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philteale

May 16
0

Can VCTs help your retirement?

By | Investment Planning

For many people approaching retirement, they face a bit of a financial quandary.

It isn’t that they have too little money for retirement. Rather, the problem is they might possibly have contributed too much to their pension!

Is that even possible? Well, when you look at the situation in light of the Lifetime Allowance, t become clearer how having too much money in retirement might be an issue.

The Lifetime Allowance places a limit on the value of your pension pot(s). Once the pot goes over this threshold, then the amount that has gone over is liable to tax. In 2019-20, the threshold is set at £1.055 million. Anything above this could be taxed at either 25% or 55%, depending on how you choose to take the money.

This threshold has actually gone down in recent years. In 2010, for instance, you could keep £1.8 million in pension savings. The Annual Allowance has also changed (i.e. the amount you can contribute to a pension each year, without getting taxed). In 2010 you could contribute up to £255,000 without being liable to tax. In 2019-20, the limit is now £40,000.

All of this leaves some people in a bit of a pickle. What do you do if you have ten years until your retirement, for instance, but look set to go over the Lifetime Allowance – even if you made minimal pension contributions until then?

There is no universal answer to this question, and for most people speaking with a professional financial planner will help you identify the best options. For some people, Venture Capital Trusts (VCTs) might form part of the answer.

In the rest of this article, we’re going to briefly explain what VCTs are, how they work and how they can benefit a retirement plan. This content is for information purposes only and should not be taken as financial advice. For advice regarding your specific goals and financial situation, please contact a member of our team to arrange a free, no-commitment consultation.

 

VCTs: An overview

The name Venture Capital Trust might sound intimidating, but it actually is fairly straightforward.

A VCT is a highly tax-efficient way of investing your money into UK small businesses, such as startups. These businesses are not listed on the stock exchange, and whilst a VCT offers the chance for a high investment return it also entails a high degree of risk.
A VCT is, itself, a company. It is listed on the London stock market, and essentially it brings your money together with that of other investors to invest in small UK businesses. If those businesses make money, then so do you. Moreover, you get to keep more of it due to the tax incentives offered by the VCT structure.

Small businesses and startups are naturally more risky to invest in. Many of them will fail, which means you would lose your money. A VCT will attempt to spread out your risk by pooling your money will other investors, and investing it in lots of different small businesses which have been vetted / “stress-tested”.

To invest in a VCT, you can either buy shares from other investors who hold them in an existing VCT. Or, you can buy shares in a new VCT when it starts up. When you buy the shares, you get a 30% Income Tax relief on investments up to a total of £200,000 per tax year.

This is why VCTs have become quite an attractive option to lots of people approaching retirement, who are looking to minimise their potential tax bill by exceeding their Lifetime Allowance. You need to be careful though, as doing this yourself is likely to land you into trouble. Speak with an independent financial planner if you are considering this as an option.

For instance, certain conditions are imposed upon your use of VCTs. An important one to note is that you must hold shares in a VCT for a minimum of five years, if you want to retain the Income Tax relief. Bear in mind that it can also be difficult to find someone to buy your shares when you do eventually look to sell them.

One attractive feature of VCTs is that you do not pay Capital Gains Tax on any profits made from your VCT shares. The main condition is that the VCT you invested in must retain its status as a VCT, in order for you to retain this benefit. Any dividends you receive are also exempt from tax, although remember that you are not guaranteed to receive dividends.

Bear in mind that charges for VCTs tend to be high compared to other investments. Sometimes, a VCT will also levy a performance fee as well. So make sure you read the small print with your financial planner before committing your money.

 

Conclusion

VCTs are not a silver bullet for those facing tax constraints on their retirement plans, but they can be a viable option for some people with higher levels of wealth who are looking to minimise their exposure to needless tax.

Please be aware that with VCTs – and with any investment for that matter – your money is at risk and your investment value could go up or down, depending on performance. Whilst there is no compensation in the event your investment goes down, it is helpful to know that if your VCT goes bust then up to £50,000 of your money is protected under the Financial Services Compensation Scheme (FSCS).

On a final note, it’s important to say that we do not recommend VCTs are a replacement to sound retirement planning through a pension. VCTs can be a viable way to supplement your retirement plans and pension arrangements, but you should work with a professional financial planner in order to ensure these sit appropriately within your wider financial strategy.

May 16
0

Is BTL (Buy To Let) a Good Idea?

By | Financial Planning

Bricks and mortar is often an attractive investment idea for many British people.

Property is something you can feel and touch, and many of us have heard stories of people who have made fortunes out of it.

Yet, is property always a good investment? Buy To Let (BTL), in particular, is an interesting topic in this respect. After all, it’s one thing trying to make money out of a property which you own outright. However, doing so on a property which you only partially own – whilst repaying the rest via a mortgage – adds another important element to the equation.

In this article, we’re going to take a look at some of the pros and cons of BTL, recognizing that property can form an important part of an investment portfolio in particular situations, but it should certainly not be your only investment!

In most cases, property should not form the majority or exclusive composition of your investment portfolio. In general, it’s better to diversify your investments across different asset classes and investment types, to spread out your risk and maintain a steady level of growth in the long term.

Please note that this article is for information purposes only, and should not be taken as financial advice. For advice and consultation into your specific financial goals and circumstances, please contact us to speak with a member of our team.

 

BTL: Pros & Cons

Suppose you have £40,000 in cash. What should you do with it, if you are looking to invest?

One idea might be to put it into a pension. Another idea, however, could be to use it as a deposit on a BTL property. From there, you can use the rent from your tenant to pay off the mortgage and make a nice profit on top of it.

It sounds straightforward and appealing in principle, especially to those who like the idea of being a property mogul! However, BTL is not straightforward and there are significant risks to be aware of – meaning you should not dive into such a commitment lightly.

