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Sources of information

Posted on: May 10th, 2022 by fwAdmin

Sources of Information

At Five Wealth, we have a host of sophisticated investment analysis tools at our fingertips as well as direct access to fund managers, economists and professional advisers. But how does the average person stay up to date with what’s happening in markets? In this blog, I ask a handful of my colleagues the sources they would recommend to clients looking to stay in the loop.

Rick Gosling, Associate Director – Podcasts:

Part of an adviser’s job description means being out on the road visiting clients, even if video meetings are now a more accepted tool in the post-lockdown world. Any medium which allows me to absorb information whilst driving is therefore particularly useful. The number of podcasts available has skyrocketed over the past decade and there are several quality offerings available depending on your personal preferences.

My favourite is the Money Talks podcast from The Economist, which is a 45-minute-long show in an interview format released once a week. The topics are global in scope which can sometimes give a bit of perspective to investors who are used to seeing UK centric headlines every day. Recent topics covered include the global effect of economic sanctions on Russia, the success of private equity investments in recent times (& whether they can continue outperforming public markets) and the effect of high inflation expectations.

Other podcasts that are recommended include:

Steve Jordan, Director – Business News:

A lot of my clients are business owners and professionals advising businesses. What this means is that is very important and useful for me to be aware of what’s going on in the Northwest and further afield in the business world. To do this I subscribe to The Business Desk, Business Insider and other news sites and receive the regular bulletins covering company news, deals, new hires etc. It means that when I’m talking to clients and contacts I am as informed as I can be about the wider market and what’s impacting them in their world – aside from their investments.

Phillip Dewhurst, Director – Newspapers:

Whilst I do have various apps on my mobile phone that allow me to follow markets closely, I also enjoy the traditional sources. Reading the Sunday papers means that I have a good feel for what’s en vogue and I often receive client queries off the back of particularly eye-catching headlines.

I’ll usually make sure I read the Financial Times – Weekend edition and the Sunday Times, both of which have excellent money sections. Quite frequently there is an article written by Simon Edelsten, manager of the Artemis Global Select Fund, who is a fund manager I respect very highly. Even at challenging moments for investors, which we have seen plenty of in recent years, he always provides a useful reminder of investment fundamentals which tend to be the basis of a sound investment strategy.

It’s important to maintain a critical eye when reading the papers and be wary of sensationalist headlines. It’s also important to remember that many of the UK papers have a focus on the UK market and the FTSE 100. Whilst that is understandable, all of our clients will have a diverse geographical spread within their investment portfolios and so I’d encourage them to ensure they are looking at the bigger picture, whilst also bearing in mind that not everyone is suited to taking the same level of risk within their investment strategy.

Liz Schulz, Associate Director – Social Media:

As well as the more formal offerings that my colleagues have covered above, I also like to use social media as a quick way to keep on top of industry topics and discussions as well as local business news. Whilst naturally any social media has to be taken with a pinch of salt, there is useful content given out daily from both companies and peers. A few accounts worth a follow are:

And whilst not necessarily industry specific, for a more light-hearted read the regular updates appearing from our charity of the year Support Dogs (Support Dogs: Overview | LinkedIn) are always very welcome.

Diversification in Financial Planning

Posted on: March 14th, 2022 by fwAdmin

Diversification in Financial Planning

 

Diversification is at the heart of good long term financial planning, both in the products you use and the investments you make. In this blog post I look at the benefits of combining different financial products to meet your long-term objectives in a tax efficient way.

Typically, the main objective of your investment portfolio is to achieve the highest possible return in line with your attitude to risk. Tax will always have an impact on this return. Using the principle of diversification when structuring your investment portfolio means you can take advantage of any tax allowances you are entitled to. This means you can maximise the returns of your investment portfolio.

Each year there are various tax allowances and exemptions that you can use to make your investment portfolio more tax efficient. Used consistently over a long period of time, you can save substantial amounts of tax.

Your investments can be wrapped or unwrapped. A tax wrapper (which is a vehicle that can be wrapped around a portfolio of assets) determines how the gains and returns of the investments are treated for tax purposes. An ISA and a pension are both examples of a tax wrapper.

As financial planners, we look to make use of your available tax allowances and exemptions each year to reduce your current and future tax liabilities. In the following examples, I show how using the ISA and pension tax wrappers, and unwrapped investments can achieve this:

If you are over the age of 16 (or 18 for a Stocks & Shares ISA), you can contribute up to £20,000 into an ISA in the 2021/22 tax year. If you have children under the age of 18 you can also contribute up to £9,000 into a Junior ISA. Once in the ISA, any growth, dividends or interest is tax-free. Withdrawals from the ISA are also tax free.

Each year we look to make use of our clients’ ISA allowances, and when taking into account investment growth you can build up substantial funds within your ISA. Funds held in an ISA can then be used to supplement income in later life in a tax efficient way, or they can be used for one off expenses.

Depending on your earnings, the annual allowance for a pension in the 2021/22 tax year is up to £40,000 gross. Once in the pension wrapper, any growth, dividends or interest is tax-free.

Not only are funds within a pension held in a tax-free environment, but contributions are also subject to tax relief as well, at an individual’s highest marginal rate of income tax (20%/40%/45%). A pension can be a very effective retirement savings vehicle.

