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Last call for 2016/17 on your annual allowance…

The clock is ticking on using up your pension annual allowance

The allowance effectively sets the maximum pension contributions from all sources (including your employer) on which you may be able to claim income tax relief. In recent times it has been the subject of much controversy because of the way the allowance is tapered from the ‘standard’ £40,000 to as little as £10,000 for high earners.

One reason why the taper rules have come to the fore is another aspect of the annual allowance which has received far less press coverage: the carry forward rules. These allow you to mop up unused annual allowance from up to three tax years ago – i.e. from 2016/17 onwards during the 2019/20 tax year. In theory this could mean that, before 6 April 2020, tax-relievable pension contributions of up to £160,000 could be made (£40,000 a year for 2016/17 – 2019/20 inclusive).

As you might expect, there is some complex legislation setting out how carry forward operates. For example:

  • You must have been a member of a registered pension scheme in the tax year from which any unused annual allowance is carried forward. However, you (or your employer) do not have to have paid any contributions or accrued any benefit during those years, nor do any carried forward contributions have to be made to that scheme.
  • You must have covered an effective ‘entry fee’ of contributions equalling your annual allowance for the current year, i.e. £40,000, if you are not caught by the taper regime.
  • The carry back goes to the oldest tax year first and then works forward.
  • All tax relief is given in the current tax year, not the year to which the unused allowance relates.
  • Carry forward is not available if, at any time, you have taken advantage of the 2015 pension flexibilities to draw from any pension arrangement.

Calculating how much can be carried forward is sometimes a difficult exercise, requiring detailed contribution records, so if you want to beat the deadline for using up your remaining allowance from 2016/17, start seeking advice now.

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.

A Budget Day… at last

In early January Chancellor announced a new Budget date: 11 March 2020.

This could be a significant Budget. Traditionally, the first Budget of a new Parliament is when the Chancellor delivers the medicine of tax increases and/or unpopular reforms. To borrow from Macbeth: ‘If it were done when ‘tis done, then ‘twere well it were done quickly’…that way the electorate has over four years to forget.

If you’re struggling to remember what happened in Budget 2019, you haven’t forgotten. Unusually, in 2019 there was no Budget. There was a Spring Statement in March 2019 from Philip Hammond, but the general election call forced his successor, Sajid Javid, to abandon the planned Autumn Budget set for 6 November. During the election campaign the Conservative party said that the Budget would be revealed in February, but this date shifted again in the new year when the Chancellor announced a date of 11 March.

We already know a good proportion of what the Chancellor will announce, as draft legislation was published eight months ago in anticipation of the cancelled Autumn 2019 Budget. The contents will almost certainly include controversial legislation to strengthen the operation of off-payroll working rules (IR35) in the private sector, possibly with some amendments following the government’s last minute review,  as well as  tighter rules on the capital gains tax treatment of main residences. Both are due to take- effect from 6 April 2020.

Ahead of the Budget, the government confirmed at the end of January a ‘tax cut’ mentioned in the Conservative party manifesto, of an increase in the starting point for national insurance contributions (NICs) from the current £8,632 to £9,500 a year – a maximum saving of £2 a week.

The Budget unknowns include what the Chancellor might do about pensions tax relief. He already faces a growing problem with the impact of the annual allowance on NHS senior staff, which has been fixed temporarily, but only until April. There are already calls for the Chancellor to overhaul the system, something he could do while simultaneously raising more revenue.

One consequence of the Budget date is that any year end tax planning – especially on the pension front – now potentially has a deadline date of 10 March.

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

Life expectancy shortens…or does it?

New calculations from the Office for National Statistics have lowered life expectancies.

 

Source: ONS

Every two years, the Office for National Statistics (ONS) recalculates its national population projections (NPP). As part of the exercise, the ONS reviews and updates its assumptions about future mortality, which in turn will have an impact on population size.

The latest figures, released in early December, show a fall in life expectancies from those calculated in 2016, as the graph above demonstrates. As a headline, ‘Fall in Life Expectancy’ can be confusing. What it does not mean is that future generations will not live as long as the current generation. What it does mean is that future generations will live longer than the current generation, but not live quite as long as previously predicted.

You can see this in the graph. The projection made in 2016 was that a man who reached age 65 in 2040 would live, on average, another 23.0 years, whereas the latest projection (based on 2018 figures) brings that number down to 21.9 years. In 2014 the figure was projected to be 24.1 years. For women the figure has gone down from another 25 years in 2016 to 23.9 years in 2018.

