March 2023

Mar 30

Pension planning for business owners

By FAS | Pensions

When we first meet business owners, we often find that they view pension planning as a low priority, and we do come across business owners who have no pension provision at all. This is in contrast to those who are employed, where most are auto-enrolled into a workplace pension scheme, and therefore automatically accumulate savings towards their retirement. This is not the case for business owners, who need to take action to pay funds into a personal pension, and far too often this option is overlooked. There is, however, every reason for business owners to make pension contributions, as this is a tax-efficient way of drawing funds out of the business.

Salary or dividends

Directors of limited companies tend to draw income as a mix of a small salary, which is often somewhere between the level above the Lower Earnings Limit for National Insurance, but below the Personal Allowance above which Income Tax is paid, with the remainder drawn as dividends. In practice, this means that most Directors draw a salary between £6,396 and £12,570 in the current Tax Year. As pension contributions are limited by salary, this restricts the ability for a director to make meaningful personal pension contributions. It is important to note that dividends are not deemed “relevant earnings” and cannot be treated as income for the purposes of personal pension contributions.

Employer contributions

Whilst personal pension contributions are limited, a powerful tax break can be used that enables directors to receive contributions into their pension over and above the level of their salary. Directors of a limited company can benefit from their employer/employee relationship and opt to make contributions as an employer pension contribution, which is paid by the company from pre-tax company income. As the contributions are not made by the individual director and therefore are not limited by their salary, the full Annual Allowance is available. This is £40,000 in the current Tax Year, but will increase to £60,000 from 6^th April 2023, although the Annual Allowance can be reduced if an individual is a higher earner (and therefore subject to the Tapered Annual Allowance) or has previously accessed pensions flexibly (and is therefore subject to the Money Purchase Annual Allowance).

Tax savings

If a Director was to draw £10,000 from their business in additional dividends, this would be taxed at 8.75%, 33.75% or 39.35%, depending on the other income earned in the tax year in question. Arranging an Employer Pension Contribution would mean that the full £10,000 would be paid into a pension. A further tax saving should follow in the form of Corporation Tax relief on the amount contributed. Assuming the contributions are deemed as being exclusively in respect of your business trade, they can be classified as a legitimate business expense. This could mean a further saving of between 19% (the current rate of Corporation Tax) and 25% (the new highest rate of Corporation Tax in the next tax year).

What level of contribution?

The level of contribution made by a limited company on behalf of a director needs to pass a number of tests to ensure that the level of contribution is commensurate with the total remuneration, e.g. salary, dividends and benefits in kind, that are received by the director. This is where an Accountant can provide the necessary guidance that any employer pension contributions arranged would be deemed acceptable by HMRC.

Carry forward

Directors can also make use of the carry forward rules, to potentially make larger contributions than the Annual Allowance, by carrying forward any unused allowance not used in the preceding three tax years. This potentially means that a director could contribute up to £180,000 from 6^th April 2023, although there are two key caveats. Firstly, an individual would need to have held a qualifying pension in the tax year from which an allowance is carried forward and secondly, a contribution of this level may not be deemed acceptable under the “wholly and exclusively” rules. It could be the case that the tax relief would need to be spread over a number of tax years , rather than being relievable in the year that the contribution is made.

Investment options

Whilst employer pension contributions are a very tax efficient way for directors to draw funds from their business, how the pension contributions are invested will determine the level of growth achieved and ultimately be the major deciding factor as to the level of retirement income that can be enjoyed. This is where adopting an appropriate investment strategy and regularly reviewing the performance of investments put in place are both crucial elements of effective pension investment. As an alternative to pension investments, some directors use a Self Invested Personal Pension (SIPP) to invest in their commercial premises, which is a permitted investment for pensions.

Potential pitfalls and the need for advice

Whilst directors should make use of pensions as a very tax efficient method of extracting funds from their business, obtaining the right advice is key to avoiding the potential pitfalls, such as breaching the Annual Allowance, or arranging contributions that fail to attract Corporation Tax relief. As each company’s circumstances are different, obtaining individual and tailored advice can help maximise the tax advantages and avoid potential issues.

