State pension sees rise thanks to the triple lock

A 2.6% rise in the single tier state pension was announced in the 2018 Budget.

The increase to the single tier state pension, and its predecessor the basic state pension, will apply from next April. Other state pensions, such as the State Earnings Related Pensions Scheme (SERPS), will rise by 2.4%.

The higher increases for the two main pension benefits are the result of the ‘triple lock’, which requires the annual uplift to be greatest of:

  • CPI inflation (2.4% in September 2018);
  • Earnings inflation (2.6% for average weekly earnings to July 2018); and
  • 2.5%.

The increased payment – £4.30 a week for the single tier pension – is often presented as extra money for pensioners. However, it is doing little more than maintaining the state pension’s buying power against inflation.

Earnings and CPI inflation have been roughly in line with each other for some time, which can be linked to any discussion about the lack of real wage growth. Had September’s annual inflation figure come in at 2.6%, as expected by many pundits, it would once again have been the triple lock winner, albeit matched by earnings.

Triple lock guarantee

The triple lock is only guaranteed until the end of the current parliament (2022, at the latest) after which its future is in doubt. There have been many calls for the triple lock to be scrapped, including from the House of Commons Work & Pensions Select Committee.

The problem with the triple lock is its cost, which is greater than a pure link to earnings or a simple price inflation.

To see how expensive providing only inflation proofing is you can look at pension annuity rates. For a 65-year-old, an RPI-linked annuity costs approximately two thirds more than an annuity which does not increase over time. While annuities are not as popular these days, that 66% difference is a fair indicator of how much more it costs to build inflation protection into your retirement planning.

If you would like to discuss your retirement plans in light of these developments, please get in touch.

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


Inflation eating into the value of savings

Inflation still outpaces nearly all available deposit rates.

Source: ONS, Bank of England

At the end of September, the US bank, Goldman Sachs, launched a new online easy-access savings account in the UK under the name of Marcus. It has offered a similar account in its home territory since 2016, gaining over 1.5 million customers according to the bank’s second quarter results. In the UK, 50,000 Marcus accounts were opened in the first fortnight after its introduction.

Marcus gained heavy press coverage at launch, not least because the interest rate on offer was – and at the time of writing, still is – top of the instant access league tables. The headline rate is 1.5%, but that is not quite the whole story. The rate is actually a variable 1.35%, plus a 0.15% ‘bonus’ payable for the first 12 months. However, even the 1.35% would leave Marcus very close to the top of the league tables.

UK banking history is littered with new-name deposit accounts that were league-topping at launch, only to disappear without trace a few years down the line, such as ING Direct or Cahoot. The strategy Goldman Sachs has adopted with Marcus in the US, however, has so far kept the account in a leading position: it is paying 1.95% against a national savings rate average of just 0.32%.

However, to paraphrase a common warning, past performance (in the States) is not necessarily a guide to the future (in the UK).

In the UK, Marcus’s 1.5% interest rate is still 0.9% below September’s CPI inflation figure of 2.4% or, if you prefer the old RPI measure, 1.8% short. Short-term interest rates, as measured by the Bank of England Base rate, have been below CPI inflation for much of the last 10 years. Even if you had an account consistently paying 0.75% above base rate (the dotted line), as Marcus is currently, your cash would still have lost buying power – and that is before considering any tax on interest.

There is no argument that Marcus is a competitive account, but it is perhaps not a long-term investment choice. If you would like to discuss your investment options, please get in touch.

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 risks of late estate planning

Imagine you are named as the executor and a beneficiary of your wife’s wealthy aunt. You learn that she is suffering from terminal cancer and has ‘a very impaired lifespan’. What do you do?

This is what happened in the case of Nader and others v Revenue & Customs. The executor/beneficiary, a Dr Nader, decided to consult a leading firm of accountants about inheritance tax (IHT) mitigation options for Miss Dickins (the aunt).

The accountants put forward an offshore trust-based scheme, provided by a third party, which would remove the IHT liability on £1,000,000 of Miss Dickins’ estate. The scheme was highly complex, involving multiple trusts and short-term loans. It cost a total of £100,000 in fees and its first stage was triggered on 6 December 2010, three weeks before Miss Dickins’ death.

Dr Nader received grant of probate on 4 July 2011 and a little over a month later the scheme was wound up, with IHT-free payments being made to Miss Dickins’ beneficiaries. However, subsequently HMRC opened an enquiry into the IHT return and by February 2015 – a little over four years after Miss Dickins’ demise – tax demands were issued to the beneficiaries.

