The 2006 ‘A –day’ was meant to be the start of pension simplicity; its purpose was to reduce the high level of legislation and complexity built up over the years which was often seen as a barrier for people when planning their retirement.
The last 10 years has shown very little evidence to suggest that these changes have been successful in making pensions simple. In my view, pensions have become even more complicated, and to be honest, even I am becoming a little fed up with the constant changes.
From this April (2016), the amount that can accrue in pension arrangements is £1m and savings in excess of this level will be taxed at a penal rate of 55%. The impact of the change penalises the prudent saver, business owners, doctors, teachers, civil servants and senior executives in occupational pension schemes.
There will be some protection available to help shelter funds that have accrued to date for those who have funds above and below the current maximum of £1.25 million. If you stop making pension contributions or leave your final salary pension scheme by April 2016 you may retain the £1.25 million limit by applying for fixed protection.
Alternatively, individual protection is available for pension pots between £1 million and £1.25 million. This protects the value of the fund at 5th April 2016 and this fund value becomes your lifetime allowance up to a maximum of £1.25 million. This option enables further contributions to be paid however there could be a tax charge at a later date.
A further possibility is to draw benefits early or opt out of the scheme if you are at least 55 years of age. For some individuals, this may be a better option as it gives a higher lifetime allowance and allows you to continue making contributions. This would involve withdrawal of the full 25% tax free cash allowance.
In addition to these changes the government has tapered the annual amount that can be paid to pension schemes and this reduction can in the worst case reduce contributions from £40,000 to £10,000 for those earning over £210,000 (see our previous blog which covers these changes).
In addition to this, there is a very good chance that the government will reduce tax relief to a flat rate of up to 30% which will be a large reduction for higher and additional rate tax payers. We await the detail on this but the current chancellor has to raise more tax revenue.
The combination of all of these appear to make pensions less attractive for some, when the opposite should be the case. It is clearly important to maximise opportunities now so that you can have a dream retirement … leaving us to battle with the ever changing pension landscape.
Landlords – and prospective landlords – have had a tough time recently in respect of legislation changes. Below we’ve summarised the key changes you need to be aware of if you’re already a landlord or considering becoming one:
February 2016 – right to rent checks
This is an ongoing reform borne out of the government’s policy to tackle illegal immigration and deter individuals who do not have the right to stay in the UK from remaining here unlawfully. As part of this reform new legislation will come into force on 1 February 2016 which will impact landlords, anyone who sublets and anyone who takes in lodgers.
This is referred to by the government as the ‘right to rent checks’ and will apply to new tenancy agreements in the UK from 1 February 2016 onward, whether written or verbal. These checks must be undertaken within 28 days before the start of the new tenancy agreement, and the records should be kept. The aim of these checks is to ensure that the adult tenants have the right to rent these properties from an immigration perspective, namely, by verifying the perspective tenants’ right to stay in the UK.
Landlords, their appointed agents and those who sublet properties or take in lodgers may be liable for civil penalties of up to £3,000 per tenant, where those tenants are found not to have the right to rent properties in the UK due to their immigration status. To assist, the Government has provided an online checking tool which can be used by landlords and others to conduct the right to rent checks: https://www.gov.uk/landlord-immigration-check.
April 2016 – Stamp Duty Land Tax (SDLT) on new buy-to-let properties
As we have previously highlighted, this legislation will come into from 6 April 2016. The draft guidance states that an extra 3% stamp duty charge will apply to any purchaser(s) who owns more than one residential property at the end of the day of its purchase – irrespective of the intended use of the property.
April 2017 – removal of higher rate income tax relief on mortgage interest
Thousands of buy-to-let landlords will see their earnings hit after George Osborne cracked down on mortgage interest tax relief in the 2015 summer Budget.
The amount landlords can claim as relief will be set at the basic rate of tax – currently 20 per cent. Currently landlords can claim the tax relief at their highest rate of income tax, potentially up to 45%!
