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Lessons From Five Years Of Pension Flexibility

By | Pensions | No Comments

It’s been five years since pension holders were given the freedom to draw directly from certain pension savings. What have we learned that can help those about to embark on their own retirement journey?

The pension reforms in April 2015 gave defined contribution pension holders “complete freedom to draw down as much or as little of their pension pot as they want, anytime they want,” according to the Chancellor of the time. After five years of experience in the UK – and many more in places like the US and Australia that have had similar rules for longer – we can draw some conclusions about the changes, and derive some lessons for the future.

Despite the sceptics’ almost immediate warnings that pension pots would be frittered away on Lamborghinis or world cruises, leaving the State to pick up the pieces, it has not worked out that way. After an initial rush to fully encash pension pots, the average amount withdrawn per person quickly declined. By the final quarter of 2019, nearly four times as many people were receiving flexible payments as in the second quarter of 2015, but the average payment had fallen by almost two thirds.

Source: Official Statistics – Flexible payments from pensions (www.gov.uk)

The relatively stable pattern of average withdrawals over the last three years suggests that the gloomy forecast of spendthrift pensioners was wrong. However, there has been a continued decline in the purchase of annuities to provide retirement income. The latest data from the Financial Conduct Authority (2018/19) shows just 11% of pension plans being used to buy an annuity.

 

Drawdown pros and cons

If you are at the stage when you are beginning to consider your retirement, there are some lessons to learn from half a decade’s experience of pension drawdown:

  • A full withdrawal can make sense for small pension pots, even though 75% of the amount received is subject to income tax under PAYE. As the pot size increases, income tax and the operation of PAYE becomes much more of an issue. Full withdrawals account for nearly 90% of payments from plans valued below £10,000, but for only about 1% of pots of more than £250,000.
  • Flexi-access drawdown is by far the most popular means of drawing from pension plans valued at £100,000 or more. However, it is probably still too early to say whether those who choose this option without taking professional advice are making a sustainable level of withdrawals.
  • Flexibility in law may not mean flexibility in reality for your pension plan. Many providers of large group schemes, and insurers with pre-2015 pension policies, decided not to offer all the options that legislation permits. In some instances, the only flexibility is the ability to withdraw in full. If you find yourself with such a plan, you may wish to seek advice about transferring to a more flexible arrangement.

Whatever decisions you make about managing your retirement income, it’s a complex area. To make sure you understand your options clearly, it is imperative that you seek expert advice and a member of our Financial Planning team will be happy to assist you!

The value of your investments and the income from them can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Occupational pension schemes are regulated by The Pensions Regulator.

Shifts In The Savings Landscape

By | Investments, Savings | No Comments

Government incentives to save – like ISAs – are valuable, but recent changes to the savings landscape have opened up new opportunities while closing down some old ones.

If you are aiming to buy your first home, investing in a Lifetime ISA (or LISA) could be a great help. The recent withdrawal of the Help to Buy ISA in December 2019 means that the LISA is now the only tax-incentivised savings plan for first-time buyers. Anyone who had already taken advantage of the Help to Buy ISA during the four years it was available can continue to contribute to it until November 2029.

You must be between the ages of 18 and 40 (inclusive) to open a LISA, and qualifying savers can invest up to £4,000 per tax year. Like other cash ISAs, it grows free of tax, but they also benefit from a 25% government bonus. This is added to the contributions – so for every £4,000 invested, the government adds another £1,000. Once you turn 50, however, you will not be able to pay into the LISA or earn the 25% bonus. This bonus is a major advantage of LISAs compared with the Help to Buy ISAs, where the bonus was capped at £3,000.

Beware of penalties

The trade-off, however, is a withdrawal charge if you cash-in or withdraw from your LISA before age 60 and you are not using the funds to buy your first home (there is an exception for those who are terminally ill).

Ordinarily, the charge is 25% of the amount withdrawn, which recovers the government bonus and applies an extra charge to the original savings. This can be a trap for savers, who could actually end up with less than they paid in, if their circumstances change and they need early access.

However, as of 5th May 2020, there has been a recent relaxing of the withdrawal rules by the Treasury to allow for the current situation – LISA holders who withdraw money will face no penalty until April 2021 as the previous 25% of the amount withdrawn has been cut to 20% until April 2021, which is the equivalent of the bonus being taken back.

 

Child Trust Funds mature

For even younger savers, the first Child Trust Fund (CTF) accounts reach maturity in September 2020. Launched in 2005, the government contributed for children born between 1 September 2002 and 3 January 2011, when the scheme was closed.