The ONS reductions in life expectancy were unsurprising to the experts, as a near stalling in UK life expectancy improvements had already been noticed by health think tanks and pension funds, among others. The causes are the subject of some debate. As the Health Foundation remarked on its research, “These causes are multiple and complex – working across all age-groups, seasons and both sexes…some of the simplified explanations that have been advanced are clearly inadequate.”

One consequence of these new projections is that the ONS has had to update its life expectancy calculator (see the link below). It is worth looking at this, not only for the average life expectancy number, but also for the graph and other data which accompany the results. For example, a man aged 65 today (which is no longer State Pension Age, don’t forget – it’s about 65 and two-thirds), is expected on average to live until age 85, but has a 1 in 4 chance of reaching 92 and a 1 in 10 chance of achieving age 96. For a woman of the same age, the corresponding figures are all two years higher.

Those odds of reaching into the 90s are worth remembering next time you review your retirement planning.

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.

ONS Life Expectancy Calculator: https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07

Venture Capital Trusts continue to attract investors.

The latest statistics from HMRC show the inflows to venture capital trusts (VCTs) have more than doubled since 2009/10.

Source: HMRC

At the end of last year, HMRC published details of how much money was raised by VCTs in 2018/19. At £716m, the figure was the highest since 2005/06, when a temporarily higher rate of tax relief was on offer.

The increased popularity of VCTs in recent years is at least partly due to the restrictions on pensions, such as the tapered annual allowance rules. The tightened pension limits have made pension contributions tax in-efficient for some high (and not so high) earners.

In contrast, VCTs offer:

  • A 30% tax credit on investments of up to £200,000 per tax year. This is clawed back if the VCT shares are sold within five years;
  • All dividends are free of personal tax, provided the original investment was made within the £200,000 per tax year limit; and
  • No capital gains tax on any gains (but no relief for losses, either).

While VCTs are being used as a pension alternative to obtain tax relief, in investment terms VCTs are very different. Your choice of pension investments is almost limitless and can be as high risk or secure as you wish. In contrast, a narrow investment choice and high risk are both inbuilt to VCTs.

At least 80% of the investments underlying VCTs must be in relatively young, small companies that are not listed (other than on the AIM market). Over the years, successive Chancellors have ratcheted up the risk element by excluding a wide variety of businesses, from market gardens to wind farms.

The latest change to VCT investment rules took effect in April 2018 and introduced a specific ‘risk to capital’ requirement to prevent ‘safe’ investments being made. That high risk focus makes it all the more important to take advice when investing in VCTs.

With the Budget now in March, the year end season for VCT capital raising is well underway. Some VCTs have already closed their issues for the year, so if you wish to invest in VCTs to cut your 2019/20 tax bill, the sooner you act, the better.

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. 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 2019 investment year

The world’s share markets enjoyed strong rises in 2019.

2019 was a very different year for investors from 2018. Whereas 2018 saw a pattern of losses across all major markets, 2019 was the exact opposite: the red numbers that marked a year of negative performance in 2018 were replaced by black. A good global example of this was the MSCI ACWI, a broad global index covering both developed and emerging stock markets. In sterling terms, this index fell by 5.66% in 2018, but rose by 19.26% in 2019.

Despite all the trauma of Brexit politics during the year, the UK stock market posted double digit returns, as the table shows. Along with other major markets, the UK benefitted from starting at a relatively low level, following a sharp fall in the final quarter of 2018.

A point hidden in the index numbers is the performance of mid-sized UK companies – those in the FTSE 250, which sit below the top tier of FTSE 100. The strength of sterling during the year (up 4% against the US dollar and nearly 6% against the euro) had a greater impact on the multinational members of the FTSE 100 than the more domestically focused FTSE 250 constituents. The end result was that the FTSE 250 rose by 25%, more than double the increase in the FTSE 100.

The good performance of the pound – the opposite of 2018 – also took a slight edge off the returns from overseas markets for sterling-based investors. However, as the performance of the MSCI ACWI shows, in overall terms 2019 still offered greater profits for those who invested overseas.

2020 starts off with a reasonable investment outlook. The UK is now past its era of Brexit wrangles – at least until the EU trade negotiations begin in earnest. Meanwhile the US and China have just about agreed the first stage of a trade deal and interest rates remain at rock bottom levels, with few pundits expecting any move upwards in the year.

