Category Archives: Financial Planning

Risking It All: Why Failing to Invest Properly Could be the Biggest Risk You Take

As financial planners, we’re always talking to clients about risk. When we take on a new client, risk is always an important topic of discussion because attitude to risk – be it cautious, moderate, balanced or adventurous – will have a direct impact on the investment strategies we implement on their behalf.

When we have this conversation, both with new clients during initial meetings and existing clients when it comes to their annual review, most people are aware of the relationship between risk and reward. This is the concept that the higher the risk applied when investing, the greater the potential for higher rewards in the long run but alongside this, the greater the likelihood for volatility in your portfolio.

But when it comes to risk, no-one ever talks about the risk of failing to properly plan – particularly for retirement.

Although many younger people are being encouraged to start investing in a pension from an early age via auto-enrolment, the amounts being invested represent only a small percentage of income and it is still possible to opt out. This has been confirmed by recent statistics released by the ONS, which show that although the proportion of employees contributing to a company pension in 2017 has reached a high of 73 per cent, almost half of private sector employers with defined contribution (DC) pension schemes contributed less than 2 per cent of employees’ pensionable earnings.

A discussion I find I am having with younger clients is the risk associated with failing to properly plan for the future. For many younger people – some of whom may still be saddled with student debt or trying to get onto the property ladder – making pension contributions may be the last thing on their mind.

However, statistics show that delaying paying into a pension can have a hugely detrimental effect. In fact, some calculations show that even delaying pension contributions by 10 years – for example waiting until your early 30s rather than starting in your early 20s – means a much greater percentage of salary will need to be invested to provide for a ‘comfortable’ retirement. This is due to the power of compound interest – reinvesting the interest that has been earned year on year.

Proposals have laid out a couple of ways in which younger people may be encouraged to start paying into their pension at an earlier stage, including scrapping the minimum qualifying threshold for auto-enrolment schemes.

These measures are alongside the plan to increase the minimum contributions from both employees and employers to 5% and 3% respectively by the start of the next financial year (2019-20). Although the idea is for people to start to accumulate more in their private pension pots, the risk is that more people will opt out as their contribution levels increase. Encouragingly, ONS figures to end of 2017 show that nearly 63 per cent of private sector workers aged 22 to 29 paid into a defined contribution pension (although these figures do not take into account the recent increases to minimum contribution levels, introduced in April 2018).

It isn’t just young people who are in danger either – those edging closer to retirement age can also be at significant risk have they not properly planned. The risk for this group is having to work for longer to try and ‘top up’ retirement funds. Alternatively, if you’re unable to continue working into your 60s or 70s, you could risk a shortfall in the income you need.

Another group that are particularly ‘at risk’ are the self-employed. This group, along with the many thousands of people who employ themselves via their own limited company, can often be blissfully ignorant of pensions, with many having little or perhaps no pension savings from previous employment. As a rapidly growing group – increasing from 3.3 million people (12.0% of the labour force) in 2001 to 4.8 million (15.1% of the labour force) in 2017 according to figures from the ONS – there’s a growing importance to address this issue.

The advice that comes out of all of this is clear – start paying into a pension as early as you can – preferably as soon as you begin employment or qualify for a pension scheme.

Starting to pay into a pension from an early age gets you used to long-term saving from the outset. If saving into a pension is the norm, it doesn’t feel like a ‘sacrifice’ but is rather part and parcel of your monthly pay packet and probably something you don’t even notice.

So while any investment will carry a risk warning (‘you may not get back as much as you invest’, ‘past performance is not an indicator of future performance’ or similar), you also need to consider the risks that come with the decision not to invest.

Taking the ‘risk’ of opting out or failing to make suitable private pension provisions can leave you in a very vulnerable position down the line.

For more information or to speak to one of our IFA’s about retirement planning, whatever stage you’re at, please contact us.

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Did You Know? Key Changes This Tax Year 2018/19

Over the past few months, we’ve been making clients aware of the changes and things to be aware of for the new tax year. During our conversations, we’ve been surprised at how many clients were unaware of the changes.

So now we’re a week into the new tax year, we thought we’d put together a useful summary of the new allowances that are now in place.

• The Dividend Allowance is being reduced to £2,000 (from £5,000) on 6th April 2018. For company directors taking income as dividends or those receiving dividends from investments, tax will therefore be payable on all drawings over £2000 at the following rates: 7.5% for basic rate taxpayers, 32.5 % for higher-rate taxpayers and 38.1 % for additional-rate taxpayers.

