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Newsletter – June 2017

2017 election: no good news for income tax!

2017 election: no good news for income tax!

Judging by the manifestos of the three main political parties, the days of appealing to voters by cutting income tax (and its alter ego, national insurance) are over:

  • The Conservatives repeated their 2015 manifesto promise of a personal allowance of £12,500 and a higher rate threshold of £50,000 (outside Scotland) by 2020. The way inflation is picking up, that pledge means little more than keeping pace with prices, which is already built into the legislation. Although there were references to “low taxes”, the previous manifesto’s promises to freeze rates for income tax and national insurance had disappeared. Given the problems Mr Hammond encountered with his March Budget, the silence is unsurprising.
  • The Labour Party manifesto promised no personal national insurance increases and no income tax increases for those with income of up to £80,000. Beyond that point, Labour wanted to apply a 45% rate (which currently starts at £150,000). There would also be the return of a 50% top rate, beginning at £123,000. The odd-looking starting point is driven by the fact that this is the income level at which all the personal allowance is lost.
  • The Liberal Democrats adopted a simple approach in their manifesto: an immediate 1% increase in basic, higher and additional rates of tax. However, the party suggested that in the longer term this would be replaced by “a dedicated health and care tax…possibly based on a reform of national insurance contributions”.

Income tax and national insurance will account for about 44% of all tax revenue in 2017/18, according to the Office for Budget Responsibility’s March 2017 estimates. This makes reductions expensive and increases valuable – the Liberal Democrats’ 1% would yield £6 billion a year. With even the Conservatives talking about not eliminating the Budget deficit until 2025, the hard truth is that, regardless of political hue, no government can afford income tax giveaways.

All of which means that if you want to see your income tax bill reduce, you need to elect for more financial planning rather than any particular political party.

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

Change of heart from the Bank of England

Change of heart from the Bank of England

The latest Quarterly Inflation Report (QIR) from the Bank of England has been published and shows that ‘the Old Lady’ has changed her mind a little. But the market projections for short-term interest rates don’t make for helpful reading for those with cash deposits. 

The QIR was published in May, a few days before the Office for National Statistics revealed that in April, CPI inflation was running at 2.7%, 0.7% above the Bank’s target. The Bank shouldn’t have been surprised to see the higher inflation number. It’s QIR projected a short-term increase, with inflation reaching 2.8% in the final quarter of this year. Thereafter the Bank’s central projection is in for a gentle decline in the pace of price increases that will still leave inflation above target in the early part of 2020

Why isn’t the Bank raising interest rates?

In his opening remarks when presenting the QIR, Mark Carney, the Bank’s Governor, said “The projected inflation overshoot entirely reflects the effects on import prices of the fall in sterling since late November 2015 – a depreciation caused by market expectations of a material adjustment to the UK’s medium term prospects as it leaves the EU.” This explains why the Bank is not raising interest rates, which would be its usual response to above-target inflation.

There is a highlighted page of the QIR devoted solely to explaining why global interest rates are so low and likely to continue to be. For the UK, the Bank notes that the money markets are currently projecting that short-term real (inflation-adjusted) rates will still be around 0.25% in ten years’ time, compared with an average of 2.75% between 1993 and 2007. Demographics and “heightened risk aversion” are to blame in the Bank’s view.

The current combination of sub-1% short term rates and 2%+ inflation is unwelcome news if you hold much cash on deposit: the longer your money is in the bank, the less it will buy. That may be a price worth paying if you are convinced that investment markets worldwide are headed for a fall in the near term. If you are not, or are just feeling uncertain where your money should be placed, do talk to us about the many options available.

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.

Election campaign: revisiting social care again

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Election campaign: revisiting social care again

The general election campaign provided a reminder that the issue of funding social care remains unresolved.    

Who pays how much for long term care in England came to the fore last month. It is one of those subjects which successive governments have repeatedly kicked down the road. Nearly 20 years ago the then Labour government established a Royal Commission to examine the problem. Its proposals that personal care should be free were rejected. Ever since, there have been further reviews and reports, all of which have met a similar fate.

