Finance

The Bottom Line: Why Shrewd Customers Use An Adviser

 560 315 Jess Easby
By:

By Grant Ellis, Director Ellis Bates Group

Let’s face it – Financial Advisers have a bit of an image problem. In the public’s mind they probably rank alongside bankers, second-hand car dealers and estate agents in the trustworthiness stakes, and every investment fraud and mis-selling scandal that’s gleefully reported by the press does nothing to improve this. Then there’s the thorny issue of fees, and the anecdotal view that Adviser fees are unjustifiably high, and that they’re all simply out to line their own pockets at the customer’s expense.

So, is this image and reputation deserved? Should Financial Advisers be viewed with suspicion or is this all a myth? Let’s take a look at a few facts.

In 2017 the ILC-UK published its report The Value of Financial Advice, which quantified, for the first time, the real value of taking financial advice. The results strongly demonstrate the positive value of financial advice for consumers – both amongst those who are wealthy and those less well-off too.

The report concluded that those who were wealthy and took financial advice accumulated 17% more in liquid financial assets and 16% more in pension wealth than those who hadn’t consulted an Adviser. For those ‘just getting by’ the figures were even more dramatic – 39% more liquid assets and 21% more pension wealth for those who took advice; all more than enough to justify the fees charged by the Adviser.

Alongside demonstrating real value for their customers, evidence from this report also reveals that the experience of taking advice is highly satisfactory – 9 in 10 people were satisfied with the advice received with the vast majority deciding to go with their Adviser’s recommendation.

In December last year ILC-UK issued an updated analysis which not only reinforced their 2017 findings but in addition demonstrated that fostering an ongoing relationship with a Financial Adviser leads to even better financial outcomes. For example, those who reported receiving advice at both time points in ILC’s analysis had nearly 50% higher average pension wealth than those only advised at the start.

So, given this independent assessment, it begs the question why Advisers have such a poor image, and since advice has clear benefits for customers, why more people don’t seek it? The ILC-UK report sheds some light on this too.

The two most powerful driving forces of whether people sought advice were whether the individual trusts the Adviser providing the advice and that individual’s level of financial capability. Clearly therefore the more Advisers can demonstrate trustworthiness, the more likely they are to attract customers.

There are a number of ways you can assess an Adviser’s credentials – checking they are actually on the FCA register and how long they have been in business is a good starting point. The most effective check however is to ask their customers. Get the prospective Adviser to give you testimonials from satisfied customers along with the number and scoring of verified reviews they’ve had from clients.  At Ellis Bates Financial Advisers we encourage all our customers to leave a review of the service they have received with an independent review company. Check out the following link for more information https://www.ellisbates.com/reviews/

The International Longevity Centre UK (ILC) is the UK’s specialist think tank on the impact of longevity on society. The ILC was established in 1997, as one of the founder members of the International Longevity Centre Global Alliance, an international network on longevity.

Ellis Bates Financial Advisers are independent financial advisers with offices across the United Kingdom. They specialise in active investment management of over £1 billion of assets on behalf of clients, who have given them a 4.9/5.00 score with Trustist. https://www.ellisbates.com/reviews/

For more information please visit their website www.ellisbates.com

Find Your Local Adviser

The Big ‘Lies’ About Our Economic Prospects

 560 315 Jess Easby
By:

By Grant Ellis, Director Ellis Bates Group

In the spring of 2007 I hosted a conference for a group of insurance professionals. One of the most popular speakers was my old friend the economist Roger Martin-Fagg. He was his usual entertaining self, but took everyone by surprise by suggesting that the world economy was on the brink of a meltdown the like of which we had never seen before, and it was going to happen soon – probably within 12 months. Yes, he predicted the financial crash of 2008 a year before it actually happened.

Now in Spring 2007 the world economy was doing very nicely thank you. Following three consecutive years of good growth, averaging 3.8% it was expected to fall only slightly in 2007 to 3.6%. Meanwhile the UK was doing pretty well too. House prices had risen from an average of £150,633 in January 2005 to £184,330 in May 2007 – a rise of 22.4%, whilst wages grew by an average of over 5% per annum between 2004 and 2007. Inflation on the other hand was under control and only rose by an average of 3.25% in the same period. Furthermore, between 2003 and 2007 the FTSE All Share Index grew by 49%, so overall everyone was feeling pretty optimistic about the prospects for the future. No one, other than Roger was saying anything about a recession, never mind a full blown crash!

So, when Roger issued his dire warning, the overwhelming response was to laugh it off – in the same way that we would laugh at a soothsayer predicting the end of the world. Eccentric yes, and likely to happen eventually, just not anytime soon.

You can imagine that those of us who were there in 2007 are far less likely to write off Roger’s opinions now than we would have done previously.

I was therefore pleasantly surprised, and heartened to receive his latest Economic update, penned on 16 June. Once again he is at odds with the mainstream view, and indeed is critical of others talking world economic prospects down. He opens his piece by saying that the press is being irresponsible in the way it is reporting our economic outlook. His opening paragraph reads:

“Last weekend the Daily Telegraph had a banner headline: ‘Britain’s biggest ever collapse in GDP wipes out 18 years of growth’. This statement is completely wrong. I am concerned that individuals who are trying to make the right judgement call are being fed this nonsense. To be clear: 18 years ago our GDP was £1 trillion. It is now £2.2 trillion. The reduction in spending in April was 20% on the previous April. The monthly flow of spending averages £200bn. 20% of that is £40bn. The media, as we know, impact emotion and decision taking. That Telegraph article is therefore both economically illiterate and irresponsible.”

Wow! Hard hitting stuff. And the perpetuation of such comments is still evident a week later. In the Sunday Times on 21 June Sajid Javid is quoted as saying:

“We’ve seen a 25% fall in GDP in two months. To put that in some perspective, that is 18 years of growth wiped out in two months.”