While pension funds are not accessible until age 55 (57 depending on your date of birth), throughout your life you can build up a substantial fund to draw on in retirement. Or alternatively, if you have also built-up funds across a range of investment products, you may not need to draw from your pension and you can pass it on to the next generation without it being assessed for inheritance tax.

There is no limit to how much you can put into an investment account. Income from the assets held in the investment account may be subject to dividend or income tax. Any growth in the value of the assets held may be subject to capital gains tax once sold.

In the case of an investment account, you can use the allowances as follows:

The examples above show how splitting your money between different investment products can reduce your tax liability both now and in the future. Structuring your investment portfolio using both wrapped and unwrapped investments also gives you flexibility when you come to draw an income from your funds in retirement.

As financial planners, we see a broad range of client circumstances and there is no one size fits all approach, but generally making use of your available tax allowances and exemptions where possible in each tax year is a sensible starting point for most clients.

Where a client’s circumstances become more complex, there are a broad range of additional product wrappers that we can use. These include, but are not limited to, onshore bonds, offshore bonds, Venture Capital Trusts, Enterprise Investments Schemes and Seed Enterprise Investment Schemes. The suitability of each of these products depend on a client’s circumstances, objectives and appetite for risk. These products are not suitable for the majority of investors and are considered high risk, they can invest in relatively new startup companies and may be subject to time constraints to benefit from tax. However, when used appropriately, they can help to diversify a client’s portfolio in a tax efficient way and help them achieve their financial planning objectives.

If you would like further information on anything covered in this article, please get in touch.

 

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Tax Advice.

2021/22 Tax Year Allowances

Posted on: February 21st, 2022 by fwAdmin

2021/22 Tax Year Allowances

As we approach the end of the 2021/22 tax year, it is useful to review the annual allowances available to individuals.

In the run up to each budget, headlines are littered with predictions of tax rises and speculation as to which areas of legislation might be revisited. Most of the post-COVID changes have been relatively muted, but with UK government debt standing at 103.6% of GDP (£2,223 Bn) as of March 2021, there are increasing calls to cut spending, raise taxes, or a combination of both.

It is therefore more important than ever to ensure you understand what your personal tax allowances are, and whether you can make use of them.

In this article, we have highlighted five of the most commonly discussed allowances.

Personal Allowance – £12,570

The first £12,570 of income in the 2021/22 tax year will fall within an individual’s Personal Allowance and be free from income tax. This figure is set to be frozen until 5th April 2026, having previously increased in line with inflation.

It’s worth noting that for individuals with adjusted net incomes over £100,000, the Personal Allowance is reduced by £1 for every £2 it breaches that threshold. This results in an effective 60% Income Tax rate for individuals with adjusted net incomes between £100,000 and £125,140.

For individuals who do fall into this ‘Personal Allowance trap’, it is possible to reduce your adjusted net income by making pension contributions. This can often work out to be extremely tax efficient as you will obtain tax relief on the pension contribution as well as benefit from having some or all of your personal allowance reinstated.

Another consideration for married couples is to ensure that income producing assets are held in a way which makes use of both partners’ allowances.

ISA Allowance – £20,000

ISAs (Individual Savings Accounts) are a fantastic tool to shelter assets from Income Tax and Capital Gains Tax. As the rules currently stand, an individual can contribute up to £20,000 into ISA products each tax year. Investments held within a Stocks and Shares ISA ‘wrapper’ will grow free of tax and can be withdrawn without triggering a tax liability.

There are two ISA products where the £20,000 limit is not applicable:

Junior ISA – Is available to children under the age of 18 and has a reduced annual limit of £9,000.

Lifetime ISA (LISA) – Is a product designed to be used either towards a first property purchase, or a retirement savings vehicle which benefits from a 25% government bonus. There is an annual LISA limit of £4,000 which counts towards the overall £20,000 ISA limit. Only individuals aged between 18 and 40 can open a LISA, however you are able to make contributions until your 50th birthday. You cannot access the LISA funds without penalty unless you are purchasing your first property, aged 60+ or terminally ill. It is important to understand the terms of LISA products, such as limitations on the values of first house purchases, to avoid incurring an unexpected 25% penalty.

Pension Annual Allowance – Up to £40,000

The amount that an individual can contribute into pension without suffering an ‘annual allowance charge’ is capped at £40,000 (gross) each tax year. There are several caveats to this rule and this area of pension planning can involve some complex calculations. The main points to be aware of are as follows:

Pension contributions benefit from tax relief (and potentially National Insurance savings) at the point you make the contribution. Any contributions that are invested will be able to grow free of tax. With legislation as it currently stands, pensions sit outside of your estate for Inheritance Tax purposes, making them an extremely valuable tool to those that might be facing an IHT bill upon death.

It’s important to remember that any capital contributed into pension wrappers cannot be accessed until age 55, with this rising to 57 from 2028 and likely to increase in future years.

Capital Gains Tax Allowance – £12,300

Capital Gains Tax (CGT) rates have been the subject of much speculation since the Office of Tax Simplification issued a paper in November 2020 recommending that the government should consider aligning Income Tax and CGT rates.

An individual has a personal CGT allowance of £12,300 in the 2021/22 and 2022/23 tax years and capital gains that fall within this threshold are exempt from CGT.

Gifts between married couples are exempt from CGT which often presents a planning opportunity where one partner is not making use of their CGT allowance.

Dividend Allowance – £2,000

An individual does not need to pay tax on the first £2,000 of their dividend income, regardless of the level of their non-dividend income.

