Tax planning

Rule changes for drawdown plans

HM Revenue & Customs (HMRC) has changed the rules over the transfer of capped drawdown plans. Some investors will now avoid drops of up to 55% of their income.

Changes to HMRC rules mean investors will no longer need to have their income limits reviewed after a transfer. This applies if they are on pre-April 2011 rates and five yearly reviews. The change affects those with drawdown anniversaries that fall on or after 26 March.

If a drawdown investor was transferring, it triggered a review of drawdown limits. With Government actuarial rates at an all-time low, that could have led to a drop of up to 55% in maximum possible income.

The new rules mean that those who wish to change providers can do so without concern.

Investors should consult an independent financial adviser before taking any decisions regarding their drawdown plans.

Are you an ethical investor with a social conscience?

With the ISA season in full swing clients may be interested in ethical or socially responsible investing. This is an Investment philosophy which tries to balance the morality of a firm’s activities with a return on investment.  Ethical investment is usually through mutual funds or unit trusts and would typically be in firms which make a positive contribution to the quality of the environment and quality of life.

Ethical investing depends entirely on an investor’s individual views; you may choose to rule out certain industries entirely (such as gambling, alcohol, or firearms) or to favour industries which meet your own particular ethical principles.

Ethical investing often goes hand in hand with socially responsible investing.

Socially responsible funds typically have one overarching set of guidelines.  These are used to choose the portfolio, whereas ethical investing is more personal.

A good way to start with an ethical investing policy is to write down the areas you would like to avoid as well as where you want to see your money invested. From there you can come up with an asset allocation plan.

Independent Financial Advisers at Mark Hughes & Associates can help research individual securities and funds if you are an ethical investor, as well as assist with the development of a plan for a socially responsible portfolio.

Investors should keep in mind that “ethical” does not imply “outperform.”

Managing investment risk

Money that may be needed in a specific short term time frame is usually held as cash deposits. The worry that cash may not keep pace with inflation is of less concern as the money is, in effect, an immediately accessible reserve. However, if your time frame extends beyond the immediate to say three years or more, it can be well worth consulting an Independent Financial Adviser -IFA to see what opportunities may be available to achieve returns that exceed inflation.

For many the idea of risking savings in the stock market can be a cause for concern. It may be tempting simply to leave your money on deposit.  Every investing decision you take – including staying out of the market altogether – carries risk. The key is understanding which risks you can afford to take, and which you should avoid.

Let us look at the main types of risk.

Opportunity cost and inflation risk

If you keep your money in low-risk, low-return assets, there are two big risks. First, you sacrifice the returns you could be making if you had invested elsewhere. Worse still, your wealth could be eaten up by inflation. For example, if you try hard, you might get a return of around 2% on cash savings today. But prices (measured by the retail prices index) are currently rising at around 3% a year. So after a year, your savings will buy you fewer goods and services. They’ve lost value in ‘real’ terms and we have not even factored in the impact of taxation which can reduce the returns further.

The same is true of the tiny returns on so-called ‘risk-free’ investments such as UK government bonds (or ‘gilts’). The government is unlikely to go bust: it will always be able to pay you back, even if it has to print the currency to do so. But with bond yields well below inflation, every day you hold gilts, you risk losing money in ‘real’ terms.

Liquidity risk

Timing matters in investing. If you are close to retirement, for example, you should focus not just on the return on your money, but also the return of your money. In short, you need liquidity – the ability to get out of a position quickly, at minimal risk of loss. Some assets are far more liquid than others. Big blue-chips can be bought and sold on the market easily and at low cost, even in the toughest conditions.  Smaller company stocks and bonds aren’t as easy to offload. And buying and selling property takes weeks or months, not seconds.

So, when you look at your portfolio, ask yourself: “How easily can I get out of this asset at short notice? And how likely am I to need to do so?” If you have sufficient ‘liquidity’ elsewhere you can retain investments rather than being a forced seller in a falling market.

Price risk

Asset prices go down as well as up. This may discourage many investors from the likes of equities. So they buy ‘low-risk’ investments. If your financial goal (usually retirement) is a long way off this can be a mistake.  If you have 20 or 30 years to go, you can afford to take lots of risk early on, aiming to earn a decent return.

