Topic: Family financial planning

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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The kids are alright?

Further to my blog at the end of March “You can’t Take it with you”, I wanted to share with you some experiences and observations around gifting to children.

In many cases people delay making decisions about gifting to their children and other family members which is often due to fears such as: –

  • They may squander the gift – This may indeed be the case, but if they are set to inherit the money eventually, gifting it to them whilst you are still around allows you to guide them.  However, if this is a concern then the money can be gifted into a Trust. This would entail additional cost, added complexity and possibly a feeling of distrust and therefore if you are considering this option, you should be open with the family; at least about why. Another option is to gift an asset such as a property or a house deposit, which is difficult to squander and from our experience, property ownership makes children more responsible.   Another somewhat extreme but effective measure is to make it known that if the gift is used unwisely, they may be disinherited.
  • Too much too young– I love getting song titles from the Specials into my blogs! Some people are concerned that giving money too soon could remove that individuals work ethic and desire to create their own wealth. This can be tricky and the choice will be determined by the child’s personality and the values they have had instilled upon them. Again, a trust may be a possible solution.

 

  • Future Outlaws – As we all know; divorce courts start from a 50/50 split of assets. If you are concerned

It pays to live …

… or more accurately, it now costs more to die if you live in England and Wales as Probate fees are set to rise in May 2017.

The Ministry of Justice (MoJ) has announced that it plans to go ahead with a revision of probate fees despite a consultation in which only 63 out of 829 respondents agreed with changing from a flat probate fee to a proportionate fee based on the value of the estate. In addition only 13 out of 831 respondents agreed with the revised proportionate scales.

Should I stay for good in this final salary pension scheme?

The overwhelming majority of people who have been fortunate enough to be a member of a defined benefit (also known as ‘final salary’) occupational pension scheme should stay in it. There is certainly much to be said for a guaranteed, inflation-linked income for life

However, for some individuals leaving the scheme might be the right option. One example of this is wealthier clients, who may be more concerned about passing on an inheritance and the amount of income tax they pay on an income they may not need, rather than the prospect of running out of money.  For such people the high level of transfer values currently available will be good news and Carpenter Rees have been advising several clients on this matter.

There are many factors that are driving up transfer values but the first, falling interest rates from UK government bonds – gilts – is having the greatest impact.

Falling gilt yields – The economic uncertainty produced by the vote to leave the EU has seen investors moving into safe havens; gilts have been a major beneficiary of this trend. The increased demand has pushed prices high and as a result reduced gilt yields to historic lows. With the lower expected future returns from gilts, pension schemes have had to assume higher current values to provide the guaranteed future benefits – which in turn have resulted in higher pension transfer values.

Lower expected investment returns – We currently live in an economy with low inflation and low interest rates meaning we should expect lower investment returns. In addition, defined benefit final salary based pension schemes are paying out more of their funds in retirement benefits to pensioners as many schemes are closed to new younger members. As a result, Trustees, are expected to take less investment risk by reducing the proportion of their funds in equities and switching to gilts and fixed interest stocks to match the liabilities of the pensions they are paying out.

Improved life expectancy – Life expectancy at older ages in England has risen to its highest ever level. This is a generally welcome development, but it can be a headache for pension schemes that must now expect to pay pensions for longer and this is again reflected in higher transfer values.

It does not however follow that higher transfer values mean that more people should transfer. Many will be comfortable with the guarantees in place and the fact they do not have to take on the investment risk.  But for those with enough wealth to be confident about their own future financial security and would like to be in control of the level of income and therefore the tax they pay, a transfer of benefits from a final salary would be worth considering.

The decision to transfer will be based around numerous factors including the level of risk a client would wish to take, the income levels required and whether they would view their pension fund as a valuable asset to pass on to future generations outside of the estate. I know that I have mentioned our financial modelling software many times, however, this tool is invaluable in helping our clients understand whether a transfer would be of benefit to them; this is crucial as once the transfer is complete, the decision is irreversible.

If you would like to talk to us about your defined benefit pension plan, or in deed any other pension plan, please do get in touch.   We look forward to hearing from you hear.

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