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When life means life

Archive for January, 2020

When life means life

Wednesday, January 29th, 2020

Some people object to insurance on the principle that it may not provide any tangible benefits: an insurance policy only pays out if the event occurs that it’s designed to protect against. If your house doesn’t suffer fire, flood, subsidence or other damage, your house insurance won’t pay out. And so on.

Of course, many such policies provide peace of mind and reassurance, which surely has some value. But it must be agreed that many types of insurance never pay out. Your house may never suffer damage. And even though term assurance is a type of life assurance, if you don’t die within the period specified, it won’t pay out either.

However, there is one type of insurance guaranteed to pay out: whole of life protection. This type of life assurance runs for your whole life; and as death is unavoidable, it will pay something sooner or later.

This provides you with the peace of mind that your family won’t suffer financial stress due to your death, whenever it occurs. But this type of policy also has other uses. You can combine it with term assurance to cover particular debts. It can also be used as part of estate planning by providing money that can help with Inheritance Tax bills. It can even have value for businesses: when used as so-called key person cover, it can protect a company from the financial consequences of losing a vital employee, partner or director.

Whole of life protection comes in various forms. In essence, though, there are two types of cover: maximum and balanced cover. With maximum cover, the initial premiums and the sum insured don’t change for the first 10 years. Thereafter, the premiums may go up depending on various factors – such as the performance of the life fund in which the premiums are invested.

Balanced cover plans aim to keep the original premium level for however long the policy runs for. However, premiums still might rise if the fund doesn’t perform as well as anticipated, or if charges go up.

How much does whole of life cover cost? The premium rate depends on a number of factors: your age, how much cover you want, your sex, whether you’re a smoker, and your state of health at outset. However, because whole of life cover is guaranteed to pay out eventually, it will tend to be more expensive than term cover which might not pay out anything.

You can bolt on some extras to increase your security. One of these is critical illness cover. While life assurance only pays out on your death, critical illness plans pay their sum assured following diagnosis of a specified serious illness; and the money can be used however you want. Waiver of premium might also be worth considering: this will pay your premiums for you for a set period if you’re unable to work due to illness or accident.

As always, it’s worth discussing your circumstances with a trained and qualified financial adviser to make sure you buy the plan that best suits your needs.

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Understanding Active vs Passive investment strategies

Wednesday, January 29th, 2020

The debate about whether a passive or an active investment strategy produces a better return for investors is one that has rumbled amongst financial planners for as long as passive strategies have been in existence. For you as a client, the method favoured by your adviser can have a major impact on your investment experience, so understanding the two different approaches is important.

An active strategy is one in which the investor – possibly a fund manager or other investment professional – will make investment choices on a regular basis, buying or selling holdings when they think it is necessary, often when they believe they can make a peak profit. An active strategy is highly involved and requires constant management.

A passive strategy meanwhile is one which requires hardly any trading whatsoever. Instead, money is invested into funds linked to indexes, such as the FTSE 100, by way of just one of many possible examples. Relying on the market to make your gain, passive investing is typically seen as a longer term strategy and, although it may sound easier than active from a management point of view, there is still a lot to do in terms of selecting the right funds and creating a well-balanced portfolio of asset classes that meet client’s needs.

On the active side, proponents claim that such a strategy is the only way to generate better-than-average returns; the only way to ‘beat the market’. After all, passive strategies, though divested across indexes and asset classes, are by their very design market-linked. If the index your passive strategy invests in goes up, so will your investments, with the negative being true if the index falls. Your investment may never outperform the market but it will also never lose more than the market as a whole.

Passive proponents, meanwhile, point out that active investment strategies typically cost more in fees, with these fees potentially impacting on the ability of the strategy to produce a better return. Those who favour passive investments also point out the increased volatility of active strategies, stemming from the higher frequency of investment movements and the timing of those movements, which also produce the potential for market-beating gains.

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Why Business Owners Fail to Plan their Retirement

Wednesday, January 29th, 2020

Company directors and owners of SMEs make plans and do forecasts all the time. Cash flow forecasts, SWOT analyses, plans for renewals and refurbishment; there’s hardly a day when they’re not eyeball to eyeball with a spreadsheet.

