Taxing times

Dominic Thomas
Jan 2024  •  5 min read

Taxing times

Tax is perhaps one of the most divisive issues.  At the time of writing, just before the Christmas break 2023, the Scottish Government has announced that it is imposing the additional rate of income tax (45%) at a much lower level.  Unlike England and Wales, the Additional Rate will start at £75,000.

Here in England and Wales, the 45% rate starts at that “only a quango could come up with it” number of £125,140 for tax year 2023/24.  So someone earning more than £125,140 pays 45% income tax, but in Scotland the line is drawn much sooner.

By comparison, a Scottish resident earning £125,140 will pay an extra £2,507 on the same income. I doubt that the extra tax is enough to prompt thoughts about moving south, but it may well alter behaviour at the ballot box.

As a reminder, the tax rates for this tax year (2023/24) which comes to a close on 5th April 2024 are as follows:

Band Taxable Income Tax Rate
Personal Allowance Up to £12,570 0%
Basic rate £12,571-£50,270 20%
Higher Rate £50,271-£125,140 40%
Additional Rate Over £125,140 45%

These are the income tax rates on earned income, not dividends (which have lower tax rates).

If you are breathing a sigh of relief because you live in England or Wales, remember that this tax year saw the Government reduce the higher rate band so that Additional Rate begins at £125,140 rather than £150,000.

Most of us have been impacted by inflation, yet the personal allowance remained frozen as did the basic rate tax band. So more people pay more income tax. This is what the media and whoever is in opposition, like to call “stealth taxes” basically an increase in tax in real terms.

Additional Rate tax was introduced in the tax year 2010-11, and saw 236,000 people pay 45% raising £34.5billion. Ten years later, the HMRC 2020-21 data saw this number increase to 481,000. There is no doubt that whichever way one observes the data produced by HMRC, we all pay more tax.

There are of course some things that you can do about reducing tax or even obtaining tax reliefs, these are all part of a good financial plan. However what I often observe is how little attention is paid to good arrangement of financial ‘stuff’ so that you can minimise tax payments. How much and where from become really important when drawing money from your portfolio. It’s one thing to get tax relief or use an allowance, it’s another to draw money out so that you pay less than 20% tax.

I recently produced a White Paper that you may find of interest called ‘Understanding Adviser Fees’, which includes and explanation about the value that we bring. Whilst I firmly believe that every little helps, if you focus purely on costs and ignore taxes, you will quickly wonder why you bothered. You can find the paper (which is designed to be readable – feedback welcome) here.

Taxing times2024-02-01T09:21:01+00:00

The Autumn Statement – the Ghost of Christmas Past

Dominic Thomas
Nov 2023  •  2 min read

The Autumn Statement – the Ghost of Christmas Past

We are in the closing weeks of the year. Our thoughts turn to Christmas celebrations and perhaps looking ahead to the New Year. The familiarity of our traditions poses a challenge to attempts to change them, yet even the harshest of men, Mr Scrooge, managed to pay attention to what is important and change his behaviour.

I don’t think it is contentious to say that the Conservatives are a party of tax cutting and yet we currently have one of the highest rates of personal taxes in the main economies. Few of us enjoy paying taxes, perhaps because often it seems that our hard-earned money is wasted on expensive ideas and ‘kit’ that doesn’t work very well at all … anyone tried the NHS IT system or indeed any ‘converting to digital’ Governmental system, let alone the military’s ability to spend a fortune on malfunctioning weaponry to cite just a couple of examples. We all have opinions. (As an aside the Power of Attorney system is going digital in 2024, so I urge you to sort yours before they muck it up and make the backlog even longer).

The Conservatives came to power in May 2010, admittedly with the assistance of the LibDems, but then we have had an entire mess of Government ever since.

According to Jeremy Paxton in 2018, David Cameron was the worst Prime Minister since Eden:

“[He] got to the top of a tree in order to set it on fire and cleared off, put the interests of his party before the country and decided to have this referendum, believed one thing was the only right outcome for the country, didn’t campaign for it, got the opposite outcome and XXX off. It doesn’t seem like leadership to me”.

Given the PMs we have had since 2018, Cameron might actually look a lot better, the bar seems woefully low, anyway, for now Cameron is back, this time as Foreign Secretary.

