Financial Planning

While many clients understand the potential of an investment plan or the tax-efficiency of a pension, estate planning is a less exciting prospect. No one wants to think about their own mortality, and taking steps to plan for death can seem like tempting fate.

But rather than dwelling on the negatives, this article focuses on the opportunities. The main benefits of estate planning are:

• More of your money will go to those you have intended
• There are ways to minimise tax
• Comfort in knowing that your loved ones are taken care of
• Realising that the money you have worked for will leave a legacy for many years beyond your own lifetime

When creating a financial plan for our clients, one of the key points we address is the need for a Will.

Why You Need a Will

Making a Will is one of the easiest financial decisions to put off, but it is also very simple to complete. The assumption that your estate will be distributed according to your wishes, even without a Will is all too common.

If you die without a Will, this is known as intestacy. The rules of intestacy are complex and depend on your family situation, as well as where you are in the UK. More information can be found at:

https://www.gov.uk/inherits-someone-dies-without-will

A number of factors would indicate that settling for intestacy is not the best course of action. For example:

• You would like your spouse to inherit everything in the first instance, with assets only passing to your children on the second death.
• If your spouse is financially independent, you may prefer for your estate to pass directly to your children.
• You do not have a spouse or children and would like to nominate relatives, friends or charities to receive your assets.
• You are in a common-law relationship. Without a legal marriage or civil partnership, your partner has no automatic right to inherit.
• You would like your step-children to benefit.
• You would like to have some control over what happens to your money after you die, for example, by setting up a Trust.
• You would like other wishes to be taken into account, such as care arrangements for children or funeral arrangements.

Making a Will is particularly important if you have a less than straightforward family situation, as it is very unlikely the rules of intestacy will suit your circumstances.

How a Financial Plan Can Help

The main purpose of a financial plan is to determine how much money you need, either from existing assets or future income, to achieve everything you wish during your lifetime.

When you have worked hard for this money, it is worth thinking about the kind of legacy you would like to leave behind. Depending on where you are in your financial journey, this may involve:

• Arranging life insurance to make sure your family are provided for.
• Making regular gifts during your lifetime. Not only does this help to minimise inheritance tax, but also allows you to see your loved ones benefitting from the money.
• Setting up Trusts, using either existing capital or life insurance benefits.
• Making gifts to charity, or even setting up your own Charitable Trust.

When you have decided what is important to you during your life, this can help to inform the bequests you make within your Will.

Making Use of Trusts

Trusts can be set up during your lifetime, or be created on your death as directed by your Will.

Lifetime Trusts should be undertaken as part of your wider financial plan. They should take into account:

• How much money you can afford to give away.
• Your wishes, and the level of control you would like to have over the Trust.
• Whether you need to retain any access to the Trust funds. A few Trust structures allow this, but in general, the more access you have to the money, the less effective the Trust is for Inheritance Tax purposes.
• The source of funds for the Trust, whether this is a gift or a life insurance policy.

You can also set up Trusts via your Will. You might want to do this for the following reasons:

• To set aside money for children who are not yet of age.
• To control who has access to the funds. This may include your spouse, children, grandchildren and anyone else you specify. If all of your assets pass to a spouse and they then remarry, this places your children at risk of not inheriting anything if their surviving parent dies. A Trust can also protect funds if any of the beneficiaries get divorced or are declared bankrupt.
• To control when the money is received by the beneficiaries and if any conditions apply.

You can write a Letter of Wishes to direct your Trustees how the money should be dealt with.

How Your Pension Can Help

While pensions are not specifically designed for estate planning, they have the following benefits from a legacy perspective:

• Pensions can be paid out to your beneficiaries free of tax if you die before age 75. After age 75, the beneficiaries will pay tax at their own highest marginal rate of Income Tax rate and can withdraw the money flexibly as required.
• You can create an Expression of Wishes nomination to inform your Pension Trustees what should happen to your pension fund if you die. While the Trustees are not bound by this, they will usually follow your wishes unless there is a strong reason not to.
• Your Expression of Wishes can either follow the provisions in your Will, or be entirely separate.
• A good financial plan will combine retirement income planning and estate planning. For example, by drawing on assets within the estate first (which would be subject to Inheritance Tax) and preserving the pension, this can reduce the amount of tax paid and increase the amount available for your beneficiaries.

Top 5 Tips When Writing Your Will

When creating your Will, consider the following:

• Make sure your Will is securely stored, and that your Executors know what to do in the event of your death.
• If you leave at least 10% of your estate to charity, your rate of Inheritance Tax reduces from 40% to 36%.
• Ask your legal adviser if a Trust would be an effective way of administering your estate.
• Where possible, avoid nominating your solicitor as Executor. This can work out more expensive, and can result in a conflict of interests.
• While you are dealing with legal matters, you should also have Powers of Attorney completed. This allows your attorneys to make decisions about your finances and care if you become incapacitated. It is therefore important to give careful consideration to who you nominate as your attorneys.