Against that backdrop, it may seem odd to suggest investors should consider selling, but as the tax year end nears, it could be worth realising some of those 2019 gains to take advantage of your £12,000 capital gains tax (CGT) exemption and reinvesting the proceeds – even perhaps in the same funds – via an ISA or a pension.

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.  Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

New government, new tax targets?

How will the new government affect your financial planning?   

December’s general election delivered a Conservative government with the sort of majority which consigns the knife-edge parliamentary battles of recent years to the past. So what will the new government do, apart from “get Brexit done”?

A look at the Conservative manifesto, easily the shortest of the three main parties, gives some limited clues.

Income tax There was a promise of no increases to income tax rates – although it is worth remembering that this does not extend to Scotland and Wales, which can both set their own rates. While Boris Johnson had talked about an £80,000 higher rate threshold during his campaign to become party leader, this idea did not reach the manifesto.

National Insurance Contributions (NICs) A no rate increase promise also applies to NICs, however, this may prove difficult to square with the abolition of class 2 self-employed contributions, which has been regularly deferred. The manifesto also promised an increase in the national insurance threshold to £9,500 in 2020/21 from the 2019/20 level of £8,632. That is worth a theoretical maximum saving of £104 a year for an employee (and £78 for the self-employed). The true saving is smaller, as the threshold would have risen to £8,788 through normal inflation linking. The manifesto expressed an ‘ultimate ambition’ – with no date specified – to raise the threshold to £12,500 (matching the current personal income tax allowance).

Social care After the problems Boris Johnson’s predecessor encountered on this topic during her election campaign, the manifesto (and Queen’s Speech) gave few clues beyond a commitment to build a cross-party consensus to solve the problem of funding social care. One condition of that solution would be that nobody needing care should be forced to sell their home to pay for it.

Corporation tax The rate cut from 19% to 17%, which was legislated to take effect from April 2020, will no longer happen.

The change in the NICs threshold represents over two-thirds of the tax cuts promised in the manifesto over the next four tax years. The financial picture should be made clearer in March, when the long-overdue Autumn Budget will now be delivered. In the meantime, if you want to see your tax bill fall, the solution looks to be in your own hands, not the Chancellor’s.

Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

HMRC keeps an eye on offshore fund investors

In early November, HMRC undertook a distinctly non-festive bulk mailing.

“We receive information about investment funds and this information shows that you may have invested in Offshore Investment Funds.”

Those slightly discomforting words are contained in a letter which HMRC sent out in early November. It was sent to a subset of taxpayers whose tax affairs are dealt with by HMRC’s Wealthy & Mid-Sized Business unit. What the letter shows is:

  • HMRC continues to be focused on offshore evasion as an area to raise additional revenue. It makes sense for HMRC to do so – the ‘Panama Papers’ exposure of 2016 is reported to have netted £190m so far for the Exchequer.
  • The Common Reporting Standard (CRS), which came fully into force in October 2018, is now being used by HMRC to target individuals. The CRS provides an automatic exchange of information between the tax authorities of over 100 countries.

As HMRC says in its letter, “How to treat amounts gained from an investment fund can be complex.” Most of the offshore funds now marketed to UK resident investors are ‘reporting’ funds and many of these distribute all of the income they receive. As a result, their tax treatment is very much like their UK-based counterparts, with any gains subject to capital gains tax. However, problems start to arise when some of the income of a ‘reporting’ fund is accumulated within the fund. Such unseen income remains taxable as personal income.

Unsurprisingly, the other category of offshore fund is a ‘non-reporting fund’. If these types of fund distribute income, then it is taxable in the normal way as either dividends or interest. However, any capital gains – including those from accumulated income – are taxed under income tax rules on sale. That harsher treatment explains why ‘non-reporting’ funds are not often recommended to UK resident investors.

HMRC’s action does not mean offshore funds should be avoided. In some circumstances, they have a valuable role to play. One point that the HMRC letter effectively does make is that if you want to invest in these types of funds, you need advice to avoid the potential tax pitfalls.

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.  Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances

Factor inflation into your planning cycle

Inflation has fallen to its lowest level in almost three years, but you should still take it into account.

Source: ONS

The October 2019 measure of annual inflation was lower than most experts had expected. At 1.5% on the CPI yardstick, it was the lowest since November 2016 and 0.5% below what is still the Bank of England’s central target of 2.0%. Ironically, the main reason behind the fall was a government price control, which began at the start of the year: the utility price cap.

This now operates on a half yearly cycle, with the cap reset on 1 April and 1 October by OFGEM, the utility regulator. The fall in the annual CPI rate reflected the latest October adjustment, which produced a theoretical dual fuel price cut of 6% for the ‘typical customer’ on default rates.