For business owners, this presents an opportunity to extract cash from the business free of tax by declaring dividends.

Investments that are taxable and not held within a tax ‘wrapper’ such as a pension or ISA may also generate dividends. It’s important to regularly review whether these are structured in a tax efficient manner, particularly for married couples who will each have their own dividend allowance.

Dividends in excess of the Dividend Allowance will be subject to the below rates in the 2022/23 tax year, a 1.25% increase from the current position for each band:

Basic Rate Taxpayers – 8.75%

Higher Rate Taxpayers – 33.75%

Additional Rate Taxpayers – 39.35%

 

 

Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Tax Advice.

Pension Pitfalls Part 3 – Approaching Retirement

Posted on: February 7th, 2022 by fwAdmin

Pension Pitfalls

Part 3 – Approaching Retirement

This post is the third in our ‘pension pitfalls’ mini-series. The series is intended to highlight some of those areas which we feel can catch individuals out when it comes to their pension planning, or could mean that the tax advantages of the pension aren’t being fully utilised.

  1. Triggering the Money Purchase Annual Allowance (MPAA)

When income is drawn flexibly from a pension, this triggers the Money Purchase Annual Allowance (MPAA). This reduces the amount that can be contributed to a pension to just £4,000 per tax year (including both personal and employer contributions). Any contributions in excess of this limit would be taxed at an individual’s marginal income tax rate (20%/40%/45%).

With increased pension flexibility and income-drawing options for plans, individuals may look to use some of their pension capital whilst still working and accruing pension contributions on a month-by-month basis (say through the workplace pension offered by their employer). By way of example, an individual earning over £50,000 of salary with 8% pension contributions (4% employer, 4% personal), total pension contributions would exceed £4,000 per tax year.

When not taking advice, it can be quite tricky to navigate the world of pension legislation and we do come across individuals who have triggered the MPAA without being aware of this, and as a result have since contributed in excess of this allowance to their pensions. Some of the main situations where the MPAA could be triggered are:

  1. Understanding Income Options

When it comes to drawing income from pensions, there are a number of ways in which this can be actioned. In broad terms, these ways are split into two separate categories:

There is no ‘one size fits all’, and when it comes to the most suitable option for an individual then consideration must be given to personal circumstances, objectives, wider wealth and attitude to risk (to name just a few things!). Purchasing an annuity would give comfort and security over the level of income which will be paid during retirement, but there would be no flexibility to amend this, whereas drawdown offers the flexibility to amend the income level drawn but carries the risk of managing a fund to last for your full retirement (adviser input certainly needed!). For many, a hybrid set up combining both elements will likely be a strong solution.

It is important to be aware than some pension plans may not offer all of the flexible income drawing options, and it may be necessary to move your fund to an alternative contract if this is deemed to be appropriate. As you approach the retirement age of your pension plan, the plan provider will provide details of those options available within the existing contract – it is not a given that those are the only options available to the policyholder, but more that those are the only options available within the existing plan. Many newer-style pension contracts offer the full suite of options.

  1. Losing Pension Guarantees or Benefits on Transfer

We understand that for many people, consolidating all of your pension pots to one place ahead of retirement can be very attractive. Whilst the majority of schemes will offer a transfer-out for this purpose, it is important that full details of the scheme have been read and understood as there may be some valuable benefits hiding within the scheme rules that could be lost on a transfer.

Some of the guarantees or benefits we see are:

If you do have a pension with one of these guarantees attached, it would be crucial to take advice in order to fully understand how this guarantee ties in with your own planning and circumstances, the trade-offs involved with transferring and whether the plan should be retained.

  1. Invalidating Pension Protections

A number of individuals will hold a form of pension protection (e.g. Fixed Protection, Individual Protection, Enhanced Protection) in respect of their lifetime allowance – this is to total value of pensions that can be held without HMRC levying a tax charge.

The protections are extremely valuable, and each has its own criteria attached in terms of actions that may result in the protection being lost. For example, if a form of Fixed Protection is held (either 2012, 2014 or 2016) then no further pension accrual can occur (except in limited circumstances) whereas Individual Protections allow you to continue accruing benefits. There are also rules around the types of transfers which can be actioned by someone holding protection. If protection is lost, it is the pension member’s responsibility to report this to HMRC (in writing) – HMRC will levy monetary penalties if this reporting is more than 90 days after the event.

We see cases (thankfully not too frequently) where individuals hold a form of pension protection and have invalidated this without realising – for example by being auto-enrolled into a workplace pension scheme whilst holding Fixed Protection, or by actioning an unauthorised transfer (e.g. where an enhanced transfer value has been offered).

  1. Not Keeping on Top of State Pension Entitlement

Whilst working, entitlement to the UK State Pension is accrued through National Insurance Contributions (NICs). In order to be eligible for the full level of pension (£179.60 gross pw in 2021/22), 35 ‘qualifying years’ are needed. We see State Pension often being overlooked by individuals however this provides a secure source of guaranteed income that can underpin your retirement position.

