Efficient Wealth Update April 2018
What’s Best – ISA or Pension?
It is a common dilemma: which is better – an ISA or a pension? In truth, there is a place for both and it is easy to argue the case that we should all have both. But how you choose to invest your money is ultimately your decision, so here are some facts about ISAs and pensions to help make your investment choices easier.
Pensions have some valuable benefits, which makes investing in them even more attractive:
- They provide tax relief at your marginal rate on contributions from you as an employee;
- Employers now have to contribute: the new rate for contributions between April 2018 and April 2019 will be a minimum of 2% for employers;
- They lock your money away until at least age 55, which means you can’t make a juvenile decision and decide to withdraw it all to buy a speedboat;
- They are free of Inheritance Tax when you die;
- Depending on when you die, they may be tax free when your beneficiaries take them as income or a lump sum;
- They provide a tax-free lump sum, usually a maximum of 25%;
- If invested, your pension could make good growth, which is accumulated tax free.
Pensions also have some drawbacks:
Your money is locked away until at least age 55 and you cannot access it in an emergency or when you may really need it;
- Although you receive a tax-free lump sum, the rest of the pension is taxable at your marginal rate;
- They can be complex to understand and difficult to manage;
- If your pension is invested, then it is at the mercy of the stock market;
- The Lifetime Allowance and Annual Allowance have reduced considerably over the years and may do so again in the future.
In comparison, ISAs also have valuable benefits:
- You can save up to £20,000 per year (current tax year rate 2018/2019);
- All growth within the ISA is tax free;
- All withdrawals from the ISA will be tax free;
- They are generally easily accessible;
- There are different types for different purposes (LISA/JISA/ISA/Help to Buy ISA …);
- General ISAs can be accessed at any time;
- You can now pass your ISA and its tax-efficient status to your spouse on your death;
- There is no lifetime limit;
- Bonuses are available on some types of ISA.
ISAs also have their drawbacks:
- You can only save a maximum of £20,000 per year – half of what you can currently save per year into a pension (provided you have the relevant net earnings);
- They are easily accessible and therefore not protected from those ‘juvenile moments’ mentioned above;
- There are so many different types it can be confusing to decide which is best for you;
- Passing your ISA to your spouse on your death can be complicated.
These lists are by no means exhaustive and I am sure you are aware of many more advantages and disadvantages. However, this is enough to be getting on with!
It will depend on your circumstances which investment vehicle is best for you and so it is not possible to recommend one or the other here. However, looking at the good and bad points of each should help you to make that decision and, as always, we are here to support and guide you.
Inheritance Tax Reaches New Highs
HMRC collected £5.3 billion from IHT alone in the last year. Let’s just take a second to think about that. This has been reported as a 13% increase on IHT paid in the 2016/2017 tax year – that’s quite an increase.
There are many reasons why experts think there was such an increase, including the fact that there was quite a property growth spurt over the past few years, as well as the Nil Rate Band being frozen at £325,000.
And this increase includes the introduction of the Residential Nil Rate Band! Imagine if we had not had that? With that allowance increasing by only £25,000 in April this year, it is unlikely to make a huge difference to these figures.
However, all is not lost, read on to the next article to find out how you may be able to keep hold of some of this cash.
5 Ways to Help You Pay Less Inheritance Tax
Nobody likes to think that their hard-earned cash is going straight to the taxman when they die, so here are five ways that could help keep your cash in the family. Remember, IHT is 40% – nearly half of the asset’s worth!
- Make a Will …
- Often neglected but very important. Without a Will your assets will pass according to the Rules of Intestacy, meaning you will have no control over who they go to, and a larger proportion may end up in the taxman’s pocket.
- If you would like to find out what the Rules of Intestacy are, follow this link: https://www.gov.uk/inherits-someone-dies-without-will
- Give it away …
- There are many ways to gift money during your lifetime that mean the assets are outside of your estate on death.
- You can use annual exemptions, which means there is no waiting period for the asset to leave your estate, it is gone immediately.
- To find out what the gifting allowances are, follow this link: https://www.gov.uk/inheritance-tax/gifts
- Give even more away …
- If you wish, you could give away more than your annual exemptions allow. Providing you then live for a further seven years or more, the full amount of the gift will be outside of your estate for IHT.
- Make sure you keep a detailed record of your gifts so that HMRC cannot question this after your death.
