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Financial Planning

The Autumn Statement 2023

By | Financial Planning

Jeremy Hunt delivered the Autumn Statement on 22 November following weeks of speculation about potential tax cuts. The headline measure, a reduction to National Insurance Contributions was something of a surprise. Beyond this, economic measures are looking more positive than indicated in March, and the government has committed to continue investing in businesses to boost growth.

The main measures announced are covered below.

The Economy

  • Inflation is expected to reduce to 2.8% by the end of 2024.
  • Overall, the rate is expected to stay ‘higher for longer,’ and is unlikely to drop to the Bank of England’s 2% target until 2025, a year later than previously predicted.
  • Based on this, it is suggested that the base rate will remain at around 4% until 2028, rather than dropping to 3% as previously indicated.
  • It is anticipated that the economy will grow by 0.6% this year and 0.7% next year. Incremental growth of 1.4% – 2% per year is expected over the following four years.
  • Overall, the economy has grown by 1.8% since before the pandemic.
  • In March, it was predicted that the economy would shrink by 0.2% this year, before growing at a higher rate than currently predicted. This suggests slower growth from a higher starting point than previously predicted.
  • Government debt is projected at 94% of GDP, which is lower than predicted in March.
  • The budget deficit, or difference between spending and income, is currently 4.5%.
  • Public borrowing is estimated at 5.1% of GDP, or around £132 billion.
  • While these figures are an improvement from March, it is likely that there will be little difference in long-term projections due to the additional cost of the measures announced.

Personal tax

  • The main rate of employee National Insurance Contributions are to be cut from 12% to 10%. This will take effect from 6 January 2024.
  • Class 2 National Insurance, payable by self-employed people at a rate of £3.45 per week, will be abolished.
  • Self-employed people will also see a 1% cut to Class 4 NI contributions, from 9% to 8%.
  • Both changes to self-employed rates will take effect from April 2024.
  • There were no changes to Inheritance Tax, despite discussions in the preceding weeks.
  • Alcohol duty will be frozen until August 2024 while tobacco duty will increase at 2% above inflation (12% above inflation for hand-rolled tobacco). No changes to fuel duty have been announced.

Pensions

  • A pension ‘pot for life’ will be introduced. This is intended to give employees more choice over where their pensions are invested and reduce the number of ‘small pots’ accumulated over the course of a working life.
  • The State Pension ‘triple-lock’ was re-affirmed, with an increase of 8.5% to retirement income from April 2024.

Investments

  • Currently, ISA investors can contribute to one cash ISA, and one stocks and shares ISA. From April 2024, this restriction will be removed. The contribution limit will remain at £20,000 per year.
  • The scope of investment choice for ISAs will also be widened to allow access to ‘long-term asset funds,’ which invest in illiquid assets such as property and private equity.
  • The government has committed to extend the tax advantages of Venture Capital Trusts and Enterprise Investment Schemes to 2035. This change follows a post-Brexit consultation as these investments did not align with EU rules.

Energy Crisis

  • Anyone living near new pylons and transmission infrastructure could be offered up to £10,000 off their energy bills over the next 10 years.

Business

  • Temporary measures allowing businesses to offset the cost of capital investment in the company (for example, by purchasing new equipment) will be made permanent.
  • Business rates will be discounted for hospitality, leisure, and retail businesses.
  • The government plans to invest £4.5 billion in manufacturing and £1 billion in aerospace/green technology between 2025 and 2030.
  • New investment zones will be introduced in Wrexham, Greater Manchester, the West Midlands and the East Midlands.
  • £80 million will be directed towards new levelling up projects in Scotland.
  • It is hoped that the total package of measures for businesses will increase investment by up to 1% of GDP.
  • The government is considering a sale of its remaining stake in NatWest Group following the bank’s bail out in 2008.

Property

  • New rules are under discussion which would allow existing houses to be converted to two flats, providing the exterior of the property is unchanged. This is intended to increase the number of homes available.

Work and Benefits

  • The National Living Wage will increase to £11.44 per hour from April 2024. This will be extended to all workers aged 21 and over.
  • The rate will increase to £8.60 per hour for 18- to 20-year-olds.
  • Universal credit and other benefits will increase by 6.7%, equivalent to September’s inflation rate. This represents an average gain of £470 for 5.5 million households.
  • Local housing allowance is to be increased, with an average raise of £800 for £1.6 million households. These rates have been frozen since 2020, despite average rental increases of over 30%.
  • Anyone claiming unemployment benefits will need to undertake mandatory work experience if they do not find a job within 18 months. If they do not actively look for work, benefits will be stopped.
  • £1.3 billion will be allocated over the next five years to help people with health conditions get back into work.