‘Qualifying years’ can be accrued by those working (both employed and self-employed), but credits are also given for those who claim Child Benefit, get Jobseeker’s Allowance, Employment and Support Allowance or Carer’s Allowance. If there are gaps in your NI record which means that a full qualifying year hasn’t been achieved, there is the ability to pay voluntary NICs. These can generally be done for the past 6 years (hence the importance to stay on top of your entitlement), but there is currently an additional period available for those born after 5th April 1951 (men) or 5th April 1953 (women) whereby gaps between April 2006 and April 2016 can be filled – the deadline for this ends in April 2023. Of course, the ability to pay voluntary contributions (by way of lump sums) will depend on affordability, but on a purely financial basis we tend to find that these payments represent very good value for money

We often find that many individuals are not aware of their state pension entitlement, and therefore haven’t looked into whether they should be looking to ‘top-up’ any missing years. State pension forecasts can be obtained here: Check your State Pension forecast – GOV.UK (www.gov.uk), and this will show not only the current accrual (in £’s terms) but also how many additional years are required to achieve the maximum accrual.

The information featured in this article is for your general information and use only and is not intended to address your particular requirements. Whilst knowledge is power, the best way to naturally avoid any of these pitfalls is to take financial advice along the way from a pension specialist. Five Wealth Ltd offer independent financial advice to a wide variety of clients, at various stages throughout their investment and retirement planning journey. If you feel that our expertise would be beneficial to you, please get in touch.

The information contained within the article is based upon our understanding of HMRC legislation and practice. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts and their value depends on the individual circumstances of the investor.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.

Workplace pensions are regulated by The Pensions Regulator.

Please keep an eye on our blog posts/linked where parts 1 and 2 of this ‘pension pitfall mini-series’ have been published, specifically focusing on considerations for pre-retirement and those approaching retirement.

Pension Pitfalls Part 2 – High Earners

Posted on: January 28th, 2022 by fwAdmin

Pension Pitfalls Part 2 – High Earners

This post is the second in our ‘pension pitfalls’ mini-series, which is intended to highlight some of those areas which we feel can catch individuals out when it comes to their pension planning, or could mean that the tax advantages of the pension aren’t being fully utilised.

  1. Not Claiming Tax Relief

Personal pension contributions are eligible for tax relief at an individual’s highest marginal income tax rate. There are two types of way in which these contributions can be made, either using the ‘net pay’ method or the ‘relief at source’ method.

When contributions are made via ‘net pay’, income tax relief is automatically given at your highest marginal rate. Where contributions are made via ‘relief at source’, the only tax relief immediately given is basic rate (20%) – this uplifts the net contribution to a gross contribution. If eligible for 40% or 45% tax relief, this would need to be reclaimed as part of the individual’s tax return.

We find many individuals are not aware of the practicalities of pension tax relief, and have been high earners for a number of years without maximising the tax relief available to them. It is possible to backdate any claims to cover relief which should have been claimed in the last 4 tax years.

  1. Reduction to Tapered Annual Allowance

The tapered annual allowance was introduced on 6th April 2016. This impacts the amount that high earners can contribute to their pensions by tapering the allowance down from £40,000 to £10,000 for individuals with ‘adjusted income’ in excess of £150,000 (by £1 for every £2 of income) – this meant that if someone earnt £210,000 or more, contributions to their pension which were eligible for tax relief were capped at £10,000.

In April 2020, changes were made to this tapering which brought the lower limit to just £4,000. At the same time, the ‘adjusted income’ limit was increased to £240,00 and therefore the £4,000 limit would apply for those with earnings in excess of £312,000.

We find many individuals were aware of the initial tapering and reduced their pension contributions to the £10,000 limit but have overlooked the further reduction. Any contributions in excess of the allowance will be subject to an annual allowance tax charge, which is at an individual’s marginal rate of income tax – for those impacted by the tapered allowance this will be 45%.

  1. Not Utilising Available Carry Forward

Whilst the amount that can be contributed to pension in a tax year (and is eligible for tax relief) is limited, it is possible to use ‘carry forward’ to sweep up missed contributions from the previous three tax years. Before using any carry forward allowance, the full contribution allowance for the current tax year must be fully utilised.

Once the current tax year’s allowance has been utilised, the order in which any available allowance is used starts at the furthest tax year back. This is shown in the table below.

 

Tax Year Order (1) Order (2)
2022/23 1
2021/22 1 4
2020/21 4 3
2019/20 3 2
2018/19 2

As the carry forward rules are based on a rolling 4-year period, moving into a new tax year means the loss of the oldest allowance – once we enter 2022/23, there will no longer be the ability to use unused scope from 2018/19.

Given the preferential tax treatment of pensions, this is often valuable scope and it’s important to be on top of your available allowances and when these need to be used by.

  1. Being Auto-Enrolled

Auto enrolment was introduced in 2012, and since this date there has been a requirement for employers to provide pension funding for ‘eligible employees’. If an individual doesn’t want to receive pension contributions then they would need to ‘opt-out’.

Most workplace pension contributions are expressed as a % of salary, and for high earners, these contributions can be sizeable. For an individual who earns £300,000, an 8% pension contribution (4% employee, 4% employer) would equate to a contribution of £24,000 and would be in excess of the available Annual Allowance (covered in point 2 above). Any contributions in excess of the Annual Allowance will be taxed at your marginal income tax rate.

We also find this to be a common scenario for those who change their employment status – for example, moving from being a Partner to more of a consultancy role where they are classed as an employee. This employee position will come within auto-enrolment, and it’s important to be mindful of this and the contribution limits. We also tend to see these individuals have built up large pension pots throughout their working career, and whilst not covered in detail here the ‘Lifetime Allowance’ would also be a consideration.

Some employers may offer an alternative remuneration structure if pension contributions are not feasible, and it’s important to ensure all options are thoroughly explored.

