How retirement looks in 2015
On 21 July 2014, the government released their response to the ‘Freedom and Choice in Pensions’ consultation, effectively giving the go-ahead for the sweeping pension changes that were proposed as part of the 2014 Budget in March. These changes could radically alter your plans for retirement.
From April 2015, we have now seen more freedom in ways people can take their pension benefits when they reach 55. Few would vote against choice and flexibility for their pension, but what do the changes mean if you are planning your retirement? Here we give you five areas for consideration.
More freedom in how you draw your income
In theory, the flexibility allows you to treat your pension fund in the same way as any other investment: you are able to take withdrawals whenever you want.
If you are a member of a defined contribution pension scheme and aged 55 or over, you are able to draw money from it as you see fit. You can receive a tax free cash sum of up to 25% of the amount you take, then you have the freedom to access some or all of the remaining fund as income, taxable at your marginal rate of income tax. So if you want to access all of the money from your pension, you can take it as a lump sum.
As tempting as it sounds to get hold of your money when you want it, in practice, the tax treatment may discourage you from extracting large sums in a single year. So unless you really need the extra income, you may want to withdraw your pension savings at a slower rate that is more tax-efficient.
Although the new pension freedoms mean you are no longer compelled to buy an annuity, if you are looking to secure a guaranteed income for the rest of your life, an annuity it still an appropriate option for you, especially as it’s impossible to tell how long you will live.
Changes to how much you can contribute
If you are drawing an income from your pension (after taking tax free cash) and wish to make contributions to a defined contribution scheme, you can continue to do so, but the amount on which you can receive tax relief (the ‘Annual Allowance’) has been cut from £40,000 to £10,000 a year. This could be via employer or personal contributions.
The £10,000 Annual Allowance has been introduced for those already in ‘flexible drawdown’. This provides a potential advantage as the previous rules prohibited tax-relievable contributions if you are already taking income from Flexible Drawdown.
In some circumstances the Annual Allowance does not apply, but the rules can be complex. For example, you can take income from a maximum of three smaller personal pension pots, or an unlimited number of smaller occupational pension pots (in both cases, worth less than £10,000), without being subject to the Annual Allowance restriction. Similarly, if you entered Capped Drawdown before April 2015 and take income within your income limit after this date, the Annual Allowance will remain at £40,000 a year in these cases.
Transferring defined benefit schemes
Transfers from private sector defined benefit to defined contribution schemes is still allowed. The government is also consulting further on allowing full or partial withdrawals direct from private sector defined benefit schemes, to remove the need to transfer out to a defined contribution scheme before taking benefits. If you are a member of a defined benefit scheme that is already in payment and you wish to transfer out, this is still prohibited.
Transfers from unfunded public service defined benefit schemes are not allowed. Transfers from funded public service defined benefit to defined contribution schemes are permitted.
Taxation on death
The tax position on death under the previous rules was that lump sum payments from any money remaining in drawdown was subject to a death tax charge of 55%. The same tax rate also applied to any remaining pension fund not being used to provide benefits, if the death occurred from age 75 onwards. As part of the new reforms, the government has abolished the 55% tax charge for money inherited from pension funds, regardless of the age of death. It has also extended the same generosity to money in drawdown, if the death of the holder occurs before age 75. For deaths after age 75, the tax rate for money inherited from drawdown has been reduced to 45%.
The new rules are effective from April 2015 but importantly, it is the date the claim is settled rather than the date of death, which determines if the money is paid at the new rates.
Guidance or advice?
The government has introduced a new right to impartial financial guidance at the point of retirement, for anyone with a defined contribution pension scheme. The guidance is available through the Pensions Advisory Service and the Citizens Advice Bureau. But it’s important to understand that what is on offer is just guidance – not advice - so while guidance will explain the impact of these new rules and let you know what you could do, it won’t tell you what you should do. Advice, therefore, remains essential.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
Charlotte Poole-Graham represents only St. James's Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group's wealth management products and services, more details of which are set out on the Group's website www.sjp.co.uk/products.
Who needs money ? Why remortgage ?