Public Services

  • £14.1 billion has been pledged for the NHS and adult social care, while schools will receive £2 billion in the current and next tax years.
  • Defence spending will remain at 2% of national income, with overseas aid spending falling 0.2% below target at 0.5%.

How Will You Be Affected?

If you are employed or self-employed, you can expect your net income to increase due to the reduction in National Insurance. Anyone receiving an income from pensions or investments will not be affected by this change.

Lower earners may benefit from the increase to the National Living Wage, particularly as this has now been extended to anyone aged 21 and above. However, despite the increases to benefit payments, the likelihood is that anyone claiming benefits will face increased pressure to find work, whether this is feasible or not.

While pension savers may eventually benefit from the ‘pot for life’ concept, the reality is many years away and concrete details are not yet available. It has been pointed out that investors can already set up pension schemes independently of their employer and that perhaps more guidance would have a greater impact than a brand-new pension system.

Conclusions

After weeks of speculation about a reduction to Inheritance Tax, the cut to NI rates was unexpected. However, this will offer more benefit to the average worker versus a tax cut on large estates.

Criticisms for the measures from Labour were limited and mainly focused on the idea that it was too little too late. The NI cut has been generally welcomed, but it was felt that it did not begin to compensate for frozen thresholds and stealth taxes.

Please do not hesitate to contact a member of the team if you would like to discuss any of the topics covered.

How Behavioural Biases Can Affect Your Financial Plan

By | Financial Planning

Whether we are aware of them or not, we all carry biases which shape our thoughts and behaviour. Most investors know that making decisions based on emotion is likely to be counterproductive. But what about those subconscious beliefs that can fool us into thinking we are making an entirely rational choice?

Biases are apparent in all areas of life, and financial planning is no exception. It is only when we explore the reasons for the biases, and look past them, that we can make genuinely objective decisions.

Confirmation Bias

Have you ever started with a theory or a hunch and decided to carry out further research? Do you notice how straightforward it is to find information that supports your original view, while opposing evidence can be easily debunked or cast aside?

That’s confirmation bias. When we have a particular belief, we are naturally inclined to seek out evidence in favour of it. The more we find, the more this enforces the belief, making it easier to ignore or discredit the opposite view.

Confirmation bias stems from two things. Firstly, we like to believe we are right. And secondly, you can prove just about anything with statistics. The truth is rarely black and white and it’s not always easy to see the nuances.

In financial planning, we might favour a particular company or investment and look for reasons to use them, rather than taking an objective view. An independent financial adviser, by definition, must look at the whole of the market when making recommendations. Seeking advice can help you see the wider picture and make decisions based on evidence.

Overconfidence Bias

Overconfidence bias occurs when we place too much faith in our own judgement.

Evidence has proven that it’s virtually impossible for an individual investor to consistently ‘beat the market.’ This is particularly true when trading individual stocks and attempting to buy and sell at the right times. The market is too unpredictable, and any information that could affect your decision is already priced in.

But people still trade shares. This suggests that a huge number of investors place greater confidence in their own stock picking abilities than that of a professional manager, or the steady predictability of a passive fund.

Successful investing doesn’t just mean supercharging your growth in the short term. It’s also about managing risk and coping with the inevitable downside. Over the longer term, a diverse investment strategy that stays on course is likely to improve long-term growth prospects.

The Gambler’s Fallacy

Past performance is not necessarily an indication of future performance. This statement appears throughout the financial services industry, and is intended as a reminder that just because a fund has had a good run, this doesn’t mean it will continue.

But top performing funds attract attention, and therefore investment. This boosts the share price as demand increases. Eventually, this levels off, and another fund takes the top spot. And so it continues.

The gambler’s fallacy arises from a belief that just because a horse (or a fund) has performed well, it will continue to do so. Often, this doesn’t include in depth research into the reasons for the success or the underlying holdings. Many of the top performing funds in 2020 benefited from the circumstances, i.e. an increased demand for tech and healthcare products. That doesn’t mean that the same funds will outperform in 2021 as it’s likely that other trends will take over.

When investing, it’s important to look at factors other than past performance. As always, diversification is vital, as this can help to capture market trends that might otherwise be missed.