The backdrop of a Covid enquiry which merely proves what most of us thought, that Mr Johnson is an unreliable character (I am being polite), we have the prospect of an election looming by the end of January 2025. The Labour party seems set on sabotage and the plethora of political open goals being squandered is lamentable. The traditional approach of appealing to the notion “everyone has their price” is in the hands of the Chancellor, who is being tempted to cut taxes now that inflation appears to be returning to a more comfortable figure (4.7% October 2023 ONS).

Which of us doesn’t want to pay less tax? In an environment of rising prices, seeing your net pay remain pitifully stagnant is irksome. Yet we also know that tax pays to keep society running in some vaguely civil way. We can all find things to disagree with, it’s almost a rite of passage into a fifth decade. It’s clear that ‘the system’ doesn’t work for all, and indeed seems to generally work best for the few. The sadness is that there seems to be so few alternatives to the binary choices we have here in the UK; stuck in traditions that don’t work for the good of the country. Creativity and visionary leadership remain sadly elusive.

There was a time when the economy was thought about as a way of serving society, yet here in 2023 we are evidently a society that is serving the economy. There is no good reason why this cannot change, and despite experience, I remain an optimist in a sufficient number of decent people.

For the record, I have no intention of offending your political beliefs, but I do think we all deserve rather better than we have had. On 22 November 2023 we shall get further notice …

The Autumn Statement – the Ghost of Christmas Past2023-12-01T12:12:26+00:00

Golden handcuffs

Dominic Thomas
Jan 2023  •  6 min read

Golden handcuffs…

For many employees, a key reason to remain with their employer is because of pension benefits, however the playing field of employer pension schemes is far from level and the cynic in me questions whether Government tax policy is deliberately attempting to reduce the cost of pensions to employers, particularly the State employers such as the NHS.

Firstly, it’s important to understand the two basic types of pension. The clue to what they are is in the unusually straight-forward name.

1 – Defined Benefit (DB) or Final Salary Scheme

Your pension (benefit) is based on your final salary when you leave the scheme, whenever that is at the scheme normal retirement date (NRD).

The amount you get is a fraction of your final salary, your membership of the scheme and work for the employer builds your entitlement. So a scheme with a 1/60th rate of “Accrual” 25 years of membership would provide 25/60ths  (41.6%) of your final salary. This will be inflation-linked within parameters set by the scheme.

The amount you receive has nothing to do with how much you contribute, that can be any amount (sometimes nothing). It is your employers duty to honour the agreement not simply for the remainder of your life but likely the remainder of your spouse’s life as well.

According to ONS data to 2019 (the most recent at the time of writing) there are about 7.6m active members (people still building benefits)  of DB schemes, of these 6.6m are in Public Sector schemes.

2 – Defined Contribution (DC) or Money Purchase Scheme

These schemes are more straightforward in that they are investment-based schemes and the only guaranteed definitions are how much the employer is going to contribute as a percentage of pensionable salary (and the employee). How much this is ultimately worth will depend on how well the money is invested and the charges applied. Many employers use fairly cautious investment strategies in the misguided belief that this is better, yet as most people will save for their retirement for three or four decades, this will be rather like driving with the handbrake on.

The Auto Enrolment pensions that were introduced to automatically add staff to a pension rather than ask them if they wanted to join are essentially defined contribution schemes. They have been a success in the sense that more people are now saving into a pension.

The majority of employers do not offer a DB scheme, in fact hundreds have been closed over the years. There are barely any open DB schemes in the private sector, because they cost an awful lot to run and provide. There are roughly 10.4m people drawing a pension from a DB scheme and it’s fairly evenly split between private and public sector pensions. Remember that these are pensions payable for many years with a degree of inflation-proofing. Back in 2006 there were about 3m members of private sector DB schemes, half of them were closed, but by 2019 only 0.6m members were actively building benefits due to the number of closed schemes, deemed too expensive. Contrast this to the 0.9m members of open private sector DC schemes in 2006 which has risen to a whopping 10.6m.

To put a little more ‘flesh on the bones’ of the open private sector DB schemes, employers contribute a weighted average of 19.1% with employees adding a further 6.5%. Compare this to the weighted average private sector DC scheme where employers contribute 3.5% and employees just 1.6%. It doesn’t take a maths genius to work out that its much cheaper (by a country mile) for employers to provide a DC scheme, for which they pay annual contributions when their member of staff works for them and not a penny more thereafter.