Here are some of the pros of investing in BTL:

  • Potential long-term growth. Historically in the UK, overall, house prices have risen over previous decades. Of course, house prices go up and down but, generally speaking, they usually go up in the long-term. That means you could potentially sell the property at a profit in the future, once the mortgage is eventually paid off.
  • Income in the immediate term. With BTL, the rent from your tenants will exceed your BTL mortgage payments (the lender will not lend to you otherwise!). That could be a nice extra source of income on top of your salary and other income sources.
  • Tax advantages. There are certain areas where you can offset the costs of your BTL costs against your tax bill, such as property repairs and fees to letting agents.

Here are some of the cons to consider:

  • Profit-eating factors. In a perfect world, your BTL property would always have a paying tenant to cover the mortgage, and there would be no unexpected costs. In reality, however, there are often times when your property is empty, meaning you need to pick up the mortgage bill yourself. There are also times when you have expensive repairs to cover, such as a broken boiler or roof. These costs can amount to thousands of pounds and can, therefore, eat into years’ worth of your rental yields.
  • Interest rates. In early 2019, ‘interested parties’ are pointing to or promoting some relatively attractive deals for BTL mortgages. However, interest rates are not static and there is a strong possibility they will rise in future years. Indeed many BTL landlords are now faced with significantly higher replacement mortgages as they come to the end of the original terms. Your finances need to be able to cope with this.
  • Increased taxes. BTL landlords are at the mercy of government policy, which often changes and can seriously eat into your profits. A recent example is the change to interest rate tax relief for BTL mortgages, which has led some landlords to lose thousands of pounds in the form of extra tax.
  • Liquidity. We all know that buying and selling houses cost money in terms of surveys, legal fees, Stamp Duty, arrangement fees etc. We also know that sellers sometimes have to drop their property price to attract buyers in slow or difficult markets, so care should be taken to weigh these additional cots up.

Other options for your £40,000

Is BTL your only option when deciding where to commit a lump sum of, say, £40,000?

With the help of an independent financial adviser, you could invest it in a range of assets and spread out the risk. For instance, putting it into a pension (e.g. over two years) offers the chance to grow your lump sum significantly over two or three decades, due to compound interest.

There’s also a big tax advantage as well since the government will put an extra £25 into your pension for every £100 you put in, up to £40,000 or up to your annual salary – whichever is lower (assuming you are a Basic Rate taxpayer).

Putting your money into a pension also offers some important risk mitigation. When you commit the full £40,000 into a BTL property, for instance, all of the money is tied up with the fate of this one property and also the fate of the wider property market.

If you put it into a pension, however, and invest the money across different asset classes then you are effectively putting your eggs in several baskets. If one or two of these “baskets” (investments) do not perform so well (such as some of your equities), then the others (e.g. your bond investments) can help support you and protect your wealth until the market improves.

Conclusion

BTL can sometimes be a good investment for people who understand the risks they’re getting into, and who have planned carefully for contingencies which might eat into their profits.

For most people, however, you are probably better off thinking about other ways to invest your money. If you are keen to invest in property, then there are other options you can consider outside of BTL, such as Real Estates Investment Trusts (REITs).

Speak to an independent financial adviser today to discuss your options.

Apr 24
0

Should you switch your final salary pension?

By | Financial Planning

Transferring a final salary pension is a big decision that cannot be undone once you have made it. You, therefore, need to be sure that it’s the right thing to do before you move forward.

What exactly is a final salary pension? What are the reasons to stay on your current pension scheme, or potentially move out of it?

Those are some of the questions we will be dealing with in this article. Please be aware that this content is for information purposes only, and should not be taken as financial advice. Speak with a financial adviser prior to making any decisions about transferring your pension.

Indeed, if your final salary/defined benefit pension is worth over £30,000 then you are required by law to seek independent financial advice if you are considering a transfer.

 

Overview of final salary pensions

A final salary pension (sometimes called a defined benefit pension) is a type of pension which you receive from your employer. They are sometimes called “gold plated” pensions because they are increasingly rare. Many people view the benefits as not only industry-leading but also difficult/impossible to replicate elsewhere through other pension schemes.

These pensions are different from the more common type of workplace pension, known as a defined contribution pension. Under this scheme, both you and your employer contribute to your pension pot over time. Under a defined benefit scheme, however, your employer promises to pay you a specified annual income when you retire – for life.

The precise amount you get varies under a defined benefit scheme, depending on factors such as your earnings during employment, your accrual rate and your total years of service. The income you receive is usually index-linked, meaning that as the cost of living rises each year so does the income you receive.

 

Why would I think about transferring?

If this all sounds like a brilliant deal which you would need a good reason to give up, you would generally be right. For most people, it would be fair to say that switching from your final salary pension to a different scheme will not offer the same level of benefits.

With that said, however, there are good reasons to consider switching to another scheme in certain situations. For instance, you cannot pass on your final salary pension to your descendants in the form of an inheritance, like you can with a defined contribution pension.

When someone transfers from a final salary/defined benefit pension, the scheme provider usually offers a “transfer value” – which refers to the sum of money you receive for leaving the pension scheme and putting it into a new pension.

Not all providers will allow you to transfer into a new scheme. These include taxpayer-backed defined benefit pensions (i.e. “unfunded”), such as NHS pensions. If you should, therefore, check that your provider will let you transfer out of the scheme, if you are considering it.

 

Advantages of a transfer

Here are some of the reasons people usually consider transferring out of their final salary pension into a defined contribution pension:

 

#1 Inheritance

As mentioned above, you cannot pass on your final salary/defined benefit pension to beneficiaries. If you die and leave a surviving spouse, then the scheme usually pays out some benefits to this person. However, once they die the pension does not usually pay out to children. A defined contribution pension pot, however, can usually be passed on as an inheritance.

 

#2 Employer stability

Since it is your employer who is promising to pass out your income when you retire, what happens to your pension if your employer goes bust?

Usually, the company pension scheme will be dealt with by the Pension Protection Fund. However, you are unlikely to receive your full benefits (e.g. annual inflationary increases).

