Topic: Family financial planning

Your Wealth – Your Legacy

In my recent blog ‘to gift or not to gift’ I talked about how too much money can leave you with a difficult quandary regarding gifting. But what is too much money, and have you even considered your Legacy or Inheritance Tax?

Data from the Office of National Statistics shows that IHT receipts increased by 22.9% in the first quarter of this tax year. The figures show that since March, more than £2billion has been taken from people’s estates in IHT.

According to new research[1], almost half of UK Adults (47%) say they have never discussed Inheritance matters.  Talking about estate planning can of course be an extremely emotional subject as people generally don’t like talking about death or money. However, research shows that around one in ten people would like to talk about it but haven’t found the right time, whilst some people just don’t know where to start.

Amongst the most common reasons given for not discussing Inheritance are; not old enough so it’s not a priority, don’t like talking about it, and avoiding it because it’s a morbid subject.

However, whilst approximately a third of people say they don’t feel comfortable talking about their legacy, there are some life events that may prompt people to talk to loved ones, such as a health scare, a near death experience and getting older. Research suggests that after their partner or spouse, people feel most comfortable talking to their mum or a financial adviser in the first instance.

So just what can you pass on?

When someone dies, the value of their estate becomes liable for IHT. Everyone is entitled to pass on assets up to the value of £325,000 IHT-free. This is called the ‘nil-rate band’. It hasn’t changed since 2009 and will remain frozen until 2021.  Any excess above £325,000 is taxed at 40%.

Residence nil-rate band

The new £100,000 residence nil-rate band was introduced in April 2017. It will increase in steps to £175,000 in April 2020 so married couples or registered civil partners with children will be able to pass on up to £1 million IHT free, as this is in addition to the ‘nil rate band’.  However, the residence nil rate band is only available when passing on the family home, or the value from the sale of it, to a direct descendant, so it is important to consider structuring your estate to make the most of these allowances.

5 Conversational topics to have with your loved ones

  1. The importance of an up to date will – When you are making a will, this is a good time to talk to your family about your wishes. Research found that just four in ten over 55’s have an up to date and valid will.
  2. Take advantage of the gift allowance – gifting small sums or money regularly throughout the year can be a great way to financially help loved ones, as well as reduce your IHT liability. See my previous blog http://carpenter-rees.co.uk/blog/gift-not-gift/ for further information on gifting.
  3. Let life events help you start a conversation – It’s not only negative events that can prompt a discussion about inheritance matters. Positive events such as the birth of a child or a marriage can also make people evaluate their plans. Use these opportunities as a way of talking to relatives about how you would like to pass on your wealth.
  4. Talk about later life care – Social care is a much talked about topic, and many people are worried about how they will pay for care when they get older. As a result, people are starting to plan for this earlier, and this provides an ideal opportunity to also talk about your estate planning.
  5. Talk about family heirlooms – If you find it hard to approach the subject of estate planning with your family, then a good place to start could be talking about family heirlooms. People love to hear stories about other relatives even if they never had the chance to meet them and this can be a great opportunity to start a conversation about estate planning.

For more information, please see the November / December edition of our smartmoney magazine, http://carpenter-rees.co.uk/resources.html

Planning for what will happen after your death can make the lives of your loved ones much easier. To discuss putting in place an estate plan to reduce or mitigate Inheritance Tax, please contact us – don’t leave it to chance.

 

[1] Brewin Dolphin

To Gift or not to Gift.

Having more money than you need can sometimes leave you with a difficult quandary – should you gift it or not?  This is a question I have been asked numerous times over the past few months.

In a previous blog, http://carpenter-rees.co.uk/blog/the-kids-are-alright/ I talked about this and the fact that people often delayed making gifts due to fears such as giving the kids too much to young, treating the family fairly, or whether they might squander your hard-earned money (and believe me when you grew up in the 60’s in a culture of ‘watching the pennies’, the thought of someone else being reckless with ‘your’ money is certainly not an easy thought).

On the flip side of the coin, delaying making gifts can mean that you could die with ‘too much’ and therefore potentially incur IHT liabilities on your estate. Whilst there are thresholds to ensure that some of the value of your estate is excluded, anything above these thresholds is taxed at 40%. Not only could this result in a significant reduction in the inheritance you leave behind, but the tax due must be paid by the end of the sixth month after an individual has died …. not always an easy task and particularly where a proportion of wealth is tied up in property.