  1. Not Using Pension Contribution Strategically

As well as offering tax-relief at an individual’s highest marginal rate, personal pension contributions can be used as a strategic tool to minimise tax liabilities and even reinstate tax allowances which may have been lost during the year. The calculation for any personal pension contributions made will work by extending an individual’s basic rate tax band by the gross contribution amount, which in turn then provides higher/additional rate tax relief by reducing the amount of income that is subject to that tax level.

The strategic example of this we see most often is related to the Personal Allowance (the 0% income tax band) which is lost at a rate of £1 for every £2 of earning above £100,000 – therefore an individual who earns in excess of £125,140 would lose the full amount. Making a personal pension contribution which then brought the ‘adjusted net income’ (income, less personal pension contributions) down either below £100,000 or between the tapered amounts would provide tax relief at an effective rate of 60%.

Other ways in which pension contributions can be used are to reduce the impact of the tapered annual allowance or to reduce the impact of the high-income child benefit tax charge.

This is a technical area of strategic planning, and whilst we would always advocate taking advice in relation to this, it’s important to be aware of the broad ideas and tax levels involved.

The information featured in this article is for your general information and use only and is not intended to address your particular requirements. Whilst knowledge is power, the best way to naturally avoid any of these pitfalls is to take financial advice along the way from a pension specialist. Five Wealth Ltd offer independent financial advice to a wide variety of clients, at various stages throughout their investment and retirement planning journey. If you feel that our expertise would be beneficial to you, please get in touch.

 

The information contained within the article is based upon our understanding of HMRC legislation and practice. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts and their value depends on the individual circumstances of the investor.

 

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.

 

Workplace pensions are regulated by The Pensions Regulator.

 

Please keep an eye on our blog posts/linked in to see parts 1 and 3 of this ‘pension pitfall mini-series’, specifically focusing on considerations for pre-retirement and those approaching retirement.

 

 

Pension Pitfalls: Part 1 – Pre-Retirement

Posted on: December 7th, 2021 by fwAdmin

Pension Pitfalls: Part 1 – Pre-Retirement

This three part ‘pension pitfalls’ mini-series is intended to highlight some of those areas which we feel can catch individuals out when it comes to their pension planning, or could mean that the tax advantages of the pension aren’t being fully utilised.

  1. Underlying Investments

We find that many individuals are not aware of how their pension is invested, let alone knowing whether this is appropriate for them. There is no ‘one size fits all’, and the strategy which is suitable for you should take into account factors such as how much involvement you want to have, your wider wealth position, your timeframe to retirement, your investment experience, your tolerance for value fluctuations/losses (risk) and how you intend to draw income in the future.

The underlying investments within pensions are typically into ‘funds’, structures which have multiple diversified investments within them. Allocations within these could be into a combination of asset classes including equities (company shares), fixed income (bonds/gilts), cash, property or commodities. Each of these asset classes has a different risk/return profile, and therefore offers different growth potential. Workplace pensions tend to have a ‘default strategy’ which is set at scheme level and often has a mixture of each of the asset classes within it.

It’s important to take the time to understand how the current strategy aligns with your views, as well as assessing options available and whether something alternative could be more appropriate (either through your own research or with professional assistance). Investments carry risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

  1. Pension Access Age

It has recently been announced that the minimum pension access age will rise to 57 (currently 55) from April 2028 – this will therefore automatically apply to any individual born after 5th April 1973, and for those born between 5th April 1971 and 5th April 1973 it will apply if benefits aren’t drawn between their 55th birthday and 6th April 2028.

Some schemes will offer the protected right to take benefits at age 55 (if an ‘unqualified right’ was already written in the scheme rules), but there is no longer the option to transfer into a scheme which offers this before the change comes into force as the window to do so was closed in a follow-up to the 2021 Autumn Budget.

This rise to age 57 will keep a 10-year gap between that and the UK state pension age, which is in the process of both equalising between men and women and rising to 67.

  1. Keeping Track of Older Pensions

One of the common questions we get asked in relation to pensions is to do with the sheer number of them that people accumulate throughout their working lives, especially where a number of job changes have been involved – now that auto-enrolment into pension schemes is mandatory for employers, this is something we expect to continue seeing.

As each pension will have a value to you and your retirement (either by way of an invested pot or detailed as an income stream for life), it’s vital to keep on top of each plan by keeping your own personal details to hand (e.g. plan number/website log-in) as well as a record of the pension provider/scheme administrator.

If you are struggling to locate details on one of your schemes, GOV.UK has launched a helpful tracing service which can be accessed here: Find pension contact details – GOV.UK (www.gov.uk)

  1. Pension Nominations

Each pension you hold should have a nomination form attached to it, which details your intentions for distribution of the value on your death. A common misconception is that your Will would guide this distribution, but as (under current legislation) pensions don’t form part of your ‘estate’ on death, this isn’t the case.

Your pension provider will be able to provide you with a nomination form for completion, with each of these varying slightly in format – it’s common to see an initial section which can be completed with names and %’s, followed by a free text section in which further guidance can be given (e.g. should the named individual pre-decease you or feel that they don’t require the full amount involved).

As well as ensuring that a completed form is held, it is important to regularly review this to ensure it is up to date and continue to reflect your current wishes.