New regulations will ensure that the freedom from UK income tax and capital gains tax will continue once the CTF has matured at age 18, even if no action is taken by the now-adult account holder.

Both the maturity of CTFs and the complex LISA rules serve as reminders that financial advice is important wherever you are on your savings journey.

Levels and bases of taxation and tax reliefs are subject to change and their value depends on individual circumstances. The Financial Conduct Authority does not regulate tax advice. Tax laws can change.

Overcoming The Gender Pensions Gap

By | Pensions | No Comments

Women are saving more than ever into pensions, but they still lag behind men in retirement savings.

The good news is that the proportion of women who are now saving for their retirement has increased, along with their level of contributions, according to a recent report from pension provider Scottish Widows, which has tracked women’s pensions for the last 15 years.

Most of us are familiar with the gender pay gap. The idea of a “gender pension gap”, which sees women retire on far smaller pensions, is less well known. Although it is narrowing, equality is a long way off. Scottish Widows found that while 57% of women were now saving enough for their retirement, self-employed women and those in lower earnings brackets remain under-prepared for their retirement. Men are still saving more and benefiting generally from an additional £78,000 in their pension pot at retirement.

 

Why is there a pensions gap?

The main cause of the pension gap, unsurprisingly, is the pay gap. Women, on average, still earn less than men. Most people pay a fixed percentage of their earnings into a workplace pension, so this means less money is being invested for women’s retirement.

The fact that women are more likely to work part-time, or to take time out to look after young children or elderly parents, exacerbates the problem. Other life events, like divorce, can also impact negatively on women’s savings.

At the same time, women typically live longer than men, so if they are to enjoy the same standard of living in retirement, they ideally need larger pension pots – not smaller ones.

 

How to boost your pension savings

Some strategies can help bolster women’s savings options:

Maximise your savings: Join a workplace pension – your contributions are boosted by tax relief and contributions from your employer, which may increase if you pay in more. If you are self-employed, you don’t benefit from an employer’s contribution, but you can still benefit from tax relief on the money saved into a personal pension arrangement.

Get a pension forecast: Find out what you are likely to get from your State or workplace pension and when you can take them. If this isn’t enough to live on, you should aim to save more each month. The earlier you start, the better. The easiest way to obtain a State pension forecast is to apply online via the link. If you are unable to access online, you can complete a BR19 form to send in the post or request a statement by contacting the Future Pension Centre helpline 0800 731 0175.

Don’t overlook your partner’s pension: Some pensions will pay out to a surviving spouse or partner. If you are not married (or not in a civil partnership) you may need to sign a form to qualify. If your partner has more substantial pensions savings, make sure you aren’t losing out on this potentially valuable benefit. Aim to build pension savings in your own name, though, because if you rely on your partner, then you could lose out if the relationship breaks down.

Our experienced Financial Planners can help you review your options so do give us a call if you are unsure what route to take!

The value of your investments and the income from them can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Occupational pension schemes are regulated by The Pensions Regulator.

The Financial Conduct Authority does not regulate tax advice. Tax laws can change

3 Reasons to Stay Globally Invested in 2020

By | Investments | No Comments

During March and April, we witnessed a considerable amount of global market volatility and instability, which is why we have been spending a lot of time proactively speaking to our clients in order to provide as much reassurance as possible. As the COVID-19 outbreak sweeps across the world and results in nationwide shutdowns, many UK investors are naturally worried about their portfolios as the markets have reacted.

On the 12th of March, for instance, the FTSE 100 recorded its worst performance since 1987, dropping over 10% following the U.S. announcement of restricted travel from mainland Europe. Indeed, by the end of the month, the index had recorded its largest quarterly fall since Black Monday in 1992.

However, Britain is not the only country to have been affected. We have noticed the effect of COVID-19 on virtually every major economy across the world. In the U.S., for example, the 1st of April logged the worst beginning to a business quarter in history for the S&P 500 and Dow Jones, with losses of at least 4.4%. European markets have also been hit, with the Stoxx Europe 600 finishing the first quarter at a 23% loss.

Given this widespread “bear market”, isn’t it safer to keep your investments confined to one country, just in case other countries are worse hit by COVID-19 than others?

In our professional experience, we would caution against dramatically changing a client’s investment strategy as a result of hitting harder times. Indeed, there are very good reasons to stay globally invested; three of which we share with you here.

 

#1 Unpredictability

The markets are never predictable, but this is especially true in light of the COVID-19 outbreak. Given the unknowns surrounding the virus, it’s still very difficult to anticipate how it might spread and affect different countries’ economies. This provides a strong reason for not placing all of your investment eggs in one basket, but instead, spread them out appropriately across different countries.

