Monthly Archives: December 2015

Merry Christmas

We would like to wish you all a very Merry Christmas and a Happy New Year and also thank you for your support over the last 12 months.

The office will be closed from 5pm on Wednesday 23rd December and will re-open on Monday 4th January 2016.

As in previous years, we are not issuing Christmas Cards but have instead made donations to 3 local charities – Key 103 Mission Xmas, The Nightingale Centre Christmas Appeal and Play-ability Supporting Disabilities.

Merry xmas

 

Turn Down the Noise

The investment and financial services industry is a noisy one. Every day, thousands of articles, blogs, broadcasts, podcasts and webcasts are published, all vying for your attention.

It’s easy to fall into the trap of thinking that if you don’t listen to the noise carefully and sift out the ideas that could help you find the highest returns, then you won’t achieve your financial goals.

Actually, we find the opposite to be true. Trying to keep up with the latest investment fads can be detrimental to your long-term performance, rather than prove beneficial. The noise can drown out the signal.

So, what’s the alternative?

We believe that it starts with having a strong investment philosophy which, over a long period of time, will prove to be rewarding for our clients. Our philosophy is based around some of the most enduring ideas in finance that help us to help you achieve your financial goals by harnessing the power of capital markets in a systematic way.

At the core, these fundamental concepts have remained the same for decades but, as research into how markets work evolves, our understanding improves and we develop our approach accordingly.

Added to this, we use investment managers who take real care over the details when implementing these ideas. They understand that investment returns are precious and easy to lose in day-to-day management. They know it doesn’t make sense to pay five per cent in fees and costs to go after a four per cent return.

This combination of a robust, enduring philosophy and a steady, disciplined application has helped us provide our clients with a way to turn down the noise.

 

Is it worth paying the Lifetime Allowance charge?

In April, the lifetime allowance (LTA) drops to £1M and for anyone approaching this limit there are some tough choices ahead:

  • Should I continue to pay pension contributions?
  • Should I give up the pension contributions from my employer?
  • If I exceed the LTA, is it worth carrying on paying into a pension?

How this could affect you depends on your circumstances, if you would like to speak to us about this, please give us a call.

Everyone’s initial reaction will be to stop paying into their pension as this will lead to a tax charge on savings in excess of the LTA.  However, is a bigger tax bill necessarily a bad thing?

Important considerations

So what must you consider when making this important decision?

Stop funding Continue funding
You’ll reduce or eliminate the LTA charge on future savings.

You’ll potentially be eligible for ‘fixed protection’ on your existing savings.

You’ll continue to benefit from your employer’s contribution.

You’ll still get tax relief on their personal contributions at your highest marginal rate of income tax (if within your annual allowance).

The pension will continue to grow tax free.

You’re likely to lose your employer’s contributions.

You’ll have to decide where to save your personal contributions instead.

Saving above the LTA will be subject to an LTA charge of 25% if savings extracted as taxable income (or 55% if the surplus is taken as a lump sum).

None of the surplus can be taken as tax free cash.

Fixed protection could mean that up to an additional £250,000 of your pension funds are free from the LTA charge, but just a single pound of additional contributions will void that protection. So it’s clear that there’s a trade-off of an increased LTA against the loss of future funding.

The loss of employer funding

Employer pension contributions are essentially ‘free money’. Even if you suffer an LTA charge of 55% on your entire future employer funding you’ll still be better off (As you’re still receiving 45% of something they would otherwise miss out on).

If you have to continue to pay into the scheme in order to secure the employer contribution, it could still make sense and take the LTA charge on the chin.

The goalposts may move if your employer is prepared to offer some other financial incentive instead of making pension contributions. This will very much depend on what the alternative offer is, and how much will be lost to tax and NICs (both individual and company), but is worth considering.

So I have decided to stop paying into a pension, where do I save for the future now?

  • Cash
  • National Savings
  • ISAs
  • Investments
  • Offshore Bond

But wait – why not continue to fund your pension?

Funding above the LTA certainly makes sense where it means retaining employer contributions (‘free money’), but the same can be said for personal contributions too!

There’s something that feels slightly uncomfortable about paying contributions knowing that an additional tax charge will be applied, but what really matters is what you get back after all taxes have been deducted.

The table below compares what you could get back after 10 years for the same net cost of £15,000:

Pension ISA Offshore Bond
Contributions paid (inc tax relief) £25,000 £15,000 £15,000
Final fund value

(10 years later assuming 2.5% growth pa)

£32,000 £19,200 £19,200
LTA charge 25% (£8,000)
Income tax 20% (£4,800)   (£840)
Net amount received £19,200 £19,200 £18,360

What this does ignore is the position on death; the pension is generally IHT free, whereas both the ISA and offshore bond will form part of your estate for IHT.

Summary

It’s only natural to think tax charges should be avoided – especially one designed to act as a cap on funding, but it’s always important to weigh up all of the options available.

If you would like to weigh up your options and the alternatives, please call us for a chat.