Savings & Investments

Trusts

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Protecting, preserving or ultimately distributing wealth

As part of your Inheritance Tax planning, you may want to consider putting assets in trust – either during your lifetime or under the terms of your Will. Putting assets in trust – rather than making a direct gift to a beneficiary – can be a more flexible way of achieving your objectives.

For example:

  • You might want assets that will pass to a child to be held on trust until they are older
  • You might want assets to eventually pass to your children, but to ensure that your spouse can benefit from them for the rest of his or her life

The tax treatment of trusts is complex and depends on such factors as the kind of trust, the value of the assets put into it, and who the beneficiaries are. Recent changes to the rules mean that the tax treatment of some trusts is no longer as favourable as it used to be, but there are still circumstances in which they can help to reduce the overall level of tax payable.

The structures into which you can transfer your assets can have lasting consequences for you and your family, and it is crucial that you choose the right ones. The right structures can protect assets and give your family lasting benefits. A trust can be used to reduce how much Inheritance Tax your estate will have to pay on your death.

Legal arrangement

A trust, in principle, is a very simple concept. It is a legal arrangement where the ownership of someone’s assets (such as property, shares or cash) is transferred to someone else (usually a small group of people or a trust company) to manage and use to benefit a third person (or group of people). An appropriate trust can be used to reduce how much Inheritance Tax your estate will have to pay on your death.

The main types of trust

Bare (Absolute) Trusts: The beneficiaries are entitled to a specific share of the trust, which can’t be changed once the trust has been established. The settlor (person who puts the assets in trust) decides on the beneficiaries and shares at outset. A simple and straightforward trust – the trustees invest the trust fund for the beneficiaries but don’t have the power to change the beneficiaries’ interests decided on by the settlor at outset. Offers the potential Income Tax and Capital Gains Tax benefits, particularly for minor beneficiaries. The assets, both income and capital, are immediately owned and can be taken by the beneficiary at age 18 (16 in Scotland).

Interest In Possession Trusts

With this type of trust, the beneficiaries have a right to all the income from the trust, but not necessarily the capital. Sometimes a different beneficiary will get the capital – say, on the death of the income beneficiary. They’re often set up under the terms of a Will to allow a spouse to benefit from the income during their lifetime, but with the capital being owned by their children. The capital is distributed on the remaining parent’s death.

Discretionary (Flexible) Trusts

The settlor decides who can potentially benefit from the trust, but the trustees are then able to use their discretion to determine who, when and in what amounts beneficiaries do actually benefit. Provides maximum flexibility compared to the other trust types, and for this reason is often referred to as a ‘Flexible Trust’.

A few trusts will now have to pay an Inheritance Tax charge when they are set up, at ten-yearly intervals and even when assets are distributed. You should always obtain professional advice on whether trusts could be of benefit for your particular circumstances and requirements.

Tax treatment depends on individual circumstances and may be subject to change in the future. The information given is not intended to provide legal, tax or financial advice. With this type of trust, the beneficiaries have a right to all the income from the trust, but not necessarily the capital. Sometimes a different beneficiary will get the capital – say, on the death of the income beneficiary.

Bank of Mum and Dad

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Innovative Products To Be Created For Would Be Homeowners

The Building Societies Association (BSA) have recently published a raft of recommendations as to how the mortgage industry can support the Bank of Mum and Dad in their endeavours to help first-time buyers onto the property ladder.

They have called for more innovative products to be created to enable parents and grandparents to loan or gift money to family members who are would-be home owners. The BSA also wants building societies to provide clearer communication to help explain all the options, and it wants regulatory and tax barriers to be broken down.

Helping Younger Homebuyers Climb Onto The Housing Ladder

The BSA’s report recognises the contributions of the Bank of Mum and Dad to date, highlighting the billions of pounds that have been gifted and lent to help younger homebuyers climb onto the housing ladder.

They also confirmed that 90% of all building societies expect this form of financing to play an increasing role in helping first-time buyers over the next five to ten years. Their priority now is to help create an environment whereby the financial well-being of the older generation is not put at jeopardy due to their generosity in helping younger family members achieve their housing objectives.

  • 86% of people surveyed wanted to own their own home, but the financial challenges facing first-time buyers meant many thought they would never achieve this aspiration
  • In 2017, there were 360,000 first-time buyers – but the minimum should be nearer 450,000. The ability to buy was increasingly concentrated on dual-earning households and those with higher incomes
  • More than half of aspiring first-time buyers expected the Bank of Mum and Dad to support them onto the housing ladder.

Support Between Generations Remains A Fundamental Ambition

The report also highlighted how the Bank of Mum and Dad wasn’t just about family members handing over cash in the form of gifts and loans – many customers wanted support between generations through guarantees or using their property or savings as security. Indeed, it also identified equity release or downsizing from larger properties as ways to support the younger generation. Robin Fieth, Chief Executive of the BSA said: ‘Home ownership remains a fundamental ambition for the majority of people…against the challenging backdrop of high prices, a woefully inadequate supply of homes and a growing intergenerational divide, new ideas and strong debate are essential. Family help – the so-called “Bank of Mum and Dad” – is great for those fortunate enough to have this option, but innovations in underwriting could help all potential first-time buyers.

