Category Archives: Financial Planning

Divorce and Financial Advice in Light of the Pandemic

Following on from the strain of national lockdowns, and considering that the most recent ONS divorce statistics showed the number of couples getting divorced/dissolving civil partnerships in England and Wales increased by almost a fifth in 2019, all indications point towards divorce rates increasing over the coming months and years.

Here we look at some of the main financial factors that come into play when considering divorce.

Knowledge is key

It is often the case in a relationship that one party takes a greater responsibility for the household finances. This may be due to skill set, time availability or just the way things happen to have worked out. However, the downside is that one spouse may be less informed about how the household finances actually stack up.

Knowing where you stand financially can make it much easier to get the ball rolling on the financial side of divorce. Even if you are not fully aware of your partner’s financial position, which is not unusual between couples, having up to date information about your own personal finances and those you hold jointly is a good place to start. Where financial advice has always been sought jointly, it may be a good idea to appoint your own financial adviser to assist you going forward.

Look into the future

When caught up in the midst of divorce, it can be difficult to think ahead to what the future will look like. However, you will need to consider how your financial needs may change – as what may be suitable for the here and now may change in 5 or 10 years, or further into the future. The main thing to consider is living costs/your home, along with other essentials such as food, bills etc. In addition, other fixed expenditures such as everyday travel costs, insurance fees etc will need to be accounted for. Where children are a consideration, childcare/school fees and general everyday costs will need to be factored in – again with a view to the future and how these costs may evolve.

Outside of this, the things in life that are non-essential – ie. your discretionary spending – will still need to be paid for. You’re not all of a sudden going to want to stop everything you are accustomed to doing – such as going on holiday, getting your hair cut, activities with friends or family – just because you have divorced your spouse.

Saving for your future and having an ‘emergency fund’ in place are also some of the basics of having a secure financial plan – which may be more difficult to achieve as you come out of a divorce.

Taking everything into consideration can be difficult but seeking the advice of a financial adviser alongside that of a divorce lawyer can go a long way to bringing finances into context for every stage of your life, therefore helping to secure a more favourable outcome during divorce proceedings.

Don’t forget pensions

A recent report (Jan 2021) found that rights regarding pensions are frequently being forgone during financial settlements following divorce. The research from L&G found that more than a quarter of women (28 per cent) would give up pension rights, along with 19 per cent of men. The impact of this can be more significant the older a couple are when they divorce, as pension pots usually become more valuable.

When going through a divorce, people are naturally keen to come to a settlement and move on. But pensions can often make up a significant proportion of an individual’s overall wealth and failing to seek advice on them could have a hugely detrimental impact on finances in later life, and the fairness of any settlement that is reached.

The turbulent impact of the Covid-19 pandemic on factors such as housing, businesses and investments mean that seeking financial advice is more important than ever when looking to settle finances following divorce. Our team regularly work alongside family lawyers to help achieve the best outcomes for their clients.  Please get in touch to discuss your own, or your client’s circumstances and how we might be able to help.

 

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A Reminder of the Personal Allowance Trap

The tax rate applied to the first £12,500 of income earnt in a tax year is 0%. This is what is known as the personal allowance, however not everyone benefits from it because it is reduced by £1 for every £2 of taxable income earnt in excess of £100,000. This means that if you have taxable earnings in excess of £125,000 your personal allowance is removed completely.

Personal pension contributions act to extend the basic rate tax band and therefore allows those able to make a gross contribution equal to the amount of income earnt in excess of £100,000, to regain the allowance in full. An example of how pension contributions can help clients in this situation is as follows:

  • Client A has employed income of £95,000, taxable benefits of £2,500 and received a bonus of £30,000. There taxable earnings are therefore £127,500.

 

  • If no pension contributions are made, then their income tax liabilities would be £43,500 and total take home pay would be £75,140 after accounting for NI contributions.

 

  • If a gross contribution of £27,500 were made Client A would need to transfer £22,000 of their savings to a pension. Basic rate tax relief is given at source which means the investment is uplifted to £27,500. Client A would claim higher rate relief via self-assessment totalling £5,500 (20%) would regain 100% of their personal allowance, creating an additional saving of £5,000.

 

  • The net cost of the contribution above is £11,500. Without accounting for investment growth, this contribution amounts to a minimum of £27,500 sat in a pension for future benefit. The effective rate of relief is in excess of 58%.

 

This is a clear example of how allowances can be utilised effectively when knowledge is applied. For more information on this, tax year end planning or financial planning more generally, please contact us.

Note – the figures in this article relate to the 2020/21 tax year.

The personal allowance is increasing to £12,570  for 2021/22.

 

The Financial Conduct Authority does not regulate tax advice.

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The Value of Options in Tax Year End Planning

With the tax year end fast approaching, we are working with a number of clients to look at their available allowances and the ways in which we can utilise these most effectively.

For the majority of people in the straightforward scenario of wanting to utilise their full ISA allowance of £20,000 and their maximum annual pension contribution (up to £40,000, dependent on income), we are working to get their contributions made and invested before the 5th April.