So, if making the decision to gift isn’t difficult enough, as with many things in life, once you’ve made that decision the next steps are not straightforward either; and I’m not just talking about deciding who to gift to, how much, what they will do with it, what happens in the event of a future marriage breakdown, have you left yourself with enough funds, etc. etc. … I’m talking about the HMRC rules which govern Gifts.

HMRC rules

There’s usually no Inheritance Tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents. These are known as ‘exempted gifts’.

There’s also no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they live in the UK permanently.

Other gifts count towards the value of your estate.

What counts as a gift

A gift can be:

  • anything that has a value, such as money, property, possessions
  • a loss in value when something’s transferred, for example if you sell your house to your child for less than it’s worth, the difference in value counts as a gift

Exempted gifts

You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.

You can carry any unused annual exemption forward to the next year – but only for one year.

Each tax year, you can also give away:

  • wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
  • normal gifts out of your income, for example Christmas or birthday presents – but, you must be able to maintain your standard of living after making the gift
  • payments to help with another person’s living costs, such as an elderly relative or a child under 18
  • gifts to charities and political parties

You can use more than one of these exemptions on the same person – for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.

Small gifts up to £250

You can give as many gifts of up to £250 per person as you want during the tax year as long as you haven’t used another exemption on the same person.

The 7-year rule

Any gifts made in excess of the exemptions count as part of your estate for 7 years.  Therefore, death within this period may result in inheritance tax to pay.  To make this fairer, HMRC introduced a sliding scale known as ‘taper relief’, which sets out the amount of tax due.  Gifts given in the 3 years before you die would be charged at 40%, whilst gifts made 3 to 7 years before your death would be charged as follows: –

Years between gift and death Tax paid
less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%

 

Gifts are not counted towards the value of your estate after 7 complete years have passed from the date of the gift.

Conclusion

As with all financial decisions, gifting is something which requires careful thought. Of course, gifting is not the only option.  Another option is to spend more money, or save less.  Often clients can be so preoccupied with accumulating wealth and ensuring that they can fund the lifestyle that they require, that they forget to consider the impact of ‘too much’ money.  In my previous blog  http://carpenter-rees.co.uk/blog/sometimes-spending-brings-a-bigger-return-than-saving/, I talked about how spending money and particularly on ‘life experiences’ can be hugely rewarding.  These are all things that we discuss when going through a client’s financial plan.

As I’ve said previously, there is no perfect solution and one of our roles as financial planners is to help clients think through major life decisions. Our experience in dealing with many families and family businesses stands us in good stead. Carpenter Rees will help make sure that the decision you reach is sensible, balanced and meets your personal values & preferences, family circumstances and concerns over inheritance tax.  Involving family and helping educate them in financial matters is an area where our involvement makes a difference.

Lifetime Allowance – Clearing up some of the Myths

During many of our annual planning meetings with clients, we often cover the effects of the pension lifetime allowance, as this now impacts upon more and more people. The pension lifetime allowance is the maximum value you can build up in all pensions without incurring an additional tax charge.

The current level of the Lifetime allowance is £1m and this is scheduled to increase in line with CPI (a measure of inflation) from April 2018. It is estimated that 4% of retirees will exceed this allowance – as there are 11.5 million people approaching retirement age this means 460,000 could be subject to the tax charge by the time they come to draw their pension benefits.

Government figures suggest that tax revenues of £126 million were collected from individuals whose pension pots exceeded the lifetime allowance in 2015/16 and this represented an increase of 62% on the previous year. Importantly, the standard Lifetime Allowance was £1.25m at that time!

It is an allowance not a limit

We prefer our clients not to view the lifetime allowance as a limit but more a point at which the tax treatment changes, so it is no different to other allowances such as the personal income tax allowance or annual capital gains tax allowance.

When your pension fund value is more than £1m you may have to pay tax on the excess slice of your money. It is important to note that you only pay the tax when you start to take pension savings over the £1 million allowance. It is not something you automatically pay when your pension savings reach that figure.

So how much is the tax?

There is a myth around the tax being 55% in all cases; but this is only the case if you take the excess over the lifetime allowance as a lump sum. If you draw the excess as your savings over the allowance as income the tax charge is 25% this being a tax charge on top of the income tax you pay on your pension. So, if you are a 40% tax payer you would pay total tax of 55% on this excess income. This is because for every £1,000 of excess, a £250 lifetime allowance charge is deducted, leaving £750. After 40% income tax that leaves £450, resulting in the same figure as the 55% charge. This is therefore the same rate of tax so it the comes down to bird in the hand or in the bush if you have a choice.

