On the subject of “Tax Relief”?
…have you claimed yours correctly?

People paying higher rates of income tax must claim their extra tax relief on their pension contributions or risk losing it for good.

This affects a lot of different people in different ways, for example those paying into a personal pension will probably receive the basic rate of tax relief at source, and pay their monthly premiums net of that amount, however when you complete your tax return you still need to detail any pension contributions being made in order to claim the extra tax relief you are entitled to.

A recent survey has also estimated that literally hundreds of thousands of people paying 40% and 50% income tax assume their contributions to contract-based company pensions automatically receive full tax relief at source, however only the basic rate of tax relief, currently 20%, is automatically credited, which means people are missing out on many millions of pounds in tax relief every year.

Higher rate tax payers are responsible for filling in their own self-assessment tax forms and claiming any additional tax relief on their pension contribution.

So, talk to your accountants and make sure you are claiming what you are entitled to. If you dont have an accountant I would suggest you get one, if only to check you are paying and claiming what you should. I can make recommendations to an Accountant if you dont know where to turn.

Tax relief on pension contributions?
…is it under threat?

In recent years the tax relief available from pensions has been subject to a number of changes. Whilst there is no clear indication that it will be subject to more changes at the current time, I recently read an interesting article on IFA Online which looked at how certain changes could affect you and whether there were any steps you could take to reduce their impact.

Will higher rate tax relief on pension contributions be restricted?
Twenty years ago only 6.3% of all UK taxpayers paid higher rate tax, and that figure has now increased to 13.5% and continues to increase which means that higher rate tax relief on contributions is one of the most valuable features of a pension for many clients. In turn that means that higher rates of tax relief is costing the Government more money.

Just to expand on this, with higher rate tax relief, investors that pay higher rate tax can for example increase the value of their pension by £1,000 at a net cost of only £600. If this level of tax relief on pensions is removed, the same increase in pension value will cost your clients an extra £200.

The Government has set an annual allowance which currently allows savers to contribute up to £50,000 to their pension each tax year, as well as carry forward any unused allowance from the last three tax years.
Will the 50% additional tax rate be removed?

This isnt something that affects a great percentage of people, but the Chancellor previously confirmed that the 50% tax rate was only a temporary measure and would at some point be removed. This is a very hot topic at the moment, and I will believe it when I see it.

Anyway, one way in which those of you earning more than £150,000 can reduce its impact is by making contributions to a pension scheme. Increasing the value of your pension scheme by £1,000 currently costs only £500, even less than it costs higher rate taxpayers. It isnt quite as clear cut as this and I would have to discuss your particular circumstances with you.

The ability to make use of unused contribution allowances from previous tax years will be particularly useful for 50% taxpayers, as this group were most affected by the complicated “anti-forestalling” restrictions introduced by the previous Government. If you fall into this category, please have a discussion with me around this.

The Chancellor’s recent statements mean it looks unlikely that 50% tax will be scrapped in the very near future. However, if you are a 50% taxpayer the amount of pension tax relief available to you will also be restricted if the 50% tax rate is scrapped. So, if you are considering making pension contributions, doing so before the 50% tax rate is scrapped would potentially maximise the tax relief available to you!

Will limits be placed on the tax free lump sum?
Currently most modern pension funds allow for the option of receiving 25% of the pension fund as a tax free lump sum, and this has always been a very attractive feature for many clients. However, I often wonder why the phrase “Tax Free Cash Lump Sum” was replaced by “Pension Commencement Lump Sum”. Maybe that’s just me being cynical!

Restricting tax free cash would be incredibly unpopular with the majority of people saving in a pension and would therefore be counter productive, so I am not expecting changes to this any time soon.

Pension Annuities…
…The cost of delay…

Converting your pension fund into an income is a complicated area, with many decisions needing to be made. For example, should the income be taken straight away or is waiting a few years in the hope of getting a higher retirement income a better option?

Here are a number of factors that may impact on your decision?

Falling annuity rates

Rates have seen a general downward trend in recent years, in fact one annuity index shows that they have fallen on seven occasions out of eight since 2009. This is largely due to the fact that people are living longer, but I suspect that this may continue to be case going forward.

Legislation

• European Legislation – The introduction of the new EU Gender Directive means that men and women will be offered the same annuity rates in future. In the past, women received less each year as on average they live longer. This change may see men’s rates fall by up to 5% while women’s rates increase slightly.
• Solvency II – This means that insurers which sell annuities will need to hold greater capital reserves, which in turn means that annuity rates will fall, and, the Bank of England’s decision to inject further money into the economy by buying gilts may push rates down further.

The cost of delay

Delaying decisions can mean missing out on potential income, which can take years to recoup over the same period if your fund value remains static.

