Category Archives: Financial Planning

Creating a New Financial Plan Following a Divorce

How much money do you need to live? What would you do if your financial investments took a hit? And can you really afford that special holiday you want to book?

These are all questions someone facing life post-divorce may well need to answer. Making a new financial plan for yourself is something that can be prompted by any significant change in financial circumstances, but is particularly useful following divorce as you will not only have a new set of financial circumstances, but also other changes in your life to adapt to.

Emergency Fund

First thing’s first, you need to look at your essential fixed expenditures – these are the things that you have to pay for like mortgage/rent, council tax, bills, child-care costs, school fees, travel expenses, insurances etc.

A good financial plan really should ensure that in the worst-case scenario, your fixed expenditures can still be covered – usually for a period of around 12 months. This is what financial planners call your ‘emergency fund’ – a pot of money that is readily available for you to access should you need to if life deals an unexpected turn.

Spending habits

Once you have the basics covered, you can turn to look at the ‘non-essential’ costs in your life – your discretionary expenditure.

These will vary from person to person and could range from things such as getting your hair cut right through to holidays.

Taking a look at and totalling these up often gives people the biggest shock.

Clothes shopping, entertainment, a meal out with friends, a trip to the cinema, a family day out…all these things quickly add up. Don’t forget to factor in additional costs to the things you do too – although the headline cost of a flight to Spain may seem quite reasonable, you also need to take account of other expenses you will incur – such as transport and eating out whilst you are away.

In the past, where you may have been used to two incomes coming in and splitting some of your regular costs with your spouse/civil partner, you perhaps may not have felt the financial pressure of such outgoings. But when coupled with your essential expenditures, you may need to re-think how you manage and go about your spending.

Cash-flow modelling

If you have received a lump sum post-divorce which needs to fund your lifestyle for the foreseeable future, it is vital to properly plan out how this money can be utilised to its full potential for as long a period as possible.

One of the tools we use as financial advisers is cash flow modelling.  Essentially, this involves processing the figures around your current and forecasted wealth, along with income and expenditure, to create a snapshot of your finances both now and in the future. It’s a really useful process to go through with clients as it clearly demonstrates the affordability of their lifestyle – or not, as the case may be.

This process is becoming even more important for clients as life expectancy increases.  It is forecast that nearly one in five people currently living in the UK will reach their 100th birthday, so any pot of money that is invested will now need to last longer than it would have done in generations gone by.

We also take into account inflation because the cost of goods and services generally goes up every year.   For example, if prices increase by 2% each year, over a 20-year time scale the purchasing power of your money reduces by one third.

Sometimes, clients that go through the cashflow modelling process with us receive a short, sharp shock as they realise that if they maintain their current spending habits, their money is going to run out.  However, once a sensible plan has been put in place that balances expenditure with a sustainable portfolio, clients are always left in a much stronger position.

Annual review

Just as things change within an individual’s life and personal circumstances, so too do external factors that can influence the markets. As a result, it can become necessary to review and tweak a financial plan. This is why it’s vital to undertake a review of your financial plan with your adviser on an annual basis. Whether it’s Brexit, a change in Government, or legislation changes, a good financial adviser will discuss these things with clients and how their portfolios may need to be adjusted accordingly.

For example, between 2015 and 2018, the majority of investors experienced a buoyant three years, meaning even after drawing an income out, the purchasing power of their money would have remained due to the overall growth of their investments.

But then we hit the end of 2018 and suddenly there was a nosedive in the markets.  We’re now having to prepare clients for the fact that they may have to pull in the purse strings – it has been what we call a ‘flat year’ with most people being lucky to be level or any form of positive return.

This is where we can show our real value as financial advisers. It’s our job to ensure that clients make informed decisions regarding their money and that it can ultimately help them to achieve their lifestyle and financial goals in both the short and long term.

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6 Ways to Get Ahead This New Tax Year!

Several of the tax and investment allowances afforded to individuals come to an end on 5th April each year, with a new set coming into play from 6th April. Despite these dates being the same each and every year, human nature leads us to leaving addressing matters such as ISAs or pension contributions to the last minute!

Every year we talk to clients about getting their affairs in order well in advance of the end of the tax year. Yet every year, we find ourselves rushing around, sending off paperwork and cheques in an attempt to get funds cleared before the cut-off dates.

Here are 6 ways to get ahead and avoid the last minute rush come the approach of 6th April next year!

Make regular contributions

Rather than waiting until the 5th April deadline is approaching to make lump-sum contributions, you could consider making regular contributions to pensions and ISAs instead. The ISA contributions limit is £20,000 for the year 2018/19. So if you plan to utilise your full allowance, you can arrange to make monthly payments of £1666.66 into your ISA account.

Assuming you’re not subject to annual allowance tapering, the normal annual allowance for pension contributions for 2019/20 is £40,000. Depending on the amount you intend to contribute, you could split this equally over 12 months.

