Newsletter – February 2018

Investors and their advisers should start to turn their focus to the end of the tax year on 5 April.     

ISA contributions have historically always been focused on the end of the tax year. This is the case even though it would make more sense to invest at the start of the tax year, to maximise the period of tax shelter.

This time of year, the personal finance pages start to fill with stories about ISAs, often including tales of ISA millionaires. For all the coverage, these remain a rare breed, but they serve as a reminder that regular saving over a long term can create meaningful amounts of capital.

The past couple of years have seen total ISA contributions falling primarily due to a sharp drop in the popularity of cash ISAs. These have seen contributions fallen by over a third between 2014/15 and 2016/17 for two good reasons:

1. Ultra-low interest rates and limited competition between banks have made prospective returns look miserable, particularly as inflation has picked up; and
2. The introduction of the personal savings allowance in 2016/17 has meant many depositors no longer need an ISA to escape tax on their deposit interest.

Stocks and shares ISA contributions have reached a new high, probably helped by some ISA investors abandoning the cash version. This tax year there are a few of points to remember when making your stocks and shares ISA investment:

• The contribution limit (in total to all ISAs) is now £20,000, up from £15,240 in 2016/17. It will be held at £20,000 in 2018/19.
• Dividends within an ISA are free of UK tax. With the dividend allowance falling from £5,000 in 2017/18 to £2,000 in 2018/19, you may find you have to pay tax on shares held outside of an ISA.
• It is important to get your money into an ISA shelter. Whilst your annual limit can’t be carried forward to the next year, you do not have to invest it all in funds by 5 April – once you hold cash in your ISA you can drip feed investment into funds, if you wish.

For more information and advice on selecting ISA providers, please talk to us ahead of the April deadline on 01793 881602 or download our free Key Guide:

Making the most of ISA’s

Our full range of Key Guides can be found here

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 value of tax reliefs depends on your individual circumstances. Tax laws can change. 

The Financial Conduct Authority does not regulate tax advice.

There will be no Spring Budget this March, but that does not mean the Chancellor is staying silent. 

On 13 March, the Chancellor will present a Spring Statement to the House of Commons, not a Budget. The next Budget should be in the autumn, probably November. The rationale for the revised schedule is to give more time to develop legislation and avoid the situation of changes taking effect from 6 April, but not reaching the statute book until three months or more later.

This problem was made worse in 2017, when the snap election meant most of the March Budget measures were put on hold. Some that took effect from 6 April 2017 – such as the reduction in the money purchase annual allowance – were in a Finance Act that only received Royal Assent on 16 November.

Despite the new schedule, there seem to be plenty of people expecting a Spring Budget in March, perhaps because 2017 was an unusual year – with two budgets and three Finance Bills. However, 2018 should be much quieter on the tax front (assuming there is not another surprise election).

Whilst there is no Budget there may still be changes announced on 13 March that have immediate effect. Few Chancellors can resist the opportunity when they are in the parliamentary spotlight. Mr Hammond’s predecessor was a classic example, as some of George Osborne’s Autumn Statements were more like Budgets than the real thing.

If you are considering year end tax planning, then it could make sense to complete any transactions before 13 March. If you need of assistance in that planning, you should contact us as soon as possible.

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

This is the time of year to review your pension contributions.  

February and March are rightly popular times for reviewing and making pension contributions. By this stage you should have a good idea of what your income for the tax year will be and how much you may be able to contribute as a one-off payment before 6 April arrives.

In this tax year, there are several changes to note:

• Thursday 5 April will be the last day on which you can make a contribution to mop up any unused annual allowance from 2014/15. To do so you will need to first use up your annual allowance for the current tax year.
• The money purchase annual allowance was reduced from £10,000 to £4,000 at the start of this tax year, although the legislation achieving this did not arrive until November. If you have used the new pensions flexibility to draw benefits this may limit the amount you can contribute.
• From 6 April 2018, the lifetime allowance rises by 3% to £1,030,000. At the margin that modest increase may permit more benefits to be taken without triggering tax charges.
• From 6 April 2018, automatic enrolment contribution levels increase, with the total of employee and employer payments rising by about 150%. There will be another increase of around 60% the following year.

If you want to maximise contributions, contact us as soon as possible. The calculations involved can be complex and miscalculations can lead to lost tax relief.

For further information on Pensions please contact one of our advisers on 01793 881602 or download our free Key Guide:

Pensions freedom – drawing from your pension

Pensions tax planning for high earners

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Our full range of Key Guides can be found here

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.

The value of tax reliefs depends on your individual circumstances. Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

HMRC has published its annual assessment of the cost of tax reliefs.

Every January HMRC publishes a table of ‘Estimated costs of principal tax reliefs’. Any Chancellor facing a budget deficit is bound to run his eyes down the list to see where the money is not coming in. After that assessment, they may well ponder whether some tweaking could benefit the Exchequer’s coffers without causing too much of a political outcry.

