ARE YOU MISUSING YOUR CASH ISA?

TODAY’S BLOG

ARE YOU MISUSING YOUR CASH ISA?

You may have gathered that I am not a fan of the Cash ISA. If you really must have one, then you need to be clear that you are getting a top rate of interest (less than 1% at the moment) and that you are not locked in for too long. If you expect rates to rise, why on earth would you lock in to one?

We all have a personal savings allowance. That’s £1000, £500 or nothing depending on your highest rate of tax. Basic rate (20%) taxpayers have a £1000 savings allowance (interest from savings) and those that are higher rate (40%) have a £500 allowance. Therefore, majority of people will have at least £500 of interest that they can earn tax free. Today that means holding around £50,000 of cash, which is a little under twice the average national income. According to ONS data to the end of the 2019/20 tax year, that’s £29,900 (median household income).

As I have said before, I am a great believer in holding cash. It provides for projects and emergency. Good planning – which is something that you already do better than most because you are here today, means getting a realistic estimate for something you intend to do and setting that aside prior to starting the project. This is therefore based on your research, quotes, and prudence to allow a sensible margin for error, or builder maths.

CASH FOR EMERGENCIES

Then there is your emergency fund. This is entirely subjective. It is an amount that enables you to sleep at night knowing that if something disastrous happened by the time you woke, you and your family would be able to cope financially. Things like loss of your job, the boiler breaking down, your car being vandalised or stolen, perhaps even a quick getaway fund from an abusive relationship. You might relate this number to how much you normally spend each month and hold a multiple of that.

RISKS CHANGE AS YOU AGE

Those that have a guaranteed income (people that are retired and living on State Pensions, annuities, or final salary pension benefits) arguably don’t need to worry about the loss of a job or their income. Its more likely that, if that’s you, you think of the extra income sources – from your investments or perhaps a holiday home that is let during a pandemic.

Most people will probably not need more than £50,000 (in 2021) but I did say it was subjective and personal to you. Cash doesn’t really work for you; it works for a bank who lend your money out at a rate that makes them rather more than they offer you to “store” it with them. If this drags on for months and years, you will undoubtedly see the spending power of your money reduce due to inflation. It needs to do some heavy lifting, which means investment. This comes at the price of market volatility in the short term, but if done properly, will deliver greater yields.

PARABLES ABOUT BARNS AND GRAIN

To my mind, it’s like an arable farmer keeping all their seed (cash crop) in a barn and not sowing enough. At some point, the barn will run out as its consumed or rots, missing out on all that multiplication and future harvests.

Anyway, given that most people don’t need to hold much more that £50,000 and would get the interest on it tax free anyway, there is no point using your valuable ISA allowance to give you something you already have.

Of course, this is what a plan will help determine and why understanding what the money is for and the reasons for your anxieties about money. Do get in touch.

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

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ARE YOU MISUSING YOUR CASH ISA?Dominic2023-12-01T12:13:02+00:00

THE BUDGET 3 MARCH 2021

TODAY’S BLOG

THE BUDGET 03 MARCH 2021

The House of Commons was unusually civil during the Chancellors Budget Statement largely because hardly anyone was there due to social distancing and making the task rather easy to identify who is behaving like a spoiled child. Normally the Speaker has a harder job. As for the Budget – well, it’s a good job I am not a betting man.

The Chancellor believes that support over the pandemic will run to £407bn in various forms. This needs to be repaid if future generations are not to be saddled with debt forever, thereby hampering how future Governments can help them.

I did warn that taxes would rise, I thought capital gains tax would be the most obvious tax to increase. It has not. The only actual increased tax rate is Corporation Tax, which impacts business owners running profitable businesses (with profits over £250,000). Corporation tax will rise from 19% to 25% – that’s an increase of 31%. It may surprise you to learn that only 10% of businesses claim to make profits over £250,000.

Almost everything else stayed the same – but staying the same really means changing. Of course, this knock-on effect means reduced profit to share out in the larger businesses (like those you invest in via a fund) so returns may be dampened – but then this is simply a UK issue and most of your equity holdings are not in the UK now (your portfolio is global).

THE SAME DOES NOT MEAN NO CHANGE

Pensions, Capital Gains, Inheritance tax all remain unchanged, which means that as incomes or the values of assets rise, the excess taxes begin to hurt rather more.

Those approaching retirement have the spectre of a 5-year freeze of the Lifetime Allowance at £1,073,100. Anything above this sees the excess taxed at 55% – so more likely. How much and how you can contribute to pensions is also frozen, as it is for ISAs and Junior ISAs. These are probably the “nice to have” problems if you are running a business that is struggling or have an income that has fallen dramatically due to the pandemic.

Your Personal allowance (income you can have at 0% tax rate) rises by £70 on 6th April to £12,570 but then stays at that level for 5 years. Higher rate and Additional Rate tiers also remain frozen. What this really means is that if your income rises due to inflation or promotion etc, you will pay more tax.