Stating the obvious, if you are running any business, profit is what sustains a future; reducing costs increases profits (or should). The Public Sector cannot generally make quick and substantial changes like this. Generally the approach has been to alter existing DB schemes, with pensions starting later (65, 67, 68 as opposed to 60). Member employee contribution rates have increased – doubling in many cases. Finally, the rate of accrual has also been changed, often dressed up as better, but invariably forfeiting other benefits such as a lump sum. This is where most Union and legal challenges have been directed.

So taking a typical doctor who began their career paying 6% into a 1/80th pension scheme that would provide a pension for life from age 60 and a one-off tax-free lump sum. If they started working without any career breaks they might build 36 years of service (36/80ths) providing a 45% pension of their final salary (say £130,000) of £58,500 a year and a one off lump sum of £175,500.

If we exclude inflation, a same salary doctor will need to work an extra 7 years to get their pension at 67. They pay closer to 13.5% of salary to the pension and build it as 43/54ths of 79% of their salary (no lump sum)… but the Government was smarter than that, the maths isn’t really 1/54th of final salary, it’s of each year … the term ‘career average earnings’ captures this.  A doctor starting out is obviously paid substantially less than one at the peak of their expertise and career earnings – so it’s nothing like a final salary but an average salary over 43 years.  Taking the midpoint as an example, 21 years into a career – or retiring on a salary that you had 21 years ago. In fairness it isn’t quite like that, there is some inflation-linking, but this is detail you don’t need to know right now. The principle is how pensions in the Public Sector have been sliced and diced to save money.

When you add in draconian Government/HMRC rules about the Lifetime Allowance (a tax charge of 25% or 55% for those with pensions valued at over £1,073,100 and the Annual Allowance formula used, (which for many triggers a substantial tax on a pension income they have not yet had), it is very hard to conclude anything other than a deliberate strategy to remove higher paid long-term employees … like doctors.

So quite apart from the awful treatment medics often get in the media and utterly fictional suggestions of Consultants barely breaking from a round of golf to turn up for work occasionally, there is little wonder that most of them feel betrayed by a nation that they chose to serve. I can certainly tell you that from three decades of working with NHS doctors, I’ve not met any that became multi-millionaires through their work within healthcare. Some are certainly more entrepreneurial than others, but most of them simply love medicine and get satisfaction making a real difference in people’s lives, more likely describing it as a ‘calling’.

The reasons for the NHS being in crisis are complex and many, but part of the reason is that many doctors are being forced to reduce the number of sessions that they work or retire early so as to avoid a scenario where they are essentially paying more tax than the income they earn … actually paying to work. It is down to the Government and policymakers to have an adult approach to pensions and scrapping many of the really very badly thought through self-defeating rules.

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 info@solomonsifa.co.uk

Golden handcuffs2023-12-01T12:12:39+00:00

The mini budget – Sept 2022

The mini budget – September 2022

You may have gathered that I ended up pouring myself a stiff drink after I listened to the ‘mini budget’ last week. To say that it wasn’t quite as expected would be an understatement. Some would have us believe that we live in an age of being offended by any old opinion, the truth is quite different, but as ever these societal messages all have a purpose to serve, just usually not yours or mine. I felt the heading here ought to have a date, as there may be another one along any minute now … it’s a bit of a mini adventure!

Setting aside partisan politics, which is relatively easy to do these days, because no party looks anything like they should. I give you the budgie … I mean budget, a mini one, though probably one of those BMW minis on steroids that runs off a wall socket and can easily swallow a double bed.

TAX CUTS

We had tax cuts… well, more accurately, we have been promised tax cuts from April and National Insurance cuts from November. Anyone who has built up 35 tax years of NI payments since 16 will barely wake up to this marvellous news, the rest however have had an increase removed … or it will be. A saving of 1.25% within the NI threshold. As a well-known supermarket may say, every little helps … yes – if you believe that somehow your NI is not simply another tax, that for most of us is the price of membership to get a State Pension. Yes, it does provide a few other things.

A BRIMFUL OF ASHA ON THE 45… (YOU KNOW, OR YOU GOOGLE)

The big news is really the additional rate of tax being abolished. That’s the extra 5% tax that anyone with income over £150,000 must pay. Instead, they will simply continue to pay 40% on all income from the higher rate threshold. That also means that the additional rate is abolished on dividends and additional rate taxpayers can have back a £500 personal savings allowance (non-taxpayers and basic rate taxpayers have £1,000 allowance, higher rate taxpayers £500). That’s £500 of interest tax-free (all interest is taxable, it’s just that there is a personal savings allowance, which until the recent interest rate rises you’d need £50,000 to £100,000 on deposit to achieve).

