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Feb 12
0

End of Year Tax Planning

By | Financial Planning

As 6th April approaches we inevitably face a transition into new rules within the UK’s tax regime. For those looking to optimise their tax position, what forward planning can you do?

New thresholds

In our previous article, we have already talked about how the Personal Allowance is set to rise from £11,850 in 2018-19 to £12,500 from 6th April 2019. This follows a general rise in the Personal Allowance over the past 5 years. In 2012-13, for instance, it stood at just over £8,000.

In practical terms, this means that Basic Rate taxpayers can expect to take home an extra £130 in 2019-20. Higher Rate taxpayers will also see the Higher Rate threshold rise to £50,000, which amounts to an additional £860 for 2019-20.

However, working age employees will also face a 12% National Insurance contribution on earnings between £46,350 and £50,000. For Higher Rate taxpayers, therefore, the rise in their threshold will be offset to some degree. From April 2020, both the Basic and Higher Rate thresholds will be frozen and then will rise with inflation from April 2021.

Please bear in mind that the above only applies in England, Wales and Northern Ireland. Residents in Scotland face different rules due to the devolution of tax policy.

Capital Gains

Another important change for the 2019-20 financial year is the planned rise in the Personal Allowance for Capital Gains Tax (CGT). From April 6th, the threshold will rise to £12,000 – allowing you generate £300 more in profits before you are liable to Capital Gains Tax.

Similarly to the Personal Allowance for Income Tax, this gradual rise in the Capital Gains Allowance follows a broad trend since 2014-15 when it stood at £11,000.

The important thing to remember with this aspect of taxation is that losses you make on sales can be offset against your capital gains for tax purposes.

Please remember also, that different CGT rates apply to different people, depending on the asset in question and your Income Tax bracket. For instance, Basic Rate taxpayers pay 18% on property capital gains whilst for Higher Rate taxpayers it is 28%.

Lettings Relief

The system governing Lettings Relief is also set to be changed. (This is the system which previously allowed you to let out and live in your home whilst avoiding CGT).

The new plans are not set fully in stone yet, and are expected to be implemented in 2020. However, the essential thrust of it seems to be that Lettings Relief will only be available if you are a landlord inhabiting your property with a lodger.

The final period relief will also be cut down from 18 months to 9 (unless you are in a care home or disabled, in which case the present period of 36 months should remain in place).

At the moment, the total Lettings Relief you can claim is the lowest of either:

• £40,000;
• The total you can claim for private residence relief;
• The amount you generate from letting out the relevant part of your home.

Bear all of this in mind if you are considering expanding your investment portfolio into property. We recommend consulting with us before making any important decisions in this area.

You should also consult if you previously lived in a property and then rented it out. It is possible that these new plans will present you with a higher CGT bill.

Personal savings

You have been allowed to grow your cash, tax-free, through interest on your savings since April 2016 when the Personal Savings Allowance was introduced.

Essentially, this means that you can earn up to £1,000 per year in interest without it being taxed on the Basic Rate (if you are a Basic Rate taxpayer). For Higher Rate earners you can earn up to £500 interest per year without tax, after which any interest will be taxed at 40%.

Be mindful that interest you earn on your savings can sometimes push you into a higher tax bracket. For instance, suppose in 2018-2019 your salary earned up to £46,350, therefore putting your income in the Basic Rate. Suppose also that the interest on your savings took you into the Higher Rate.

In this case, you would only be allowed a £500 personal savings allowance. This would mean that the rest of the interest would be taxed at 40%. If you think this might affect you, do also remember that the Higher Rate threshold will rise to £50,000 in 2019-2020.

This means that in an example like the above, you might not be tipped into the Higher Rate if the example were to occur in the 2019-20 tax year. If you are at all unsure about your own situation, please speak to us.

Allowances

If you are married and at least one of you was born before 6 April 1935, then you are likely eligible for the Married Couple’s Allowance. This is set to increase to £8,915.

Another important area of allowances to highlight is that spouses and civil partners will be able to transfer £1,250 of their Personal Savings Allowance to their spouse or civil partner, provided that neither of you pay above the Basic Rate of Income Tax after the transfer is complete.

