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For anyone wishing for a quiet start to 2022 in the financial markets, they would have been sorely disappointed. 

Amongst other things, the markets have been hit by uncertainties surrounding a possible Russian invasion of Ukraine, and the ongoing inflationary pressures that are seen here and around the world. 

In the UK

Despite global equities struggling throughout the month, the UK was one of the strongest performers as the traditional sectors (energy, financials and industrials) rallied. During January, the FTSE 100 Index increased by 1.1%. 

The UK’s consumer price inflation shows no sign of falling away. In fact, in December the index rose from 5.1% to 5.4%. As I am sure you are aware, these inflationary pressures are fuelled by higher prices for energy and food. There seems to be no rest in sight, with energy bills set to increase further and talk of the index breaching the 7% mark in the spring. 

The International Monetary Fund (IMF) downgraded its forecast from 5% to 4.7% for UK economic growth in 2022. This was in large part due to the impact that they believe supply constraints and the inflationary pressures will have on households in the UK. Despite this, the UK’s forecast remains the highest amongst the G7 economies. During November, the UK economy grew by 0.9%, which actually meant it rose above pre-Covid levels for the first time. Of course, during December we saw the emergence of the Omicron variant and the Government’s Plan B measures, all of which I am sure will have an impact on December’s figures.

Globally

The IMF announced that global economic growth is expected to fall to 4.4% in 2022, from 5.9% in 2021. Much the same as the UK, they cite the disruption in supply chains, inflationary pressures caused by higher energy prices and ever-increasing wage demands. In regards to the US economy, they cut their forecast for 2022 from 5.2% to 4%. For China, the reduction in their forecast went down to 4.8% from the previous figure of 5.6%. 

As we have seen in the UK already, the Federal Reserve (Fed) in the US has strongly hinted at a tightening of monetary policy in the near future. This could see the Fed increase their key interest rate in the coming months.

The US saw their consumer prices index hit an annualised rate of 7% in December, which was the fastest growth seen since June 1982. The increase was largely fuelled by higher costs for food, housing and cars. During January, the Dow Jones Industrial Average Index saw a fall of 3.3%.

Closer to home, the eurozone ended 2021 with a 5.2% rise in their economy as a whole. However, it is not so different in Europe, where the growth rate was struggling towards the end of the year. Similar issues with increasing inflationary pressures, the impact of Omicron and supply chain issues all come to the fore. 

The rate of inflation in the eurozone increased to 5% during December, for the same reasons as with the UK, in large part due to the impact of energy costs. 

The European Central Bank (ECB) still sees the inflationary pressures as temporary and expects them to ease during the course of 2022. While, the German Dax Index fell by 2.6% during January. 

As we see the volatility in the investment markets, we fall back on our mantra for investment clients - to provide long-term growth in portfolios that match their appetite for investment risk. This means, that the short-term losses that may be being seen should be outweighed by the longer-term gains of the recommended portfolios. 

As always, if you would like to discuss any aspect of your financial affairs, please do contact us and we will be happy to help. 

Richard Brazier

 

 Richard Brazier

Director

E RichardBrazier@hanoverfm.co.uk

Who should you contact for more information?

Director Richard Brazier

Financial Adviser Amanda Beacon

Senior Consultant Graham Smithson

The 60% income tax trap*

It is widely believed that the highest income tax rate is currently 45%, paid only on an income in excess of £150,000. While this is true, some people may actually have an effective tax rate of 60& on part of their income.

 

Case study: salary increase over £100,000

Caroline has had a successful career as a shipping lawyer and has reached a salary of £100,000.  She was delighted to learn that she was being promoted to a salaried partner with a 10% increase in her pay. However, the issue is that for every £2 she earns over £100,000, she will lose £1 of her personal allowance (so once her salary reaches £125,000, she will have no personal allowance). The following table illustrates the impact this has on her net pay:

Before pay rise After pay rise
Salary range Tax rate Tax Salary range Tax rate Tax
£0 to £12,500 0% £0 £0 to £12,500 0% £0
£12,500 to £50,000 20% £7,500 £12,500 to £50,000 20% £7,500
£50,000 to £100,000 40% £20,000 £50,000 to £110,000 40% £24,000
Lost personal allowance of £5,000 40% £2,000
Total tax £27,500 Total tax £33,500

 

The table shows that although Caroline’s pay has increased by £10,000, her tax has increased by £6,000, which is an effective tax rate on this top element of her pay of 60%.  This is triggered by the 40% tax on the lost personal allowance.

As Caroline is now earning more than £100,000, HMRC will also require her to complete a tax return.

As a solution, Caroline can make an additional pension contribution. If her employer’s pension scheme is a group personal pension and Caroline pays a net pension contribution in the tax year of £8,000, then with the addition of basic rate tax relief, this will increase to a payment into her pension of £10,000. Her “adjusted net income” will reduce to £100,000, so she will get back her personal allowance, and her basic rate band will grow by the amount of the contribution. Therefore, we now has the following tax rates:

Salary range Tax rate Tax
£0 to £12,500 0% £0
£12,500 to £60,000 20% £9,500
£60,000 to £110,000 40% £20,000
Total tax £29,500

 

Caroline pays £4,000 less in tax, but also receives the £2,000 top-up to the pension contribution, so the overall effect is an additional payment into her pension of £10,000 and a saving in tax of £6,000  (a 60% tax relief).

If her employer’s pension scheme is a trust-based scheme, then the payment of pension contributions are generally deducted before the calculation of tax. Therefore, paying a £10,000 contribution in the tax year effectively puts her tax position back to how it  was before the pay rise.

Alternatively, Caroline may be able to use salary exchange to give up the pay rise, in return for the employer making the additional contributions into the pension scheme. The additional benefit of this approach is the additional saving of National Insurance contributions, which on a sacrifice of £10,000 would be an additional saving of £200.

 

Case study:  discretionary bonus payment

Patrick is a Managing Associate earning £95,000. He has had a very busy year working on some major clients of the firm, giving great client service and advice; so the firm decides to reward Patrick for his exceptional performance by paying a discretionary bonus of £15,000.

As a result, Patrick will now earn £110,000 in the tax year, and therefore faces the same issue as Caroline.

Before bonus After bonus
Salary range Tax Rate Tax Salary range Tax rate Tax
£0 to £12,500 0% £0 £0 to £12,500 0% £0
£12,500 to £50,000 20% £7,500 £12,500 to £50,000 20% £7,500
£50,000 to £95,000 40% £18,000 £50,000 to £110,000 40% £24,000
Lost personal allowance of £5,000 40% £2,000
Total tax £25,500 Total tax £33,500

 

The table shows that although the firm has paid Patrick a bonus of £15,000, he will pay an additional £8,000 in tax (an effective tax rate of 53.3%).

Again, a possible solution for this is for Patrick to make an additional pension contribution. This is achievable through a bonus sacrifice, and as the bonus is discretionary, this would simply need to be agreed at the time the bonus is being discussed.  If Patrick sacrificed £10,000 of his bonus, his pay would reduce to £100,000 and his tax will be as follows:

Salary range Tax rate Tax
£0 to £12,500 0% £0
£12,500 to £50,000 20% £7,500
£50,000 to £100,000 40% £20,000
Total tax £27,500

 

Consequently, Patrick has additional net income of £3,000, but in addition, an extra contribution in his pension account of £10,000 and a saving of £200 in National Insurance costs. Overall, a total value of £13,200 and effective tax rate of 12%.