  1. Death in Service Cover

Death in service (DIS) cover is a benefit provided by many employers for their staff members, and is often quoted as a multiple of salary (e.g. 3x, 4x) which is paid out to nominated beneficiaries. Some of these DIS schemes when written on a group basis are subject to the rules of registered pension schemes and for this reason, their value will be taken into account for any pension lifetime allowance calculations.

The lifetime allowance currently stands at £1,073,100 (for 2021/22) and any pension value above this limit will be taxed. Tests for the lifetime allowance can occur at multiple times during an individual’s lifetime, including when pension income commences, at age 75 and on death.

There are ways in which a DIS policy can be written on an induvial basis rather than on a group basis, and this would mean that they aren’t subject to the same pension rules. If you feel this is something that could be relevant, I would suggest speaking to a financial adviser in order to help navigate the complexities involved.

Whilst knowledge is power, the best way to naturally avoid any of these pitfalls is to take financial advice along the way from a pension specialist. Five Wealth Ltd offer independent financial advice to a wide variety of clients, at various stages throughout their investment and retirement planning journey. If you feel that our expertise would be beneficial to you, please get in touch.

Please keep an eye on our blog posts/linked in to see parts 2 and 3 of this ‘pension pitfall mini-series’, specifically focusing on considerations for high earners and those approaching retirement.

 

VCT’s and EIS’s – Another planning option for high earners?

Posted on: August 16th, 2018 by fwAdmin

Our previous blog in May 2018 explored the Tapered Annual Allowance and how subject to certain criteria, the annual pension allowance on which you receive tax relief may be reduced (to a minimum of £10,000) for those earning over £150,000. For those who have already managed to build up sizeable pension pots, the lifetime allowance currently stands at £1.03m (due to increase in line with inflation) and any excess over this figure will incur tax when tested that could negate the benefits of making pension contributions.

We are therefore seeing increasing numbers of clients who have maximised their pension contributions and have significant excess income with which they can look to use other allowances.

The first step would be to review your goals and ensure that any relevant ISA allowances, Junior ISA allowances or pension contributions for spouses and/or children are made. Unwrapped portfolios and other tax wrappers such as investment bonds may also meet the needs of many clients and should be considered at this point. Further details on the current tax year’s allowances can be found here

However, for those individuals who have made use of their relevant allowances and are looking for further opportunities for tax efficient investments, Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS)/Seed Enterprise Investment Schemes (SEIS) offer some attractive headline reliefs.

These products are a government sanctioned venture capital schemes designed to encourage investment in small companies that are not listed on a recognised stock exchange. Both VCTs and EISs are considered high risk ventures and therefore are only suitable for a small number of investors.

The key difference in terms of the actual structure of the schemes is that a VCT is a listed fund, whereas an EIS scheme is not. In theory this means that VCTs are the more liquid product as you could simply sell the shares, whereas with an EIS you must wait for an exit opportunity (stock market floatation, management buy-out, trade sale etc.) to realise the investments. However, in practice VCTs can often be illiquid and trade at a discount to their net asset value (NAV).

Venture Capital Trusts (when purchased as new shares)

Enterprise Investment Schemes

Seed Enterprise Investment Schemes

SEIS’s share a lot of the same reliefs as regular EIS’s, however have some exceptions where they are more generous, reflecting the increased risk of investing in smaller companies. The main differences are:

Whilst both VCT and EIS products both benefit from 30% income tax relief, they have significantly different structures and benefits, which will need to be carefully assessed against a client’s needs and objectives. VCT’s offer tax-free income in the form of dividends which can be a useful top up to an existing income. However, the larger investment limit of £1m, Capital Gains Tax deferral, ability to set losses against income and potential BPR qualifying status of EIS can make it an attractive option. It’s therefore important to assess whether additional income, CGT planning or estate planning is more important. The products can be considered to be complementary and for some clients, a combination of EIS and VCT might be a potential solution.

As with any investment, ensuring that the underlying securities are of a suitable quality is the main priority. Changes were made to the EIS legislation in 2015, tightening the definitions of qualifying companies by introducing rules which stated EIS only applied to companies that had been trading for 7 years, amongst other. Furthermore, HMRC has recently introduced a ‘capital preservation purpose test’ which aims to weed out those schemes which are simply low-risk tax shelters and ensure that there is an actual risk to capital. It’s important to understand the legislative risk of these schemes (i.e. a company becoming non-qualifying and therefore reliefs being lost) and we would only recommend those schemes which are investing in the true spirit of the legislation by investing in genuine growth businesses.

The nature of VCT and EIS investments means that an investor will be exposed to smaller companies and therefore a higher level of risk than, for example, a fund of large cap equities. Whilst some of the risk of a drop in capital value will be offset by the initial tax reliefs, we would generally look at these products only for investors who a comfortable with the possibility of a 100% loss of the invested capital.

This blog has only briefly touched on the subject matter, VCT and in particular EIS schemes can involve some complex planning and it’s therefore essential that you seek advice before considering investing. Not all schemes are of equal quality and the experience, financial stability and diligence of the scheme/trust manager is extremely important. At Five Wealth we review the whole marketplace in order to recommend the best quality schemes. If you would like to discuss the content of this blog or would like any further information about VCT and EIS products, please contact us.

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. Tax relief depend on scheme maintain their qualifying HMRC structure.

Tapered Annual Allowance

Posted on: May 11th, 2018 by fwAdmin

Following on from Liz’s blog in regard to the new tax year specific allowances. Jordan wanted to provide a more detailed explanation of the Tapered Annual Allowance and how this could affect you.