Consider the start of the outbreak. In early March, China seemed to be taking the brunt of the economic damage. Its city of Wuhan was the pandemic’s source, and the country faced strong widespread lockdown. Chinese production stalled, but markets in the Western world did not initially react. Fast forward to April 2020, however, China’s lockdown appears to be lifting and China has passed the U.S. as the world’s most popular venue for stock market listings in Q1, raising over $11bn in three months. The Western world, however, is now struggling.

Of course, everything could change again dramatically in the coming weeks and months. The lesson: don’t assume that one country is a “safe bet” for investments and write others off as unviable, leading to an under-diversified portfolio.

 

#2 Unavoidability

There is another important reason to include global investments in your portfolio; they cannot really be avoided! Consider that U.S. stocks comprise 54.4% of the world’s market capitalisation in April 2020, and many of these companies will have operations, supply chains and customers based overseas. Within the UK, moreover, many of the FTSE 100 companies also include foreign operations and revenue streams.

 

#3 Underexposure

Many nervous investors look at global investing and think they can avoid excessive damage to their portfolio during a down market, by keeping a “domestic focus”. There is another way of looking at this, however. By trying to confine your portfolio to one country, you could miss out on a range of investment opportunities which are only available elsewhere in the world.

Consider the effects of restricting your portfolio to the UK. As strong as the UK is for certain sectors (e.g. financial services, oil and gas), many industries/sectors are not represented well in our country. Most of the largest tech companies – such as Netflix and Facebook – are based overseas in the U.S., and many high-tech manufacturers are based in Japan (e.g. Hitachi).

By investing globally, you can help to further diversify your portfolio by exposing it to a wider range of sectors. This can enhance balance amongst your investments and shield your portfolio from excessive damage, should certain sectors struggle, compared to others. Consider the impact of COVID-19 on different sectors by the end of March, which has hit sectors such as retail, aviation and hospitality the hardest. Other areas, however, actually seem to be experiencing a boom in business due to the outbreak such as digital streaming, food delivery and hand sanitiser producers.

As we keep saying, if at any point you wish to discuss your investment strategy in more detail, please do get in touch.

This content is for information purposes only. It does not constitute investment advice or financial advice. To receive bespoke, regulated advice regarding your own financial affairs, please contact us.

 

How Much Do I Need to Retire Comfortably?

By | Pensions | No Comments

Many people are unaware of how much they need to save for retirement. We sometimes speak to clients who overestimate the amount needed, believing their retirement income should be the equivalent of their wage. Quite often this is unnecessary, as your outgoings are likely to be lower due to your mortgage being repaid, children leaving home and reduced outgoings (no more travel costs to work!).

On the other hand, there are also many people who vastly underestimate how much income they’ll need in retirement. Amounts vary depending on a client’s personal situation but currently, covering the basics is likely to cost £11,830 per year, per person. This average figure changes depending on where you are in the country; in Wales, the figure might be closer to £10,520. Here in Kent and the wider South East, the average could be significantly higher at around £14,270.

Of course, most people don’t just want to survive in retirement; they want to thrive too, enjoying a comfortable, well-earned “life after work”. However, how can you ensure you get there? We have devised this short 2020 guide to get you started.

 

What is a “comfortable retirement?”

According to Nationwide Building Society, 33% of British people expect their State Pension to meet their retirement needs. Yet in 2020-21, the full new State Pension is £175.20 per week, equivalent to about £9,110.40 per year. Looking at the aforementioned figures, this is lower than the regional average needed for covering the basics across the UK, let alone covering the extra expenditure you might need for meals out or the occasional holiday.

Indeed, people who rely on the State Pension (as important as it is for retirement planning) could be in for a nasty shock. Again, Nationwide’s research shows that, based on current pensioner spending habits, many of these people could face a £68,000 shortfall in their pension savings; equivalent to being about £400 out of pocket each month.

We can help you roughly calculate what you might need for a comfortable retirement but bear in mind that, as things stand currently, you could need at least two-thirds of your salary for a comfortable annual retirement income; e.g. possibly £27,000 – £42,000 per year. That said, this is a very broad estimation as your needs might produce a lower or higher figure.

 

How to make up a shortfall

There are many ways to address a potential shortfall in retirement income, and the sooner you act, the better. Here are some ideas to consider:

 

Maximise your State Pension

Whilst your State Pension is unlikely to cover all of your retirement expenditure, it is an important component of your retirement income. You need to make at least 35 years of qualifying National Insurance Contributions (NICs) to receive the full new State Pension. If you have gaps in your record, consider making voluntary contributions to “top them up”.