In today's competitive market, many borrowers choose to switch their mortgage every few years in order to take advantage of the new rates on offer. Those that remain on the same deal for the full term of their loan could lose out on a range of potential benefits, not least the opportunity to reduce the total amount paid back, which could be a significant margin in some cases.
In simple terms, remortgaging involves switching your current mortgage to a new deal, arranged either with your existing lender or with a new lender. As a current homeowner you may want to consider taking this step for a number of reasons, such as:
To save money If you're paying your lender's Standard Variable Rate (SVR), it's likely that your existing lender will offer a better rate and greater flexibility on other available products. This could allow you to save money on your monthly repayments, or to repay your mortgage sooner. And if your current lender doesn't offer better rates or greater flexibility on its other products, you may want to consider switching your mortgage to another lender, even if doing so would trigger early repayment charges payable to your existing lender, as this could still mean a net saving to you.
To raise money Higher income or a rise in your property's value means you could increase your mortgage to help pay for major outgoings such as a wedding or your child's university costs, rather than borrowing separately, and in some cases more expensively, for the outgoing itself.
To avoid moving home It can be cheaper and more convenient to adapt or add an extension to your existing home, paid for by remortgaging or a further advance, than to move home.
To consolidate your debts Remortgaging can allow you to release some of the equity you hold in your home and consolidate other debts, such as a car loan or credit cards, which can attract higher rates of interest than that of your mortgage.
To Reduce the Term
With each remortgage you can look at reducing the term of the loan bring the mortgage down by years eventually if this is the goal. Why might it not be ? Well you need to speak to me to find out.
Book your free Home Mortgage Review Now 07973 720848 or 01594 719389
TAX FREE EXTRA INCOME
By signing up to the ‘rent a room’ scheme, not only could you enjoy the extra income from the rent, but also up to £4,250 a year is free from tax. ‘Rent a room’ relief is an optional scheme that lets you receive up to this amount in rent each year from a lodger, tax-free. !is only applies if you rent out furnished accommodation in your own home.
LANDLORD’S ENERGY SAVING ALLOWANCE
You can claim ‘landlord’s energy saving allowance’ for the cost of buying and installing certain energy-saving products for properties you rent. You can also claim a special tax allowance of up to £1,500 for insulation, draught proofing and installing a hot water system.
COSTS YOU CAN OFFSET AGAINST TAX
If you rent out property, don’t forget you can deduct certain costs before declaring your taxable income. !e costs you can offset against tax are numerous, including mortgage interest; lettings agents’ and accountants’ fees; insurance; utility bills; council tax; cleaning; and maintenance and repairs (but not improvements – building an extension will enhance the value of your property, but you can’t claim it as a daily expense in the running of that property).
STAMP DUTY CHANGES HOW DOES EFFECT YOU
With the announcement of the stamp duty changes in the Autumn Statement, Chancellor George Osborne, has announced sweeping changes to the system of Stamp Duty. The current system of whichever banding the property price falls into being levied on the whole of the value of the property, will be replaced by one of gradients so that different rates will apply depending on the portion of the purchase price that falls into each rate band
Purchase price of property Rate of SDLT
Up to £125,000 Zero
Over £125,000 - £250,000 2%
Over £250,000 - £925,000 5%
Over £925,000 - £1,500,000 10%
Over £1,500,000 12%
Example: A buyer exchanges contracts for the purchase of a house for £275,000 on 5 December 2014, with completion expected to in February 2015. Under the new rules the SDLT is calculated as follows:
0% on the first £125,000 = £0
2% on the next £125,000 = £2,500
5% on the final £25,000 = £1,250
Total SDLT payable = £3,750
Purchasing a home is undoubtedly one of the most important decisions most individuals will make. Assessing whether to approach a lender directly or employ a mortgage broker is the first choice for many in the route to home ownership.
Advantages of employing a broker
According to the Mortgage Advice Bureau, the number of products in the UK mortgages market reached record levels in August 2014, with over 12,000 different options available. While this is good news for home-buyers, offering a better range of products to suit their needs, it also makes finding the right mortgage a much more complex process.
In addition, legislation introduced by the Mortgage Market Review in April means lenders are required to perform a more extensive range of affordability checks before approving a mortgage.
