Pensions: Lifetime Allowance and Mad Max

You have probably heard of Mad Max – its latest incarnation is currently in UK cinemas. You may have heard about the Lifetime Allowance – which has been part of the pension vocabulary since 2006 or “A-Day”. Suffice to say that I believe that the Lifetime Allowance is rather mad.

In the event that you are a politician and reading this, may I ask why you think pensions are important? To my mind, pensions should be encouraged. The end result of a pension should be that people living in the UK are able to provide for themselves above the State Pension, so support their lifestyle. This has several obvious benefits – creating financially independent adults, not requiring State support. Having income means that income tax can be levied and collected to help pay for our society. Let’s also not forget that income is there for using (spending) which enables trade to occur and wealth to be created and so on.

A World of Plenty?

It would seem that politicians generally think not having a rising burden on the State is a good thing. Indeed encouraging pensions with tax relief is the “sweetener” or “bait”. Much like the film Mad Max, we probably don’t want to create a society reliant upon the occassional benevolence of the prevailing “Lord”. Surely we would like a society where all prosper? OK we know the UK has limited resources, so adjust the tax relief, but don’t make it hard or even pointless to save. Even the current regime isn’t tempting enough for millions of people that don’t or cannot save for their future.

Scarcity

At present pension contributions are restricted, which seems fair enough, but the amount that the pension pot grows to is also restricted by the Lifetime Allowance. This is currently £1.25million, which sounds like a reasonable sum, but in practice isn’t as much as you’d like to think, given that it has to last for the remainder of your life. The Lifetime Allowance has already reduced over the years from £1.8m and if the Chancellor does what he suggested he would in the last Budget, it is likely to shrink to £1.0m next April. In other words £250,000 of the Lifetime Allowance will be lost – or more accurately invoke a tax penalty of £137,500.

Mad Max and Excess Tax

If the Lifetime Allowance is exceeded, there is a tax charge of 55% on the excess. OK there are some ways that you can protect your higher pre-legislation allowance, but these are designed by bureacrats and “problematic” to say the least. Essentially this excess tax charge punishes those that save or get good investment results…. let’s not forget that the income from pensions is subject to income tax anyway. So I fail to understand why we don’t simply abolish the Lifetime Allowance and all the protections that have surrounded it. Your pension fund should be just that – a pot that you can actually use with confidence.

Mad Max – Fury Road is currently in UK cinemas, starring Charlize Theron, Tom Hardy and Nicholas Hoult. The Chancellor, George Osborne has his next Budget on 8th July 2015…

Dominic Thomas

Pensions: Lifetime Allowance and Mad Maxadmin2017-01-06T14:39:28+00:00

Autumn Statement – 3rd December 2014

So the Chancellor has delivered his Autumn statement, most of which was leaked in the media or announced in his radical budget (well radical for financial planners). The main points of the budget that we didnt know already is the provision to pass ISA allowances between spouses on death. This will certainly please married couples with large ISA funds. Prior to this, upon death an ISA becomes part of the estate, unless it has been held in specific AIM listed holdings for at least 2 years thereby benefitting from an IHT exemption, but invariably increasing the degree of investment risk (p56 of statement). The ISA limit will increase for 2015/16 to £15,240 from £15,000 as it is today.

Stamp Duty

A signficant change to Stamp Duty on property was announced, which mirrors the system used for income tax rates, that is, the more you earn, the more you pay, but only over certain thresholds – higher rates are only applied once thresholds are reached and nor applied to the full amount. Stamp Duty has now adopted this approach, some will be better off at the lower end of the property price range, some will be considerably worse off. The aim probably being twofold, to increase and encourage first time buyers and be more of a help to people trying to get onto the property ladder, whilst also attempting to dampen price increases at the top end. You can see a helpful chart on the impact of these changes on pages 53-54 of the Statement.

On a similar theme, the higher rate (40%) threshold has been increased marginally more than previously announced (by £100). We will have to wait until 12 December to find out what the interest rates will be on the new NS&I Fixed Rate Pensioner Bond (only for those age 65+). No doubt the free newspaper you pick up this evening or the TV and radio coverage will have pundits discussing the changes. You might want to look at the figures towards the back of the report, (page 100) which essentially show the UK’s income and expenditure. All the talk of austerity (which is certainly more real for some than others) has still resulted in national overspending and this looks likely to continue until 2016/17 with lots of “if’s, but’s and maybe’s”. If you do have any questions about your own situtation and how it might be effected by today’s Autumn Statement, do get in touch.