Mums And Dads – Are You Planning To Lend Money To Your Children?

It goes without saying that lending money to your loved ones shouldn’t endanger your own financial status. But if this is your plan, then it requires professional financial advice to assess all of your options. If you would like to discuss this subject with us, please contact us.

Reasons For Making a Will

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Continuing your support long into the future

We spend our lives working to provide for ourselves and our loved ones. You may have a house or flat (in the UK or overseas), shares, savings, and investments, as well as your personal possessions. All of these assets are your ‘estate’. Making a Will ensures that when you die, your estate is shared according to your wishes.

Everyone should have a Will, but it is even more important if you have children, you own property or have savings, investments, insurance policies, or you own a business. Your Will lets you decide what happens to your money, property and possessions after your death.

Law will decide

If you die with no valid Will in England or Wales, the law will decide who gets what. If you have no living family members, all your property and possessions will go to the Crown.

If you make a Will, you can also make sure you don’t pay more Inheritance Tax than you legally need to. It’s an essential part of your financial planning. Not only does it set out your wishes, but die without a Will, and your estate will generally be divided according to the rules of intestacy, which may not reflect your wishes. Without one, the state directs who inherits, so your loved ones, relatives, friends and favourite charities may get nothing

Same-sex partners

It is particularly important to make a Will if you are not married or are not in a registered civil partnership (a legal arrangement that gives same-sex partners the same status as a married couple). This is because the law does not automatically recognise cohabitants (partners who live together) as having the same rights as husbands, wives and registered civil partners. As a result, even if you’ve lived together for many years, your cohabitant may be left with nothing if you have not made a Will.

A Will is also vital if you have children or dependants who may not be able to care for themselves. Without a Will, there could be uncertainty about who will look after or provide for them if you die.

Peace of mind

No one likes to think about it, but death is the one certainty that we all face. Planning ahead can give you the peace of mind that your loved ones can cope financially without you, and at a difficult time helps remove the stress that monetary worries can bring. Planning your finances in advance should help you to ensure that when you die, everything you own goes where you want it to. Making a Will is the first step in ensuring that your estate is shared out exactly as you want it to be.

If you leave everything to your spouse or registered civil partner, there’ll be no Inheritance Tax to pay, because they are classed as an exempt beneficiary. Or you may decide to use your tax-free allowance to give some of your estate to someone else or to a family trust. Scottish law on inheritance differs from English law.

Good reasons to make a Will

A Will sets out who is to benefit from your property and possessions (your estate) after your death. There are many reasons why you need to make a Will:

  • You can decide how your assets are shared – if you don’t have a Will, the law says who gets what n If you’re an unmarried couple (whether or not it’s a same-sex relationship), you can make sure your partner is provided for
  • If you’re divorced, you can decide whether to leave anything to your former partner
  • You can make sure you don’t pay more Inheritance Tax than necessary
  • Several people could make a claim on your estate when you die because they depend on you financially
  • You want to include a trust in your Will (perhaps to provide for young children or a disabled person, save tax, or simply protect your assets in some way after you die)
  • Your permanent home is not in the UK or you are not a British citizen n You live here but you have overseas property
  • You own all or part of a business

Before you write a Will, it’s a good idea to think about what you want included in it.

You should consider:

  • How much money and what property and possessions you have
  • Who you want to benefit from your Will
  • Who should look after any children under 18 years of age
  • Who is going to sort out your estate and carry out your wishes after your death (your executor)

Passing on your estate

Executors are the people you name in your Will to carry out your wishes after you die. They will be responsible for all aspects of winding up your affairs after you’ve passed away, such as arranging your funeral, notifying people and organisations that you’ve died, collating information about your assets and liabilities, dealing with any tax bills, paying debts, and distributing your estate to your chosen beneficiaries.

You can make all types of different gifts in your Will – these are called ‘legacies’. For example, you may want to give an item of sentimental value to a particular person, or perhaps a fixed cash amount to a friend or favourite charity. You can then decide who you would like to receive the rest of your estate and in what proportions. Once you’ve made your Will, it is important to keep it in a safe place and tell your executor, close friend or relative where it is.

Review your Will

It is advisable to review your Will every five years and after any major change in your life, such as getting separated, married or divorced, having a child, or moving house. Any change must be by Codicil (an addition, amendment or supplement to a Will) or by making a new Will.

If you’re looking into making a Will, please contact us for our Will writing service. 