For context, anyone earning £150,000 does not get a personal allowance of £12,570 which has a 0% tax rate … apparently, they don’t deserve it. Anyone earning over £240,000 a year (heaven forbid – it’s actually just about enough to get a mortgage to buy a 2up2down terraced house in Edna Road, SW20) can only contribute 10% of the £40,000 annual allowance towards a pension, meaning they are actually penalised from saving into pensions. If you are an NHS doctor in the pension scheme, you don’t even have to earn anything like these sums to get clobbered with tax on money you will not get until you retire, as you well know, but Joe Public seems oblivious to. These measures have not been altered, but the great injustice of the day is to allow them to retain an extra 5% of income above £150,000. That’s 5p in every £1 or £5,000 for every £100,000 (on which they still pay 40% or £40,000 in every £100,000).

STYLUS and STYLE LESS

What we deem fair depends on who you are and what you earn. However, one thing is clear, the Chancellor has failed to read the room, much like he did at a recent funeral. This is the age of appearances, in all but hairstyles (I write with no sense of envy at the naturally enforced lack of one).

What we have is messages that miss the target, appearing to help and appease the ‘wealthy’ which I would argue is never income, always capital when talking about money. When many will evidently struggle to pay for power and heating this winter (our little office in SW20 has had a tenfold increase, 10x good grief, I am definitely in the wrong industry!). The appearance and indeed the impact of the cuts is woefully poor messaging. Bankers’ bonuses being uncapped to most of us sounds insane, until you realise that the cap resulted in higher salaries (fixed costs) for poor performance and many that couldn’t keep the score they wanted decided to pay income tax in Paris, Frankfurt or the Caymans… scrap that last one. Anyway, keeping them here paying 40% of everything seems logical to me as opposed to nothing of nothing.

But facts don’t make for good news or even bluff and thunder. Equally neither does the promise to pay for it all at some point in the future. This is the age-old problem of Government printing money (Bonds) as an IOU and hoping enough of us buy them and believe that, as previously there will be enough tax revenues to enable them to keep paying the coupons (interest) and ultimately return the capital at redemption date.

THE GREAT RECKONING OR REDEMPTION?

Redemption is perhaps the right word – can Liz Truss salvage the car crash of politics that Mr Johnson left. Johnson has had many forgive him, at least three wives have done so at times. Whether this is a gamble that Truss has the hand or nerve to match remains to be seen. I am hopeful; but deeply sceptical. As she clearly can drive a tank, I won’t suggest we watch to see if she can parallel park a mini.

WHEN LESS IS LESS (YES REALLY)

Side note. Lower basic rate tax at 19% means on the first £37,700 (after the personal allowance) you will pay income tax of £7,173 rather than £7,540 a saving of £377 a year or £31.42 a month … the milky bars are on me! (I jest at the price of confectionary and anyone old enough will recall the advert).

Additional side note, that means your basic rate tax relief on pensions will also reduce from 20% to 19%. In maths we can relate to, £81 invested by you sees £19 added by HMRC rather than £80 and £20. So for those paying say £300 gross a month into a pension (as I advise many people to do even if retired and under 75) that means you will now pay £243 a month rather than £240 (from 6th April). Yes it costs a little more…. it’s the classic giveth and taketh away (all Chancellors do this).

I imagine you may have questions, some are being answered by the markets (which seem to be calling this a game of bluff and double-bluff). Some will appear in your newspapers, though I suspect they will be full of rather more conjecture and opinion than fact. If you wish to genuinely understand the impact of reduced taxes on your wealth, get in touch or hold fast until your next review. We are all playing the long game here, but none of us know how long.

No politicians were hurt in the writing of this article.

According to the ONS in 2020/21 the average disposable (after tax and NI) income is £37,622 but the median (the mid-point if you lined up everyone) is £31,385. If you separate out the non-retired and retired, the former has an average of £39,349 and mean of £32,934. Retirees see this considerably lower at £29,408 and £25,405. It is generally true that retirees have no mortgage payments and unless they are our clients, apparently never have any fun either (joke!).