 

#3 Your lump sum

If you want access to a lump sum at the beginning of your retirement, then some final salary schemes allow you to do this. However, they often provide a poor deal for converting some of your pension money into cash compared to a defined contribution scheme. In the latter case, you can usually take the full 25% tax-free lump sum you are entitled to.

 

Disadvantages of transferring

With some of the advantages of transferring your pension now specified, here are some of the reasons why people often choose to remain on their defined benefit/final salary scheme:

 

#1 Stability

With a defined contribution pension, your money is usually invested quite heavily in the stock market and so your income might fluctuate depending on how your investments perform. With a defined benefit pension, your employer is obliged to pay you a specified amount. So you know with greater certainty what your retirement income will be.

 

#2 Inflation protection

A defined benefit pension will usually raise your income in line with inflation. That means that as the price of food, fuel and other goods/services go up each year, your pension does not lose purchasing power over time. With a defined contribution pension, you will need to make your own income provisions to account for rising inflation.

 

#3 Future guarantees

You likely do not know how long you will live. That means you do not know how long your retirement income will need to stretch out for. With a defined benefit pension, your income is guaranteed for the rest of your life. With a defined contribution pension, you need to decide how your pension pot will be able to provide for your lifestyle over potentially 30+ years in retirement.

 

Summary

The topic of pension transfers is very complex and everyone’s personal circumstances are different. This means that a pension transfer might right for some people, but not for others.

A lot depends on what is important to you. If you most value being able to pass on your pension to your children, then a pension transfer might be high on your mind. If, however, the most important thing to you is income stability and certainty in retirement, then staying on your current defined benefit scheme might be the better option.

Even in these cases, however, there are exceptions and it’s important to weigh up your options carefully with an experienced, independent financial adviser to make sure you are making the right decision for you based on the best available information.

Apr 24
0

4 Reasons to Remortgage, & 4 Reasons Not to

By | Financial Planning

Your mortgage is likely to be your biggest expense over the course of your life. So finding a better deal can be very worthwhile.

In fact, getting a new mortgage which has just a 1% lower interest rate compared to your current deal can often equate to thousands of saved pounds in the short term, and tens of thousands in the longer term.

So, your primary motivation for getting a new mortgage (i.e. “remortgaging”) is to put more money in your pocket, which would have otherwise gone towards interest payments. However, whether or not remortgaging is a good idea for you depends on your unique circumstances.

We cannot, unfortunately, cover all of the bases in the article about the ins and outs of remortgaging. However, we can provide some information about when remortgaging might be a good idea to consider:

 

Reasons to Remortgage

 

#1 Fears about rising interest rates

At the time of writing, the UK is currently deliberating Brexit options including further extensions following the missed deadline of 29th March 2019.

Property markets across the country have been jittery to say the least, and there is some talk in the press about the Bank of England raising interest rates later in 2019.

Of course, no one knows for certain what effect Brexit will have on the UK housing market. Interest rates could remain steady in an attempt to provide stability to the wider economy. However, if interest rates do rise then naturally that could have an impact on your mortgage payments.

If you are on a variable rate mortgage, for instance, then your mortgage lender might change the amount you are required to pay each month depending on the Bank of England’s base rate. One option might be to remortgage onto a fixed rate deal for the next 2-5 years, in order to ensure that your monthly mortgage payments remain stable as the UK economy navigates through the post-Brexit economic landscape.

However, please do not take this as a recommendation to ditch your current mortgage deal and apply for a new one. Fixed rate mortgages have their own advantages and disadvantages which may or may not make one suitable for your current financial goals and situation. The same applies to variable rate mortgages. Speak to a financial adviser if you are looking for specialist advice on how to plan your financial affairs.

#2 Rising home value

If your property has dramatically gone up in value since you first took out your mortgage, then your loan-to-value band might now be lower. This could mean that you are eligible to ask for a better deal, with a lower interest rate. It’s not a certainty, but it justifies a look!

#3 Overpayments

Have you suddenly found yourself in a position where you have a lot more disposable income – perhaps due to a big pay rise? In these situations, it can be a good idea to consider overpaying your mortgage in order to reduce the loan term and save money on interest payments.

However, some mortgage deals do not allow you to overpay – or if they do, the amount you can overpay is very small. For people in this scenario, remortgaging can be a good idea if your new deal allows you to overpay a decent sum. However, watch out for any charges or exit fees you might face otherwise you could lose out financially.

#4 Your deal is ending

Most mortgage deals last about 2-5 years. Naturally, when your deal is approaching its end then it’s usually a good idea to shop around for a good deal. You are not obliged to stay with your current mortgage lender.

Start looking around at least three months before your mortgage deal is due to expire. If you are on a fixed rate mortgage and allow yourself to drift over the expiry date, then usually you will be put automatically onto the lender’s variable rate. The monthly payments due under this arrangement are usually higher than your payments were under your fixed rate, so beware.

 

Reasons not to Remortgage

 

#1 Reduced property value

Sometimes, people take out a mortgage and unfortunately the value of their home goes down – meaning you owe a larger portion of the property value to the lender than you previously thought. In the worst cases, you can end up in negative equity – i.e. you owe more to the lender than the total value of the property. Here, you have little choice but to stay where you are until house prices rise again in your area.

 

#2 New circumstances

You should be aware that your mortgage options will likely be affected if you have recently become unemployed, or if you have moved from employed work to self-employment. Moreover, if you have experienced credit problems then this can also affect your mortgage applications.

Lenders are now legally required to see evidence of your income when you apply for a mortgage. If you no longer meet their conditions for a remortgage, then you will likely be required to stay on your current deal.

 

#3 Early repayment charges

Some deals will charge you a lot of money to move out of the deal before your incentive period has ended. Sometimes it can still make sense to move onto a better mortgage deal and take the hit from an early repayment charge, if you will still save money. However, quite often it makes sense to sit tight for a bit and wait until the charges are lower before you move.

 

#4 You have a good deal already

It could well be that you are already on a fantastic mortgage deal, and you’d be foolish to leap off it. However, don’t allow yourself to settle too much into your current deal. In all likelihood, a better offer will come your way eventually and it can pay off to keep your ear to the ground.