These case studies illustrate how tax-efficient pension contributions could help you achieve more at this pay point in situations where the loss of personal allowance increases the effective tax rate.

 

For more information, don't hesitate to get in touch with a member of our team.

Robert Young Robert J Young  BSc FIA

E Robert.Young@hanover-group.com

 

*These examples are fictional, but the content is based on various, real client experiences.

Firstly, Happy New Year to you all. I hope that you managed to have an enjoyable and restful festive period.

 

The FTSE 100 index increased

To start this market review with some good news, over the course of December the FTSE 100 index increased by 4.6%, which saw it reach its highest level seen since February 2020. Looking at 2021 as a whole, the index finished the year 14.3% higher. To put this in perspective, this was the best performance over a calendar year since 2016. Of course, this is good news for those investments that we look after with a stocks and shares element. 

Having said this, at the start of December the news of the Omicron variant saw the markets wobble, with concern over how this may affect investments. At this time, there were fears over how contagious this variant was, and the governments across the UK brought in fresh restrictions. This caused a degree of concern on how this would affect the already struggling hospitality and leisure sectors.

 

The inflation and the consumer price index continued to rise in the UK

Inflation has continued to increase in the UK and the annualised rate of consumer price inflation rose to 5.1% in December, driven largely by continuing high costs for transport and energy. The Bank of England’s (BoE) Monetary Policy Committee somewhat surprisingly increased the base rate to 0.25% from its historical low of 0.10%, a move that was expected in November. The surprising element was not the increase, but the timing, as earlier in the month, the BoE had warned of the impact that the Omicron variant could have on the UK economy. It is widely expected to continue tightening its policy measures over 2022.

 

In the US...

Much like the UK, all the major global equity markets saw increases during 2021. The Dow Jones Industrial Average Index in the US closed December 5.4% higher, and saw an annual increase of 18.7% over the year.

Again, as was seen in the UK, inflation continued to surge in the US, led by energy and food prices rising. Their consumer price inflation rose to 6.8% during November, a rate not seen in the US since 1982. There is now expectation that the Federal Reserve will look to increase interest rates during 2022, with some policymakers forecasting anything up to four rises.

 

In the Eurozone...

The Eurozone was no different, as high energy prices affected the annualised consumer price inflation that rose to 4.9% in November. However, the European Central Bank continues to see the current inflationary pressures as a temporary issue, caused by the global pandemic. In Germany, the Dax Index went up by 5.2% during December, and closed 2021 15.8% higher.

We hope that 2022 sees an end to the restrictions when it is safe to do so, and we finally return to a sense of normality. As always, if you have any questions in regards to your current investment portfolio or any other financial planning matter, please do get in touch with us.

 

Richard Brazier

 

 Richard Brazier

Director

E RichardBrazier@hanoverfm.co.uk

Who should you contact for more information?

Director Richard Brazier

Financial Adviser Amanda Beacon

Senior Consultant Graham Smithson

This case study demonstrates how clients can use SSASs to save for their retirement in a flexible, tax-efficient manner, to compliment and assist their business operations.

 

Setting up the scheme

Keith and Mick own a successful manufacturing business. They operate out of a commercial building that they lease from an unconnected third party. Their landlord approaches them and offers first refusal on the purchase of the building.

Keith and Mick have various options opened to them to purchase the property:

  • They could purchase the property themselves, with their personal funds;
  • They could purchase the property through their company; or
  • They could use a pension fund to purchase the property.

The pension fund route is their preferred option due to tax savings. Keith and Mick consider setting up either (a) two SIPPs (Self-Invested Personal Pension) to purchase the property together or (b) an SSAS to purchase the property. They decide to set up an SSAS (Small Self-Administered Scheme) for the following reasons:

  • The complexity of owning the property over two SIPPs, with two associated borrowings, was pushing up the costs of operating the SIPPs;
  • They are keen on the option a SSAS has to make loans to the sponsoring employer of the scheme; and
  • They know they will act as trustees of the SSAS and will therefore retain more control over their retirement benefits when compared to the SIPP route.

Consequently, they set up an SSAS, with the help of an Independent Trustee to assist them with compliance with the relevant HMRC rules.

 

Purchasing property

Keith and Mick transfer their existing pension arrangements into the new SSAS. They also make sizeable employer contributions to the scheme, which qualify for tax relief within the company.  They are still short of the purchase price, so the trustees arrange bank borrowings to assist with the purchase.

The property is purchased and the trustees are now acting as the landlord, with the sponsoring employer the tenant. An arms-length commercial lease is put in place to define the terms on which the property is let to the company. However, the company are now paying rental income to their pension fund instead of to the unconnected third party.

 

Using SSAS - early years

The trustees use the rental income to service the borrowings, and  any surplus is retained in the scheme and invested in a portfolio of quoted investments, managed by a discretionary fund manager.

After a few years, the borrowings have been repaid. Accordingly, all the rental income paid to the scheme is boosting the investment portfolio. The rental income and capital growth soon generate a sizeable investment portfolio, sitting alongside the property as the two main assets of the scheme.

 

Making employer-related investments

Keith and Mick’s business is doing well, but they have cashflow issues and need to borrow money to keep the business moving forward. They discuss their options with their Independent Trustee and  decide to borrow funds from their SSAS instead.

A loan is granted over five years, with the employer paying back interest and capital to the pension fund throughout the term of the loan. Keith and Mick feel this is a much better source of funding for the company, as they are paying interest to their pension fund rather than to a bank.

 

Drawing benefits

As Keith and Mick get older, they bring their children into the family business to help with the day-to-day operation of the company. Their children also join the SSAS, so can benefit from the greater returns they achieve from pooling their modest pension savings with those of their parents.

Keith and Mick are drawing less income from the company, so both decide to draw benefits from the SSAS. Although Keith and Mick are members of the same scheme, this does not mean they have to draw the same retirement benefits. Keith requires a large lump sum, so draws the maximum tax-free lump sum andcommences drawing a pension, whilst Mick decides to phase his benefits and spread his tax-free lump sum payments over a number of tax years.

While Keith and Mick are drawing benefits, their employer is still funding their pensions by paying their rental income into the scheme. Keith and Mick can choose to draw modest pensions, roughly equal the rental income, or draw greater amounts and use some of the capital held in the investment portfolio as well as rental income. The speed at which they draw benefits is entirely up to them under the flexi-access drawdown rules.

 

Passing benefits onto other family members

Sadly, Mick passes away. The trustees of the scheme can use the remainder of Mick’s fund to pay death benefits. These benefits are split equally between his wife and his four children, who are each allocated a pot within the scheme, equal to 20% of Mick’s remaining funds. Benefits are paid at the discretion of the trustees.  The SSAS now sits outside of Mick’s estate and is free of IHT when these benefits pass to his wife and children.

As Mick passed away before age 75, the trustees are therefore able to offer these benefits to the beneficiaries tax-free.  All five beneficiaries are able to make independent decisions as to what they do with their own pot.  One decides to draw everything out tax-free in one go, another decides to draw a tax-free pension from the scheme each month, while the other three decide they do not need any income at present, so they decide to wait to draw any benefits until they’re required

 

Passing property to the next-generation 

Keith and Mick’s children have been running the business successfully for some time now and have outgrown the building owned by the pension fund. They find a larger site for relocation and they decide to liquidate the investment portfolio within the pension fund and obtain bank borrowings to acquire this new commercial property within the pension fund.