• The Capital Gains Tax annual exempt amount increases in line with the Consumer Price Index from £11,300 for individuals to £11,700.

• The Personal Allowance – the amount you can earn before paying income tax – will increase on 6th April to £11,850 (from £11,500). The level at which higher rate tax (40%) becomes applicable will rise from £45,000 to £46,350.

• For the first time this April, Scottish taxpayers will have different rates from those in England and Wales. These are as follows:

Starter rate – 19% – from £11,850 to £13,850
Basic rate – 20% – from £13,851 to £24,000
Intermediate rate – 21% – from £24,001 to £44,273
Higher rate – 41% – from £44,274 to £150,000
Additional rate – 46% – from £150,000

• From 6th April, those who own a home will face less inheritance tax (IHT) when passing it on to their ‘direct descendants’. The additional exemption for main properties (called the Residence Nil Rate Band – RNRB), which was introduced in April 2017, will rise from £100,000 to £125,000. NB. There is no increase in the main exemption – the first £325,000 of any estate.

• From 6th April, the Pensions Lifetime Allowance – the most you can have in a pension pot without potentially suffering a tax charge on any excess – is going up from £1m to £1,030,000.

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.

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10 Tips for Tax Year End Planning

Every year each individual is allocated a number of different allowances so far as taxation, savings and investments are concerned. When assisting individuals, we can often use these tax reliefs and allowances as part of the overall process of financial planning.

We’re just six weeks away from the end of the current tax year and start of a new one, meaning the countdown is on to make the best use of tax breaks and allowances available.

Here we provide 10 tips on how to make best use of your allowances before 6th April 2018.

  1. Maximise annual pension allowance. The annual allowance for most individuals contributing to a personal pension is £40,000. With the cost of living rising and people having a tendency to vastly underestimate how much they will need in retirement, making the most of the allowable pension contribution (which also includes any contributions made by your employer) could make a significant difference to your pension pot when you decide to retire.
  2. Take note of carry forward rules. It is worth noting that carry forward rules allow unused allowances from the past three years to be utilised – a tactic that can help you pay in over and above the annual allowance in a certain year should you have the funds to do so. This is particularly relevant to those approaching the end of their working lives as they will have less time left to accumulate funds.
  3. Make the most of higher rate relief. Any individuals earning over and above £45,000 which is the basic rate threshold of £33,500 plus the full personal allowance (11,500 for the current tax year 2017/18) will be afforded additional rate relief when making personal pension contributions. It is not clear how much longer these reliefs will be available, so additional and higher rate taxpayers may wish to contribute an amount to maximise tax relief at 45%, 40% or even 60%.
  4. Sacrifice bonus for a pension contribution. If you usually receive an annual bonus, it could be worth speaking to your employer about 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 employer and employee. Which could also be added to the pot, further enhancing your pension savings.
  5. Use ISA allowance. ISAs offer savers valuable protection from income tax and Capital Gains Tax (CGT) and the annual ISA allowance is on a use it or lose it basis. It is therefore worth considering maximising ISA contributions to the annual limit, currently £20,000 per annum. We now have some clients with significant fund values which can provide a valuable source of tax free income in retirement.
  6. 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 will reduce income and reverse the tax charge, wiping it out altogether once income falls below £50,000.
  7. Regain personal allowance. Since 2010, individuals earning in excess of £100,000 per annum have been subject to a tapering of their personal allowance – £11,500 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 £123,000, 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 £23,000 pension contribution could be as little as £9,200.
  8. Review how you structure remuneration as a Director. Using pension contributions in combination with salary and dividends can prove to be an extremely tax efficient way to fund your remuneration package and is often of particular advantage to those over age 55 who can access their pension fund with immediate effect should they wish to do so. Pension contributions also provide an opportunity to extract value from your business over time and help to reduce your exposure to creditor and business risk.
  9. Avoid annual allowance tapering. If you are a higher earner (over £150,000) you may be aware that the annual amount you are able to pay into your pension may now be liable to tapering. Every £2 of ‘adjusted income’ received over and above £150,000 results in a £1 reduction in your annual pension allowance, until their allowance drops to £10,000.  If you have unused pension allowances from the previous 3 years, you may be able to carry these forward and make a personal pension contribution to reduce or remove the impact of allowance tapering.
  10. 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.

 

Even if you’re just able to do one or two of these things, you’ll be in a better position in the long run.