The key takeaway here is that, if you can legitimately shift income from a Higher Rate Tax paying spouse/civil partner to one on the Basic Rate (or none), then it would be sensible to explore this in more depth.

Oct 31
1

Simple Pension Tips For Self-Employed People

By | Business Planning

As Financial Planners servicing Kent & the South East, we have witnessed first-hand the steady rise in self-employed people looking for financial advice and tax planning. In fact, across the UK, the total number of self-employed has risen from 3 million to 5 million people since 2001. This is an exciting trend but it poses a lot of challenges when viewed through the lens of pensions.

Whilst employed people in the UK are now compelled to contribute towards a pension via Auto-Enrolment, no such obligation currently exists for self-employed people. The worrying result is that many of these people are failing to adequately prepare for their retirement, instead relying on the insufficient provisions of the State Pension.

Self-employed people face unique challenges when it comes to saving for a pension, as well as some great opportunities. On the one hand, irregular income can make saving for a pension quite difficult, and you have no employer contributions topping up your own contributions.

On the other hand, the fact that you are building a business gives access to a set of assets that could set you up for the future. Indeed, it is not out of the question that these assets, when handled correctly through careful financial planning, could pave the way for a comfortable early retirement.

Know the limits of the State Pension

Many of the self-employed people we speak to in and around Kent & the South East, have unrealistic expectations when it comes to the State Pension. Many people assume the Government will look after them in retirement but unfortunately the amount provided through the State Pension is simply not going to stretch far enough for many.  Indeed, with rising life expectancies and a growing elderly population, means that the State Pension system is likely to come under more strain in the years ahead

This makes it even more crucial for self-employed people to work with a Financial Planner to ensure they are saving adequately for their retirement. Presently in 2018-2019, the new State Pension will give you up to £164.34 per week. Even if you assume you will have paid off your mortgage by the time you retire and other expenses reduce, this is still far too low for most people to live on each month. Current figures estimate that about 45% of self-employed people, aged between 35 and 55, do not have a private pension to supplement their State Pension.

Know your tax reliefs

Self-employed people are at a disadvantage when it comes to pensions, in the sense that they have no employer to top up their contributions. However, they can still benefit from an important tax relief when making contributions. So, for every £100 you put into a pension the Government will effectively top it up by £25. This assumes you are a Basic Rate taxpayer. If you are in the Higher Rate bracket in England, Wales or North Ireland, then you can claim back an additional £25 for every £100 you put in.

Know about the different pension types

As a self-employed person, you do not benefit from a Workplace Pension Scheme but you do have a range of options when it comes to Personal pensions. By arranging your own Personal pension, you will have greater control over the choice of provider and where your funds are invested. It is important to be aware that there are different types of Personal pensions, such as Stakeholder Pensions and Self-Invested Personal Pensions (SIPPs). The former tend to have lower charges with limited investment choice, whilst for the latter have a wider range of investment funds to choose which costs more.

It is sensible to explore your options in detail before commencing contributions, especially if you are unsure which type of pension arrangement is most suitable for your needs. Our Financial Planners will be able to provide you with impartial advice and help you plan for a comfortable retirement.

Be aware of the limits

When you are self-employed you have the advantage of being able to decide your own contribution levels. However, just like everyone else, there is a limit to how much you can contribute and also receive in terms of tax relief. There are two limits in particular that you need to be aware of. Firstly, the ‘Annual allowance’ which limits the amount you can contribute to your pension arrangement in any one year. For the tax year 2018-2019, the maximum you can contribute to a pension and receive tax relief is £40,000. Any contributions above this amount cannot receive tax relief.

Secondly, the ‘Lifetime Allowance’ is the total amount you are allowed to save in pensions whilst receiving tax relief. In the 2018-2019 tax year, you can have up to £1,030,000 in your pension savings; any amount above this will not be able to receive tax relief. If you are fortunate enough to have more than this in pension savings, it is important to be aware of the implications. For instance, any amount over the Lifetime Allowance (LA) that you withdraw as a lump sum will be taxed at 55%. If you decide to draw funds over your LA as a regular income, this will be taxed at 25%.

