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Category Archive Ongoing Reviews

Bymapfinancesadmin

ISAs

Anyone, who is an income tax payer and has some money to save or invest should know about Individual Savings Accounts (ISAs). ISAs are wrappers within which a wide range of savings and investment products can be held, free of UK income and capital gains tax by anyone aged 18 or over (16 or over for cash ISAs).

ISAs serve as a ‘wrapper’ to fully protect savings from tax, allowing individuals to invest monies up to maximum limits (by way of regular or single amounts) each tax year in a range of savings and investments and pay no personal tax at all on the income and/or profits received. The main ISA benefits are:

  • No personal tax (income or capital gains) on any investments held within an ISA;
  • Income and gains from ISAs do not need to be included in tax returns; and
  • Money can be withdrawn from an ISA at any time without losing the tax breaks.

There are five types of ISA:

  • Stocks & Shares – in the form of either individual shares or bonds, or pooled investments such as open-ended investment funds, investment trusts or life assurance investments;
  • Cash – usually containing a bank or building society savings account;
  • Innovative Finance (IF-ISA) – in the form of loans made through peer-to-peer (P2P) platforms;
  • Lifetime (LISA) – for those aged between 18 and 40 designed to help them save up for their first home or retirement; and
  • Help to Buy – aimed at helping first-time buyers save for their mortgage deposit.

All of your annual allowance can be invested in either stocks & shares, cash, innovative finance ISAs or lifetime ISAs, or you can split it between more than one type, up to the overall annual limit of £20,000 with either the same or a different provider. However, the maximum annual amount you can save in a lifetime ISA is £4,000.

You are also able to transfer money saved in previous years’ cash ISA holdings to stocks & shares ISAs and vice versa without affecting your current year’s annual allowance. Innovative Finance ISAs cannot be transferred to other ISA wrappers, however it is possible to transfer existing ISA funds into IF-ISAs.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Pension Drawdown

Pension drawdown is the process of taking money out of your pension, i.e. drawing down from it, without purchasing an annuity. A pension should really only be used in a person’s retirement, but they are accessible from age 55 onwards, so can provide an emergency fund of sorts if required.

There are many reasons why someone would go into drawdown:

  • Deferring an annuity purchase, thus avoiding being locked into low annuity rates which may apply at the time of retirement;
  • Enabling the policy holder to buy an annuity when it best suits them and hopefully when annuity rates are more favourable or provides an opportunity to avoid purchasing an annuity altogether where appropriate;
  • Enabling investors to retain control over their pension investments and allows them to continue to be invested in the markets, and hopefully make gains on their existing money; and
  • Allowing income to be varied within allowable limits thus giving valuable flexibility, which is useful for tax planning or where other income may have changed.

There are two different types of drawdown contract you can own – capped drawdown and flexi-access drawdown.

Capped drawdown allows you to withdraw income, within limits, from your pension fund without purchasing a lifetime annuity. This was the traditional method of drawdown but has been superceded by flexi-access drawdown. No new capped drawdown arrangements can now be created, however it is still possible to transfer from one capped arrangement to another and, in some cases, for additional pension funds to be added to the capped drawdown plan.

The maximum amount of income that can be drawn is 150% of a comparable lifetime annuity based on tables published by the Government Actuary’s Department. It is not however necessary for any income to be taken. Any amount of income from zero income through to the 150% maximum can be selected. The plan and maximum income will be reviewed every three years up to the anniversary of entering drawdown until the 75th birthday and annually thereafter.

Flexi-access drawdown is very similar to capped drawdown but does not have as many limits with regards the income which can be withdrawn from your pension fund; it is flexible with regards the money which can be taken out.

For flexi-access drawdown, you can choose how much income you want to withdraw without reference to any rates or limits other than the size of your pension fund. If you or your spouse is relatively young, a secured pension (lifetime annuity or scheme pension) would be less attractive due to the lower mortality factor and, in addition, there is a longer timescale to take advantage of the potential investment rewards and risks of a drawdown pension. However, the levels of income provided may not be sustainable, so in other words, your pension fund may run out.

