The appeal of cryptocurrencies is really twofold, firstly some people seem to be making a lot of money from investments into them. Secondly, some people seem to be making a load of money from investing into them. Oh, ok the better reason, is that digital currency enables finance to be arranged more promptly without the dreaded interference of those nasty ‘Bankers’ and avoid problems of exchange rates.
Perhaps I am oversimplifying, but the truth is that cryptocurrency is generally fuelled by greed and a belief that money is very easy to make. The evidence for investment is generally a conversation with a specialist or anecdotal discussions with friends and perhaps a bit of ‘research’ online.
Let me be clear, I am not saying that the banking system is good, it’s terrible frankly, but there is something to be said for ‘better the devil you know’ than the backroom hack shops beholden to organised crime. I am not a crypto expert, I know a couple, but as of right now in 2023, I cannot see a good reason for the typical long-term investor to muck around in the sector.
We see story after story of failed currencies and platforms, where supposed fortunes become worthless. Unlike your portfolio, there are no real assets behind most cryptocurrencies, often just other cryptocurrencies.
I will likely be proven wrong by a friend of yours who makes several million from a couple of pounds. I can live with that, but can you live with your investment portfolio becoming worthless?
The mistakes that investors consistently make are invariably due to four key beliefs
They know what they are doing
They have done their ‘research’
The opportunity is too good to miss
This time it’s different.
Delusion is very powerful and is alive and well in all aspects of professional life. You may have read the BBC story about the ‘King of Crypto’ (Sam Bankman-Fried and FTX). Panorama had a look at the whole sorry mess (have a look on BBC iplayer).
These are the days of being offended. It seems that, unsurprisingly, opposition parties and in particular the Labour party are having kittens about announcements around pensions in the Budget. The criticism is that this helps the rich and not the poor. There is some truth in this of course, but this goes to the political heart of wealth redistribution. In case you are concerned about my political bias, I don’t like any of them.
A million pounds seems like a lot, (it is!) but it’s not as much as it was. The sense we have of £1m is due to ‘anchoring’ as most of us grew up believing that £1m was a lot of money; a millionaire was a very rich person. Search for a home online in the south east and quickly you appreciate that perhaps a million doesn’t buy very much. The TV show “Who Wants to be a Millionaire” with the prize of £1m was first aired in April 1998, almost 25 years ago. £1m then bought you rather more than the same prize fund does today. In fact in real terms, the prize should be adjusted to £1,776,802 … but that doesn’t really fit with the show’s title.
An adult approach is of course to recognise the impact of inflation. I’m going to speculate that politicians know this, but are always selective about the things that vex them. Your house is worth more perhaps because you have done some refurbishment, but also due to inflation. Anyone living in the South East (or indeed swathes of the country) knows that house prices are eye-watering and this is a problem for those trying to buy and for those paying inheritance tax. Inflation in house prices has been higher.
THE PENSION REFORMS WERE REALLY ABOUT NHS CONSULTANTS
The main thrust of the pension reforms are aimed at NHS Consultants, because they have been leaving in droves, because simply by working a normal week they end up owing tax on income that they have not had, in a pension they dont get until 67 at best. Ask any doctor. If we assume health and the NHS is important, it would seem that Labour politicians suggesting that they will reverse pension changes announced in the Spring Budget 2023 have not understood very much at all. If Labour are serious about looking after the health of the nation, we need to rethink pension rules that basically punish them from working. Sadly, few politicians understand the true impact of pension rules.
An alternative would perhaps be to have a simplistic approach, cut doctors and those in similar schemes out of the annual allowance tax calculations entirely. I suspect this would make them happy, it would certainly make my life easier. However the NHS pension is a Defined Benefit or Final Salary scheme, what you do for one, legally you have to do for others. The only other group of people with excellent “old school” final salary pensions are people with long service in big companies or institutions and almost certainly on high incomes – precisely the sort of people that Labour seem to loathe along with their multinational employers. So such a “cut out the problem” isnt actually a solution.
Reality is always an irritation for an MP or political party of any persuasion. A few non-partisan (I hope) facts for you to consider. The last time Labour won an election was in 2005. David Cameron formed a Coalition Government following the election in May 2010 (tax year 2010/11).