Dominic Thomas

Autumn Statement – 3rd December 2014admin2017-01-06T14:39:33+00:00

Medics See-Through Outsourcing.

1963: The Man With The X-Ray Eyes

The medics amongst you may be interested in the changes that seem to taking hold of radiology departments. This is not a new story and I have talked at length with clients about the impact of the internal changes within the NHS due to outsourcing of services and and in some instances a potential reduced perceived need for certain Consultants.There’s a fairly pithy blog that I follow by a doctor which often points to the growing privatisation of NHS services. Retired Consultant Bob Bury writes an interesting piece in Hospital Doctor today. As you will be aware, I advise quite a number of Consultants and GPs who are all at the receiving end of a taxation assault against them, which I believe to be largely due to the last Governments inability to do the maths on the Consultant Contract and GP Contract. I have never met a doctor that is in pursuit of money, even those with very large private practice incomes are very “patient focused” the money just kind of follows. Of course if you are ever unfortunate enough to need their skills, then you really appreciate the training and experience that they have gained over many years.

Saving money (by buying cheaper) is not always a great way to operate. Nobody wants to be ripped off, but equally we know that cheap does not equal quality – just look at the row between Virgin Trains and the Government at the moment.

We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
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Medics See-Through Outsourcing.admin2017-01-06T14:39:54+00:00

More Pain For Doctors – Breaking Trust

1963: Doctor in Distress – Thomas

As you may have gathered, I advise quite a number of medical professionals. I came across a concerning piece of news that was published in “Hospital Doctor” today. It seems that your pay is under threat from cash stretched hospital Trusts. The report suggests that this is being considered in some Surrey hospitals with potentially renegotiated terms for those earning over £55,000 – which is pretty much all senior doctors. The “cards on the table” negotiations also include changes to overtime, weekends and Bank Holidays as well as reductions in sick pay and annual leave entitlement. It would appear that the NHS continues to be a political punch bag and clearly there is increased concern about good Trust management following the first NHS Trust to be placed into administration (last week South London Healthcare Trust which is the old Princess Royal Orpington, Queen Mary’s Sidcup and Queen Elizabeth in Woolwich). It seems that having a Royal title will not save hospitals, who seem to be facing the equivalent prospect of the guillotine.

The Pay Review bodies are due to report to the Government this week on the impact of introducing regional pay rates after the public sector pay freeze, which is due to end in April. It needs to be said, that Doctors and Consultants in particular have been hit very hard by cuts and tax increases over the last three years. I imagine that many of you will be feeling rather “frustrated” at yet further meddling with a system that seems to have less to do with providing high quality medical care and more to do with budget manipulation by whoever is in office.

We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
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More Pain For Doctors – Breaking Trustadmin2017-01-06T14:39:59+00:00

So You Want to Understand Your Personal Allowances?

1949: Any Number Can Play – LeRoy

Sadly I have not mastered a way to put a graphic into this blog – which would help enormously to portray what really happens to personal allowances and rates of income tax. This is for everyone under 65 – sorry I know many of my clients are over 65, but the Government are intending to scrap the age allowance anyway and this is really a post about the mechanics of tax.

Now (2011/12)

Personal Allowance £7,475 = 0% tax

The next £35,000 (total income up to £42,475) = 20%

The next £57,525 (total income up to £100,000) = 40%

The next £14,950 (total income up to £114,950) = 60%

The next £35,050 (total income up to £150,000) = 40%

Everything above £150,000 = 50%

New Tax Year (2012/13)

Personal Allowance £8,105 = 0% tax

The next £34,370 (total income up to £42,475) = 20%

The next £57,525 (total income up to £100,000) = 40%

The next £16,210 (total income up to £116,250) = 60%

The next £33,750 (total income up to £150,000) = 40%

Everything above £150,000 = 50%

Budget Announcement (2013/14)

Personal Allowance £9,205 = 0% tax

The next £32,245 (total income up to £41,450) = 20%

The next £58,550 (total income up to £100,000) = 40%

The next £18,410 (total income up to £118,410) = 60%

The next £31,590 (total income up to £150,000) = 40%

Everything above £150,000 = 45%

So if you follow this (well done!) the amount of income you need to earn before paying 40% tax is falling (from £42,475 to £41,450). Let’s do a worked example. Suppose you earn £160,000 a year and your income remains fixed.