Critical Illness Cover

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Minimising the financial impact on you and your loved ones

What would life be like if you were diagnosed with a serious illness? Things could change very suddenly. You’d get your family together and tell them what was going on. Before long, you’d start spending time in hospital for treatment. You may also need to take some time off. It’s hard to know what the financial impact of all this would be for you and the people who depend on you. Any of us can become ill at any age – and with appropriate critical illness cover in place, it could help to give some financial security at a difficult time. Critical illness cover can help to minimise the financial impact on you and your loved ones. For example, if you needed to give up work to recover, or if you passed away during the length of the policy, the money could be used to help fund the mortgage or rent, everyday bills, or even simple things like the weekly food shop – giving you and/or your family some peace of mind when you need it most.

Surviving a serious illness

After surviving a critical illness, sufferers may not be able to return to work straight away (or ever), or may need home modifications or private therapeutic care. It is sad to contemplate a situation where someone survives a serious illness but fails to survive the ensuing financial hardship. Preparing for the worst is not something we want to think about when feeling fit and healthy, but you never know what life is going to throw at you next.

Tax-free lump sum

Critical illness cover, either on its own or as part of a life insurance policy, is designed to pay you a tax-free lump sum on the diagnosis of certain specified life-threatening or debilitating (but not necessarily fatal) conditions, such as a heart attack, stroke, certain types/stages of cancer and multiple sclerosis. A more comprehensive policy will cover many more serious conditions, including loss of sight, permanent loss of hearing, and a total and permanent disability that stops you from working. Some policies also provide cover against the loss of limbs. But not all conditions are necessarily covered, which is why you should always obtain professional financial advice.

Much-needed financial support

If you are single with no dependants, critical illness cover can be used to pay off your mortgage, which means that you would have fewer bills or a lump sum to use if you became very unwell. And if you are part of a couple, it can provide much-needed financial support at a time of emotional stress.

Exclusions and limitations

The illnesses covered are specified in the policy along with any exclusions and limitations, which may differ between insurers. Critical illness policies usually only pay out once, so they are not a replacement for income. Some policies offer combined life and critical illness cover. These pay out if you are diagnosed with a critical illness, or you die – whichever happens first.

Pre-existing conditions If you already have an existing critical illness policy, you might find that by replacing a policy, you would lose some of the benefits if you have developed any illnesses since you took out the first policy. It is important to seek professional advice before considering replacing or switching your policy, as preexisting conditions may not be covered under a new policy.

Lifestyle changes

Some policies allow you to increase your cover, particularly after lifestyle changes such as marriage, moving home or having children. If you cannot increase the cover under your existing policy, you could consider taking out a new policy just to ‘top up’ your existing cover.

Defined conditions

A policy will provide cover only for conditions defined in the policy document. For a condition to be covered, your condition must meet the policy definition exactly. This can mean that some conditions, such as some forms of cancer, won’t be covered if deemed insufficiently severe. Similarly, some conditions may not be covered if you suffer from them after reaching a certain age – for example, many policies will not cover Alzheimer’s disease if diagnosed after the age of 60.

Survival period

Very few policies will pay out as soon as you receive diagnosis of any of the conditions listed in the policy, and most pay out only after a ‘survival period.’ This means that if you die within this period (even if you meet the definition of the critical illness given in the policy), the cover would not pay out.

Range of factors

How much you pay for critical illness cover will depend on a range of factors, including what sort of policy you have chosen, your age, the amount you want the policy to pay out, and whether or not you smoke. Permanent total disability is usually included in the policy. Some insurers define ‘permanent total disability’ as being unable to work as you normally would as a result of sickness, while others see it as being unable to independently perform three or more ‘Activities of Daily Living’ as a result of sickness or accident.

Activities of daily living include:    

  • Bathing
  • Dressing and undressing
  • Eating
  • Transferring from bed to chair and back again

Make sure you’re fully covered

The good news is that medical advances mean more people than ever are surviving conditions that might have killed earlier generations. Critical illness cover can provide cash to allow you to pursue a less stressful lifestyle while you recover from illness, or you can use it for any other purpose. Don’t leave it to chance – contact us to make sure you’re fully covered.

If the policy has no investment element then it will have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse. Critical illness plans may not cover all the definitions of a critical illness. The definitions vary between product providers and will be described in the key features and policy document if you go ahead with a plan. 

The Final Retirement Countdown

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Time to review your financial plans with a financial check-up?

If you are aiming to retire within the next five years, it’s time to get into the mindset of considering the practicalities of fulfilling your desired lifestyle and making plans during your retirement countdown. While you should think about retirement planning as early as possible, the five years leading up to retirement are critical.

Retirement may be looming with terrifying urgency, and the reality is that you have just 60 pay packets left until you retire. This is a time when you’ll need to obtain up-to-date pension forecasts and obtain professional financial advice to make sure your retirement plans are on track. So if you believe you are five years or less away from retirement, now is the time to seriously review your financial plans with a financial check-up.

What are the key things to concentrate on?