At FAS, we regularly provide advice to business owners and directors across Kent, London and the South East. Speak to one of our experienced Financial Planners here if you would like to review the options open to you and your business.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Mar 22

Combined images of Silicon Valley Bank HQ and Credit Suisse HQ - Market update

SVB, Credit Suisse and Market update

By FAS | Investments

Pressure on two banks in the US and Europe has increased market volatility over the last week, and led to global equity markets giving back gains made so far this year. Whilst it is disappointing to see the solid start to 2023 interrupted, we don’t believe the issues behind the bank failures are likely to lead to contagion and a repeat of 2008/9, when the banking sector as a whole faced a liquidity crisis.

A social media fuelled bank run

Silicon Valley Bank (SVB), which was the 16^th largest bank in the US, became the highest profile bank failure since 2008, when regulators stepped in to take over the bank and guarantee depositors on 13^th March. SVB, despite being little known outside of the tech sector, was popular with tech start-ups, and as deposits increased with the bank, SVB started buying longer dated Treasury Bonds with their capital. Following the rapid rise in US interest rates over the last 12 months, Treasury Bond yields have also risen, which has caused the price of Treasury Bonds to fall, in particular longer dated issues, which are more reactive to changes in interest rates.

Depositors became spooked, with some reports suggesting that the rapid spread of information across social media drove concerns over the bank’s stability. SVB were forced to sell the Treasury Bonds they held at a loss to the price paid, and concerns grew, with $40bn being withdrawn by savers over two days.

Unlike the Great Financial Crisis of 2008/9, where cracks could be seen appearing for some time, regulators had little warning that SVB was in need of a bailout. However, learning from the mistakes made almost 15 years ago, regulators acted quickly to reassure depositors that their funds were safe, and the Bank of England and Treasury acted with speed to rescue the UK arm of SVB, brokering a sale of assets to HSBC.

Two other smaller US banks have also ran into difficulties over recent days. Signature, who were based in New York, saw a similar run from depositors, and First Republic, who are based in San Francisco, received a $30bn cash injection from major banks including JP Morgan and Bank of America.

It remains a possibility that other small and mid-sized US banks could follow down the path of SVB, Signature and First Republic, although we feel reassured that regulators have acted swiftly to resolve the potential for contagion.

The impact of central bank policy

The demise of SVB has in part been led by the aggressive interest rate increases we have seen since the start of 2022. Central banks have been laser-focused on tackling inflation over the last year, and by hiking the central bank rate from 0.25% to 4.75% in the space of twelve months, the US Federal Reserve has raised interest rates more quickly than at any point in history. In some respects the Federal Reserve were correct to focus on the inflationary pressures, as high inflation over the long term can cause serious economic damage. However, the actions taken by central banks, including the Bank of England and European Central Bank amongst others, have wider consequences in terms of financial stability.

The European Central Bank raised interest rates by 0.50% last week and we expect other central banks to nudge rates a little higher, although we do not believe significant further increases are warranted. Indeed, with inflation falling sharply – the Office for Budget Responsibility has suggested UK Consumer Price Inflation would return back to 2.9% by the end of this year – central banks run the risk of going too far, and could begin cutting rates as we move into 2024.

Credit Suisse

Away from the US, the continued woes at Swiss bank Credit Suisse has added to the negative market sentiment. Credit Suisse’s shares has been under pressure since 2021, after being hit by a number of scandals and compliance failures, although the downward stock price movement accelerated following the news of SVB. The Swiss central bank agreed to lend Credit Suisse $53bn last week to shore up their operations, following the news that the bank’s largest backer, the Saudi National Bank, wasn’t prepared to add further support.

It is important to acknowledge that Credit Suisse have been under pressure for some time, and whilst the very recent market malaise hasn’t helped Credit Suisse’s cause, there is little to link the Swiss bank’s issues to those faced by SVB and others in the US. That being said, unlike the three smaller US banks that have run into difficulties, Credit Suisse is of much greater importance to global financial stability. As a result, regulators worked to arrange a deal for the bank to be sold to another Swiss bank, UBS, which appears to have been successful in calming market fears.

Reasons to be positive

Away from the specific issues facing the banking sector, it is important to recognise that the global economy is in reasonable shape. Despite the unexpected jump in UK Consumer Price Inflation reported for February, we expect inflation rates in most Western economies to fall rapidly, and this should lead to Central Banks pausing the rate hiking cycle, and potentially performing an about face as we move into 2024. In the Budget last week, Chancellor Jeremy Hunt suggested the UK economy should avoid a technical recession this year, confounding previous negative predictions. Corporate earnings remain resilient, with US companies on average reporting better than expected results in the Q4 2022 earnings season. Finally, stress in global Bond markets has eased, as investors believe central banks will change direction in due course.