2011/12 the actual tax (excluding any National Insurance) would be £58,000, in 2012/13 £58,126 and in 2013/14 £58,051. This is what I mean by moving the goalposts – the reality is that you end up about the same (in this example), even though at first reading it looks as though you may be a bit better off as the personal allowance has risen.

Suppose you earn £65,000 well this tax year you would pay tax of £14,010, in 2012/13 you would pay £13,884 and in 2013/14 you would pay £13,869. Not exactly massive sums, which is the point, because the Chancellor/Government/Country cannot really afford to reduce tax in the current climate, at least not for those who are generally 40% taxpayers.

This is not a political statement, its simple fact (all Chancellors play this game because they are head of the Treasury, which is a Civil Service department). Its also true that we do have a 60% rate of tax (effectively) as well as the 50%, but this only applies to those caught earning a bit above £100,000.

Of course a good financial planner will know how to help you reduce your tax liability legitimately, but tax is only an aspect of financial planning, not the main purpose.

We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
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So You Want to Understand Your Personal Allowances?admin2017-01-06T14:40:06+00:00

The Day After The Budget

1940: Blondie on a Budget – Strayer

It has been a manic few days. There was the endless speculation in the media about what the Budget would contain, then the Budget itself and today further speculation tempered by some analysis. The reality is that you and I can do nothing about what is in the Budget, all we can do is reflect, understand and where necessary make adjustments to your financial planning.

So what is the big news? well probably the gradual phasing out of the Age Allowance. This is probably welcome by most that understand it, though it would seem that a number of politicians and media journalists do not. The age allowance is currently complex in application – extra personal allowances for those over the age of 65, but these are gradually reduced once income is above £24,000 by 50p for every £1 over £24,000. Good financial planning uses allowances for those caught within this income range so that they don’t lose allowances (another good reason for ISAs) but those with larger incomes frankly tend to have their personal allowances reduced to the standard levels for all. As you will have gathered we are all having the standard personal allowance increased. I say all, but what I really mean is those earning under £100,000.

The tax tier system continues to be smoke and mirrors – pretty much standard diet to all Chancellors that I have known in my lifetime. Yes it is the case that the personal allowance (income you can earn before paying tax) is rising towards £10,000 – but then the amount of income that you pay 40% is increasing. This is a classic moving the goalpost technique. I will put a separate post about this.

The scrapping of Child Benefit has been altered, thankfully some common sense has prevailed and a few more sums have been done. Its a shame that the Chancellor couldn’t simply say that he got it wrong and amended his plan, but there you go.

Corporation tax rates are being reduced – so very good for those running Limited or Plc businesses, such as Ken Livingstone. However for most people this is probably of little interest, for those attempting to do some tax planning, the option of becoming a Ltd company may now be more appealing than self-employed as a partnership or sole trader.

The 50p rate of income tax is being reduced to 45p – but this is hardly news due to all the leaks that pre-empted much of the Budget itself. This is one of those “depend which side you sit on” issues. You will either see this as help to indicate that UKplc is no longer the highest taxed country in Europe and so “open for business” or you will see it as a backhander to the rich. It is of course both.

Pensions were not attacked, but reliefs (excluding those to pensions, VCT and EIS) so mainly capital gains losses and large charitable donations are to be restricted to £50,000 or 25% of income, whichever is the greater. This prevents very large losses deliberately realised in order to pay little or no income tax.

I’m sure you are already bored to death by the annual silly schoolboy behaviour of MPs that we witness each year and the attempt to make a donkey look like a horse. Sadly, little radical reform, much of the Budget is welcome, but the proof of the pudding…

We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
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The Day After The Budgetadmin2017-01-06T14:40:06+00:00

Transparent Tax System? Fact or Fiction?

