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Holding back the years: the new State Pension Age dilemma

The government has nearly finished its review of the next stage of State Pension Age (SPA) increases. But changes to life expectancy figures pose a significant, and potentially expensive, dilemma.

A review of State Pension ages from the Department for Work and Pensions (DWP) back in March 2017 stirred initial controversy. The report by John Cridland proposed that the move to an SPA of 68 should be phased in between 2037 and 2039. That was seven years earlier than had been legislated for in the Pensions Act 2007.

Cridland’s idea was a political hot potato, not least because there was then – as there still is now – considerable controversy about the acceleration of women’s SPA to 65 by November 2018 and to 66 less than two years later. In the month after Cridland’s report, Theresa May called a general election for early June. Unsurprisingly, in May 2017, the DWP announced that no decision would be made on fresh changes to the SPA until after a new government was formed. Fast forward two months and that newly installed government revealed it would accept Cridland’s recommendations but would not legislate them until after a further SPA review had been carried out.

It has taken until now for that process to come to fruition. Shortly before last Christmas, the DWP kicked off the promised SPA review by commissioning two independent reports. The government looks as if it will once again find itself in an awkward position. Cridland’s report was based on Office for National Statistics (ONS) data that said that a man aged 68 in 2039 could expect to live for 21.3 years and a woman for 23.2 years. However, in January 2022, when the ONS published its latest projections, the corresponding figures were 18.8 years and 20.8 years. The decline of about two and a half years has nothing to do with Covid-19, rather it reflects that life expectancy has not improved as fast as was previously expected.

Using those latest ONS figures suggests that for a 68-year-old to have the same life expectancy in retirement as Cridland predicted, the SPA should move to 68 around 2069 – a 30-year postponement of the original proposal. From the Treasury’s viewpoint, that would mean 30 years of starting to pay pensions from 67 instead of 68. The cost would run into many billions.

To check your current SPA, go here.

To check your ONS life expectancy, go here.

To sort out your retirement plans, come to us.

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.

Crypto – investment or gamble?

Cryptocurrencies are regularly in the headlines and growing in popularity, but are they really investments?

Source: Investing.com

Cryptocurrencies, of which Bitcoin is the most famous (or notorious, depending on your viewpoint), are not currencies in any practical sense of the word. Think of the pound in your pocket:

  • It has the backing of a state-owned central bank;
  • Its value is stable, give or take the longer-term impact of inflation; and
  • It can be easily used in any financial transaction as a method of payment.

According to the Financial Conduct Authority (FCA), in the UK, 2.3 million people own some form of cryptocurrency, with an average holding of about £300 – meaning that cryptocurrencies account for about 0.1% of UK household wealth. Other research shows ownership to be concentrated largely among Generation Z – 45% of 18–29-year-olds have placed some money in cryptocurrencies and half of those have gone into debt doing so. However, 10% of cryptocurrency holders in the UK are over 55, with potential inheritance tax and legacy issues for their estates.

Many of these new investors may believe these virtual currencies are socially as well as personally beneficial. But with the huge amounts of energy required in cryptocurrency mining just one area of controversy, they may not be simply a benign option for those seeking to sidestep traditional investing.

HMRC has recently entered the fray, seeking to contact holders of crypto assets to remind them that they would owe tax on any profit from disposal of cryptocurrencies, whether from sale, exchange or where used for goods or services in the limited areas available.

Some cryptocurrencies called stablecoins, such as Tether, aim to have a fixed value (often linked, ironically, to a traditional currency). However, most cryptocurrencies have anything but a stable value, as none have central bank backing and it can be difficult or near impossible to buy anything with them.

Despite these factors the cryptocurrency market has grown at a breakneck pace: over the last five years to November 2021, its value has increased from USD $16 billion to USD $2,600 billion.

The FCA does not directly regulate cryptocurrencies. However, UK cryptocurrency businesses are required to register with the FCA and comply with money laundering rules. The regulator makes clear in its consumer guidance (see fca.org.uk/consumers/cryptoassets) that:

  • Cryptocurrencies are regarded as “very high risk, speculative investments”;
  • Purchasers are unlikely to be covered by the main investor protection schemes; and
  • If you choose cryptocurrencies, “you should be prepared to lose all your money”.