Apr 24
0

Save £1000’s: Our money renovation guide

By | Money Tips

Did you know that setting aside just one morning could result in thousands of pounds more in your pocket over the next 12 months?

With Brexit dominating the news at the moment and living costs potentially set to rise, it certainly wouldn’t hurt to look at ways to reduce your expenses and build up a savings buffer.

As a financial planning business, we wanted to share some of our thoughts in this article on:

● How you can start setting a spending plan.
● Ways you can reduce some of your outgoings.
● Suggestions for clearing costs incurred by debts.
● Ideas on how this money could be put to better use, both short and long-term.

Before we get started, please note that this article is for information purposes only. It does not constitute financial advice and should not be taken as such.

For financial planning and advice about your own personal goals and situation, please get in touch to speak with us.

 

Setting a spending plan

An important first step to improve your savings and spending efficiency is to take stock of what you earn, how much you spend and what you spend it on.

The best way to do this would be to record your spending in a notebook or smartphone app, to determine your average monthly spending. Most of us are not that organised, however, so you might need to look at your bank statement for the past thirty days and go from there.

You will not know how drastically you need to rein in your spending until this picture is clear in your mind. Here are some obvious expenses to look at:

● Mortgage payments & household bills (e.g. gas, electricity).
● Mobile phone bills and broadband.
● Food bills.
● School fees & childcare costs.
● Car & transport costs.
● Subscriptions
● Debts & finance payments

It can be helpful to divide your expenses into different categories in a similar way to the above, as this can really help make your estimates more accurate.

 

Suggestions for reducing costs

There are literally hundreds of ways you could potentially reduce your outgoings. Here are just a few suggestions for you to consider:

● Check your Council Tax band. Many people are in the wrong one without knowing it. Since this tax goes up about 4.5% each year, it’s worth making sure you are not paying more than you should be.
● Check your broadband. Some people pay over £600 a year by just staying with their current provider, rather than taking advantage of promotional deals which can bring your bill down to as little as £12 a month.
● Take a hard look at childcare. The equivalent of one parent’s wage can be entirely devoted towards childcare costs, so it’s always a good idea to look at whether potential savings can be made here. For instance, are there any free summer holiday activities you can take advantage of? Does your employer offer any help with childcare costs which you are not using?
● Direct debits. This is another huge area where people’s money disappears without their noticing. Whether it’s a £40-per-month unused gym membership, or unused subscriptions to online services such as Audible and Spotify, you could save over £1,000 over the course of a year just by making some sensible cutting decisions here!

 

Debt-cutting ideas

Clearing a high-interest debt quickly can be one of the best ways to save money over the longer term. Leaving credit cards unpaid and building up interest, for instance, can easily amount to hundreds of pounds per year.

However, cutting your outgoings isn’t just about addressing the obvious debts such as credit cards and personal loans. It’s also worth taking a look at your mortgage, which is likely the biggest debt you will have as a homeowner.

Remortgaging your home, for instance, can sometimes open the door to a lower interest rate and reduced monthly mortgage payments. This frees up some extra cash in the short term, and also potentially save you tens of thousands more in the form of reduced interest down the line.

 

Putting money to better use

Hopefully, by this point, you will have already identified some areas where you could save hundreds or even thousands of pounds per year through careful financial restructuring.

What, then, should you do with the extra cash now sitting in your account as a result? It completely depends on your unique circumstances and goals, but here are some ideas that everyone should consider:

● Think about building up an emergency fund. Ideally, this should amount to between 3-6 months of your living costs. Not only will this help keep you afloat in the event of an expensive, unexpected expense which could otherwise plunge you into financial trouble (e.g. covering the costs of a sudden broken boiler).
● Take a look at your pension. Would it be worth contributing more of that extra cash towards your long-term future? Many people are just putting as little as 3-5% of their salary towards their workplace pension scheme, which is unlikely to cover your lifestyle in later life on its own (even when combined with the state pension). Putting even just £50 a month more towards your pension could result in thousands more to support you in later life, when you retire.
● Consider investing. It’s easy to spend extra money on things which cost you money – such as a new car, or a motorbike. There’s nothing wrong with treating yourself from time to time, but what if you spent some of that instead on things which could actually make you money (i.e. an asset)? For instance, perhaps you have a goal to save up for a deposit on a property within the next 10 years. One option would be to build up some saving towards this goal within a Cash ISA account, but another option might be to invest your money in a diverse set of investments in order to try and get a better investment return at the end of the 10-year period.

Apr 24
0

Tax breaks for widows to help in rough times

By | Money Tips

Spousal bereavement is an unimaginably difficult time. Not only are you having to process your grief, but there is the whirlwind of sorting through the estate and finances.

In this midst of the complexities, many people end up needlessly paying tax on assets and money inherited from their lost loved one – particularly when it comes to ISA savings.

Most people need all the emotional, relational and financial support they can get during their bereavement. So make sure you don’t miss out on these important tax breaks below.

 

Keep your tax-free wrapper

In 2015, the UK government introduced the Additional Permitted Subscription allowance (APS). This means that if your spouse or civil partner dies, then you can claim extra ISA allowances.

Normally, in 2018-19 you can put up to £20,000 per year into an ISA (or set of ISAs) without the amount being liable to tax. Under the APS scheme, however, you can inherit your deceased spouse’s/civil partner’s ISA savings without the amount being taxed.

The APS scheme is not widely known, unfortunately, so it is estimated that as many as 15% of widows are missing out on these benefits. With the average APS claim currently standing at around £55,000, clearly more needs to be done to inform grieving people about this important source of financial provision and support.

Here are some important things to know about the APS scheme:

● You can apply for the additional ISA allowance if your spouse or civil partner died on or after 3 December 2014.
● You must have been living together at the time of the death. You must not have been separated or estranged from your spouse or civil partner.
● Subscriptions cannot be made to or from a Junior ISA.
● Non-UK residents can make subscriptions.
● You can make the subscription to a wide range of different ISA types including stocks and shares, innovative and cash ISAs.