Irrespective of what drawdown contract you have, taking withdrawals may erode the capital value of the fund, especially if investment returns are poor and a high level of income is being taken. This could result in a lower income if/when an annuity is eventually purchased, or no fund at all if fully withdrawn.

Most drawdown contracts allow for the first 25% of a withdrawal to be taken tax-free; everything thereafter is fully taxable at source.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Defined Benefit Pension Transfers

A Defined Benefit (DB) pension, otherwise known as a final salary scheme, is a type of workplace pension scheme in which an employer promises a specified pension payment, lump sum (or a combination of both) on retirement.

The benefits payable are predetermined using a number of factors, typically including an employee’s earnings history, tenure of service and age, as opposed to relying directly on individual returns. A typical DB pension scheme usually continues to pay a pension to a spouse, civil partner or dependents (for a restricted period) when the member dies.

There are advantages and disadvantages to DB schemes, and in most cases, the advantages far outweigh the disadvantages.

Advantages:

  • Your pension lasts as long as you do so there is no risk of you having no pension income.
  • Although each scheme varies, there will be something for your surviving spouse/civil partner/dependants. Typically a survivor’s pension is half of your pension income and will be paid for the duration of your spouse’s/civil partners lifetime. However, a dependants pension may only be paid for a limited period, i.e. until they reach the age of 23.
  • Some protection against inflation is provided to help you maintain your spending power.
  • Your pension does not rely on the ‘rise and fall’ of the stock market, thus making it much more secure than a personal pension.

Disadvantages:

  • The death benefits of a DB scheme are extremely rigid – if you are not married and have no financially dependent children, your fund may die with you.
  • If you are concerned with your life expectancy, your DB pension scheme may offer you a poor total capital return.
  • It is not possible to vary the level of income you receive from the scheme, thus making it largely inflexible.
  • If your employer becomes insolvent, there may not be enough assets in the pension scheme to pay your pension, although The Pension Protection Fund (PPF) may provide compensation.

Our regulator, the Financial Conduct Authority (FCA), is clear that we should start by assuming that any transfer of a DB pension into a personal pension would most likely not be suitable. Also, you cannot transfer from a DB pension scheme if you are already taking your pension. There are also some types of DB pension schemes where transfers are not possible, for example, public sector schemes for teachers, nurses and civil servants.

If your pension savings are worth £30k or more, you will be required to seek financial advice before even considering transferring a DB pension. If you leave your DB pension scheme, the benefits you’ve built up still belong to you and they can remain there until you retire or you can transfer them to a different type of pension scheme.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Small Self-Administered Schemes

A Small Self-Administered Scheme (SSAS) is an occupational pension scheme which is subject to the normal rules and regulations for registered pension schemes, but offers greater flexibility and freedom of choice over the types of investment it can make.
There are also generous tax concessions afforded to a SSAS which are advantageous to both a company and its directors. These can be used to develop a highly effective and coordinated approach to minimising corporate and personal taxation.

SSASs are generally set up to provide retirement benefits for a small number of a company’s directors and/or senior or key staff. They can be open to all employees and their family members, even if they don’t work for the employer. The number of members is generally limited to 12. Contributions may be made to the SSAS by the members and/or the employer. Each receives tax relief on contributions made, subject to certain conditions.

Most types of conventional investments are freely permitted including quoted stocks and shares, unit trusts, insurance policies, commercial property and employer related investments or loans, but there are some restrictions designed solely to prevent abuse.

Any SSAS holding prohibited assets directly or indirectly will have all tax advantages removed which will broadly mean that it is at least no more advantageous to hold such assets in a pension scheme than it is to hold them personally. Prohibited assets include direct or indirect investment in residential property and certain other assets such as fine wines, classic cars and art & antiques.

The trustees of a SSAS may make loans to the employer, but not the members.

To be eligible to invest in a SSAS and receive tax relief on personal contributions, an individual investor must be under 75 years of age, and resident in the UK (there are some exemptions for individuals who work for the UK Government or have left the UK in the last few years).

Contributions can also be made by your employer or a third party e.g. parent or spouse. The minimum contribution will vary between providers but is usually around £20 per month, and these can be stopped and started at any time.