And that’s from our erstwhile Chancellor of the Exchequer, who should be anything but economically illiterate!

In his update Roger goes on to suggest that, despite what the world and his wife are saying, we are not going to have a recession. Indeed, whilst he acknowledges that quarter 2 of 2020 will be significantly negative, he expects quarter 3 to be significantly positive, and predicts that the UK economy could grow by 8.5% in 2021, with the World economy back to 2.5% growth next year too.

His argument is that the fundamentals for a recession don’t exist in the same way as they did for previous recessions; rising prices and interest rates squeezing individuals and companies alike in 1979 and 1989, and banks stopping lending in 2008.  The common factor is a shortage of money available, and that’s not the case this time around. Households have seen a reduction in income, but a larger fall in what they’ve spent, and the UK Government is spending an extra £40bn a month pumping new money into the system, so no shortage here. Roger predicts a mini boom to take off in the next few months as a result of this excess cash in the system, with the only thing that could dampen it being the media reporting company closures, an increase in the R well above 1, and stories of mass redundancies.

I don’t propose to reproduce all Roger’s arguments here – you can read the whole article at https://www.ellisbates.com/news/june-2020-economic-update/ to get the complete picture, but I would say his reasoning and logic are very persuasive. And I for one would not bet against him. I also fully endorse his condemnation of sensationalist reporting in the media. They have to take more responsibility for the message they send out as, rightly or wrongly, people do listen to them. A more evenhanded and less melodramatic approach to reporting would benefit us all. After all, we all know the power of ‘fake news’ by now, don’t we?

Ellis Bates Financial Advisers are Independent Financial Advisers with offices across the United Kingdom. They manage over £1 billion of assets on behalf of clients, who have given them a 4.9/5.00 score with Trustist. https://www.ellisbates.com/reviews/

Sources:
World Economic Situation and Prospects 2007 (United Nations publication, Sales No. E.07.II.C.2), released in January 2007 accessed on 21 June 2020
Office of National Statistics UK House Price Index, accessed on 21 June 2020
Office of National Statistics Wages and Salaries average growth rate percentage, accessed on 21 June 2020
Office of National Statistics RPI All Items: Percentage change over 12 months, accessed on 21 June 2020
Swanlowpark.co.uk FTSE 100 and FTSE All-Share since 1985, accessed, on 21 June 2020

Find Your Local Adviser

Lifestyle Protection

 560 315 Jess Easby
By:

One in five self-employed and contract workers unable to survive a week without work. The world of work has changed enormously over the past 20 years. Being self-employed, freelance or working on a contract basis has become the norm for all sorts of professions. Although it has many benefits, working for yourself means that the responsibility for providing a financial safety net shifts from the employer to the individual. New research has highlighted the precarious nature of self-employed people’s finances.

Financial Support

A survey[1] of the financial health of self-employed, part-time and contract workers reveals that if an accident or illness prevented them from working, more than one in ten (11%) wouldn’t be able to last any time without using long-term savings, while 30% would run out of money in less than a month. And 48% said they couldn’t turn to friends or family for financial support, while one in ten said they would be forced to turn to credit cards or payday loans.

Figures from the Office for National Statistics (ONS) show that the number of self-employed workers in the UK increased from 3.3 million in 2001 to nearly 5 million in 2019[2]. While a quarter (25%) of those surveyed said they would seek help from the state, benefits provide little or no support for this group.

Income Protection

Some self-employed people wrongly believe they would not be eligible for income protection if they fell ill and couldn’t work. However, Statutory Sick Pay isn’t available to self-employed workers, and for those workers that are eligible, the maximum that can be claimed is just £94.25 a week versus the average outgoing of £262.83[3] a week for self-employed or contract workers.

More than half (55%) have no life insurance, private medical insurance, critical illness cover or income protection should they find themselves unable to work due to illness or injury.

More Time off Work

Nearly half of those surveyed (45%) worry that sickness will prevent them working. They also worry about consistency of earnings (37%), and over a third (35%) of those workers who took time off for illness or injury last year returned to work before they felt they had fully recovered. Half (50%) of these said they did so because they couldn’t afford to take any more time off work.

People in full-time employment commonly receive sick pay and life insurance through their employer, but self-employed people need to provide it for themselves. Although many self-employed people and contractors worry about the consequences of an accident or illness preventing them from working, too few are taking steps to protect themselves from any loss of earnings if they are unable to work.

Do you have a financial safety net in place?

Many self-employed people consider income protection insurance and critical illness cover in case they get too sick or injured to work, or suffer from a serious illness. Life insurance is also common for people who have dependents, such as a partner or children. If you have any concerns or want to review your protection requirements, please contact us.

Source data:

[1] Research among 1,033 UK self-employed, part-time, contract and gig economy workers between 1 October and 7 October 2019, conducted by Opinium on behalf of LV=.
 [2] EMP14: Employees and self-employed by industry.
 [3] Average monthly outgoings of £1,182.76 recorded from 1,033 UK self-employed, part-time, contract and gig economy workers between 1 October and 7 October 2019, conducted by Opinium on behalf of LV=.

Find Your Local Adviser

Wealth transfer and the next generation

 560 315 Jess Easby
By:

How to secure your family’s financial future.

We spend a lifetime generating wealth and assets but not many of us ensure that it will be passed to the next generation – our children, grandchildren, nieces, nephews, and so on. Intergenerational wealth transfer is the passage of wealth from one family generation to the next.

It’s becoming increasingly important for more people to consider succession planning and intergenerational wealth transfer as part of their financial planning strategy. As the baby boomer generation reaches retirement age, we’re on the brink of a vast shift in assets, unlike any that we have seen before.