 

Workplace Pension

In 2020-21, if you are employed then you are required (under Auto-Enrolment rules) to contribute at least 5% of your salary into your workplace pension. Your employer must also put in at least 3%. Here, there can be significant opportunity to boost your pension pot by negotiating a higher contribution rate from your employer (amounting to “free pension money”), or by increasing your own contributions.

Suppose you earn £30,000 per year. If you contribute the minimum 5% to your pension and your employer 3% of your qualifying earnings, then your annual pension savings are likely to be £1,900.80. If you both continued to commit this total each year over 30 years, then with an average annual return of 5% on your investments, you are likely to accumulate about £132,601.31 (setting aside any tax relief, which would boost the pot further).

However, suppose you increased your contributions to 8% and your employer to 5%. This total annual contribution would, instead, be £3,088.80. Taking the same saving scenario, timeline and annual return outlined above, you could expect the total pot to reach £215,477.13. In such a case, increasing your monthly contributions by about £59.40 (i.e. from £99.00 to £158.40) and by persuading your employer to put in a bit more, you could grow your pension by £82,875.82.

 

Other assets

Of course, there are other ways you might address a future retirement income shortfall. If you have a second home, for instance, then this might release funds for your pension through its sale. The same might be said for a business or shares which you own. However, it’s important to consider these assets carefully, as a potential source of retirement income. Illiquid assets can be hard to sell, for instance, and you might not get as much for the sale as you currently hope.

If you are interested in discussing your financial plan or retirement strategy with a member of our experienced financial planning team, please do give us a call.

This content is for information purposes only. It does not constitute investment advice or financial advice. To receive bespoke, regulated advice regarding your own financial affairs, please contact us.

 

VCTs and EIS: How Can They Improve a Financial Plan?

By | Investments | No Comments

Looking ahead in 2020-21, how do you see your pension contributions and Individual Savings Accounts (ISAs) panning out? Some clients regret not considering these earlier in the 2019-20 financial year, to get a better deal out of their tax position. Provided your circumstances allow, you may wish to act sooner this tax year, to take advantage of the full range of tax planning tools available to you, including VCTs (Venture Capital Trusts) and EIS’ (Enterprise Investment Schemes).

These two options can be attractive to investors who want the opportunity of possibly generating stronger returns. However, they can also be great for some people who are likely to maximise their pension and ISA contributions during a tax year.

In this short 2020 guide, we outline some ideas how you can do this.

 

Overview of EIS & VCTs

In the 10 years preceding 2019, both EIS & VCTs markets have doubled in size. Since its inception in 1994, for instance, the EIS market has attracted more than £18bn of investment to over 27,905 companies. VCTs, moreover, have raised about £7bn since first launched in 1995.

Both EIS & VCTs are Government-run schemes intended to incentivise investment into innovative companies, which can spur economic growth and create jobs (thus creating more tax revenue). One reason they have proven popular with some investors is down to the tax reliefs on offer. In particular, both EIS & VCT investments allow you to claim back 30% of your investment against your Income Tax bill.

However, both EIS & VCTs have also come to the attention of pension savers, who have faced an increasing “squeeze” in recent years. Over ten years ago, for instance, you could put up to £255,000 per year into your pension. Today in 2020-21, you can only commit £40,000 per year (or up to 100% of your salary; whichever is lower). As a result, some clients now consider EIS & VCT investments as another way of supplementing existing retirement savings but of course they are more complex and need to be fully understood.

 

Case Scenario: EIS & VCTs “in play”

Suppose you earn £100,000 per year and want to continue saving and investing into your pension, despite nearly having used up your £1,073,100 Lifetime Allowance. What options do you have?

One idea to consider (which we recommend discussing with us first!) is to reduce your pension contributions (to keep within your Lifetime Allowance before you retire), and redirect some of this into VCT investments. This involves “buying” shares in one or more VCT companies on the London Stock Exchange (LSE), and you can commit up to £200,000 per year into these investments. From there, you could then claim back 30% of your VCT investment against your Income Tax, the following April. If you put £40,000 into VCT investments, for instance, then you could claim back £12,000.

Another option, however, would be to consider investing in some EIS-qualifying companies or EIS funds. With an EIS, you can invest up to £1m per tax year (i.e. 5 times more than VCTs), which can make it an attractive option if you have just sold a business or received a large bonus, and are wondering what to do with it. Again, you can claim back 30% of your EIS investment against your Income Tax bill.

 

Which is better?