Loss Aversion

No one wants to lose money. In financial planning, sometimes we can take actions that are interpreted as ‘cautious’ or ‘risk-averse’ to avoid losses. For some investors, the pain of a loss can far exceed the elation of a gain.

But keeping all of your money in cash is not simply cautious. It’s creating a loss in real terms, as your money will lose spending power in every year that inflation rises. By eliminating one risk (investment fluctuations) you are creating another (inflation risk).

Similarly, selling investments when the market is falling is not a prudent move. It can prevent further losses, but what about the losses that have already occurred? When do you decide to buy back in? A habit of selling when the market is falling and buying when the market is rising is far less efficient than simply buying and holding.

Fluctuations are part of investing, and therefore part of financial planning. Rather than trying to avoid market dips, the secret is to understand how you will cope when (not if) they occur.

Herd Mentality

Herd mentality, or ‘groupthink’ means following the crowd.

Investment prices are driven by supply and demand. This not only relates to the underlying assets, but also to investor appetite for a particular fund or share. So if a particular stock falls out of favour, investors often believe they are taking the safe route by copying what everyone else is doing. But this causes the price to drop further, and those at the back of the queue will probably lose more than if they just stayed invested.

Cryptocurrency is an excellent example of this, as the wildly fluctuating values are based on little more than trends and opinions shared on social media.

Sometimes success comes with taking your own path rather than following the herd.

A financial adviser can help you to overcome biases and take an objective look at your financial situation.

Please don’t hesitate to contact a member of the team to find out more about financial planning.

Happy New Year!

By | Financial Planning, Tax Planning

Well, Tax Year anyway!

Following the recent Budget there are some changes to allowances and pension funding rules, which have now come into effect. Here, we provide a summary overview of the allowances and reliefs available this tax year.
 

Income tax

  • Most people are entitled to a personal allowance of £12,570.

    If your income is over £100,000 then you will see your allowance reduced by £1 for every £2 of income over £100,000. This means the allowance is lost completely lost once your total income is £125,140 or more.

    Put another way, for every £100 of income between £100,000 and £125,140, you only get to take £40 home – £40 is deducted in income tax, while another £20 is lost by the tapering of the personal allowance which effectively amounts to a 60% tax rate on income within this range.
  • The additional rate threshold has been reduced to £125,140. This means that more people will find themselves paying more income tax as a result. However there are ways to reduce your income tax, for example, making pension contributions, making charitable donations or investing in investments which provide income tax relief. The right combination will depend on your personal circumstances.
  • Marriage allowance – If you are a basic rate taxpayer and you’re married or in a civil partnership, you can transfer 10% of your personal allowance to your spouse or civil partner. When combined between a couple, this unused allowance offers an overall tax saving. However, there is a limit to how much can be transferred – this is currently £1,260.
  • Dividend allowance – The annual dividend allowance has reduced to £1,000. This will be further reduced to £500 in April 2024. There are no changes to the dividend tax rates.

Regardless of your employment position, it is important to ensure that you are on the correct tax code, otherwise you could be paying too much tax (or not enough). You can contact HMRC or your accountant to doublecheck.
 

Tax efficient investments

  • Individual Savings Accounts (ISAs) – ISAs are exempt from income and capital gains tax, which means they are a tax-efficient way to save. There are four types of ISAs available – cash ISA, stocks & shares ISA, innovative finance ISA and lifetime ISA. The annual subscription limit (for all ISA types combined) is £20,000.

    A few providers offer ‘flexible ISAs’ which allow you to replace withdrawals within the same tax year, in addition to your standard annual ISA allowance.

  • Growth-oriented unit trusts/OEICs –income tax rates are higher than the current rates of CGT, so it can be advisable, from a tax perspective for a higher/additional rate taxpayer, to invest in collectives geared towards capital growth as opposed to income.
  • Single premium investment bonds – Bonds (onshore or offshore) are non-income producing investments, so are useful investments to defer tax payable by use of the 5% cumulative allowance, ignoring any charges. This may appeal to you if you are a higher/additional rate taxpayer now, but you are likely to pay tax at a lower rate in the future, due to how the gains are taxed.
  • Enterprise Investment Scheme – an investment of up to £1 million (or £2 million provided anything above £1 million is in knowledge-intensive companies) can be made to secure income tax relief at 30%, with tax relief being restricted to the amount of income tax otherwise payable by the investor in that tax year. The relief can be carried back to the previous tax year. In addition, unlimited CGT deferral relief is available provided some of the EIS investment potentially qualifies for income tax relief.
  • Venture Capital Trust – offers income tax relief at 30% for an investment of up to £200,000 in new shares, again with tax relief restricted to the amount of income tax otherwise payable by the investor in that year. Dividends and capital gains generated on amounts invested within the annual subscription limit are tax free, so, again, these investments may appeal to higher/additional rate taxpayers.

