Newsletter – December 2016

It has been reported that £10,000 held in a high street savings account will be worth £9669 in two years’ time, effectively costing you £165.50 per year just to hold the cash!

This prediction uses an average interest rate of 0.76% for a fixed-rate 2-year account, which means while your money is costing you money, you can’t even spend it! If the prediction was based on an easy-access account, then the average interest rate drops to 0.65% and your £10,000 after 2 years will be worth £9848, costing you £76 per year.

This loss over the 2 years is due to inflation; that is, your money will be worth less in the future if the interest rates are not high enough to produce some growth. Actually, to break even you need to make 2.44%, not including fees, etc., and you will not get anywhere close to this for cash deposits on the high street.

For long-term savers this could add up to a massive loss over time and could mean that your savings are slowly eroding to be worth much less than what you deposited in the first place.

Whilst holding some cash on deposit for emergencies is wise, holding large amounts of cash in this time of low interest rates makes no sense. If you have large cash deposits you need to revaluate your situation and take action now to avoid your savings being eaten away.

Well they were talking about it, and now they have actually done it. 

From 31st March 2017, early exit charges on existing pensions for those wanting to access their benefits from the age of 55 will be capped at 1% of the value of the policy. That doesn’t mean pensions with early exit charges of less than 1% will be increasing their fees, we hope! Early exit penalties for new pensions, i.e. those set up after the new flexible pension rules came into force in 2015, will have their fees capped at 0% – even better!

The intention of the cap is to give those aged 55 or over more choice and flexibility in accessing their pensions, and to enable those who perhaps felt unable to access their benefits to now do so. Whilst the hope is that this does not encourage everyone to run out and withdraw their entire pension, it provides people with the freedom they deserve to make flexible investment choices.  

As you are all probably aware, the new allowances for dividends introduced in April this year mean you can earn £5000 of gross dividend income before having to pay tax, no matter what kind of tax payer you are. Earnings above your allowance are then taxed as:

7.5% for Basic Rate tax payers

32.5% for Higher Rate tax payers

38.1% for Additional Rate tax payers

But what you may not know is that this does not apply to trusts or trustees. Any dividend income generated (regardless of whether it is paid out to the beneficiaries or not) will be taxed at the 38.1% rate, as all trust income is automatically taxed in the Additional Rate band.

If this dividend income is paid out to beneficiaries then it ceases to be dividend income but is instead considered to be trust income and is taxable at the highest rate of 45%; it is not allowed to be part of the individual beneficiaries’ dividend allowance.

It is quite aggravating that this allowance has not been transferred to trusts, as it means that those trying to protect their funds are losing out on effectively “tax free” income available to every other individual. The complex nature of trusts was probably too much to consider in this instance, but this just means that you need to be very careful when distributing funds from within a trust and you should almost certainly seek advice before doing so.

To receive any UK state retirement pension on retirement after 5 April 2016, you need at least ten complete years on your National Insurance Contribution (NIC) record. The full state pension is paid to those who have 35 or more complete NIC years.

You may not receive the full pension if you were contracted out of the second state pension or State Earnings Related Pension (SERPs) for part of your working life. You can check how much state pension you are due to receive on gov.uk under ‘check state pension’, or through your personal digital tax account. We can help you with this.

It is possible to plug gaps in your NIC record by paying voluntary class 2 or class 3 NIC. This payment generally needs to be made within six years of the gap year, but there are a number of exceptions which extend that period.

You may also qualify for NI credits for some years if you were claiming state benefits, child benefit or were a foster carer. The NI credits were not always applied automatically, so it’s worth checking your own NI record.

If you attained state pension age before 6 April 2016, you can boost the value of your state pension by up to £25 per week by paying voluntary class 3A NIC. You choose how many extra £1/ week units to buy, and make a lump sum payment determined by your age at the time you make the payment.

This is like buying a state-backed annuity but, unlike most annuities, the amount payable is identical for men and women, and there is no adjustment for the health of the annuitant. This opportunity to pay class 3A NIC closes on 5 April 2017.