Despite the fact we have seen the useful gains made during January and February given back over the last week, we do not see the specific issues in the banking sector leading to wider contagion across global banking stocks. The underlying economic outlook is proving to be stronger than anticipated, and whilst markets are likely to be volatile in the short term, our positive view over the medium term remains intact.

Speak to one of our experienced financial planners here if you have concerns about how your portfolio is positioned in light of the news in the banking sector.

Mar 16

Note on yellow background reading '2023 Budget' referring to Spring Budget 2023 announcement

A Budget for Pensions

By FAS | Tax Planning

The Budget statement was clearly focused on the economically inactive and included a series of measures designed to aid individuals back to work. The proposed changes to childcare provision have captured most of the headlines; however, there were also significant changes to pension rules which will affect many individuals, and a tax reduction for business capital expenditure.

Lifetime Allowance abolished

Perhaps the most surprising measure announced was the abolition of the Lifetime Allowance (LTA) tax charge from 6^th April 2023. The LTA caps the amount an individual can hold in their pension without paying a tax charge. Individuals who breach the LTA – which was as high as £1.8m in 2010 but stands at £1.073m today – currently pay a 25% tax rate on income withdrawals above the LTA limit, with lump sums in excess of the LTA being taxed at 55%. This charge will be removed from 6^th April 2023 and the LTA will be abolished altogether from 6^th April 2024.

Following concerns that senior professionals are being forced into early retirement for fear of being subject to increased taxation on further pension accrual, press speculation had suggested the LTA would increase to £1.5m or £1.8m; however, the announcement that the LTA is to be abolished entirely is something of a surprise and opens a wide range of financial planning opportunities for those where the value of their pensions exceed – or are expected to exceed – the LTA.

The maximum amount of Tax Free Cash an individual can draw represents 25% of the current LTA, which is a maximum of £268,275. Despite the abolition of the LTA, the maximum amount of Tax-Free Cash available will remain capped at the current level. Those who hold existing Lifetime Allowance protections will still be entitled to the higher amount by reference to the specific protection held.

Increased Pension Annual Allowance

The amount an individual can save into a pension each year, and receive Tax Relief, has increased from £40,000 to £60,000 (or 100% of earnings if lower) with effect from 6^th April 2023. This is a very helpful increase for higher earners, for members of a Defined Benefit scheme, or for those who wish to fund large lump sum contributions. The ability to Carry Forward any unused Annual Allowance has been maintained and coupled with the abolition of the Lifetime Allowance, further increases the attractiveness of pensions as a long-term savings vehicle.

Taper tweaked

Whilst the Annual Allowance has been increased from the start of the Tax Year, higher earners will still be subject to a Tapered Annual Allowance. The threshold income level, at which the Annual Allowance starts to taper, has been increased from £240,000 to £260,000, and the minimum Tapered Annual Allowance has increased from £4,000 to £10,000. Whilst this is still restrictive, the rules have been relaxed slightly to provide more scope for those with earnings that exceed the threshold income to fund contributions without being subject to a Tax charge.

Money Purchase Annual Allowance changes

In a move to encourage those who have already accessed their pensions to return to the workforce, the Money Purchase Annual Allowance (MPAA) has been increased from £4,000 to £10,000. Anyone who flexibly accesses a pension is subject to the MPAA in the future and whilst the restriction remains, the more generous allowance will allow those who have taken pension benefits in the past to make a meaningful level of contribution if they continue to work.

Growth forecast upgrade

As usual, the Budget provided an update on the state of the UK economy. Forecasts from the Office for Budget Responsibility (OBR) now show that the UK is unlikely to enter a technical recession this year. Contrary to more pessimistic forecasts made last year by the Bank of England, the OBR indicated the economy will shrink by 0.2% this year before recovering. The OBR also forecasted UK Consumer Price Inflation would fall more sharply than anticipated, pencilling in a year end forecast at 2.9%, compared to the current rate of 10.1%.

Savings Allowances unchanged

Mr Hunt confirmed that the Individual Savings Account (ISA) and Junior ISA (JISA) allowances would remain unchanged for the forthcoming Tax Year at £20,000 and £9,000 respectively. The starting rate band for savings will also be maintained at £5,000. The Help to Save scheme, which provides a bonus on regular savings for those on a low income, will be extended for a further 18 months.