EISs and VCTs are high risk, illiquid investments and may not be suitable for everyone. It’s therefore important to take advice from a fully qualified financial planner with experience in these areas before investing.
 

Capital gains tax

  • The Capital Gains Tax (CGT) annual exemption has reduced to £6,000, and will reduce again to £3,000 in April 2024. This will effectively mean that more people will find themselves paying CGT on their capital gains, making careful financial planning more important than ever.
  • If you have made capital losses in previous tax years, to carry forward against future gains, you should make sure you report them to HMRC – you have up to 4 years after the end of the tax year that you disposed of the asset to report the loss. This can either be done via self-assessment or by writing to HMRC.

Corporation tax

  • The 19% rate applies to the first £50,000 of profits and a marginal rate of 26.5% applies to any excess up to £250,000 (£50,000 @ 19% + £200,000 @ 26.5% = £62,500 = £250,000 @ 25%). The 19% rate does not apply to close investment-holding companies. So, for close investment-holding companies and companies with profits of more than £250,000, the rate of corporation tax is 25%. (Note, however, that the 19% rate can apply to a property letting company with profits of up to £50,000.)

    Your financial planner and/or accountant will be able to offer advice on tax-efficient ways to extract your company profits.

Pensions

  • The Annual Allowance has increased to £60,000 for most individuals and you can use carry forward for up to three years of any unused allowances.
  • For high earners the minimum tapered allowance has increased from £4,000 to £10,000, along with an increase in the assessment thresholds.
  • Similarly, the Money Purchase Annual Allowance has also increased from £4,000 to £10,000 providing scope for further savings if you have flexibly accessed your pension benefits.
  • Lifetime allowance – the Lifetime Allowance (LTA) charges have now been removed. This provides opportunities for those previously restricted by the LTA to recommence or increase their contributions. Those with Fixed or Enhanced protection can now make further contributions without impacting any tax-free entitlements.

    However, it has already been well publicised that a different future government may well attempt to reintroduce lifetime restrictions.

Inheritance tax

  • The freeze on the Inheritance Tax (IHT) thresholds remains in place and is expected to stay until 2028.
  • The current nil rate band threshold is £325,000 and the residence nil rate band is £175,000.
  • The residence nil rate band is tapered by £1 for every £2 where the total estate exceeds £2 million. If you are in this position, you might consider options to reduce your estate during your lifetime in order to reclaim at least some of the allowance.

Invitation

Interested in finding out how we can optimise your financial plan? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.

You can call us on 01869 331469.

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

Source: Knowledge: Year End Tax Planning (techlink.co.uk)

Tuning out the noise

By | Financial Planning

You may have noticed that in our monthly newsletter a regular slot is given to a short video about ‘tuning out the noise’.

We usually reference this with “Watch this video and discover how partnering with the right financial planner plays a vital role in keeping investors on their financial plan and what really matters.”

 
The video is just under 4 minutes long. Even if you’ve seen this before, it’s worth re-watching as a timely reminder.

The message to ‘tune out the noise’ is particularly important at the moment, with all that is going on in the World, not least within our Government, the rising cost of living, and how interest rates are affecting bond markets.

At times like these there are a number of things that you can do to feel calmer and more in control:

  1. Read, watch or listen to less financial press and commentary.
  2. Accept that investing is always a two steps forwards, one step back journey.
  3. Try not to dissect your portfolio statement line by line – look at the big picture.
  4. Look at portfolio outcomes over the longest time frame you have available.
  5. Remember that a fall in value is not a loss unless you sell.
  6. Higher bond yields and lower equity prices point towards higher expected returns.
  7. Attempting to jump in and out of markets is simply guesswork, and likely to be costly.
  8. Place 2022 in the context of your multi-year, or even multi-decade, investment horizon.
  9. Keep your eyes on the prize of building future purchasing power over the longer term.
  10. Keep the faith – stay invested.

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.