- Follow this link again for more details: https://www.gov.uk/inheritance-tax/gifts.
- Use your pension allowances …
- Pensions are free of IHT so make sure you use your annual pension allowance of £40,000 if you can.
- Remember you must have net earnings of at least £40,000, otherwise you can only put in the maximum amount of your net earnings … but that is better than putting in nothing.
- Set up Trusts …
- Trusts can be very effective in reducing the size of your estate. They work similarly to gifts in that you must live for seven years after you put money into a Trust, but they provide much more protection and control over the assets during your lifetime.
- If you want to make a gift but are worried about how the recipient may use the money, or you don’t want them to have access to it just yet, then Trusts are definitely worth considering.
- Obviously, there are many more rules and many different types of Trust, so come and see us and we can help set up the right one for you.
Lifetime Allowance Decrease is 2100% Better for Government
Why do the government keep reducing the pension Lifetime Allowance? They repeatedly ask us to save more for retirement but then keep capping how much can be put into pensions! Sounds bizarre … but is it?
Well, not for them! The reduction in the Lifetime Allowance has led to a 2100% increase in the government’s tax income compared with the same income in the 2006/2007 tax year. As the allowance drops further, more people are being hit by the severe tax charges for exceeding the allowance.
Many of us may feel the £1 million allowance is not something we may ever reach or exceed. However, over many years, and taking into consideration tax-free growth and the reinvestment of interest, this situation is becoming more and more of a reality for many of our clients. This means that it is sneaking up on people, so they may not realise they are close to or over the allowance limit until it is too late.
That is why it is important to plan, to make use of other allowances and to apply for the available protections if you can (details of which can be found here: https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance).
A retirement plan that incorporates all of your assets and takes into account all of your individual circumstances is something we help people achieve every day, so if you need help then let us know and avoid paying over the odds on your pension income.
Pension Schemes Asking for Their Money Back …
Defined Benefit Pension Schemes have been given a deadline of October 2018 to check their records with HMRC to make sure the pension payments they have set up are correct.
In 2016 it was highlighted that people may have been severely underpaid or overpaid on their set annual pension payments, in some cases up to £50,000; and now some of the pension schemes want their money back.
These issues come from errors in calculations in relation to the contracted-out element of the pension (usually called GMP) that would have been made 30–40 years ago when systems were usually manual.
Many schemes have taken the stance that the client cannot be blamed for an error by the scheme itself, and so will not reclaim the money from members who have already received payments. However, if these members do not pay the money back, then it will be those scheme members who are not yet receiving payment who may end up paying for these errors in the long run.
This announcement comes as Defined Benefit Pension Schemes have been under the microscope for their lack of transparency, underfunded status and complex nature, and this certainly will not do anything to alleviate members’ fears that they will receive less pension than expected when they retire.
Aviva in the Proverbial Dog House
In the month of March, it was one thing after another for Aviva.
First, it was the fact that they could not seem to fix their platform issues. Aviva went through an upgrade process, which obviously did not go to plan! For a week they could not produce client reports and so, when clients or advisers such as us, rang to ask for client information we were told that there was absolutely nothing they could do to produce any reports, or even tell us when it was likely we could have them!
Second, this system glitch also affected regular pension drawdown payments being sent out to clients. Aviva were dealing with the most serious cases first and, where the lack of payment was causing financial hardship to clients, they were working to release funds as a priority.
Finally (they say it comes in threes), waiting times to contact Aviva increased dramatically at the end of March. This was probably linked to their other issues, but one adviser reports waiting on hold to speak to someone for fifty minutes! Now that is outrageous and a complete waste of time.
We all have technical issues, which is understandable, but a large organisation such as Aviva should have a better contingency plan in place for when everything goes wrong, because sometimes it does just that.
I believe there are still some residual issues, which are slowly improving. Let’s just hope they don’t have any more upgrades planned for the near future!
Notes on Brexit
With just 12 months to go before exit day we are now in the uncomfortable position of remembering Mrs May’s words from last year’s leg of the negotiations: “Nothing is agreed until everything is agreed”. The new draft agreement published this week comes with a similar ominous addendum and so, despite shining a light on some of the withdrawal darkness, businesses in the UK are struggling to take comfort from the provisions made for the 21-month transitional period. (By the way, if you’re wondering why the transition period is such an odd length of time, it’s because the quotas for industries such as fishing and agriculture are agreed per calendar year and this avoids setting any partial quotas for 2020.)