 

How APS subscriptions are processed

As the surviving spouse or civil partner, you will need to speak to the deceased’s ISA manager to begin the APS process. This means providing them with sufficient evidence that they are satisfied you are their client’s surviving spouse/civil partner.

Important information you should consider submitting to the ISA manager therefore include:

● Your name and physical address.
● National insurance numbers.
● Dates of birth, marriage/civil partnership and the date of the death.

You will likely need to submit this information and other important details to the ISA manager via a formal application form.

In some cases, someone else might make an APS subscription on your behalf – for instance, if they hold Legal Power of Attorney (LPA). In this instance, the ISA manager will need to see a copy of the LPA and check the relevant provisions.

 

Valuing the deceased’s ISA(s)

It isn’t always clear how much your spouse/civil partner has in their ISA(s), and it’s important to establish this early on.

For instance, stocks and shares ISAs need to be properly valued so the ISA manager knows how much to put into your account. This can get complicated, as it involves referring to obscure laws and regulations such as section 272 Taxation of Chargeable Gains Act 1992.

Essentially, the ISA manager should carry out this valuation legwork for you. It’s a good idea to get the advice of a professional financial adviser particularly at this stage, who can look over the ISA manager’s valuation and ensure you are getting a fair deal.

Things can become even more complicated, unfortunately, depending on the date your loved one died and the number of ISAs they held.

If they died before 6 April 2018 and held numerous ISAs, then the ISA manager needs to take into account a single additional permitted subscription limit. This will need to account for the total value of all of the deceased’s ISAs at the time of their death.

If your spouse or civil partner died after the 6 April 2018, however, then the rules are slightly different. Here, the single additional permitted subscription limit is instead determined by the total values of each ISA at the time it ceased to be a “continuing account”.

Confused yet? Don’t worry if you are. This is a big reason why many bereaved people miss out on important tax benefits during this difficult time. Yet with the help of a professional financial adviser, you can make sure your interests are protected and get the help you need to navigate this complex tax landscape without it feeling overwhelming.

 

Time limits

One important detail to bear in mind is the time restrictions on APS. If the APS is made as stock, for instance, then your subscription must be completed within 180 days of your spouse’s / civil partner’s assets distribution date.

If, however, the APS is being made in cash then you have three years from the date of death to complete the subscription. Or, you have up to 180 days following completion of the administration of your spouse’s / civil partner’s estate. Whichever happens first.

Bear in mind that if you do not act within the relevant timeframes, then you might need to gradually funnel your spouse’s / civil partner’s ISA savings into your own in order to minimise the tax involved.

For instance, if they had £60,000 in ISA savings and you contribute nothing to your own ISA(s) during a given tax year, then in 2018-19 you could put £20,000 of your spouse’s / civil partner’s ISA savings into your own ISA(s) without attracting tax. You would need to do this each financial year, however, over three years in order to move this money without facing tax.

Mar 12
0

Tax Year End Planning Guide – 2018/2019

By | Financial Planning

As the end of the financial year approaches, and the tax landscape is continually changing, we have put together this guide to ensure that you are making the most of the allowances and reliefs available.

 

Individual Savings Accounts (ISAs)

You can contribute up to £20,000 to your ISA in the current tax year. Your contribution can be allocated to cash, stocks and shares or a combination of both. Any income or gains generated by your ISA are completely free of tax, and you can withdraw money at any time. On death, an ISA can be passed to a spouse or civil partner, retaining the beneficial tax treatment.

If you have taken any money out of your ISA, you can replace it in the same tax year without using up any of your annual ISA allowance.

Don’t Forget

  • You can also contribute to a Junior ISA (JISA) for your child. This offers the same tax-advantaged savings opportunity as an adult ISA, and the child will become entitled to the money at age 18. The annual contribution limit is £4,260.
  • If you are saving to buy your first home, a Lifetime ISA (LISA) may be appropriate. You can contribute up to £4,000 per year, which the Government will top up by 25% (up to a maximum of £1,000). New LISAs are available to savers under the age of 40, and you can contribute until age 50. The proceeds must be used to buy a first home or to provide retirement benefits from age 60, otherwise a 25% penalty applies.
  • Help to Buy ISAs are being phased out, but can still be opened until November 2019. You can contribute up to £1,200 in the first month and £200 per month thereafter. If you withdraw the money to buy a first home, the Government will add a 25% bonus, up to a maximum of £3,000.

Contributions must be made by 5th April 2019 otherwise you will lose your ISA allowance for the current year.

 

Pensions

Pension contribution limits can be complex, but the main points are:

  • Any UK resident under the age of 75 can contribute up to £2,880 per year to a pension and receive tax relief, taking the total gross contribution up to £3,600. This tax relief is also available to non-taxpayers, making it very attractive to fund pensions for spouses or children who are not in paid employment.
  • Anyone with ‘relevant UK earnings’ (generally a salary from employment), can make a gross contribution up to the level of their income. This means that if you earn £30,000, you can contribute £24,000 to your pension, and this will be topped up to £30,000 with the addition of tax relief. Employer contributions may be paid in addition to this.
  • An overall Annual Allowance of £40,000 applies (covering individual and employer contributions combined), meaning that if you earn £50,000, you can only receive tax relief on gross contributions of £40,000 per tax year (£32,000 net). However any unused allowance can be carried forward by up to three tax years.
  • Investors with a total remuneration package of £150,000 or over may have a reduced Annual Allowance, as you lose £1 of Annual Allowance for every £2 over the threshold.