You can call us on 01869 331469

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

Why holding too much cash can inhibit your goals

By | Financial Planning

During times of uncertainty, it can be tempting to move more of your wealth into cash. It seems “safer” due to its ability to shield from stock market volatility, and there is the security of knowing the Financial Services Compensation Scheme (FSCS) guarantees up to £85,000 of savings if your bank should fail. Yet, perhaps counter-intuitively, holding too much cash can be detrimental for your financial goals. Below, our team at WMM explain why cash should form a relatively small portion of most people’s longer-term wealth compared to their other assets.

 

Cash is not risk-free

On your bank statements, cash savings may seem to be earning you money. However, inflation is usually eroding their real value. In 2022, inflation currently stands at 10.1%, meaning it may now cost you £1.10 to buy an item that cost you £1 twelve months ago. If your cash savings offered you a 10.1% interest rate, then they would be closer in keeping up with this rising living cost. However, interest rates remain low, with the “best” deals currently offering 1.85% easy access and 3.61% fixed.

Cash, therefore, is not risk-free. In fact, you are certain to lose value over the long term due to inflation. This makes it a poor asset class for building long-term wealth. Cash can certainly help provide an easy-access emergency fund (e.g. 3-6 months’ worth of living costs) if you come across hard times, such as losing your job. It can also be useful when building towards a short-term financial goal (e.g. putting down a mortgage deposit within the next three years). However, if you want to build a retirement fund and stand a chance of beating inflation, other assets need to be considered for your portfolio.

 

Alternatives to cash for building long-term wealth

Non-cash assets such as bonds, equities and property can intimidate people. After all, they often involve more volatility. Stock prices can go dramatically up and down within a day, and the housing market is also subject to fluctuation. Yet it is worth pointing out that nobody can completely escape risk. Even the value of cash changes due to currency exchange movements. If the pound (GBP) devalues, then it can result in higher prices for UK consumers. A 20% fall, for instance, can lead to prices of imported goods rising by 25%.

One key aspect to building wealth, therefore, is to try to balance the risk associated with each asset class – helping you to also benefit from their opportunities. You can build a portfolio that reflects your unique “risk appetite” too, with the help of a financial planner. If you are a “cautious” investor, then leaning your portfolio towards investment-grade bonds may be appropriate. Those with a longer investment horizon and higher risk tolerance, conversely, are likely to do better by including a higher proportion of equities within their asset mix. The FTSE 100, for instance, has averaged a 7.75% annual return since its inception in 1984 – despite numerous economic crises and market falls along the way. Property has also historically shown itself to be a strong investment over the longterm. UK house prices in 2022 are 65 times higher than they were in 1970.

With this said, building an effective and diversified portfolio is no simple task. There are 1,000s of funds available in the UK market alone. Getting help from an experienced financial planner can help you narrow down on a shortlist of appropriate investment candidates in light of your goals, risk tolerance, investment horizon and sound principles (e.g. the fundamentals of a prospective investment). Over time, your planner can also help keep your portfolio on track and aligned with your chosen investment strategy. 

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

The energy crisis – how it could change everything

By | Financial Planning

The rising cost of gas and electricity is a worry for many UK households in 2022. In November 2021, the energy price cap (set by Ofgem) was £1,277. By April 2022, however, it had risen by 54% to £1,971. Now, projections suggest that the 12-month cap could reach £3,420 by October. By April next year, however, it could even rise to £4,200 (over 3x more than in 2020).

Understandably, such an outcome would leave households considerably worse off and will have a huge impact on the political and economic landscape. Below, we suggest how things could play out in the coming years and how this could affect your financial plan.  

 

Less spending power

In December 2021, there were 29.5m payrolled employees in the UK and the average person earned £31,772 p.a in salary. Net of tax, this is £27,972. A yearly energy bill of £4,200 would, therefore, take away 15% of this take-home pay. The 2021 cap of £1,277, by contrast, might have taken closer to 4.57% of average UK net income.

Of course, many people do not earn the UK average salary. Recent graduates and part-time workers (e.g. parents), for instance, might earn a salary closer to £24,000. The UK’s poorest 20% of UK households had an estimated £12,798 of disposable income in 2018, making them very sensitive to energy price shocks. 

By contrast, The UK’s richest 20% of households had £69,126 – putting them in a much better position to weather the storm. Other groups (by household income) had disposable income of between £21,000-£39,000. Naturally, a higher energy price cap will mean less money to spend in the wider UK economy. Most households in 2022-23 are likely going to need to make tough choices about where to cut back on luxury spending – such as overseas holidays, dining and digital subscriptions – as more income is devoted to covering essentials.

