Financial Planning

As Financial Planners here at FAS, we understand the value of financial planning which we offer to our clients. However, that value isn’t always easy to explain to those unfamiliar with it.

After all, financial planning isn’t particularly tangible; you can’t “see” or “feel” it like you can with retail products, such as a new car. However, financial planning, when done properly, solves many key problems which many of us experience:

How will I ensure my family is financially secure if I suddenly passed away?

Am I paying more tax than I need to, and are there ways to free up more of my income?

How can I be sure that I am fully complying with the various rules about my taxes?

Can I ensure a meaningful inheritance for my loved ones at the end of my life?

Is it possible to secure a comfortable, secure retirement income? If so, how?

These are all very important questions which can keep us awake at night. Moreover, the answers are not always clear to people. Take the world of pensions, for instance. There are numerous rules about the State Pension, Workplace Pensions and Personal Pensions which often change over time (e.g. due to Government policy).

Once you start peering into this world, it can sometimes feel intimidating, but speaking to someone who understands the landscape can really help. At FAS, we believe there are at least five ways a good Financial Planner can add real value:

Helping to Clarify your Goals

Have you ever set out to achieve a goal, only to later realise it was unrealistic? Perhaps you thought you could teach yourself Mandarin Chinese fluently within a year, for instance, and quickly realised that it would realistically take more time and investment to get there?

Without the help of a professional Financial Planner, it is easy to make a similar mistake with your finances and wealth. However, the danger is that the costs can be much higher. This is because it is often many years later when people realise that their original retirement goals were unrealistic. With a Financial Planner, however, you can plot your intended course much more clearly and with far better information at your disposal.

At FAS, we will be completely honest with you and explain why we feel you are aiming too high or low with your retirement goals whilst outlining the reasons why. Then we will propose strategies that are achievable, allowing for different possible future scenarios.

Pointing out Blind Spots

It can be easy to think that you have “covered all of your bases” in your financial plan and yet miss out something important which could later cost you dearly.

Take British people who live overseas (Expats) as an example. Many people living abroad believe that they will not have to pay Inheritance Tax when they die due to their residential status, yet the reality is that most people will have to pay Inheritance Tax on their UK assets.

Mistakes like these can come as a nasty surprise later. So it does pay to consult a professional about your financial plan, helping to ensure that you have not missed out anything important.

Getting Better Deals

There are many areas of financial planning where it is possible to pay more than you need to. Take investment management fees as an example.

You might have an investment portfolio which you feel is performing well. Yet if you are paying excessively high fees which eat into your investment returns, then over many decades these could, effectively, represent a “loss” of tens of thousands of pounds.

We will help you to review your portfolio, scan the wider market and help you find the best deal for your needs and goals. Even a slight reduction on your investment management fees, for instance, could make a huge difference to your standard of living later on in retirement.

Minimise Threats

Did you know that in 2018 many people were scammed out of their pensions by fraudsters, costing each victim an average of £91,000? Whilst having a decent Financial Planner on standby is not iron-clad protection against receiving a malicious cold call, a trusted financial planner can help you discuss any unsolicited offers and avoid making costly mistakes with your money.

Simplify Everything

As mentioned above, many areas of financial planning are deeply complicated (such as pensions). A good Financial Planner will help to bring clarity to the world of Inheritance Tax, Income Tax, National Insurance, ISAs, Annual Allowances and more to help ensure you understand it. Moreover, this person can also help you bring different parts of your wealth together. This can not only make things more tax-efficient but can also simplify everything.

For instance, perhaps you are nearing retirement and have over a dozen pension pots scattered around due to a long, successful career in different lines of work. For many people, it can help immensely to consult a Financial Planner who can help consolidate all of these separate pots into a central pot, making everything much easier for you to manage.

Final Thoughts

There are many other benefits to a Financial Planner in addition to the above. For example, this person can help you to manage the emotional rollercoaster of investing. After all, your investments are likely to experience a lot of volatility and it can be tempting to act impulsively.

A Financial Planner can also help you to delineate the areas of your finances and wealth where you can exert control, and where you cannot. They can then help you to focus your energies on the former, allowing you to better relax and enjoy more peace of mind.

If you are interested in speaking to us here at FAS about your financial plan, then we’d be delighted to hear from you!