The most notable help to younger generations is the Apprentice Scheme and the re-opening of 95% mortgages by lenders, who have been given Government guarantees. There may be some window dressing here, a borrower will still be made to jump through a variety of hoops to prove that they can become an owner (or more accurately, a borrower) rather than a renter, with a 5% deposit. Those that have taken advantage of the reduce Stamp Duty ending in March, have a little longer to complete their purchase.

If you are asking me what I would have done differently, (you aren’t) well there is a very long list and most of it involves simplifying pensions and tax rates. Complexity enables some to thrive and others to become rather entangled. HMRC are due to have a whopping £180m spent on further technology to help ensure you report your taxes correctly with fairly dire consequences for those that do not. I do hope that the track and trace lot are not “awarded” the HMRC technology contract.

DETAIL IS A DEVIL

Politicians rely on our short-term memories, they must do otherwise so few would ever be re-elected. When you cut through the words it is best to look at the numbers. These are some key forecasts that I have pulled from the Budget Statement (which you can see here).

How you view life will likely influence how you select data from the table above (which is all lifted directly from the Budget) I have only shown the year on year changes as a percentage and drawn attention to some of the data (of which there is a lot!). Long story short, we will be paying more income tax. The Chancellor seems to be expecting unemployment to increase by 500,000 over the next 2 years before reducing, but still above current levels. Inheritance tax receipts peak in the coming tax year perhaps reflecting the consequences of the fatalities from the virus.

The property market looks predicted to return to normality shortly, but really picking up next year. Council tax looks likely to increase rather faster than inflation. Fuel duties will begin to rise, and oddly over the next 12 months, once hopefully this is over, duties from alcohol actually fall in 2021/22 (which I think is odd unless you have all been knocking back the booze over the last year or so more than normal with a plan to cut back). Air Passenger duty has rather obviously collapsed and will likely return to pre-pandemic levels in 4-5 years time, that’s quite a slow recovery.

Corporation tax will really bite in 3-4 years time. Business rates also begin to pick up, which when combined with loan repayments and more VAT, I imagine that some business owners may be looking at cost reductions. There may well be “pent up demand” and a good supply of labour, the Chancellor is understandably encouraging investment in growth, through new technology and digital business combined with Apprenticeships. It (business growth and development) is certainly what needs to happen, but whether it will remains to be seen.

Every Budget has lots of assumptions about the future, but you will be paying more tax, so use the allowances you can.

Dominic Thomas
Solomons IFA

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Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

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THE BUDGET 3 MARCH 2021Dominic2023-12-01T12:13:09+00:00

WHEN MONEY TALKS AND WE DON’T

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WHEN MONEY TALKS AND WE DON’T

The lack of money will test anyone and has a tendency to play havoc with relationships. This is explored in the new movie “Wildlife” starring Jake Gyllenhaal, Carey Mulligan and new, rising star Ed Oxenbould. Set in the late 1950s at the crossroads of domestic politics in the US, we enter the world of an aspirational family. Jerry and Jeanette Brinson are shackled by their class background and struggling with compromises between their traditional upbringing and the reality of life as they experience it.

Jerry loses his job which seems to be something of a familiar story, this forces them to confront how the family might realistically pull together, meaning Jeanette would need to find work. Their son Joe helps out too, by finding after school work. Whilst the lack of money may be the catalyst, the sad reality is that the Brinson’s are not good communicators, each having flaws that make things worse rather than any better. Their dysfunction is played out before Joe, who struggles to comprehend how his once seemingly nice, normal family life becomes a chaotic lonely environment.

Fighting the Bonfire of our Vanities

Whilst set in the late 1950s and early 1960s, there are of course parallels for today. The lack of work in parts of any country turns it into a wasteland with few signs of hope. Whilst it is undeniably true that the percentage of people in poverty is reducing, this does not mean that life is easy or even good for many people. It is precisely this lack of hope, the desire to blame anyone or anything different, that certain politicians will take advantage of. The sense of shame in being poor and the anxiety that it produces cannot be overstated. Jeanette will trade her dignity for security. Jerry will dice with death just to demonstrate his contempt for his lot. Joe, meanwhile (a boomer) is caught in the crossfire, trying to make sense of the gap between child and adult and what becoming a man might mean for him.

You get one lifetime but another shot at honesty

One of the biggest assumptions that financial plans make is that a couple remains together. Sadly, this can often be a mistake. That’s not to say that divorce or separation are a “sad” thing, it can be healing and of course healthier. What I mean is that the self-awareness required to allow for this or make provision for it is often lacking. The assumptions being made about investment returns or taxes are frankly small beer when it comes to division of assets and the implications for all.

Here’s the trailer.

Dominic Thomas
Solomons IFA

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WHEN MONEY TALKS AND WE DON’TDominic2023-12-01T12:17:43+00:00