So why do so many of them fail to plan their own retirements properly? In our experience company directors and owners of SMEs are so wrapped up running their business that they often forget their own financial planning – or simply don’t see it as a priority. There is clearly a need for more directors to plan properly: why do so many of them fail to do so?

Over the years we’ve probably been given half a dozen answers when we’ve asked that question. As you’ll see, none of them really hold water…

“I haven’t got time.” The simple fact is that no one ever has time. And yet planning your retirement is one of the most important jobs you’ll ever do. As the old saying goes, a director or owner of a small business will either walk out of his business or be carried out of it. Assuming your preferred course of action is the former, then there needs to be enough money waiting when you do eventually walk out – and the only way you can make sure of that is to plan for it.

“It’s too early/too late.” It’s not too early if you’re in your twenties or thirties and it isn’t too late if you’re in your fifties or sixties. We know that in your twenties and thirties you’re working all the hours in the day to build your business: but trust me, you will get older – rather more quickly than you think. And yes, of course it’s easier to achieve savings targets if you have more time but the simple fact is that there is need for financial planning at all ages, as personal circumstances and financial planning goals are always changing.

“I’m going to keep working.” There seems to be a trend amongst some business owners and directors at the moment to declare that they’ll never stop working, that nothing is as satisfying as working so why would you ever want to stop? Unfortunately your health, your family and your competitors may eventually play a part in this decision. In our experience, there comes a time for every entrepreneur and director when ‘enough is enough’ and when that time comes it needs to have been planned for.

“It’s boring/not worth it.” In some ways this is one of the easiest objections to understand. Many directors and entrepreneurs – especially younger ones – have seen their own parents dutifully save for retirement and then not be very well off when they do finish work. Unfortunately, everyone now working faces a very simple fact: the population is getting older and the Government simply won’t be able to fund the retirement you want.

“The numbers are too big/too frightening.” Sadly, this is a reflection of proper financial planning. If we’re going to plan for the retirement you really want then the numbers will be big – and they will be challenging. But there is no point in us preparing a financial plan which provides less than you want – and it’s surprising what can be achieved if you save consistently and keep your savings and investments under regular review.

“My business is my pension.” Despite the fact that virtually no businesses are sold at exactly the right time for exactly the right amount of money, many directors and business owners still say this. Of course the answer is to build your business but you also need to build cash outside your business as well. That’s what gives you choice and control and, ultimately, that’s what allows you to dictate the timing and the quality of your retirement.

We’re always happy to talk about a client’s retirement planning. Directors and business owners can plan for their retirement very tax efficiently – and they enjoy flexibility which certainly isn’t available to normal employees. It makes sense to explore the options: we promise you that it isn’t too late and we’ll do our best not to be boring!

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The election result and your finances.

Wednesday, January 22nd, 2020

With the Conservative’s having won their largest majority since 1987, we thought now would be a good time to reflect on some of the pledges made during the election campaign. How will the promised reforms affect you and your finances? 

Increase of the National Insurance threshold

The NIC threshold is set to rise from £8,632 to £9,500, which will lead to savings of around £100 a year for the 31 million workers who earn above that amount. Over the long term, the Conservatives have set an ambitious £12,500 threshold which would result in a tax reduction of £500 for those who earn over that figure.  

State pension triple lock

The state pension lock is set to be maintained, which is unsurprising, particularly after Theresa May’s plans to change the system cost her voters back in 2017. Currently, under the triple lock the state pension increases year on year, in line with whichever is the highest of these three measurements: the average earnings increase, the rate of inflation or 2.5%.

Further pension pledges

The government has pledged to address a separate pension anomaly which can result in people earning under £12,500 to be denied pension tax relief, if their provider uses the ‘net pay arrangement’ approach as opposed to the ’relief at source’ method. 

The government has also mentioned that it will address the ‘taper tax’ issue that is causing many senior NHS medical professionals to turn down work and overtime, rather than risk a retrospective pension tax charge. 