Wealth transfers

By 2027, it is expected that wealth transfers will nearly double from the current level of £69 billion, to £115 billion[1], coined as ‘the Great Wealth Transfer’ of the 21st century.

Intergenerational wealth transfer can be a huge issue for all family members concerned. If done well and executed properly, it can make a real difference to the financial position of the recipients. If misjudged or poorly handled, it can cause enormous issues, conflicts and resentments that are never forgotten nor forgiven.

Financial implications

One aspect that hasn’t been widely considered is the impact on other family members, and in particular children, as their parents think about selling their business or retiring from their career, perhaps selling their family home, and starting life in retirement.

It is important that children are prepared to deal with this process, not least so they are aware of the financial implications and how they may be affected. For instance, children may be expecting to receive a certain amount of money from their parents – particularly those who are selling a business – and end up disappointed. Conversely, they may not be expecting to receive anything, and are therefore not equipped to deal with a windfall.

Contributory factors

According to the King’s Court Trust, £5.5 trillion will move hands in the United Kingdom between now and 2055, with this move set to peak in 2035[2]. Why? Well, there are a number of contributory factors that account for this. The two main reasons are increased net worth and rising mortality rates.

For those approaching, or in, retirement, it’s important to have frank and open conversations with children about expectations and also whether children have the knowledge and understanding to manage financial matters.

Approaching retirement

This is not an easy exercise, as you may not want to discuss your financial affairs with your children. You may find your children’s eyes are opened when they see what their parents have been able to achieve financially. They may even want to know how they can do that themselves and change their own habits.

Everyone works hard to provide for their family, and perhaps even leave them a legacy. However, parents approaching retirement shouldn’t feel that their family is solely reliant on them, or that they need to be responsible for their children’s financial situation.

Expressing wishes

A good approach is to help your children establish their own strong financial footing and be ready for intergenerational wealth transfer. For instance, introducing them to your professional advisers can provide comfort that there is someone they can go to for advice.

Having open conversations with your children and expressing wishes and goals will also ensure that your family are all on the same page, which can help reduce potential conflict later when managing intergenerational wealth transfer. These are some questions you should answer as part of your intergenerational wealth transfer plans:

  • When did wealth enter my life and how do I think this timing influences my values and family relationships?
  • What impact does affluence have on my life and the lives of my next generation?
  • What was the key to my success in creating wealth and how might telling this story to my future generation be helpful?
  • What is my biggest concern in raising my children or grandchildren with affluence?
  • What conversations (if any) did I have with my own parents about money and wealth growing up?
  • How did my parents prepare me to receive wealth?
  • What lessons did I learn from my parents about money and finance that I would like to pass on to my heirs?
  • What family values would I like to pass down to the next generation and how do I plan on communicating this family legacy?
  • What concerns do I have about my adult children when it comes to inheriting and managing the family wealth?
  • How can I help prepare my beneficiaries to receive wealth and carry on our family legacy?

Between generations

Despite the vast amount of wealth likely to be passed down between generations, those in line for inheritance could end up being over-reliant on their expected windfall. The key will be to ensure younger generations are able to get involved and understand how to handle the wealth they will be inheriting, as well as being able to make good decisions about the wealth that they generate themselves.

You need to consider who will receive what and whether you want to pass your wealth during your lifetime or on death. These decisions then need to be balanced by the tax implications of any proposed planning. This is especially important at what can be a highly stressful time. By making advanced preparations, the burden of filing complicated Inheritance Tax returns can be reduced. It’s worth noting that UK Inheritance Tax receipts exceed £3bn from 17,900 estates[3].

Source data:
 [1] Kings Court trust, ‘Passing on the Pounds – The rise of the UK’s inheritance economy’.
[2] Resolution Foundation, Intergenerational Commission. ‘The Million dollar be-question’.
[3] Prudential 2019.

Find Your Local Adviser

Estate Protection

 560 315 Jess Easby
By:

Preserving your wealth and transferring it effectively.

Estate planning is an important part of wealth management, no matter how much wealth you have built up. It’s the process of making a plan for how your assets will be distributed upon your death or incapacitation.

As a nation, we are reluctant to talk about inheritance. Through estate planning, however, you can ensure your assets are given to the people and organisations you care about, and you can also take steps to minimise the impact of taxes and other costs on your estate.

In order to establish the value of your estate, it is first necessary to calculate the total worth of all your assets. No matter how large or how modest, your estate is comprised of everything you own, including your home, cars, other properties, savings and investments, life insurance (if not written in an appropriate trust), furniture, jewellery, works of art, and any other personal possessions.

Having an effective estate plan in place will not only help to ensure that those you care about the most will be taken care of when you’re no longer around, but it can also help minimise Inheritance Tax (IHT) liabilities and ensure that assets are transferred in an orderly manner.

Write a Will

The reason to make a Will is to control how your estate is divided – but it isn’t just about money. Your Will is also the document in which you appoint guardians to look after your children or your dependents. Almost half (44%) of over-55s have not made a Will[1], and as such, they will not have any say in what happens to their assets when they die.

Should you die without a valid Will, you will have died intestate. In these cases, your assets are distributed according to the Intestacy Rules in a set order laid down by law. This order may not reflect your wishes.

Even for those who are married or in a registered civil partnership, dying without leaving a Will may mean that your spouse or registered civil partner does not inherit the whole of your estate. Remember: life and circumstances change over time, and your Will should reflect those changes – so keep it updated.

Make a Lasting Power of Attorney

Increasingly, more people in the UK are using legal instruments that ensure their affairs are looked after when they become incapable of looking after their finances or making decisions about their health and welfare.

By arranging a Lasting Power of Attorney, you are officially naming someone to have the power to take care of your property, your financial affairs, and your health and welfare if you suffer an incapacitating illness or injury.