They consider letting out the old building to an unconnected third party. However, in the end they decide to sell the original property. As the trustees have held onto the property for so many years, the value is far greater than the original purchase price.

However, the trustees do not pay Capital Gains Tax and therefore the wholesale price is paid into the pension fund. The trustees decide to use these funds to pay off the borrowings required to purchase the second property and invest the residual funds in the investment portfolio.

 

For more details on SASS pension, please don't hesitate to contact a member of our team.

 

 

*These case studies are fictional, but the content is based on various, real client experiences.

The term “inter vivos” can be roughly translated as “between the living”. One way to reduce your potential Inheritance Tax (IHT) liability is to make gifts during your lifetime to another person, hence a transfer between the living.

Everyone has a personal inheritance tax allowance, which is currently £325,000 or possibly higher depending on your circumstances. Any amounts above this are subject to inheritance tax at the rate of 40%. One way to reduce this potential liability is to make a gift during your lifetime. The main issue with this is that the gift will only be exempt from inheritance tax if you survive at least seven years after granting the gift. For this reason, such gifts are known as potentially exempt transfers. The liability to inheritance tax gradually reduces over the seven years as follows:

Policy year Percentage of IHT payable Effective rate of IHT
One to three 100% 40%
Four 80% 32%
Five 60% 24%
Six 40% 16%
Seven 20% 8%
Eight and onwards 0% 0%

 

One solution to this issue is to purchase an insurance policy that will meet the liability for IHT. This would be due from the beneficiary for the IHT that would become due. A gift inter vivos policy is designed to meet the gradually reducing liability and pay out the appropriate sum on death within the first seven years. However, the main issue is that only a few insurers offer these policies.

Fortunately, there is another solution, which is offered more widely by insurers. With a multi-policy solution, the same result can be achieved using a suite of five term insurance policies each for a fifth of the total liability. The five policies run alongside each other with terms of three, four, five, six and seven years respectively. After three years, the first policy falls away, thus reducing the total cover by 20%.

The only real difference is that for a gift inter vivos policy, the premiums remain the same throughout the term, but for the suite of policies, they start a little higher and reduce overtime as each policy comes to an end.

In the unfortunate event of death within the seven years, the policies then, in force, will pay out and the premiums will cease.

Generally, it would not be sensible for the proceeds of the policy to be paid to the estate of the donor, as this is likely to increase the IHT due on their estate. To avoid this, the policy or policies should be written in trust. Not only then will the proceeds not end up in the donor’s estate, they can also be paid out without the delay of probate, so that the proceeds are available to the beneficiaries quickly to meet the IHT tax liability that will be due.

When determining the tax liability, you must consider how this interacts with the nil rate band for IHT, particularly with multiple gifts. It should also be noted that the liability on the remainder of the estate may be higher until the seven years have passed and the full nil rate band becomes available again. There are several things to consider and calculations to undertake, but if these are done properly, this can be an effective way to help the donor reduce their IHT liability. At the same time, ensuring that the beneficiaries of the gift are not landed with a tax bill to pay if death does occur in the first seven years.

Robert J Young Bsc FIA

Individual Savings Account (ISAs) and pensions each have their unique set of rules, and for this reason, they are both very different in how they work. Is there a right or wrong way to fund your savings and investments, and is there an advantage to using one investment product over the other?

In this article, I wanted to look at two different tax-efficient investment products that can be used for long-term savings. Let’s take a look at an overview of each of the products to see how they compare:

ISA Pension
Payments are paid gross with no tax relief. Maximum amount for tax year 21/22 is £20,000. Personal payments attract tax relief for amounts up to £40,000 or 100% of your annual earnings (whichever is the lesser). Certain circumstances can reduce these limits.
The savings fund grows tax free. The savings fund grows tax free.
Capital Gains Tax is not charged when savings are accessed. Capital Gains Tax is not charged when savings are accessed.
Income Tax is not charged when savings are accessed. Usually you are able to take 25% of the fund tax free. When an income is taken from the remaining fund, income tax is chargeable.
An ISA will form part of your estate, subject to IHT exemptions. Pension fund is usually exempt from inheritance tax.
No other taxes are payable. Pensions have a lifetime allowance, currently £1,073,100. Funds in excess of this amount pay an extra charge.
For cash ISAs, payments can be made from aged 16. For stocks and shares ISAs, this rises to 18. There is no maximum age limit, as children under 18 can use a junior ISA. Payments to a pension can be made from birth to age 75.
A cash ISA can be accessed from aged 16, and a stock and shares one from 18 years old. Earliest you can normally access a pension is from age 55.*
Employers cannot made payment on your behalf. If you are employed and meet eligibility criteria, you must be enrolled into a pension scheme by your employer and your employer must contribute.
Investment is allowed in cash, government and corporate bonds and equities. A wide range of funds are available. Investment is allowed in cash, government and corporate bonds and equities. A wide range of funds are available.

 

Why consider an ISA?

  • ISAs are the most flexible form of tax-efficient savings plan available.
  • ISAs can be accessed at any time. However, stocks and shares ISAs should be looked upon as medium to long-term investments (over five years). 

Why consider a pension?

  • If the investment is being made for retirement (currently over the age of 55), the pension provides the advantageous benefit of tax relief on your payments. Remember you don’t get tax relief for payments to ISAs.
  • If you are employed and meet the eligibility criteria, your employer must enrol you into a pension scheme and pay contributions into the scheme. These contributions will boost your payments and are in effect, free money.

 So, which is best for you?

  • ISAs offer the most flexible tax-efficient products for your savings or investment, as you can access them at any time, with no tax to pay. However, as we have mentioned, if you are using stocks and shares ISA these are usually held for the medium to long term.
  • You should consider a pension for your savings or investment if you are planning to use these funds in later life and won’t need to access the funds before your 55th birthday.
  • Of course, you can use a combination of both ISAs and pensions for your savings and investments. This will depend on how much money you have at your disposal for this purpose. Using both products will allow you to use all the advantages of each and the monies will be sheltered in a very tax-efficient manner.

With both stocks and shares ISAs and pensions, the value of investments can go down as well as up and you may get back less than has been paid in. The value of a cash ISA may not keep pace with inflation.

Should you wish to discuss either of these products or have any other investment queries, please do not hesitate to contact us.

*The minimum age to access your pension will increase to age 57 from April 2028.

One of our Private Wealth clients had made several gifts, and was about to make another significant one as the result of a property sale. Each gift created a potential inheritance tax liability with total potential liability in excess of £2 million.

There is a liability to inheritance tax for seven years after a gift is made, with liability gradually reducing after three years. We arranged an insurance cover to pay this liability in the event of the death of the donor in the first seven years.

As each gift was given at a different time, we created a model to determine how the total inheritance tax liability changed every month for all of the gifts going forward. Then, we sourced insurance policies to meet the potential for inheritance tax (IHT) as closely as possible.