The first step is to ask yourself if you are actually ready to retire. There are many factors to consider. Your financial affairs are the big factor to begin with. Your ability to afford retirement depends on your lifestyle, your family situation and home ownership. If you have dependent children, or have 15 years left on your mortgage, the time might not be quite right. You have to ensure retirement is the right move for you. Work can be stressful, but it can be rewarding and give you a sense of achievement. People may miss the routine of working life and the day-to-day interaction with people.

Taking a different path

What you need might not be retirement, it could be change. A chance to get out from behind your desk to do something meaningful. Perhaps retirement is your ticket to achieving this – taking a different path where money is no longer the prime motivation. If you are afraid about having time on your hands after retirement, explore options for filling it well before you take the leap.

Major change in lifestyle

Retirement means a major change in lifestyle. You need a clear mind as to what you want your life to look like and how to spend your time. Then you can work on arranging your finances to suit. Decide on your priorities for retired life. Do you want to travel, or split your time between home and somewhere hot and exotic? Is there a particular hobby you want to immerse yourself in? What kind of leisure and social activities matter to you?

Later years in your retirement

Try not to get caught up in what happens right after you end work – also consider the later years in your retirement. Will long-term travel continue to be feasible as you get older? Will you need such a large house, or will it become a burden? And what about in the latter stages of life? Would you need to fund care? You must also have a clear picture of what kind of life you would like to lead in retirement and what it will cost. Then you can start to dig a little deeper into what you might be able to afford. This means getting to grips with your sources of income once your earnings stop.

Request up-to-date forecasts

Your first port of call is your pension – or pensions. Contact previous pension trustees to request up to-date forecasts. If you’ve lost details of a pension scheme and need help, the Pension Tracing Service (0800 731 0193) may be able to assist you.

You should also find out what your likely State Pension entitlement would be – you can do this by completing a BR19 form or by visiting www.direct.gov.uk.

Consolidate existing pensions

If you have personal pensions, you need to find out where they are invested and how they have performed. Also check if there are any valuable guarantees built into the contracts. It may make sense to consolidate existing pensions, making it easier for you to keep track of everything and reduce the amount of correspondence you receive. With investments in general, it is important to review your strategy before you take the leap into retirement. You don’t need to suddenly become an ultra-conservative investor – you still want your portfolio to grow over the next few decades. Should the investment markets make a correction, you may want to limit your downside. Don’t forget, there may be another 30 years ahead.

Don’t put off confronting the truth

If your investments don’t look on course to give you the income you’d hoped for in retirement, don’t put off confronting the truth. You may need to revise your projected living costs. Alternatively, there’s still time to change your investments, and you could also cut back on spending while you are still earning to generate more savings. Your income can be used in other ways besides topping up your savings as you prepare for retirement. Clearing debts, including your mortgage, should be a priority before you retire. Whatever you owe on credit cards and loans, focus on paying off the debt that charges the most interest first. Debt will be the biggest burden once you do not have a regular working income.

Consider re-adjusting your finances

Having no mortgage to pay is a major step towards re-adjusting your finances for a post salary life. You might also decide you want to sell up, whether to downsize, to give you a lump sum of cash to live off, or to fund your dreams of moving abroad. Either way, use your working income while you can to improve your home, maximising potential revenue when you come to sell it. Finally, retirement is a huge change, both personally and financially – so big it might be too much to take in all at once. It makes good sense to practice at being retired before it becomes a reality, especially if you will have to make certain adjustments and sacrifices to compensate for a reduced income. You might even consider a phased retirement, cutting back on your hours gradually. This will not only soften the financial effect, but it will also get you used to having more spare time to fill.

Taking The Right Steps Today To Ensure You Have The Retirement You Want Tomorrow?

Retiring is a huge life event and can sometimes leave us feeling as though we’ve lost our identity. After decades of working and saving, you can finally see retirement on the horizon. But now isn’t the time to coast. If you plan to retire within the next five years, we can ensure you take the right steps today to help ensure that you have what you need to enjoy a comfortable retirement lifestyle. To arrange a meeting, please contact us.

Guide To Tax Matters

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2019/20 Key Changes You Need To Know

In this guide we set out the main tax changes that apply to the 2019/20 tax year, which commenced on 6 April 2019. Reviewing your tax affairs to ensure that available reliefs and exemptions have been utilised, together with future planning, can help to reduce your tax bill. Personal circumstances differ, so if you have any questions or if there is a particular area you are interested in, please do not hesitate to contact us.

Increases to the tax-free personal allowance announced in last year’s Budget have now also come into effect, alongside a number of other proposals. We’ve provided our summary of the key changes.

Income Tax

The tax-free personal allowance increased from £11,850 to £12,500, after Chancellor Philip Hammond announced in the 2018 Budget that he was bringing the rise forward by a year. The higher-rate tax band increased from £46,350 to £50,000 in England, Wales and Northern Ireland. But in Scotland, where Income Tax rates are devolved, the higher-rate tax band remains at £43,430 – £6,570 lower than the rest of the UK.