 

Implications for financial planning

Of course, no one has a crystal ball and anything could happen between now and April 2023. Maybe Russia pulls out of Ukraine and re-opens oil pipelines to the west, leading to a fall in global oil prices. Perhaps the UK government initiates a huge financial support package (like the furlough scheme during the Covid pandemic) to help households cope with their surging energy bills, although this would put considerable strain on the public finances.

Yet households cannot depend on such outcomes. Generally, it is wise to prepare for the worst whilst hoping for the best. Here are some ideas to get your wealth and finances in better shape before further potential rises in the energy price cap:

  • Optimise your mortgage (likely your biggest monthly expense). Those on a variable rate might benefit from moving to a fixed rate deal, which is typically cheaper.
  • Clear costly debts (e.g. personal loans and unpaid credit cards).
  • Review your tax plan to ensure you are getting the most out of your income. Our recent article on this topic offers 5 ideas to help you here.
  • Review your budget and eliminate needless spending – such as digital subscriptions or gym memberships that you hardly ever use.
  • Get your protection plan up to date. Policies such as life insurance, critical illness cover and income protection can provide much-needed financial stability and support to your loved ones should the “worst happen” to you.

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

Bonus sacrifice and saving on tax: a short guide

By | Financial Planning

Are you a Higher Rate taxpayer? One way to lower your tax bill is via bonus sacrifice. Yet how does it work, exactly – and what are the benefits? In this guide, our team at WMM explains how the rules work regarding bonus sacrifice, how bonuses are taxed and some common pitfalls to look out for in 2022-23. We hope this is helpful and get in touch if you want to learn more.

 

How does bonus sacrifice work?

When you receive a bonus from your employer, it comes via your PAYE salary. This means that the amount is subject to income tax and National Insurance. In some cases, this can push you into a higher tax bracket. For instance, if you earn £48,000 per year then everything over £12,570 is taxed at the 20% Basic Rate. Should you receive a £5,000 bonus, then most of this will be subject to the Higher Rate at 40%. By contrast, bonus sacrifice would put this amount straight into your pension.

 

Why would I engage in bonus sacrifice?

The benefit of putting a bonus straight into your pension, as an employer pension contribution, is that the bonus will not be taxed. The full amount goes into your retirement fund. In some cases, this can help a taxpayer avoid the 40% or 45% income tax rates. You can also side-step needing to pay child benefit tax charges, student loan repayments and National Insurance on the bonus.

Employers are not obligated to offer bonus (or salary) sacrifice, though most will allow it, and some even pass on the employer National Insurance saving into your pension too.

 

Drawbacks of bonus sacrifice

So far, so good. However, putting your bonus into a pension needs to be considered carefully. Bear in mind that you will be unable to access the money until age 55 (or, 57 in 2028; when the Normal Minimum Pension Age is expected to rise). So, make sure you do not need the money for a while. Higher earners also need to take care with the Tapered Annual Allowance, which lowers the amount you can contribute to your pension each tax year – depending on earnings. Here, your annual allowance is reduced by £1 for every £2 of “adjusted income” over £240,000. You can exceed this in certain scenarios (e.g. using “carry forward” to access unused annual allowance from the past three tax years), and everyone always retains an annual allowance of at least £4,000 per year. However, you need to ensure that bonus sacrifice does not put you over your limit for how much you can put into your pension. Otherwise, you risk a tax penalty.

 

Considerations for financial planning

If you have already received your bonus, don’t worry. You can still pay it into your pension to reduce your tax bill. The bonus sacrifice process is usually straightforward. Your boss notifies you about an upcoming bonus; you decide how much you want to put into your pension and let them know; the amount is put into your scheme.

We have already mentioned your annual allowance. However, also be mindful of your Lifetime Allowance when putting bonuses into a pension. This limits how much you can hold in total across your pensions, tax-free (£1,073,100). Also, your employer may require that you put any bonus sacrifice into your workplace pension – not another scheme such as a personal pension, where the fees and investment choices may be better.

Finally, remember that bonus sacrifice reduces your income, in effect. This could impact other areas of your finances such as how much you can borrow for a mortgage. It may also lower certain employee benefits. Life cover and sick pay are often calculated based on your income, for example. Seek financial advice to ensure you balance these various considerations.