As the cover was not placed at the time each gift was made, it was not practical to meet the precise profile of the IHT liability. We agreed with the client that there would be some months where the cover would be higher than strictly required. We placed a suite of term insurance policies and wrote the policies under trust, so that in the event of the death of the donor, the resulting payment would not form part of their estate.

We agreed to work on a fee basis enabling the policies to be placed on nil commission terms, resulting in reduced overall costs for the client.

I often say to clients during our review meetings that I still see the ongoing pandemic as being the main contributing factor to the performance of the investment markets at this moment in time. This was seen in November, when the new Covid-19 variant, Omicron, changed investors’ sentiment around the world. The discovery of the new variant of the Covid-19 virus in South Africa saw all the main global equity markets generally fall over November. The fear, from an economic point of view, is how this variant will affect the recoveries that we have seen so far this year.

In the UK, news of the Omicron variant caused concerns over both the UK’s and the global outlook for their respective economic recoveries. It will also be interesting to see if this news will have any impact on UK monetary policy and its future direction.

Consumer Price Index (CPI) is on the rise

During October, the CPI continued to increase on the back of rising prices for energy, fuel and the second-hand car market. The year-on-year CPI figure rose to 4.2% in October, compared to 3.1% in September. This has increased the likelihood of an interest rate rise in the very near future. As we have reported in previous reviews, the Bank of England (BoE) do not expect these inflationary pressures to subside any time soon. They have predicted that we could see a figure as high as 5% by April 2022.

Base rate remained the same in the UK

Somewhat surprisingly, the BoE did not increase the base rate in their November meeting, leaving it unchanged at 0.1%. Members of the Monetary Policy Committee (MPC) voted 7-2 in favour of no change. However, the BoE Governor, Andrew Bailey, made it very clear that it had been a narrow escape in the meeting as to whether they should have been raised. It is now widely expected that the base rate will rise in the very near future, with the next MPC meeting due in December. However, it will be interesting to see if the new Omicron variant will have any bearing on their decision making in the short term.  During November the FTSE 100 index fell by 2.5%.

In the US...

A similar tale can be seen in regards to inflationary pressures. Much like us, higher energy prices and food prices are driving up inflation. During October, the US consumer price inflation went to 6.2%. Unlike the BoE, the Federal Reserve System (Fed) seems to be looking to take a patient view in regards to inflation. They expect the inflationary pressures to continue into next year but are predicting that they will fall back during the second or third quarter of 2022. With this in mind, The Fed has indicated that they can take a watching brief in regards to any thoughts of tightening interest rates. In November, The Dow Jones Industrial Average Index was shaken by the Omicron variant news and fell by 3.7%.

In the Eurozone...

The same issues were in play as in the UK and US. Rising energy prices saw the Eurozone’s rate inflation hit a record high 4.9% during November. Much like The Fed, the European Central Bank does not intend to raise its rates at this time. Their fear is that any policy tightening could have an impact on the economic recovery in 2022. For this reason, they have so far indicated that an increase in 2022 is unlikely to be seen. Meanwhile, in Germany, Olaf Scholz is set to succeed Angela Merkel as Chancellor. This follows a coalition agreement between the SPD, the Greens and the FDP. Germany’s Dax Index fell by 3.8% during November.

In the Far East...

Japan’s economy saw an annualised fall of 3% in the third quarter. Supply chain issues undermined export activity, consumption and capital spending. Over the month of November, the Nikkei 225 Index went down by 3.7%.

 

Many investment targets are set as x% above inflation and this is because you need to achieve an investment return at least equal to inflation to maintain the purchasing power of your funds.

This is the issue with keeping funds in cash, which many regards as risk-free whereas generally, any interest earned is less than inflation, so funds are falling in value in real terms. As noted above in much of the western world and indeed elsewhere, the increased energy costs and food costs are fuelling rises in inflation. Investments will need to work harder.

For those still in the accumulation phase where the emphasis is mainly on capital growth, the aim will be to ensure that the investment managers have reacted to this and have holdings in sectors that do well in inflationary times.

For those who have moved into the decumulation phase and are seeking at least some income, then a refocus of your investments may be required to be able to continue to draw income without impacting too greatly on the capital value. If these issues are worrying you then we are available to review your portfolio and your wealth planning and reassure you or make adjustments as necessary

As always, I hope that you find this market review useful. If you have any concerns regarding your investment and the impact of the Omicron variant, please do not hesitate to get in contact with us.

 

 

We helped our client, a beneficiary of their father’s pension fund, to receive these benefits in the most tax-efficient way possible, minimising the potential large amounts of income tax.

 

Sadly, our client passed away at the age of 79. We had previously advised them to complete a pension drawdown nomination form, and they had elected their partner, son and daughter to receive these funds.

The son wished to take his benefit in the form of a lump sum death benefit, equating to £60,000.

As our client passed away over the  age of 75, the death benefit is taxable at the beneficiary's marginal rate.

Therefore, the lump-sum would be added to the son’s other income in the tax year, and he would be taxed accordingly.

 

The son had a salary of £40,000. This meant if he had taken the lump sum of £60,000, he would have paid £22,000 tax in total (£10,000 at 20% plus £50,000 at 40%), giving him a net benefit of £38,000.

Instead, we advised that the son should use inherited drawdown; which is taxed only when the beneficiary withdraws an income from their inherited fund.

Using inherited drawdown, the son withdrew £10,000 per annum over six years. This meant no higher income tax was payable (£60,000 at 20% = £12,000).

 

By advising the son to use inherited drawdown, we saved him a significant £10,000 in tax, allowing the son to receive more of his father’s hard-earned pension benefits.

Inherited drawdown provides beneficiaries with the ability to spread tax over many tax years. The beneficiary has the control to withdraw monies when they wish, and this flexibility can help utilise tax allowances and limit the amount of tax payable.

This case illustrates the importance for clients to have nomination forms for their pension funds, to ensure these benefits are passed onto the people they wish, and to update these when circumstances change.

 

Don't hesitate to contact a member of our team to talk about your personal circumstances.

Robert Young, Hanover Financial Management, pensions and employee benefits specialist reflects on the latest budget update and dissects what these changes actually mean for individuals with businesses, pensions, savings and investments.

 

Pensions 

Pensions tax relief

There are two ways in which tax relief is granted on employee pension contributions, net pay and relief at source. Currently, low earners receive tax relief under the relief at source method as the pension providers claim the 20% basic tax relief directly from the Government. As a result low earners who pay little or, no tax still receive the tax credit.ar

However, under the net pay scheme, pension contributions are deducted from pay before tax is calculated so higher earners receive tax relief at their highest marginal rate directly in payroll but lower earners who pay little or no tax lose out.

The Government have stated that they will introduce legislation to make top-up payments directly to the pension arrangements of low earning savers. It is anticipated that payments will start to be paid from 2025 to 2026 in respect of contributions made from 2024 to 2025. This will bring the two tax relief methods into line.

 

Allowances

No changes have been proposed about the annual allowance or money purchase annual allowance which remain at £40,0000 and £4,000 respectively.

The Lifetime Allowance is to remain fixed at this year’s amount of £1,073,100. It will no longer rise in line with the Consumer Price Index (CPI). This will not just impact high earners, but particularly in the short term will impact long-serving employees at a senior level in the medical and teaching professions.

This means more pension savers may be impacted by the LTA charge so this is an important issue to consider in deciding how to take retirement benefits.

