is how to invest your money to provide an income while still protecting yourself against the eroding effects of inflation and income tax. Investing in fixed interest gives certainty of income but returns will be low and unable to keep up with inflation. The alternative, investing in growth assets such as shares and property, will give a better return over the long term but with increased uncertainty in the short term. For that reason, many retirees are afraid of investing in shares. However, there is a way of structuring your portfolio so you can use both income assets and growth assets to advantage. Here is how you do it.

Divide your portfolio into three amounts. The first amount is a lump sum of cash that is the equivalent of 6-12 months worth of income. For example, if you need $1,000 per month to top up your income, set aside $6-12,000 in cash. This amount should be placed in a high interest on-call account.

The second amount of money should be the equivalent of 1-3 years income, so in our example you would set aside $12-$36,000. This should be invested in fixed interest investments which are of good quality.

The third amount to be invested is whatever is remaining after setting aside the first two amounts. These funds should be invested mostly in growth assets with a small amount of fixed interest.

The way this strategy works is that over a three or more year time period the gain from your growth portfolio can be cashed up and put into your income portfolio to keep both portfolios constant. The interest from your income portfolio can be put into your on-call account to keep it topped up, along with proceeds from investment maturities as required.

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Buying your First Home

Tips for Home Buyers

For first home buyers the next few months are shaping up to a good time to buy and  there are three reasons for this. Firstly, we are seeing a decline in property prices as winter sets in. Some property investors have reacted to the last budget by choosing to sell and this has had an impact at the lower end of the market. Mortgage interest rates are expected to increase over the next few months and this will help keep property prices in check.

The second piece of good news for first home buyers is that from 1 July, 2010 you can you use some of your KiwiSaver funds for your house purchase providing you meet certain criteria. You must have been a member of KiwiSaver for at least three years and the house you buy must be one that you plan to live in yourself for at least six months. You will be able to withdraw the contributions you have made to KiwiSaver plus your employer contributions and investment returns. As well, you may be eligible for a subsidy of $1,000 for every year you have been a member of KiwiSaver up to a maximum of $5,000. To be eligible, your income and the value of the house you are buying must be within certain limits.

Thirdly, you may also be eligible for a low deposit loan through Housing New Zealand’s Welcome Home Loan scheme. With this scheme, you can borrow up to $200,000 without a deposit and up to $280,000 ($350,000 in some areas) with a 15% deposit on the amount above $200,000. That means you can buy a $280,000 house with a deposit of $7,500 and your KiwiSaver money (contributions plus subsidy) will count towards your deposit.

Now is definitely a good time for first home buyers.

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How to Manage Your Revolving Credit

Crunch your Credit

A line of credit, or revolving credit, is a very useful facility to have as part of your mortgage structure. The way it works is that you are committed to pay back only the interest each month and interest is charged only on the amount borrowed. Repayments of principal can be made at any time without penalty and the more you repay, the less interest you pay.
One key advantage of a line of credit is that if you run short of funds you can spend or withdraw up to the limit that has been set. This means that you can pay all your spare cash into your line of credit to keep the balance and the interest down, knowing you can grab it back at any time. If you have a mortgage, the best return you can get for your emergency savings is to ‘invest’ it in a line of credit. The return you get will be the interest you save on your borrowing.
Some mortgage brokers and lenders advocate using a line of credit as a transaction account for receiving income and paying all your living expenses. In theory, this will ensure your loan balance is kept as low as possible. In practice, this system usually fails because unless you are very disciplined it becomes almost impossible to keep to a budget. It is better to instead make a regular payment each payday into your line of credit to reduce the balance.
Some banks are now offering customers the ability to offset balances in a range of accounts, which is a great way to keep your savings separate from your mortgage. You will only pay or earn interest on the net balance of the range of accounts. The more you save, the more you will crunch your credit!

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Responsible Investing

There is a worldwide trend for investors to want to make a positive contribution to the world by investing in companies that are socially and environmentally responsible. If you are passionate about the effects of climate change, the scarcity of food and water, and social or environmental policies in general, then you will no doubt wish to ensure that the companies in which you invest are going about their business in a manner that is consistent with your views.
Traditionally, fund managers have had full discretion to invested funds based on expected financial return, however investors are now demanding more information about where their money goes and whether they are unwittingly supporting the expansion of companies that are harming society or the environment. Responsible investing describes an investment strategy which seeks to maximize both financial return and social good.
In the early days of responsible investing, funds typically used what is referred to as a ‘negative screen’ for selecting investments, which means they avoid investments in such things as tobacco, alcohol, gambling and armaments. Later came funds using a ‘positive screen’ which means they sought out investments in companies whose products are good for society or the environment, such as companies involved in clean technology (eg wind farms or water purification). More recently, fund managers are using a range of environmental, social and governance (ESG) criteria to assess companies. As responsible investing grows in momentum, fund managers are using the voting power they have as shareholders to directly influence the ESG policies of companies an approach sometimes referred to as ‘shareholder activism’.
The evidence clearly shows that companies with sound ESG policies also produce excellent financial returns, so that responsible investors can indeed be rewarded for their contribution. For more information, contact your adviser or the Responsible Investment Association of Australasia

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Top Up or Miss Out

The end of June is an important date for KiwiSaver members. The financial year for KiwiSaver runs from 1 July 2009 to 30 June 2010 and if you have contributed at least $1,040 to KiwiSaver during that time, you will be eligible for the full amount of Government tax credit to be paid into your KiwiSaver account in July. The maximum value of the tax credit is the lesser of $1,040 or the total of your contributions for the year. If you have put in $900 through deductions from your pay, then your tax credit will only be $900. By putting an extra $140 into your account before the end of June you will get the full tax credit of $1,040.
If you are contributing 2% of your pay into KiwiSaver and you earn less than $52,000 a year, or if you are contributing 4% of your pay and you are earning less than $26,000 a year, you will need to top up your KiwiSaver account to get the full tax credit. To find out how much you need to top up your account by, check your contributions with either your product provider or your financial adviser.

If you are self employed or not working and under the age of 65, you can still become a KiwiSaver member by joining directly with the provider of your choice. By contributing $1,040 a year as a either a single payment or $84 a month you will get the full benefit of the tax credit. It is not too late to join now. New members will receive the Government kickstart payment of $1,000 and a tax credit for the first year based on the number of days of membership.

Get your payments in as soon as possible to allow time for processing!

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