Of course, what the regulator gives, the regulator can just as easily take away – the April 2019 review resulted in an average 10% increase in the cap. Either way, it is a reminder that behind the headline inflation number, there are many factors at work, often pulling in opposite directions at different times.

Cumulative effect

While inflation is now relatively low, it remains an important factor in financial planning, not least because of its cumulative effect. Over the last five years, the period covered by the graph, prices rose by 7.9%, while over the last ten years prices increased by almost a quarter at 24.2%. Unless your financial planning is regularly reviewed to take account of inflation, you could find that it gradually becomes outdated.

It is a wise idea to look at any fixed components of your planning, such as life assurance cover, income protection or regular pension savings, and consider whether they need to be increased to counter the effect of inflation. Do talk to us before taking any corrective action as it might be better to start afresh rather than make an incremental increase to an existing arrangement.

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.

Calling a halt on mini-bonds

The Financial Conduct Authority has announced a temporary ban on the promotion of most ‘mini-bonds’.  

Have you ever been tempted by those advertisements offering 8%+ yields on property-backed bonds?

If you have, then you’ve probably been looking at a promotion for ‘mini-bonds’. These investments are not always what they seem and have already resulted in losses for investors, notably in the case of the failure of London Capital Finance (LCF) at the start of 2019.

There is no legal definition of what constitutes a ‘mini-bond’, but generally it is a fixed term bond that cannot be traded on the stock market and is typically issued by a small, unquoted company. As securities, rather than deposits, mini-bonds are not covered by the £85,000 depositor protection given by Financial Services Compensation Scheme (FSCS).

At the end of November 2019, the Financial Conduct Authority (FCA) announced that it would be banning the promotion of most new mini-bonds to all but high net worth and sophisticated investors from the start of 2020. Many thought the FCA’s move was overdue, as there have been other failures since LCF.

A lesson from the whole sad mini-bond saga is that unadvised investors can end up taking risks which are not sufficiently explained and/or which they do not fully understand. Many of the mini-bonds appeared to have some form of property backing, but the existence of a reference to bricks and mortar is no guarantee of capital security. Investors should be particularly wary if the property involved is a speculative development.

The high interest rates on offer ought to be a warning of potential dangers. At a time when bank base rates were under 1%, red lights should have been flashing at interest rates over 7% higher for ‘secured’ loans. Remembering the adage that “If it looks too good to be true, it probably is”, could have saved some mini-bond investors five-figure losses.

Next time you come across an investment that quotes returns well above normal market rates, think twice before going any further. And if you decide you are still interested, take independent financial advice before parting with your money. That way you are firmly within the FCA’s regulatory remit and associated compensation schemes.

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.

Higher state pension increases on the cards

Recently released economic data suggest a relatively large increase in the main state pensions for the next tax year, but it’s still inadequate for a happy retirement.

The new levels of state pension for the coming financial year (2020/21) are usually revealed in or alongside the Autumn Budget statement. But as 2019 has been a strange year – in particular with no Budget – there has been no official announcement yet on what state pensions will be from April 2020.

However, it is possible to work out fairly accurately what the new rates may be because the basis of increase is fixed.

New state pension, old basic state pension

These are both subject to the so-called ‘triple lock’, which means the annual increase is the greatest of:

  1. The annual increase in the CPI to September (1.7% in 2019);
  2. 2.5%; and
  3. The 3-month average earnings increase to July (3.99% in 2019).

In this instance average earnings are the clear winner. The precise (rounded) figures must await the Department for Work and Pensions’ formal announcement, but it looks like the new state pension (for anyone reaching state pension age (SPA) after 5 April 2016) will rise from £168.60 to £175.30 a week, while the basic state pension will rise from £129.20 to £134.35 a week.

Other state pensions (including SERPS and S2P)

The triple lock is limited to the new state pension and the basic state pension. Other state pension entitlements, such the old additional pension elements for those who reached SPA before 6 April 2016 will increase in line with the CPI, i.e. by 1.7%.

While the increases are to be welcomed, the new state pension is still far from being enough for a comfortable retirement. At just over £9,100 a year from April, it will be more than £3,300 less than the income tax personal allowance in 2020/21. The current national living wage for a 35-hour week works out as more than 60% higher.  

If you want a retirement that you can enjoy, you need to make sure you have adequate private pension provision on top of what the state provides.

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.