1960: The Amazing Transparent Man

As a financial planner, one of the most significant issues that I have to deal with is taxation. I’m no Accountant (I believe in allowing people to specialise in what they are good at) but I have to deal with various aspects of the tax system that can be a frustrating exercise. At the moment we are counting down the days until the end of the tax year, which is always the same. We are helping clients ensure that proper allowances are used, capital gains are triggered and so forth. Tax is essentially an emotive and highly political issue. In many ways it is voluntary, in that it is possible to arrange your affairs so that you pay hardly any tax (if any). This inevitably carries some problems – such as residing outside of the UK for a set number of days each year and a huge array of legitimate tax avoidance measures. However, there is a sense of civic duty in paying tax – to pay for our roads, hospitals, welfare system and so on. Most of us would probably think that we pay too much tax.

The Government is planning to provide taxpayers with an annual statement of how their tax was spent. The idea being that this will show how much tax you paid and how this was used. Whilst I support a clear, no-nonsense approach to public finances, I have to say that I have concerns about this initiative. For starters, it only considers direct tax (income tax) it does not include indirect taxes like VAT, excise duty, TV licenses, Road Fund tax, Council Tax. Neither does it include other taxes that are paid by businesses – employers National Insurance, corporation tax etc, not even capital gains tax or tax on investments (tax on dividends). So the data is considerably flawed. It also has a potential to mislead, your tax may well pay for schools and so forth, but the way this is funded is not directly down to you and neither is it your choice. Some might look at their tax and believe that they don’t pay enough to this or too much to that – though tax is not selective. Importantly it does not make allowance for the spending that is done on “our behalf” that is not met by taxes, but by the Government borrowing money (which is why we are in a mess and having cuts). So if the statement was for UK plc I would be happy to support it, but it won’t be. There are too many vested interests in keeping the tax system murky and frankly overly complex. I regret that this will merely become a tool for any politician, whatever their view, to support arguments based on flimsy information. As ever, the truth can be hidden in the numbers. As suggested before in this blog, I am an advocate of a full in-depth reformation of the tax system, aligning taxes, so that there aren’t differentials between the actual amounts and rates of tax paid depending on whether you pay tax as a business, investor, entrepreneur, retired person, on welfare, employee, employer or self-employed, where it does not pay to “hide” wealth and everyone contributes equally (which does not mean the same). Now that would be fair and radical, but highly unlikely.

We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
Call us today or visit our website for more information and to arrange a meeting

Transparent Tax System? Fact or Fiction?admin2017-01-06T14:40:06+00:00

Work in Progress – Development of the Spotless Mind

2004: Eternal Sunshine – Gondry

Another day, another training session. Financial Planners have to complete a minimum of 30 hours of CPD (Continuous Professional Development) each year and from January will have to obtain a certificate of professional standing which evidences qualification and CPD. Fortunately this is not an arduous task for me as I am regularly improving my knowledge and attend numerous seminars and events that ideally help me to do an even better job. I think it best left that I simply overachieve the CPD requirements by a significant factor. Anyway, today I’m at events which explore the pension rules that are impacting many of our clients in Final Salary Pension Schemes and returning to the office via tucking into a little heavy economics at the IOD. This is of course all part of most professions these days, but when I do count my time spent going to what I consider to be helpful training events (often they are very good) this makes the 30 hour target look rather a dim and distant target. This is all valuable time that admittedly helps me do a better job (well most of the time) but is also rather costly in terms of not being available to clients, anyway my purpose in sharing is that a day in the life of.. is often about ongoing development, which is rather necessary in a world where economics, stockmarkets, law and taxation issues change on a frequent basis and another reason why conducting a review of your financial planning, is vital, even though it may feel rather familiar. However another reason for reviewing your planning is because things change, sometimes unexpectedly and sometimes because mistakes happen and need correction. Despite the continuous development and thorough training, I have yet to meet the perfect adviser or for that matter, the perfect client.