Wind forward another three years and at a First Tier Tribunal (Tax), Dr Nader, together with his fellow beneficiaries, made an appeal against the tax bills they were facing. In a 51-page judgement, the Tribunal dismissed the scheme as ineffective, and the beneficiaries were also left with the appeal legal costs on top of the bill for IHT plus outstanding interest.

The case is a reminder of the risks, costs and protracted timescales that can be involved in deathbed estate planning.

There are many ways to mitigate the impact of IHT, but the sooner planning starts, the better. It is all too easy to defer such planning – as with writing a will – but delays can carry a high price.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax or trust advice, will writing and some forms of estate planning.


Unmarried couples lack the rights of married couples

Two recent events have shone different lights on the government’s view of unmarried couples.

Marriage Rates in England and Wales

As the graph shows, marriage has been drifting out of fashion for close to 50 years. There are now over 3.3 million unmarried couples in the UK, of which nearly half have children.

In spite of this major social change, governments have largely maintained sharp legislative distinctions between the married and unmarried. When they have conflated the two, it is usually to swell the Exchequer’s coffers, for example when applying the high income child benefit charge to unmarried couples with children.

This approach is starting to be challenged in the courts:

  • In October, the Prime Minister announced at the Conservative Party conference that civil partnerships legislation would be extended to cover heterosexual couples. The announcement came after a June ruling from the Supreme Court that limiting Civil Partnerships only to same sex couples was in breach of the European Convention on Human Rights (ECHR).
  • In a judicial review case in August, the Supreme Court found the government was wrong to deny an unmarried mother her claim for widowed parent’s allowance, again referring to the EHCR in the decision. The Department for Work and Pension’s response was that the judgement did not affect the eligibility regime for bereavement benefits, which replaced the widowed parent’s allowance for new claimants in April 2017.

If you are one of the 3.3 million unmarried couples, these decisions serve as a reminder that your status is very different from that of a married couple. Given the DWP’s stance, you could need more life and health protection than if you were married.

You will also potentially require a different approach to estate planning, as transfers on death to your partner, such as your interest in the family home, will not benefit from the inter-spouse inheritance tax exemption.

If you would like advice on how to plan for your family, please get in touch.

The Financial Conduct Authority does not regulate tax or trust advice and some forms of estate planning.


The Budget: an end to austerity?

The 2018 Budget – delivered on a Monday for the first time since 1962 – produced a number of surprises, not least some high-profile ‘giveaways’.

Announcements in the Budget included:

  • A £650 increase in the personal allowance to £12,500 for 2019/20, the level originally pencilled in for 2020/21.
  • A £3,650 increase in the higher rate threshold to £50,000, again targeted for 2020/21.
  • A £25,000 increase in the pension lifetime allowance to £1,055,000 from April 2019.
  • A one-third reduction in business rates on smaller retail premises, starting from next April.
  • An increase in the annual investment allowance (AIA), from £200,000 to £1,000,000, from January.

However, Mr Hammond’s generosity was not all it appeared. For instance, the personal allowance and higher rate threshold will both be frozen in 2020/21, while the business rates reduction and higher AIA will only last for two years. The Chancellor also kept many tax thresholds and allowances unchanged.

A good example of the impact of frozen thresholds is the personal allowance that will continue to be tapered from an income level of £100,000. This threshold has applied since April 2010, and it creates high marginal rates for some taxpayers. Combined with the increase in the personal allowance, for income between the taper threshold of £100,000 and the starting point for additional rate tax of £150,000:

  • the first £25,000 will be taxed at up to 60% (61.5% in Scotland); and
  • the next £25,000 will be taxed at 40% (41% in Scotland).

By far the largest element of spending announced in the Budget was for the NHS. Investment is £7.35bn out of a total £15.09bn in 2019/20, rising to £27.61bn out of a total £30.56bn in 2023/24. With such large amounts to secure for the health service, the Chancellor has limited scope to reduce personal tax in the medium term.

If you would like to discuss the impact of the Budget on your finances, please get in touch.

Tax laws are subject to change.

The Financial Conduct Authority does not regulate tax advice.

More people working past 65

Do you fancy working once you have reached age 65? The trend of rising employment levels is not limited to working-age people, according to the latest employment statistics from the Office for National Statistics.

