Newsletter – August 2017

The long-running saga of the final spring Budget and subsequent Finance Bills is one step nearer the end.

The Chancellor’s spring Budget was thrown into disarray by the snap election. It was billed as the last spring Budget, since from now on all Budgets will be autumn events. However, only about a fifth of the Budget’s proposals made it onto the statute book before Parliament shut up shop ahead of the election. The question of what would happen to the four fifths lost in action has been up in the air ever since.

It was (and is) an important question because large parts of the missing legislation were originally intended to take effect for this tax year from 6 April 2017. A good example is the proposed 60% reduction in the money purchase annual allowance (MPAA) to £4,000, which could affect you if you both draw pension income and your (and/or your employer) also make pension contributions. In theory, the current £10,000 limit still applies, but in practice acting on such a premise could be an expensive mistake should the proposed change eventually be enacted with an April 2017 start date.

Autumn Finance Bill on the cards

A week before the politicians left Westminster for their summer holidays, some clarification emerged in a written statement from the new Financial Secretary to the Treasury.  The Government will “introduce a Finance Bill as soon as possible after the summer recess containing the withdrawn provisions”. The start date for provisions “will be retained”, meaning the £4,000 MPAA will be backdated to the start of the current tax year. This assumes that the Government will succeed in passing the Bill, which is not 100% guaranteed, even with DUP support pledged for Budget measures. As the Chancellor learned during the March Class 4 NICs battle, the best laid plans can falter in the face of backbench opposition.

At least there is now some greater certainty about the shape of the tax legislation. If you have been delaying any planning action while waiting for the dust to settle, now is the time to start talking to us. You might also want to discuss whether any pre-(autumn) Budget planning is necessary…

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

The Financial Conduct Authority (FCA) has examined the impact of pension flexibility and is worried about the lack of advice. 

Pension flexibility came into effect in April 2015. In theory, since then it has been possible from age 55 onwards to withdraw your entire money purchase pension fund as a lump sum, albeit generally 75% would be taxable as income. When the proposals first emerged there were concerns expressed that the temptation to take a pot of cash and spend it would be too great for many. The FCA has been examining what has actually happened since 2015 and in July published an interim report on its findings.

The FCA found that over half of the pension pots accessed since April 2015 had been withdrawn in full. While this grabbed the headlines, it does not tell the whole story: 60% of those pots were worth less than £10,000, while another 30% were below £30,000. That does not suggest the worries about people blowing their pension funds on a new Lamborghini have been realised. Indeed, the opposite seems to have happened: over half of those who fully cashed in their pension reinvested the proceeds in other savings or investments. However, as the FCA noted, such a move can “…give rise to direct harm if consumers pay too much tax, or miss out on investment growth or other benefits”.

Bypassing advice

That danger highlights another FCA concern: that many people are failing to take advice about their pension flexibility options. In the FCA’s words, they are choosing “the path of least resistance” and opting for drawdown with their existing pension provider. The regulator says that the lack of shopping around this implies “may result in [the unadvised] achieving poorer deals”.

If you are considering drawing money from any pension arrangement, you should pay heed to the FCA’s emphasis on the benefits of shopping around and taking advice. DIY pension planning can turn out to be an expensive option, even if at first sight it looks the easiest.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

UK companies paid out a record amount in dividends in the second quarter of this year.      

At a time when there is much heated debate about whether the Bank of England should double its base rate to 0.5%, it can be easy to forget the much higher income yield available from UK shares. While most interest rates remain at sub-inflation levels, the UK stock market has an average dividend yield of about 3.6% and, as new data recently released show, those dividends are growing strongly.

Research undertaken by Capita, the share registrars, revealed that in the second quarter of 2017:

• UK companies paid a record £33.3bn in dividends, up 14.5% on the second quarter of 2016.
• If special (one-off) dividends are excluded, the total falls to £28.6bn, still a record and a year-on-year increase of 12.6%.

Capita attributes the rise in overall pay-outs to “very healthy underlying growth, topped up with a substantial boost from the weak pound, plus a large haul of special dividends”. For the next two quarters, the impact of sterling’s weakness will not be as great because the pre-Brexit numbers will disappear from 12-month comparisons. Nevertheless, Capita expects 2017 to see a dividend increase of 7.0%, comfortably ahead of inflation.

These dividend numbers are a reminder that it is still possible to invest in a way that gives scope for growing income and does not rely on the whims of a central bank.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. 

The government has announced plans for a further increase in state pension age.