Also, you should positively welcome falling share prices: the further they fall, and the cheaper they get, the more you can afford to buy.  Indeed when saving for the long term, say in a pension or an ISA, ‘pound cost averaging’ is vital. The key point about pound cost averaging is that you invest small amounts on a regular basis. This means that when prices are high your monthly contribution may buy fewer shares or fund units, but when prices are low your investment buys more shares or fund units.  Buying cheap assets with the potential to offer big long-term returns is the secret to growing your retirement pot.

You can afford to tolerate a bit of price risk in the meantime. The best way to deal with it is to spread your money across different asset classes. For example, inflation is usually bad for bonds (as most pay a fixed income), but it can often be good for shares, as long as the companies you own can raise prices to compensate.  A good IFA will construct a portfolio based on a core asset allocation which he will use as a point of reference to manage the risk associated with individual investments.

Regret

Regret is an emotion of pain and anger when you think that you have taken a bad decision in the past and could have taken one with better outcome. In financial markets we experience regret when we sell an investment and subsequently see the price rise further or we fail to sell an investment that is showing a good profit only for the price to subsequently fall. We look back at what was rather than what is!

Regret is such a powerful negative emotion that the prospect of its future experience may lead some people to make non-rational decisions relative to their present situation.

As with all investing talk to your IFA and explain clearly what you want to achieve and when! Your IFA will then construct investment portfolios appropriate to the risk that you can tolerate to give you the opportunity to be well rewarded and to meet your expectations.

The next time you’re nervous about the risks you are taking… remind yourself which risks you’ve actually got rid of because of those decisions you have made with the help of your Independent Financial Adviser.

Using EIS investment funds for building your investment assets

For higher rates taxpayers the advantages of investing into a pension are well known. However the amount that you can invest into pensions has been significantly reduced from £255,000 to £50,000 and will further be reduced to £40,000 in the tax year 2014/2015

However  improvements to the Enterprise Investment Scheme EIS means this scheme is now potentially one of the the most generous tax saving investments available to UK taxpayers.

Enterprise investment schemes can be utilised to supplement more traditional pensions and ISAs as a means of saving for the future. Investing in smaller companies must be seen as a high risk strategy however investors in EIS schemes can reduce the risk by picking good fund managers and investing in an EIS fund as opposed to a single company.

The fund can reduce risks by diversifying across a range of companies and different industry sectors so even if some companies perform poorly it is still possible to enjoy good overall investment returns.

The amount of loss relief available means that for the 45% tax payer the maximum exposure to loss is 38.5p in the pound which is a very generous tax allowance and should significantly reduce the overall exposure.

Most importantly lost relief against income tax payment in the year the loss is realised can be claimed against each individual investments and so are not to offset against any gain made from the winning investments within a fund.

As the new rules allow funds to invest into bigger companies with up to 250 staff and gross assets of £15 million and the risks of investing into EIS funds have been reduced further. This does still not make them suitable for risk adverse investors but could be a consideration for some people on some of their overall investment portfolio.

Most importantly investors should seek advice from independent financial advisers who are experienced in this area

End of year tax planning

As the financial year draws to a close on 5th April there is much tax planning to be done for those who may not have taken advantage of the tax breaks available to them throughout  the year.

Individual Savings Account (ISA)

Any UK resident aged 18 or over (16 for cash ISAs) can invest in an ISA. There is no upper age limit and your tax-efficient savings can be withdrawn whenever you need them.

The amount you can invest into an ISA each tax year is decided by the government, this tax year the allowance is £11,280.

Junior ISAs are also available and are expected to become a popular way for family and friends to build up tax-efficient savings and investments to help with the cost of university, provide a deposit for a house or simply give children a great start in life.  There is an allowance of £3,600 per child per tax year, which will rise in line with inflation. The account is held in the child’s name and a parent or guardian can open and manage the account, with anyone contributing up to the annual limit.

Venture Capital Trusts (VCT)

VCTs are listed companies, run by a fund manager, which invest in small businesses.

There are attractive tax breaks available to encourage the provision of private equity capital for small expanding companies and capital gains for investors.

The maximum investment into a VCT is £200,000 per tax year and the investment must be held for five years to retain the tax relief, which is offered at 30%.