Scams, particularly using social media and involving offshore companies, are another high risk of the cryptocurrency market. One international scheme, the subject of an in-depth podcast investigation, operated in over 175 countries to the tune of $4 billion but turned out to be a complex scam with the founder still apparently unaccounted for.

As the Bitcoin graph shows, it is possible to make – and lose – large amounts in cryptocurrencies. With the development and growing popularity of app platforms making ‘trading’ and tracking more accessible and convenient, you may be tempted to join in. But be warned – other, less exotic, and better regulated investments could well be a wiser choice.

The value of your investment and any income from it 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.

Focus on tax year-end planning

With Christmas and New Year now behind us, tax year-end planning should now be on your radar.

The 2021/22 tax year will end on Tuesday 5 April. This year there is no Spring Budget and Easter arrives on 15 April, so no obstacles stand in the way of year-end tax planning. Nevertheless, the sooner you start the better, as some decisions cannot be made quickly. Among the areas to consider on this occasion are:

Pensions

Making pension contributions is one of the few ways that you can receive full income tax relief and reduce your taxable income. The second benefit matters in a world where your level of taxable income can determine whether you suffer the High Income Child Benefit tax charge or retain entitlement to a full personal allowance. The end of the tax year is a good time to assess how much you can contribute as you should have a good idea of your income for the year.

Inheritance tax

Now that we know the Chancellor does not have any plans for major reform of Inheritance Tax (IHT), there is a stable framework on which to plan. As ever, first on the list to consider is use of your annual exemptions, such as the £3,000 annual gifts exemption. With the nil rate bands currently frozen until April 2026, it is more important than ever not to let these go to waste.

Capital gains tax

As with IHT, the Chancellor has recently clarified his plans for Capital Gains Tax (CGT). The annual exemption, which currently allows you to realise CGT-free gains of up to £12,300 each tax year, will not be slashed, nor will the tax rates be raised to income tax levels. That has simplified the year-end planning process, as there is now no point in realising gains above your annual exemption in case there would be more tax to pay in the near future.

If you think your personal finances could benefit from year-end planning, do not wait until the last moment to seek advice. Calculations will often need data that can take time to collect, particularly on the pensions front.

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

The value of your investment can go down as well as up and you may not get back the full amount you invested.

Uncertainties removed on two key personal taxes

The future of two important personal taxes – inheritance and capital gains – has finally been clarified, simplifying aspects of year-end planning. The extended wait highlights the difficulty of changing useful revenue-raising measures in uncertain times.

Four years ago, in January 2018, when there seemed to be both appetite and scope for reformation of the tax system, the then Chancellor, Philip Hammond, asked the Office of Tax Simplification (OTS) to review inheritance tax (IHT). Of two reports submitted in November 2018 and July 2019, the second was the more interesting, making several proposals to reform and simplify the tax, including restructuring some of the current exemptions and scrapping the relief for lifetime gifts made within seven years of death.

Reaction to the reports’ recommendations were expected in the Autumn 2019 Budget. However, by the time November 2019 arrived, Sajid Javid was Chancellor and an imminent general election meant that the Budget was postponed to the following spring. When March 2020 arrived, along with Covid-19, Mr Javid had been replaced by Rishi Sunak and his first, Covid-focused Budget made no comment on the OTS’s proposals. Four months later, Mr Sunak asked the OTS to review another tax on capital – capital gains tax (CGT).

Once again, the OTS laboured away and produced two more reports, the first in November 2020 and the second in May 2021. This time it was the first report that was the more radical, suggesting that CGT rates should be aligned (i.e. increased) to income tax rates. The OTS also suggested a reduction to the annual exemption by around two thirds (currently £12,300). For those trying to plan their capital disposals, the possibility of such radical change and uncertainty around timing were, to say the least, unhelpful.

