HOW TO PROTECT YOUR TAX ALLOWANCES

TODAY’S BLOG

HOW TO PROTECT YOUR TAX ALLOWANCES

The government has committed to an awful lot of new spending. But the money has to come from somewhere. The unwritten rule of electioneering is to announce the spending increases during campaigning, and wait for the first post-election Budget to reveal the bad news about tax. Over the past few weeks we’ve seen suggestions of everything from some form of ‘mansion tax’ on more expensive homes, to changes in capital gains tax and tweaks in pension tax relief.

Sajid Javid’s resignation as chancellor – the person in charge of the Budget – might have derailed some of the plans in progress, but commentators are divided on what’s likely to happen next. Some think fiscal (tax) rules will be relaxed, so there’s less pressure to balance the books and spending can rise alongside tax cuts.

Let us not forget the small matter of an election manifesto pledge to get rid of ‘arbitrary tax advantages’ for the wealthy. Unfortunately we don’t have a working crystal ball to know what tax changes if any will come to fruition. We think the best way to shelter yourself from any potential tax changes is to take as much advantage as you can with the appropriate current breaks, while they still last:

Take advantage of ISAs (£20,000)
Consider a Lifetime ISA (£4,000)
Don’t forget Junior ISAs (£4,368)
Top up your pension (£40,000 and the abilty to use up unused allowances from the 3 previous tax years)
Consider salary sacrifice (employer pays your reduced NI and tax into your pension)
Take advantage of your spousal exemptions (share capital gains etc)
Claim the marriage allowance (transfer £1,250 to your spouse)
Consider your annual gifting allowance of £3,000
Use your 2019/20 Capital Gains Tax Allowance of £12,000
VCT, EIS, SEIS investment options for those that are more adventurous

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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HOW TO PROTECT YOUR TAX ALLOWANCESDominic2020-02-25T12:09:14+00:00

TAX FREE AT 65 – IT’S ABOUT TIME…

TODAY’S BLOG

TAX FREE AT 65, IT’S ABOUT TIME…

I am going to have to put a lot of caveats with this item on tax free money. There are lots of ways to have tax free money, but I want to highlight a couple of issues, the first being the different tax treatment of different financial products and secondly how these might be used in conjunction with the current tax rules.

Joan is 65 and now finally retired – it’s about time!

Joan (10/02/1954) was 65 at the start of the tax year but she stopped working in February when she turned 65. She is single and back in the late 80’s a dead-ringer for Kim Bassinger. She has worked since leaving University in 1977 and much like her favourite band Fleetwood Mac, she has gone her own way. She did a bit of employed work whilst at Uni, but got her “first proper job” working as a junior assistant in an advertising company. Over the years she worked for various employers, most didn’t have pension schemes, anyway most wouldn’t let you join them until you were 30, so by the time she actually joined a scheme at 35 (in 1989), she didn’t really feel that she was too late to the party. She didn’t really like pensions, or rather the sharp suited, red-tie wearing blokes from Merchant Investors that sold them, they reminded her of some of the worst people in advertising. Then there was Robert Maxwell, no she didn’t like pensions at all. Mind you she was quite pleased that her current adviser found an old Contracted Out of SERPS pension, worth about £85,000 – so one of those fellas must have persuaded her to sign a form at some point. It helped top up her pension fund quite a lot to about £400,000.

At the age of 30 Joan bought her Wimbledon house in 1984 for £34,000 which was a lot back then. She recalls a great house warming party – lots of Wham! and Duran Duran. Looking back she wondered how she afforded it, (the house, not the party) given that interest rates were about 10% and kept going up. However property prices seemed to be rising (hers had doubled in value in 5 years) and she was forming a habit for nice things, which nearly got out of hand, but she spoke to her bank and remortgaged, increasing her loan in 1988 to almost £60,000. When the property crash happened shortly afterwards life got a little tricky, she had to economise. She enjoyed applying tips to improve her home from Tessa Shaw and the team on Home Front. She loved relaxing in the evening having done a bit of decorating whilst listening to Simply Red’s “Stars” curled up on the sofa. It heped her manage her feelings about her large mortgage which barely seemed to reduce in the first 10 years, but at least it was – and she hung in there. She finally paid off her mortgage 10 years ago at the age of 55. She still believes it was her best investment.