I read an example in the press that said a 65 year old man can buy a yearly income of a little over £2,850 with a pension fund of £50,000, but a 67 year old man in the same situation could obtain a better annual income of just over £3,030. If the younger man delayed buying an annuity for those two years in an attempt to gain a higher income, with all the factors remaining unchanged, he will have given up nearly £5,800 of income in order to boost his annual income by a little over £180pa. It doesnt take a mathmetician to work out how many years it would take to recoup the income lost!

There are obviously a number of assumptions in this example, but I think you get the idea.

So, I hear you ask, “What’s the answer?”

If you believe that there is a chance that investment markets are going to rise over the medium to long-term, your situation may change, or that your health may deteriorate, then there is always a chance that delaying may mean you have a larger fund and access to impaired life annuities, which may be beneficial, however, if your fund remains static, and inflation continues at its current rate then you may be better not waiting.

There are literally loads of influencing factors, which is why it is important that we talk about this if you are thinking of retiring either now or in the next few years! So, feel free to contact me if you want to discuss your personal situation in more depth.

Are you going to lose your Child Benefit?
…or your Personal Allowances for that matter!!!….

I think we all agree that it has been a very trying few years, and it seems that every time you open a newspaper or watch the news there are talks of economic downturns, deficits, inflation, recessions and so on, so it is inevitable that changes had to happen to try and repair the economy over the coming years.

A couple of changes that may affect a number of you reading this email included the proposed change to Child Benefit entitlement, and the loss of personal allowances for higher earners. Clearly the former would affect more people, but it is important that people are aware of these changes, but also if there is anything that can be done to avoid losing these valuable benefits.

Child Benefit

Lets start with Child Benefit, it has been proposed, although not fully finalised, that from 2013 child benefit is to be axed for higher-rate taxpayers. This would affect parents that earn approximately £44,000, the slightly controvesial element to this is that the cut will hit homes with a single or two high earners BUT families with two parents on incomes just below the cut off point, which may add up to over £80,000pa – would keep the benefit.

At the moment, parents are paid roughly £20 a week for the eldest child and just over £13 for subsequent children, which could mean a family with three children who are no longer be eligible to receive child benefit would be in the region of £2500 worse off each year.

So the question is, if you are just below that cusp, you may want to avoid tipping over the boundary. Lets use an example, a £2,000 pay rise taking someone from £43,000 to £45,000 could cost them over £250 in child benefit payments if they have two children.

This is still some way off, and as I mentioned earlier, is still to be finalised, but who wants to turn down a pay rise in this climate? There are options around pension planning and salary sacrifice that may offer one solution.

Personal Allowances

Currently if your income is above £100,000pa, then you may not realise this, but you will lose some or all of your personal allowance, this is the amount you can earn before paying income tax. This is being tapered down at a rate of £1 for every £2 of income above the £100,000 limit. This means that when someone aged under 65 with a standard tax code reaches income of £114,950pa they will have lost their full personal allowance, for some higher earners, thus can have the effect of making an effective rate of tax paid for that element of their income approximately 60%!!!!

I appreciate that this doesn’t affect a large number of people, but that doesn’t make it any less important to mention. Again, with careful planning, it may be something that can be avoided.

Are you adequately protected?…
Apparantly most of you aren’t!!!….

Aviva have recently released their ’2011 Family Finances Report’, and one aspect caused me particular concern and therefore I felt compelled to highlight it.

They say that of the 2000 people surveyed 95% said they didn’t feel they were completely protected, and 49% feel unprotected or completely unprotected, and even the 22% that felt they had some security only feel ‘protected if nothing unexpected happens’….. Seriously?!?!?! Surely the purpose of protection is to protect against the unexpected! That last statement spelt out the gravity of the problem in my opinion!
In light of the fact that I read an article in the press suggesting that the price of term assurance premiums had fallen by approximately 50% over the last decade, I am surprised that so many people are under insured, or even not insured at all!

On a completely separate note, and nothing to do with the Aviva Report, another interesting statistic I read in the press was that as a general rule, employers in the UK were more likely to insure their photocopier than they were their own staff!

I cannot tell you how strongly I feel that protection, or the lack thereof is something that needs to be addressed and quickly! The impact of not being protected can be absolutely catastrophic, and if people think the recession was difficult, I cant imagine what adverse effect the death of a primary breadwinner would have for example! Sorry to be so morbid but I would rather people felt a reaction to this article and do something about it than tread around on eggshells and people not do anything.

If you feel you are one of those that isn’t adequately protected, whether life, critical, mortgage, income protection or key person, or just want a review of your protection arrangements, then please email us or give us a call. We can look at a whole range of protection solutions for clients, and it really doesn’t have to cost the earth!

Saving up for that special event….
Private Education, University, Wedding(s) or the Deposit for a house…

Over the last few months I have seen an increase in the number of people wanting to talk to me about saving for future events, such as University, Private Education, Weddings, and Deposits for houses etc.
Everyone knows that events like this cost more now that ever, but what has become apparent is that many people are not usually expecting only one of these events, in some cases they can expect two or even three of these events to occur, and when we started to dig deeper the costs just spiral.