Again, though this move protects borrowers from inadvisable financial decisions, and many lenders already practised rigorous checks before its introduction, this however could be viewed as an extra level of complexity to the application process for those inexperienced in this procedure The length of time it may take for an initial interview can be upto four weeks with a lender where as with me its days.
Approaching a mortgage broker like myself would be a prudent decision for many homebuyers. As an independent advisor I have an expert knowledge of the market and I’m required to give an unbiased opinion on the best deal for each buyer’s unique circumstances. This can be particularly useful for non-traditional cases, including self-employed or older buyers, who some lenders may automatically discount on inflexible criteria, without reviewing their financial profile as a whole. I will also have a better understanding of why cases might not be accepted and what can be done to overcome these objections, which could save buyers from letting their dream property slip away due to delayed or rejected applications. I will also be able to recommend related insurance products to ensure buyers are still able to meet their mortgage repayments in the case of adverse circumstances, including redundancy or illness.
Despite these numerous benefits of using a Broker, there are several things to consider before approaching any mortgage broker, beginning with the costs involved. Charges can vary for intermediaries, who are likely to either take a fixed fee from the buyer, commission from the lender, a percentage of the secured mortgage or a combination of the above. More information on this topic can be found through the Money Advice Service.
Opting for professional advice could cost buyers hundreds of pounds in the short-term, but over the lifetime of a mortgage, securing even a fractionally better interest rate could lead to significant savings. Using a broker also means homeowners may be able to claim compensation in certain cases if they feel misleading advice drove them to choose an inappropriate mortgage, though buyers are under no obligation to follow recommendations.
Aside from costs, it is also worth bearing in mind that employing a broker does not guarantee the best deal on the market, and buyers should take the time to compare brokers in order to find the right service, at the right price.
Under Financial Conduct Authority guidelines, there are three distinct classes of broker, depending on the number of lenders’ products that will be considered, from tied mortgage brokers who work with a single lender, to whole of market brokers who consider the full market. Even this last category may not have access to every product though, since some mortgage lenders deal only with direct customers.
The importance of business succession planning What happens to a business if its owner or co-owner dies or falls seriously ill? Much will depend on the type of business – sole trader, partnership or limited company – but unless there has been some advance planning, the chances are that there will be disruption, arguments and the strong possibility that all or part of the business will end up in the wrong hands.
So if you’re a business owner, business succession planning and insurance is important. It’s quite simply the process of planning for what you want to happen if you (or your co-owner, if you have one) were to die or fall seriously ill.
The legal position on the death of a business owner will depend on the type of business entity.
When a sole trader dies, their business dies with them, legally speaking. The business’s assets will form part of the sole owner’s estate and pass on to beneficiaries under the terms of their will. If the owner has not made a will, the intestacy rules apply; in effect, the state lays down who the estate should pass to, and normal inheritance tax (IHT) rules apply.
However, the good news is that most trading businesses are not subject to IHT – if you’re unsure about yours, you should certainly take advice. If your business does not enjoy tax relief, the basic requirement is to create a capital sum, preferably outside the estate, in order to minimise IHT.
This could be achieved with the help of a suitable life insurance policy.
A partnership is a business owned by at least two people. Unless there’s some specific provision in the partnership agreement (and very many partnerships have no formal agreement), a partnership ceases when a partner dies. When that happens, the deceased partner’s estate becomes entitled to their share of the business.
This can mean a choice for the surviving partner or partners. They could pay the deceased partner’s estate a sum of money they all agree to be the value of the deceased partner’s share, or carry on in business together with the deceased partner’s spouse or other beneficiary – even if the new partner has little to contribute to the success of the business.
Effective succession planning provides some clarity in the event of death. A double option agreement ensures the surviving partner(s) has the option to buy the share in the business from the deceased partner’s estate. The deceased partner’s estate can also exercise an option to force the surviving partner to buy. Under an automatic accrual arrangement, the surviving partner(s) inherits the business, but the family receives the proceeds of a life policy.
There may also be a need to insure the lives of all the partners to cover potential liabilities that might arise on their death – perhaps to pay off an overdraft or other creditors.
Limited companies continue after a shareholder’s death, but the basic succession issues are similar to those facing a partnership. The key is to make sure that the shares end up with the surviving shareholders and the deceased shareholder’s family receives some money.