The other benefit of doing this is that by making regular investments, you can reduce the risk of buying into the market at a single point in time, a technique that’s often used during times of market volatility (as we have experienced recently).

Get your contributions in early!

If you are in a position to do so, there is certainly an argument to top up your ISA and make any pension contributions during the first few weeks of the financial year. Not only does this give you the peace of mind that you have everything sorted, but when compared to leaving lump sum payments until the end of the year, you’ll have almost a year’s worth of time for the investment to potentially grow in value.

Make contributions to your spouse’s pension

Starting a pension for your spouse (if they do not have one), or topping up if they aren’t contributing their full allowance, may be a tax-efficient way of saving if you have the funds available.

Bear in mind that when it comes to drawing an income in retirement, if a couple’s pension income only comes from one partner, only one tax-free personal allowance can be used. Where both spouses have a pension pot to draw from, two personal allowances can be utilised – therefore potentially doubling the tax free allowance a couple has (depending on other sources of income).

Set up accounts for family members

Again, if you have the funds available, setting up and contributing to ISAs in the name of children/grandchildren can be a useful way of cascading wealth to the next generation. However, any contributions made on behalf of children fall within normal inheritance tax rules, and must also fall within the individual’s personal ISA allowance.

Re-allocate assets

Sometimes, the most appropriate course of planning isn’t to simply top up existing ISA or pension plans, but rather something that requires more thought and therefore time. Depending on what stage of life you are at, you may need to think about re-allocating assets in preparation for retirement. Alternatively, if you are in receipt of a large lump sum, or have experienced any other change in your financial circumstances, this will need to be given careful thought well ahead of the tax year end.

Consider moving your annual review with your financial adviser

Depending on your personal circumstances, there may be a date that works better for you to have your annual review with your financial adviser. For example, if you are a company director, you may want to consider moving your annual review to near your Company year-end. This will allow you to have a clearer picture of your profit and any liabilities due, therefore allowing an informed decision regarding making a lump sum employer pension contribution.

 

There’s no doubt that getting ahead at the start of the tax year can put you in a preferable position.  Not only is there more time to consider the options available to you, once your plans have been actioned, you can sit back and relax!

To discuss your own personal circumstances with one of our financial advisers, and how you can get ahead this tax year, please get in touch.

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2019/20 Tax Year – A Brief Guide

The start of the new tax year falls on 6th April each year and brings with it a new set of rules and allowances.

Now the 2019/20 tax year is underway, here is a useful summary of the new allowances that are now in place.

  • The Capital Gains Tax annual exempt amount increases in line with the Consumer Price Index from £11,700 for individuals to £12,000.

 

  • The Personal Allowance – the amount you can earn before paying income tax – has increased to £12,500 for 2019/20, from £11,850 previously, meaning an extra £130 tax free income for the typical basic rate taxpayer.

 

  • The higher rate threshold has also been increased – to £50,000.

 

  • Scottish taxpayers have different rates from those in England and Wales. These are as follows:

Starter rate – 19% – from £12,500-£14,549
Basic rate – 20% – from £14,549-£24,944
Intermediate rate – 21% – from £24,944-£43,430
Higher rate – 41% – from £43,430-£150,000
Additional rate – 46% – from £150,000

 

  • Those who own a home will face less inheritance tax (IHT) when passing it on to their ‘direct descendants’ as the next staged increase in the Residence Nil Rate Band (RNRB) kicks in. The additional exemption for main properties, which was introduced in April 2017, has increased from £125,000 to £150,000. NB. There is no increase in the main exemption – the first £325,000 of any estate. The increase to the RNRB takes the total available tax-free allowance to £475,000 per individual, or £950,000 between a married couple/civil partners.

 

  • The Pension Lifetime Allowance – the most you can have in a pension pot without potentially suffering a tax charge on any excess – has increased from £1,030,000 to £1,055,000.

 

  • The Junior ISA limit will increase from £4,260 to £4,368. All other ISA limits stay the same.

Contact us

For further help in relation to any of the above changes or advice specific to your circumstances, please contact us.

NB: The Financial Conduct Authority does not regulate tax planning.

This guide represents our understanding of law and HM Revenue & Customs practice as at 6/04/2019

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Tax Year End Tips You Can’t Afford to Miss! Part 2

Many people don’t always realise the significance of the end of the tax year until it’s too late. Each and every year, an individual has a set of allowances allocated to them and some of these can be lost if action isn’t taken.

So with the 6th April and the dawn of a new tax year fast approaching, what do you need to consider?

We’ve put together our top 10 considerations – split over two instalments. Here are the second set of 5…

Clients approaching retirement: boost pension saving now before triggering the MPAA

Once you reach retirement age and start to take pension income (but not tax free cash) from a defined contribution pension (over and above your tax free cash allowance), the amount you can pay into a pension and still get tax relief reduces. The amount you can continue to pay into a pension is known as the Money Purchase Annual Allowance (MPAA) – and is currently only £4000 per year.