For further help or advice specific to your circumstances, please get in touch with us and one of our financial advisers will be able to assist.

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

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‘Cashing In’ – 5 Ways to Make More from Cash Savings

We all like to have a bit of money tucked away in case of emergency. Expecting the unexpected is a sensible approach to take – having the money to pay for urgent repairs to your home, to have on hand for any unplanned purchases or to dip into if planning a big holiday provides peace of mind.

However, how much cash do you really need to keep in reserve?

If you’re receiving a regular income from working or drawing down from a pension, your cash funds can quickly accumulate. Upon review, we sometimes find that clients have cash funds well in excess of even a generous emergency fund!

We all know that interest rates on cash are pitifully low at the moment. Here are 5 ways in which you can better use surplus cash reserves.

Explore your ISA options

Although lots of people like the straightforward nature of cash ISAs, there are now so many more options to consider. If you are under 55 and still working, you might want to consider a Lifetime ISA.  Alternatively, if you anticipate saving for more than 5 years, a stocks and shares ISA is statistically likely to deliver a return on investment.  These can also be a good bet as any growth in the value of the shares, or any income you receive, is tax-free. If you’d like to put some money aside for younger relatives, JISAs can be good savings vehicles.

Remember that any contributions made into an ISA held in your name count towards your annual £20,000 ISA limit.

Investments

Investing directly in the stock market comes both with risks and potentially significant rewards. The markets have enjoyed a good run over the last 12 – 18 months, delivering generally strong returns.  Whilst investing in the markets can be a bumpy ride, especially to the unexperienced investor who lacks access to all the tools a professional analyst has, the long-term results speak for themselves. However, due to volatility in the markets, if you want the flexibility of accessing your money in the short term, investing in the stock market may not be the best route to take.

Top up pensions

Personal pension contributions can significantly reduce income tax liability. There are a number of ways in which tax relief can be achieved but, most commonly, basic rate tax at 20% is automatically claimed from HMRC by your personal pension provider and added to your pot.

If you’re a higher or additional rate taxpayer, you can claim further tax relief from HMRC.

Business cash

Cash doesn’t only mean money sat in your personal account – if you have a business, large amounts of cash in your business account could be put to good use. For example, making either regular or lump sum payments into a pension rather than drawing down as dividends has many positive outcomes. Not only can you save income tax , you are also moving money into an environment free from Inheritance Tax.

Spend it!

Yes, you heard us right! Having a ‘saving’ mindset is commendable, but not if it’s to the detriment of enjoying life while you can. After all, money is only one source of wealth – experiences and living a fulfilled life is another (arguably better) one.

To discuss any of the above strategies, please contact your usual adviser.

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Did You Know..? FSCS Cover of up to £1 Million Available for ‘Temporary High Balances’

The majority of us are aware of the Financial Services Compensation Scheme (FSCS), which provides protection for consumers in the event that a financial services firm fails. The normal cover limit provided is £85,000 per person per financial services firm and protection applies to monies held within banks, building societies or credit unions that are regulated by UK regulators the FCA and PRA.

But did you know that deposit payments up to £1 million that are made in connection with certain events are also covered under the scheme’s ‘temporary high balance’ rules?

Introduced in July 2015, the extended protection was brought in to standardise the protection of money held in banks, building societies and credit unions across the EU. Under the temporary high balance rules, deposits over £85,000 are protected for up to six months from when the amount was first credited.

The types of ‘event’ that are covered under the scheme include:

  • Real estate transactions (property purchase, sale proceeds, equity release) relating to a depositor’s main or only residence
  • Benefits payable under an insurance policy
  • Personal injury compensation (unlimited amount)
  • Disability or incapacity (state benefits)
  • Claim for compensation for wrongful conviction
  • Claim for compensation for unfair dismissal
  • Redundancy (voluntary or compulsory)
  • Marriage or civil partnership
  • Divorce or dissolution of their civil partnership
  • Benefits payable on retirement
  • Benefits payable on death
  • A claim for compensation in respect of a person’s death
  • Inheritance
  • Proceeds of a deceased’s estate held by their Personal Representative

Whilst the standard £85,000 cover under the FSCS is widely known, this additional ‘temporary high balance’ protection has gone under the radar of many. However, it can actually apply in many situations. When in receipt of a settlement, proceeds from a property sale or another windfall, it’s important not to rush into making any decision. The temporary high balance cover provides peace of mind and space to think about what you want to do with your money.

For more details of the rules and how they apply, visit the FSCS website.

 

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