Under the new proposals, those earning £200,000 or more do not get an automatic allowance of £60,000 into pensions. This is the threshold at which a lot of calculations need to be done, some doctors will still have to do this. As a result, they may well suffer a reduced annual allowance (how much they can put into a pension).
Those earning £260,000 or more will certainly have a reduced (tapered) annual allowance from £60,000 and will need to do some sums.
Those earning £360,000 or more can only contribute £10,000 gross into pensions, which is less than they can pay into an ISA. So these three facts would suggest that Labour are not happy that people paying 45% tax and have no personal allowance are somehow able to load pensions like a kid in a sweet shop. Its not true.
The tax-free cash from a pension is capped at 25% of today’s lifetime allowance (£268,275). That means those retiring in the future have an allowance that does not keep pace with inflation, meaning in real-terms lower tax-free cash sums will be available. Tax-free cash of 25% of £1.8m or Primary/Enhanced protection, was higher under the last Labour Government than at any point since. Pension income is taxable, it is a future revenue for HMRC. It is also a possible solution to care costs rather than the State paying, I digress.
The last Labour Government had an annual allowance (how much can be paid into a pension) of £255,000, there was no Tapered or reduced Annual Allowance.
The main gripe of Labour about salary austerity wage inflation would appear not to apply to pension benefits being inflation/austerity-repaired since 2010. In short, the LTA would be £1.8m+ inflation, the Annual Allowance would be £255,000+inflation. Tax-free cash from pensions would be higher at a minimum of £450,000+ inflation. Additionally, the £100,000 income threshold for loss of the personal allowance has reduced in real terms. In short they are using the same facts to argue for higher wages, but not higher allowances that benefit… well, taxpayers.
A-Day was introduced by Labour and will turn adult (18) on 6/4/2023. Perhaps adults should be allowed to save for their own financial independence rather than penalised/restricted on both what you can pay in and what you can take out. The original intention of pension simplification and A-Day was to increase the Lifetime Allowance, it started at £1.5m and increased substantially each year until 2010.
The current Government will, from 6/4/2023 take more tax, starting the 45% rate of tax at £125,140 rather than £150,000. There are more people are paying additional rate tax.
The personal allowance is currently £12,570 (up substantially from 2010 but removed from those earning over £100,000. In tax year 2009/10 it was £6,475, the rule to gradually remove the personal allowance for those earning £100,000+ came into effect in 2010/11 set by Labour, in the likely event of a change of Government and in light of the credit crunch.
The £6,475 personal allowance would be lower at £9,155.82 (its actually £12,570, so brownie points for Conservatives?)
£100,000 income before loss of personal allowance would be £141,402 (it’s still £100,000)
The Lifetime allowance of £1,800,000 would be £2,545,248 (its currently £1,073,100 and about to be abolished, this is what they are complaining about)
25% tax free cash would be £636,312 but it is not even half that amount, capped at £268,275, reducing in real terms every year.
The annual allowance of £255,000 would have become £360,576, yet apparently it is act of serving the wealthy to increase it from 6/4/23 from £40,000 to £60,000. Note that those “rich people” earning over £360,000 will be able to put in £10,000 as opposed to £4,000 into their pension, which has been the case for several years now. Just for the record someone earning £360,000 pays a lot of income tax.
In Labour’s last tax year, the basic rate of income tax (20%) applied to £37,400 if this had been linked to inflation, it would now be £52,885, the higher rate extended up to £150,000, which would otherwise be £212,104. In short, Conservatives have evidently cut allowances and increased tax
Chancellors of all persuasions have a knack are implying positive changes are their own doing all whilst completely ignoring the impact of inflation. You think you have been paying more tax? Well, clearly you have. We all have paid for the mismanagement of the economy by our underqualified political masters. Despite what is said in the media, even by supposed pension experts, if you earn more than £360,000 you can only place £10,000 into a pension and get tax relief, for the record a minor (child) can place £9,000 into a tax free Junior ISA.
We will have to see if Labour really will win an election and then change the lifetime allowance again. It seems entirely unhelpful to keep messing around with people’s planning for retirement and financial independence, apparently this is democracy in action. It would seem that politicians from both parties do not really like you benefitting from earning more, particularly if you earn between £100,000 and £200,000 or have I missed something? As for the media, well they don’t like you either unless you own the newspaper you are reading.