 

Green NS&I product

The Chancellor announced in the budget a “Green Bond” launching in the summer by National Savings and Investments (NS&I). These bonds will raise funds for “green” projects and help the country on its journey to being carbon neutral, while at the same time helping to boost saving. The terms are not yet known but with government backing through NS&I it is anticipated these will prove to be popular, given the growing demand for sustainable investments.

 

National Insurance

The previously announced increase in National Insurance contributions to help cover the increasing cost of social care and the funding of the NHS was confirmed. National Insurance contributions will increase by 1.25% for the 2022/23 tax year.

Although National Insurance rates will return to current levels on 6 April 2023, the extra 1.25% will remain but as a separate Health and social care levy which will be ring-fenced to ensure that the funds raised are used for social care and the NHS. Unlike National Insurance contributions, this levy will apply to those over State Pension Age.

Employers pay on earnings over the Secondary Threshold and this will increase from £8,840 in 2021/22 to £9,100 in 2022/23.

 

Other

Employees currently pay 12% on earnings between the Primary Threshold and Upper Earnings Limit and 2% on earnings over the Upper Earnings Limit. So these rates will rise to 13.25% and 3.25% respectively. The Primary Threshold is £9,568 in the current 2021/22 tax year and will rise to £9,880 for 2022/23 and the Upper Earnings Limit which is £50,270 for 2021/22 will remain frozen at this level.

Salary exchange arrangements where an employee elects to give up salary in return for a higher employer pension contribution, offer National Insurance savings for both employees and employers and the maximum potential savings will rise significantly in 2022/23. Employers who have not previously considered this should now do so.

 

Dividends

In order to help fund social care and the NHS, dividend tax rates will also rise by 1.25% from 2022/23. The £2,000 dividend allowance will remain but thereafter the tax rates will be:

  • 8.75% for basic rate taxpayers
  • 33.75% for higher rate taxpayers
  • 39.35% for additional rate taxpayers

Shareholding directors will be used to managing their remuneration strategy with a mix of salary, dividends and employer pension contributions. Many will have adopted a strategy of main dividends and although this is likely to remain more tax-efficient than paying salary, the position should be reviewed in the light of these changes to determine the impact on post-tax income. Pension contributions remain even more tax-efficient up to the annual allowance.

 

Income tax

In England, the personal allowance and basic rate tax bands will remain frozen for 2022/23 so the personal allowance remains at £12,570 and higher rate tax will start to be paid on income over £50,270. Scotland and Wales set their own rates.

The tapering of this relief for those earning over £100,000 is to remain so that £1 of the allowance is lost for every £2 of income over £100,000 reducing to zero once income reaches £125,140. The effective tax on income in this band is 60% so employees with income at this level should certainly consider making additional pension contributions or exchanging income for additional employer pension contributions.

 

Inheritance tax

Tax (IHT) threshold is to remain frozen at £325,000 and the residential nil rate band will also be fixed at £175,000 until 5 April 2026. The result is that more and more people will fall into the IHT net so now is a good time to take advice and review what actions you can take to reduce or remove your liability to IHT.

 

Capital Gains tax

The annual exempt amount is to remain frozen at £12,300 until April 2026.

 

State pension

The Budget confirmed that the earnings element of the triple lock will not apply for 2022/23 so the increase will be 2.5% or the increase in CPI which for September was 3.1%. As a result of this the New State Pension is anticipated to rise from £179.60 per week to £185.15 per week in 2022/23.

With costs such as energy costs rising significantly and much faster than the inflation index, and energy costs being a major expense for many retired people, this change is likely to have a significant impact on the standard of living for many who are retired.

 

Normal minimum pension age

The Budget confirmed that the previously announced change would proceed and legislation is to be included in the Finance Bill 2021-22. This will increase the earliest age at which most pension savers will be able to access their pension arrangements without incurring an unauthorised payments tax charge, from age 55 to age 57. This increase, however, is not to take effect until April 2028.

 

Aspects of the budget relating to businesses and business owners

Corporation tax

It was confirmed that the Corporation Tax rate is to increase to 25% but only for financial years beginning on or after 1 April 2023 and for businesses with profits over £250,000. For small businesses with profits below £50,000, the rate will remain at 19%. There will be marginal relief introduced for businesses with profits between £50,000 and £250,000. Businesses both incorporated and unincorporated will be able to carry back trading losses for three years rather than just one year in 2020/21 and 2021/22 subject to certain thresholds. Businesses should look at the fine details of these changes and take advice on their impact.

 

Support for hospitality and leisure businesses

Recognising that the hospitality and leisure sectors have been particularly hard hit through the recent lockdowns as a result of the coronavirus, the Chancellor announced measures that should enable 90% of businesses in these sectors to receive at least 50% off their business rates in 2022/23.

In addition, it was announced that the business rate system would be reviewed and reformed to make it fairer, more responsive ad more supportive of investment.

 

Research and Development (R&D)

To ensure that the United Kingdom remains at the forefront of innovation, an increase to £20bn in public investment in R&D by 2024/25 was announced which represents around a 25% increase.

Plans to reform R&D tax reliefs to support modern research methods and further support to private R&D investment by increasing the funding for core Innovate UK programmes were also announced. The changes will also be designed to be more focused on domestic activity.

 

Shipping

The budget announced the first reform to Tonnage Tax since 2000, with changes to be introduced from April 2022. The changes aim to attract ships to register in the UK and for more shipping companies to base their headquarters in the UK, use the UK maritime services industry and fly the UK flag. The changes have been generally well-received by the UK maritime industry as a move to strengthen the UK maritime industry.

 

To discuss the impact of the budget on your business, investments, pensions or savings please get in touch. We will be happy to discuss your requirements and ensure your funds are working effectively for you.
For more financial advice, don't hesitate to get in touch with a member of our team.

 

Hanover Financial Management Limited is an appointed representative of Culver Financial Management Limited which is authorised and regulated by the Financial Conduct Authority No. 114852. Hanover Financial Management Limited is registered in England and Wales with number 8586887. Culver Financial Management Limited is registered in England and Wales with number 01157569. The Financial Conduct Authority does not regulate tax advice or trusts. The value of investments can fall as well as rise. You may not get back what you invest.

The Financial Ombudsman Service is available to sort out individual complaints that clients and financial services businesses aren’t able to resolve themselves. To contact the Financial Ombudsman Service please visitwww.financial-ombudsman.org.uk.

 

 

 

Author: admin

For anyone wishing for a quiet start to 2022 in the financial markets, they would have been sorely disappointed. 

Amongst other things, the markets have been hit by uncertainties surrounding a possible Russian invasion of Ukraine, and the ongoing inflationary pressures that are seen here and around the world. 

In the UK

Despite global equities struggling throughout the month, the UK was one of the strongest performers as the traditional sectors (energy, financials and industrials) rallied. During January, the FTSE 100 Index increased by 1.1%. 

The UK’s consumer price inflation shows no sign of falling away. In fact, in December the index rose from 5.1% to 5.4%. As I am sure you are aware, these inflationary pressures are fuelled by higher prices for energy and food. There seems to be no rest in sight, with energy bills set to increase further and talk of the index breaching the 7% mark in the spring. 