Plan for Inheritance Tax

IHT is calculated based on the value of the property, money and possessions of someone who has died if the total value of their assets exceeds £325,000, or £650,000 if they’re married or widowed. If you plan ahead, it is usually possible to pass on more of your wealth to your chosen beneficiaries and to pay less IHT.

Since April 2017, an additional main residence nil-rate band allowance was phased in. It is currently worth £150,000, but it will rise to £175,000 per person by April this year. However, not everyone will be able to benefit from the new allowance, as you can only use it if you are passing your home to your children, grandchildren or any other lineal descendant. If you don’t have any direct descendants, you won’t qualify for the allowance.

The headline rate of IHT is 40%, though there are various exemptions, allowances and reliefs that mean that the effective rate paid on estates is usually lower. Those leaving some of their estate to registered charities can qualify for a reduced headline rate of 36% on the part of the estate they leave to family and friends.

Gift Assets while you’re Alive

One thing that’s important to remember when developing an estate plan is that the process isn’t just about passing on your assets when you die. It’s also about analysing your finances now and potentially making the most of your assets while you are still alive. By gifting assets to younger generations while you’re still around, you could enjoy seeing the assets put to good use, while simultaneously reducing your IHT bill.

Make use of Gift Allowances

One way to pass on wealth tax-efficiently is to take advantage of gift allowances that are in place. Every person is allowed to make an IHT-free gift of up to £3,000 in any tax year, and this allowance can be carried forward one year if you don’t use up all your allowance.

This means you and your partner could gift your children or grandchildren £6,000 this year (or £12,000 if your previous year’s allowances weren’t used up) and that gift won’t incur IHT. You can continue to make this gift annually.

You are able to make small gifts of up to £250 per year to anyone you like. There is no limit to the number of recipients in one tax year, and these small gifts will also be IHT-free provided you have made no other gifts to that person during the tax year.

A Potentially Exempt Transfer (PET) enables you to make gifts of unlimited value which will become exempt from Inheritance Tax if you survive for a period of seven years.

Gifts that are made out of surplus income can also be free of IHT, as long as detailed records are maintained.

IHT-Exempt Assets

There are a number of specialist asset classes that are exempt to IHT. Several of these exemptions stem from government efforts over the years to protect farms and businesses from large Inheritance Tax bills that could result in assets having to be sold off when they were passed down to the next generation. Business relief (BR) acts to protect business owners from IHT on their business assets. It extends to include the ownership of shares in any unlisted company. It also offers partial relief for those who own majority rights in listed companies, land, buildings or business machinery, or have such assets held in a trust.

Life Insurance within a Trust

A life insurance policy in trust is a legal arrangement that keeps a life insurance pay-out separate from the valuation of your estate after you die. By ring-fencing the proceeds from a life insurance policy by putting it in an appropriate trust, you could protect it from IHT. The proceeds of a trust are typically overseen by a trustee(s) whom you appoint. These proceeds go to the people you’ve chosen, known as your ‘beneficiaries’. It’s the responsibility of the trustee(s) to make sure the money you’ve set aside goes to whom you want it to after you pass away.

Keep Wealth within a Pension

When you die, your pension funds may be inherited by your loved ones. But who inherits, and how much, is governed by complex rules. Money left in your pensions can be passed on to anyone you choose more tax-efficiently than ever, depending on the type of pension you have, by you nominating to whom you would like to leave your pension savings (your Will won’t do this for you) and your age when you die, before or after the age of 75.

Your pension is normally free of IHT, unlike many other investments. It is not part of your taxable estate. Keeping your pension wealth within your pension fund and passing it down to future generations can be very tax-efficient estate planning.

It combines IHT-free investment returns and potentially, for some beneficiaries, tax-free withdrawals. Remember that any money you take out of your pension becomes part of your estate and could be subject to IHT. This includes any of your tax-free cash allowance which you might not have spent. Also, older style pensions may be inside your estate for IHT.

Make Sure Wealth Stays in the Right Hands

Estate planning is a complex area that is subject to regular regulatory change. Whatever you wish for your wealth, we can tailor a plan that reflects your priorities and particular circumstances. To find out more, or if you have any questions relating to estate planning, don’t hesitate to contact us.

Source data: [1] Brewin Dolphin research: Opinium surveyed 5,000 UK adults online between 30 August and 5 September 2018.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from. Taxation are subject to change. The rules around trusts are complicated, so you should always obtain professional advice. The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.

Find Your Local Adviser

Why Silence Isn’t Necessarily Bliss

 560 315 Jess Easby
By:

Over six million adults refuse to discuss their will with loved ones. Making a Will is very important if you care what happens to your money and your belongings after you die, and most of us do. But have you tried to talk with your children about your Will? If that conversation isn’t happening, you’re not alone.

And it’s not only parents who are uncomfortable. Adult children may also be nervous about raising the topic of their parents’ finances for fear they appear greedy or nosy. Understandably, talking about dying can be seen as ‘taboo’ and it is not always easy to bring it up. However, discussing your Will with beneficiaries means they are better prepared when the time comes. However, worryingly, almost six and half million adults refuse to discuss their Will with loved ones according to new research[1]. A quarter (26%) of people with a Will say they will not discuss it as they do not want to think about dying, and one in four (27%) do not want to upset beneficiaries by discussing the contents of their Will[2]. It is also hugely important for family members to be aware of vital decisions in your Will, such as who will look after your children. By overcoming ‘death anxiety,’ the natural fear of talking about death and the emotions associated with it, these important conversations can ensure your beneficiaries are aware of your wishes and understand them. Nearly half (45%) of UK parents, the research identified, with adult children believe their Will is ‘no one’s business’ but their own or a partner’s. But sharing the contents of a Will makes the financial and practical consequences of death easier for those left behind. Losing someone can have a huge impact on finances for months or even years to come, so it is crucial for families to be prepared.

