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.

 

Five Steps to Starting to Save for Retirement in Your 30s

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.

  1. 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?

  1. 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.

  1. 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.

  1. 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.

  1. 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.

 

The Power of Getting Started

I was chasing up a client the other day that had told me that he desperately needed to meet with me to discuss his financial plan; not so much for his own benefit, but for his family. For some time now he has been promising his wife that he would set out everything they have so that when we all meet up, we can discuss when and if they will run out of money, can they help their children to buy a property each and how much are they going to leave the tax man.

This client certainly has his life plan sorted and since retiring from a very high powered job, he is enjoying lots of adventure and living life to the full.  However, he still hasn’t got his financial affairs in order and there are a number of issues that need to be addressed.   Fortunately for him, they are not massive issues as it is highly unlikely that he will ever run out of money, but all the same it needs sorting out for the family’s sake and then they can all get on with enjoying themselves. Plus in a purely selfish way, I will feel a lot better knowing that it has been done.

I’m guessing what I’ve just described sounds a lot like many people. We can all come up with perfect plans to get everything done, then we wake up and realise that real life gets in the way and in our ‘spare’ time we prefer to do the fun stuff.

When it comes to our finances, we tell ourselves we can’t possibly invest our hard-earned money unless we’ve identified perfect investments and it fits a perfect plan.  Perfection means different things to different people, but with investments it often means, “Guaranteed to make me a lot of money with very little risk.”

There’s one, teeny weeny problem with this definition …. It doesn’t exist! Unfortunately however, that doesn’t stop people from trying to find these perfect investments.

That’s why getting started is such a big thing!  By putting aside a bit of time to think longer term and letting go of the need for perfect, we can begin to recognize that the end goal matters so much more than whether the journey is perfect.

I want to reach my financial goals. I know you probably want to reach yours, too. But we’ll never get there if we keep on stalling or waiting for something that’s highly improbable.

Good things happen if you stick to the plan

This blog coincides with the launch of our first corporate yoga class which took place in our offices yesterday afternoon.  There were quite a number of our staff involved, which is fantastic; I wasn’t one of them as I was busy writing this…. hopefully the yoga made for a calmer drive home.

It is often said that the secret of success in any endeavour is “stickability”, your capacity for staying committed to a goal.  But success also depends on having goals you can stick with. Managing that tension is what a financial adviser does.

Inspired by the impressive weight-loss of a work colleague, a portly middle-aged businessman decided to copy his friends programme. It was a crushing regime, involving zero carbs, 5am sprint sessions and mountain biking.  You can guess what happened next? The aspiring dieter lasted about a week on the programme before packing it all in and returning to sedentary life, pies and beer.

In hindsight, it would have been better for him to get some advice first, start slowly, swap the mountain biking for brisk walks and the zero carb diet for low calorie beer. He may not have lost weight as quickly as his friend, but he would probably have had a better chance of sticking with the plan in the longer term.

Similar principles apply with investment. You may envy acquaintances who seem to have succeeded with high-risk strategies, but that doesn’t necessarily mean those are right for you (or them).  In any case, their dinner party talk may leave out key information, such as how they sit up all night watching the market and worrying.

Just as the want-to-be weight loser couldn’t live with 5am sprints, not everyone can stick with highly volatile investments that keep them up at night or that cause them to constantly second-guess themselves and few people can do it without a trainer.

On the other hand, reaching a long-term goal like losing weight and building personal wealth requires accepting the possibility of pain and uncertainty in the short-term.

The trick is finding the right balance between your desire to satisfy your long-term aspirations and your ability to live with the discomfort in the here and now. Quite often, this tension can be managed through compromise. In other words, you can accept some temporary anxiety or you can moderate your goals.

The point is you have choices. And the role of a financial adviser is to help you understand what they are. So, for example, an adviser can assist you in clarifying your goals and setting priorities.

A personal trainer would be unlikely to recommend an out-of-shape sedentary business executive should start running marathons or try to halve his body weight in six months.  The job of the trainer, or an adviser, is to manage your expectations and ensure the goals you are pursuing work with everything else you want to achieve in your life.