The suitability of VCTs over EIS’ (and vice versa) depends on your individual financial objectives, needs and circumstances. One notable benefit of VCTs, for instance, is that they provide dividends which are paid completely free from tax. This can lead us to recommend VCTs as a useful tool for retirement planning, since they provide a regular tax-free yield. On the other hand, EIS investors can defer a Capital Gains Tax (CGT) liability, which can give you much more tax planning flexibility if you have suddenly received a large unexpected sum of money, such as an Inheritance.

It’s important to note, both EIS and VCT investments involve a higher level of investment risk when compared to the likes of other Equities, Bonds and Cash. The potential returns, of course, can be higher and thus worth the trade-off. Yet you should always discuss this with one of our experienced Financial Planners first, to ensure that any EIS or VCT investments sit appropriately within your investment risk profile.

Two notable benefits of EIS, nonetheless, are worth mentioning. First of all, you can claim loss relief on any EIS investment which fails, equivalent to your highest rate of Income Tax. In the case scenario above, for instance, a £100,000 earner would be in the 40% Higher Rate bracket in 2020-21. So, if he/she invested £10,000 into an EIS opportunity which failed, they’d “only” make a £4,200 loss. This is because 30% of the original investment would be claimed back against the Income Tax bill, meaning that the “at-risk” capital was £7,000. 40% “loss relief” on this amount is £2,800, resulting in a £4,200 loss. Secondly, any EIS shares held for at least two years are exempt from Inheritance Tax.

If you are interested in exploring this area of financial planning in more detail, please do give us a call or broach the subject with your Adviser when next reviewing your circumstances.

This content is for information purposes only. It does not constitute investment advice or financial advice. To receive bespoke, regulated advice regarding your own financial affairs, please contact us.

How to Enhance Your Business Protection in 2020

By | Business Planning | No Comments

Business protection is all about preparing for the worst, so your business has the best chance of reaching its full potential. It can help you to keep trading and financially afloat should things go wrong, which, in light of the COVID-19 national lockdown, things broadly have. In April 2020, most businesses remain closed under Government guidelines, with airlines grounded and sectors such as hospitality and retail suffering heavy financial losses.

Of course, no business owner could have predicted the effect COVID-19 would have on the economy. Yet for some businesses that are continuing to keep going during the crisis and for those that will resume post lockdown, there are still things that can be done to enhance your business financial protection.

Here is our short guide for business owners.

 

Protection & business type

Financial protection can come in many forms depending on your business goals, strategy, size and stage in its life cycle. In February 2020, there were nearly 5.9m private businesses across the UK; the vast majority (99%) comprising small or medium-sized businesses (SMEs) with under 250 employees. When added together, these businesses form a huge part of the UK economy, employing 16.6 million people.

There are many factors which keep businesses afloat, such as product development and strong distribution networks. However, a crucial (and often neglected) factor is business protection infrastructure. In other words, what would happen to your business if either you, or another key person, could no longer work because they became seriously ill, or even died?

This has always been an important question for a business, but in light of COVID-19, it has become even more poignant. None of us knows what’s around the corner, even if we do not believe the worst could happen to us or someone we know. Unfortunately, we are able to recount cases from our own experience, where a company took out protective cover, and only a few years later a Key Person within the organisation (e.g. the Director) sadly passed away.

Unfortunately, financial protection cannot prevent tragedy but it can help soften the blow. We can help you identify the weak points in your protection plan and find the best solution for your situation.

 

Succession planning

Whilst all businesses are different, one common issue centres around succession planning; i.e. who will take over should the Director/owner die, or suddenly become incapacitated (e.g. through a serious accident). At FAS, we can work with your Accountant and Solicitor to help you craft both a short term and long term succession plan. The first plan is most important, as it assists in addressing the more pressing issues that could occur if the business leadership is severely disrupted. The second, however, involves developing a tax-efficient plan to eventually transfer leadership to new management, usually after the current Director/owner reaches their intended retirement date. This might take the form of handing the reins to a trained family member, appointing an external successor or even business disposal. Regardless of the situation, careful planning is needed to ensure livelihoods are protected and liabilities are addressed.

 

Key Person protection

In the case of a sole trader, one of the key protective measures you might want to consider is Life Insurance. After all, since your business largely rests on your own shoulders, if you die suddenly then it will be considered as part of your Estate for Inheritance Tax (IHT) purposes. A lump sum from a good Life Insurance policy can help ensure your beneficiaries have the liquidity they need to wind up your business or take up the reins whilst dealing with any debts in your name.

For joint partnerships and Limited Liability companies, however, things work differently due to the share structures involved. Suppose one business partner in a joint partnership dies; what happens to their shares? Typically, these will pass to their beneficiaries, usually a surviving spouse. Unless you (the surviving business partner) have the funds and written agreement in place to ensure you can buy these shares, your business will run the risk of being held back by a stakeholder who has no interest or experience in stepping in to take the deceased’s place.