The Spring 2021 Budget passed by with no mention of reform of CGT and just one administrative tweak to IHT rules. Surely, the Autumn 2021 Budget would end the wait for a formal response to the OTS’s quartet of reports…

Yet, we had to wait several weeks after the Budget, until 30 November, when the Treasury had its Tax Administration and Maintenance Day. Among the raft of largely technical documents was a five-page letter to the OTS on its IHT and CGT reports. Replying on the IHT recommendations, the Treasury highlighted that “IHT still makes an important contribution to the public finances and it is forecast to raise £6 billion in 2021–22 to help fund public services.” Similarly, commenting on the proposals for reforming CGT: “…these reforms would involve a number of wider policy trade-offs and so careful thought must be given to the impact that they would have on taxpayers, as well as any additional administrative burden on HMRC.”

The reply was not quite “Thanks, but no thanks” – five administrative improvements to CGT were accepted – but the message was clear enough: no major changes would be made to either tax.

So with two swords of Damocles now removed, you now have no excuse to delay estate and CGT planning.

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

Lessons from rising inflation and interest rates

As 2021 drew to a close, inflation finally forced the Bank of England’s hand. What will higher rates mean for you?

Source: ONS.

The November inflation figures, released in mid-December, once again exceeded the Bank of England’s (BoE) expectations. At the start of November, the BoE had said that CPI inflation was “expected to peak at around 5% in April 2022”. Six weeks later it changed its tune: “Bank staff expect inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022”.

What does that mean to you?

  • The effects on your personal spending will fluctuate. Inflation is not constant across all goods and services. For example, November’s data showed that while overall inflation was 5.1% a year, in the health category prices rose only 1.4% across the 12 months, while for transport (for example those petrol prices and secondhand cars) the annual increase was 12.5%.
  • The buying power of your cash savings is depreciating fast. The Bank responded to the latest jump in inflation by raising Bank Rate from 0.1% to 0.25%. Viewed another way, over a year a deposit of £1,000 would earn £2.50 (before tax) in interest at Base Rate, while current inflation would erode its buying power by about £50.
  • Your next pay rise probably won’t cover the erosion of buying power. The Bank’s forecast of an April peak for inflation – primarily driven by the next Office of Gas and Electricity Markets (OFGEM) utility price cap rise – will coincide with the increase in National Insurance contributions announced last September. For example, if you earn £40,000 a year and, like many employees, your salary review takes effect in April, you will need a pay rise of 8.2% to maintain the buying power you had a year ago.
  • Your insurance cover will need a review. If you have life assurance and/or income protection that is not inflation-proofed, then you will need to increase the level of cover to maintain the real value of your protection. With buildings and contents insurance, that often happens automatically and goes unnoticed.
  • Any inheritance tax (IHT) liability on your estate has probably gone up. The current Chancellor has followed in the footsteps of his predecessors by freezing the IHT nil rate band. As inflation drives up asset values, such as your home, that could mean more of your estate is exposed to 40% tax.

The value of your investment and any income from it 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.

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

 

Escaping the higher minimum pension age

A surprise change of tack on pension ages was revealed when this year’s Finance Bill was published.

In February 2021, the government confirmed that it would go ahead with a two-year increase in the normal minimum pension age (NMPA) from 55 to 57 from April 2028. The NMPA is the earliest age at which you can start to draw benefits from a pension arrangement, unless you are covered by a limited range of exemptions.

The news coincided with the publication of a consultation document which by July had resulted in draft clauses for this year’s Finance Bill. One part of the draft that surprised some pension experts was that the proposed legislation allowed people with an actual or prospective right to retire between age 55 and 57 to transfer their pension to a new provider with their existing pension age safeguarded. However, the transfer had to occur by 5 April 2023. As many personal pensions set their minimum benefit age equal to the NMPA, there was a concern that the legislation would encourage buy-now-while-stocks-last pension transfers merely to lock in age 55.