This type of investment is not for everyone as it does carry risk.

Enterprise Investment Schemes (EIS) 

EIS’s allow direct investment in small businesses. To encourage this, the government offers 30 per cent income tax relief.  Eventual gains are exempt from capital gains tax and EIS’s are eligible for business property relief for inheritance tax purposes. Investors can put £1m into an EIS per tax year, with the ability to carry back a £500,000 tax allowance from the previous year, and the investment only has to be held for a minimum of three years.

Whether you need advice on which ISA to invest in, or whether VCT’s or EIS’s are suitable for you, the financial planners at Mark Hughes and Associates are here to assist.

Make your appointment in good time for the end of the tax year to ensure tax efficient financial planning.

Changes to child benefit

There has been much discussion recently about the changes to child benefit payments but what are the nuts and bolts of the matter?

If your income (or your partner’s income) is more than £50k per annum you will be affected by the changes and you will lose some of the benefit.  It will be withdrawn entirely if one parent earns above £60,000.

What can you do?

The deadline for high earners to declare they will no longer qualify for child benefit has now passed.  You will now have to fill in self-assessment tax forms every year.   If you are not already registered you will need to complete form SA1 before 6th October 2013.  You can get a copy at hmrc.gov.uk/sa1 (cut and paste to your browser)

How does it affect me?

If you earn more than £60k per annum, the tax charge will be equal to the amount you receive as child benefit – you should make provision for this as HMRC will effectively be asking you to repay what you have received.

If you earn £50k – £60k the tax charge will be less than you receive as child benefit but there will still be tax charge.

Child benefit payments stopped for those declaring they no longer qualify on 7th January 2013.

The tax charge will be 1% of the child benefit paid for every £100 of income between £50,000 and £60,000 OR the full amount of the child benefit paid for income over £60,000 per annum.

Child benefit is paid at the rate of £20.30 a week for the first child, and then £13.40 a week for each child after that.

It lasts until each child reaches 16 or 18 if they are still in full-time education and in some cases until they are 20.

If you missed the deadline and wish to make provision for your future tax charge, consult an independent financial adviser for suggestions on how you might achieve this.

Pensions auto enrollment

After ten years since it was first muted, automatic enrolment for employees into an employer sponsored pension scheme finally went live on 1st October 2012. There is perhaps the inclination to think that now the systems and processes are

in place we can relax. Indeed, NEST has been open for business and has had members since July last year –working with over 300 employers, including more than 100 large firms that have chosen to use NEST to meet their automatic enrolment duties. These include household name firms such as the BBC, BT, McDonalds and Travelodge.

But in reality, the hard work is only just beginning. Over the next five years, over 1.2 million employers and up to 11 million workers will be automatically enrolled into saving for a pension, many for the first time and as time goes on, the sheer numbers of employers facilitating arrangements means one on one support from the actual scheme will not necessarily be an option. During summer 2014, 25,000 employers will hit their ‘staging date’ – NEST alone expects to welcome about 5,000 employers during this period and while it is simply not practical to engage with them on an individual basis, NEST will provide support in a number of different ways. It can take up to 18 months to put everything in place to comply with the duties. While there’s no getting round the work employers have to do to get ready, NEST has been built with simplicity and ease of use very much in mind, from the initial set-up, to its award-winning investment strategy to managing the opt-out process.

NEST also offers delegated access, which lets employers appoint an IFA to set up and run aspects of the scheme on their behalf. By contacting us for an initial discussion or to request a meeting at your work place. You can find more about how Mark Hughes & Associates  are working with employers to ensure that they are both compliant and offering a suitable pension solution for their employees.

Automatic enrolment is both a challenge and an opportunity. The scale of the task at hand is great, but represents a once in a generation chance to foster a culture of saving for retirement in the UK, it should also be an opportunity for employers to add value to their employee propositions.

Financial planning for divorce

The festive season is now upon us.  While the extended holiday period is a great time to relax and catch up with friends and family, for some, it is a time when long festering problems can come to a head.

The average age of divorcees is increasing and the fastest growing group is those aged 60 +

This age group is more likely to have considerable assets and will need the help of a financial adviser to make sense of it all.  Whilst solicitors have legal expertise, independent financial advisers are finance experts. Where pensions are involved in a divorce case, the expertise of both is required to find the best solution for the client.