National Insurance contributions across the UK have also increased to 12% on earnings between £46,350 and £50,000. In line with the rest of the UK, someone in Scotland pays National Insurance at a rate of 12% on earnings up to £50,000, before this reduces to 2% on earnings above this level.

Inheritance

The threshold at which the 40% Inheritance Tax rate applies on an estate remains at £325,000. However, the Residence Nil-Rate Band increased to £150,000. This is an allowance that can be added to the basic tax-free £325,000 to allow people to leave property to direct descendants such as children and grandchildren, taking the combined tax-free allowance to £475,000 in the current tax year. However, the allowance is reduced by £1 for every £2 that the value of the estate exceeds £2 million.

When you pass on assets to your spouse, they are Inheritance Tax-free, and your spouse can then make use of both allowances. This means the amount that can be passed on by a married couple is currently £950,000.

Pensions

The State Pension increased by 2.6%, with the old basic State Pension rising to £129.20 a week, and the new State Pension rising to £168.60 a week.

The amount employees now pay into their pensions has increased to a minimum total of 8% under the Government’s auto-enrolment scheme. The increase means employers now pay in a minimum 3% of a saver’s salary, while the individual pays in a minimum 5%.

The level of the State Pension rises every year by the highest of 2.5%, growth in earnings or Consumer Price Index (CPI) inflation. This is due to the ‘triple lock’ guarantee, which was first introduced in 2010.

The pension lifetime allowance increased to £1,055,000 on pension contributions, in line with CPI inflation. This is the limit on the amount retirees can amass in a pension without incurring additional taxes. Anything above this level can be taxed at a rate of 55% upon withdrawal.

The overall annual allowance has remained the same at £40,000, along with the annual allowance taper which reduces pension relief for those with a yearly income above £150,000.

Student Loans

The earnings threshold before you start to repay a student loan for:

  • Plan 1 loans has increased to £18,935 (from £18,330)
  • Plan 2 loans has increased to £25,725 (from £25,000)

If you’re a director being paid salary and dividends from your company, and you’re paying back a student loan, you must remember the threshold for repayment is based on your total income. This will apply to all current and future student loans where employers make student loan deductions. So if you run a payroll for any employees who have student loan deductions, you need to ensure you have a record of what type of loan they have, so that the correct deductions are made.

Investors

The Junior Individual Savings Account (ISA) limit increased to £4,368. All other ISA limits remain the same. The annual amount that can be sheltered across adult ISAs stays at £20,000 for the 2019/20 tax year.

The Capital Gains Tax annual exemption, that everyone has, increased to £12,000. Above this amount, lower-rate taxpayers pay 10% on capital gains, while higher and additional- rate taxpayers pay 20%. However, people selling second properties, including buy-to-let landlords, pay Capital Gains Tax at 18% if they are a basic-rate taxpayer, or 28% if a higher or additional-rate taxpayer.

Capital Gains Tax for non-UK residents has been extended to include all disposals of UK property.

Entrepreneurs’ Relief gives a Capital Gains Tax break to those who sell shares in an unlisted company, provided they own at least 5% of the shares and up to a lifetime value of £10 million. The holding period to qualify for the relief is 24 months.

This is also the first tax year where claims can be made for Investors’ Relief which, in a similar way, gives Capital Gains Tax breaks to those who sell shares in unlisted firms. While the former is aimed at company directors, the latter is geared to encourage outside investment in firms.

There is no minimum shareholding to be eligible, but investors must have held the shares for at least three years. As the relief was introduced in 2016, this is the first tax year when it can be used.

Buy-to-let Landlords

On 6 April, the next stage of the phased removal of mortgage interest relief came into effect. Buy-to-let landlords used to be able to claim the interest paid on their mortgages as a business expense to reduce their tax bill. Now, they will only be able to claim a quarter of this amount as tax deductible ahead of the complete removal of the relief in the 2020/21 tax year.

Corporation Tax

Corporation Tax is payable on business profits and remains at 19%. The Government is planning to reduce this to 17% for the 2020/21 tax year (on 6 April 2020).

Would you like help with tax planning?

The UK tax system is very complex, but the benefits of structuring your finances tax- efficiently can be significant. Ellis Bates are here to ensure that you have made the best use of the reliefs and allowances available for your particular situation. There are a variety of planning ideas available for individuals, entrepreneurs and business owners. Should you need to discuss or require advice on tax planning ideas, please do not hesitate to contact us.

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 value of investments and income from them may go down. You may not get back the original amount invested.

Income Boosting Investments

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Structuring your investment portfolio throughout life

If low interest rates continue to remain, it really matters where you invest your money. Investing for income means choosing assets that are able to provide you with a regular income. This is in contrast to investing for growth, which focuses on how much your assets could gain in value.

People are living longer. Simple demographics mean that supplementary income is no longer a luxury, it’s a necessity. With historic ultra-low interest rates on savings, many investors over the past decade have turned to income-paying funds as an alternative to cash-based savings.