Source: ONS 11/9/2018

The data reveals a growing number of people are working beyond what is still often thought of as male pension age since the start of the millennium. From May to July 2018, 10.7% of the population aged 65 or over were in employment. Women aged 65 or over are less likely to be working, but the proportion who are has increased to 8.1% from 4.7% in July 2008.

In fact, 65 will be women’s state pension age (SPA) from November 2018, but only briefly. From December 2018 the next phase of SPA increases begins, reaching a SPA of 66 for both men and women by October 2020. These increases, with yet more rises by March 2028, make it almost certain the percentages will increase further.

Not everyone in work beyond age 65 is forced to do so for financial reasons. Some people enjoy work and there is a good case for saying a phased retirement is better than the traditional cliff edge approach.

Whichever camp you fall into, keeping your options open is important. Just because you currently think you will want to keep on working in your late 60s does not mean that your health, personal or economic circumstances will allow that to happen.

If you have not reviewed your retirement planning recently or just want to know when you will eventually see your state pension, you should check now. Late planning could lead to deferred retirement.

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 different view on tax reform

A leading think tank has proposed a radical shake up of the UK tax system.

The Institute for Public Policy Research (IPPR) is a centre-left think tank that has a long history of influencing Labour Party policy. So, its ideas on tax reform published in the final report of its ‘Commission on Economic Justice’ are of more than just academic interest.

Income tax and national insurance – The IPPR propose combining income tax and national insurance contributions (NICs) into a single tax, applicable to all income, including investment income. They would replace the current system of incremental tax bands with a gradually rising rate applied to all taxable income, capped at a maximum 50% marginal rate above £100,000. Their proposal would smooth out inconsistent marginal rates, as the graph shows.

Source: IPPR

Inheritance tax (IHT) The IPPR supports the recent proposals from the Resolution Foundation to abolish IHT. The IPPR would replace IHT with a lifetime gifts tax, payable by the recipient of a gift or legacy (other than a spouse or civil partner) – currently IHT is usually paid by the estate. Income tax rates would apply once a lifetime receipts allowance of £125,000 has been reached. According to the IPPR, this tax structure would raise much more than IHT, as it would largely remove the benefit of making gifts during lifetime.

Capital gains tax – The IPPR propose abolishing “most exemptions”, other than for the main residence. Capital gains would instead be taxed at income tax rates, implying a maximum marginal rate of 50% under their proposed income tax structure. Taxing capital gains as income is not a new idea – it was a practice previously introduced in the late 1980s, by the Conservative Chancellor, Nigel Lawson.

Corporation tax – Instead of cutting the corporation tax rate from 19% to 17% in 2020, the IPPR proposes increasing the rate to 24%, with business reliefs and allowances ‘simplified’ (i.e. cut back) to broaden the tax base. To tackle multinational tax avoidance (a practice associated with the FAANS companies, Facebook, Apple, Amazon, Netflix and Google), the IPPR proposes an alternative minimum corporation tax, pro-rating global profits to the proportion of global turnover in the UK.

These wide-reaching proposals are unlikely to be implemented exactly as the report proposes. But if we do see a Labour government, the IPPR could become more relevant, quite quickly.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.   

Trick or treat? The Chancellor calls the 2018 Budget for late October

The 2018 Budget has been set for Monday 29 October, setting a deadline for speculation and proposals. Mr Hammond, however, has indicated that he won’t end the long spell of austerity measures, despite improving public finances.

Proposals raised by think tanks and professional bodies include overhauls of income and inheritance tax, ‘pension tax relief simplification’, and scrapping entrepreneur’s relief to help fund NHS costs.

But every proposal is overshadowed by Brexit, and the uncertainty of what will happen on 29 March 2019.

What’s coming?

Alongside measures announced in the draft Finance Bill, the following areas could see change:

The NHS – The NHS Foundations’s ten-year plan may not be published in time for the Budget, so the Chancellor could be limited to general spending priorities. Mr Hammond said a digital services tax or ‘Google tax’ is coming – with or without European allies. This income could be dedicated to the NHS.

Inheritance tax (IHT) – The IHT review from the Office of Tax Simplification (OTS) may be published ahead of the Budget. It was tasked to look at making IHT less complex, focusing especially on trusts, administrative issues and business and agricultural property reliefs. Calls for a complete overhaul in favour of a ‘lifetime receipts’, ‘property’ or ‘wealth tax’ seem unlikely from a Conservative government.