An adviser can also assess your capacity for taking risk. We aren’t all high risk takers and a portfolio that’s right for one person may be all wrong for another. That’s because each individual’s circumstances, risk appetites and goals are different. A financial plan should be bespoke not an off the peg solution .

A third contribution an adviser can make is to help you manage change. Our lives are not static, we change jobs, our incomes increase, we take on new responsibilities like children and mortgages, we deal with aging parents, we move cities and countries. Nothing stays the same and a financial plan shouldn’t either.

So not only do different people have different goals, but each person’s own goals evolve in unique ways as they move through life. Reaching those goals requires a detailed and realistic plan, plus a commitment to stay with it. Some people may be up for the triathlon when they’re young and fit. But in later years, they might just need a more conservative programme of stretching and walking.

You can try doing this on your own, of course. But it makes it easier if you have someone to keep you focused, keep you disciplined and help you change course when the circumstances of life require it.

Now that’s stickability!

Suits You ……Tailor Made Pension Scheme for the Family Business

I am pleased to announce that I have recently had confirmation that I have passed my latest exam. To tell the truth I thought my exam days were over, but I really quite enjoyed the study and the paper I had to write to achieve my pass in the Advanced Certificate in Family Business Advising from STEP (Society of Trust and Estate Planners) – trumpet blown!

Family businesses in the UK employ over 9.5 million people and two thirds of this country’s businesses are family owned. We have a great deal of experience in dealing with family businesses a lot of which comes as a result of the fact that we administer the ultimate family business pension vehicle, the Small Self- Administered Pension Scheme (SSAS).

These schemes are the made to measure Family Business Pension Plan in that the family are trustees, members and also have the facility to use the funds in the scheme to invest into the family business by way of a loan to the company (now referred to as Pension Led Funding but we still call it Loan back) or using the funds to purchase commercial property for the business. The key here is that the family has control over the investment strategy, the membership (family members only) and the level of contributions (within limits set out by our good friends HMRC but we covered that in a previous blog and will no doubt do so again).

In addition to this, the fund can assist with the family’s succession plans in that Mum and Dad can draw their benefits from the pension fund making them less reliant on drawing funds from the business enabling more to be paid to younger family members working in the business, when they probably need it most.

In our dealing with the Family Pension Schemes we have grown into the role of Family Business advisors and developed the soft skills necessary to help families with their future planning. It is not always about the money it is often about how and who is best to take the business forwards and where to have the assets i.e. in the Company or the Pension Fund to help with the future generational planning.

I am probably teaching to the converted in many cases but please feel free to pass the word on to other family businesses that could benefit from the bespoke made to measure pension scheme or who simply have a scheme but are not receiving any proactive advice on what they can do.

 

Cyber-crime and your personal data

Last week was National Get Safe Online Week, so I suppose it was somewhat ironic that one of the week’s big news stories related to a cyber-attack on TalkTalk, which saw many individuals left vulnerable to fraud.

Unfortunately for TalkTalk customers, the risk that fraudsters may now be in possession of their personal information is not the whole story; it also brings with it the added risk that other fraudsters may seize the opportunity to contact individuals, claiming to be from TalkTalk with instructions on how to ‘safeguard individuals from fraud’, claiming to be from a third-party security company, or claiming to be software companies offering advice or a fix!

Frustratingly, we have no control over how companies manage our personal data, but we can control how we manage it ourselves. While I’m not a client of TalkTalk, it certainly made me stop and think about just how much personal information we are prepared to share via the internet, particularly on social media platforms.

Take Facebook for example: we proudly update our status to share beach photos of ourselves and our family, advertising that we are away on holiday and our homes are therefore empty. We also share our dates of birth, children’s and pets’ names, previous schools and home towns. Whilst all of this information is posted innocently and intended for our Facebook friends and contacts, it can be a fraudster’s dream.

According to the National Crime Agency, cyber-crime is one of the most significant criminal threats to the UK. So, what can we do to help protect ourselves? A good place to start would certainly be to ensure that your devices are protected with secure passwords and up to date anti-virus.