The Finance Bill, published on 4 November 2021, closed off this option by limiting it to transfers made before that date. The move was a surprise – there was no hint of the change in the Budget – but it was nevertheless welcomed by many pension organisations. The Economic Secretary to the Treasury justified the lack of any notice by explaining that a prior warning “could have led to unnecessary turbulence in the pensions market”. Other longer-standing concessions on early retirement ages remain in force.

In practice, a pension age of 55 – still legally possible if you reach that age before 6 April 2028 – is only a viable option if you have a large pension pot and, preferably, other sources of income. For example, at age 55 the current lifetime allowance of £1,073,100 would buy an inflation-proofed pension of under £1,500 a month (before tax). A level pension would be much higher – about £3,500 a month – but could you live for 30 years or more with no pension increases?

The value of your investment and any income from it 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.

The global dividend recovery

Research shows that in Q3 2021, dividend payments increased sharply in all major markets and are expected to return to pre-pandemic levels before the year’s end.

Sources: Janus Henderson, Link Group.

In 2020, global dividends fell by 11.9% year-on-year in USD terms according to an index calculated by the investment manager Janus Henderson. In the UK, dividends suffered a much greater drop, with a decline of 42.9% recorded by Link Group, a leading corporate services provider. The UK’s significant underperformance had much to do with the Bank of England forcing UK banks to suspend dividend payments.

Both Janus Henderson and Link Group recently published their latest dividend reports covering the third quarter of 2021. The gloom that pervaded 2020 had disappeared:

  • On a global basis, overall dividend payments jumped a record 22.0% year-on-year to an all-time high for the third quarter of the year.
  • In the UK, total dividend payments were 89.2% higher than in the same period of 2020.

Both sets of figures were helped by a boom in dividends from mining companies, which accounted for two thirds of the increase in global dividends according to Janus Henderson’s calculations. The biggest global dividend payer in the third quarter – and likely for the whole of 2021 – is BHP, an Australian miner whose shares are currently listed in both London and Sydney.

In the UK, miners took the top three positions in the dividend payers’ league for Q3 2021. Five mining companies paid special (one-off) dividends totalling £4.3 billion, about £1 in £8 of all dividend payments over the quarter. The result was that the concentration of dividend payments among a small number of companies in the UK grew significantly – just five companies (including that trio of miners) accounted for over half of Q3 dividends.

On a global basis, Janus Henderson expects dividends to surpass their pre-pandemic peak by the end of the year, a rapid recovery from their low point in March. While Link Group estimate that 2021 UK dividends will be 45% higher than 2020’s, that would still be 17.4% below the level of 2019.

If you are looking for income, these latest sets of dividend data are a reminder of the power of companies to generate income for their investors.

The value of your investment and any income from it 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.

The pension annual allowance trap

Latest HMRC figures show that the annual allowance continues to help fill its depleted coffers.

The annual allowance is an important number in the pension world. It sets the maximum tax-efficient amount of total contributions in a tax year – from any source – that can be made to pension schemes for your benefit. If the allowance is exceeded, then any tax relief you receive on the excess is effectively clawed back by the annual allowance charge. However, the tax status of the benefits bought with the unrelieved contributions remains unchanged, meaning potentially that 75% is taxable when withdrawn.

Until 2011, the annual allowance was set at a level that made it a somewhat academic topic – in 2010/11 it stood at £255,000. Then, in 2011/12, it was reduced to £50,000 – a cut of about 80%. The Chancellor’s aim was to lower the cost of tax relief at a time when the top rate of income tax was 50%. Three years later, from 2014/15, there was another reduction, this time to £40,000. In 2016/17 the axe fell for a third time, but on this occasion, it was more a salami-slicing than a chop. The main allowance remained at £40,000, but it became subject to a taper that could bring it down to as little as £10,000 for high-income earners.

The effects of these changes are visible in the graph. In 2010/11, only 140 people reported a liability for the annual allowance charge on their tax returns. That jumped to 5,570 the following year and 18,870 in 2016/17. At last count – three tax years ago – over 34,000 people were caught with total excess contributions of £817 million. The vast bulk of that excess would have been taxed at 40% or 45%, netting perhaps £350 million for the Treasury.