Generally, the deceased shareholder’s beneficiaries will want financial compensation in return for their shares, assuming that they don’t plan to continue in the business; and there may also be the need to pay off creditors on an owner-director’s death.
A double, or cross, option agreement is often used for company shareholder succession planning. If a shareholder dies, their beneficiaries can require the remaining shareholders to buy them out or the remaining shareholders can require the beneficiaries to sell their shares.
To provide the funds, each shareholder should take out an ‘own life’ policy written under a special business trust to benefit the other shareholders.
Of course, it’s not just the death of a business owner that can stop a business. If a business owner suffers a critical illness, such as a heart attack or cancer, it may not be possible to continue in the business either temporarily or permanently.
Expert advice, taken before the event, could have helped in both of these cases. A suitable critical illness insurance policy is probably the best way to provide protection against the financial consequences of having a serious illness. These policies pay a cash lump sum on diagnosis of a specified critical illness or disability.
The policies are normally written in trust for the other business owners, along with an agreement between the business owners about the circumstances in which the share in the business should be transferred.
The death or critical illness of a business owner can lead to unexpected or undesirable consequences for those left behind. Taking the opportunity – well in advance of such an event happening – to plan for such a situation can help crystallise what you want to happen to your business after your death, and to identify how best to ensure that this will actually come about.
A good adviser will start by finding out the most important issues of their business owner clients and, once these have been identified and prioritised, they’ll recommend a suitable way forward.
To receive a complimentary guide covering Wealth Management, Retirement planning or Inheritance Tax planning, produced by St. James’s Place Wealth Management, contact Charlotte Poole-Graham on 07415855071, by email email@example.com or visit www.charlottepoolegraham.co.uk
What is an IFA? Do I need one?
What is an Independent Financial Advisor (IFA)?
Broadly speaking there are two types of financial advisors, Independent and Restricted. A common misconception is that ‘Independence’ in this context means that IFAs work alone, however it actually refers to the fact that they are not tied to any particular product provider. IFAs are regulated by the Financial Conduct Authority to advise across all regulated investment and saving products in the UK and as such their advice is impartial. Many IFAs also provide mortgage, annuity, insurance and protection advice.
Why choose an Independent Financial Advisor?
Here’s what I believe a good IFA offers -
· The ongoing support of a person you trust
· A one-stop solution for financial advice across all areas
· A full financial plan - how much must you save, invest, earn and borrow over your life to achieve your goals?
· “Whole of market” advice – hunting out the very best investments and products for you, from the thousands available
· Fee-based advice - Advisers are paid by their clients and not by commission, eliminating any hidden incentives and biases
· Full qualifications and FCA Authorisation – so you can be confident in the quality of advice you receive
· under the Financial Services Compensation Scheme, just in case you are mis-advised
Why not go to your Bank?
Financial advice was available from many Banks and Life & Pension firms, however following the Retail Distribution Review which outlawed commission payments many have closed down their advice offering. Those that retain their advice arm should have rigorous processes in place to ensure any advice is “suitable” for the client, and generally do a good job of highlighting to their customers where they might have products with better returns available.
However, bank advisors are normally Restricted, so “tied” to particular product providers, and are rewarded based on which products they sell. So, there is often a conflict of interest between you and them.
Moreover, there is significant variance in the quality of advisor and their suitability for you, and you have limited ability to “pick and choose”.
Why not manage my financial affairs myself online?
There are several reputable online brokerage sites where you can invest your money yourself, giving access to thousands of different investment instruments. They are generally only suitable for very knowledgeable investors. However, even these investors often turn to their IFA because they don’t find the time to regularly research and manage their investments.
Not optimising your investment portfolio, through limited knowledge or time, can often be more expensive (in terms of returns) than paying the cost of advice.
There are also several comparison sites that allow you to find the best deals available across Savings, Mortgages, Insurance and other product areas.
These product areas are less complex than investments, so it might be more viable to self-manage these affairs. But, it is still best to consult your IFA first, as you may overlook costly issues or fruitful opportunities which your IFA could quickly point out.
Why not use a large Wealth Manager or Private Bank?