Get Safe Online suggests that there are a number of sensible and simple measures that we should follow in order to protect ourselves. Their six top tips are as follows: –

 Cyber crime - 6 tips to keep it personalSource: https://www.getsafeonline.org/protecting-yourself/getsafeonlineweek2015/

As a business, we have worked hard to ensure that our IT systems are as secure as possible and have trained our staff to look out for potential scams but, as the TalkTalk debacle has highlighted, nothing is invincible and there’s no such thing as ‘no risk’.   However, with our continued vigilance of our systems and your individual vigilance with your personal data, we can certainly all help to ensure that we maintain a ‘low risk’ profile.

 

Investment Plans and Forecasts Don’t Mix

Investment Plans and Forecasts Don’t Mix

Sketch courtesy of Carl Richards of The Behavior Gap.

 

I set off early this morning to get into the office and write this week’s blog, but clearly I hadn’t predicted the short-term traffic problem correctly, as an accident had turned the M56 into a temporary car park.

I guess this was quite apt given that this week’s blog focuses on one of Carl Richards’ great sketches and gives a typically British angle to its meaning.

Something we often get asked is ‘I know you can’t time the market, but in your view, where is it going?’

We get still get this question from people at meeting after meeting and, it often comes after we have spoken about the importance of behaviour and how we can’t predict short-term market performance.

Despite the irony of this, we fully understand why people continue to ask questions about timing. Firstly, there’s an assumption that having an opinion — whether it’s about the market, the economy, or Japan — makes someone look smart. Being able to speak confidently about these subjects must mean you have more money and your investments will do better, right?

Wrong.

Secondly, if you don’t talk about sport or politics, that only leaves economic issues. Again, not true – it just feels that way! Maybe you like to talk about all three, but it’s reached the point where talking about the economy and markets is an official spectator sport – one that we all feel capable of playing!

Moreover, while it may be fun to chat about what the market might do next at the golf club, don’t kid yourself. What we know about the market comes down to a number of guesses, also known as forecasts.

Forecasts about the future of the market are very likely to be wrong. All we don’t know is by how much and in which direction. So, why would we use these guesses to make incredibly important decisions about our money?

You shouldn’t because you know better and relying on what’s really just a hunch is an all but guaranteed recipe for financial pain.

Instead of relying on guesses to dictate our financial decisions, we need to focus on the investment basics:

    • Figure out where you are today
    • Make a guess about where you want to go
    • Buy diversified, low-cost investments that have the best shot of getting there
    • Behave for a long time.

Obviously, following these rules isn’t nearly as interesting as speculating about whether the FTSE will break 7000 before the end of the year again – by the way, try looking at the papers at the beginning of the year and see what the so-called experts predicted for the markets for 2015! However, it is a list that will keep you from doing something dumb, like thinking it’s a good idea to bet your portfolio on a guess.

So, just in case I’ve left you in doubt, please don’t forget: plans and guesses don’t mix! That’s probably why I should have used my sat-nav this morning!

Lessons from the FTSE 100 Record.

Although it has recently fallen by 10 per cent, the FTSE 100 reached an all-time high in late April, surpassing its previous peak achieved on the eve of the millennium.

This illustrates just how long it can take for the stock market to recover from a crash, but it’s not really representative of an investor’s experience since 1999. People tend to fixate on headline indices, but it’s important to understand that there’s more to a real return than the numbers that make the news.

A more realistic measure of the investment return of the UK’s largest listed companies is the total yield, which includes the reinvestment of dividends. By that measure, £100 would have fallen in value after the dot.com crash but would have recovered its original £100 value by the end of 2005 and since grown to £168.

The total return is more meaningful than the headline you see in the paper, but it’s still far from accurately representing a diversified investor’s experience over the past 14 years.

Diversifying beyond the FTSE 100 might involve holding small companies that offer important diversification benefits and have a history of performing better than large companies in the long run. During this period, UK small companies more than tripled in value, so an investment in the whole UK market, measured by the FTSE All-Share, would have made the £100 investment grow to £190 over the same period.

On top of that, investing in global markets can improve expected returns and increase diversification; over this period, a global portfolio of shares returned £176 from the initial £100 investment.