The International Monetary Fund (IMF) downgraded its forecast from 5% to 4.7% for UK economic growth in 2022. This was in large part due to the impact that they believe supply constraints and the inflationary pressures will have on households in the UK. Despite this, the UK’s forecast remains the highest amongst the G7 economies. During November, the UK economy grew by 0.9%, which actually meant it rose above pre-Covid levels for the first time. Of course, during December we saw the emergence of the Omicron variant and the Government’s Plan B measures, all of which I am sure will have an impact on December’s figures.

Globally

The IMF announced that global economic growth is expected to fall to 4.4% in 2022, from 5.9% in 2021. Much the same as the UK, they cite the disruption in supply chains, inflationary pressures caused by higher energy prices and ever-increasing wage demands. In regards to the US economy, they cut their forecast for 2022 from 5.2% to 4%. For China, the reduction in their forecast went down to 4.8% from the previous figure of 5.6%. 

As we have seen in the UK already, the Federal Reserve (Fed) in the US has strongly hinted at a tightening of monetary policy in the near future. This could see the Fed increase their key interest rate in the coming months.

The US saw their consumer prices index hit an annualised rate of 7% in December, which was the fastest growth seen since June 1982. The increase was largely fuelled by higher costs for food, housing and cars. During January, the Dow Jones Industrial Average Index saw a fall of 3.3%.

Closer to home, the eurozone ended 2021 with a 5.2% rise in their economy as a whole. However, it is not so different in Europe, where the growth rate was struggling towards the end of the year. Similar issues with increasing inflationary pressures, the impact of Omicron and supply chain issues all come to the fore. 

The rate of inflation in the eurozone increased to 5% during December, for the same reasons as with the UK, in large part due to the impact of energy costs. 

The European Central Bank (ECB) still sees the inflationary pressures as temporary and expects them to ease during the course of 2022. While, the German Dax Index fell by 2.6% during January. 

As we see the volatility in the investment markets, we fall back on our mantra for investment clients - to provide long-term growth in portfolios that match their appetite for investment risk. This means, that the short-term losses that may be being seen should be outweighed by the longer-term gains of the recommended portfolios. 

As always, if you would like to discuss any aspect of your financial affairs, please do contact us and we will be happy to help. 

Richard Brazier

 

 Richard Brazier

Director

E RichardBrazier@hanoverfm.co.uk

Who should you contact for more information?

Director Richard Brazier

Financial Adviser Amanda Beacon

Senior Consultant Graham Smithson

The 60% income tax trap*

It is widely believed that the highest income tax rate is currently 45%, paid only on an income in excess of £150,000. While this is true, some people may actually have an effective tax rate of 60& on part of their income.

 

Case study: salary increase over £100,000

Caroline has had a successful career as a shipping lawyer and has reached a salary of £100,000.  She was delighted to learn that she was being promoted to a salaried partner with a 10% increase in her pay. However, the issue is that for every £2 she earns over £100,000, she will lose £1 of her personal allowance (so once her salary reaches £125,000, she will have no personal allowance). The following table illustrates the impact this has on her net pay:

Before pay rise After pay rise
Salary range Tax rate Tax Salary range Tax rate Tax
£0 to £12,500 0% £0 £0 to £12,500 0% £0
£12,500 to £50,000 20% £7,500 £12,500 to £50,000 20% £7,500
£50,000 to £100,000 40% £20,000 £50,000 to £110,000 40% £24,000
Lost personal allowance of £5,000 40% £2,000
Total tax £27,500 Total tax £33,500

 

The table shows that although Caroline’s pay has increased by £10,000, her tax has increased by £6,000, which is an effective tax rate on this top element of her pay of 60%.  This is triggered by the 40% tax on the lost personal allowance.

As Caroline is now earning more than £100,000, HMRC will also require her to complete a tax return.

As a solution, Caroline can make an additional pension contribution. If her employer’s pension scheme is a group personal pension and Caroline pays a net pension contribution in the tax year of £8,000, then with the addition of basic rate tax relief, this will increase to a payment into her pension of £10,000. Her “adjusted net income” will reduce to £100,000, so she will get back her personal allowance, and her basic rate band will grow by the amount of the contribution. Therefore, we now has the following tax rates:

Salary range Tax rate Tax
£0 to £12,500 0% £0
£12,500 to £60,000 20% £9,500
£60,000 to £110,000 40% £20,000
Total tax £29,500

 

Caroline pays £4,000 less in tax, but also receives the £2,000 top-up to the pension contribution, so the overall effect is an additional payment into her pension of £10,000 and a saving in tax of £6,000  (a 60% tax relief).

If her employer’s pension scheme is a trust-based scheme, then the payment of pension contributions are generally deducted before the calculation of tax. Therefore, paying a £10,000 contribution in the tax year effectively puts her tax position back to how it  was before the pay rise.

Alternatively, Caroline may be able to use salary exchange to give up the pay rise, in return for the employer making the additional contributions into the pension scheme. The additional benefit of this approach is the additional saving of National Insurance contributions, which on a sacrifice of £10,000 would be an additional saving of £200.

 

Case study:  discretionary bonus payment

Patrick is a Managing Associate earning £95,000. He has had a very busy year working on some major clients of the firm, giving great client service and advice; so the firm decides to reward Patrick for his exceptional performance by paying a discretionary bonus of £15,000.

As a result, Patrick will now earn £110,000 in the tax year, and therefore faces the same issue as Caroline.

Before bonus After bonus
Salary range Tax Rate Tax Salary range Tax rate Tax
£0 to £12,500 0% £0 £0 to £12,500 0% £0
£12,500 to £50,000 20% £7,500 £12,500 to £50,000 20% £7,500
£50,000 to £95,000 40% £18,000 £50,000 to £110,000 40% £24,000
Lost personal allowance of £5,000 40% £2,000
Total tax £25,500 Total tax £33,500

 

The table shows that although the firm has paid Patrick a bonus of £15,000, he will pay an additional £8,000 in tax (an effective tax rate of 53.3%).

Again, a possible solution for this is for Patrick to make an additional pension contribution. This is achievable through a bonus sacrifice, and as the bonus is discretionary, this would simply need to be agreed at the time the bonus is being discussed.  If Patrick sacrificed £10,000 of his bonus, his pay would reduce to £100,000 and his tax will be as follows:

Salary range Tax rate Tax
£0 to £12,500 0% £0
£12,500 to £50,000 20% £7,500
£50,000 to £100,000 40% £20,000
Total tax £27,500

 

Consequently, Patrick has additional net income of £3,000, but in addition, an extra contribution in his pension account of £10,000 and a saving of £200 in National Insurance costs. Overall, a total value of £13,200 and effective tax rate of 12%.

These case studies illustrate how tax-efficient pension contributions could help you achieve more at this pay point in situations where the loss of personal allowance increases the effective tax rate.

 

For more information, don't hesitate to get in touch with a member of our team.

Robert Young Robert J Young  BSc FIA

E Robert.Young@hanover-group.com

 

*These examples are fictional, but the content is based on various, real client experiences.

Firstly, Happy New Year to you all. I hope that you managed to have an enjoyable and restful festive period.