Given the many tax advantages that are available with regard to funding a personal pension there are limits to the tax-relievable contributions that can be paid. Individuals are able to make contributions of up to the greater of £3,600 or 100% of their annual earnings to all of their pensions each tax year and receive tax relief on them.

There is also an annual limit on the total amount of pension contributions that each person can make without incurring a tax charge (this includes employer and employee contributions). This is called the annual allowance. Where the total employer and/or employee contribution exceeds the annual allowance a tax charge will apply.

It may also be possible for contributions in excess of the Annual Allowance to be paid in some circumstances under the rules which allow unused Annual Allowance from the three previous tax years to be brought forward and added to the current year’s Annual Allowance.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Group Pensions

Group Personal Pension Plans (GPP) or Group Stakeholder Plans (GSHP) are a relatively straightforward method of providing employees with a pension arrangement. As they are not classed as occupational schemes, they are not subject to the more onerous rules and regulations applicable to such schemes. Instead, they are made up of a series of individual personal pension policies, with each employee having their own policy.

Group pensions are money purchase schemes allowing both the employer and employee to contribute. On leaving the employment, the accrued pension will cease to be part of the scheme and will be an individual plan the employee can continue funding to if they wish.

An employer can make contributions into a regulated pension scheme without limit subject to the wholly and exclusively accounting rules. To be eligible to make contributions and receive tax relief on personal contributions, employees must be under 75 years of age and be resident in the UK (there are some exemptions for individuals who work for the UK Government or have left the UK in the last few years).

The minimum contribution will vary between providers but is usually around £20 per month, and they can be stopped or started at any time. Given the many tax advantages that are available with regard to funding a personal pension, there are limits to the tax-relievable contributions that can be paid. Individuals are able to make contributions of up to the greater of £3,600 or 100% of their annual earnings to all of their pensions each tax year and receive tax relief on them.

There is also an annual limit, the Annual Allowance, on the total amount of pension contributions that each person can make without incurring a tax charge (this includes employer and employee contributions). Where the total employer and/or employee contribution exceeds the Annual Allowance a tax charge will apply, this will be added to the individual’s taxable income to determine their tax liability. Alternatively, the scheme may agree to pay the charge from the pension benefits if it is over £2,000.

For the 2019/20 tax year, the Annual Allowance is £40,000. It may also be possible for contributions in excess of the Annual Allowance to be paid in some circumstances under the rules which allow unused Annual Allowance from the three previous tax years to be brought forward and added to the current year’s Annual Allowance.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Self-Invested Personal Pensions

Self-Invested Personal Pensions (SIPPs) are subject to the normal rules and regulations for registered pension schemes, but offer the freedom of choice over investment management, whilst keeping the administration in one place.

This means you are able to change the investment manager when you wish, without incurring the expense of changing the provider of the administration. Additionally, you can achieve greater flexibility in the benefits you can take during retirement without necessarily having to transfer your funds again.

You can elect to purchase an annuity or follow the route of phased retirement and/or drawdown pension. There is now no upper age limit at which benefits must be taken.

SIPPs are money purchase schemes with contributions receiving tax relief. An employer may contribute to an individual’s SIPP but this is not obligatory (unless being used to meet auto enrolment obligations). SIPPs can move with individuals when they change jobs, as they are personal to them.

You are free to give direct investment instructions, or more typically, indirectly via an appointed investment manager or adviser. Most types of conventional investments are freely permitted including quoted stocks and shares, unit trusts, insurance policies and commercial property but there are some restrictions designed solely to prevent abuse.

Any SIPP holding prohibited assets directly or indirectly will have all tax advantages removed which will broadly mean that it is at least no more advantageous to hold such assets in a pension scheme than it is to hold them personally. Prohibited assets include direct or indirect investment in residential property and certain other assets such as fine wines, classic cars and art & antiques. SIPPs can also be used to purchase commercial property, albeit this can involve considerable costs.

To be eligible to invest in a PPP and receive tax relief on personal contributions, an individual investor must be under 75 years of age, and resident in the UK (there are some exemptions for individuals who work for the UK Government or have left the UK in the last few years). Contributions can also be made by your employer or a third party e.g. parent or spouse.