Varying income

Changing life plans and priorities mean we now encounter varying income needs and goals throughout our life – and when investing, certain innate behavioural traits will influence our decision-making. Increasingly, some income seekers are looking beyond cash and government bonds to capitalise on the more attractive income opportunities that exist across global markets. Investing in higher yielding assets – such as dividend-paying stocks, corporate bonds and emerging market debt – can provide attractive income, even with interest rates so low.

Investment strategy

Our reasons for seeking income tend to shift through life. Shorter-term goals like supporting a business start- up or funding children’s education may be a priority in earlier years, before making way for a longer-term focus on boosting retirement income and providing an adequate cushion for later life. The key is working out how much income you need at each stage, and then finding an appropriate investment strategy to help you meet your goals.

It’s essential to work out what you need to achieve and set clear objectives. The most obvious option to generate a monthly income is to buy funds that do just that. Some funds explicitly set out to provide investors with a monthly income, while others – such as many property funds – pay out dividends monthly, too.

Balanced portfolio

With time on your side, there are steps you can take to reduce risk, particularly in the final years before you need the money as your focus shifts from capital growth to capital protection. In order to achieve your financial goals, you can build a balanced portfolio incorporating a variety of different investment types (including cash and funds that invest in everything from corporate bonds to FTSE 100 companies, smaller companies, and companies based in numerous countries across the world) or you can simply pick one fund that is itself a balanced portfolio and offers you access to a broad spread of investments through one single plan.

However, if you are seeking income from your investment straight away, you may need to ensure your investments immediately generate the sum you need, so it’s worth factoring this into any decision-making. It may well be that your decision does not involve whether or not you should invest in the stock market, but which particular stock market investment will help you generate the income you need.

Money talks

There are various ways in which capital can be used to generate income. Each has its pros and cons, and for most people the ideal solution, where possible, is to spread money among several different types of investments, providing a balance and diversifying risk.

Here, we look at some potentially income-boosting investments. Always remember to ensure you have a suitably diversified portfolio. You should never just rely on one asset class or investment, as if this investment suddenly falls in value, you stand to lose more than if you had put your money into a range of different investments.

Banks and building societies

Savings accounts have traditionally been a clear favourite for many people who rely on the interest payments as a supplementary income. Deposits are seen as a secure option because the monetary value of savings does not go down, and there is protection under the Financial Services Compensation Scheme for deposits up to £85,000 in any one institution should they not be able to meet their commitments.

However, interest rates fluctuate, so the income from savings accounts cannot be relied upon to remain stable. Not only do the returns depend upon the general level of interest rates (which has only fallen over the last decade), but banks and building societies are also able to apply their own discretion to the interest they pay on their accounts. Rates are often inflated by introductory bonuses which then fall away, typically after a year. Inflation can also erode the value of cash on deposit.

Fixed income securities/bonds

A bond is a loan that the bond purchaser, or bondholder, makes to the bond issuer. Governments and corporations issue bonds when they need to raise money. An investor who buys a bond is lending money to the government or corporation.

Like a loan, a bond pays interest periodically and repays the principal at a stated time, known as the ‘maturity date’. Certain government securities are regarded as the most secure, though corporate bonds can pay higher rates of interest depending on the deemed creditworthiness of the issuing companies. Over the long term, shares have tended to provide a greater total return, but bonds are generally regarded as less risky. In the event of bankruptcy, a bondholder will get paid before a shareholder.

Equities

By investing in equities, savers can back companies which have potential to pay out significant dividends – a share in the profits – to shareholders. There are many such companies which have historically provided not only reasonable dividends, but a track record of growing profits and consequently improving those dividend payments over time.

It is also possible to grow your original capital if the share price increases in value over the time you are invested, although it may go down as well as up along the way. Investments in equities can be volatile. Their values may fluctuate quite dramatically in response to the results of individual companies, as well as general market conditions.

Property

In recent years, there has been a growing demand for rented property, as the cost of housing has risen. Many investors have profited from the buy- to-let market, buying residential property that they then let out in order to generate a rental income. However, property is not as liquid an investment as some others. There is also the risk of periods without income between lets and the ongoing costs of maintaining the properties.

More significantly, the taxation burden on UK buy-to-let investors and the properties themselves increased in 2016 following a government clamp down. There was a sharp increase in stamp duty payable by homeowners purchasing a second home, as well as an increase in the level of taxation faced by landlords buying to let.

People are living longer. Simple demographics mean that supplementary income is no longer a luxury, it’s a necessity. For more information on investing for income, please get in touch.

Cost of Inflation

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Eroding the purchasing power of your money

The impact of the cost of inflation on savings and investments, especially of those retirees living on a fixed income, is an important issue. But it’s also not good news for other savers and investors, as it can erode the purchasing power of money.

