Where safe meets secure
If your retired clients aren’t making the most of their tax allowances, they could be throwing away valuable income.
At the end of each tax year, retired investors have the opportunity to review their finances and minimise the tax they pay in order to maximise their income. Low interest rates on bank and building society accounts, coupled with increased media speculation about tax rises, have made this more important than ever. But a recent survey* showed an astonishing 4 out of 5 people ‘bury their heads in the sand’ and fail to make the most of their tax allowances each year. It’s estimated that a staggering £10 billion a year is wasted in this way, as many of the allowances have to be used by the end of the tax year.
Choosing an appropriate tax-efficient investment can help retired investors minimise the tax they pay. But, while the benefits of equity investment are widely recognised, many retired investors are uncomfortable with the volatility, feeling they’re unprotected from falls and unable to take advantage of the rises. Looking at the last decade, their concern is understandable: the FTSE 100 finished 1999 at 6,930, buoyed by the tech boom, but by March 2003 it had fallen to 3,613, and today (9 April 2010) it stands at 5,762. These peaks and troughs have made a challenging environment for retired investors who want a secure, tax-efficient income.
A secure solution
AEGON Secure Lifetime Income provides investors with a secure income which initially is paid tax free and can rise each year. This assumes the policyholder starts to take income immediately. If they decide to defer the start of their income and they benefit from the income escalator feature, there may be an income tax charge. This income is protected from falls in the investor’s chosen fund and will continue throughout their life. The investor’s fund is reviewed each year and, if the value has risen to a new highest level, their guaranteed income will increase to be based on this new highest fund value. The new level of income is then guaranteed throughout the investor’s lifetime (unless it rises again). If their fund has not risen to a new highest level, their guaranteed income remains unchanged.
This yearly review allows the investor’s guaranteed income to benefit from good fund performance. It’s been particularly appealing to investors who have money on deposit and want a higher income from it, as they get the full benefits of investing in the markets but without the risks. The income paid is age related and can be up to 5% of their original investment or subsequent fund value on the anniversary date, if it increases.
Investment returns aren’t guaranteed and although the income is guaranteed with AEGON Secure Lifetime Income, the fund value isn’t – so it could fall as well as rise.
The only circumstance in which the guarantees wouldn’t apply is if AEGON Ireland plc failed. In this unlikely event, the benefits from your plan may be affected.
More income, less tax
Table one shows the income rates paid at each age group, and the gross equivalent needed from a bank or building society account to achieve the same income level without eating into the investor’s capital.
Table 1
| Age | Guaranteed income from AEGON Secure Lifetime Income |
Gross interest rate (basic rate taxpayer) |
Gross interest rate (higher rate taxpayer) |
| 75-79 | 5.00% | 6.25% | 8.33% |
| 70-74 | 4.50% | 5.62% | 7.50% |
| 65-69 | 4.00% | 5.00% | 6.67% |
| 60-64 | 3.50% | 4.37% | 5.83% |
As you can see, a 75-year-old higher rate taxpayer would need to find an account paying 8.33% gross to have the same income level.
AEGON Secure Lifetime Income uses a unique tax allowance that can minimise the tax investors might pay if their income rises. The initial income is paid tax free as it’s within the allowance.** And if your client’s income rises following the yearly review, then the new level of income may be above this allowance. Ordinarily this would create an income tax liability, but AEGON Secure Lifetime Income (ASLI) allows investors to ‘roll forward’ any unused allowance to the following tax year, so that none of their allowance is lost. This gives retired investors an opportunity to maximise the income they can take tax-free.
Table 2 – How ASLI shapes up
| Bank/building society | AEGON Secure Lifetime Income | |
| Is my income guaranteed? | Interest rates are currently the lowest they’ve ever been. Even if an attractive headline rate is advertised, you’re very unlikely to get it for the lifetime of your savings. To keep getting an attractive headline rate you can move your savings around to different accounts. However, it’s likely you’d have to do that every 1, 2 or 3 years |
You can get a minimum level of guaranteed income for life. The lifetime guaranteed amount depends on the value of your investment and the age you start taking income payments* Your guaranteed income can also increase if your fund performs well – and any increase to your guaranteed income will be locked in for life. |
| Do my income/savings have a good potential to grow? | Savings can only grow by the interest rate applied to them. | Savings are invested in real assets (equities and bonds) so can take advantage of any market upturns which in turn can lead to higher guaranteed income. |
| Will my income be paid for as long as I live? |
If interest rates stay low, you may have to live off your savings and could be left with nothing | Your guaranteed income will be paid every year even if your original investment runs out |
| Will my income be tax free? | You’ll have to pay tax on the interest your savings generate | Guaranteed income is tax-free for life** |
| Can I access my money? | You can access your money whenever you need it | You can access your money whenever you need it† |
| Can I pass on my money when I die? | Any money left in your account when you die gets passed to your loved ones | Any money left in your plan gets passed to your loved ones |
* With AEGON Secure Lifetime Income, even though the income is guaranteed, the capital isn’t and can fall as well as rise. |
||