Joan quite liked PEPs and ISAs. She remembered getting a little lucky with a few Building Societies that demutualised and even put the proceeds into a Single Company PEP. She wasn’t sure why she liked them, perhaps it was because she was told she could get her money out if she needed to (she never did) or perhaps it was because it seemed that they were more glamorous, or was that because she seemed to remember a tune by Right Said Fred called “I’m Too Sexy For My Shirt” that was playing a lot at the time. It wasn’t, that was 1991, no perhaps it was all those boy bands like Westlife and Boyzone that she secretly liked she remembers them being around in 1999, that was Tony Blair and all the optimism and promise of equality of new Labour. She kept up her regular savings and built up her ISAs, which began 20 years ago in 1999.

Joan had learned a bit about investing, the important things like ignoring what everyone else said, she first learned this as her Yuppie thirtysomething friends got into a panic in the crash of October ’87 which she ignored. Then shortly after opening her new ISA learned never to invest in a technology themed fund when the dot-com bubble burst. She chalked it up to “experience”. Other than that, she took investment news in her stride, largely ignoring the mountains of paper that seemed to pile up each year. Over time she observed that stock markets tend to go up and down and up again. Admittedly Joan got a little lucky – 10 years ago at 55 when she had cleared off her mortgage, her career was going well and she had a decent disposable income. She saw an adviser who suggested she add more to her pension and ISA, as luck would have it the Government increased the amount she could contribute and she took advantage of 40% tax relief. It was just as well as her State Pension Age was being pushed even further into the future.

Not long afterwards, she started investing into VCTs, (Venture Capital Trusts) well, she had a few friends that had some good business ideas, she had watched The Apprentice and Dragon’s Den and thought a little bit of a flutter was probably ok. She saved into a VCT for few years ago but has since stopped adding money.

Joan has always paid her National Insurance and has a full State Pension which only started in the summer when she was 65, 4 months and 26 days old. Her State pension is £168 a week. She was a bit miffed that it wasn’t 65 (and when she started out at Uni, it would have been 60) but she had enjoyed the benefits of working until 65.

Joan’s Portfolio

£400,000 – Personal Pension Plan
£400,000 – Stocks and Shares ISA Portfolio
£80,000 – VCT (Venture Capital Trust)
£50,000 – Bank Deposit Account
£600,000 – Home

Not an unreasonable sum of money – in fact having paid off her mortgage and owning her home, Joan has savings and investments of £930,000. Her home is not an investment, its where she lives. Though her friends regularly tell her that it is an investment if she sells and moves away from Wimbledon. However what would be the point? her friends all live in the area, she loves going jogging on the Common with some of them. Her mum (91) is still alive and living nearby, though Joan is worried that she may need care at some point and the cost of care in Wimbledon is, well… there may not be much of an inheritance.

Tax Free Allowances

In the current tax year 2019/20. Joan has a personal allowance of £12,500 before she pays any income tax. Her State Pension will use up a lot of this. Income up to £50,000 is taxed at 20% (when the personal allowance is considered).

The VCT is a fairly “high-risk” type of investment, she isn’t paying any money into it any longer, but does enjoy income from it of 3% a year, this is tax free within a VCT. That’s £2,400 a year.

Her ISA is doing well, she has set up a monthly payment from it to her of £4,000 a quarter (£16,000 a year). As this is an ISA, the income that she takes (or capital) is tax free. By way of note £16,000 4% of £400,000.

The State Pension – Joan is caught by equalisation.

Joan originally expected her State Pension to start when she was 60, but following various rule changes and seeking advice in the early 2000’s she realised that it would be later than that. Joan’s State Pension actually began this summer on 6 July 2019. Over the full remainder of the tax year she will have 38 payments of £168 (£6,384) normally in a full tax year it would obviously be 52 weeks (£8,736) but she is one of many women that saw their State Pension Age increased. She’s a little miffed at having an extra 5 years to wait and wanted to know how she can minimise her tax payments.

Joan would like to know how much she could take from her pension without paying any tax. As her other investments are tax free, the only taxable income she has is money from her State pension (£6,384 in 2019/20) the personal allowance is £12,500. She puts £8,154 of her pension into a Flexible Access Drawdown pension. This enables her to take £2,038.50 as a tax free lump sum (25%) and £6,115 as taxable income. So rather like this:

State Pension £6,384 (taxable at 0%)
Drawdown Pension £6,115 (taxable at 0%)
Tax Free lump sum from pension £2,038 (tax free)
VCT income £2,400 (tax free)
ISA income £16,000 (tax free)
TOTAL income £32,927 and NO INCOME TAX

More and Less

The first point to make is that the above is not the maximum income that Joan could have. I simply want to identify some options. She could take more from her ISA, she is entitled to tax free interest on her money at the bank. She could take more from her pension (a larger tax free lump sum and no income from the pension if she was so minded). As an employed income £32,927 in 2019/20 would for most people result in about £7,000 paid in tax and national insurance.