Once again, this is where our experience in dealing with such matters can really help. We can help you come to a binding agreement with your business partner which addresses the above scenario, and releases the funds you need to buy the deceased’s share(s) or we can assist with the arranging of a Key Person protection policy to guard against the loss of a key person. The right type of cover can help release the funds you need to help meet commitments, without rocking the entire ship.

If you are interested in discussing any of these aspects in more detail, please do give us a call.

Where Should the State Pension Sit in Your Retirement Plan?

By | Pensions | No Comments

The State Pension is unlikely to provide you with a comfortable retirement on its own, but it shouldn’t be overlooked.

The State Pension for 2020-21 is £9,110.40 per year. This assumes that you reach State Pension age after 2016 and have enough National Insurance credits. Some people may even receive more than this if they built up some additional pension before the rules changed in 2016.

This may well be enough to pay the bills, while your private pension can be directed towards other things.

It’s easy to fall into the trap of either ignoring the State Pension, or avoiding retirement planning altogether on the assumption that the State Pension will be enough.

Our belief is that the State Pension is important, and that you should build up maximum National Insurance credits if you can. However, this is just one part of a retirement plan, and where possible should complement a well-funded private pension.
 

How Much is a State Pension Worth?

The average salary in the UK is around £30,000 per year. This salary would incur National Insurance contributions of £2,460. This buys one year’s credit. You need to accrue credits for 35 years to build up a full State Pension, although you can start to earn a proportional State Pension with only 10 years’ worth of credits.

If you were to invest £2,460 per year into a private pension for 35 years, and achieved investment growth of 5% per year, you could build up a fund of £233,297.35.

You could probably safely withdraw 3% of the fund value every year and increase your withdrawals annually in line with inflation. This could give you over £7,000 per year. Not only is this less than the State Pension, it is not guaranteed, as it would be dependent on investment growth.

Of course, some people earn much more than £30,000, but many people earn significantly less, and are still able to accrue the same State Pension.

To be able to buy an income equivalent to the State Pension, you would need a fund of just under £300,000.

Clearly, the State Pension is a more valuable benefit than many people believe.

 

When Would You Like to Retire?

Depending on your age and gender, the State Pension is payable between age 65 and 68.

One of the main financial goals that clients tell us about is the desire to retire early. Clearly, relying on the State Pension does not allow for this.

You may wish to build up a fund to allow you to retire at age 55. But think carefully about your spending patterns. Most people spend more in the early years of retirement while they are still fit and well. Does it make sense for your income to suddenly increase (and to rise with inflation) at age 68?

A good financial plan will account for these irregularities. Perhaps you will have a personal pension, or even an ISA to fund your expenditure from age 55, with a cash reserve to cover any ad hoc costs. Your withdrawals can then be reduced alongside the State Pension, not only to preserve the fund, but also to make the best use of your tax allowances.

 

Filling in the Gaps

If you are not employed, there are other ways of building up a State Pension. For example:

  • Receiving Child Benefit for a child under the age of 12
  • Claiming unemployment benefits
  • Claiming disability benefits

If you are not working, and not receiving any of the above benefits, you can still accumulate a State Pension by making voluntary National Insurance contributions. In 2019-20, this amounted to £15 per week.

This is overlooked by many people who are not in work but think about what you receive in return. A year’s contribution of £780 buys 1/35th of a full State Pension – approximately £250 per year. No other pension or investment provides this level of return on your money.

Company directors have an added advantage, as they can draw a basic salary from their business (between £6,144 and £8,628 per year as of 2019/2020) and take their remaining income as dividends. At this level of salary, no National Insurance contributions are actually payable but are credited nonetheless.

You can check your State Pension Forecast at:

https://www.gov.uk/check-state-pension

 

The Disadvantages

If you are a salaried employee, paying National Insurance is not optional. For high earners, there is a chance that you will pay more in National Insurance contributions than you receive in return.

Of course, the other side of this point is that many people do not have the opportunity to build up much, if any pension provision, and the current system provides a safety net.

We also cannot ignore the government’s role. Pensions are an area of continual tweaking, with retirement ages rising, and many people questioning if they will receive any State Pension at all.

It used to be possible to pass some of your State Pension on to a spouse on death, if they didn’t have a full State Pension in their own right. This was quietly removed in 2016.

Again, a sound financial plan is the answer, as changes can be made in plenty of time to account for legislative developments. It is unlikely that the State Pension will be removed entirely.

While the State Pension is not perfect, it provides a solid foundation from which to build your retirement income.