This change will be phased in over a four-year period from April 2017. Mortgage interest relief is estimated to cost £6.3billion a year, a Freedom for Information request revealed recently.
The Chancellor claims the move will ‘level the playing field for homebuyers and investors’. We anticipate the changes will only deter smaller investors in the buy-to-let market and put it into the hands of larger operators, which won’t necessarily be a good thing.
A number of clients have asked this week whether they should get out of the market based upon the scaremongering of RBS… i.e. the very bank that we the tax payers bailed out because it could not predict its own problems! Okay, so that’s harsh but probably fair.
Within the investment world there is a Clash (see what I did there) of strategies – there is the traditional theory that value can be added through selecting the right shares and timing the market. This “active “approach strives to exploit inefficiencies in the stock markets. Research has shown that most active investment managers fail to add value for investors as they are concentrating on market forces that are neither controllable nor predictable.
The alternative is what we call “evidence based” investing, which is still a relatively new way of investing in the UK. We at Carpenter Rees believe that this is a smarter approach to investing and is built upon the following principles:-
- Determine the level of risk you wish (or need) to take.
- Diversify to deal with uncertainty – as we are all too aware, nothing is guaranteed and investments will fall as well as rise. Markets (whether it be stock markets, gilts, property etc.) behave differently and move in different directions. Therefore, you can reduce your risk by ensuring you do not have all your eggs in one basket.
- Manage the effects of inflation – inflation will erode the true value of your money, i.e. what cost you £50 twenty years ago would cost you approximately £100 in today’s money.
- Costs matter – keeping the costs of investment down ensure more of the investment profit stays in your pocket.
- Control your emotions as they have the power to destroy investment returns – selling close to the bottom and buying back in close to the top is a recipe for disaster.
- Rebalance regularly – Higher risk assets have historically provided greater returns over the longer term and as a result, if your portfolio is left unattended then the amount allocated to the more risky investments increases. Regular rebalancing, back to the original allocation, controls the risk and keeps your investment portfolio focused on your long term goals.
So if you want to time the markets, and it can be an exciting thing to do, you should ask yourself; if the experts can’t get it right consistently what chance have you got? Our job I guess is to make it all rather “plain vanilla” so that you can enjoy life and not worry too much.
So in answer to The Clash’s question, my view is that you should stay!
HM Treasury has recently published details of how it will apply the new stamp duty land tax (SDLT) surcharge on second properties from 6 April 2016.
The draft guidance states that an extra 3% stamp duty charge applies where a purchaser(s) owns more than one residential property at the end of the day of its purchase – irrespective of the intended use of the property.
An exception applies to properties bought to replace the main residence, on the condition that the original main residence has been sold. However, if the new main residence is bought before the old one has been sold; the buyer must pay the charge but can claim a refund providing the old one is sold within 18 months.
It is not clear exactly what the definition of ‘main residence’ will be, or how closely it will mirror the principle private residence (PPR) for capital gains tax purposes. There is to be no right to elect which residence is the main residence for SDLT purposes, so HMRC will instead determine it by ‘taking into account ‘a group of ‘factors’.
Properties bought as furnished holiday lets will be treated in the same way as all other residential properties, in that the surcharge will apply if the property is purchased as an additional property.
Married couples and civil partners will be treated as a single unit, so that each couple may only own one main residence between them at any one time for the purposes of the SDLT surcharge. This could cause issues where the property is owned by one member of the couple, as the other member would incur the surcharge if they purchased another property.
HM Treasury has not yet decided how to deal with scenarios where two or more people who are neither married or in a civil partnership purchase property jointly (this could be cohabitee’s, parents and children, property partnerships etc.). If one of the people already owns a property but another does not, then either applying or not applying the surcharge seems unfair to one of the parties. They are inviting suggestions on how to deal with this.
The proposed rules may also present some problems for trusts and their beneficiaries. Those who obtain a life interest or interest in possession (IIP) in a second property will be liable to the surcharge.
If you plan to make a future property purchase you therefore need to take this issue into consideration.