Anyone approaching retirement age may want to consider boosting their pension pot before April. The full annual pension allowance is £40,000 (or up to a maximum of your net relevant income) and there are also rules that allow any unused allowances from the past three years to be carried forward.

Use ISA allowances

ISAs offer savers valuable protection from income tax and Capital Gains Tax (CGT). The ISA allowance is limited to £20,000 per annum per individual and if it is not used in any given tax year it is lost forever. It is therefore worth considering maximising ISA contributions to the annual limit. Many of our clients have used their allowances over many years, and as a result, they have significant amounts of money held within a tax wrapper which offers a valuable tax shelter. This pot will provide a valuable source of tax free income in retirement.

Maximise personal pension contributions

There are many benefits to contributing to a personal pension, so if you are in a position to be able to do so, making a payment up to the maximum pension allowance will likely serve you well. This is especially true for additional and higher rate taxpayers as the current levels of generous tax relief at 45%, 40% or even 45% may not be around forever.

Carry forward rules

An individual’s level of income can vary from year to year, as can the demands on that income. Therefore, the amount that an individual can contribute to a pension fund may not remain static. Should you have unused allowances from the past 3 years, you may not be aware that you can carry thee forward. The annual allowance has been £40,000 since the 2014/15 tax year. To qualify, you must have had a personal pension arrangement in place in an earlier year, although you don’t have to have contributed.

Investments: take profits from taxable investments using CGT annual allowances to fund income, cash requirements or simply enhance the tax efficiency of your portfolio

The capital gains tax exemption is the most underutilised tax allowance. For tax year 2018/19 individuals can take profit from their investment portfolio of up to £11,700 per annum without paying capital gains tax.

Individuals could use this allowance to supplement their income tax-efficiently. For those who do not require additional income or cash, taking profits within the £11,700 CGT allowance and moving the money into more tax efficient investment vehicles like pensions and ISAs may help shelter gains from capital gains tax in the future, create immediate income tax savings (in the case of pension contributions only) and ultimately make their investment portfolio more tax efficient. This supports the ability to take profits more tax efficiently in the longer term.

The advice is very simple; tax has a major impact on net investment returns in the longer term and  the best way to manage that liability is to ensure that you action a small number of items on your tax year end checklist each year. The cumulative effect of doing so will compound into real monetary savings. For more information on any of the above points, please contact our financial advisers for advice.

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Tax Year End Tips You Can’t Afford to Miss! Part 1

Many people don’t always realise the significance of the end of the tax year until it’s too late. Each and every year, an individual has a set of allowances allocated to them and some of these can be lost if action isn’t taken.

So with the 6th April and the dawn of a new tax year fast approaching, what do you need to consider?

We’ve put together our top 10 considerations – split over two instalments. Here are the first 5…

Business owners: take profits as pension contributions

Using pension contributions in combination with salary and dividends can prove to be an extremely tax efficient way to fund your remuneration package as any contributions made during the company’s accounting year are treated as an expense, so attract corporation tax relief.  Effective rates of extraction can be as low as 15% from the pension, plus you get tax free growth in the meantime.

This approach is of particular advantage to those over age 55 who can access their pension fund with immediate effect should they wish to do so.

Pay employer contributions before corporation tax relief reduces

Another one for business owners – there are plans for Corporation tax, which currently stands at 19%, to reduce to 17% by 2020. Companies may want to consider bringing forward pension funding plans in order to benefit from the current rate of tax relief before the reduction if they have the profits and the cash available.

Employees: sacrifice bonus for an employer pension contribution

If you usually receive an annual bonus, it could be worth your while sacrificing this in favour of an additional pension contribution. Depending on the size of the bonus, taking this approach could result in significant NI contribution savings for both yourself and your employer. Even a relatively small bonus could boost your annual pension savings considerably.

Recover personal allowance

Since 2010, individuals earning in excess of £100,000 per annum have been subject to a tapering of their personal allowance – £11,850 in the current tax year – which reduces by £1 for every £2 that their adjusted net income rises above £100,000. If your earnings are between £100,000 and £123,700, it is worth considering making additional pension contributions, ideally to bring your ‘taxable income’ below the £100,000 threshold, therefore allowing you to regain your full annual tax free personal allowance. This type of planning can result in an effective rate of income tax relief of up to 60%, meaning the net cost of a £23,700 pension contribution could be as little as £9,200.

Recover child benefit

Child Benefit is eroded by a tax charge if the highest earning individual in the household has income of more than £50,000, and is cancelled altogether once their income exceeds £60,000. A pension contribution could reduce income and reverse the tax charge, wiping it out altogether once income falls below £50,000.

For more information on any of the above points, please contact our financial advisers for advice.

The second part of this blog can be viewed here.

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