The minimum contribution will vary between providers but is usually around £20 per month, and they can be stopped or started at any time. Given the many tax advantages that are available with regard to funding a personal pension there are limits to the tax-relievable contributions that can be paid. Individuals are able to make contributions of up to the greater of £3,600 or 100% of their annual earnings to all of their pensions each tax year and receive tax relief on them.

There is an annual limit on the total amount of pension contributions that each person can make without incurring a tax charge (this includes employer and employee contributions). This is called the Annual Allowance. Where the total employer and/or individual contribution exceeds the Annual Allowance a tax charge will apply. Depending on your taxable income the excess pension savings can be charged to tax in whole or in part at 45%, 40% or 20%.

It may be possible for contributions in excess of the Annual Allowance to be paid in some circumstances under the rules which allow unused Annual Allowance from the three previous tax years to be brought forward and added to the current year’s Annual Allowance.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Personal Pensions

Personal Pension Plans (PPP) have now been around since mid-1988. They were introduced by the UK government to enable the self-employed, and employees working for companies not operating a group pension scheme, to build up a pension fund for retirement.

PPPs are money purchase schemes with contributions receiving tax relief. An employer may contribute to an individual’s PPP. Such plans can move with individuals when they change jobs, as it is personal to them.

To be eligible to invest in a PPP and receive tax relief on personal contributions, an individual investor must be under 75 years of age, and resident in the UK (there are some exemptions for individuals who work for the UK Government or have left the UK in the last few years).

Contributions can also be made by your employer or a third party e.g. parent or spouse. The minimum contribution will vary between providers but is usually around £20 per month and they can be stopped and started at any time.

Given the many tax advantages available with regard to funding a personal pension, there are limits to the tax-relievable contributions that can be paid. Individuals are able to make contributions of up to the greater of £3,600 or 100% of their annual earnings to all of their pensions each tax year and receive tax relief on them.

There is an annual limit on the total amount of pension contributions that each person can make without incurring a tax charge (this includes employer and employee contributions). This is called the Annual Allowance. Where the total employer and/or individual contribution exceeds the Annual Allowance, a tax charge will apply.

The rate of tax will be determined by your taxable income in the tax year. It may be possible for contributions in excess of the Annual Allowance to be paid in some circumstances under the rules which allow unused Annual Allowance from the three previous tax years to be brought forward and added to the current year’s Annual Allowance.

Past performance is not a reliable indicator of future results

Bymapfinancesadmin

Why Accountants should do Tax Planning

As an accountant myself, I know that many accountants don’t want to stray into the financial advice market in case it goes wrong. It doesn’t need to be as black and white as that though.

When doing clients’ accounts and tax returns, it is easy enough for an accountant to recommend that someone see an Independent Financial Adviser (IFA) and potentially concentrate on pensions. You may have noticed when doing their accounts, that their tax bill has increased, and just about the only way to reduce that is contributions into pensions. This means you are at least helping your clients whilst not actually giving advice. They get the best of both worlds and is something that you won’t be held accountable for, but may get an income yourself from.

Accountants today should only recommend independent advisers, and that’s what MAP are. Moreover, the way we do our investing process keeps it that way, because we don’t outsource our investment process. What we invariably do for each client is invest in a spread of 10 investment funds through an investment platform, and then monitor those funds quarterly thereafter to ensure the client is always invested in funds on our approved Recommended Funds List.

In other words, we don’t let things drift, which is important when doing anything like this. Most people – even those that do their own investing – will treat investing as a one-off exercise, when in fact it needs to be a continuous exercise. MAP looks at all the funds that clients use every quarter, and if we are not happy with any fund, we will look to switch to others that we are happy with; so it is constant reviewing.

What could be better for your clients than using this kind of process, and your clients will love you for recommending this to them. They will then feel you are really looking after them with this kind of recommendation, and this will increase loyalty and client retention. Bear in mind we will also give you a percentage of the initial fee so that you can benefit from this as well as your client, and enable you to build an additional income stream for your business.

If you would like to find out more information or would like to start investing today, please contact Money Advice & Planning Ltd on 0345 241 1808 or e-mail us at enquiries@mapfinances.co.uk.