Don’t Forget

  • Higher and additional rate taxpayers receive further relief on their pension contributions. For example, if your highest rate of tax is 40%, you will be credited with further tax relief of 20% when you submit your tax return, or by contacting HMRC. This means that a gross pension contribution of £1,000 only costs £600 out of net income.
  • Salary sacrifice is an extremely efficient method of increasing your pension contributions, as all the tax calculations are done automatically by payroll. In addition, both you and your employer will save on National Insurance Contributions – some employers may agree to share this saving.
  • If you earn over £100,000, your tax free personal allowance (£11,850 for 2018/2019) will be tapered at a rate of £1 for every £2 of income over the threshold. This results in an effective tax rate of around 60% on the band of income between £100,000 and £123,700. You can reduce your tax bill by making pension contributions to take your income under £100,000.
  • If you take any taxable benefits from your pension (over and above your tax-free cash entitlement) you will trigger the Money Purchase Annual Allowance. Contributions will be restricted to £4,000 per year, and it will not be possible to carry forward unused allowances. It is recommended that you seek advice if you are looking to take pension benefits, particularly if you are still working.

Making a pension contribution before 5th April 2019 could reduce or eliminate your liability to higher/additional rate tax for 2018/2019. It is also your last chance to use up any unused Annual Allowance from 2015/2016, which is particularly useful if you are a higher earner.

Please note that while unused Annual Allowance may be carried forward, you must still have the relevant UK earnings to support the contributions. Therefore you can only benefit from carry forward if you are earning over £40,000 per year, or if your employer is making contributions on your behalf.

 

Maximise Your Income Allowances

As well as the tax-free personal allowance (£11,850), there are a number of other allowances that can be utilised before the end of the tax year to ensure that you draw your income as efficiently as possible:

  • Personal Savings Allowance – this is the amount of interest that can be received before being subject to tax. The amount is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers do not receive this allowance.
  • Starting Rate for Savings – interest of up to £5,000 may be paid free of tax, providing this forms part of your total income, which does not exceed £16,850. Allocating savings to a lower-earning spouse is a good way of taking advantage of this allowance.
  • Marriage Allowance – a lower-earning spouse can transfer up to £1,190 of their tax-free personal allowance to their higher-earning partner, potentially reducing the family’s tax bill by up to £238.
  • Dividend Allowance – dividends of up to £2,000 per year may be drawn (from your own company or from investments) without tax liability.

It is worth checking that your accounts and investments are allocated in the most efficient manner before 5th April 2019.

 

Gift Aid

Charitable gifts are eligible for Gift Aid. This means that for every £80 donated, the charity receives £100 with the addition of tax relief. Higher and additional rate taxpayers may claim further tax relief.

Don’t forget

  • Gift Aid relief can be carried back to the previous tax year, providing this is included in your tax return for the relevant year. This means that you have a deadline of 31st January each year to allocate the gift to the previous tax year.
  • Making charitable gifts can have the effect of preserving certain allowances, for example by keeping your income under £100,000 to retain your personal allowance.

You may wish to consider any gifts that you would like to make in the 2018/2019 tax year, although if you miss the 5th April deadline, you have the option to carry back.

 

Capital Gains Tax (CGT)

Each investor has an annual CGT exemption of £11,700 (as of 2018/2019). This is the amount of ‘gain’ that you can realise by selling investments before being subject to tax. It is worth using up this exemption each year, particularly on larger portfolios, as it avoids rolling up a substantial tax liability for the future.

Any gains realised that exceed your exemption will be subject to tax of 10% for basic rate taxpayers, and 20% for higher rate taxpayers, or where the gain pushes your income over the higher rate threshold. The rates are 18% and 28% for property investments.

Don’t forget

  • If you transfer assets to a spouse, this is ignored for CGT purposes, and you then have two exemptions (£23,400 in total) to set against gains.
  • Any losses realised can be set against gains to reduce the overall liability. Losses can be carried forward from previous tax years.
  • Any assets sold to realise a capital gain should not be re-purchased within 30 days, otherwise the transaction will be ineffective for tax purposes.

To make use of your capital gains exemption for 2018/2019, the assets must be sold by 5th April 2019. Transferring funds to your ISA or rebalancing your portfolio are useful strategies for using up your exemption without disrupting your investment strategy.

 

Inheritance Tax (IHT)

It is possible to gift up to £3,000 each tax year (£6,000 for a couple), and for this gift to be immediately outside your estate for IHT purposes. The exemption can be carried forward by up to one tax year.

Don’t forget

  • Smaller gifts of up to £250 per person do not count towards this allowance, nor do certain gifts in respect of special occasions like birthdays or weddings.
  • Larger gifts may also be allowable, providing they are funded from income and a regular pattern of gifting is established.
  • Where the gift is not immediately exempt, it will drop out of your estate after 7 complete tax years.

To ensure that your £3,000 exemption is utilised for 2018/2019 (and 2017/2018 if applicable), the gift must be made by 5th April 2019. It is important to keep a record of any gifts made.

 

Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs)

These are investments with the following characteristics:

  • High-risk opportunity to invest in smaller companies
  • Tax advantages apply
  • In general, suitable only for high net worth, experienced investors who are prepared to invest for the long term.

Investing in this type of asset could reduce your tax bill by up to 30% of the investment amount (or 50% if the investment is made in a particularly high-risk version of the EIS). If a subscription is made by 5th April 2019, this could be set against your tax for 2018/2019, or in the case of the EIS only, could be applied to 2017/2018 if this is more beneficial.

This is a complex area and you should seek advice to determine if higher risk investments are likely to be suitable for you.

 

Property Investments

For property investors, the amount of mortgage interest that is eligible for higher rate tax relief is reducing. From 6th April 2019 only 25% of the interest will be subject to higher rate tax relief, reducing to 0% from 6th April 2020.

In advance of the new tax year, you may wish to consider repaying some of your debt, or allocating some of the rental to a lower-earning spouse to reduce the impact of these changes.

This guide is for information only, and should not be considered personal financial advice. Please speak to your adviser if you would like to take advantage of any of the tax planning opportunities available, or if you have any questions.

Feb 14
0

Can Money Buy You Happiness?

By | Money Tips

As financial planners, it might be tempting for you to believe that we think so.

After all, why would we spend all day advising clients on pensions, tax and investments if we did not think to have more money would make you happier?

