Client Newsletter – May 2013
The Budget – Give and take
The Budget held few surprises on taxation, with many of the changes well flagged – not least by the Evening Standard. Chancellor of the Exchequer George Osborne finally fulfilled the coalition promise of a £10,000 personal tax allowance – for individuals born after 5 April 1948 the allowance will increase from £8,105 to £9,440 in 2013/14 and £10,000 in 2014/15. It will then increase in line with the consumer prices index.
However, a fiscally neutral budget saw the Chancellor take as well as give and the basic rate limit was reduced from £34,370 in 2012/13 to £32,010 in 2013/14 and £31,865 in 2014/15. Individuals will therefore start to pay 40% income tax at a progressively lower threshold. The highest rate of income tax will, however, still fall from 50% to 45% from 6 April 2013.
Changes to Isa limits had already been announced. There is an overall investment limit of £11,520 for 2013/14, up from £11,280, with a cash maximum of £5,760. For Junior ISAs the overall limit has risen from £3,600 to £3,720. Pension limit changes also held no surprises – the annual allowance reduces to £40,000 and the lifetime allowance to £1.25m from 2014/15. The inheritance tax nil rate band remains frozen at £325,000 until April 2018, three years longer than previously stated, to help fund the cap on care costs for older people.
The Government also plans to proceed with tax breaks on ‘employee shareholder’ employment status, announced last year. Individuals adopting this status are eligible to receive between £2,000 and £50,000 worth of capital gains tax exempt shares. There were also plans to reduce the income tax and National Insurance liabilities arising when employee shareholders receive shares, with the first £2,000worth tax free.
The Chancellor extended reinvestment relief for seed enterprise investment schemes, which were introduced in 2012 as an incentive for individuals to buy new shares in smaller companies. The venture capital trust (VCT) limits remained unchanged but Osborne was critical of some current buyback schemes, where investors can receive further tax relief on VCT investments rolled over after the qualifying period. There were also a range of measures introduced to target UK residential properties valued above £2m, held by ‘non natural persons’, including higher stamp duty land tax and capital gains tax rates.
Retirement Choices – A better deal
The Association of British Insurers (ABI) has introduced a new ‘Code of conduct on retirement choices’ to help individuals secure the best possible deal for their retirement income. Under the code, insurers now have to write to people approaching retirement to spell out their options. Insurers will have to explain the different ways that retirement income can be taken, including provision for dependants and the possibilities of an enhanced annuity and protection against inflation. Moreover, insurers are no longer allowed to include annuity application forms in their literature – a move designed to increase the likelihood individuals will shop around.
Some 400,000 people buy an annuity every year yet, according to the ABI, one in four do not believe they fully understand their retirement options, while one in three do not feel informed enough to compare quotes from another annuity provider. “Increasing life expectancy means that many people will be receiving a pension for longer than they were paying a mortgage,” commented the ABI. “The need to make the right decisions at retirement has never been more important.”
Determining what to do with your pension pot is an important decision that can affect the rest of your life. People are living longer – according to the 2011 Census, 16% of UK residents – a total of 9.2 million – were aged 65 or over. Retirement is taking up an ever larger chunk of our lives so you should consider all your options carefully – including taking advice – in order to make the right choice.
Investing – Little and often
In the world of investment, timing is everything. However, despite claims to the contrary, no one can second guess the market. There is a way round this though. By saving regularly, investors can benefit from what is called ‘pound cost averaging’. It mitigates the risk of buying all your investment at a single price and instead, means lots of smaller sums are invested at a variety of different prices. In a rising market, regular savings would underperform a lump sum as the later investments would miss out on the early growth. However, in a volatile or falling market, later investments would buy in at lower or alternating prices and thereby offer more growth as the market returns to higher levels.
Long term care plans
An overlooked peril of our ageing population is the rising cost of long term care. For those of us who want to help ourselves, there are two ways to plan: a prefunded insurance policy or an immediate care plan. A prefunded policy will pay your fees for you if and when you need it. However, such insurance can seem expensive and therefore the vast majority do not choose to cover themselves. Most people meet short term requirements out of income and saving. However, if you need help long term, payments for care can increase substantially and many may wonder how long their savings will last. An immediate care plan might at least help to top up what you can afford to meet the full bill
For many people, debt is a necessary part of everyday life – for example, few people are able to buy a home without a mortgage. If properly managed, debt can be a useful tool – but it is essential to remain in control.