The Tapered Annual Allowance was announced by George Osborne in the Summer 2015 Budget but and came into effect a year later on the 6th April 2016. Although this will be the third year of the tapering system it is still a very complex and difficult topic to understand. If you think you might be affected by the Tapered Annual Allowance, it is vital to seek advice from a professional.

Purpose of the Tapered Annual Allowance

The change was intended to reduce the amount of income tax relief available to higher earners who make pension contributions and to reduce the amount of government spending on pension tax relief.

The annual allowance restricts the amount of pension contributions you can receive income tax relief on. The standard annual allowance (the maximum gross amount you can pay into pension) is £40,000 in the current tax year but, if you are subject to the tapered annual allowance this could be reduced to £10,000.

Who is affected?

If your total taxable income is under £110,000 in the 2018/19 tax year, then you should not be affected. Please note the phrase “total taxable income” includes all sources of taxable income and some pension contributions (it is not limited to just your salary).
To see if you might be affected by the tapered annual allowance you can follow these 3 easy steps:

1. Calculate your total income before tax from all sources (Gross total income includes employment income, pension income, rent, bank interest, dividends – essentially any taxable income).
2. Include any new salary exchange or salary sacrifice arrangement which was set up or changed on or after 9th July 2015.
3. Deduct the gross value of any pension contributions you paid under the relief at source method of calculating income tax relief (personal pension contributions).

This is your threshold Income.

If this figure is less than £110,000 you should not be affected by the tapered annual allowance. This means you should continue to be subject to the standard annual allowance of £40,000.

What if I earn over £110,000?

If this is £110,000 or more, you now need to calculate your Adjusted Income:

1. Calculate your total income before tax from all sources (ignoring deductions for pension contributions).
2. Add the value of any pension contributions[1]paid by your employer. This includes contributions paid under a salary sacrifice or salary exchange system, regardless of when this system was originally set up.

This is your Adjusted Income. If this is less than £150,000 you should not be affected by the tapered annual allowance. This means you should continue to have the standard annual allowance.

What if I earn over £150,000?

If this is more than £150,000 you now need to do the following to find your tapered annual allowance:

1. Take your adjusted income figure
2. Deduct £150,000
3. Divide this by 2
4. Subtract this figure from £40,000

This should be your tapered annual allowance for the 2018/19 tax year. If this figure is less than £10,000 your tapered annual allowance is £10,000 (the lowest tapered annual allowance you can have is £10,000 – this will apply to anyone with adjusted income of more than £210,000).

Importantly you can still use any unused annual allowance from the 3 previous tax years on top of your tapered annual allowance under the standard “carry forward” rules. This can allow larger contributions than £40,000 which can maximise tax relief especially for higher earners.

What if I exceed the tapered annual allowance or the standard annual allowance?

You will face an annual allowance charge, which essentially removes the additional income tax relief you received on your pension contribution. This can sometimes be paid by your pension scheme, but it is normally paid by you directly.
You are responsible for ensuring you pay any annual allowance charge due. This will not be automatically done by HMRC, your employer or your pension provider.

What if I’m not sure what to do?

This subject is very complicated, it is recommended you seek professional advice if you think you may be affected or have exceeded the annual allowance. We can find out if you are affected and offer advice on the most suitable way of dealing with this issue, including alternative methods of saving for your retirement or structuring your pension contributions differently.

Any reference to taxation will be based on your individual circumstances. Tax legislation and regulations are subject to change. Investments, and the income from them can fall as well as rise. Your capital is not guaranteed.

For a defined contribution pension this is simply the monetary amount paid by your employer. For a defined benefits pension this is more complicated: it is the annual increase in your defined benefits scheme pension benefits from your employer only.

New Tax Year Allowances

Posted on: April 13th, 2018 by fwAdmin

Now that we have entered the 2018/19 tax year, this brings about a refresh of your tax-year specific allowances. We wanted to provide a short summary of the new allowances available, many of which provide valuable investment opportunities.

Personal Allowance – £11,850

The personal allowance has increased by £350 to £11,850, with income within this not being subject to income tax. As a brief reminder, the personal allowance is available for all individuals, however is reduced by £1 for every £2 of income above £100,000 (completely lost at £123,700). Marginal rates of income tax remain unchanged at 20%, 40% and 45% for income received in excess of the personal allowance.

Capital Gains Tax (CGT) Allowance – £11,700

The CGT allowance has increased by £400 to £11,700, with any realised gains up to this level not being liable to CGT. For Trusts, the allowance remains at half of the level available for individuals (£5,850). Any gains realised above the allowance will continue to be taxed at 10% or 20% depending on your marginal rate of tax (higher rates for residential property gains).

Dividend Allowance – £2,000

The dividend allowance has reduced from £5,000 (2017/18) to £2,000, with any dividends in excess of this allowance being tax at marginal dividend rates (7.5%, 32.5%, 38.1%). It is important to remember here that the dividend allowance essentially utilises £2,000 of your basic-rate band and should your income level already be fully utilising your basic rate tax band, this would push £2,000 of taxable income into the higher-rate tax band (40% tax rather than 20%).

It is important that portfolios are structured in the most tax-efficient way to utilise these three allowances. For example, considering the transfer of dividend producing assets to a spouse that pays a lower marginal rate of tax or managing the taxable gains within a portfolio on an ongoing basis.