At Weston Murray & Moore our slogan is: “You have one life, let us help you live it.” So clearly, we believe money has an important role to play in making our clients happier.

However, we also believe that things are more nuanced than the simple equation:

Having more money = a happier person.

Really, we think that sensible money management is an important means to an end. That is, it helps you to achieve the goals in life that are truly important to you.

Let’s unpack the relationship between money and happiness a bit more…

 

Does having no money equal no happiness?

We all hear stories of terrible poverty in the world. Many people still live on under a dollar a day, for example, and struggle to feed their families. If a medical emergency comes their way, moreover, it can completely wipe them out financially.

Clearly, a base level of money is needed for humans to at least tolerate their existence – paying for essential food, shelter and other vital goods. Few people, we think, would dispute that.

Yet when you look at people on the lower income scales in society, there is usually a mixture of happiness levels across the picture.

For instance, some families have very little in the way of material goods but at the same time, they experience a lot of joy. Perhaps they have lots of children living in a small house, and they struggle to afford food and clothing. Yet in the midst of this, there is lots of fun and laughter. They do not seem too upset that they cannot afford a more lavish lifestyle.

Yet for other lower-income people, their existence is miserable and full of unhappiness. Perhaps they are saddled with crippling debt which they feel unable to escape from, creating a deep sense of entrapment. Maybe a family would like to move out of a high-crime area into a safer one, for instance, but they cannot afford to do so.

 

Does having more money mean more happiness?

On the other side of the coin (i.e. the wealthiest members of society) the situation seems to be similarly reflected. There are many wealthy people who are perfectly content. They enjoy the finer foods and also the most incredible holiday experiences. They live comfortably in large homes.

With such immense financial resources, how could these people not be happy?

Yet we all know of wealthy people who are deeply miserable! Perhaps they have multiple homes and expensive cars, yet their debts are hanging over them like a dark cloud, threatening to derail them at any moment. Maybe they worry about their precarious financial position due to market threats to their business, which ultimately supports their lifestyle.

 

Where financial planning fits into the picture

We deal with a wide range of financial matters and clients, and know all too well how complicated the relationship is between money and happiness.

If you are looking for the definitive answer on how people can address all of their inner angst about money, we, unfortunately, cannot provide it here.

Yet we can offer an important piece to start fixing the puzzle – and that’s through meaningful, effective financial planning.

Really, a financial plan starts with asking yourself what is ultimately important to you:

Is your deep desire to one day sell your business and retire early to enjoy a long-time hobby?

Is it to travel the world with your wife of thirty years?

Is it to leave a meaningful inheritance to your grandchildren, giving them the better start in life you wish you could have had?

Once you know the answers to these questions (what really matters to you and will make you happy), then you can then start planning towards making these goals a reality.

Simply having a financial plan can go a long way towards making you happier. Speaking from experience with our own clients, knowing that you are steadily moving towards your goals usually brings a huge sense of satisfaction, purpose and peace of mind.

Sitting down with an experienced financial planner can be immensely valuable when thinking about putting your plan together.

It might be, for instance, that some of your goals are not actually possible in light of your current financial situation. This can be difficult to come to terms with, but it is better to deal with that now and revise your expectations rather than hitting a shocking dead end in years down the road.

In many other cases, however, it is often the case that you can achieve much more than you thought previously was possible. Perhaps we could show you a planning opportunity which means you could actually retire earlier than you thought, for instance.

Or, maybe you find out (through estate planning) that you could leave much more to your grandchildren as an inheritance (tax-free) than you previously believed would be possible.

 

Summary

How could we round up everything we have talked about above?

In short, we believe that a key part to a happy life is having a clear set of meaningful goals in front of you, and putting a financial plan in place to move towards them.

Quite often, the key to happiness when it comes to money isn’t about having more or less of it. It’s about managing it well and committing it towards the things that matter.

If you would like to start talking to us about how to start putting a financial plan like this together, then we invite you to get in touch. We’d love to talk more with you through a free, no-commitment financial consultation.

Get in touch today!

Feb 14
0

A Short Guide to ISAs: Which Do You Need?

By | Money Tips

We are fast approaching the ISA season (i.e. tax year end), and my thoughts turned towards making sure our clients maximise their allowances where possible. With this in mind, I thought I would pen some thoughts on the advantages of putting your money into an ISA, and, as there are lots of different types which one(s) should you chose?

We frequently advise clients on these questions. Simply put, an ISA (individual savings account) allows you to save money and gain interest, without it being liable to income tax.

ISAs are available to UK residents aged over 16 (except in the case of Junior ISAs). In 2018-19 you can put up to £20,000 per year into one ISA or across multiple ISAs. This limit is fixed for the financial year. Although generally, you cannot reset your limit by withdrawing money from your ISA, with some schemes you can, so not all ISA’s are equal!

Different ISAs do exist,  offering certain options to the guidelines described above. So let’s briefly look at each one, with a note on some of their respective pros and cons.

 

Help to Buy ISA

This ISA is actually set to be phased out by November 2019. However, it is still useful to know about them in case you want to set one up before then.

Help to Buy can be an attractive saving mechanism for first-time buyers looking to save for a mortgage deposit. Under this scheme, you can save £1000 in your first month and £200 per month thereafter, tax-free.

When the time comes to putting down your mortgage deposit, the UK government will then add 25% (tax-free) to the amount in your ISA. This “bonus” is capped at £3,000.

This can be a great option for couples who are both first-time buyers, as you can both open a Help To Buy ISA. This means you could buy a house together and get up to £6,000 extra from the government as a bonus.

One downside is that the property you are looking to purchase must be valued under £250,000 (or £450,000 in London). You also need to use a solicitor when applying for the government bonus, which can be an extra cost of around £60 for an administrative fee.

 

Cash ISA

If you have an ordinary savings account and you have lots of money sitting in it, then you might have to pay income tax on the interest you have gained (i.e. 20% on any interest over £1,000, assuming you are a Basic Rate taxpayer).