You are unlikely to receive more interest on your savings than you will pay on your borrowings. It is generally prudent therefore to concentrate on paying down your debts before you focus on savings. Nevertheless, you should still aim to have a cash buffer you can access in an emergency – as a rule of thumb, enough to last you for three months.
Don’t ignore debt – it will not disappear. If you have debts on top of your mortgage, the most sensible strategy is to try to pay off any outstanding loans, using your savings if necessary. You should always clear your most expensive loans first, although you should check in case there are charges for early repayment.
Debt consolidation services allow you to combine all your loans into one. However, they are a relatively high risk strategy – their long term cost can be very high, and they are usually secured against your house, putting your home at risk if you do not manage to keep up with the loan repayments. If you are having problems, take expert advice from your financial adviser or a free debt advice agency, or talk to the Citizens Advice Bureau. Above all, make sure you are in control of your debt. Don’t allow your debt to control you.
Green shoots of recovery in the UK property market?
Since the financial crisis, banks and building societies have cut back on lending activity, reserving their loans for low risk borrowers with the ability to stump up a substantial deposit. However, mortgage lending gathered pace during 2012, boosted by a strong increase in first time buyers.
The Council of Mortgage Lenders (CML) reported a 12% annual increase in first time buyers during 2012 – the fastest annual increase since 2007. According to the organisation, first time buyers found mortgage finance became more accessible during 2012, despite having relatively small deposits at their disposal. One in 40 first time buyers was able to take out a 95% mortgage, compared with fewer than one in 100 a year earlier, while one fifth of first time buyers borrowed 90% or more.
The issue of raising a deposit continues to pose a significant problem for many potential first time buyers, however. A report from the Home Builders Federation found an average UK first time buyer has to save for a total of 10 years in order to put together enough money for a deposit, compared with just two and a half years in 2002.
House prices climbed by 3.3% during 2012 as a whole, according to the Office for National Statistics, although much of the rise was caused by a strong increase in property prices in London and the southeast of England, where prices rose by 6.4% and 3.7% respectively. Excluding London and the southeast, UK house prices rose by a rather more modest 1.9% during 2012.
Reaching your investment goals
Investors are generally either income seekers or growth seekers but, whatever your aims, it is important to set them out and understand your attitude to risk as these decisions will form the basis of the investments you make. There is a relationship between the amount of risk taken and the amount of potential return but, to ride out short term ups and downs, you need to take a long term view. So the decisions you make about a pension – which might have a 35 year lifespan – will be different to those of, say, an inheritance which you want to spend in less than five years. Put the latter in the wrong place and you risk losing a lot of what you have been given.
Planning for retirement
People in the UK are living longer than ever, but many individuals are failing to make effective plans for their retirement. According to a survey by LV=, for example, 6.5 million British over 50s now expect to work for six years beyond the official retirement age because they cannot afford to retire While such an idea might appear viable now, however, it could seem very different at the age of 65, when ill health, personal circumstances or lack of opportunity might prevent you extending your life in the workplace.
Meanwhile, according to Scottish Widows’ ‘Women & Pensions Report’, 43% of women will rely on joint savings with their partners in order to fund their retirement. Yet one in three UK marriages now end in divorce within 15 years and so it is important women take charge of their own retirement plans.
Pressure on household budgets can make it a challenge to find additional cash that can be earmarked for retirement. Nevertheless, it is worth reviewing your current expenditure to see how your lifestyle would be affected by retirement. Most of us have a finite number of years in which to put aside money for our old age and it is never too soon to start.
Above all, you need to plan early to allow as much time as possible to build your nest egg. Take control of your future – your financial adviser can help you to develop a suitable long term savings strategy for you. The only thing you cannot afford to do is nothing.
The value of the investment can go down as well as up and you may not get back as much as you put in.