Large Wealth Managers (aka Private Banks) tend to serve “High Net Worth Individuals”, with a minimum investment portfolio size anywhere from £500k to £5m.
Depending on the firm, you may receive the support of a wider team (e.g., a specialist Investment Research team), access to more “institutional-like” products (some Wealth Managers are side-arms of Investment Banks) and be advised by individuals with degree-level investment qualifications. You may also feel more confident with the support of a large brand.
On the down side, Wealth Managers often suffer the same drawbacks as Banks (above) – they can be tied to particular products, have hidden incentives and have varying quality and suitability of advisor.
In short, go local and find a good IFA.
Key questions for Auto Enrolment
Auto enrolment cannot be ignored; legislation clearly puts the responsibility firmly on the shoulders of employers to operate a Qualifying Scheme correctly for their employees. Failure to comply will result in a series of penalties and fines. So, as an employer (whether a company employing thousands or a sole trader with a single employee), while the resulting actions may be different, the key questions are the same:
· When do I need to have a Qualifying Scheme in place?
· Who do I need to enrol?
· How much will this cost?
· What choices do I have in selecting a Qualifying Scheme and,
· Is there anything that can be done to reduce the cost?
When do I need to have a Qualifying Scheme in place?
The ‘staging date,’ is the date by which you must have established your Qualifying Scheme, it varies between October 2012 and April 2017 depending on the number of employees on your payroll as at 1 April 2012. There is an interactive tool available from The Pension Regulator at www.tpr.gov.uk/automatic-enrolment which enables you to find out your staging date.
Who do I need to enrol?
All employees, whether part-time, full-time or contractors age 22 and State Pension Age who earn over the ‘earnings trigger’ in a pay reference period (£192.00 if employees are paid weekly, £833.00 monthly and £10,000 annually for 2014/15) must be auto enrolled. Employees outside these parameters simply need to receive a communication about their rights to join the scheme.
How much will this cost?
The statutory minimum contribution into the scheme will be 8% of an employee’s ‘qualifying earnings’, made up of an employer’s contribution of at least 3%, member’s contribution of 4% and 1% from the Government in the form of tax relief. The ‘qualifying earnings’ will be total earnings falling within an earnings band of £5,772 to £41,865 in 2014/15.
What choices do I have in selecting a Qualifying Scheme?
There are a variety of different pension schemes that can be used for auto enrolment, from defined benefits schemes to personal pension plans. Your ultimate strategy for auto enrolment could be a multi-scheme solution with your workforce segmented into different schemes.
Your solutions will depend on the answers to the following questions:
· Do you have an existing scheme(s) in place for all your employees? If so, you can continue with this scheme as long as it meets the conditions for auto enrolment
· Do you only offer pension benefits to some employees, eg senior management? If this is the case you can continue with the scheme for these existing members (as long as it meets the conditions for auto enrolment) however you will need to set up a new scheme for all other employees
It is unlikely that you would want to start a new defined benefit scheme to satisfy your auto enrolment requirements.
Where, on average, contribution levels are likely to exceed £100 per month per employee and you employ more than ten employees, you may want to consider setting up a group personal pension scheme. Alternatively, the offerings from NEST, The People’s Pension or NOW: Pensions may be an appropriate solution. Further information on these solutions is available on request.
Is there anything that can be done to reduce the cost?
While contributions themselves can be based on ‘qualifying earnings’ or ‘pensionable earnings’ (where different minimum contributions may apply), in addition to the level of contributions it will be advisable to consider ease of administration, as this will also be a contributor to cost. The scheme with the lowest contribution levels may substantially increase the administrative burden. Beyond this you could look at salary sacrifice. This is a method of using National Insurance savings to help fund part of the overall contribution for both you and your employees.
Pension reform is coming and, even if auto enrolment may still be some time off for you, for many employers there is much to think about and plan for. The sooner you engage in this process the easier the process and cost will be to bear.
The levels and bases of taxation and reliefs from taxation can change at any time.
The value of any tax relief depends on individual circumstances.
The levels and bases of taxation and reliefs from taxation can change at any time.
The value of any tax relief depends on individual circumstances.