Sir Andrew Dilnot’s review

The last (2011) set of recommendations, from Sir Andrew Dilnot’s review, were accepted (with several modifications) before the start date was summarily deferred for four years to April 2020, shortly after the 2015 election. It was these reforms that the Conservative manifesto proposed to abandon completely, causing much controversy. Within four days, the Prime Minister had been prompted into something which looked remarkably like a U-turn, even if she said it was only a clarification.

The original 2020 plan would have placed a cap on the total personal contribution you would make to social care fees. While the figure most often quoted is £72,000, this is a substantial understatement because:

  1. The figure is index-linked, so will probably be nearer £80,000 by 2020.
  2. It excludes the “hotel costs” of food and accommodation.
  3. It is based on what a local authority would pay for care, not what a self-funding individual would be charged by a care home – normally a much higher amount.

It has been suggested that the true figure would be more like £200,000.

At present, there is no direct way of insuring against social care costs before they arise: the few providers who were in the market withdrew some years ago and only ‘immediate care’ plans remain. One current potential solution is to build some provision into your retirement planning, using pension flexibility to draw the large sums needed to fund care home fees. To see whether and how this might work for you, please talk to us. We promise not to defer a response for two decades or longer…

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.     

protection

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Is it time you reviewed your protection needs?

Many people are introduced to the benefits of life insurance when they sign up for their first mortgage. Having taken the important step of putting cover in place that would ensure that their mortgage would be repaid in the event of their death, they often put the policy away in a safe place and don’t give it another thought for many years.

However, we all experience life-changing events such as having children, buying our next house, taking on more debt or changing jobs. Before we know it, we’re contemplating retirement.

Many people don’t think about reviewing their policy, but forgetting to do so could mean that your family won’t have enough money to pay the mortgage or meet the bills if you die. It could also mean that you’re paying more for your premiums than perhaps you need to, as there may now be more cost-effective policy options available to you.

Policies tailored to your needs Life insurance comes in various forms and can be combined with other types of cover to cater for a range of needs. So, besides providing a lump sum on death, you can take out cover to protect against the diagnosis of a critical illness, accident, incapacity or unemployment, or to provide income protection.

It can be a good idea to write your life policy ‘in trust’. This simple formality ensures that the proceeds would go directly to your beneficiaries on your death, avoiding inheritance tax and the need to obtain probate before the funds are payable.

So, if you’ve had your policy for a few years and your circumstances have changed, then why not ask us for a review? Doing so will ensure you have the right policies in place to protect your financial future.

FTSE

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FTSE at 20,000

No, it’s not a mistake, but it is not the FTSE 100, either.

The most frequently quoted index of UK share prices is the FTSE 100 index, or the “Footsie” as it is frequently described. The FTSE 100 index was launched at the end of 1983, with the aim of giving a yardstick to the value of the largest 100 companies listed on the London Stock Exchange. It started life with an initial value of 1,000 and is now about 7,500, equivalent to an average annual return of about 6.2% excluding dividends.

Two years after the FTSE 100 came into being, the FTSE 250 appeared. This captured the performance of the 250 UK listed companied that ranked below the Footsie’s larger constituents. The FTSE 250 was launched with an initial value of 1,412.6, an odd-looking number which becomes more understandable when you know that was the reading on the FTSE at the FTSE 250’s birth.

In May, the FTSE 250 hit one of those round numbers which cause a brief flurry of comment: 20,000. That is equivalent to an average annual return of 8.8%, again excluding dividends.

The difference in performance between the two can largely be explained by the difference in the industry concentrations in the two indices, as illustrated in the chart below.

The industry concentration is partly driven by the nature of the companies. The FTSE 100 contains many large multinational companies, including mining groups (e.g. Rio Tinto), with little more than a share listing in the UK. On the other hand, the FTSE 250 is more domestically oriented.