Let’s take private education and university for example, if we assume a young family with two children are looking to send their children to private school and then on to University; they could require literally hundreds of thousands of pounds over what in reality is a relatively short period of time.

That may sound crazy, but one such example involved a family wanting to send two children to Private School from the age of 8 and then onto University, and the fees alone, not including accommodation, food, or inflation amounted to over £200,000.00, and that was a conservative estimate.

Obviously not everyone wants to send their kids to private school, and I know that in some cases people hope to be able to fund school fees from earned income, but not everyone can afford to do that, and therefore planning ahead is essential.

The question now is what you can do about it, there is absolutely no doubt that the sooner you prepare for it the better, and we can advise on a number of solutions to prepare for these events. It is most likely that more than one solution will be required depending on how soon the first instalment will be required for example, or your attitude to investment risk.

Also don’t forget, in a lot of cases it isn’t just Mum and Dad that have to save for this, very often grand parents are keen to help out! If you would like to discuss this in more depth, then please do not hesitate to contact us and we can talk through you individual circumstances

Recent stock market activity…

There is no escaping that the worlds stock markets have seen some very volatile activity over the last few months, and at times like these, it is important that clients do not panic.

Investing for many clients is for the medium to long term, and it is inevitable that at times there will be market fluctuations, and whether sudden falls are a short term blip, or something more serious it is difficult to say, however some say that these types of market fluctuations give rise to buying opportunities.

The first thing to remember when stock markets are experiencing this level of volatility is that most investors do not have portfolios invested ‘wholly’ in UK or global markets and therefore may not be experiencing the same degree of volatility in their portfolios. Dramatic falls in stock market levels are rarely replicated in the fall in the value of diversified investment portfolios. This is why we work very hard to establish a clients risk profile, and concentrate on blending different asset classes to give a portfolio that matches this risk profile.

I am not saying that either to sit tight and ride it out, or to sell is necessarily the right thing to do, as this is more “client specific”, but if you want to talk about this in more depth then please drop me an email.

Attention Company Directors…
ensuring your life protection is tax efficient….

Protection is a massive part of the whole advice process, and whilst it can be a very morbid subject, trust me when I say the implications of NOT discussing it should the worst happen are far, far worse!! However, every now and then something comes along which can make the prospect of discussing and subsequently paying for this type of cover easier to bear.

When we talk to clients about protection it isnt always driven by what level of cover, or type of cover a client SHOULD have, and the reason for this is simple, in most cases we have to consider the clients budget and affordability! so when opportunities arise that can reduce the cost of cover we cant ignore it.

For example, there is currently a way that assuming a number of criteria are met, we can make the premiums payable for basic life cover that much more affordable and tax efficient.

This is aimed more at business owners that are looking for the most tax efficient way to provide family protection, and can in some cases reduce the total cost of cover by almost 50%. It can also help businesses with too few employees for a group death in service scheme.

So if you own your own business, or know someone that does that may well benefit from discussing this in more depth, then please dont hesitate to get in contact.

I just read an extract on IFAOnline.co.uk taken from LV=’s “Little Book of Protection”, and here are some facts you may not be aware of:

• In 2009 the average length of a marriage for divorcing couples was 11 years and four months.
• 1,392 people are made redundant daily
• One in five people will be affected by depression sometime during their life
• A property is repossessed every 17 minutes
• New parents face outlaying £9,491 during the first twelve months of a child’s life
• The Office for Budget Responsibility (OBR) predicts household debt will be £2,126bn by the end of 2015. This would take the average per-household debt to £84,365
• Every 4.28 minutes someone will be declared insolvent or bankrupt
• The cost of raising a child until their 21st birthday now totals more than £210,000. This equates to £10,040 a year, £836 a month or £27.50 a day
• Between the ages of one and four, a child costs their parents an average of around £53,586

If you ask me, this is as good a reason as I can think of to ensure your protection arrangements are reviewed regularly and any cover you have is sufficient.  If you have no cover for any of the above, or death, or critical illness etc, then please consider arranging an appointment for a review.

According to one of the more prominent Sunday newspapers, the treasury have started further discussions relating to the possible axing of tax relief currently received on pension contributions by individuals who pay income tax at the higher rates of 40% and 50%.  Plans for ending higher-rate relief have restarted as the chancellor targets immediate cash flow savings as easy “wins”. This was considered last year by Ministers but instead chose to reduce the amount of tax-free income savers can put into pensions from £255,000 to £50,000 per annum.

Currently people paying into an occupational pension have amounts taken by their employers before tax is deducted thereby receiving the full “relief” straightaway, and those paying into a private pension from earned income receive basic rate tax relief initially, and higher-rate taxpayers can claim the difference through their tax returns or by contacting HMRC.

What does this mean for you? Well, if you were planning on making pension contributions this year, and you are a higher rate tax payer, then perhaps you may want to consider not putting this off. Obviously this is something we urge you to discuss with us in depth, and if you think this may affect you, then please give me a call.