Inflation is officially defined as the sustained rise in the general level of prices of goods and services in the economy. On a basic level, the buying power of an individual pound decreases when the price of everything has increased. Low interest rates also don’t help, as this makes it even harder to find returns that can keep pace with inflation and rising living costs.

Different factors

If inflation becomes too high, the Bank of England may increase the bank rate to encourage us all to spend less and to save more. They can use the bank rate (the interest rate it sets) to control inflation. The higher the rate, the more incentive individuals and businesses have to save rather than borrow money, meaning they’ll receive higher returns from their savings but have to pay more for any loans.

There are a number of different factors which may create inflationary pressures in an economy. These include rising commodity prices that can have a major impact, particularly higher oil prices, which translates into steeper petrol costs for consumers.

Volatile periods

Investments are usually a better option than cash savings if you want to protect or grow the real value of your money, although it is still worthwhile holding some of your assets in cash as opposed to investments, as this will help to protect your money during more volatile periods.

Historically, investments such as shares and bonds have outperformed cash – particularly over long periods, although remember that past performance isn’t a guide to future performance. So if you’re saving for your retirement, investing can put you in a stronger financial position and put you on track towards your dream retirement.

Inflation protection

Different asset classes provide varying degrees of protection against inflation. Equities are often cited as being one of the best long-term defences. Intuitively, this makes sense. On a basic level, by investing in shares of companies, as the price of goods rises so too do the profits the companies earn on those goods, and in turn the returns to shareholders.

So although they have the potential to be more volatile, stock market investments have historically performed well, benefiting from the earnings of companies usually rising along with inflation and reinvesting dividends. It is these dividends that help in the battle to beat inflation, particularly when returns compound.

Stock market

Changes to pension legislation in more recent years have given us all more freedom about how we use our pension pot and when we take that money. This means you can leave your money invested until you’re ready to take it, and then release it gradually, rather than being at the mercy of stock market performance on the day of your retirement.

This also means that you’re giving your money more opportunity to grow in value and to beat the cost of inflation.

ISAs guide

Guide to Individual Savings Accounts

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The little allowance with big potential

Individual Savings Accounts (ISAs) are an incredibly effective means of shielding your money from both Capital Gains Tax and Income Tax. Using your tax-free allowances every year should be a standard part of your financial planning.

Each tax year, we are each given an annual Individual Savings Account (ISA) allowance. This can build up quickly, letting you accumulate a substantial tax-efficient gain in the long term.

It is a ‘use it or lose it’ allowance, meaning that if you don’t use all or part of it in one tax year, you cannot take that allowance over to the next year. Utilising your ISA allowance to invest tax-efficiently could lead to significant savings in Capital Gains Tax and even improve your potential returns.

Q: What is an ISA?

A: An ISA is a ‘tax-efficient wrapper’ designed to go around an investment. Types of ISA include a Cash ISA and Stocks & Shares ISA. A Cash ISA is like a normal deposit account, except that you pay no tax on the interest you earn. Stock & Shares ISAs allow you to invest in equities, bonds or commercial property without paying personal tax on your proceeds.

Q: Can I have more than one ISA?

A: You have a total tax-efficient allowance of £20,000 for this tax year. This means that the sum of money you invest across all your ISAs this tax year (Cash or Stocks & Shares) cannot exceed £20,000. However, it’s important to bear in mind that you have the flexibility to split your tax-free allowance across as many ISAs and ISA types as you wish. For example, you may invest £10,000 in a Stocks & Shares ISA and the remaining £10,000 in a Cash ISA. This is a useful option for those who want to use their investment for different purposes and over varying periods of time.

Q: When will I be able to access the money I save in an ISA?

A: Some ISAs do tie your money up for a significant period of time. However, others are pretty flexible. If you’re after flexibility, variable rate Cash ISAs don’t tend to have a minimum commitment. This means you can keep your money in one of these ISAs for as long – or as short a time – as you like. This type of ISA also allows you to take some of the money out of the ISA and put it back in without affecting its tax-efficient status.

On the other hand, fixed-rate Cash ISAs will typically require you to tie your money up for a set amount of time. If you decide to cut the term short, you usually have to pay a penalty. But ISAs that tie your money up for longer do tend to have higher interest rates.

Stocks & Shares ISAs don’t usually have a minimum commitment, which means you can take your money out at any point. That said, your money has to be converted back into cash before it can be withdrawn.

ISAs guideQ: What is a Help to Buy ISA?

A: A Help to Buy ISA is an ISA designed to help first-time buyers save up a deposit for their home. The Government will add 25% to the savings, up to a maximum of £3,000 on savings of £12,000. If you pay into a Help to Buy ISA in the current tax year, you cannot also pay into another Cash ISA.

Q: Could I take advantage of a Lifetime ISA?

A: You must be 18 or over but under 40 to open a Lifetime ISA. You can use a Lifetime ISA to buy your first home or save for later life. You can put in up to £4,000 each year until you’re 50. The Government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.

Q: What is an Innovative Finance ISA?