With a Cash ISA, however, if the money was sitting in here then the interest would not be taxed. The features of this type of ISA is very similar to a typical savings account, so you are usually able to withdraw money fairly easily.

You can transfer a cash ISA (e.g. from one bank provider to another one), although this can sometimes incur a transfer penalty. Check with your provider before moving money around.

 

Stocks & Shares ISA

Some people want to use an ISA to save in a tax-efficient way. However, we frequently talk to people who want to use an ISA to invest – in order to attain higher returns from the interest they generate.

A Stocks & Shares ISA is one way to do this. Here, the money you put into it is invested into certain financial products. These might include funds (i.e. company shares and bonds which have been pooled together), government bonds or other investment assets.

These ISAs are attractive because they can offer a higher return than a Cash ISA, or ordinary savings account. The profits you make will not be taxed. However, your money is usually locked away for at least a few years, which limits your ability to withdraw it. Moreover, the value of your investment could go up or down depending on performance.

 

Innovative Finance ISA

When it comes to investing, there are different levels of risk. Investing in UK government bonds, for instance, is usually seen as fairly low-risk because the UK government is widely seen as reliable when it comes to paying its debts.

Other investments offer higher potential returns, but are inherently more risky. For instance, peer-to-peer lending (i.e. lending money to other people/companies) is regarded as in this category.

One way you can do this is via an Innovative Finance ISA, which allows you to invest in riskier opportunities without being taxed (e.g. crowdfunding and property). You should think carefully before committing large sums of money to an Innovative ISA, as this should be done within the context of a balanced, well-thought-through investment plan. Speak to one of our Oxford financial advisers if you would like to know more.

 

Lifetime ISA

The Lifetime ISA (or LISA) is a fairly recent scheme allowing you to save up to £4,000 a year. Whatever you put in, the UK government will add 25%. So if you put in the full £4,000 each year, you actually end up with £5,000.

The government bonus is capped at £33,000, which would actually take a long time to build up (e.g. starting your LISA at aged 18, and putting in £4,000 each year until your 50th birthday). You need to be over 18 when you open a LISA, but under the age of 40.

The main condition of a LISA is that the money must either be used for your retirement, or towards the purchase of your first home. Use it for another reason, and there would be a 25% charge – leaving you worse off than before.

 

Which ISAs do I need?

The answer to this question depend entirely on your own unique financial situation and goals. If you are looking to buy your first property in the next few years, for instance, then the LISA might be an option to consider. If you are over 40 and already have a mortgage, however, then this will not be open to you.

Currently, with the LISA and Help To Buy ISA both still on offer, it is worth considering which one might be better for your needs if you are looking to buy your first home soon. A big consideration here, of course, will be the value of the property you want to purchase. If it is likely to be valued over £250,000 then Help To Buy will not be suitable for you.

Regarding Cash ISA, Stocks & Shares ISAs and Innovative Finance ISAs it can really help to discuss your investment strategy with an experienced financial planner. Due to the different levels of risk and potential returns involved with each ISA, it is important to consider which option (or balance of options) might best suit your risk tolerance and financial goals.

Feb 14
0

Saving for University: How Much Do You Need?

By | Money Tips

In recent client review meetings, I have been asked about the options for University saving and the impact on the family budget. Having a son currently enjoying his gap year in Japan means this was close to our hearts when originally setting our own plans. With that in mind, I thought this article may be helpful.

With university tuition fees in England now approaching £9,250 per year, many young people are understandably questioning whether higher education is worth the investment.

We have many clients with children asking such questions. Given the importance of education to one’s career prospects (and, therefore, your earning potential) we wanted to offer some practical tips about the financial costs of university:

 

Is going to university still worth it?

Only you will truly know whether attending university is personally right for you. From a financial point of view, however, we can offer some suggestions to help you decide if it is worth 3+ years of your time.

There is some evidence to suggest that those with an undergraduate degree are paid more than those without one. However, the picture is not completely clear-cut.

The statistics point to certain university degrees offer a higher earning potential than others.

The institution you attend also has a big impact but surely it is more important to find the best university for your child, than just simply the best university

Historical statistics point out that female graduates are also more likely to see a bigger financial benefit from university compared to men. Women with a degree are estimated to earn 28% more than those without. For men with degrees, their earnings are about 8% higher compared to their non-degree counterparts.

Mixed in with all of this, of course, are the costs of going to university. In other words, even if your earning potential is higher with a university degree, is the up-front investment and subsequent debt you need to pay worth it (from a financial perspective)?

You will need to sit down and do some sums for your own particular situation, but here are some suggestions as a general guide.

Firstly, and importantly, remember that you do not start paying back your student loan until you start earning. For instance, if you start a university degree this coming September (2019) then you will only start paying back your loan once you start earning over £25,000 per year. You will then have to pay back 9% of your earnings over this amount.

But do remember that your student debt is wiped after 30 years after you started paying it back. So, if you start repaying it from the age of 25 you will no longer have to do so once you reach age 56.

So, it looks like you should not pay your student loan back early as the debt will eventually be wiped anyway. Try to think of the monthly payments as a kind of “graduate tax” which you pay for having attended university.

In our view, attending university still makes a lot of sense from a financial point of view – despite the student loan repayments you will have to make.

However, this does not mean university is right for everyone. Nor does it mean that there are no other options available to you which could offer even higher earning possibilities or fulfil your life’s ambitions

 

How much money do I need for university?

There are many factors involved with answering this question, including where in the country you will live whilst you study as well as the length of your course.

You already know that you will be facing tuition fees of up to £9,250 per year if you are a British student studying in England. However, you only start paying that back later – so set this aside in your mind for now. We are concerned with how much/if you need to save beforehand in order to live comfortably whilst at university.

Your main living cost whilst you study will be your rent. When we looked in 2017 it averaged at £125 per week – or £4,875 a year on a 39-week contract. Certain locations such as London, however, present higher rent costs.

Essentially, we are suggesting that parents have honest discussions with their child and more importantly, incorporate it into your family long term financial planning.

If you would like us to help you with this, please do get in touch.