This year’s list has a familiar look to it in terms of the most expensive reliefs. At a cost of over £101 billion the largest factor by far is the personal allowance. The next three largest are equally untouchable for a Chancellor – national insurance contribution (NIC) thresholds and the capital gains tax exemption for main residences. Fifth largest is income tax relief for pension schemes, costing an estimated £24 billion in 2017/18.

This is a curious figure because of the way in which Whitehall calculates it. Their definition adds together income tax relief on employer and individual contributions and pension fund investments, then deducts tax charged on pensions in payment. That deduction – which in effect relates to pension contributions made over many years – is estimated to be worth £13.4 billion for 2015/16. Remove the deduction and the cost of pension income tax reliefs alone could be £38–£40 billion in this tax year, the equivalent of nearly 9p on basic rate tax.

Further down the list, the tenth entry is NIC relief for employer pension contributions. This is forecast to cost £16.9 billion in 2017/18. The government is virtually assured both income tax and NIC costs will increase substantially because of legislation raising automatic enrolment pension contributions by about 150% in 2018/19 and another 60% in 2019/20.

As the graph shows, the cost of pension reliefs has been rising anyway, despite government measures to rein them back with allowance cuts and other measures. If you or your employer are contemplating pension contributions, perhaps as part of year end planning, it is worth remembering the HMRC’s list, and the temptation for any Chancellor to change pension relief.

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.

The value of tax reliefs depends on your individual circumstances. Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

New regulations are producing some strange figures in investor information documents. 

There is a new acronym causing furrowed brows among investment managers, financial advisers and regulators: PRIIPS. PRIIPS are ‘Packaged Retail and Insurance-based Investment Products’, which includes most fund and investment-related products aimed at retail investors. Since 1 January 2018, a new set of EU regulations have set out what a new Key Information Document (KID) must tell potential PRIIP investors.

The idea behind KIDs is a sensible one. For some years collective funds, such as unit trusts, have had to produce a KIID (Key Investor Information Document), but there was no equivalent document for other personal investment products. This meant comparisons between different products were somewhere between difficult and impossible. The new KID was designed to provide a common set of information on risks, performance scenarios, costs and other factors in a standardised way. The aim was to make investors’ lives easier.

In practice there have been some glitches. Firstly, the transitional rules mean that KIIDs (not KIDs) can still be provided by investment managers until the end of 2019. The extra “I” adds plenty of difference – for example the old KIID includes past performance data, whereas the new KID does not. To make matters worse, the new KID rules can produce some strangely optimistic numbers covering four future ‘performance scenarios’.

In late January the Financial Conduct Authority (FCA) took the unusual step of issuing a statement about the new regulations. It said, “Where a PRIIP manufacturer is concerned that performance scenarios in their KID are too optimistic, such that they may mislead investors, we [FCA] are comfortable with them providing explanatory materials to put the calculation in context and to set out their concerns for investors to consider”.

Regulations rightly require both KIDs and KIIDs, but the latest problems are a reminder that standardised information is just that. It is not the personalised guidance we aim to provide.

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.

If you haven’t given much thought to your New Year resolutions, there’s still time even now and here’s one you should seriously consider. Make 2018 the year you plan your long-term wealth and get the right advice to help you achieve your goals.

Review your financial objectives

It helps to start with a clear idea of what your goals are – have they changed? Think through what your key saving, spending and investment plans are for the next 12 months and decide what you want your money to do for you. For instance, are you looking to become debt-free, save for your children, or plan your retirement spending?

Pensions

This year, you’ll be a year older and a year closer to your retirement. Pensions are one of the most efficient savings vehicles for the future, offering tax-free growth and tax relief on contributions. Plus, if you join a workplace scheme (including not opting out of pension auto-enrolment), then your employer will, in most cases, make contributions on your behalf, meaning you’ll effectively benefit from free money. Sitting down with us will help you get a clear picture of how much your pension is likely to be worth, and we will be able to tell you if you’re saving enough for a comfortable retirement, or if you need to put aside more to ensure you have enough to live on in your later years.

Review your savings and investments

Don’t forget to make the most of this year’s ISA allowance. For the 2017-18 tax year, it’s a generous £20,000 or £40,000 for a couple in separate ISA accounts. ISAs are a great way to save tax-effectively; each year, more and more people  are becoming ‘ISA millionaires’.

If you’ve held a portfolio of investments for a while, it might be time to review its performance. We will be able to assess the stocks and shares you hold, and ensure the balance of your portfolio remains in line with your risk profile and asset allocation strategy. A review gives you the opportunity to consider moves like selling investments that are underperforming or taking a profit from a holding that has appreciated considerably in value over the years.

Write, or update an existing Will

Dying without a Will could leave your family in disarray and facing financial worries.  It’s a simple procedure that means you can decide in advance what you want to happen to your wealth on your death. You know it makes sense.

For further information on Financial Planning please contact one of our advisers on 01793 881602
or download our free Key Guide:

The financial planning journey

Our full range of Key Guides can be found here

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.