If you would like to discuss retirement planning in more detail, please do get in touch. We can help you plan for the future.

Tips When Using Trusts for Inheritance Tax Planning

By | Tax Planning | No Comments

Inheritance Tax is still a concern for many families, despite the new Main Residence Nil Rate Band adding up to £350,000 to the standard IHT threshold.

Making gifts or using Trusts usually take seven years to become completely free from Inheritance Tax (IHT). But an investment in a Business Property Relief (BPR) qualifying company can be passed down to beneficiaries free of IHT on the death of the shareholder, provided it has been held for at least two years at that time.

At FAS, we are strong advocates of using Trusts as well as BPR investments to mitigate a potential IHT liability and always give full consideration to both options when discussing Inheritance Tax Planning with our clients.

 

Don’t Give Away More Than You Can Afford

Trusts are a specialist planning tool that may not be suitable for everyone. We have prepared this guide to address some common questions, concerns and pitfalls that can arise when considering Trusts.

Remember, a Trust is a completely separate legal entity. Once you have gifted an asset into a Trust, it is no longer yours. In most cases, you cannot receive any benefit from the asset.

If you are thinking about gifting money into Trust, think about how much you would be prepared to give away without the Trust structure.

The main benefit of a Trust is that it gives you some control over how and when the gift is distributed. So, if you’re sure that you want to set aside £100,000 for your grandchildren, but don’t want them to receive it as a single lump sum when they turn 18, a Trust could be the answer.

But if there is a chance you will need the £100,000 to pay care home fees, a straightforward Trust won’t help with this.

There are certain Trusts which allow you to retain some access to the capital or to draw an income. These are known as Gift and Loan Trusts and Discounted Gift Trusts. However, these carry some restrictions, and may not be as effective for IHT purposes as a full Trust.

Trustee investments should be considered as part of your wider financial plan. A simple cashflow projection can help you decide how much you can afford (and are prepared) to give away.

 

It’s Not Just for Gifts

A Trust can be set up even if you don’t have any money to gift.

The simplest way to use Trusts in IHT planning is to ensure that your life insurance is payable into a Trust. This offers the following advantages:

  • No IHT when the benefits are paid out
  • No IHT on second death, as with the benefits in trust, the surviving spouse’s Estate has not increased in value
  • Benefits are paid out more quickly, bypassing probate procedures
  • Life policies can be set up for family protection, or specifically to cover an IHT liability.
  • Pension death benefits and employer death in service plans can also be paid into trust.

 

Absolute or Discretionary?

An Absolute Trust (or Bare Trust) works in the same way as a gift. The asset is earmarked absolutely for one or more beneficiaries under the terms of the Trust. There is no scope for the Trustees to apply their discretion.

This means that once the Trust is in place, you no longer have any control. However, the gift will drop out of your Estate after 7 years. The investment is taxed as if it belongs to the beneficiary.

A Discretionary Trust, as the name implies, allows more control over the investment. The Trustees can decide how and when to distribute the money. The beneficiaries can also be changed or selected from a particular group.

However, a Discretionary Trust offers certain disadvantages:

  • If the gift is over £325,000, IHT of 20% applies immediately. A further 20% is then due if you die within 7 years.
  • Further IHT charges apply every 10 years. This is broadly 6% of the value over £325,000, with adjustments made for any withdrawals taken.
  • Exit charges may also apply when money is distributed from the Trust.

These points can mostly be mitigated with proper planning. But considering that larger Trusts in particular may incur additional fees in respect of legal and tax advice, a Trust can prove very expensive.

 

IHT is Not the Only Tax

Discretionary Trusts are subject to higher rates of tax than individuals.

Income is taxed at 20% on the first £1,000 only. Thereafter, income is taxed at 45% – an individual would need to earn £150,000 before paying this rate of tax.

If the Trust realises a capital gain, the first £6,000 is exempt from tax. This is half of the allowance available to an individual investor. Any gains over this amount are taxed at 20%, the same rate payable by a higher rate taxpayer.

Detailed planning is required to make sure that the strategy works, taking all taxes and costs into account.

 

The Investment Strategy Matters

The portfolio selected for a Trust investment may be different from an individual’s own funds.

It could be appropriate to use a higher risk portfolio on a Trust, to maximise the growth potential so that the money can last for several generations. Alternatively, the money might be required in the short term to provide an income, in which case a lower risk strategy would be suitable.

Taxation is an important factor. Using an Investment Bond as a wrapper for the investments can be effective, as there are no tax implications unless money is actually withdrawn. This means that funds can be switched within the bond without worrying about Capital Gains Tax. Similarly, interest and dividends produced within the funds are not only free of tax, but do not need to be declared on a tax return.