As with any investment, you should consider other uses for your money and the returns you could achieve elsewhere.

When your total income reaches certain thresholds, it tips any extra income into a tax band where a higher rate of tax is charged. This can also mean you lose part or all of your savings allowance, child benefit, personal allowance, or pension annual allowance.

The main trigger points are: £45,000, £50,000, £100,000 and £150,000. If your total income is expected to hover around one of those thresholds, you could save tax by moving income from 2016/17 to 2017/18, or by making certain payments in 2016/17 rather than in 2017/18.

Say you’re a 20% taxpayer in 2016/17, but expect that a bonus due in March 2017 will tip you into the 40% band. If you ask your employer to delay paying the bonus until after 5 April 2017, you’ll pay the tax on that income later. You will also retain all your £1,000 savings allowance, and may still stay out of the 40% band for 2017/18, as the threshold for that year will be higher.

The main thresholds are (2016/17 figure first, then 2017/18):

• basic personal allowance: £11,000 rises to £11,500 – basic rate tax (20%) starts
• higher rate threshold: £43,000 rises to£45,000 – 20% rate increases to 40%and savings allowance reduces from £1,000 to £500
• married couples allowance: transfer of 10% of personal allowance is possible where the higher earner has income of no more than £43,000, rises to £45,000
• child benefit clawback: income between £50,000 and £60,000 (no change for 2017/18)
• withdrawal of personal allowance: income between £100,000 and £122,000 (£123,000 in 2017/18)
• additional rate: income above £150,000 – 40% rate increases to 45% (no change for 2017/18), savings allowance removed, and pension annual allowance reduced

Gift Aid donations and pension contributions can increase the value of most of the above thresholds. You can elect for donations to be treated as being paid in the preceding year.

Income that can easily be moved from year to year includes:

• bonus from your own company
• dividends from your company
• encashments of life assurance bonds
• withdrawal of taxable income from pension schemes in ‘drawdown’

According to the Financial Conduct Authority (FCA) 22% of over 55’s and 32% of over 75’s believe they have been targeted by an investment scam in the last 3 years.

The FCA is urging over 55’s to take their time to check that investment ‘opportunities’ are legitimate before they hand over their money.

This comes as new research by the FCA reveals:

22% of over 55’s and 32% of over 75’s believe they have been targeted by an investment scam in the last 3 years.

55% of those who have invested in financial products did so on their own, rather than making the decision with family

14% of over 55’s spend little or no time researching financial investment products before handing over money, rising to 26% of over 75’s.

According to figures from Action Fraud, on average victims of investment fraud lost £32,000 each last year. Recent pension freedoms and low interest rates offering poor returns on savings are making over 55’s an increasingly attractive target for fraudsters.

The new research is part of the FCA’s ScamSmart campaign, helping to protect consumers from investment fraud. The campaign features an interactive tool, the FCA Warning List, that helps investors find out more about the risks associated with an investment, and check a list of firms the FCA knows are operating without its authorisation.

To avoid being a victim of investment fraud, the FCA advises consumers to:

• Reject unsolicited contact about investments.
• Before investing, check the FCA Register to see if the firm or individual you are dealing with is authorised and check the FCA Warning List of firms to avoid.
• Get impartial advice before investing.

Mark Steward, Director of Enforcement said: “Making a significant financial investment is an important decision – be prudent, do your homework and be especially on guard if contacted out of the blue by someone you don’t know.  Fraudsters are targeting our growing over 55 population because they are more likely to have money to invest. They may pressure you to make a quick decision or try to make you feel stupid for not taking up their bogus offers.

“No investment decision should be rushed. Be sceptical. Be suspicious. Ask questions and get answers you can verify. And remember, if you receive an unsolicited call about an investment opportunity that sounds too good to be true then it probably is. The best thing to do is hang up.”

If you have been affected by this, or any other scam, report it to Action Fraud by calling
0300 123 2040, or by using the online reporting tool at www.actionfraud.police.uk