‘When I’m gone’ conversation with your partner or family

Avoid talking to someone when they’re busy. Look for opportunities to broach the subject, such as when you’re discussing the future or perhaps following the death of someone close to you

  • Consider beginning the conversation with a question such as, ‘Have you ever wondered what would happen…?’; ‘Do you think we should talk about…?’
  • Think about how you would manage financially should the worst happen. What impact would losing a partner or family member have on your household income and your expenses? Be aware that your financial situation may change in the future
  • Make sure you know where all important documents such as Wills, bank details, insurance policies, etc. are kept, so that you have all the information you might need
  • Prepare in advance – would you know how to manage the day-to-day finances? If not, consider how you could start to learn about them now so this doesn’t come as a shock

In the event of an illness, loss of capacity or death – are your plans in place?

Many of us will eventually reach a point in our lives when we require specialist assistance to ensure that our family will be able to cope better and manage their affairs in the event of an illness, loss of capacity or death. If you would like to review your particular situation, contact us to arrange an appointment.

Source data: [1] Royal London – six million figure is based on ONS adult population stats of 52.8million. Our research shows 47% of UK adults have a Will – 26% of this figure equates to 6,458,535.05 [2] Opinium on behalf of Royal London surveyed 2,006 adults between 26 and 29 October 2018. The survey was carried out online. The figures have been weighted and are representative of all GB adults (aged 18+).

Find Your Local Adviser

Tax-wise

 560 315 Jess Easby
By:

Make the most of your valuable allowances, reliefs and exemptions

Once we enter January, the end of the 2019/20 tax year will be just over three months away on 5 April. As this date approaches, the window of opportunity reduces if you want to make the most of valuable allowances, reliefs and exemptions that could help reduce your tax bill and make sure your finances stay tax-efficient.

Some of these allowances will be lost forever if they are not used before the tax year end – and the sooner you claim them the better. Every year, some people leave end-of-year tax planning until the last minute. But leaving planning until the eleventh hour increases the risk that you will discover you have left it too late and missed out on the chance to improve your financial position.

Acting well before the tax year end means you can also be sure that you are maximising your opportunities and minimising your stress. The list we’ve provided below isn’t exhaustive, but it highlights some of the main areas to consider if appropriate to your particular situation. If you would like to discuss your own financial position, please contact us.

Income Tax

Consider making use of lower-rate tax bands. It’s important to review the tax implications of transferring income-producing assets and taking note of anti-avoidance and settlements legislation.

The way you receive an income, and the rates and allowances that apply, should be at the front of your mind. How much you pay depends on where you live in the UK, with Scotland and Wales in receipt of devolved powers to set their own Income Tax bands on top of the personal allowance.

The annual dividend allowance remains at £2,000 for 2019/20 after reducing from £5,000 this time last year. With the new personal allowance of £12,500 added to the frozen dividend allowance, the maximum tax-free income you can receive through dividends is £14,500 in 2019/20.

Some smaller amounts of income are tax-free up to annual limits. Under the Government’s renta-room scheme, you can continue to earn taxfree income of up to £7,500 a year from letting out a furnished room in your home.

Individual Savings Account (ISA) Allowance

With a Cash ISA or a Stocks & Shares ISA (or a combination of the two), you can save or invest up to £20,000 a year tax-efficiently.

If you are in a position to, it makes sense for you and your spouse to take advantage of each other’s ISA allowance, particularly if one of you has more financial resources than the other. That way, combined, you can save (in the case of Cash ISAs) or invest (in the case of Stocks & Shares ISAs) up to £40,000 tax-efficiently in 2019/20.

Currently, 16 and 17-year-olds actually get two ISA allowances, as they’re able to open a Junior ISA (which for 2019/20 has a limit of £4,368) and an adult Cash ISA. This means that you can put away up to £24,368 in your child’s name tax efficiently this tax year.

People aged 18–39 can open a Lifetime ISA, which entitles them to save up to £4,000 a year until they’re 50. The Government will top up the savings by 25%, up to a maximum of
£1,000 a year.

Pension Contributions

The annual pensions allowance enables you to contribute up to £40,000 in 2019/20. If your adjusted income exceeds £150,000 in 2019/20, your annual allowance will be reduced by £1 for every £2 that exceeds this threshold down to a limit of £10,000.

Any unused pensions annual allowance can be carried forward for three tax years, providing you were a member of a registered pension schemeduring that period. This unused allowance can be added to your 2019/20 annual allowance, giving a maximum pension contribution of £160,000, all of which will attract personal tax relief if you have the required level of relevant earnings.

You can also increase your basic State Pension by paying voluntary Class 3 National Insurance Contributions (NICs).

Consider contributing up to £2,880 towards a pension for your non-earning spouse or children. Tax relief is added to your contribution, so if you contribute £2,880, a total of £3,600 a year will be paid into the pension scheme, even if you earn less than this or have no income at all.

You begin to lose your personal allowance once your adjusted net income exceeds £100,000, such that the allowance reduces to £0 when adjusted net income reaches £125,000.

Inheritance Tax

You can act at any time to help reduce a potential Inheritance Tax (IHT) bill when you’re no longer around.

Gifts of up to £3,000 per year can be made on an IHT-free basis. The limit increases to £6,000 if the previous year’s annual exemption was not used.

A married couple can therefore make IHT exempt gifts totalling £12,000 – if unused, the annual allowance can be carried forward to the next tax year only. This simple technique could save a possible IHT bill of £4,800 in the event of your untimely death.

You should also consider using other annual gifts such as gifts in consideration of marriage or £250 small gifts.