Business Capital Expenditure

From 1 April 2023, investments made by companies in plant and machinery will qualify for a 100% first-year allowance for main rate assets. This exemption will last for 3 years and will mean UK companies will be able to write off the full cost in the year of investment.

A significant change

As with all Budgets, the devil is in the detail; however, it is clear from the measures announced that Pensions have received their biggest shake-up since the introduction of the Pension Freedom rules in 2015. The abolition of the Lifetime Allowance and increase to the Annual Allowance now provide significant additional scope for tax-efficient planning, cementing the attractiveness of a pension as a planning tool.

Contact one of our experienced advisers here to discuss the impact of the changes on your pension savings and consider new opportunities as a result of the Budget.

Tax treatment varies according to individual circumstances and is subject to change. The Financial Conduct Authority does not regulate tax advice.

Mar 09

The Affordability Crisis

By FAS | Financial Planning

We have commented on the prospects for house prices on a number of occasions over the last year, and highlighted the immediate headwinds that are likely to face the housing market. Recent data published by Nationwide has supported this view, as their House Price Index has now fallen by 3.2% from the peak in August 2022 to January 2023, and further weakness is likely over coming months. A recent report commissioned by Schroders on housing affordability has underlined how stretched current property valuations are and suggests that house prices could correct further in the near term.

High earnings multiples

The Schroders report analysed the average UK house price as a multiple of average UK earnings, and at nine times earnings, the last time UK house prices were this expensive relative to earnings was over 150 years ago. Apart from a blip during the 2008-9 Great Financial Crisis, the last 20 years has seen home ownership becoming steadily less affordable.

There are a number of reasons why affordability has been steadily falling. For many years, demand for housing has outstripped supply, and according to data from the Office for National Statistics (ONS) the UK population increased by 3.4m between 2011 and 2021, but only 1.9m new dwellings were built.

Wages have also lagged behind the pace of house price increases. Between 2012 and 2022, prices across the UK registered an average increase of 5.3% per annum (according to Rightmove), compared to average wages, which increased by an average of 2.7% per annum over the same period (Source ONS). More recently, however, wage inflation has picked up, with average earnings increasing by 6.4% over the three months to November 2022, compared to the same period in 2021.

Mortgage pressures starting to ease

Borrowers have become conditioned to low interest rates since 2008, and as a result, covering mortgage interest payments has not been a major concern for many holding a mortgage. Over the last 15 months, the UK Base Rate has increased sharply, increasing from 0.15% to 4%, which means that those borrowers on a variable or tracker rate will have experienced a series of hikes in their payments.

Fixed mortgage rates also increased during the first half of 2022, but the very sharp acceleration in fixed mortgage rates last October has added to the pressures on the housing market. As a result of the ill-fated mini budget, announced by former Chancellor Kwasi Kwarteng just six months ago, Gilt yields increased rapidly, which in turn pushed up the cost of securing long-term debt for mortgage lenders. As is often the case, however, the market reaction has turned out to be an over-reaction; at one point, the market rate was implying that the Bank of England Base Rate would hit 6% by the middle of this year. This is looking increasingly unlikely, and indeed, the Bank of England may actually be close to reaching the end of the rate hiking cycle, with Base Rates sitting at 4%.

Given the downward adjustment in base rate expectations, it is possible that the effect on the housing market will be lower. There are, however, a large number of mortgage holders, whose fixed rate mortgage deal is coming to an end during 2023. These individuals are highly likely to see a jump in their mortgage payments, although as fixed rates have fallen back from their peak, the effect is now likely to be less than was feared only 3 months ago.

Deposit concerns

For many first-time buyers, gathering a deposit still remains the biggest hurdle to home ownership. We have previously covered how the “Bank of Mum and Dad” is the UK’s 10^th largest lender measured by total loans issued, and our previous article highlighted some of the potential issues that can arise by gifting funds for a deposit.

With house price affordability so stretched, parents and grandparents may well be tempted to provide larger gifts to help family onto the housing ladder. However, parents and grandparents need to consider their own financial position carefully before making a gifted deposit. For example, giving away capital sums when retired, or close to retirement, can not only diminish the amount of savings or investments held, but also reduce the level of income that could be generated by any capital that is gifted. In addition, this could mean that funds are also no longer available to cover any unexpected expenditure that faces the parent or grandparent, and children will often not be in a financial position to return the favour if the parents require funds.