ISAs

Cash ISAs/Stocks & Shares ISAs – £20,000

Junior ISAs (JISA) – £4,260

Lifetime ISAs (LISA) – £4,000

The cash/stocks & shares ISA allowance is remaining unchanged at £20,000, and during the course of the year the allowance can be split between the two types of plan. For those wishing to maximise the allowance using monthly investments, these would need to be at a level of £1,666.66 pm. ISAs remain one of the most tax-efficient wrappers, being free from all forms of personal taxation (income tax, CGT, dividend tax) and should be the first point of call to accumulate capital on an annual basis.

The Junior ISA limit is increasing from £4,128 (2017/18) to £4,260, meaning that a further £132 can be invested for children. JISAs remain a tax-efficient way for parents/grandparents/family members to save for children throughout their minor years, with no access to the capital until the age of 18 when the plan would convert to a stocks & shares ISA (although control of the plan is given at 16).

For those looking to invest into LISAs, the allowance is remaining unchanged at £4,000. These products are aimed primarily at those looking to buy their first house, or those looking to save for retirement (post 60), for which 25% bonuses from HMRC can be earned. For any other withdrawals, investors are charged a 25% penalty which effectively removes this bonus.

Pensions – £40,000 gross

For the new tax year, the pension annual allowance is remaining unchanged at the lower of £40,000 (£32,000 net) or the level of earned income. For those with no earned income (including children), the maximum annual contribution remains at £3,600 gross (£2,880 net). For those with total income in excess of £150,000, the annual allowance is tapered down at a level of £1 for every £2 of income, to a minimum level of £10,000, with this being the third year of the tapering system. This tapering is a complex topic, and we will be looking to produce a blog in the coming months which focuses on this in more detail.

Pensions remain a very attractive option for investors, with tax relief being able to be achieved at your highest marginal rate on any personal contributions, and companies being able to classify employer contributions as business expenses. In addition, under current legislation most pensions are not included as part of your estate when being assessed for Inheritance Tax (IHT).

The aim of this blog is to highlight the allowances available to individuals now that we have entered the 2018/19 tax year. If you have any questions at all then you should contact your adviser.

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Tax Advice.

Financial Advice when selling your business

Posted on: February 13th, 2018 by fwAdmin

Financial Advice when selling your business.

Sale is often the long-term goal when an entrepreneur starts out. They want to build their business into an established company that they can ultimately sell and receive a (hopefully large) capital sum which will be taxed at just 10% [1]. Although I have a working knowledge of some of the options available (Trade sale, Management Buy Out, Employee Ownership, Private Equity deal etc) I am by no means an expert and that is what a business owner needs in this situation, a good corporate finance adviser – they should really be having discussions a few years before. That said, although a financial adviser isn’t the one who will organise the exit for you, a good one can play an invaluable part in the process.

I have spoken to many business owners who have sold, are approaching sale, or at some point will sell. They often have a “magic number” in their head as to the figure (£) they want to receive. Sometimes this is achievable, sometimes it isn’t – but what drives this figure? The question I would ask is – what do you want to do afterwards? This should hopefully lead to a real conversation which could be about all the things that have been put off whilst working flat out on their business – retirement plans, travel, bucket lists, property purchase(s) or perhaps just the next business they want to start. From those discussions a plan can be developed as to how much capital will be required to achieve their goals and then how much income will be required to live comfortably, for perhaps the rest of their lives. Once we have those answers we can work back as to what their magic number should be to achieve those plans.

This sounds relatively simple, but a good financial planner is needed to explain how a capital sum could be structured across a number of different tax wrappers in order to produce a regular “income” stream (that maybe a combination of income and capital) that uses all available allowances and hence limits the tax that is paid on that income. Too often when doing these rough calculations people just look at a pot of money, apply a 4% yield and assume 20% tax will be paid on that yield. With good planning, depending on the sums involved, the net figure should be significantly closer to the gross than this.

The time to seek financial advice is actually well before a sale occurs, your adviser should be part of those early discussions coming up to sale, working alongside your other advisers and helping understand how the capital you may be able to receive could be structured to provide for your long-term requirements and what planning can be done in advance of a transaction. You may find that the magic number is less than you thought?

Once the sale completes it should be about implementation of the plan that has been constructed well before. Many exits involve an initial capital payment then a staggered earn-out based on performance, the owner is often retained in the business on a salary for a period of time to manage the transition. Each deal will be very different and can change as terms are agreed. A bespoke but flexible plan is needed and an adviser that has knowledge of experience of such transactions is very important.

It is important to not just focus on the now, but also the future. If a structure can be set up that achieves your initial objectives it should also be mindful of your longer-term plans. In most cases this will involve intergenerational planning and inheritance tax (IHT) planning. A significant sum of money if managed well could provide an “income” and be passed on to children and grandchildren inheritance tax efficiently using a combination of gifts/trusts, and potentially more bespoke structures such as Family Investment Companies. Such bespoke advice would certainly involve a trusts lawyer and tax accountant.

The aim of this blog is not to set out a standard financial plan for those selling a business, nor is it to simply list a range of suitable products/investments and how they may be used. It is to highlight that for those in this position good advice is not only essential, but it is essential that advice is sought early on in the process, ideally at the stage sale is being considered.

[1] Entrepreneurs’ Relief means you’ll pay tax at 10% on all gains on qualifying assets which would include owning 5% or more share in a trading business and voting right.