Government Sanctioned information here

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 info@solomonsifa.co.uk

The mini budget – Sept 20222023-12-01T12:12:43+00:00

Hard Truths

Hard truths

As Wimbledon begins, some hard truths will be faced. Some players will not be “on their game”; some will peak too early and some will enjoy good luck whilst others might curse technology, training, lack of sleep or why on earth they did or didn’t do something that may have made all the difference. We will all have our favourites, but in the end only one person can win the singles championship. In just a couple of weeks all the questions, hopes and dreams for Wimbledon 2017 will be consigned to history.

In a similar vein, June was interesting and is now over. An election, a minority Government, a deal with the DUP, various horrendous disasters and circling political vultures all attempting to appeal to the crowds, some more obviously than others. Much of this we cannot control, despite what some might suggest within social media.

A new savings low

The FT reported the rather grim news that Britons are saving less of their disposable incomes that at any time since 1963 when such records began. An alarming 1.7% of income was left unspent in the first quarter of 2017, significantly below the long-term average of 9.2%. Reports also continue to make the argument that around 1 in 6 people use a credit card to get through the month. In tennis terms – there’s not enough left in the locker.

Squeezed rises

Whatever your view of austerity, clearly if income falls behind the rate of inflation, you effectively have a pay cut. This is something that the State Pension triple lock is designed to prevent (after many years when the State Pension arguably fell in real terms). It is estimated that the triple lock costs around £6bn. It would certainly appear that the days of austerity are coming to an end and that there is growing support for the end to the cap on Public Sector salaries which have been held back since 2010 (when Rafael Nadal won the men’s singles and Serena Williams won the women’s singles at Wimbledon).

Self-defeating

However, unless people begin to save for their own futures, arguments about austerity are going to seem like the proverbial storm in a teacup.  The undeniable truth is that we all need to budget and live within our means. Most don’t appear to do this. No Government in recent history has achieved it either. If you cannot control what you earn, you can only control what you spend, which means accounting for how your money is spent. The truth is that hardly anyone likes to budget and probably dislikes drawing one up a little more. Our clients are no exception – and most don’t really “need to budget” but of course it is a discipline that we advise and encourage to ensure that your hard-earned income sticks to you.

However, it is vital to understand where your money goes. The chequebook (remember those?) does not lie. It is very easy to spend and keep spending in a society that is expert in parting you from your hard-earned cash.

As with politics, in tennis with patience, generally your opponent will tend to beat themselves. Sure, you may need to play well, but invariably the loser is the one that makes the most and more significant mistakes or errors. The most basic of these to make in financial planning is failing to budget, ignore it at your peril. In tennis terms, its the equivalent of not being able to serve.

Dominic Thomas
Solomons IFA

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 info@solomonsifa.co.uk

Hard Truths2023-12-01T12:18:29+00:00

Great Rivals

Great Rivals

Perhaps you watched the men’s Australians Open final, which saw Roger Federer eventually overcome Rafa Nadal. The speech at the end by Roger Federer was typical of him, but many that don’t follow tennis might wonder if he wasn’t simply saying some well-rehearsed lines, which sound very nice but aren’t really true. Those who do follow tennis, will recognise that it seems to have an unusually generous, gracious and humble group of people at the top of their game. Respect is not something demanded, as it is in some sports, but modelled.

What if businesses took a similar approach?

Let us not forget that this is a highly competitive sport, a battle of skill, stamina and psychology and the momentum flows back and forth like the ball itself. Imagine if this sort of respect was found in business, if competition was performed with grace. If being “the best” didn’t mean others were annihilated in the process. An awareness that being “the best” only lasts so long, whilst you are good enough to be better than, rather than because you once were. I wonder how this sort of approach might alter the way companies behave. It might change the way they invested in their staff, sector or community rather than simply focus on the quickest and cheapest way to get what they want.

… and how about the Public Sector?

I had thought that the non-business sector might be different. Schools might collaborate rather more than they do, but in practice Head Teachers are invariably under pressure of targets. Achieve results, retain pupils and so on, which might be in the interests of the pupil, but might not. The targets incentivise certain types of behaviour and as usual, you get what you measure. What therefore requires challenging is the targets being set, which within the Public Sector are set by Governments. I appreciate that many within the Public Sector may well collaborate, but this is rarely incentivised or encouraged.

Rise above the noise

Similarly, when it comes to your own financial planning, the targets that you set, should be yours, not those set for you by others. The fact that your favourite radio or TV station feels the need to report the level of the FTSE100 every half-an-hour is beyond my comprehension. It is irrelevant information to anyone other than a financial trader – who already has it! So, when you play your game best, you don’t have to beat the market, you don’t have to beat other people. Your financial plan “simply” needs to align with your values and then make use of the most suitable financial planning techniques. The difference is fundamental and fundamentally about confidence …and some good humour.