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.
You can call us on 01869 331469

 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

An example of a financial planning “road map”

By | Financial Planning

What is a financial planning “road map”, and how does it benefit you? Just like a long road trip, a financial road map plots your life journey towards your financial goals. Not only does it help you determine where you are right now, but it reveals the different directions you could go and highlights the distance/work required to reach your destination. Here at WMM, in this article we offer an example of what this can look like. We hope this is helpful and invite you to get in touch to discuss your own road map via a free, no-commitment consultation.

 

Location

Where do your finances stand right now? Gaining a clear picture of your assets and liabilities is key to determining where your goals are realistic. For instance, perhaps in your case the former includes £50,000 cash savings, a £300,000 pension pot, a final salary pension (from a previous employer), a house which is nearly paid off and a large share in a business that you founded. 

However, your liabilities might include your outstanding mortgage, some personal debt (e.g. unpaid credit cards) and a loan used to invest in your business

It is also important to determine the “liquidity” of your assets; that is, how easily they can be converted to cash, for spending. Your business share may be an asset on paper, for instance, but does it produce a regular income? Could you sell it easily and generate a healthy profit if you wanted to, or would you have to lose a lot of value and income in a ‘fire sale’ if needed?

 

Destination

What would you like to achieve in the future? Perhaps you’d like to retire early, at 57. Or, maybe your dream is to travel the world with your spouse after the kids have left home. Whatever your goals, wealth will play a key role in making them a reality. Here, it is important to consider some vital questions to give the best chance of success. For example, how long are you likely to live? (Be optimistic!). What are your income and expenses likely to be in retirement? 

Perhaps your costs will go down since the mortgage will be paid off, the children will (hopefully) be living independently and you no longer commute to work. However, your lifestyle may rise in retirement as you take up new hobbies, make home improvements and travel. Living costs will also be higher due to inflation. Your pension and other savings will need to account for all these factors, and more.

 

Organisation

With your goals now established, it is time to construct a plan (the “road map”) to move you towards them. Suppose your goal is to retire at 52. Assuming your financial planner agrees this is possible, you can start crafting a strategy to achieve this. 

For instance, you will need to factor in that you cannot access your State Pension until much later (e.g. 67 or 68). Also, you cannot access pension funds until age 55 (rising to 57 in the future). So, initially you will need to draw from other income sources – such as your ISAs, regular savings and perhaps income from Buy to Let (BTL) property. This can also make sense from an inheritance tax (IHT) perspective, since ISAs and BTL properties are not automatically exempt from IHT like a pension pot is, or your family home (assuming its value falls under your IHTfree allowance). 

If you also intend on leaving an inheritance to your loved ones, then the plan will also need to ensure that you do not spend so much in retirement that nothing is left for them when you die. Here, a financial planner can help determine a “safe withdrawal rate” for your pension – so there are sufficient funds for a comfortable retirement, but also funds left to pass down later.


Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

3 ways to keep staff during “the Great Resignation”

By | Financial Planning

A third of UK workers are considering a career change in 2022, with the sectors most likely to be affected including Legal, IT & Telecoms and Sales, Media & Marketing. Indeed, many analysts have called 2022 a “job seekers market”, with many sectors offering more vacancies than they seem able to fill. The age groups most affected appear to be 18-24 and those age 65+. Many of the former moved back in with parents since the 2020 pandemic, whilst many of the latter took early retirement (with too many unprepared, financially). 

The reasons cited by workers for leaving employment include a lack of pay rises or bonuses, limited flexibility (e.g. home working options) and feeling disrespected. In 2022, therefore, how can business owners ensure they keep their best staff? What kinds of qualities can employees look for in a good employer? Below, we suggest 3 benefits to keep in mind..

 

Put in a solid employee package

It might sound obvious, but offering a fair salary and decent employee benefits will be strong positive drivers in helping to retain staff. Unfortunately, many business owners do not keep an eye on market rates in their area/industry – leaving them vulnerable to poaching. Be careful not to assume that employees just care about pay, however. You can make a contract much more compelling with tax-efficient ideas such as the following:

  • Matching employee pension contributions (rather than just offering 3%).
  • Offering “death in service” benefits, as a type of life cover.
  • Providing long-term sick pay.
  • Making “salary sacrifice” schemes such as the ‘Cycle to Work scheme’ available.

 

Foster a healthy work environment

Few things are as likely to alienate employees as a toxic workplace. Perhaps discrimination is tolerated to some degree, making people feel unvalued and unwelcome. Maybe there is just a general atmosphere of unfriendliness, gossip or lack of trust between team members. Managers can also be overbearing, or disinterested.