Steve Webb, director of policy at Royal London, raises the concern that there is a “lack of detail” in the suggested reforms, mentioning that “the measure proposed is far too narrow and may not even work. The tapered allowance affects far more people than senior NHS clinicians and creates complexity and uncertainty in the tax system.”

More will be revealed, no doubt, when Sajid Javid delivers his budget on 11 March.  

Income tax

When he was battling for leadership of the Conservatives, Boris Johnson promised to reduce Britain’s tax burden, making the bold statement that he would raise the threshold for the 40% higher-rate income tax band from £50,000 to £80,000. This would have resulted in serious tax savings for the top 10% of earners. It appears, however, that the plan has been shelved, at least for now. 

Rest assured, we’ll keep our ears to the ground and will update you of any significant policy changes in the budget that might affect your finances. In the meantime, if you have any queries, please don’t hesitate to get in touch.

Posted in Commentary, Investments, Pensions, Tax planning | Comments Off on The election result and your finances.

What does the governor of the Bank of England do?

Wednesday, January 15th, 2020

With the 121st governor of the Bank of England, Andrew Bailey, set to take over on 16th March this year, we wanted to take a look at one of the UK’s oldest institutions and its figurehead. 

What is the Bank of England? 

The Bank of England is the UK’s central bank. It produces all the banknotes used in the UK and houses the UK’s gold reserves (a total of 400,000 bars worth over £200bn).

Founded in 1694 to act as banker to the government, the first ever governor was John Houblon – you may have seen his face on a £50 note between 1994 and 2014. The Bank was owned privately until the end of the Second World War, when it was nationalised by the government. 

How long can you be governor for? 

Officially, a governor has a term time of eight years. However, the 120th governor, Mark Carney, agreed to a five-year term with the option of an additional three years. He then agreed to extend his term twice, staying on longer due to delays caused by Brexit. 

What does the governor do?

The governor will represent the UK in meetings with international bodies such as the G7 or the International Monetary Fund, while also chairing important internal committees such as the Monetary Policy Committee and the Prudential Monetary Fund. In addition to this, he is tasked with overseeing the Bank of England’s three main responsibilities:

  • The Financial system: This is the system that connects people who want to save, invest or borrow money. The Bank of England monitors any risks within the system and tries to mitigate them – such as loaning to banks when necessary. It shares this responsibility with the Treasury and the Financial Conduct Authority.  
  • Individual banks: The Bank of England ensures that individual banks, insurers and building societies are of a suitable standard and are being run well.  
  • Inflation: The Bank of England tries to keep the cost of living as stable as possible by setting monthly interest rates and making sure that prices rise within the current target of 2% per year.

Have you got what it takes? 

When Philip Hammond first put up the job advertisement for the role of governor in 2019, the description said that the successful candidate should have experience of being at the helm of a large financial organisation, good communication skills and “acute political sensitivity and awareness”.  If that sounds like you, in eight years time there may be a £495,000 a year job opportunity for you. 

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Ready for the end of the tax year?

Wednesday, January 15th, 2020

The tax year will end on April 5th. Are you confident that you have made appropriate preparations and maximised your tax allowances?

Here are some of the allowances that you should consider: 

The Marriage Allowance

You can transfer £1,250 of your Personal Allowance to your spouse or civil partner if they earn more than you and pay tax at the basic rate. This could yield a potential tax saving of £250. You need to make sure that you have income within your Personal Allowance of £12,500. An application to HMRC needs to be made for this allowance. It’s also worth noting that you can backdate your claim to include any tax year since April 5th 2015. 

Enterprise Investment Scheme, SEIS and VCT

Investments made with the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) during the current tax year can be carried back for relief for the 2018/2019 tax year, potentially providing both income tax relief and capital gains tax deferral relief. However, rules differ between the two so be sure to check with each provider. 

For the EIS, you can obtain 30% income tax relief on the amount allocated for shares in EIS qualifying companies, from a minimum of £500 up to a maximum of £2,000,000. For Venture Capital Trusts (VCT), you receive 30% of tax relief on investments up to £200,000. For SEIS qualifying companies, you can receive 50% income tax relief on up to £100,000 per year.  