Dominic Thomas
Solomons IFA

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 info@solomonsifa.co.uk

Great Rivals2023-12-01T12:18:51+00:00

Help Stop the Pension Scam

Help Stop the Pension Scam

Can I ask you to help me to stop the pension scam? The new pension freedoms that the previous Chancellor introduced are largely welcome; however as ever, freedom brings responsibility. The main challenge of the new freedoms is that the money in your pension has to last… or if not, you will certainly need other resources. Making your money last a little longer than you is essentially what financial planning is all about.

Daylight Robbery

The days of holding a bank up at gun point are largely gone, cyber crime or financial fraud are the obvious choices for any career thief. Your pension fund will hopefully be one of your largest financial assets and thus something of a honeypot.

movie poster the Sting starring Newman and Redford

Sounds familiar?

We live in a time of very low interest rates and low investment returns, so it is often tempting to look for alternatives to reality, which in practice is anything that offers high guaranteed returns or perhaps even high returns. Invariably these are non-mainstream investments but invariably sound familiar – car parks, investment property, storage rental, film funding, hotels and casinos. Nothing you haven’t heard of… but that’s part of the deception.

If you aren’t really that familiar with investing, it can all seem rather like the same thing – its just risky stuff right? Wrong. So anyone can be tempted into giving other forms of investing a go – particularly if you believe that pensions are “rubbish” or that bankers are all evil. The perfect storm for thieves to play upon understandable concerns and a lack of knowledge.

Arming themselves with a telephone or email, they lure investors into moving their pension (generally) in exchange for high returns. They use classic cold calling pressure techniques or simply wear you down with emails and “examples” of how it works.

Many have lost their entire pensions through this.

Hence another adviser (Darren Cooke) has started a petition to ban cold calling and I’m supporting it. We are not naïve enough to believe that a ban stops thieves, but a petition can certainly inform debate at Government policy making level and hopefully result in some changes which make it far harder for people to be ripped off, it seems that relying on the regulator to do this is delusional. So can I ask you to join me in supporting the campaign.

Click here to sign the petition.

Dominic Thomas
Solomons IFA

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 info@solomonsifa.co.uk

Help Stop the Pension Scam2023-12-01T12:19:04+00:00

Help to Buy ISA… well, not that much help..

Help to Buy ISA…well not that much help

You may have heard of the Help to Buy ISAs. When this was announced by the then master of goalpost manoeuvers, Mr George Osborne, you would be forgiven for thinking that this was an innovative scheme to help savers get a bigger deposit for a house purchase. The Government will add 25% to whatever you save…. Well maybe not.. as ever, rarely do Governments make life easy, indeed one is often left to wonder if Government agenda is not precisely the opposite. So, let’s spell out a few of the issues. For the sake of simplicity, I will call the right to buy ISA “the plan” which will not help my search engine optimization, but will hopefully read a little better.

Maximum and Minimum

You can only save £200 a month into “the plan” with an initial deposit of £1000.The maximum that can be in the plan (from you is £12,000 – the minimum is £1,600). So the maximum £12,000 would get £3,000 (25%) from the Government, yes its better than nothing, but actually not that much help for a deposit. You have to be 16 or over for an account.

So then there is that mortgage…

Whilst it is possible to get a mortgage with a very small deposit (5%) the prevailing requirement is generally 15%-25% deposit. Of course this means being able to justify and afford the mortgage for the balance. So if the plan is 5% of the purchase price, that suggests a property valued at £300,000 and mortgage of £285,000… which in turn probably means an income of over £80,000. We don’t arrange mortgages, but generally borrowers can borrow up to about 3.5x their income. If you have found a property for £100,000 then of course this will be more useful, but one can only assume that the property is at least 100 miles from London.

The Hard Graft of Saving

As the plan is really a monthly saving scheme, that’s a total of 55 months or 4 and a half years of solid saving…. In the meantime, property prices are probably rising, at least in-line with inflation. Oh… just remind me how long is the typical Government lifetime? How time flies.. and policies change.

The Housing Problem

Another clause being that Government hand out only applies if the purchase price is up to £250,000 or £450,000 in London…. In which case for Londoners, clearly this would be just over a 3% deposit, so you will need other resources. The property must be in the UK (do not ask me what that would mean should either Scotland or Wales leave the UK). Naturally the plan cannot be used to purchase a second property, so if Mum and Dad have put your name of the deeds somewhere else… well, it’s not for you.