Business Relief (BR) is a valuable IHT relief, with business property potentially receiving up to 100% relief if certain criteria are met. BR is an important part of succession planning, but due to the complexity of the BR rules, the relief may not be due even though you expect to meet the conditions.

It is important to regularly review your BR position to ensure that it continues to apply and that your business activities do not jeopardise your BR position.

Capital Gain Tax Allowance

Capital Gains Tax (CGT) is a tax on the gains and profits you make when you sell something, such as an investment portfolio or second home.

Everyone has an annual allowance of £12,000 (in 2019/20) before CGT applies. Like the ISA allowance, it doesn’t roll over – so if you don’t use it, you’ll lose out. And you may have to pay more CGT in the future.

Also, it’s worth remembering the allowance is for individuals, so couples have a joint allowance for 2019/20 of £24,000. In some situations, it may be appropriate to transfer assets into your joint names so you both stay within your individual allowances. However, this is only effective if the gift is a genuine gift of beneficial ownership, and the transferor does not continue to benefit from the asset following the transfer.

Not every investment portfolio is subject to CGT. If you’re looking for a tax-efficient way to invest, a Stocks & Shares ISA could be for you. Just like any investment, it carries risk – meaning you could lose some or all of your money – but if you do make a profit due to share price increases, you won’t be required to pay CGT on it.

A Bed & ISA will allow you to utilise the current year’s ISA allowance by moving investments from an unwrapped environment to the ISA tax-efficient wrapper. This is achieved by disposing of the unwrapped investment and repurchasing it via an ISA. The disposal of the unwrapped investments may be liable to CGT, but once inside the ISA, the investments are sheltered from CGT in the future.

Don’t lose it, use it

As we make our way towards the end of the tax year, now is the ideal time to review your tax affairs to ensure that you have taken advantage of all the valuable allowances, reliefs and exemptions available to you. To discuss the planning opportunities available to help you, your family and business to reduce your tax bill, please contact us.

Find Your Local Adviser

Considering Inheritance Tax

 150 150 Jess Easby
By:

How do you leave a legacy which serves your family’s best interests?

Will you be one of the thousands of households in Britain that will have to pay Inheritance Tax? What’s the best way to avoid it? If you’re administering an estate because someone has died, how do you obtain probate? Is it ever possible to retrospectively minimise an estate’s tax liabilities?

Inheritance Tax receipts reached a record high of £5.2 billion in the 2017/18 tax year according to figures published by HM Revenue & Customs[1], despite the introduction of a new residence nil-rate band (RNRB).

Families are becoming increasingly complex entities, often shaped by divorces, remarriages and children from previous relationships. This can make estate and trust planning a challenge to navigate if an individual has strong feelings about those they would like to inherit their assets and those they wouldn’t.

If applicable to your situation, effective estate and trust planning could save your family a potential Inheritance Tax bill amounting to hundreds of thousands of pounds. Inheritance Tax planning has become more important
than ever following the Government’s decision to freeze the £325,000 lifetime exemption, with inflation eroding its value every year and subjecting more families to Inheritance Tax.

Reducing the amount of money beneficiaries have to pay

Inheritance Tax is usually payable on death. When a person dies, their assets form their estate. Any part of an estate that is left to a spouse or registered civil partner will be exempt from Inheritance Tax. The exception is if a spouse or registered civil partner is domiciled outside the UK. The maximum a person can give them before Inheritance Tax may need to be paid is £325,000. Unmarried partners, no matter how long-standing, have no automatic rights under the Inheritance Tax rules.

However, there are steps people can take to reduce the amount of money their beneficiaries have to pay if Inheritance Tax affects them. Where a person’s estate is left to someone other than a spouse or registered civil partner (i.e. to a non-exempt beneficiary), Inheritance Tax will be payable on the amount that exceeds the £325,000 nil-rate threshold. The threshold is currently frozen at £325,000 until the tax year 2020/21.

IHT is payable at 40% on the amount exceeding the threshold

Every individual is entitled to a nil-rate band (NRB) – that is, every individual is entitled to leave an amount of their estate up to the value of the nil-rate threshold to a non-exempt beneficiary without incurring Inheritance Tax. If a widow or widower of the deceased spouse has not used their entire NRB, the NRB applicable at the time of death can be increased by the percentage of the NRB unused on the death of the deceased spouse, provided the executors make the necessary elections within two years of your death.

To calculate the total amount of Inheritance Tax payable on a person’s death, gifts made during their lifetime that are not exempt transfers must also be taken into account. Where the total amount of non-exempt gifts made
within seven years of death – plus the value of the element of the estate left to non-exempt beneficiaries – exceeds the nil-rate threshold, Inheritance Tax is payable at 40% on the amount exceeding the threshold.

Certain gifts made could qualify for taper relief

This percentage reduces to 36% if the estate qualifies for a reduced rate as a result of a charity bequest. In some circumstances, Inheritance Tax can also become payable on the lifetime gifts themselves – although gifts made between three and seven years before death could qualify for taper relief, which reduces the amount of Inheritance Tax payable.

From 6 April 2017, an Inheritance Tax RNRB was introduced in addition to the standard NRB. It’s worth up to £150,000 for the 2019/20 tax year and increases to £175,000 for 2020/21. In order to qualify, you must own a property or a share in a property, which you have lived in at some stage and which you leave to your direct descendants (including children, grandchildren or stepchildren). For estates over £2 million, the RNRB is reduced at the rate of £1 for every £2 over £2 million. In addition, it only applies on death and not on gifts or any other lifetime transfers.