We also have a number of other clients in more nuanced situations where making the most of available allowances is a more complex picture. This is especially the case this year, where business owners or those with bonus-linked renumeration packages may not have received their expected level of income.

With the added benefit of having options available to them, accumulated through years of financial planning, and access to ongoing financial planning advice, there are a number of ways in which we are able to assist clients in maximising their allowances whilst reducing tax liabilities, both now and into the future.

Here is just one example of the ways in which we have been able to assist a client to utilise their full allowances to create for tax efficiency going forward.

Client Example

Client A had not received their usual renumeration this year and so had £6,000 of unused personal allowance remaining (currently £12,500 for the 2020/2021 tax year).  In addition, they had not utilised their ISA allowance for the year (currently £20,000 for the 2020/2021 tax year).

Because these allowances are lost if they are not used, it makes good financial sense to use them wherever possible.

The client was able to crystalise £56,000 of their pension and take a tax-free cash withdrawal £14,000 in addition to an income withdrawal of £6,000, in order to make full use of this year’s ISA allowance. Remaining income will be deferred to a time when the client actually needs it but they can control what level of tax is paid on that part and when.

The flexibility of the platform provider meant that no capital actually left the platform.  Utilising the client’s personal allowance in full means they were able to tax efficiently extract capital from their pension, and contribute fully to their ISA.  By seizing this opportunity, the client has increased the flexibility of future planning, which could enhance the longevity of their capital.

It’s not always easy to explain the long-term value financial advice brings, but the above example goes some way to demonstrate it.

To use the words of a client:

“I hadn’t considered other option you describe. That’s really useful in terms of flexibility and my understanding!

“It’s quite pleasing to have got to the point where I can really start to see the flexibility available to me that we discussed all those years ago when looking at the initial transfer.”

– H. S., Salford

 

To speak to use about your options approaching tax year end, or about working with us to create a long-term financial plan, please get in touch.

 

The Financial Conduct Authority does not regulate tax advice.

The value of investments can fall as well as rise. You may not get back what you invest.

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Budget 2021

The Chancellor of the Exchequer’s budget is always an important event in the political calendar, but this year’s speech to set out the government’s plans on where they plan to generate and spend income was even more highly anticipated than usual.

As the UK begins to emerge from the tightest grips of the Covid-19 pandemic, how Rishi Sunak would plan to support various sectors of the economy out of the pandemic, whilst also looking at ways in which he might generate revenue to reduce further borrowing, was a very fine balance indeed.

There are many headlines from the budget on how the government will support and boost the economic recovery post Covid-19.

For the purposes of this article, these are the main Budget headlines of relevance to financial planning:

Income/savings

Income tax threshold to increase to £12,570 and higher rate threshold to £50,270 next year then frozen until 2026. No changes to dividend allowance, personal savings allowance, starting rate band for savings. ISA subscription limit remains at £20,000 in 2021/22 and the Junior ISA and Child Trust Fund subscription limits remain at £9,000.

Comment:

Whilst the government has stuck to its triple lock promise of not increasing income tax, national insurance or VAT, the freezing of the income tax threshold and higher rate threshold will, in time, act as a tax increase. This is due to the effect of fiscal drag; where increases in income resulting from inflation will result in taxpayers moving into higher rate tax brackets.

Pensions/retirement planning

Inheritance tax, lifetime allowance for pensions, annual CGT allowance and the VAT registration threshold also to be frozen until 2026. Inheritance nil rate band frozen at £325,000 and residence nil rate band at £175,000 until April 2026.

Comment:

Freezing the Lifetime Allowance (LTA) for pensions at its current level of £1,073,100 for 2020/21 rather than increasing in line with inflation is being seen by some as a stealth tax on savers. The LTA had been expected to rise by £5,800 per person in 2021/22 in line with 0.5% Consumer Prices Index. Although the move may not seem to be a significant move at the outset, the number of people that will be affected will increase over time. If the lifetime allowance were to rise alongside inflation, as had been previously outlined, it would increase by a further £88,900 on current levels by the end of the current parliament.

With wages and inflation increasing over time, more workers will find themselves falling into the trap of potentially paying higher tax rates on savings.

Although the triggers higher tax charges, it’s important to remember that this isn’t a ceiling on what can be saved into pensions. Those that may potentially be affected should consult with an adviser as to the costs/benefits of continuing to save into their pension.

The freeze on Capital Gains tax is, however, a welcome move for investors. There had been rumours that CGT would be targeted as an area that the government looked to generate more tax from, yet the £12,300 annual exempt amount and tax rates will remain unchanged.

Corporation tax

A Corporation Tax increase to 25% in April 2023 was announced.

Small companies with profits below £50,000 will continue to pay lower corporation tax rate of 19%. There will then be a tapering of rates based on profits, with the new 25% rate of Corporation Tax only applying to larger companies with profits over £250,000.

Comment:

This is the most significant tax increase announced in the budget and is a reversal on the policy put in place by previous Chancellors.