Joan will need advice to adjust her portfolios and determine the most suitable way for her to draw income. Next year she will have a larger State pension, using more of her personal allowance as it will be a full year of income for her (and a likely increase in April).

Annuity Option

When she retired at the start of the year at 65, Joan had investigated using her pension to buy an annuity. She was going to simply take the 25% from her fund and put it in the bank and then use the £300,000 to buy an annuity. As a single person in very good health, she wanted an inflation-proofed income. The best annuity available would guarantee that she receives £9,851 a year rising by 3% a year. Job done. That’s an annuity rate of roughly 3.2%, but the income is taxable. In the first year she would have total income of £16,255 from the annuity and her State Pension, paying tax of £747. Her VCT and ISA income remain the same at £18,400 in all. So her total income would be £34,655 (more) but with tax of £747 (net £33,908) She has £300,000 less on her personal balance sheet and has £981 extra income in the year.

In the second year, she would expect £10,146 from the annuity and a State Pension of £8,736 a total of £18,882, which if the personal allowance remains at £12,500 would mean that £6,382 is taxed at 20% (£1,276.40 tax). Whilst there are good things about an annuity (it’s a guaranteed income) this is also a problem for tax planning as the income cannot be switched off and is taxable.

The purpose of this fictional case study is simply meant to highlight the issues involved, everyone’s circumstances will be different. I have not considered that Joan may live a very long time and whether taking 4% from her ISA is a good idea or indeed if she has a suitable globally diverse portfolio. I have done no inheritance tax planning and no contributions to anything that might get tax relief. Had Joan had other investments, she could also use her capital gains tax allowance. There are lots of options.

Dominic Thomas
Solomons IFA

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TAX FREE AT 65 – IT’S ABOUT TIME…Dominic2019-11-05T12:54:16+00:00

HBOS scam, stranger than fiction

Solomons-financial-advisor-wimbledon-blogger

HBOS scam, stranger than fiction

Yesterday I wrote about Venture Capital Trusts and explained that any business is reliant upon its management. You might recall my use of the new Trainspotting film T2 as an illustration of poorly suited characters for management of any business. If T2 is 20 years on then this must surely be Trainspotting 40 years on…

As is often the case, reality can be stranger than fiction. On 2nd February 2016 there was finally a successful conviction of fraudsters Lynden Scourfield and David Mills. They are guilty of a £245m loans scam. Scourfield was a manager at HBOS, supposedly tasked with helping struggling businesses. He was bribed by David Mills to pressure HBOS business clients to use a business services company called Quayside Corporate Services. Quayside was owned and run by Mills and his wife Alison. Together they set about extracting huge sums in fees from HBOS business clients who were being told that they would lose HBOS support and sources credit finance if they didn’t comply. Many ended up going bankrupt.

Like Characters from Trainspotting…

These three and three others (Mark Dobson, Michael Bancroft and John Cartwright) have finally been sentenced to prison, having spent huge sums on all the typical cliché trappings, all evident in both Trainspotting films. They ruined various businesses, who were trapped within the Bank, who issued fairly standard penalties which evolved into eviction notices with employees of the bank deceiving their own internal systems which then kicked in to the normal processes for how to handle a failing business (which you can imagine). Under pressure people do strange things, and a number of the business owners that were scammed, gave away control and or ownership of their own businesses. However this appears to be largely due to the complexity of the scam and a classic confidence trick, regularly reassuring the HBOS customers that the Bank was agreeing their finance.

Ripped off Businesses that were ruined

This is a deeply disturbing case of a major bank failing to understand that its own staff were scamming its customers. According to reports, the scam may have amounted to around £1bn, although official reports suggest £245m, all over a 4-year period between 2003-2007 (just before the credit crunch). Thankfully the six involved, have been rewarded with a collective 47 years and 9 months in prison. You may recall that HBOS was rescued by Lloyds TSB having notched up £45bn of bad debt and at one point it was reliant on a £25bn lifeline from the Bank of England. Well done Thames Valley Police.