Brave New World
Spring Budgets have had little to promise or offer UK savers and investors in recent years, apart from setting out the depth of the economic challenge ahead for the coalition government. Only last year, the mood was subdued, with talk of a potential triple dip into recession and a long and bumpy road to recovery. The UK’s economy, twelve months on, is undergoing a regeneration and a rate of growth that is now the fastest in the Western world. As Britain looks towards a general election in May 2015, the Budget contained far-reaching changes for its savers and investors.
Chancellor George Osborne, in his address on 19 March, said the Budget rewarded “the makers, the doers and the savers” in Britain. And the new pension and tax-efficient saving arrangements certainly offer radical reform of the UK’s personal finance landscape and welcome breaks for savers and investors after four years of austerity. A significant change in pension arrangements has lifted restrictions on access to pension pots and made it more attractive for individuals to invest for their retirement through pensions. And the reform of Individual Savings Accounts (ISAs) brings a very welcome increase in the annual allowance to £15,000 from July this year.
The boost that the 2014 Budget has given to investors, however, comes amid continued austerity, with the government only halfway through the fiscal consolidation it embarked on in 2010. Public borrowing levels still remain at £108 billion for 2014 (www.parliament.uk, 21/3/14). When the coalition came to power in 2010, Osborne had planned to balance the budget by 2016. Instead, the aim is 2019 (www.gov.uk, 19/3/14). The recovery also remains prone to wider global risks, whether from China’s economy or Russian military action. Meanwhile, there are widespread concerns that the recovery has been driven by consumers running down their savings, while households are squeezed by living costs as prices rise faster than earnings.
But the good news for business, markets and households is that the UK economic recovery has entrenched. In March, the Office for Budget Responsibility (OBR) revised up its forecast for the pace of the recovery in 2014 to 2.7%, from 1.8% a year ago (when its estimate for 2013 growth was a mere 0.6%). The OBR also expects earnings will grow by 2.5% this year, and inflation by 1.9%. Osborne, in these more secure conditions, packed his Budget with a broad range of pre-election giveaways, including a reduction in the savings tax rate and an increase in the personal tax-free allowance to £10,500 for 2015/16. The Budget also restated that the Inheritance Tax threshold will remain at £325,000 until April 2018.
Investors have done well as growing economic confidence, loose monetary policy and low-interest rates have buoyed equities in the leading financial centres. Although 2014 is unlikely to match last year’s market advances, market returns are expected to reflect the improvement in the global economy and corporate and consumer confidence. In this upbeat environment, the Budget’s ISA allowance increase holds out further investment opportunity, particularly for those that want an alternative to the near-zero returns on offer from cash.
The Budget’s relaxation of ISA rules to allow any combination of stocks and shares and cash rightly gives investors more flexibility to manage their valuable allowance to suit their attitude to risk and their needs. However, the Bank of England Governor, Mark Carney, remains adamant that the base rate will remain at a record 0.5% low while the economy recovers; and is widely expected to be held at this level until mid-2015 (www.bbc.co.uk, 20/2/14). It seems unlikely that the government would welcome a rise in interest rates just before it goes to the polls.
Osborne’s move to increase the annual ISA allowance to £15,000 was designed to encourage Britain to set aside more for the future. With mild inflation still eroding the value of cash, the hope must be that investors make the most of the long-term benefits provided by this even more valuable and flexible opportunity.
Osborne’s decision to champion investor choice has also underpinned the more flexible new pension regime. Perhaps most radically, he has made proposals to free up access to pension pots and change the rules for annuities from April 2015, as well as introducing a new pensioner bond. The proposal to allow anyone over the age of 55 to take their entire pension pot as a lump sum (albeit with 25% tax-free and the remaining amount liable to Income Tax) is a radical innovation that allows individuals to invest, save, spend or give as they see fit. As an interim measure, the guaranteed income required before qualification for flexible drawdown has been cut to £12,000, from £20,000, and this retrospective move will allow anyone in drawdown to benefit from the increased flexibility.
The more liberal regime, too, complements the traditional annuity route and the security it offers for those who want a guaranteed income over their retirement lifetime. Annuity investors will benefit when interest rates start to rise; while drawdown investors can encounter problems in the face of stock market volatility. The new pension regime admirably hands more control to individuals over their long-term financial plans. But, as with all financial planning, each person’s needs and appetite for risk or security are distinct. Retirement planning requires expert, not off-the-shelf, solutions. Osborne’s brave new world for savers and investors creates further nuances and complexities that make wealth management advice as important as ever.