 

The FTSE 100 index increased

To start this market review with some good news, over the course of December the FTSE 100 index increased by 4.6%, which saw it reach its highest level seen since February 2020. Looking at 2021 as a whole, the index finished the year 14.3% higher. To put this in perspective, this was the best performance over a calendar year since 2016. Of course, this is good news for those investments that we look after with a stocks and shares element. 

Having said this, at the start of December the news of the Omicron variant saw the markets wobble, with concern over how this may affect investments. At this time, there were fears over how contagious this variant was, and the governments across the UK brought in fresh restrictions. This caused a degree of concern on how this would affect the already struggling hospitality and leisure sectors.

 

The inflation and the consumer price index continued to rise in the UK

Inflation has continued to increase in the UK and the annualised rate of consumer price inflation rose to 5.1% in December, driven largely by continuing high costs for transport and energy. The Bank of England’s (BoE) Monetary Policy Committee somewhat surprisingly increased the base rate to 0.25% from its historical low of 0.10%, a move that was expected in November. The surprising element was not the increase, but the timing, as earlier in the month, the BoE had warned of the impact that the Omicron variant could have on the UK economy. It is widely expected to continue tightening its policy measures over 2022.

 

In the US...

Much like the UK, all the major global equity markets saw increases during 2021. The Dow Jones Industrial Average Index in the US closed December 5.4% higher, and saw an annual increase of 18.7% over the year.

Again, as was seen in the UK, inflation continued to surge in the US, led by energy and food prices rising. Their consumer price inflation rose to 6.8% during November, a rate not seen in the US since 1982. There is now expectation that the Federal Reserve will look to increase interest rates during 2022, with some policymakers forecasting anything up to four rises.

 

In the Eurozone...

The Eurozone was no different, as high energy prices affected the annualised consumer price inflation that rose to 4.9% in November. However, the European Central Bank continues to see the current inflationary pressures as a temporary issue, caused by the global pandemic. In Germany, the Dax Index went up by 5.2% during December, and closed 2021 15.8% higher.

We hope that 2022 sees an end to the restrictions when it is safe to do so, and we finally return to a sense of normality. As always, if you have any questions in regards to your current investment portfolio or any other financial planning matter, please do get in touch with us.

 

Richard Brazier

 

 Richard Brazier

Director

E RichardBrazier@hanoverfm.co.uk

Who should you contact for more information?

Director Richard Brazier

Financial Adviser Amanda Beacon

Senior Consultant Graham Smithson

This case study demonstrates how clients can use SSASs to save for their retirement in a flexible, tax-efficient manner, to compliment and assist their business operations.

 

Setting up the scheme

Keith and Mick own a successful manufacturing business. They operate out of a commercial building that they lease from an unconnected third party. Their landlord approaches them and offers first refusal on the purchase of the building.

Keith and Mick have various options opened to them to purchase the property:

  • They could purchase the property themselves, with their personal funds;
  • They could purchase the property through their company; or
  • They could use a pension fund to purchase the property.

The pension fund route is their preferred option due to tax savings. Keith and Mick consider setting up either (a) two SIPPs (Self-Invested Personal Pension) to purchase the property together or (b) an SSAS to purchase the property. They decide to set up an SSAS (Small Self-Administered Scheme) for the following reasons:

  • The complexity of owning the property over two SIPPs, with two associated borrowings, was pushing up the costs of operating the SIPPs;
  • They are keen on the option a SSAS has to make loans to the sponsoring employer of the scheme; and
  • They know they will act as trustees of the SSAS and will therefore retain more control over their retirement benefits when compared to the SIPP route.

Consequently, they set up an SSAS, with the help of an Independent Trustee to assist them with compliance with the relevant HMRC rules.

 

Purchasing property

Keith and Mick transfer their existing pension arrangements into the new SSAS. They also make sizeable employer contributions to the scheme, which qualify for tax relief within the company.  They are still short of the purchase price, so the trustees arrange bank borrowings to assist with the purchase.

The property is purchased and the trustees are now acting as the landlord, with the sponsoring employer the tenant. An arms-length commercial lease is put in place to define the terms on which the property is let to the company. However, the company are now paying rental income to their pension fund instead of to the unconnected third party.

 

Using SSAS - early years

The trustees use the rental income to service the borrowings, and  any surplus is retained in the scheme and invested in a portfolio of quoted investments, managed by a discretionary fund manager.

After a few years, the borrowings have been repaid. Accordingly, all the rental income paid to the scheme is boosting the investment portfolio. The rental income and capital growth soon generate a sizeable investment portfolio, sitting alongside the property as the two main assets of the scheme.

 

Making employer-related investments

Keith and Mick’s business is doing well, but they have cashflow issues and need to borrow money to keep the business moving forward. They discuss their options with their Independent Trustee and  decide to borrow funds from their SSAS instead.

A loan is granted over five years, with the employer paying back interest and capital to the pension fund throughout the term of the loan. Keith and Mick feel this is a much better source of funding for the company, as they are paying interest to their pension fund rather than to a bank.

 

Drawing benefits

As Keith and Mick get older, they bring their children into the family business to help with the day-to-day operation of the company. Their children also join the SSAS, so can benefit from the greater returns they achieve from pooling their modest pension savings with those of their parents.

Keith and Mick are drawing less income from the company, so both decide to draw benefits from the SSAS. Although Keith and Mick are members of the same scheme, this does not mean they have to draw the same retirement benefits. Keith requires a large lump sum, so draws the maximum tax-free lump sum andcommences drawing a pension, whilst Mick decides to phase his benefits and spread his tax-free lump sum payments over a number of tax years.

While Keith and Mick are drawing benefits, their employer is still funding their pensions by paying their rental income into the scheme. Keith and Mick can choose to draw modest pensions, roughly equal the rental income, or draw greater amounts and use some of the capital held in the investment portfolio as well as rental income. The speed at which they draw benefits is entirely up to them under the flexi-access drawdown rules.

 

Passing benefits onto other family members

Sadly, Mick passes away. The trustees of the scheme can use the remainder of Mick’s fund to pay death benefits. These benefits are split equally between his wife and his four children, who are each allocated a pot within the scheme, equal to 20% of Mick’s remaining funds. Benefits are paid at the discretion of the trustees.  The SSAS now sits outside of Mick’s estate and is free of IHT when these benefits pass to his wife and children.

As Mick passed away before age 75, the trustees are therefore able to offer these benefits to the beneficiaries tax-free.  All five beneficiaries are able to make independent decisions as to what they do with their own pot.  One decides to draw everything out tax-free in one go, another decides to draw a tax-free pension from the scheme each month, while the other three decide they do not need any income at present, so they decide to wait to draw any benefits until they’re required

 

Passing property to the next-generation 

Keith and Mick’s children have been running the business successfully for some time now and have outgrown the building owned by the pension fund. They find a larger site for relocation and they decide to liquidate the investment portfolio within the pension fund and obtain bank borrowings to acquire this new commercial property within the pension fund.

They consider letting out the old building to an unconnected third party. However, in the end they decide to sell the original property. As the trustees have held onto the property for so many years, the value is far greater than the original purchase price.

However, the trustees do not pay Capital Gains Tax and therefore the wholesale price is paid into the pension fund. The trustees decide to use these funds to pay off the borrowings required to purchase the second property and invest the residual funds in the investment portfolio.

 

For more details on SASS pension, please don't hesitate to contact a member of our team.

 

 

*These case studies are fictional, but the content is based on various, real client experiences.