Those in a final salary scheme who have breached the allowance will have no choice other than to pay the 25% lifetime allowance tax charge, and income tax on their pension payments.

It is important that you get advice as to how you are best to take this excess income and using your tax allowances can help to reduce the total tax you pay.

Work out if you are likely to reach the figure

It is important to get to know about all your pensions so you can keep track of what you have. We, as your financial adviser, will review your pensions annually and are able to project whether you are likely to breach the limit.

If you reach the figure are you better off saving elsewhere?

This very much depends on circumstances and we have covered this in a previous blog.

A further check is made at 75.

We also spend some time looking at this when putting together financial models for our clients as there are instances where the lifetime allowance must be paid on any remaining funds. This is once again where a good financial planner will work with you to ensure this is minimised / planned for.

In short, it pays to talk and discuss this issue with your financial adviser who can assist in ensuring your pension fits in with your goals and lifestyle aspirations but trying to ensure taxation is minimised.

Show me the money?

Where will the money come from? This is a question often asked by our clients as they think about working less or stopping work (you will note from previous blogs that I do not like the term retirement!).

It is certainly an understandable concern as most of us are used to getting a monthly salary or drawings, so it is vital to know what happens when that stops.
This is where the financial planning process comes in, especially if the hard task of saving and investing has been done along the way and we can prove using our financial modelling that you have enough!

If properly planned during the saving and investment period, it is probable that we as financial planners will have suggested you invest across a broad range of tax efficient investments to help achieve a tax efficient and sustainable income stream. These investments are likely to include ISA’s, Pensions, General Investment accounts, Life Assurance Bonds and sometimes a buy to let investment or two.

The tax allowances available are likely to include: –

  • Income tax personal allowance
  • Dividend Allowance
  • Savings allowance
  • Capital Gains Tax allowance

When working with a couple, then we have two lots of tax efficient investments and exemptions available. It is best to illustrate what can be done by way of an example; let me introduce you to Harry and Rachel.

Harry has just sold his publishing business and Rachel recently retired from her own separate business earlier this year. The children have all left home. Over the years we have helped them build a pot large enough to let them stop working for money and follow their dreams of travelling combined with their interest in art.

When they both worked they paid a lot of tax at higher rates however post retirement we can structure their income and their savings and investment to get them to a position where they have all the income they need whilst paying minimal tax, which is a massive boost as it ensures their pot can last for longer and they feel great about paying minimal tax after all those years.

Their income and tax position looks something like this:

Income Source Harry Rachel
Pension £30,000 £0
Interest £1,500 £1,500
Dividend Income £3,000 £3,000
Rental Income £0 £26000
Total Taxable Income £34,500 £30,500
ISA Dividends £5,000 £5,000
Pension Tax free cash £10,000 £0
Capital withdrawal within

CGT allowance

£5,000 £5,000
Total Tax-free Income £20,000 £10,000
Total Income £54,500 £40,500
Tax paid (£4,700) (£3,000)
Net Spendable income £49,800 £37,500
Overall tax rate 8.62% 7.41%

The above figures are based on 2017/18 tax allowances and exemptions which are subject to change, but as the financial plan should be reviewed annually, then we can adjust where funds come from to minimise tax and meet requirements from year to year.

So, the answer to the question is that the money post work is likely to come from a multiple of sources. This can take a bit of getting used to when you are used to one monthly salary payment but that is where working with a Financial Planner really helps in creating the income you need, saving tax and taking care of the administration surrounding your plan. This then allows you to get along with having the life you want, happy in the knowledge that your finances are in good hands.

 

New State Pension Age (SPA) – How will it affect your retirement plans?

In July this year, David Gauke the Secretary of State for Work and Pensions announced new plans meaning that the rise in the SPA to 68 will now be phased in between 2037 and 2039 rather than from 2044 as was originally proposed. The changes were announced after the Government accepted the recommendation of ex-Confederation of British Industry boss John Cridland, who carried out an official review of future state pension age increases.

 Those affected by the changes are those born between 6 April 1970 and 5 April 1978 and currently between the ages of 39 and 47, but the exact date that individuals can expect to receive their State Pension will depend upon the year and month of birth.

Why is it changing?

The changes to the SPA are aimed at bringing women’s SPA into line with men’s, and taking account of everyone living longer.

When the State Pension was introduced in 1948, a 65-year-old could expect to spend

Financial independence is not just about retirement

The traditional view of work is that it’s something we wouldn’t otherwise do, without the financial reward of getting paid… such that the whole point of work in the modern era is to earn and save enough to get to the point where you can “retire” and not need to work anymore.