Stamp duty – After introducing new reliefs for first-time buyers, focus has shifted to ‘last time’ buyers, with calls to incentivise older homeowners to downsize. The Prime Minister has also indicated that an additional 1-3% duty could be levied on foreign property buyers to help control rising house prices and tackle homelessness.

Business – Business rates are due to increase next year, with business groups calling for action. The Chancellor’s conference speech outlined changes to the apprenticeship levy to help build training and skills for SMEs, and appeared to boost commitment to the business sector.

The environment – We are likely to see a dedicated plastics packaging tax. Initial reports indicated the costs would be borne by manufacturers rather than consumers. However, we may also see an increase to the plastic bag levy from 5p to 10p and roll out to all shops, not just firms with over 250 employees.

In this most turbulent of times, facing pressure from many groups, perhaps the only clear thing is that Mr Hammond has an unusually tricky balancing act to pull off.

Record inheritance tax revenues ahead of simplification review

Record inheritance tax revenues ahead of simplification review

2017/18 produced record inheritance tax (IHT) receipts according to HMRC data published in July.

The latest release of the annual statistics revealed IHT produced £5.228 billion for the Exchequer in 2017/18, an increase of two thirds over just five years. As the graph shows, IHT revenue has been rising rapidly since Treasury receipts hit a low in 2009/10, owing to the impacts of the financial crisis and the introduction of the transferable nil rate band.

The Office for Budget Responsibility (OBR) expects the growth to continue, although the rate of increase will slow for the next few years because of the introduction from April 2017 of the residence nil rate band.

The Office of Tax Simplification (OTS) is currently undertaking a “general simplification review” of IHT. The OTS is focusing on the administrative aspects of IHT, but it is also looking at the “complexities arising from reliefs and their interaction with the wider tax framework”. With the OTS due to report ahead of the Autumn Budget, it is possible changes and/or pre-emptive legislation will be announced then.

It is unlikely reforms will lead to a reduction in the money raised by IHT. It may be the most unloved tax in the UK, but Mr Hammond has to find an extra £20.5 billion a year for the NHS by 2023 and IHT receipts are above £5 billion a year and rising. The politics of any cut would also be difficult to implement.

There is a case for reviewing your inheritance tax planning now, and possibly taking some action ahead of the Budget. Tax simplification can often bring to mind the words of ‘Big Yellow Taxi’ by Joni Mitchell: Don’t it always seem to go, That you don’t know what you’ve got ‘til it’s gone.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.


Slowing down our old age

A paper published in August by the Office for National Statistics (ONS) casts new light on life expectancies in the UK.

Life expectancy has been increasing in the UK for a long time, as the graph shows. In 1980, the average life expectancy at birth was 70.6 years for a man and 76.6 years for a woman. In 2016 this had increased to 79.2 years for a man and 82.9 years for a woman.

What the graph also reveals is that the rate of improvement in life expectancy has been slowing down. The ONS data shows a marked deceleration in the 21st century.

Between 2011 to 2016, women’s life expectancy at birth increased by 0.2 years compared with an increase of 1.2 years over the period from 2006 to 2011. For men, the corresponding increases were 0.4 years and 1.6 years. There was a similar effect for life expectancy at age 65, which rose by only 0.1 years for women and 0.3 years for men between 2011 and 2016, against 1 year and 1.1 years in the previous five years.

For the layman, this welter of data can be confusing, especially as the press coverage is not always well informed. A few important things to understand are:

The ONS life expectancy data imply that, on average, a man who was 65 years old in 2012 will live until 83.7, while a woman who was 65 years old in 2012 will survive until 86. The expected age at death also rises with age attained.

The data represents the entire UK, but past research has revealed significant differences between regions and even within the areas of single cities.

As well as regional variation, different sections of the population experience different mortality. For example, those with private pensions tend to live longer, probably because they are wealthier.

Crucially, the life expectancies are averages, so 50% of people will outlive the central figure. The spread around the widely-quoted average is significant and often overlooked. The ONS’s own ‘How long will my pension last’ website (which has not been updated with the new data yet) shows that a 65-year-old man has a one-in-four chance of living until 94, and a woman of the same age a one-in-four chance of living to 96.

The data suggests your retirement may not be quite as long as previously thought, but there is still a good chance you will be living into your 90s. If your pension planning does not reflect that, the sooner you review it, the better.

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.