Dominic Thomas
Solomons IFA

HBOS scam, stranger than fictionDominic2017-02-03T10:33:34+00:00

Investing in a Business

One of the ways that Government attempts to create jobs is to encourage and stimulate small businesses, start-ups or recently started businesses. The Prime Minister wants these to scale up, not simply start up. So as a regular investor (which in my world we call a retail investor) there are various ways that you are incentivized to be part of this wealth creation.

Tax effective incentives

Venture Capital Trusts, Enterprise Investment Schemes, Small Enterprise Investment Schemes are all such investment structures designed to encourage you (with tax incentives) to invest into new businesses. Generally, though not always the case, these would be businesses looking for money, to which traditional banks don’t, can’t or won’t lend. Since the credit crunch, despite the Government pouring billions into the system, most lending to small businesses has not increased. Indeed any chart on the topic would suggest that Banks are positively less than helpful.

A Different Approach

As we approach the end of the tax year, various specialist companies will produce offers for these tax efficient investments. The rules for them are fairly complex, primarily because they (the rules) seem to get changed each year. It would certainly be true to say that the degree of investment risk is generally much higher than say investing into most normal investment funds that track an index. As with most things, there are good and not so good and some downright awful. Despite being 3 or 5 year investments, in reality they are long-term investments, where the positive rewards may take some years to bear fruit, and as with almost every business, extracting money from them requires a carefully considered exit strategy and ideally several potential buyers.

The company you keep

In the latest Trainspotting film, (T2, which is a return to Edinburgh and the characters from 20 years ago) two of the characters (Renton and Simon) decide to have a proper go at running a “business”. Despite being “creative thinkers” and possessing “the gift of the gab” rather more is required to run a successful business. Sadly, their skill set and personal focus do not lend themselves to a successful outcome. Some investors could be forgiven for thinking that the degree of risk being taken is similar to that of investing into non-mainstream investments. However the only thing in common is the capability of the management of the business. Good managers can turn a bad business around, but equally a good business can be ruined by bad management. We all know that there are some very unsavory characters in business, some even cross-over into politics. Trainspotting has a particularly nasty character. As is always the case, people are key. In this form of investing, it is certainly the case that a good business plan requires a good management team to implement it.

Choose wisely

So (and here is where you imagine Ewan McGregor reading this) if you think that you might want to choose to invest in small businesses, choose to create jobs, choose wealth creation, choose something a bit different, choose a dose of tax relief, perhaps you should be thinking about choosing to invest into an EIS, SEIS or VCT. As with T2 it won’t be everyone’s cup of tea, (or drug of choice). Generally, you’ll need a minimum of £25,000 to invest. This is for those that do want to choose some of the companies that will make a mark on the next 20 years. Those that are comfortable with the risk. Those that are choosing to invest for the long-term and have a clear idea of what they are getting into. Then investing in businesses can provide a rewarding experience. But choose wisely. Here is the trailer for T2: Trainspotting.

Dominic Thomas
Solomons IFA

Investing in a BusinessDominic2017-02-02T13:21:49+00:00

What is the best way to save for retirement? Part 3

This is the third post in the series “what is the best way to save for retirement?”

So what are the alternatives to a pension?

As we have discovered, a pension, at least in the way the financial services industry use the term is a savings plan. Its has two main advantaged over other forms of savings plans. The first is that an employer or business can pay into the savings plan for you. The other a more obvious is that contributions attract tax relief. These are both massive advantages and could be described as “money for nothing”. Under the new auto enrolment rules your 4% payment to a pension is essentially doubled, with 3% from your employer an 1% from HMRC. However be aware that as with all things, today’s rules are no predictors of the future, one that I may remind you is shaped by economic realities and the politicians that attempt to pretend otherwise.

So what are the alternatives? Well they are almost infinite, but lets narrow this down to three simple ideas.

Investments
Property
A Business

As a pension is simply a pot of money to take income from for the rest of your life (with the option of buying an annuity if you want to). Then any form of investment can do this job, including a bank account (if indeed we can call holding a cash deposit account an “investment”). Today I will only focus on the investment option.

An Investment Portfolio

Investing is fraught with possible mistakes, almost every investment promises “out-performance”. This is largely hot air. Apart from selecting suitable investments and constructing a portfolio, investing has costs and any income from an investment, for example a dividend payment is liable to tax. Gains are also subject to capital gains tax. There are “tax free” investment products such as ISAs, but for many people the amount that can be put each year into an ISA is unlikely to be enough for your retirement (though many will find it more than they can actually save).