Yet research on what motivates us reveals that “money” is a remarkably inferior motivator compared to the motivation we derive from interpersonal relationships with other people. Yet due to our inability to judge our own motivations, and what will make us happy in the future, we continue to pursue financial rewards… even as a growing base of research reveals that it doesn’t improve our long-run happiness.

The reason why all this matters is that it implies the whole concept of “retirement” may be based upon a mistaken understanding of our own motivator, a realisation that most people don’t have, until they actually retire, (or at least, are on the cusp of it) suddenly discover that “not working” isn’t nearly as enjoyable as expected, despite all the sacrifices of potentially undesirable work that was done to earn the money to retire along the way.

So what alternatives have we seen from our business owners and professional clients?  Many have come to recognise that work, at least some work, can be motivating and socially rewarding, where money doesn’t have to be the driving factor. Yet at the same time, often such work does at least have some financial rewards… which is important, because if “retirement” is simply about shifting the rewards of work from “mostly financial” to “only partially financial”, then the reality is that most people may not need nearly as much to “retire” in the first place.

This is important because if it is likely there is going to be at least some modest financial reward coming from mostly non-monetary work, it means many prospective “retirees” could make this switch even sooner. Assuming the retiree withdraws 4% per annum from the accumulated savings, then earning an extra £10,000 a year in part-time work in retirement reduces the target retirement savings needed by as much as £250,000! Carpenter Rees therefore do not talk about retirement, but about reaching the point of sufficient financial independence where “work” can be chosen based primarily for its non-monetary rewards.

We have seen many of our clients retire in the traditional sense but those that continue to work because they like the work they do or they can concentrate on the areas of work that they most enjoy or involve themselves in other projects can often have the more enjoyable financially independent lives.

Inheritance Tax rule changes

This week, I thought I would outline how effective estate planning can help safeguard your wealth for future generations.

If you want to have control over what happens to your assets after your death, effective estate planning is essential.  After a lifetime of hard work, you want to make sure you protect as much of your wealth as possible and pass it on to the right people. However, this does not happen automatically. If you do not plan for what happens to your assets when you die, more of your estate than necessary could be subject to Inheritance Tax.

The rules around Inheritance Tax changed from 6 April this year. The introduction of an additional nil-rate band is good news for married couples looking to pass the family home down to their children or grandchildren, but not every estate can claim it.

Bereaved families

 This tax year, more than 30,000 bereaved families will be required to pay tax on their inheritance[1] according to the Office for Budget Responsibility,. So, it pays to think about Inheritance Tax planning while you can and work out how much potentially could be taken out of your estate – before it becomes your family’s problem to deal with.

A recent Inheritance Tax survey conducted by Canada Life [2]  shows that Britons over the age of 45 are either ignoring estate planning solutions or they have forgotten about the benefits these can provide.   Only 27% of those surveyed have taken financial advice on Inheritance Tax planning, despite all of them having a potential Tax liability.

Leaving an estate

Every individual in the UK, regardless of marital status, is entitled to

Sometimes Spending Brings a Bigger Return Than Saving

I thought it was about time we included a Sketch from our friend Carl Richards which appeared in the New York Times in his regular Sketch Guy column.

2017 06 20

Many of our clients have got used to us telling them to spend money but many of them find this hard.

Life experiences give you an incalculable return on investment every single time so why is it hard to spend money on them.

The reason is often that experiences tend to feel like an extravagant expenditure of money, time and energy but I will keep telling you that you only have one shot at life and your goal is not to leave a small fortune to HMRC!

A very adventurous Carl and his wife illustrates this well with a tale of how he and his wife had the chance to

Turn Down the Noise

The Investment and Financial Services industry is noisy and is especially so in the middle of an election. Every day, thousands of articles, blogs, broadcasts, podcasts and webcasts are published, shouting for your attention and trying to make investment sexy.

It’s easy to fall into the trap of thinking that if you do not listen to the noise carefully and sift out the best ideas, i.e. the one’s that could help you find the highest returns—then you will not 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 beneficial to it. The noise can drown out the signal.

So what is the alternative?

We believe that it starts with having a strong evidence based investment philosophy that, 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, these are ideas that help us 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 evolves into how markets work, our understanding improves and we develop our approach accordingly.

Added to this, we use investment managers that really take care over the details of implementation of the ideas. They understand that investment returns are precious and easy to lose in day-to-day management. They know it does not make sense to pay 5% in fees and costs to go after a 4% 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.

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