December and January are often seen as a time for reflection and planning; a time to look back at the recent past and consider the near future. It’s also a time for the media’s perennial favourites: the review of the past year and outlook for the next.
The Investment Bank strategists fail miserably year after year in forecasting events over the coming 12 months. As entertaining as these may be, this type of commentary is of little practical use in the real world and our suggestion is to take it with a pinch of salt. As George Eliot noted in Middlemarch “Among all forms of mistake, prophesy is the most gratuitous.”
Sometimes it’s nice to look back—to reflect on what you have achieved and to use recent experiences to inform future decisions. But as soothing as it might be to stand on the stern of a ship and gaze at its wake, it does nothing to help you reach your destination.
This is why we take care to review your investment portfolio and the philosophy that drives it, but never rest in our pursuit of ways to make improvements. Our Investment Committee meets quarterly and its role is to ensure that we offer you suitable investment solutions in order to meet your goals. We regularly review your goals with you and, where necessary, make adjustments to your financial plan to increase your chances of meeting them.
We believe in our philosophy of investing in a scientific manner rather than speculating. It can be boring but it is an excellent framework for building an investment portfolio. This has been our strategy for a number of years, and a process that run throughout 2015 and will continue to run through 2016 and beyond. In our view, this is more valuable than the end-of-year press fodder that will be forgotten before long.
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.
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.
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?
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?
- National Savings
- 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:
|Contributions paid (inc tax relief)||£25,000||£15,000||£15,000|
|Final fund value
(10 years later assuming 2.5% growth pa)
|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.
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.
It’s simple: the sooner you start saving for retirement and the more you can put aside, the more you’ll have to spend when the time arrives. What’s not so simple is figuring out what you need to get started once you’re ready to start saving.
I know that many of you have already started this process, but please forward this on to members of your family who may not have.
- Start With Some Assumptions
Most people are put off planning for retirement because it seems such a long way off and who knows how much they’ll need, or even if they’ll ever retire?
If this resonates with you, you’re not alone. However, these are only assumptions which could change significantly during the years between now and retirement – so stick a pin in a page and start with that.
When do you want to retire? How much income do you want your pension to provide? How much can you afford to put away in a pension right now? Are you a cautious, balanced or adventurous investor?
- How Much Income Will You Need for Retirement?
You can arrive at this decision in a number of ways but, most importantly, it can be refined as retirement gets closer. You can take advantage of simple calculators that can be found online to see what your affordable level of saving would provide, or you can work out an assessment based on your current expenditure – there is no wrong answer.
- Take Advantage of Compounding Growth
With compounding growth, you can earn growth on your growth. The longer your pension runs, the more money you will make, because the growth will just keep rising exponentially. Compounding growth can significantly boost your plan value in the long-run because it will nurture your pension at a faster rate.
e.g if you start saving at 25 (with an annual return of seven per cent after fees), you only have to save around £4,830 annually to reach £1 million by age 65. If you wait until age 40, you’ll need to save £15,240 per year, which is more than triple that amount – all thanks to compounding growth.
To give yourself the best chance of growth, many providers offer a range of funds (which can be difficult to navigate and choose from), but also offer short risk assessments, allowing you to compile a shortlist of investments that suit your appetite for risk.
- Find Out About Employer Contributions
The first thing you need to do is enrol in your workplace pension. You may have seen the adverts on TV but, if you aren’t already enrolled, you may be missing out on free money.
From 2017, for most employees, a company will have to contribute a certain amount to your pension. This is like free money and should be considered an additional source of income which will benefit you in retirement.
Make sure you learn what your plan includes, such as how much you need to contribute and the investment options.
- Keep an eye on costs
The more that is deducted from your pension in charges, the less growth you’ll enjoy and the lower fund value you’ll ultimately have in retirement. Look for low-cost products and funds (such as index funds), so that you’re spending less on fees and enjoying more in your pension.
If you still aren’t sure, or are struggling to get started, you may want to speak with a financial planner – such as us. We can help you organise your personal finances and create the right retirement plan for you.