If you think your pension savings might one day exceed the then current Lifetime Allowance, we would encourage you to speak to one of Financial Planners to talk through your options. With clever planning, it may be possible to avoid paying unnecessary tax on your pension savings and ultimately bequeath more to your beneficiaries.

Oct 31
0

Reasons Why You Shouldn’t Try to Time the Market

By | Investments

Regardless of whether you are a novice investor or an experienced one, timing the market is a temptation you should really try to avoid. Some people will claim they are able to predict market outcomes and make big investment returns but from our own professional experience, we can confidently say this is incredibly difficult and indeed there are far better ways to invest, in order to protect and grow your wealth.

A Tale of the South Sea

To illustrate our point of view, let us consider the case of Isaac Newton. Notorious for his groundbreaking scientific work, he is perhaps less well known for his role as an investor. Newton witnessed first-hand the growth of shares in the South Sea Company. In January 1720, these shares were trading at nearly £130. Yet 6 months later they had risen to over £1,000.

Sensing an opportunity, Newton invested. Yet he also suspected the rise in share price was unsustainable and decided to sell his stake before it crashed but this did not happen. In fact, the price continued to rise and so Newton decided to re-invest in the same company. It was at this point, as luck would have it, that the share price dived to £175 and Newton’s life savings were virtually wiped out in the process.

Perhaps those close to market speculation such as Warren Buffett with his insight, have a higher probability of success in timing the market but everyone else relies broadly on the same information with very limited knowledge.

Cognitive Biases

We have spent many years working with clients across Kent & the South East, speaking with other financial planners and following stock market investing. We have learned many things along the way, one of them being that people do not always make rational decisions in the world of investing.

Cognitive biases influence people’s investment decisions so the role of a good Financial Planner is to help clients identify and mitigate against their own biases, in order to make smarter decisions for their money. Quite often it takes an impartial, experienced observer to see identify something missing or draw attention to something that is perhaps more important than originally thought.

For instance, one common cognitive bias in investing is called the “bandwagon effect”. In this scenario, you invest in something because everyone else is. This makes the investment look less risky, because we think: “How can so many people be wrong?” Unfortunately, lots of people can all be wrong at the same time. There are countless examples throughout history of dozens of people rushing to invest in the next ‘big thing’, only to see it crash later that day, week or month.

Another cognitive bias is called the ‘gambler’s fallacy’. Just think about the times you have rolled a dice. If you roll four sixes in a row, you might start to believe that a six is less likely to come up if you roll the dice one more time. However, you face exactly the same probabilities as you did for each of the previous four rolls. We can often bring this thinking to our investment decisions. Like Isaac Newton, we might be tempted to sell because our investment has performed so well up until now. Yet, as we say time and time again to our clients “past performance is not necessarily a guide to future returns” in the world of investing.

Emotional Biases

Let us consider two scenarios. In scenario one, someone offers you two choices of either taking a guaranteed £400 home or giving you a 90% chance of taking £500. In scenario two, however, you get a different choice. You can either lose £400 or you can take a 90% chance of losing £500.

What would you do? Most would accept the guaranteed £400 in scenario one and then take the chance of losing £500 in scenario two.

Why does this tend to happen? It is because, broadly speaking, human beings tend to feel loss much more acutely than they do gains. So, if you are not careful, this can often lead to highly irrational, erratic investment behaviour. You might see your investment plummet in a short space of time, for instance, and the emotional loss you feel, drives you to want to sell before things get any worse. Yet this isn’t always the right decision. Sometimes, waiting things out even whilst others are bailing, is the best course of action. It is our job to help you see through this.

Fighting the Chimp Brain

Human beings are highly sophisticated and intelligent creatures, yet there are still parts of our brain that are considered ‘underdeveloped’ or even ‘primordial’. Such parts are known collectively as the Chimp Brain and they tend to exhibit the following traits.

  • Irrational thinking and/or behaviour
  • Decisioning making based on emotion
  • Jumping to a conclusion rather than waiting and weighing things up
  • Paranoid thinking
  • Catastrophizes
  • Seeing things as black or white, rather than shades of grey

With investments, it’s important to recognise this part of our human make up and the best way to deal with these traits is to recognise them when they emerge, put them into perspective, and then set them to one side.