Property, land or certain types of shares where IHT is due

It might also apply if the person sold their home or downsized from 8 July 2015 onwards. If spouses or registered civil partners don’t use the RNRB on first death – even if this was before 6 April 2017 – there are transferability
options on the second death. Executors or legal personal representatives typically have six months from the end of the month of death to pay any Inheritance Tax due. The estate can’t pay out to the beneficiaries until this is done. The exception is any property, land or certain types of shares where the Inheritance Tax can be paid in instalments. Beneficiaries then have up to ten years to pay the tax owing, plus interest.

Source data: [1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/ attachment_data/file/730110/Table_12_1.pdf

Find Your Local Adviser

Boosting Investment Returns

 560 315 Jess Easby
By:

Out of adversity comes opportunity

Under new Prime Minister Boris Johnson, the Government has toughened its stance on a no-deal Brexit, which it has said is ‘now a very real prospect’. 23 June marked three years since the UK voted to leave the European Union.

Three years on from the 2016 referendum, and with ongoing political wrangling, the eventual outcome of Brexit is still uncertain. Brexit-related uncertainty and the challenging domestic backdrop mean investors need to be smarter about how they invest, which is why it is essential to obtain professional financial advice. As Benjamin Franklin once said, ‘Out of adversity comes opportunity.’

Reflecting your future capital or income needs

As the uncertainty around Brexit continues, the need for asset allocation has never been more important. This is because most investment returns are explained by asset allocation, which means it matters more about how you divide up your pot than it does whether you pick the best or even worst funds in each of those asset classes.

Uncertainty is a fact of life when it comes to investing and should not be a reason to put off investing. The important thing to remember is to not let your investment decisions be driven by your emotions. This means that your overall asset allocation needs to reflect your future capital or income needs, the timescales before those capital sums are required, the level of income sought, and the amount of risk you can tolerate. Investing is all about risk and return.

Individual attitude towards risk

Not only does asset allocation naturally spread risk, but it can also help you to boost your returns while maintaining, or even lowering, the level of risk of your portfolio. Most rational investors would prefer to maximise their returns, but every investor has their own individual attitude towards risk.

Determining what portion of your portfolio should be invested into each asset class is called ‘asset allocation’ and is the process of dividing your investment/s between different assets. Portfolios can incorporate a wide range of different assets, all of which have their own characteristics like cash, bonds, equities (shares in companies) and property.

Not putting all your eggs in one basket

The idea behind allocating your money between different assets is to spread risk through diversification and to understand these characteristics and their implications on how a portfolio will perform in different conditions – the idea of not putting all your eggs in one basket.

Investments can go down as well as up, and these ups and downs can depend on the assets you’re invested in and how the markets are performing. It’s a natural part of investing. If we could look into the future, there would be
no need to diversify our investments. We could merely choose a date when we needed our money back, then select the investment that would provide the highest return to that date.

Combining a number of different investments

Moreover, the potential returns available from different kinds of investment, and the risks involved, change over time as a result of economic, political and regulatory developments, as well as a host of other factors. Diversification helps to address this uncertainty by combining a number of different investments.

When putting together a portfolio, there are a number of asset classes, or types of investments, that can be combined in different ways. The starting point is cash – and the aim of employing the other asset classes is to achieve a better return than could be achieved by leaving all of the investment on deposit.

Cash

The most common types of cash investments are bank and building society savings accounts and money market funds (investment vehicles that invest in securities such as short-term bonds to enable institutions and larger personal investors to invest cash for the short term).

Money held in the bank is arguably more secure than any of the other asset classes, but it is also likely to provide the poorest return over the long term. Indeed, with inflation currently above the level of interest provided by many accounts, the real value of cash held on deposit is falling.

Your money could be eroded by the effects of inflation and tax. For example, if your account pays 5% but inflation is running at 2%, you are only making 3% in real terms. If your savings are taxed, that return will be reduced even further.

Bonds

Bonds are effectively IOUs issued by governments or companies. In return for your initial investment, the issuer pays a pre-agreed regular return (the ‘coupon’) for a fixed term, at the end of which it agrees to return your initial investment. Depending on the financial strength of the issuer, bonds can be very low or relatively high-risk, and the level of interest paid varies accordingly, with higher-risk issuers needing to offer more attractive coupons to attract investment.

As long as the issuer is still solvent at the time the bond matures, investors get back the initial value of the bond. However, during the life of the bond, its price will fluctuate to take account of a
number of factors, including:

  • Interest rates – as cash is an alternative lower-risk investment, the value of government bonds is particularly affected by changes in interest rates. Rising base rates will tend to lead to lower government bond prices, and vice versa
  • Inflation expectations – the coupons paid by the majority of bonds do not change over time. Therefore, high inflation reduces the real value of future coupon payments, making bonds less attractive and driving their prices lower
  • Credit quality – the ability of the issuer to pay regular coupons and redeem the bonds at maturity is a key consideration for bond investors. Higher-risk bonds such as corporate bonds are susceptible to changes in the perceived creditworthiness of the issuer

Equities

Equities, or shares in companies, are regarded as riskier investments than bonds, but they also tend to produce superior returns over the long term. They are riskier because, in the event of a company getting into financial difficulty, bond holders rank ahead of equity holders when the remaining cash is distributed.

However, their superior long-term returns come from the fact that, unlike a bond which matures at the same price at which it was issued, share prices can rise dramatically as a company grows.