The Tapered Annual Allowance

For higher income earners, the tapered annual allowance will apply. For every £2 of adjusted income, including employer pension contributions, as well as income over £150,000, your annual allowance is reduced by £1. The Government has a comprehensive guide for working out whether your income will have the allowance applied. You may only be able to assess this accurately as you get closer to April 5th. If you can assess the figures accurately in time to make a pension contribution, then ensure you do so. If not, as soon as the most accurate figures become available, you can take steps to make up any shortfall by carrying it forward to the next year.

The Money Purchase Annual Allowance

You can get tax relief on pension contributions of up to £40,000 per year or 100% of your taxable salary. However, if you have already started drawing income from a defined contribution pension scheme, the amount you can pay into a pension without suffering a tax charge reduces. 

The allowance for the 2019/2020 tax year remains unchanged from last year at £4,000 and applies if you have taken any taxed income from a money purchase or defined contribution pension. This extends to personal pensions, SIPPs and workplace pensions.

Expenses

If you’re an employee, you may be able to claim for expenses not reimbursed by your employer, such as travel mileage (not including home to work), the cost of buying small essential items or equipment needed to do your job, such as tools or professional subscriptions. 

If your employer reimburses you at a rate lower than the current standard mileage rate of 45p per mile for the first 10,000 miles and 25p per mile thereafter, you can claim the difference back in your tax return. 

Taking the time now to make sure you’re maximising your allowances can yield notable tax savings at the end of the tax year on April 5th. If you require any help with your tax planning, don’t hesitate to get in contact with us and we will make sure that you’re on the right track. 

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Allowances to use before the end of the tax year

Thursday, January 2nd, 2020

The tax year will be coming to an end on 5th April. With that deadline in mind, we wanted to remind our clients of all the allowances available to you during the tax year. It’s important to make sure you’re maximising your allowances in all areas so that you mitigate the impact of tax. Listed below are a few allowances you should be considering: 

ISA Allowance

With a cash ISA or a stocks and shares ISA (or a combination of the two), you can save or invest up to £20,000 each year per person, meaning that a married couple can invest up to £40,000 between the two of them. 

Top up your pension contributions

You should make sure you check your pension contributions at least once per tax year as they can be a great way to manage your tax liabilities. For the high earners among you, however, it’s important to keep the lifetime pension allowance in mind. The current lifetime allowance is set at £1,055,000. Remember that contributions causing you to exceed the allowance are taxable. 

For those of you who aren’t nearing the limit, upping your pension contributions can be an effective way to mitigate the impact of tax. If you haven’t managed to make full use of your £40,000 annual allowance, you can carry it forward for up to three years. 

Inheritance Tax

The current tax-free threshold is set at £325,000 for single individuals and £650,000 for married couples. Anything over this amount will be taxed. Inheritance tax is where a little bit of planning can pay dividends in the future. This might be by making full use of your annual gift allowance of £3,000 (£6,000 for married couples), putting assets into trust or re-writing your will. 

Capital Gains Tax

Capital gains tax is a tax on the profits you make when you sell something, such as a second home or a personal possession worth £6,000 or more, except for your car. The tax-free allowance for the 2019/20 tax year is £12,000 per person so couples can pay no tax on a total of £24,000 of gains. Remember that genuine gifts from a spouse or civil partner do not count towards the allowance. 

Boost your children’s savings

The Junior ISA limit is set at £4,368 for this tax year. Why not take the time to give your children’s savings a boost by making sure they’re at the limit? You may even want to contribute to your grown up children’s Lifetime ISA if they have one, and the government will provide a bonus of 25% of the money invested, up to £1,000 per year. 

Your dividend allowance

If you receive dividends through a Stocks and Shares ISA or you’re a company shareholder or director, you can currently receive £2,000 worth of dividends tax free. 

For more information on how to make sure you’re maximising your tax allowances, feel free to contact us. 

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