The value of an investment will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested. Equities do not provide the security of capital associated with a deposit account or a Cash ISA.
The levels and bases of taxation and reliefs from taxation can change at any time and are generally dependent on individual circumstance
To receive a complimentary guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning contact Charlotte Poole-Graham on 07415855071, by email firstname.lastname@example.org or visit www.charlottepoolegraham.co.uk
Make the right ISA choice
Individual Savings Accounts (ISAs) remain an important building block in helping create capital and income for the future and since their launch in 1999, when they replaced Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs), the popular personal finance vehicle has gone some way to address the shortcomings in the UK’s savings culture.
And without doubt, ISAs have proved a success story, with more than £443 billion invested over the last 15 years, of which a record £57 billion was subscribed in the last tax year (source: HMRC, September 2013). The opportunity to invest in a tax-efficient way has made ISAs the cornerstone of many investment strategies; both savers and investors are understandably enticed by the ability to achieve tax-free interest and no further tax on income or capital gains.
There are two types of ISA: Cash ISAs are savings accounts where the interest is paid tax-free, and Stocks & Shares ISAs which, as the name suggests, allow investment into a wider range of stock market and other financial instruments. However, there are restrictions on how much can be invested in each type. The full annual allowance of £11,520 (2013/14) can be invested in a Stocks & Shares ISA, but only half - £5,760 - can be saved in a Cash ISA (although the balance of the allowance can still be invested in a Stocks & Shares version). An inflation-linked increase will see the allowance rise to £11,880 in the new tax year.
An individual or couple who invested the full ISA allowance each year could by now have sheltered funds of £124,080 and £248,160 respectively from any further tax liability, according to HMRC.
But there is a sting in the tail. The squeeze on savers from record-low interest rates is also being felt by those with Cash ISAs. Figures from the Bank of England in December showed that the average Cash ISA deposit rate is just 0.67%.
The reality is that the tax benefits provided by ISAs are best maximised by investing for the long term in assets capable of achieving capital growth and rising income. The likelihood is that interest rates will remain low for a number of years to come and, regrettably, savers cannot even be sure that their Cash ISA account is achieving a better rate than a standard deposit account. Against that backdrop, whilst cash is certainly the right home for money that might be needed in the short term, ISA allowances might be better utilised by investing in a diversified portfolio of assets that have the scope to deliver higher levels of income and long-term capital gains and, in doing so, make the most of the tax freedom on returns. Of course, investors need to bear in mind that the value of a Stocks & Shares ISA may fall as well as rise and it does not provide the security of capital associated with a Cash ISA.
As well as considering the best use of this and future years’ ISA allowances, those who have already built up significant ISA funds might be able to improve the income and capital returns on offer. All too often, people do not review their ISA portfolio strategy frequently enough. How are the investment managers performing? Is the asset mix, geographic spread or fund choice still right for them? Can they improve the income-generating potential of their ISA portfolio? Are they happy with the service they’re receiving?
A thorough review of an ISA portfolio by an experienced wealth manager can ensure that it is appropriately structured and diversified to help achieve immediate or future financial goals. ISAs should be a fundamental element of financial planning, but it is also important to consider them in the context of an overall investment strategy and to ensure that an ISA portfolio can be adjusted easily to cater for changing needs.
As a final thought, parents, grandparents, and indeed anyone who might want to help a child build capital for his or her future, should not overlook Junior ISAs, which were introduced in November 2011 to give under-18s a similar tax-efficient savings opportunity. The limit for investment in this tax year is £3,600; but given the future financial challenges faced by the children of today, any help will provide them with a valued head start.
Remember that the favourable tax treatment given to ISAs is subject to changes in legislation and may not necessarily be maintained in future.
To receive a complimentary guide covering wealth management, retirement planning or Inheritance Tax planning, produced by St. James’s Place Wealth Management, contact Charlotte Poole-Graham of St. James’s Place Wealth Management on 07415855071 or email email@example.com
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