Returns from equities are made up of changes in the share price and, in some cases, dividends paid by the company to its investors. Share prices fluctuate constantly as a result of factors such as:

  • Company profits – by buying shares, you are effectively investing in the future profitability of a company, so the operating outlook for the business is of paramount importance. Higher profits are likely to lead to a higher share price and/or increased dividends, whereas sustained losses could place the dividend or even the long-term viability of the business in jeopardy
  • Economic background – companies perform best in an environment of healthy economic growth, modest inflation and low interest rates. A poor outlook for growth could suggest waning demand for the company’s products or
    services. High inflation could impact companies in the form of increased input prices, although in some cases companies may be able to pass this on to consumers. Rising interest rates could put strain on companies that have borrowed heavily to grow the business
  • Investor sentiment – as higher-risk assets, equities are susceptible to changes in investor sentiment. Deterioration in risk appetite normally sees share prices fall, while a turn to positive sentiment can see equity markets rise sharply

Property

In investment terms, property normally means commercial real estate – offices, warehouses, retail units and the like. Unlike the assets we have mentioned so far, properties are unique – only one fund can own a particular office building or shop. The performance of these assets can sometimes be dominated by changes in capital values. These unusually dramatic moves in capital value illustrate another of property’s key characteristics, namely its relative illiquidity compared to equities or bonds.

Buying equities or bonds is normally a relatively quick and inexpensive process, but property investing involves considerable valuation and legal involvement. The more normal state of affairs is for rental income to be the main driver of commercial property returns. Owners of property can enhance the income potential and capital value of their assets by undertaking refurbishment work or other improvements. Indeed, without such work, property can quickly become uncompetitive and run down. When managed properly, the relatively stable nature of property’s income return is key to its appeal for investors.

Diversification

If we could see into the future, there would be no need to diversify our investments. We could merely choose a date when we needed our money back, then select the investment that would provide the highest return to that date. It might be a company share, or a bond, or gold, or any other kind of asset. The problem is that we do not have the gift of foresight. Diversification helps to address this uncertainty by combining a number of different investments.

In order to maximise the performance potential of a diversified portfolio, managers actively change the mix of assets they hold to reflect the prevailing market conditions. These changes can be made at a number of levels, including the overall asset mix, the target markets within each asset class and the risk profile of underlying funds within markets. As a rule, an environment of positive or recovering economic growth and healthy risk appetite would be likely to prompt an increased weighting in equities and a lower exposure to bonds. Within these baskets of assets, the manager might also move into more aggressive portfolios when markets are doing well and more cautious ones when conditions are more difficult. Geographical factors such as local economic growth, interest rates and the political background will also affect the weighting between markets within equities and bonds.

In the underlying portfolios, managers will normally adopt a more defensive positioning when risk appetite is low. For example, in equities, they might have higher weightings in large companies operating in parts of the market that are less reliant on robust economic growth. Conversely, when risk appetite is abundant, underlying portfolios will tend to raise their exposure to more economically sensitive parts of the market and to smaller companies.

Time to do more with your money?

Whatever your level of confidence, we can help you make better-informed investment decisions. We’ll demystify a complex subject and provide professional advice to enable you to build an investment portfolio that meets
your investment goals, whatever your risk level. Please contact us to discover your options.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change and depend on your individual circumstances. The value of investments and income from them may go down, you may not get back the original amount invested. Past performance is not a reliable indicator of future performance.

Find Your Local Adviser

Retirement Resilience

 560 315 Jess Easby
By:

Taking the reins and having more control over your pension pot.

Saving for retirement is one of our greatest financial priorities, especially as life expectancy is growing and retirements are likely to last longer. It may be the case that you’d prefer to take the reins and have more control over your pension pot. For appropriate investors, one option to consider is a Self-Invested Personal Pension (SIPP).

Please note that a SIPP is a type of Personal Pension, and the rules as to how much you can contribute to a SIPP are the same as a Personal Pension. Also, when it comes to taking the pension, the same rules apply to both a SIPP and a Personal Pension.

Saving Discipline

A SIPP is a tax-efficient wrapper for your pension investments and gives you control of your pension, whereas most members of a company pension scheme have very little control and almost no idea where their pension money is invested. SIPPs enforce saving discipline until retirement since you cannot withdraw your money early.

Also, with many of the UK’s largest companies closing their final salary schemes to all members, many members now have to look at taking their pensions into their own hands. You can make both regular and one-off payments into your SIPP, and even putting a small amount away early will make a difference to how much you will eventually have to fund your retirement.

Extra Flexibility

Once you reach 55, you can access your whole pension pot. You decide how and when to use the fund built up in your SIPP to provide you with an income. You can take up to 25% of your fund as a tax-free lump sum and use the balance to provide you with a pension through income withdrawal from your SIPP, or through the purchase of an annuity. You can also take a series of lump sums from your SIPP – it’s flexible.

SIPPs can be opened by almost anyone under the age of 75 living in the UK. You can open a SIPP for yourself or for someone else, such as a child or grandchild. Even if you’ve already retired, you can still open a SIPP and take advantage of the extra flexibility that it gives you over your pension savings in retirement – but you may be limited by how much you can pay into it.

Investment Control

SIPPs offer a wider investment choice than most traditional pensions based on investments approved by HM Revenue & Customs (HMRC). They give you the chance to pick exactly where you want your money to go and enable you to choose and change your investments when you want, giving you control of your pension and how it is organised.

Most SIPPs allow you to select from a range of assets, including:

  • Unit trusts
  • Investment trusts
  • Government securities
  • Insurance company funds
  • Traded endowment policies
  • Some National Savings & Investment products
  • Deposit accounts with banks and building societies
  • Commercial property (such as offices, shops or factory premises)
  • Individual stocks and shares quoted on a recognised UK or overseas stock exchange

Time to Take Control of your Retirement Plans for the Future?

A SIPP is not right for everyone, but the freedom it offers you compared to a traditional pension could far outweigh the extra time taken to run your own pension. To find out more about setting up a SIPP, please contact us and we’ll arrange a meeting to discuss your requirements – we look forward to hearing from you.

Please note: you must pay sufficient tax at the higher and additional rates to claim the full higher-rate tax relief via your tax return.

The value of investments and income from them may go down. You may not get back the original amount invested. Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.

Find Your Local Adviser