Many families stand to lose more money to the Government through Inheritance Tax (IHT) than they really should. In 2016, £585 million was spent unnecessarily on IHT by British taxpayers. With IHT receipts expected to reach an all-time high in 2018, it seems unlikely that this trend will reverse in 2019.

Certainly, everyone should pay their fair share to society, but why should your loved ones lose out needlessly? At FAS we can help you to put sensible measures in place ahead of time to ensure that you, one day, leave a meaningful legacy to your family.

Here are some practical ways we can help you to reduce your IHT liability:

The Nil Rate Band & Additional Threshold

A new rule was introduced on 6 April 2017 which has had an important impact on IHT planning. It is something to consider if you have direct descendants.

To quickly recap, in 2019-20 Inheritance Tax (IHT) is levied at 40% on the value of your Estate over £325,000. This threshold is called the Nil Rate Band (NRB).

Your “Estate” includes assets such as your property, cars and personal possessions.

So, if your Estate is valued at £475,000 when you die, then £325,000 would be free of IHT. The rest of it – i.e. £150,000 – would likely be taxed at 40%, which means an IHT bill of £60,000.

Since 6 April 2017, however, an Additional Threshold (AT) has been in place which can reduce your tax bill. This new threshold allows you to pass on an extra £150,000 in 2019-20 to direct descendants (e.g. children or grandchildren) in the form of your residential property.

Let’s see how this would affect the example above. Suppose this person’s £475,000 Estate consists entirely of their home. Assuming they pass this property onto a direct descendant, the whole Estate would likely be free from Inheritance Tax. This is because it would fall under the combined thresholds (i.e. £325,000 NRB + £150,000 AT = £475,000 allowance).

Spouse / Civil Partner Benefits

Each person has their own Nil Rate Band and Additional Threshold. That means you have your own NRB and AT, and if you are married then your spouse does too (the same applies in civil partnerships).

When you combine these allowances together it means that you can effectively double the amount you can pass on to beneficiaries, Tax-free, via an Inheritance:

Person A: £325,000 NRB + £150,000 = £475,000
Person B: £325,000 NRB + £150,000 = £475,000

Total Tax-free allowance (2019-20) = £950,000

So, if you and your spouse / civil partner own a £900,000 home and pass it to your children when you die, then you should be able to do so, Tax-free, assuming everything is in order, and the remainder of your Estate is less than £50,000.

Remember, your unused allowances pass on to your spouse if you die before them. You do not need to both die at the same time to combine your NRB and AT allowances!

Bear in mind that you cannot combine your IHT allowances in this way if you and your partner are unmarried, or not in a civil partnership. This is the case even if you have lived together for a long time and have children.

Pension Planning

Pensions are primarily intended to provide you with an income when you retire. However, they can also be an important part of your IHT strategy.

Remember we mentioned that your “Estate” comprises assets such as your property, cars and personal possessions? Pensions are notably absent from that list.

That’s because your pension does not form part of your Estate for IHT purposes. So, if you have a £750,000 house and a £300,000 pension pot when you die, the former might be liable to Inheritance Tax. The latter will likely not be.

You can pass on your pension pot to your beneficiaries, Tax-free, if you die before the age of 75. If you die after that age then the pot still does not face IHT. However, your beneficiaries will have to add any money they receive from your pension to their income. That means that they could face a higher Income Tax bill.

With some careful financial planning, you can therefore potentially pass on more of your wealth to your loved ones via your pension pot(s). Please note that you cannot do this with Final Salary pensions or Defined Benefit pensions.

Making Gifts

The IHT rules in 2019-20 allow you to give away up to £3,000 per year, Tax-free. Think about that. Over five years that amounts to £15,000. Over fifteen years it totals £45,000.

You could ignore this allowance but consider that £45,000 taxed at 40% IHT amounts to £18,000 that could have otherwise gone to your family. So gift-making is not a strategy to dismiss lightly.

We can help you understand the current allowances and how they impact on you and your family. One annual exemption that is often missed is for wedding gifts. Here, you can give up to £5,000 (Tax-free) to your child for their wedding day (£2,500 for a grandchild or great-grandchild).

Other Options

The above examples are just a handful of tactics to consider when thinking about Estate planning for your beneficiaries. Other options which might be appropriate for you include using Trusts and taking out a Life Insurance policy.

The rules surrounding Inheritance Tax are quite complicated and are subject to change. You could easily miss an important consideration if you try doing everything yourself, especially if you have a large complex estate.