Solving the affordability conundrum

House price affordability can only improve by an increase in house construction (thereby easing the supply issues) an increase in earnings, or a fall in prices. In reality, it may well be a combination of all three factors that eventually improve house price affordability. However, we feel this may take many years to correct, and in the meantime, house price affordability is likely to remain stretched.

For anyone looking to gift a deposit to help ease the affordability conundrum, we can provide advice on the implications of gifting capital. We also highly recommend parents and grandparents seek independent legal advice before taking any action to help a family member with a deposit.

If you would like to discuss the above in more detail, please speak to one of our Financial Planners here.

Mar 02

Group of lightbulbs with shining fibres in the shape of words including 'service', 'advice', 'support', 'assistance', 'help' and 'guidance'

Choosing the right Adviser

By FAS | Financial Planning

Taking financial advice can make a real difference in helping you achieve your aspirations, at all stages of life. As a Chartered, independent advice practice, we view our independence as being a vital component of the service we offer to clients, and we are proud of this status. Of equal importance is our ability to take a holistic approach to financial planning, whereby we consider your wider financial planning concerns and focus on your financial goals. In this article, we will explain why we value our independent status, and how taking a holistic view can help us tailor the advice that we give.

Restricted vs Independent Advice

Financial Advisers and Planners fall into one of two camps, ‘Restricted ‘and ‘Independent’. Being ‘Restricted’ means an Adviser can only recommend products from a limited selection or product range. For example, this could be an Adviser in a bank or other product provider, who can only consider and recommend products and services from that company. It could also mean an Adviser who can only advise on a limited number of areas of financial planning or is unable to review existing arrangements that you may have in place.

This contrasts with an ‘independent’ Adviser, such as FAS. As independent Advisers, we can consider products from a wide range of companies across the market and will give unbiased and unrestricted advice.

In practice, being independent means that we can take a totally impartial view when it comes to selecting a solution or product and can take into account all relevant criteria – such as cost, features and ease of administration – so that we can recommend products that provide the most appropriate fit to a particular set of circumstances.

Using a Restricted Financial Adviser doesn’t necessarily mean you run the risk of receiving poor advice. All Financial Advisers must have a similar minimum level of qualifications and meet the same standards. Using a Restricted Adviser, however, does mean that the choices available to you may be limited, and the advice they give you may not be the best available, or meet your needs.

Taking a holistic approach

At FAS, we always take a holistic approach to financial planning with our clients. This means we really take the time to understand all aspects of the complex picture that makes up a client’s financial circumstances. Of course, as part of the initial assessment, we will need to understand the current arrangements a client holds, such as existing pension plans or investment accounts, life assurance and other protection arrangements. This analysis is crucial to understand how appropriate the current plans are and whether they can be improved. However, a holistic planning approach goes much deeper, to look at how these arrangements fit into the “bigger picture” that makes up an individual’s current financial position and their aims for the future.

Holistic planning also aims to help clients define their financial goals and objectives, so that the advice we then give is tailored to help achieve that goal. Often clients have several objectives and goals, and using a holistic approach can help clients place those targets in a priority order.

Of course, life doesn’t always go according to plan, and circumstances change from time to time. For example, a client could lose their job, receive an inheritance, face divorce, be diagnosed with an unexpected illness, or welcome a new addition to the family, any of which could force a shift in those priorities. By reviewing a holistic plan regularly, we can look to adapt existing arrangements to meet the challenges or opportunities presented by the change in circumstances.

One particular area that benefits from taking this approach is when we meet a client who is considering their retirement options. For example, we help clients to identify the level of retirement income with which they will feel comfortable, by considering all aspects of a client’s position. This can help focus a client on the affordability of the kind of retirement that they wish to achieve, and also potentially help them come to a conclusion on other planning decisions, such as whether early retirement is a sensible decision.

This approach often identifies areas that need close attention that the client hasn’t given any thought to. These can be as varied as looking at the implications for Inheritance Tax if the client were to die, to looking at financial planning to help children and grandchildren or considering alternative ways of generating an income in a tax efficient manner.

Getting the most out of financial planning

We feel that choosing a Financial Adviser that takes a holistic approach can help tailor the advice and solutions to an individual’s precise requirements, and take into account important aspects that are relevant that could be overlooked by traditional financial advice. We also are firm believers in the benefits that true independence can bring to the advice proposition.

If you would like to obtain holistic advice, speak to one of our experienced Advisers to discuss your requirements, here.