Oct 31
0
boat on beach - money in retirement

5 Tips To Ensure Your Pension Lasts As Long As You Do

By | Pensions

There is probably no bigger financial worry for pensioners – and soon to be pensioners – than the thought of running out of money in retirement.

At FAS, we frequently encounter this fear when speaking to both new and existing clients. The good news is there are many practical, positive steps you can take now to ensure your future retirement is comfortable and secure.

Official statistics are showing that not only is the UK population growing but people are also living longer. This situation is likely to put additional strain on the State Pension when faced with the prospect that retirement could well be one of the longest phases in a British adult’s life.

It is therefore crucial that you plan as early as possible for your retirement to ensure you achieve the lifestyle you want when you eventually stop working.

Consider for a moment that the current basic UK State Pension would give you a weekly income of £125.95. Even with no mortgage borrowing and with greatly reduced monthly outgoings, this is barely enough for most to live on. You therefore need to look beyond the State Pension in order to achieve a comfortable retirement.

Many studies suggest that millions of people are ‘sleepwalking into pensioner poverty’ due to inadequate pension savings. Around I in 6 pensioners are living in poor conditions and complacency now is likely to cause this to rise in the not-too-distant future.

So, how can you ensure that you have a stable, secure income in retirement?

Here are 5 tips to get you started:

Take stock of your assets

Of course, this is the natural place to begin when starting to think about your retirement plan. Your assets include not just short-term savings but also property, investments, business assets, your State Pension, existing personal pensions and pension savings.

Make a detailed list of your assets and calculate their estimated value. If you are not sure of your assets’ value – such as your Final Salary Pension – you may well benefit from going through all of this with one of our Financial Planners.

Check your tax reliefs

It is quite possible that a number of your assets are not being used in the most tax-efficient way. In which case, you are needlessly giving money away to the taxman.

For instance, if you are a Higher Rate taxpayer then contributing towards a pension could actually reduce your taxable income. Remember, pension contributions receive tax relief at your marginal rate, so every 60p you put into a pension pot is currently boosted up to £1 by the Government.

Moreover, you might want to consider any workplace Salary Sacrifice schemes on offer in order to save even further on Tax. For instance, your employer could pay for car parking near your workplace in exchange for a reduction in your salary. Whilst this wouldn’t necessarily reduce your take home pay, you would pay less Income Tax and National Insurance contributions.

Work out your expenses in retirement

It is very easy to underestimate how much you will need in retirement. You may have well paid off the mortgage, the kids may have left home and there will be no more work commuting costs. However, research suggests that UK pensioners should aim for an income of at least £23,000 per year in order to have a comfortable retirement. As a minimum, you are likely to need around £18,000 to cover the essentials, such as household bills.

Of course, your State Pension should cover some of this but certainly not all of it. So, you need to take the time to carefully consider what you would like to do in retirement and realistically what your outgoings are likely to be when you give up work. Ask yourself questions such as, will you want a new car every 5 years? Will you want regular holidays? You’ll need to factor in those luxuries as well.

Take stock of your goals

Once you have gathered all of this information, it will need to consider your future in line with your financial goals. Now ask yourself, when do you want to retire? What kind of lifestyle do you want in retirement, and where do you see yourself living?

If you plan to retire early then bear in mind that you will not start receiving the State Pension until you meet the required age set by the Government. For many people, this will be aged 68. However, your pension age might be slightly earlier, so make sure your financial plan allows for this if you’re set on early retirement.

Get to know your pension options

There are a number of ways to use your pension money in retirement. Our Financial Planners help clients decide which of the available options is right for them. Here is some food for thought:

  • You do not necessarily have to start drawing your pension once you reach your retirement age – you could continue to work and keep the money invested so that it continues to grow.
  • It is not a sensible idea to withdraw all the money from your pensions as the majority will be taxed. However, you can withdraw up to 25% tax free.
  • For some people, keeping most of their pension money invested whilst drawing an income, works well. Income levels can depend on investment performance.
  • You could use your pension money to buy a financial product which gives you a guaranteed retirement income, for the rest of your life. Whilst this may appear an attractive option, it is not as flexible as the alternatives so we would always recommend speaking to our of our Financial Planners who can help you to make the right decision.