Meanwhile, as the Help to Buy ISA is really a Cash ISA, the savings earn interest, which today is about nothing. OK you can get some better deals, but not much better.

Snakes and Property Ladders

The Plan cannot be used for anything other than a deposit, not stamp duty, fees etc. It cannot form part of the deposit provided at Exchange of Contracts either…. which is quite daft! It must also be closed before you buy, which means obtaining a statement from the Bank to confirm that the account is closed (which may be easy in theory but hard in the stressful throws of purchasing a first home.. whilst the pressures mount from those higher in the chain.. It’s actually the conveyancing solicitor that claims the Government hand out for you between the Exchange and Completion… (I’m guessing a fee would apply to claim it)… what could possibly go wrong? (property falling through perhaps?).

Still, there’s no place like home….

So is it worth it? Launched nearly a year ago (December 2015) over 22,000 people have used the proceeds to buy a property, which presumably means that they had at the very most 10 months of £200 and £1000 initial deposit (£2000 in all) so a £500 help to buy. OK, ok… better than nothing, but is this really solving the housing crisis or simply providing a bit more cash to meet the inflated property prices? I think you can probably guess what I think.

However, this is money for nothing (well, there are some strings). In practice, perhaps try to use the account, fill it up to the maximum then forget about it in the hope that the offer remains valid for years to come. It does form part of your annual ISA allowance, but in practice only £2400 for most people, meaning that there is still a lot of ISA allowance left. If you move abroad or never end up buying a home, then you can easily get your money back, it simply will not be worth much more than you put in, due to poor rates of interest. Much like the Wizard of Oz, there are no magical solutions to resolve the housing crisis but if you make the effort and reflect on your own resourcefulness, its amazing what can be achieved… and you will have a bit more cash to play around with.

Dominic Thomas
Solomons IFA

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 info@solomonsifa.co.uk

Help to Buy ISA… well, not that much help..2023-12-01T12:19:09+00:00

What’s the row over pension charges now?

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What’s the row over pension charges now?

You may have been listening to Radio 4 or perhaps seen the TV news, Steve Webb the pensions Minister is doing the media rounds having announced that charges on pensions should be capped at 0.75% which he announced yesterday and has been plugging his cause since. There is no doubt that there are many very expensive pensions and I would go as far to say that there have been lots of “rip off” pensions. There are too many vested interests, this has broken out in a row over pension charges.

Is there any such thing as a free lunch?theawfultruth

We now have various think tanks and Providers all taking the opportunity to price to the bottom and distance themselves from “rip off pensions” as quickly as possible. An assortment of spurious views about the impact on the final value of a pension fund is now doing the rounds. The vast majority of this is utter drivel. We are all to blame for this (advisers, providers, investors, regulators and Governments) why? Well because over the years we have colluded in the deceit that anything to do with financial services is free. It isn’t. I had hoped that this delusion would have been put to bed by the introduction of RDR, yet AE (auto enrolment) exposes the deep resistance to a shift in mindset.

Can a pension have low charges?

It is perfectly possible to use a pension that has low investment charges and by low I mean less than 0.30%. However this is merely one element of the piece. The administration costs are high due to well intentioned regulation. The “sales costs” are high due to well intended regulation. The regulation is designed to protect the investor and the wider market.

Why does AE have unique charging problems?

The unique problem that AE brings is that there are some very tiny premiums. Suppose you earn £10,000 a year and in several years time you will have contributions of 8% a year (£800) a cap of 0.75% on this would be £6… ok its based on the value of your fund, but given that most will not be more than £4,000 that’s £30 to cover the investment and administration for the year (and by the way you can opt in and out, switch funds, vary the payments creating more administration). It’s a nightmare for pension providers. Some have come up with some low cost solutions (hardly any investment choice) and some have a fixed monthly fee. Well even at £1.50 a month (£18 a year) that’s a higher proportional charge on a small fund of £1,000 (1.80% to be precise). The Government backed (taxpayer funded) NEST is loss making and will be for many years. This is typical of Whitehall delusion that they then expect commercial enterprise to replicate. We all know Governments are not good at maths… don’t we?