The gap between the two indices’ performance is a reminder that the numbers that make the press headlines do not always tell the full story and that relying on a fund tracking the Footsie may mean missing out on some of the better performing UK companies. A review of your portfolio can be a useful exercise.

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.

election

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And after the election…

There is unfinished business for the new government to deal with.    

Past performance is not a reliable indicator of future performance. However, when it comes to general elections, there is plenty of history to suggest that tax increases are more likely in the first Budget to occur after the polls have closed. From a politician’s viewpoint, it makes sense to deliver the medicine immediately, as that leaves the longest gap before the next election. For example, it was in the summer Budget after the May 2015 election that the new dividend tax rules, reduced tax relief on buy-to-let properties and 3.5% increase in insurance premium tax were announced.

In the post-election environment, whoever ends up as Chancellor will be presenting a new Finance Bill, probably in July. There is a raft of measures to reinstate because so many were dropped from the March Finance Bill in the rush to get it passed before parliament shut down. When reviving the spring Budget, the Chancellor will almost inevitably wish to add some new tax legislation based on what was (or, as important, was not) stated in their party’s manifesto.

Changes which were not originally in March’s Finance Bill are unlikely to take full effect before the start of the next tax year (2018/19), but even so there may be some “anti-forestalling” measures that bite immediately. One area which looks ripe for a further attack is tax relief on pension contributions. You may recall that the tapering of the annual allowance for high earners was announced in the July 2015 post-election Budget.

If you are contemplating large pension contributions in this tax year, it could be a wise precaution to make them before the new government’s first Budget.

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.

gen-x

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Generation X and Y overestimate the amount they’ll inherit

Relying on an inheritance to fund your retirement could prove to be a risky strategy. Whilst many people polled for a recent survey1 expected to receive more than £100,000, this assumption could prove wide of the mark. Figures from the Office for National Statistics2 show that only one in ten people inherit more than £125,000.

Increased longevity and the mounting cost of nursing & residential care could mean that the older generation has substantially less to leave to their heirs.

How to plan for the future

Many people postpone retirement planning until they reach their mid-40s. Arguably, pension planning should begin the day you start work. Even small sums saved regularly early on in your career can mount up over the years to create a reasonable pension fund.

Recent changes in legislation, including the introduction of auto-enrolment pensions and the advent of the Lifetime ISA, provide greater tax-efficient opportunities to plan and save for life’s major financial events, like buying a property or building up a fund for your retirement.

Please get in touch if you’re making plans for your retirement and need some professional advice.

1 Old Mutual Wealth 2017

2 ONS, Inheritance in Great Britain 2013

financial-habits

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Financial habits that can destroy your wealth

We all lead increasingly busy lives and taking time out to tackle our financial bad habits can seem tedious; somehow it never quite gets to the top of our ‘to do’ list. However, spending just a comparatively small amount of time thinking about our money, and what we could do differently can help make the future more financially secure.

Being impulsive

We all have our little weaknesses, for some it’s multiple trips to the coffee shop, for others it’s online shopping, visits to the garden centre or match tickets. Whatever life stage you’ve reached, having a budget to work within will help you keep track of what you spend. This can be important at any age, but if you’re saving hard for a deposit for a property, or planning your retirement finances, it’s essential to know where your money goes and how much you can afford to spend.

Not having an emergency fund

Everyone should have cash put by that could cover three to six months of living costs based on their current expense level. If you dip into this fund, remember to build it back up as soon as you can, especially if your cost of living increases over the years. Not comparing costs Expensive debt can end up eroding your wealth very quickly, so it pays to keep loans and mortgages under regular review. Credit cards can also come with high interest charges, so shopping around for good deals really pays. And although it can seem time consuming, it’s important to compare costs for bank accounts, utilities, home insurance, phone and broadband deals too.