We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
Call us today or visit our website for more information and to arrange a meeting

Work in Progress – Development of the Spotless Mindadmin2017-01-06T14:40:08+00:00

MPs pushing for More Pension Smoke and Mirrors

2011: The Sunset Limited – Lee Jones

Financial Planners remain unimpressed with moves to further restrict pensions. As I blogged on Monday, the Chancellor is being petitioned by various MPs to reduce the annual allowance from £50,000 to a lower sum both £30,000 and £45,000 have been mentioned. Don’t forget that the annual allowance was £255,000 and was reduced to £50,000 from April 6th 2011. So dramatic actions are now a precedent. The amount of tax saved in not providing tax relief, can be used to justify raising the personal allowance to £10,000. This is decidedly bad news for pensions as I outlined in my piece on Monday “Pensions and the Muppet Show“. This is more of the same. However examined, this is not about saving tax, it is about appearing to do so. It is all to do with appearing to help lower income earners. The personal allowance has been raised, true – for everyone, true, but higher rate taxpayers have not benefited as the amount of earnings required before a 40% tax rate applies has been reduced. Anyone earning £100,000 or more can see their personal allowance completely removed and those with incomes over £150,000 pay 50% tax as it is.

What the politicians have not thought about is that Occupational Pension Schemes – in particular final salary schemes do not apply the actual amount contributed towards the pension as part of the annual allowance. Indeed the rather daft calculation involves working out how much the pension has increased, making an adjustment for inflation and then multiplying by a factor of 16 to calculate the element of the annual allowance used. This makes planning very difficult as most Final Salary Schemes are not geared up to provide the information in time for tax year end deadlines. Further messing around just makes things harder and ends up making additional work accounting for things rather than doing anything productive. I hope that George Osbourne will see sense and not introduce further restrictions on pensions. If he wants to make changes, my suggestion would be to scrap the lifetime allowance and restrict tax relief to 20% of all contributions, irrespective of earnings. This would at least make funding a pension a worthwhile exercise.

In the meantime, expect the media to be full of articles this weekend about ending higher rate relief or the annual allowance being reduced. Pension companies will be quick to point out that if you have money for investment, now is the time to act, use the allowance now before it gets removed (before 5th April 2012 presumably). Nothing quite like a fire sale and I’ve known this industry to create a few and invariably nothing changes. However, this time the current general antagonism towards those with large incomes despite the economic recession, is holding court with politicians who seem to be very concerned about appearances.

We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
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MPs pushing for More Pension Smoke and Mirrorsadmin2017-01-06T14:40:08+00:00

Grace Extended for Confessing to HMRC

1937: True Confession – Ruggles

Financial Planners are duty bound to help clients make wise decisions when it comes to how money is handled. We are also duty bound to report any fraud or tax evasion to the relevant authorities, which is not something that I have ever had to do to date. HMRC are in a precarious position at the moment, on the one hand they need to raise money (tax) properly so that our ailing economy can still pay its way and so must appear tough on those that pay late or evade their taxes. At the same time, this is set against initiatives to encourage honest reporting of income with sweeteners to help the decision to “come clean” rather easier. Hence the decision today to extend the LDF Leichtenstein Disclosure Facility. The LDF is such a sweetener that enables taxpayers to declare previously undeclared or unremitted income and associated tax. The sweetener is that the penalties are reduced dramatically by 80%. To date over 2000 people have taken the opportunity to confess all and this tactic has worked rather better than probably HMRC imagined. As a result the sweetener has today been extended by a further year until 5th April 2016. This follows double taxation agreements with Liechtenstein. There is a real sense that HMRC will now be able to accurately trace such funds and therefore common sense would suggest, coming clean is the least punitive option.

This has nothing to do with the Spurs Manager, Harry Redknapp case, which came to an end today. This is an entirely different matter where Mr Redknapp didn’t pretend that money had not changed hands, but the purpose behind the transaction was rather vital for taxation purposes – was it connected to employment or not? which has taxation implications. Mr Redknapp won his case today. Given Mr Redknapp’s profile, it is surprising that this went to a Criminal Court rather than a taxation tribunal, but presumably HMRC were attempting to convey a message to the wider population.

If you are in any doubt about tax matters, I can put you in touch with a variety of Accountancy firms with relevant expertise. Most importantly please understand that tax evasion is illegal and can carry a custodial sentence.

We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
Call us today or visit our website for more information and to arrange a meeting

Grace Extended for Confessing to HMRCadmin2017-01-06T14:40:09+00:00