On the day before parliament shut up shop for its summer holidays, David Gauke, the Secretary of State for Work and Pensions, announced that the government had decided state pension age (SPA) should be increased to 68 between April 2037 and April 2039. The timing is seven years earlier than currently legislated for in the Pensions Act 2007. As a result, if you were born between 6 April 1970 and 5 April 1978, the age at which you can draw your state pension is set to rise.

Despite some of the newspaper headlines, the announcement came as no real surprise. Earlier this year John Cridland had published a final report, commissioned by the Department for Work and Pensions (DWP), which recommended just such a move in the state pension age. The DWP had been statutorily due to reveal its decision on raising the SPA by 7 May, but wriggled out of the obligation, claiming it was hidebound by pre-election purdah rules.

Delayed legislation

Ironically, that election had a knock-on effect on the Mr Gauke’s announcement. Although he gave notice of the change, there will be no legislation to put it into effect until after the next review of SPA, which is due in six years’ time. This delay is “…to enable consideration of the latest life expectancy projections and to allow us to evaluate the effects of rises in state pension age already under way,” according to the minister. It may also be related to the government’s thin majority, the controversy still waging around the ongoing increases to women’s SPA and the Labour’s Party manifesto commitment not to increase SPA beyond 66 without first undertaking (another) review.

For all the political manoeuvring, SPA increases look inevitable in the longer term. The new single tier state pension may be under £160 a week, but with an ageing population it is an expensive benefit: the change announced in July would save £74bn by 2045/46 according to Mr Gauke.

If you want to make your own choice of retirement date, rather than be dictated to by successive DWP Secretaries of State, the lesson to be drawn from July’s announcement is that you need to make sure your private pension provision is adequate.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

With dementia and Alzheimer’s disease now officially the biggest cause of death in England and Wales¹, more families are protecting their future by creating Lasting Powers of Attorney while they have the mental capacity to do so.

A Lasting Power of Attorney (LPA) enables you to choose the person or people who would make decisions which affect you, if you are not able to do this for yourself. LPAs make things easier for family and relatives if you lose capacity, helping ensure that decisions that affect you would be made in your best interests, and that your affairs, both your finances and your health, are managed in the way you would have wanted. These documents  are straightforward to draw up, and one or more people can be appointed to act as attorney.

Without an LPA or a valid pre-October 2007 Enduring Power of Attorney (finances only), someone would have to apply to the Court of Protection to be appointed as your Deputy, a process that can be expensive and time-consuming, often taking up to six months to complete.

1 Office for National Statistics 2015. 

A recent retirement study¹ from a major insurer highlights that while people are not feeling significant additional financial pressures on a day-to-day basis, the rising cost of living and the current low level of interest rates are of concern to many. 

The report also reveals that 14% of respondents are now slightly more anxious than they were last year about having sufficient funds to last the whole of their retirement, and there’s evidence that the decisions that need to be taken can seem confusing.

This is where retirement planning can help. Taking professional advice can ensure that you make the most of your money in your later years. Most people will find themselves with a range of options at retirement, so making the right decisions is crucial. With life expectancy increasing, there is now the prospect for today’s retirees to spend as many years enjoying retirement as they spent saving for it. If you’d like to review your pension planning, get in touch.

1 Aviva, December 2016

HM Revenue & Customs (HMRC) wants to remind you of its interest in your offshore investments. 

Globalisation is not just about trade and investment flows. One of the significant changes to tax in recent years has been a move towards globalisation of tax. A prime example is the development of Common Report Standards (CRS) by the Organisation for Economic Cooperation and Development (OECD).

If you hold investments abroad, then this welter of abbreviations could explain some recent correspondence you have received. Under CRS, over 100 jurisdictions have agreed to automatic exchange of tax information. More than 50 early adopters, including HMRC, will start to exchange information by the end of this September. HMRC’s view is that CRS “dramatically increases international tax transparency.”

In advance of the first round of CRS information exchange, the government introduced legislation requiring certain financial institutions, financial advisers, solicitors and tax advisers to send a standard HMRC “notification letter” to any UK clients for whom they have provided overseas financial advice, services or referral. The deadline for issuing these letters is 31 August 2017.

Full declaration

The notification letter is designed to encourage errant taxpayers to bring their UK tax affairs up to date by using an online worldwide disclosure facility. Although the headline in large green letters at the top of the letter sounds daunting – “If you have money or other assets abroad, you could owe tax in the UK” – the key message (in much smaller black print) is that “If you are confident that your tax affairs are up-to-date, and you have declared all of your UK tax liabilities, then you don’t need to do anything further.”

The days of hiding money from the taxman offshore have long passed, a point the CRS reinforces. If you want to limit the tax you pay on your investments, there are plenty of legal, onshore opportunities we would be happy to explain.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.