Solicitors often bring in a financial adviser to help with implementing a pension sharing order. Specific pensions qualifications are required to offer advice in this area and very few solicitors have those qualifications. For financial advisers this will normally be G60, AF3 or equivalent.

Opportunities can be lost if a financial adviser is not brought in until a relatively late stage. The solicitor may not find all the pension assets, may not get a fair valuation, or may choose the wrong pension plans to share.

Even if the eventual settlement does not involve a pensions sharing or attachment order, obtaining the fairest value of the pension assets is crucial.

The cleanest financial break following a divorce is to offset the value of the pension(s) against other matrimonial assets. This is usually the first option considered. However, a pension sharing order may allow both parties to retain some assets. It may also be the only way a non-earning spouse can build up any significant pension provision in their own right.

Divorce can also cause several future tax headaches, including the potential loss of tax credits, CGT and an IHT liability – dependent on your individual circumstances.

Consult your independent financial adviser to make sure you know the options available to you.

The Chancellor’s Autumn Statement

The Chancellor George Osborne has today given his Autumn Statement the government’s commitment to addressing its finances should be welcomed by the financial markets.

Below is a summary of the key announcements made today.

Economy and Government Spending

  • The Office for Budget Responsibility expects GDP to contract by 0.1% in 2012, significantly down from forecasts of 0.8% growth in March. The OBR then expects the UK economy to grow by 1.2% next year.
  • The government’s fiscal consolidation programme is to be extended by another year to 2017/2018.
  • The UK budget deficit is set to fall from 7.9% last year to 6.9% this year.
  • National debt will not begin falling until 2016-17, a year later than previously expected.
  • UK unemployment is expected to peak at 8.3%, lower than initially expected, and employment is expected to rise every year moving forward.

Taxes

  • There is to be no new tax on property (“mansion tax”).
  • 40% tax rate threshold will rise from £41,450 to £41,865 in 2014 and then £42,285 in 2015.
  • Corporation tax will be cut by another 1% in 2014, taking the rate to 21%.
  • Capital gains tax allowances will rise by 1% in 2015 to 11,100
  • Inheritance tax  allowances will rise by 1% in 2015 to £329,000
  • Tax free allowance raise is to rise by £235 to £9,440.
  • Planned 3p rise in fuel duty not just postponed, but cancelled.

Benefits and Pensions

  • Most working-age benefits to rise by 1% per year over next three years.
  • Child benefits are also to rise by 1% per year over two years from 2014.
  • Tax relief on the largest lifetime pensions reduced from £1.5m to £1.25m starting in 2014-15, the annual allowance will now be £40,000 rather than £50,000.

To discuss how this may affect your own circumstances as always please do not hesitate to contact us to schedule a meeting.

Estate Planning and second families

Hitting retirement when second families are involved can pose a lot of questions.

However, they are questions which need to be answered to ensure that financial affairs are properly addressed and dealt with appropriately.

  • Is it simply a case of identifying who brought the most into the second relationship?
  • Does this need to go to their original children or split equally with the second family?
  • How much financial responsibility do you want to take for someone else’s children?
  • How much do you want to provide for your own children?
  • How should the Will be structured?
  • How do you avoid the potential for arguments and challenges to your Will?
  • If you have a business that involves some children but not others, do you want to leave the business to the ones running it but compensate the others by bequeathing them other assets?
  • How do you protect your own capital for your children without depriving your surviving spouse of the capital to provide an income?

Life policies and Trusts are a couple of the vehicles which are available to help you get the most from your financial plan.  Cash flow modeling can help explain and demonstrate whether there is sufficient income to support two families.  Openness about your financial affairs is always preferable and help from experienced financial planners essential.

Often it is as much about the individual people involved; more diplomacy than financial but, nevertheless, seeking independent financial advice at an early stage is critical.

STOP PRESS: The inheritance tax (IHT) nil rate band will increase by 1% in 2015-16 to £329,000, the government has announced.  IHT is charged at 40% on the amount over the nil rate band.

And don’t forget that from April 2012 anyone who leaves over 10% of their estate to charity can choose to pay a reduced rate of 36%.