As advisers, we like to ensure that you have exposure nationally, internationally and across all the major asset classes – shares, bonds and property – and we like to ensure these investments are made at minimal cost, so that you keep more of the return.

The next time you hear that one of the world’s headline indices has risen or fallen …. you should  think hard about how meaningful this news is to your broad portfolio of investments.

A good headline, that unfortunately TAPERS off…

From 6 April 2016, a date not too far away, the annual pension contribution allowance – currently set at £40,000 per annum – will start to taper away for people with high income.

The proposed legislation has not received Royal Assent and could change, but I suspect it won’t. The Government estimates that only 1 per cent of taxpayers will be affected by these changes (approximately 300,000 pension savers).

Will this apply to you?

If you have ‘threshold income’ of £110,000 or more AND ‘adjusted income’ of £150,000 or more, then this will apply to you.

‘Threshold income’ is broadly all of your taxable income, including salary, interest, rent and dividends.

‘Adjusted income’ is broadly your threshold income above the amount paid into any pension by you or your employer.

How will this apply to you?

For every £2 of ‘adjusted income’ you have over £150,000, the annual allowance will reduce by £1 to a minimum of £10,000. Therefore, for individuals with adjusted incomes of £210,000 or more, the annual allowance will reduce to £10,000. If your adjusted income falls between £150,000 and £210,000, then a tapered amount applies, as follows:

taper allowance

Your opportunities

This does present the opportunity for some individuals to maximise their pension contributions in this tax year through thorough planning. However, these options may not be available to everyone:

Option 1.

There is a prospect for those that will be affected to maximise their pension contributions now. This could be done from savings, or by bringing some remuneration forward to this tax year.

For example, a business owner who takes a total annual income of £130,000 and receives £40,000 of pension contributions into their pension from the company each year would find the maximum pension contribution being capped at £30,000 next year – their adjusted income is £130,000 + £40,000 = £170,000.

However, if the individual brought forward £20,000 of income into this tax year, their net income averaged over the two tax years would be broadly the same. However, the business would be able to pay £40,000 into their pension during the next tax year, as their ‘threshold income’ would be £110,000 and their ‘adjusted income’ would be £150,000. They could also potentially fund their directors loan account with the additional £20,000 brought forward and draw it next year.

Option 2. 

If you are not yet a member of a registered pension scheme, joining a scheme this year will generate up to £40,000 of contribution to carry forward for future years.

Option 3.

Make full use of any accumulated payments that you could have paid in previous years and use this amount in this tax year.

 

We would be happy to discuss this further, so please get in touch and if you know of others that may be caught out by this,  feel free to pass this blog onto them.

 

 

 

Your Personal Financial Landscape – Cash Flow Modelling

Some of you will have been lucky enough to have been through this process with us and I have to say, we really enjoy the interaction this involves!

Our job is to ensure you can live the life you wish without running out of money in the process. Cash flow modelling is therefore an essential tool as it can illustrate where you are now, where you would like to be and what you need to invest to get you there – or how long your will money last.

This detailed picture of your assets includes existing investments, debts, income and expenditure. These are all projected year by year, using assumptions for the rate that your wealth will grow, rates of inflation, wage rises and interest rates.

There are some of you who will have a clear plan for your life but don’t know if you’re on track to achieve your goals. However, there are many of us who don’t have a long-term financial strategy at all. Others may have a goal, but no method of determining whether it can be achieved.

Without some form of financial model, it’s very difficult to make financial decisions about critical things such as:

  • When can I retire?
  • How much do I need to sell my business for?
  • Can I afford to buy a second property or a new car?
  • What level of investment risk do I need to take to achieve my financial goals?
  • What level of tax will apply upon my death and my partner’s death?

The cash flow modelling can help you to answer these questions and assist Carpenter Rees in mapping out your personal financial planning landscape. The output from the cashflow modelling is easy to understand and, in many cases, it helps to provide clarity to our clients’ financial affairs.

Inevitably, there will be unexpected twists and turns along the way, so it’s necessary to regularly review the plan in order to ensure you remain on course. The cash flow therefore becomes the centre of your financial plan.

If you’d like to see an example of a cash flow model and how it works, please contact us and we can forward an example to you.