A: An Innovative Finance ISA allows individuals to use some or all of their annual ISA allowance to lend funds through the Peer to Peer lending market. Peer to Peer lending allows individuals and companies to borrow money directly from lenders. Your capital and interest may be at risk in an Innovative Finance ISA and your investment is not covered under the Financial Services Compensation Scheme.

Q: Is tax payable on ISA dividend income?

A: No tax is payable on dividend income. You don’t pay tax on any dividends paid inside your ISA. Outside of an ISA, you currently receive a £2,000 dividend income allowance.

Q: Is Capital Gains Tax (CGT) payable on my ISA investment gains?

A: You don’t have to pay any CGT on profits. You make a profit when you sell an investment for more than you purchased it for. If you invest outside an ISA, excluding residential property, any profits made above the annual CGT allowance for individuals (£12,000 in 2019/20 tax year) would be subject to CGT. For basic rate taxpayers, CGT is 10% or more. For higher and additional rate taxpayers, CGT is 20%.

Q: I already have ISAs with several different providers. Can I consolidate them?

A: Yes you can, and you won’t lose the tax- efficient ‘wrapper’ status. Many previously attractive savings accounts cease to have a good rate of interest, and naturally some Stocks & Shares ISAs don’t perform as well as investors would have hoped. Consolidating your ISAs may also substantially reduce your paperwork. We’ll be happy to talk you through the advantages and disadvantages of doing it.

Q: Can I transfer my existing ISA?

A: Yes, you can transfer an existing ISA from one provider to another at any time as long as the product terms and conditions allow it. If you want to transfer money you’ve invested in an ISA during the current tax year, you must transfer all of it. For money you invested in previous years, you can choose to transfer all or part of your savings.

Q: What happens to my ISA if die prematurely?

A: The rules on ISA death benefits allow for an extra ISA allowance to the deceased’s spouse or registered civil partner.

If you’re looking for ways to grow the value of your wealth for the longer term, investing through an appropriate ISA provides the potential to do this and has the added benefit of protecting the gains you make from both Income Tax and Capital Gains Tax.

If you would like to review your situation or discuss the options available, please contact us for further information – we look forward to hearing from you.

Millennials Get Real With The Numbers

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Making Sacrifices For Home Ownership Over Retirement

Millennials are chasing the home ownership dream at the potential cost of a lower income in retirement, new research[1] shows.

Over a third (35%) of millennials say they prioritise saving for a deposit on a home instead of their retirement. Nearly a fifth (19%) say buying a house is the main reason they don’t save more into their pension, while 10% say student debt stops them saving into a pension. One in 11 (9%) admits that frequently changing jobs affects their ability to make regular pension contributions.

Millennials seem willing to make sacrifices for home ownership, with one in ten (10%) living with parents instead of renting to help save more money for a home. The study found men are almost twice as likely (20%) to be heading home compared to women (11%).

Bank Of Mum And Dad

Despite worries about graduate debt and the squeeze on wages, on average, nearly a third (31%) expect to buy their first property by the age of 30, with men (39%) more confident than women (26%) they’ll achieve their ambition. However, the research shows they won’t all have to save hard – an optimistic 20% expect to receive financial aid from the Bank of Mum and Dad.

Industry data[2] shows millennials are right to be hopeful about home ownership – around 365,600 first-time buyers completed mortgages in the year to July 2018, borrowing a total of £59.9 billion. The average age of the first-time buyer during the year was 30, borrowing an average £145,000 on a gross household income of £42,000.

But pensions are feeling the strain. The research found around 21% say they have not started saving for retirement yet, while 15% say pension saving does not motivate them, and 12% believe pensions are irrelevant to millennials.

Focused On Home Ownership

Retirement can seem daunting for millennials and is, of course, a long way off when you are contending with student debts and high rents. However, it is crucial to start saving for your pension as early on as possible, putting away as much as you can each time.

It is easier if you start doing this as soon as you start working, so you get used to the money going straight into your pension pot. Many will, at least, be saving through the workplace, which is a good start, and contributions should be regularly reviewed to ensure a significant fund can be built up.

Not all millennials, however, are focused on home ownership. According to the survey, approximately 17% of under-35s say buying a house is a not a realistic option at present, while 11% say that saving for a house deposit is not a financial priority. And it is not just millennials, as the research shows that one in seven 35-54-year- olds have given up on the hope of ever owning a home.

Don’t Let Saving Become A Daunting Prospect

Juggling buying a house with saving for retirement is no doubt a challenge, and it is inevitable that something may get dropped, which unfortunately appears to be retirement saving. However, it is important to start saving for your pension as early on as possible. To find out how we can help, please contact us – we look forward to hearing from you.

Source data
[1]Consumer Intelligence conducted an independent online survey for Prudential between 20 and 21 June 2018 among 1,178 UK adults
[2]https://www.ukfinance.org.uk/house-purchase-activity-slows-in-june-but-remortgaging-activityremains-high/