The solution is right under their noses

Stakeholder pensions (with low charges) failed because there were other better alternatives at a lesser or more competitive price. The Government (this one and the previous one) believe compulsory membership isn’t quite ok, so we have a “difficult not to join” approach. However, I would argue that today employers and employees already have a proper pension system. It’s called National Insurance and the State pension. We know it’s not good enough, so why not simply make it better for everyone? It has no investment risk and is already set up. For those that want (and need) more than the State pension (most of us) then there are plenty of very good pensions around, any decent adviser can structure a sensible plan – but it is not free… neither should it be. If we want to create a society of that is independent of the State, we all need to face some adult truths.

Dominic Thomas: Solomons IFA

What’s the row over pension charges now?2023-12-01T12:38:33+00:00

UK Pension rules are a post-modern farce

The state of the UK pension system, supposedly one of the best in the world, is a shambles. It is high time this Government got its act together and decided that either we should all be saving and encourage us to do so, or give up. The bureaucrats at Whitehall are the only winners in the pensions mess, with endless tinkering with the rules that are gradually constricting the life out of a system that is supposed to encourage and reward savers and employers alike.

You may recall that the last Government decided to draw a line under pension rules and adopt a new approach called “pensions simplification”. Well intended it may have been, but it has been a shambles. The current administration are just as bad. Pension simplification was meant to give everyone a maximum pension fund allowance (the lifetime allowance). Not easy when you consider that a lot of pensions are not real money – a final salary scheme, such as the NHS or Civil Service are not investment based pensions, but service based. Irrespective of what the employee contributes the end result is assured based upon a proportion of final salary. For the record, this has also been messed around with. Anyhow, these schemes were given a formula. Let’s keep it simple and suppose you have built a pension of £25,000 a year and the lump sum would be 3x times  this amount. The formula was 2ox pension + LS. in other words £575,000 in this instance. Then this needs to be checked against the lifetime allowance, originally £1.5m – so in this case fine. The problem comes if your pension is worth £65,000 a year – which is not unreasonable in 2013 for a Consultant with 40 years of NHS service. Those with more than £1.5m at A-Day (when the new rules came in on 6 April 2006) could protect their existing funds by applying for enhanced or primary protection, essentially agreeing not to pay more in.

The Lifetime allowance has been increased and then decreased and heading to £1.25m from 6 April 2014. The amount that you can contribute has also been restricted. Severe tax penalties apply for anything over the limit. In essence there is an incentive to restrict growth and payments. Don’t forget that “the other side” of retirement, when you actually take your pension, this is taxable income. Argh! yes there are new levels of protection too, just to meet the problems of a reducing lifetime allowance and the latest raft of rules published by HMRC are out for consultation until 2nd September. These outline two more forms of protection Individual Protection (IP14) and Fixed Protection 2014 (FP14).

All of this needs very careful advice. But just in case anyone from central or any far off field of Government is bothering to listen. Here’s a question for you. Can YOU tell me what your pension is worth today? (all of them) and can you tell me what it will be worth when you retire? can you even tell me who your pensions are with? and are you aware of the potential problems for those with “workplace pension” or “auto enrolment” for those with large pension pots? No, like most people, you attempt to understand the mass of paper that may or may not arrive each year outlining the income that you might get if XYZ does something useful with your money.

If anyone in Government had a modicum of common sense the only restriction on a pension should be the amount that can be paid in that qualifies for tax relief. That is all. Have this as a fixed percentage of income – just one level, not dozens based on your age. Make it attractive. Don’t mess with it, leave it alone. YOU will get your tax relief back anyway in the form of income tax, reduced reliance upon the state and eventually in some cases inheritance tax. Here’s my suggestion after 20+ years of dealing with pensions and handling everything from the very basic questions to the most complex. Offer tax relief of 25% at source, with no need to reclaim it. Only allow those that pay income tax to receive the tax relief and restrict the amount to 25% of taxable income (in total from employer and employee). Oh, and keep the ability to have tax free cash of 25% of the fund at retirement, but no more. It bet that in 2 days you will still be able to remember my suggested fantasy rules. As for the more complex issues – allow carry back to only the last tax year and for non earners, or non taxpayers frankly there are likely to be more pressing matters for their money and a myriad of alternative forms of saving vehicles.

I wait in anticipation of the revolution that puts investors/savers/ the UK public first…. no I am not a member of UKIP.

 

Dominic Thomas – Solomons IFA

 

UK Pension rules are a post-modern farce2023-12-01T12:23:42+00:00
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