Please don’t hesitate to contact a member of the team if you would like to find out more about your estate planning options.

Jeremy Hunt delivered his much-awaited budget on 7 March. Given the upcoming election and challenging public opinion, the government has recently been under significant political pressure to assuage voters.

The headline measure was the cut to National Insurance rates, following a similar cut already announced in November 2023. Child benefit rules are also to be overhauled, and a new British ISA allowance is set to provide tax breaks for individuals investing in UK companies.

The key points are outlined below.

The Economy

• The rate of inflation (currently 4%) is expected to reduce to the Bank of England target of 2% within a few months. This is an improvement on the Autumn statement’s forecast, which suggested that this target would not be reached until 2025.
• Economic growth is projected to be 0.8% this year and 1.9% in 2025. Again, this is higher than estimated in November.
• The rates are estimated to be 2%, 1.8%, and 1.7% in the three subsequent years, respectively.
• 2022/2023 saw the largest drop in living standards since Office for National Statistics records began in the 1950s. However, real household disposable income is expected to return to pre-pandemic levels by 2025/2026, two years ahead of the November forecast.
• Tax revenue is expected to rise to 37.1% of GDP by 2028/2029, the highest level since 1948. Despite highly publicised efforts to cut taxes, the freeze in personal tax thresholds means that most people will continue to pay more tax.
• Public spending will grow at 1% in real terms rather than in line with inflation. This represents an 8% real terms drop since the policy was introduced in 2021.
• Borrowing for the current tax year is estimated as £113 billion, which is £11 billion below the Office for Budget Responsibility’s November forecast.

Tax

• As of April 2024, the rate of National Insurance contributions for employees will be cut from 10% to 8%. This is expected to save around £450 per year for someone earning an average salary of £35,000.
• This follows the 2% cut (from 12% to 10%) already announced in November.
• Non-dom status will be scrapped by April 2025. This refers to people who live in the UK but are domiciled (i.e. have permanent links) abroad and, therefore, only pay UK tax on UK income. The new rules mean that after four years of living in the UK, anyone with non-dom status will pay the same tax on worldwide income as other residents.

Work and Benefits

• The earnings threshold for starting to lose Child Benefit will be increased from £50,000 to £60,000. Additionally, the level at which the benefit is lost completely will increase from £60,000 to £80,000. This will apply from April 2024.
• Plans are in place to apply the limitations to household income rather than individuals starting in April 2026.

Investing

• A new ‘British ISA’ scheme is to be introduced, offering investors an additional £5,000 ISA allowance to invest in British assets.
• This is due for a consultation, with details and the timeline still to be announced.

Property

• The capital gains tax rate (CGT) on property sales will reduce from 28% to 24%. This will benefit landlords and second homeowners who sell their properties, as CGT does not apply to the sale of a main residence.
• However, the furnished holiday let scheme will be scrapped. This will reduce tax breaks on short-term lets and ultimately make it less profitable to let to holidaymakers than to long-term tenants.

Alcohol, Tobacco, & Fuel

• Plans to increase alcohol duty by 3% in 2024 have been scrapped. Current rates will be frozen until February 2025.
• Tobacco duty will increase and a levy on vape products will also be introduced in October 2026.
• The fuel duty will also remain frozen for at least one more year. The 5% cut introduced in 2022 was due to expire this month but has now been extended.

Public Sector

• Plans to digitise the NHS and make it more efficient are being introduced. Some of the measures mentioned include AI form-filling and making improvements to the NHS app.
• Military spending is due to increase from 2% of GDP to 2.5%.

Childcare

• Free childcare hours for children aged 9 months and over will continue for the next two years.
• However, nurseries continue to struggle with rising costs and limited resources, which means that the free hours will not necessarily translate into more nursery places. Additional support has been promised, but concrete details are sparse.

The Arts

• Independent films with a budget of below £15 million will benefit from a new tax credit.
• Film studios will also benefit from 40% relief on business rates until 2034.
• The National Theatre will receive a £26.4 million upgrade to its stages.

Conclusion

The new measures will mainly benefit middle-to-high earners, along with a small boost for property owners wishing to sell.

One of the main criticisms of the NI cut is that it benefits a specific portion of the population – people who are working and earning a reasonable income. The overall tax burden on the population will continue to increase given the freeze to the allowances and thresholds, which is expected to remain in place until 2028.

Doubts have also been raised about spending plans, which, along with the NI cut, will be funded in part by higher borrowing. Public finances are tight, and it has been argued that money could be better spent on public services. However, with Labour still leading the polls, it’s possible that this will be the next government’s problem to solve.

Please don’t hesitate to contact a team member to learn more about the topics covered.

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.

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.

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).

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 long–term. 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 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).

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).

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).