The problem of having a deadline for publication is that life tends to throw up some new important information just at the wrong time. The chaos of the ‘mini-budget’ resulted in a new Prime Minister and Chancellor. The Budget on 17th November was set to herald tax rises. So, what has been announced?
NOVEMBER – INCOME TAX
Tax thresholds have been frozen, save the additional rate of tax threshold, which now begins sooner, meaning that more people will pay 45% tax, starting at £125,140 instead of £150,000. What this means in practice for someone now brought into additional rate (earning £150,000) is that they pay 5% more income tax on their earnings above £125,140. If you earn £150,000 you would pay £1,243 more income tax as a result of this change, (£11,187 as opposed to £9,944) effectively £103.58 a month more. Whilst politicians talk of short-term pain, the projections show this measure for 5 years.
NOVEMBER – CAPITAL GAINS TAX
Capital Gains allowances have been cut substantially, reducing from £12,500 to £6,000 from April 2023 and then to £3,000 from April 2024. Trusts have a CGT allowance of half the personal allowance. So realising gains this tax year will be more effective than in future years.
As a reminder, this is the permitted gains on assets being sold with a 0% tax rate before being taxed at 10% or 20%, unless that asset is a second property in which case its 18% or 28%. So if you are a landlord, sell before April 5th to maximise your allowances.
I had expected the rates of tax to increase in line with income taxes rather than the allowance being altered and mostly scrapped entirely. In any event, capital gains tax allowance reductions makes your annual ISA, Pension, VCT, EIS allowances all even more attractive, sheltering funds from CGT in different ways.
The Dividend allowance has also been slashed. This will mostly impact those with a small business whereby family members or staff can have a share of profits (dividends) tax free. The first £2,000 of dividends are currently tax free, this will reduce to £1,000 from the new tax year and then £500 in the next ..
NOVEMBER – PENSIONS
It would seem that there are no changes, which is frankly a bit of a surprise. The annual allowance remains at £40,000 unless you have income over £200,000 when a reduced (tapered) allowance would apply. The Lifetime Allowance has remained in place. If you are an NHS employee, I cannot find anything in the 70 page statement to help you with your annual allowance problems and there is nothing about the tapered annual allowance. So, sadly, more senior doctors will likely reduce their NHS hours or otherwise face tax charges on income that they have not had. We can help crunch the numbers, but if anyone is in a position to ‘get it’, Mr Hunt is but seems to have chosen not to.
NOVEMBER – STATE PENSIONS
If you are receiving your State Pension, it’s going to increase by 10% in April. If you haven’t started taking yours, well you are also likely to have to wait until you are much older to get one. Everyone knows this is a political ‘hot potato’ and the younger generations are unlikely to receive a State Pension until at least 68 (and this will probably be increased in the announcement in early 2023).
NOVEMBER – FEELING FROZEN?
You are going to need to ‘let it go’ … that is – hopes of seeing the end of frozen allowances ending any time soon. The personal allowance, slice of basic rate and higher rate tax tiers were all frozen anyway, but the deep freeze has been extended by two further years. Due to inflation and rising salaries, this will in itself raise more tax. This is part of what critics call ‘stealth taxes’ – the sort you don’t really register (much like inflation eroding your cash) – you only tend to notice after a few years of going backwards.
The Energy Price Guarantee will be maintained through the Winter, limiting typical energy bills to £2,500, this will increase to £3,000 from April. It is generally expected that energy prices will remain high for the next 12 months. To be blunt, nobody knows because it all rather depends on the Russians. One point to note is that the energy savings you may be making now will likely continue as the Government intend to reduce energy consumption by 15% by the end of the decade. To put that into perspective, that’s about the same as making your use of energy in 10 months last a year.
The British obsession with houses continues to be supported by Government policy. The tax when buying property (Stamp Duty Land Tax) was reduced in September doubling the first tier of SDLT with a 0% tax rate from £125,000 to £250,000. For First Time Buyers this is extended from £300,000 to £425,000. These measures will end on 31st March 2025. If you are going to move or buy your first home and want to benefit from this fully, do so before March 2025.
You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email email@example.com