Please do get in touch if you wish to discuss any aspect of the above in more detail.

With 2018 now over and January ushering in a season of New Year’s resolutions, now is a great time to become aware of some important financial announcements for the months ahead.

We recommend that you factor these into your financial planning. In light of this, here are some of the key highlights you should know about for 2019:

Help to Buy ISA

Set up by the government to help people get onto the property ladder, 2019 is the final year that it will be available. From the 30th November, the scheme will be shut down to new entrants.

To quickly recap what this ISA offers, it allows you to put aside £200 per month (tax-free) – with the government putting an additional 25% towards your property purchase when it is finalised.

With the imminent conclusion of this scheme, you may wish to consider discussing this with us soon, if you think the Help to Buy ISA might be for you. Of course, once it is gone then you might want to consider the Lifetime ISA as an alternative.

A Lifetime ISA allows you to save more towards a property (up to £4,000 per year) but there are fewer accounts on offer compared to the market for Help to Buy ISAs.

Help to Save

This little-known initiative was launched by the government in September 2018, and is certainly worth a look if you meet the eligibility criteria (e.g. Crown Servants and members of the Armed Forces). Essentially, this scheme allows you to put £1-£50 per month into a Help to Save account over four years. For each £1 you put in, the government will put in an extra 50p.

If you put aside £50 each month into this account for four years then not only would you have £2,400 saved. You would also have an extra £1,200 from the government.

Income Tax & Pay

The Personal Allowance is the threshold where after you start to pay the Basic Rate of Income Tax (20%). In 2018-19 this is currently £11,850, but from April 2019 this will rise to £12,500.

Moreover, at this time Higher Rate taxpayers will also soon be taxed at 40% on earnings over £50,000 (instead of £46,350). The minimum wage is also set to rise from £7.83 to £8.21.

Be aware that National Insurance contributions will also be rising to 12% on earnings between £46,350 to £50,000. Many Higher Rate taxpayers might find their Personal Allowance increase wiped out by this.

Pension contributions

Whilst many people are set to pay less Income Tax, those who are part of an Auto Enrolment Scheme might not see this reflected very much in their take-home pay from 6th April 2019.

From this date, the minimum employees must contribute towards their pension will be 5% instead of the current 3%. You can choose to opt out, of course. However, we urge you to think carefully before doing so as this money might be very useful for your retirement financial plan.

On the subject of pensions, recipients of the State Pension should also note that this will rise by 2.6% from April. This means the basic State Pension will go up to £129.20 and the flat-rate State Pension (i.e. for those who retired after April 2016) will go up to £168.20.

The Lifetime Allowance will also be rising from £1,030,000 to £1,055,000, in line with CPI inflation.

Rising railway fares

One unfortunate development for commuters in 2019 is the rise in rail fares by 3.1% from 2018. If you have an annual season ticket from Manchester to Liverpool, for instance, then this means you’ll likely be paying an extra £100.

Confronted with this situation, for young adults it’s worth keeping an eye out for developments on the proposed 26-30 Railcard. Similar to the 16-25 Railcard, the current proposal is that members would pay £30 in order to receive a third off certain rail fares for a 12-month period.

For people outside of these age brackets, you might consider the 60+ Senior Railcard if you have not already done so. There is also the Two Together Railcard if you travel as a couple, or the Family and Friends Railcard for those travelling with children aged 5-15.

Buy-to-let changes

If you are a landlord, then from 6th April 2019 you should be aware of a key change to the rules which might affect you (Higher Rate taxpayers should take special note).

In 2018-19, you can claim tax relief on 50% of your mortgage interest payments. However, in the upcoming financial year this will go down to 25%. By 2020-21 this will reduce completely to zero. For some people, this might push you up into the Higher Rate tax bracket.

Inheritance tax

From 6th April, although the standard Nil Rate Band (i.e. the threshold where afterwards your Estate faces a 40% inheritance tax bill) will not be going up, the overall threshold for your Estate may be higher if you own a residential property.

You will still be eligible to pass on up to £325,000, tax-free, yet you will also be able to pass on an extra £150,000, if your share of a property goes to your spouse or direct descendants. (An increase of £25,000).

Be aware, however, that if your Estate is worth over £2 million then this additional Residence Nil Rate Band allowance will go down by £1 for each £2 you are over the threshold.

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.