Failing to plan

For many younger people, retirement can seem light years away. In many cases, people only think seriously about their later years when they have reached their peak earnings somewhere in their 40s. Defining your goals, short, medium and long-term, will help you get a feel for how much you should be saving in your early years to make adequate provision for your future. Even small sums saved regularly can make a big difference to your financial future.

Not keeping track of investments

It pays to review your savings and investments from time to time. That way, you won’t expose your money to unnecessary risks. Weeding out poorly-performing holdings, and rebalancing the mix of assets that you hold will help to keep your portfolio healthy.

If you’re making plans for your retirement and would like some professional advice, then please get in touch.

Confused by Financial Jargon? You’re Not Alone

Confused by Financial Jargon? You’re Not Alone

Every industry has its own jargon – words and phrases that can seem confusing to outsiders. The world of finance is no exception. In a recent survey¹, less than a quarter of British adults say they know what a defined contribution pension is, while 26% could correctly explain how the offside rule works in football.

Not understanding the terminology used in communications could mean that people are taking out the wrong policy, or starting a financial plan that isn’t right for their needs. Two in five UK adults say they have ignored financial information sent to them. Some people confess to having lost money because they ignored letters and circulars, or missed important changes to their policy, because they found the information they received too hard to understand.

Taking professional financial advice can make the situation and your options clear. This can be particularly important when it comes to making life’s big financial decisions, like getting the right mortgage, choosing the most suitable investments, or planning and taking an income in retirement.

How advisers can help

Independent financial advisers know that many words, phrases and terms can be unfamiliar to people. They will be able to explain things in a down-to-earth way using plain English, highlighting all the key points you need to be aware of. But more importantly, they will take the time to understand your financial situation and what your goals are, and can help you plan for the important financial stages in life. They know what’s happening in the marketplace and can advise on the right plans, policies and investments to meet your needs.

If you’ve found yourself confused by financial jargon and could use some practical help, please contact us. 

1 Aviva, February 2017

HMRC_0

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Alert: Fraudsters claiming to be from HMRC

  • There are a variety of methods being used including calls, texts and voicemails.
  • Fraudsters are contacting the elderly and vulnerable claiming to be from HM Revenue & Customs.
  • Victims are being told they have arrest warrants, outstanding debts or unpaid taxes in their name. 
  • The fraudsters are asking victims to purchase iTunes gift cards as payment. 

Action Fraud is warning people once again of scammers contacting victims claiming to be from HM Revenue & Customs (HMRC) that trick people into paying bogus debts and taxes using iTunes gift cards.

Victims are being contacted in a variety of methods by fraudsters claiming to be from HMRC and are being told they owe an outstanding debt. In most cases they ask for payment in iTunes gift card voucher codes.

Fraudsters like iTunes gift cards to collect money from victims because they can be easily redeemed and easily sold on. The scammers don’t need the physical card to redeem the value and instead get victims to read out the serial code on the back over the phone.

Methods fraudsters use:

Spoofed calls: Fraudsters cold call victims using a spoofed number and convince them that they owe unpaid tax to HMRC.

Voicemails: Fraudsters leave victims automated voicemails saying that they owe HMRC unpaid taxes. When victims call back on the number provided, they are told that there is a warrant out in their name and if they don’t pay, the police will arrest them

Text messages: They may also use text messages that ask victims to urgently call back on the number provided. When victims call back, they are told that there is a case being built against them for an outstanding debt and they must pay immediately.

One 87 year old victim recently told the BBC he was phoned by fraudsters who claimed to be from HMRC stating there was an arrest warrant out in his name. They told him it would be cancelled if he bought £500 in iTunes gift cards at Tesco.

The man bought the cards and gave them the serial numbers. But when they asked for a further £1,300 in vouchers, he became suspicious and hung up.

How to protect yourself: 

  • HMRC will never use texts to tell you about a tax rebate or penalty or ever ask for payment in this way.
  • Telephone numbers and text messages can easily be spoofed. You should never trust the number you see on your telephones display.
  • If you receive a suspicious cold call, end it immediately.

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

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