The Chancellor was forced to relax the rules for tapering in the 2020 Budget because potential tax bills were prompting NHS consultants and other senior public sector staff to take early retirement or limit their working hours. While the change should have reduced those paying the annual allowance charge in 2020/21, the problems it causes have not disappeared. That means you should always take advice on contribution levels, particularly if you are lucky enough to still be a member of a final salary pension scheme.

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

Placing a cost on retirement

How much income do you need for a comfortable retirement? New research has put a post-pandemic price on the answer.

One traditional way to answer the question of how much income you will need in retirement is to fix the amount as a percentage of pay. For example, when final salary pension schemes were more common, their target was often around two thirds of earnings. While this approach produces an easy to calculate number, it is arbitrary. For low earners it may produce too low a number, while at the opposite end of the scale the result may be too high.

An alternative is to focus on retirement living standards, an option that has been supported in the UK by the Pension and Lifetime Savings Association (PLSA) and is mirrored by approaches used in other countries. The PLSA sets three levels of post-pandemic retirement:

MINIMUM MODERATE COMFORTABLE
What standard of living could you have? Covers all your needs, with some left over for fun. More financial security and flexibility. More financial freedom and some luxuries.
House DIY maintenance and decorating one room a year. Some help with maintenance and decorating each year. Replace kitchen and bathroom every 10/15 years.
Food and drink A £41 weekly food shop. A £47 weekly food shop. A £59 weekly food shop.
Transport No car. 3-year-old car replaced every 10 years. 2-year-old car replaced every 5 years.
Holidays and leisure One week in the UK and a long weekend in the UK every year. 2 weeks in Europe and a long weekend in the UK every year. 3 weeks in Europe every year.
Clothing and personal £410 for clothing and footwear each year. £730 for clothing and footwear each year. £1,200 for clothing and footwear each year.
Helping others £10 for each birthday present. £30 for each birthday present. £50 for each birthday present.

Where would you want to be on those scales? It’s likely that most of us would veer towards ‘Comfortable’.

Now for the annual cost in terms of after-tax income:

MINIMUM MODERATE COMFORTABLE
  London Elsewhere London Elsewhere London Elsewhere
Single £13,200 £10,900 £24,500 £20,800 £36,700 £33,600
Couple £21,100 £16,700 £36,200 £30,600 £51,500 £49,700

 

If the numbers surprise you, then it is probably time to start checking that your retirement funding will meet the standard of living that you want.

The value of your investment and the income from it 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.

The Autumn Budget – taxed and spent

After already increasing taxes by £42 billion a year in 2021, the main focus of Chancellor Rishi Sunak’s Autumn Budget was on spending.

The first Autumn Budget in three years – and Mr Sunak’s third in less than 20 months – featured no significant increases in tax. The task of raising extra revenue had already been dealt with earlier in the year, with a range of measures, including allowance freezes and increased corporation tax.

The Budget’s main highlights on the personal front were:

  • There were no changes to inheritance tax and only one technical administrative change to capital gains tax. Both capital taxes had been the subject of extensive reports from the Office for Tax Simplification, so the Chancellor may have abandoned ideas of reform for the short term.
  • A change to pension tax relief was announced, but not the one some had feared. It involved a potential increase in relief for low earners from 2024/25.
  • The increases to National Insurance Contributions and dividend tax, announced alongside the NHS/Social Care package in September, were confirmed and will start to take effect from April 2022.
  • The income tax personal allowance and higher rate threshold (outside Scotland) were left frozen, despite higher inflation effectively making the freeze a greater tax increase.
  • The main ISA contribution limit was frozen at the £20,000 level originally set in April 2017.
  • The increase to the new and old state pension will be in line with inflation to September 2021 (3.1%) rather than the Triple Lock, saving the Treasury (and costing current and future pensioners) over £5 billion a year.

Although the Chancellor said in his speech, “My goal is to reduce taxes”, this will not happen next year. It is not too early to start thinking how you might start cutting tax through year-end tax planning.

The value of your investment and any income from it 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.