Owners and directors play a key role in setting the tone and culture of the work environment. Part of this means prioritising staff training and team building exercises (e.g. fun days out). It also involves regular check-ins with employees to see how they are doing, encouraging team communication and opportunities to share fears/grievances. 

Finally, showing appreciation – with your words and even with gifts – can go a long way to help people feel appreciated and that their work is recognised.

 

Identify progression opportunities

Not everyone in a job wants to progress up the career ladder. Perhaps they are quite happy in their role, where they are. However, many people do want the opportunity to earn better pay and take on new, interesting responsibilities. If their job feels like a “dead end”, however, then they may start to look outside your organisation to meet these needs.

Small business owners may find this a particular challenge since, by nature, there are fewer job opportunities in the company compared to a larger one. However, if the business is growing and adding more people to the team, then you can paint a vision of where the company could be in, say, 5 years’ time – and the role that your employee could progress into, if they work hard.

Vision and momentum are really important. If people in your team feel like the organisation is not really “going anywhere”, then they might see limited future opportunities to develop their skills and earning potential. You can help address this by providing regular “strategy” meetings throughout the year about where you want the business to go. From there, make sure you follow through and deliver. If not, your team will likely start to see your “strategies” as not grounded in reality or real promises.

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

“Stealth taxes” to watch in 2022

By | Financial Planning

In 2022, many households face greater financial pressure as living costs rise. However, less well known is a set of “stealth taxes” that could erode your wealth without careful planning. Below, our team at WMM shares six of these to be aware of in the coming months – together with ideas to address them with your financial planner. 

 

Five-year income tax freeze

Chancellor Rishi Sunak announced in the 2021 Spring Budget that income tax (together with others like capital gains tax and inheritance tax) will be frozen for four years from 2022/23 to 2025/26. Some projections suggest that this could, eventually, push 1.2m people into the 40% higher rate threshold as average UK wages steadily rise.

A range of options can be used to mitigate the impact on your finances. One idea might be to increase your pension contributions, as these receive tax relief at your highest income tax rate.

 

State Pension rise cap

In normal times (under the “triple lock” system), the State Pension rises each financial year in line with inflation, 2.5% or in line with the National Average Earnings Index (NAEI) – whichever is highest. However, after an 8.8% increase in earnings last year, this formula was suspended. Instead, the State Pension is set to rise by 3.1% in April. This is below the current 5.5% rate recorded by the Bank of England (BoE), and lower than the 7.25% rate projected in the spring.

Here, you may need to discuss your strategy with a financial planner. It might be that you need to lean more heavily on other income sources to fund your retirement in the short term (e.g. ISA savings). Alternatively, you may need to revisit your budget.

 

Child benefit loss

For parents with two children child benefit can be worth up to £2,000 per year. Once you or your partner starts earning over £50,000 per year, however, you may need to start paying some of this back (via a levy called the “High Income Child Benefit Tax Charge”).

This threshold has been frozen since 2013 and is set to continue as frozen in April 2022. This means about 1.6m families could lose their child benefit – including 120,000 families on the basic rate – as higher inflation and wage growth occurs across the country.

Again, this might mean revisiting your financial plan as a family, to prepare. For some, it might form another reason for a child-caring partner to return to full-time work (now that the children are older). Others may need to re-examine their budget.

Whatever you do, be careful not to simply avoid claiming child benefit (to avoid the hassle of repaying). Claiming can help you build up your State Pension via National Insurance credits.

 

Pensions lifetime allowance freeze

The lifetime allowance (LTA) is the maximum you can hold in your pension(s) before facing extra tax charges, and this has been frozen at £1,073,100 until April 2026. The annual allowance – which caps yearly pension contributions at £40,000 – will also remain frozen.

With inflation going up, many expected the LTA to rise to account for the rising cost of living. Yet the Chancellor has said he is pursuing this route as an alternative to raising income tax, VAT or National Insurance. This means that retirement savers need to be extra careful, planning so that they do not inadvertently breach the threshold.

Doctors and high-earning public sector workers, for instance, may be particularly at risk. Here, you can explore options such as “de-risking” your retirement portfolio strategy, if you still have some years ahead of you until retirement and you are nearing the LTA. Another idea is to make use of other tax-efficient investment vehicles, such as a Stocks & Shares ISA or a VCT.

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).