For company directors, the new small business rate and tapering thereafter may create a further incentive to contribute to pensions.

With total fiscal support measures now racking up to a cost of £407 billion since start of the pandemic to the end of current packages in 2022, and borrowing standing at £355 bn in this tax year, the Chancellor will inevitably be looking for ways to claw back money through tax increases, threshold freezes etc in the future.

To discuss any of the changes and how they may affect your planning, please get in touch with us.

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Financial Planning in your 30s, 40s and 50s

Milestone birthdays are usually a time for a big celebration – looking back over the years gone by with friends and family and sharing in the excitement of what the future holds. With celebrations currently needing to be more subdued due to the Covid-19 pandemic, and many parties being put ‘on hold’ until a time when it is safe to get together in large groups again, big birthdays may allow more time for reflection.

2020 coincidentally saw three members of the Gresham team reach milestone birthdays. Lauren in our admin team turned 30 in January, Samantha was 40 in September and Morven reached the grand old age of 50 in December!

With these milestone birthdays in mind, we have put together some key financial planning tips for each decade.

Financial Planning in your 30s

Whilst in your 20s, you may have considered yourself to be young and carefree. However, turning 30 often brings the realisation that now is the time to take things a bit more seriously!

The average age of a first-time buyer in England is now 33, reaching 37 for those buying in London.  So the main goal for financial planning in your early 30s may be to accumulate a deposit for a house and secure your footing on the housing ladder. To get to this point, you may take advantage of the tax benefits of a Help to Buy ISA or other ISA accounts to help you build up enough of a deposit.

Depending on whether or not you are married or in a long-term relationship, having children may also be a significant event in your 30’s. The most recent statistics for England and Wales show that the average age of all fathers of babies born in 2017 was 33.4 years, with the average age of mothers being 30.5 years.

With both of these factors in mind, along with the possibility of still paying down student debt, the ability to set aside a significant amount towards long-term savings may be reduced compared to other periods in your life. That said, those that are employed should, wherever possible, opt in to their workplace pension scheme to benefit from employer pension contributions.

Careful budgeting and making some sacrifices may mean you are still able to set aside regular or lump sum amounts into an ISA or pension.

Financial Planning in your 40s

Having made your way through the often financially stretched 30s, you may be in a slightly more settled position come turning 40.

The financial choices you’ve made in your twenties and thirties will hopefully have paid dividends in the shape of home ownership, and you may have started to build up a pension pot or ISA savings.

40 is the point at which you may start to think about making longer-term plans; such as where you want to be living for the next 10 or 20 years, which may trigger the desire to move to a bigger home or a home in another, potentially more expensive, area.

If you have children, you may be paying for private school fees, or you may need to start planning the funding University tuition fees and the associated costs of higher education.

Despite these potentially increased costs, your 40s is often considered to be the time when you reach your peak earning potential. With careful planning and budgeting, it’s possible to be able to remain financially on track whilst still thinking about the future.

Investing appropriately is one way of helping to achieve this. Utilising stocks and shares ISAs can deliver better investment returns in the long run than leaving money in cash savings. So if a financial plan isn’t something you have explored to date, it is the time to consider how best your savings are being directed.

The forties can, unfortunately, also be a decade for the unexpected. Protecting yourself in the form of having a good emergency fund in place provides comfort should the worst happen.

Critical illness and life insurance that allows for the responsibilities you have, both as a parent or a child with elderly relatives, along with financial liabilities, could ensure financial stability in the event of anything unexpected happening.

Financial Planning in your 50s

Although 50 is the new 40, with many 50 year olds still being in great health and shape, the advent of the big 5-0 does signal somewhat of a shift in thinking about later life and retirement. With only 15 years until the traditional ‘retirement age’ of 65; an age that although no longer legally recognised, is still one many of us hope to have retired by; it really is the time to get serious about retirement planning.

If you’ve been prudent in your pension and ISA savings to date, it may just be a case of looking at whether current contributions are suitable, or whether you may have room to increase these with the aim of retiring sooner.

If retirement saving has so far fallen to the bottom of your agenda, you will need to put a plan in place. This begins by looking at what you’ve got, and importantly, where you hope to get to. The retirement dream of being mortgage-free and taking several holidays may not be within your achievable limits. Working out what is, and setting that goal, is the first step to getting there. Thereafter, you can work out what you need to be setting aside on a regular basis.

It is worth bearing in mind that life expectancy has been steadily increasing and we’re generally living longer and healthier lives. What may have been a suitable amount as a pension pot in years gone by may no longer be adequate. Deciding that you need or want to work for longer maintains a level of guaranteed income to allow you to continue saving into your pension fund.

As the above demonstrates, there are many factors to consider at each stage of life, meaning that making a financial plan can quickly become complicated. Seeking the advice of a financial adviser can help to put things into context, also informing you of the options you have available and helping you to put the best plan for your circumstances in place.

Our team of Chartered Financial advisers can help those with investable assets of £250 K and above to put a robust and diversified plan in place for any age or stage in life. Please get in touch with us to discuss how we can help.

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