The transitional arrangements cover application of EU laws, free movement of people, the customs union, and defence and security cooperation. Unfortunately for us and other firms in the Financial Services industry, negotiations around our sector have been relegated to a separate annexe, which has not yet been incorporated in the negotiations or even into the guidelines for this round of talks.
And this is before any of it is even put to a vote! Here in the UK, the government has committed to holding a vote on the resolution before it goes to the European Parliament (EP). At the EP it needs a qualified majority vote to be concluded – i.e. 20 of the other 27 member states, representing at least 65% of the EU’s population; that is a lot of people who need to be satisfied that the arrangements are in their best interests.
Book of the Month
This month’s book is ‘Thinking Fast and Slow’, by Nobel Prize winning Daniel Kahneman. Let me ask you a question: A cricket bat costs £1 more than a cricket ball. Together they cost £1.10. What is the cost of the cricket ball? Easy isn’t it, it’s 10p…. isn’t it? No, it’s actually not, the answer is 5p, but your instinct is to answer fast. In ‘Thinking Fast and Slow’, Kahneman explores how we initially react to certain situations, and then, how under closer investigation, we can find out that we were wrong.
A lengthy and drawn out book it certainly is, but an insightful one it is too. Ironically I tried to listen to this a couple of times, and struggled to get into it. When I changed to 1.5x speed, it suddenly got my attention, so clearly Kahneman was thinking too slow for me. It will change the way you think about your thinking, and make you look at the world through different eyes.
Rates on some of the most popular mortgage deals available have reached their highest levels in two years, as lenders look to ‘price-in’ the expected rate hike next month. Here at Efficient Portfolio this is something that has become very noticeable over the past few weeks.
The average mortgage rate has gone up by 0.25% since last month. This follows a previous mortgage rate rise by lenders around November when the base rate moved up by a quarter of a per cent. The average two-year fixed mortgage rate has now reached 2.5% – the highest level since July 2016.
It is predicted that the Bank of England’s Monetary Policy Committee will raise the base rate further from 0.5% to 0.75% at its meeting next month and many lenders are increasing the cost of mortgages in advance.
“The mortgage market is experiencing a period of upheaval, with rates that were once at all-time lows now starting to rise,” said Charlotte Nelson from financial data provider Moneyfacts.
If we look at a typical loan of £175,000, a borrower is now paying on average £44 extra per month compared to those who fixed mid-late last year.
“Average mortgage rates have spiked at various points in the past few years, but this recent jump could be just the beginning as providers prepare for the expected base rate rise in May,” said Tashema Jackson of uSwitch. “Banks are saying that ‘market conditions’ are driving these rises, so we can expect others to follow suit in the coming weeks and months.”
With this up-tick in market activity now is definitely the time to ensure you are on the best rate. Here at Efficient Portfolio our mortgage team can ensure you have the most suitable mortgage for your needs as well as looking to save you money as the cost of borrowing continues to rise.
Charlie’s Mini Blog
Last weekend I completed the Rutland Cicle, the longest cycling sportive in our area. I cycled 115 miles during the course of what was a pretty hot day. The following day, inspirational runners we gathered on the streets of London to run our hottest London Marathon on record. Cycling or running those sort of distances is a difficult balance of going fast enough to get a good time versus taking it easy enough to last the distance.
During my hours in the saddle, it occurred to me that these endurance events are a bit like managing your money, particularly in retirement. You want to ensure you have enough money to last you your lifetime, because you definitely don’t want to run out in your 80’s when you can no longer return to work. Equally, you want do the bucket list while you are young enough to be able to.
When cycling a long distance it would be really helpful if I had a built in energy gauge on my arm, so that I could if I was using enough but not too much. Whilst I’ve never run a marathon, it would I am sure let people avoid collapsing 5 miles short of the finish. With your finances, there is the equivalent of that energy gauge. It is called a Lifetime Cash-Flow Forecast, and it allows you to see your life ahead from a financial perspective, so see if you are running too fast or too slow. If you would like our assistance to build you your own Lifetime Cash-Flow Forecast, we’d love to help you ensure that you aren’t collapsing before you reach the finish line!