Are investments more risky than a pension?

No, you could have identical holdings in a pension and a “regular” portfolio. The issue is understanding how the portfolio is constructed, why and what returns over the long-term are likely to be achieved. Anyone that promises guaranteed results is being less than honest with you. Everyone has a different idea about which assets or markets will perform best – that’s kind of the point of a market – where people agree a price on something when they disagree what direction that price is heading. Its true that there are other tax efficient ways to invest, using EIS, VCTs and such like, but be warned, the term venture or enterprise is used sensibly and most people are neither.

So let’s take an example and agree lots of assumptions

Suppose you need an income of £20,000 a year and inflation-linked at 3% a year (yes we are guessing). If you only expect to live 10 years from retirement at 65 and are happy with this assumption (that the money runs out, all gone, nothing left!) then the income (actual cash) you take will be nearly £230,000 over 10 years to age 75. If we assume that the portfolio grows at 5% a year during this time (which may be ambitious as you are probably keen to have certainty that the money will pay out for 10 years) then you need a fund of about £175,000 at 65. If you expect to live for 20 years and then the fund runs dry… well you would take out total income of nearly £540,000 and need a pot of £320,000 at 65 to provide this.

What would an annuity give me?

If you were to buy an inflation linked annuity at 3%pa as a 65 year old, you would probably need about £500,000 at 65. This is based on a 4% annuity rate (4% of £500,000 being £20,000pa) The advantage of the pension route is that if you live longer than 20 years (85) it continues to pay a rising income until you die. The investment pot has run out. Both have the same assumptions about inflation (which will be wrong in practice, unless you are going to credit me with mystic powers).

Pension or ISA?

So here’s the hard numbers. The pension pot needs to reach £500,000 and the ISA investment portfolio, well let’s go for £320,000 and assume we can predict death at 85. Lets suppose we start saving at 35, giving us 30 years to grow the money by the time we are 65. Let’s also assume the pension and investment portfolio hold the same stuff and perform identically, with the same charges, let’s assume that over 30 years the funds grow at 7% for the sake of simplicity. We will also assume that you increase what you save by inflation (3%) each year so that the amount you pay is proportionally the same each month. This is now virtually a GCSE maths question (if only they’d taught us the maths that was important in life right!).

So to build £320,000 in the ISA investment portfolio, you need to invest £195.64 a month rising by 3% a year, a total outlay of £113,220 over 30 years. As you may imagine to achieve £500,000 in the pension over the same time with the same returns, you need to invest £305.69 a month initially, increasing by 3% a year. A total outlay of £176,906 over 30 years. So the pension costs you £63,686 more (about 36% more). However, with the pension you had 20% tax relief, so you really paid 80% of £176,906 or £141,524, still more than the ISA, but not that much more.

£500,000 Pension pot actual cost for basic rate taxpayer £141,524
£320,000 ISA pot actual cost for basic or higher rate taxpayer £113,220

Your employer can make payments too

Now imagine that your employer was also paying into your pension pot (which they cannot do with an ISA). Suppose that they are paying 3% of your salary – as they will be under auto enrolment, let’s assume you want £20,000 a year because you reckon that’s what you need to support your equivalent lifestyle today, so let’s just assume you earn £30,000 at the moment, so 3% is £75 a month. So if your salary rises at 3% a year in the same way, over 30 years, that’s £43,404 of employer payments in total. You can therefore reduce your own payments from £305.69 a month by £75 to £230.69 a month, which in practice is £184.55 a month net of basic rate tax relief…. Which is marginally less than the £195.64 you need to save into an ISA.

£500,000 Pension pot with 3% employer contribution £106,804 net of 20% tax relief
£320,000 ISA pot £113,220

Of course the more your employer pays the better, but I hope that I have demonstrated that tax relief and employer contributions make a big difference. Don’t forget that the annuity dies with you (unless you build in benefits for your spouse) but anything left in the ISA portfolio is merely added to your estate and subject to inheritance tax. The big gamble is predicting your life expectancy.

Tomorrow I turn to property as an investment. I hope that it evident that this is not advice, I am merely outlining an example and doing the sums. You should get specific advice to suit your circumstances.

Dominic Thomas: Solomons IFA

What is the best way to save for retirement? Part 3Dominic2017-01-06T14:39:41+00:00