Bond withdrawals can result in unintended tax consequences, so it is always best to speak to one of our Financial Planners before proceeding.

A Trust can be an effective way of mitigating an Inheritance Tax liability, but you should always take financial (and sometimes legal) advice to ensure it is the right course of action.

Please do not hesitate to contact a member of the team if you would like to find out more about Inheritance Tax Planning.

Is It Better to Use an Active Fund Manager?

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For many investors, an active investment strategy appears to be a good idea. It can be reassuring to know that there is someone in the background, making informed decisions about how to invest your money. And more importantly, where not to invest it, since they will be more than familiar with the pitfalls of risky investments.

But recent years have seen an increase in the appetite for passive investment solutions. So what is the difference, and is it worth pursuing an active investment strategy?

 

The Argument for Active

Most of the traditional investment companies offer mainly active strategies. This means that a fund manager has responsibility for choosing the underlying investments, making switches and altering the proportions as necessary.

Now, there are many variations to this. Some managers actively choose stocks and trade frequently. Others prefer to buy and hold, adding new stocks as opportunities arise. Some aim for consistent asset allocation while others will shift proportions depending on what is happening in the market. In any case, a ‘bespoke’ service, including an element of expert judgement can be very appealing, particularly in this era of uncertainty.

But reliance on human judgement is fading, with most active managers now operating robust processes or complex algorithms to decide what they should include in their portfolios. With today’s technology and access to information, the talented fund managers of the past are being phased out in favour of teams of analysts and clever software.

While consistency and technology reduce the risk of human error, another question arises. If everyone has access to the same information at the same time, does any active manager genuinely have insight that the others don’t? And will that insight consistently lead to higher returns? By consistently, we are not talking about the last 6 months, or even the last 5 years. A 5 years performance history is not that significant when considering a 30 years retirement plan.

 

The Passive Position

Some may argue that active fund management is like trying to get ahead on a busy motorway. You can switch lanes, weave in and out of traffic and take shortcuts. You might gain a small advantage, but it is equally possible that your efforts will be counterproductive. Ultimately you will end up in the same place, and will probably have used more petrol.

A passive investment strategy does not attempt to perform ahead of the market, simply to participate in the growth. Passive investors generally accept the following to be true:

  • The market is efficient. There is no point in trying to time investment decisions based on economic news or world events, as by the time you hear about it, it has already been priced into the market.
  • Asset allocation contributes more to your performance than the individual stocks chosen.
  • Diversification is vital, as the various asset types behave differently. When one goes up, others may go down.
  • Diversification can lead to steadier long term growth.
  • Charges are a certainty, while performance is unpredictable. It therefore makes sense to keep charges as low as possible.

A quick snapshot of the Mixed Investment 40% – 85% index (which is broadly comparable with a typical balanced portfolio) indicates that of the 170 funds within the sector, 71 outperformed the index over 5 years. 99, or 58% of the funds, did not.

In the UK All Companies sector, 85 out of 251 funds outperformed the FTSE All Share. This means that 66% of funds in the sector underperformed when compared to the average of the UK share market.

While it is simple enough to point out an actively managed fund that has outperformed its benchmark, the odds of choosing the right fund at outset and maintaining the outperformance over a lifetime of investing are extremely slim.

Of course, in certain areas, there is little doubt that an active manager can add value. Investing in certain sectors or economies requires specialist knowledge that a typical investor does not have. But this type of investment can be risky, and should form only part of a well-diversified portfolio.

 

What to Consider

There is a place for both active and passive funds in a diverse portfolio. These are our top tips for choosing between active and passive funds in the same sector:

  1. Look at the charges. If the active option charges 1% more than the passive equivalent, that’s 1% in extra performance needed every single year to be in the same position. Is it worth it?
  2. Has the active fund genuinely outperformed? Compare it to the passive equivalent as well as the benchmark. Measure the longest possible period – one year’s good performance is not statistically significant. Look at discrete figures as well as cumulative.
  3. How do the funds stack up when the market falls? Does one appear to provide better capital protection, even if the upside is lower?
  4. What do the funds invest in? For a straightforward equity fund, a passive investment may meet your needs best. Active funds may be more suitable if you want to invest in specialist areas.
  5. What are the trends in the sector? In some sectors, it is very difficult for active managers to outperform passives, while in others, passive funds lag behind.

At FAS, we can agree on an investment strategy with you, one that you understand and feel comfortable with, designed to meet your long term objectives that can help you face the future with confidence.

Please do not hesitate to contact a member of our team if you would like to find out more about your investment options.