The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent professional advice for your own particular situation. Money Advice & Planning Ltd is authorised and regulated by the Financial Conduct Authority.

Bymapfinancesadmin

October 2018 Budget

I know that when it comes to Budget time, I sit very close to the radio and try to gather as much information on changes as I can. The last one on Monday 29th October 2018 was no different.

What you should not do however is merely listen to it to see how it affects you today, and nothing else. You need to sit back after the event and decide what planning you need to do as a result.

What I will be looking at for clients is:

  • Where clients are withdrawing money from their pension and merely using up their allowances, then from April 2019, the basic allowance we all get changes from £11,850 to £12,500. This is a change from £987.50 per month to £1,041.67 per month, so why not take advantage of this. After all, it’s tax-free money.
  • The other big change in income tax is that the basic rate band which started at £46,350 is now pushed up to £50,000, and for those liable, this is a saving of £730 per year. So, before this change you would get £3,862.50 per month taxed at 20% before you were moved onto 40%, and now this is changing to £4,166.67 a month. That allows you another £304.17 taxed at 20% that previously was taxed at 40%.
  • National Insurance thresholds, which wasn’t really covered in the budget, will also rise as well.

We need to remember these rates will apply to the bulk of the UK but not to those who live in Scotland, as the Scottish Government have still to declare how much they intend to deviate from the UK Government. Once we have the rates from the Scottish Government, then we all need to sit down and see how much more we can get out of the system without tax, or before we get to 40%. Thereafter, it’s time to sit back and see what tweaks you can make to your own situation, to squeeze the maximum benefit out of the system.

One thing mentioned in the Budget was that pension cold calling will be made illegal from this Autumn, so if you are contacted by anyone asking you to move your pension, take down their details and we can inform the regulator about this, as this should not be happening.

Finally, the annual ISA allowance is staying at £20,000 per year, so no change. If you can afford a wee bit more into your ISA, as long as you don’t go over the £20,000 limit, this is worthwhile doing. Maybe even divert some of the tax savings above?

If you would like any advice or assistance in planning out how the budget has affected you, for good or for wose, contact Money Advice & Planning Ltd today on 0345 241 1808 or e-mail us at enquiries@mapfinances.co.uk.

The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent professional advice for your own particular situation. Money Advice & Planning Ltd is authorised and regulated by the Financial Conduct Authority.

Bymapfinancesadmin

How long will your pension last?

From April 2015 when the then Chancellor George Osborne changed the rules and brought in pension freedoms, people have suddenly switched from buying an annuity to flexible drawdowns, where they can take out what they want when they want.

Now the FCA doesn’t have a problem with this, but they do have a problem with education more than anything else. They reckon that people are just walking into a nightmare, as there could very well be a problem at some time in the future when they will run out of pension money.

What on earth do these people do then, apart from telling a tale of woe? Pensions, as the FCA see it, are for when you retire, and if you take out a lot of money before you retire, then you won’t have it later. You can only spend it once after all!

If you run out of pension money in retirement – what are you going to live off? The State pension is certainly not enough for a comfortable life-style. How long are you going to live? Have you taken into account housing costs? What about care costs?

What we attempt to do at MAP is create a simple spreadsheet that shows your pension fund through the years to come, taking into account modest growth and withdrawals. Based on this information, we give a best effort at telling you how many years it might last. We only ever use low rates of growth to be pessimistic – 3% for cautious investors, 5% for middle risk investors and 7% for high risk investors – and we tend to work on an average of 6% withdrawals per year. So if you are a cautious investor, you can expect your fund to go down by about 3% per year, and therefore we need to look at longevity.

What we do in these spreadsheets is put in an estimate based on the information we have of how many years we think you have left to make your pension last. Having this kind of information is priceless to our clients and helps them to plan things out a bit better than they were before.

So, if you need some help in planning your retirement, please ask us for a forecast tailored for you. If you would like to discuss any aspect of retirement planning with Money Advice & Planning Ltd, please contact us today on 0345 241 1808 or e-mail us at enquiries@mapfinances.co.uk.

The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent professional advice for your own particular situation. Money Advice & Planning Ltd is authorised and regulated by the Financial Conduct Authority.