The term “inter vivos” can be roughly translated as “between the living”. One way to reduce your potential Inheritance Tax (IHT) liability is to make gifts during your lifetime to another person, hence a transfer between the living.

Everyone has a personal inheritance tax allowance, which is currently £325,000 or possibly higher depending on your circumstances. Any amounts above this are subject to inheritance tax at the rate of 40%. One way to reduce this potential liability is to make a gift during your lifetime. The main issue with this is that the gift will only be exempt from inheritance tax if you survive at least seven years after granting the gift. For this reason, such gifts are known as potentially exempt transfers. The liability to inheritance tax gradually reduces over the seven years as follows:

Policy year Percentage of IHT payable Effective rate of IHT
One to three 100% 40%
Four 80% 32%
Five 60% 24%
Six 40% 16%
Seven 20% 8%
Eight and onwards 0% 0%

 

One solution to this issue is to purchase an insurance policy that will meet the liability for IHT. This would be due from the beneficiary for the IHT that would become due. A gift inter vivos policy is designed to meet the gradually reducing liability and pay out the appropriate sum on death within the first seven years. However, the main issue is that only a few insurers offer these policies.

Fortunately, there is another solution, which is offered more widely by insurers. With a multi-policy solution, the same result can be achieved using a suite of five term insurance policies each for a fifth of the total liability. The five policies run alongside each other with terms of three, four, five, six and seven years respectively. After three years, the first policy falls away, thus reducing the total cover by 20%.

The only real difference is that for a gift inter vivos policy, the premiums remain the same throughout the term, but for the suite of policies, they start a little higher and reduce overtime as each policy comes to an end.

In the unfortunate event of death within the seven years, the policies then, in force, will pay out and the premiums will cease.

Generally, it would not be sensible for the proceeds of the policy to be paid to the estate of the donor, as this is likely to increase the IHT due on their estate. To avoid this, the policy or policies should be written in trust. Not only then will the proceeds not end up in the donor’s estate, they can also be paid out without the delay of probate, so that the proceeds are available to the beneficiaries quickly to meet the IHT tax liability that will be due.

When determining the tax liability, you must consider how this interacts with the nil rate band for IHT, particularly with multiple gifts. It should also be noted that the liability on the remainder of the estate may be higher until the seven years have passed and the full nil rate band becomes available again. There are several things to consider and calculations to undertake, but if these are done properly, this can be an effective way to help the donor reduce their IHT liability. At the same time, ensuring that the beneficiaries of the gift are not landed with a tax bill to pay if death does occur in the first seven years.

Robert J Young Bsc FIA

Individual Savings Account (ISAs) and pensions each have their unique set of rules, and for this reason, they are both very different in how they work. Is there a right or wrong way to fund your savings and investments, and is there an advantage to using one investment product over the other?

In this article, I wanted to look at two different tax-efficient investment products that can be used for long-term savings. Let’s take a look at an overview of each of the products to see how they compare:

ISA Pension
Payments are paid gross with no tax relief. Maximum amount for tax year 21/22 is £20,000. Personal payments attract tax relief for amounts up to £40,000 or 100% of your annual earnings (whichever is the lesser). Certain circumstances can reduce these limits.
The savings fund grows tax free. The savings fund grows tax free.
Capital Gains Tax is not charged when savings are accessed. Capital Gains Tax is not charged when savings are accessed.
Income Tax is not charged when savings are accessed. Usually you are able to take 25% of the fund tax free. When an income is taken from the remaining fund, income tax is chargeable.
An ISA will form part of your estate, subject to IHT exemptions. Pension fund is usually exempt from inheritance tax.
No other taxes are payable. Pensions have a lifetime allowance, currently £1,073,100. Funds in excess of this amount pay an extra charge.
For cash ISAs, payments can be made from aged 16. For stocks and shares ISAs, this rises to 18. There is no maximum age limit, as children under 18 can use a junior ISA. Payments to a pension can be made from birth to age 75.
A cash ISA can be accessed from aged 16, and a stock and shares one from 18 years old. Earliest you can normally access a pension is from age 55.*
Employers cannot made payment on your behalf. If you are employed and meet eligibility criteria, you must be enrolled into a pension scheme by your employer and your employer must contribute.
Investment is allowed in cash, government and corporate bonds and equities. A wide range of funds are available. Investment is allowed in cash, government and corporate bonds and equities. A wide range of funds are available.

 

Why consider an ISA?

  • ISAs are the most flexible form of tax-efficient savings plan available.
  • ISAs can be accessed at any time. However, stocks and shares ISAs should be looked upon as medium to long-term investments (over five years). 

Why consider a pension?

  • If the investment is being made for retirement (currently over the age of 55), the pension provides the advantageous benefit of tax relief on your payments. Remember you don’t get tax relief for payments to ISAs.
  • If you are employed and meet the eligibility criteria, your employer must enrol you into a pension scheme and pay contributions into the scheme. These contributions will boost your payments and are in effect, free money.

 So, which is best for you?

  • ISAs offer the most flexible tax-efficient products for your savings or investment, as you can access them at any time, with no tax to pay. However, as we have mentioned, if you are using stocks and shares ISA these are usually held for the medium to long term.
  • You should consider a pension for your savings or investment if you are planning to use these funds in later life and won’t need to access the funds before your 55th birthday.
  • Of course, you can use a combination of both ISAs and pensions for your savings and investments. This will depend on how much money you have at your disposal for this purpose. Using both products will allow you to use all the advantages of each and the monies will be sheltered in a very tax-efficient manner.

With both stocks and shares ISAs and pensions, the value of investments can go down as well as up and you may get back less than has been paid in. The value of a cash ISA may not keep pace with inflation.

Should you wish to discuss either of these products or have any other investment queries, please do not hesitate to contact us.

*The minimum age to access your pension will increase to age 57 from April 2028.

One of our Private Wealth clients had made several gifts, and was about to make another significant one as the result of a property sale. Each gift created a potential inheritance tax liability with total potential liability in excess of £2 million.

There is a liability to inheritance tax for seven years after a gift is made, with liability gradually reducing after three years. We arranged an insurance cover to pay this liability in the event of the death of the donor in the first seven years.

As each gift was given at a different time, we created a model to determine how the total inheritance tax liability changed every month for all of the gifts going forward. Then, we sourced insurance policies to meet the potential for inheritance tax (IHT) as closely as possible.

As the cover was not placed at the time each gift was made, it was not practical to meet the precise profile of the IHT liability. We agreed with the client that there would be some months where the cover would be higher than strictly required. We placed a suite of term insurance policies and wrote the policies under trust, so that in the event of the death of the donor, the resulting payment would not form part of their estate.

We agreed to work on a fee basis enabling the policies to be placed on nil commission terms, resulting in reduced overall costs for the client.

I often say to clients during our review meetings that I still see the ongoing pandemic as being the main contributing factor to the performance of the investment markets at this moment in time. This was seen in November, when the new Covid-19 variant, Omicron, changed investors’ sentiment around the world. The discovery of the new variant of the Covid-19 virus in South Africa saw all the main global equity markets generally fall over November. The fear, from an economic point of view, is how this variant will affect the recoveries that we have seen so far this year.

In the UK, news of the Omicron variant caused concerns over both the UK’s and the global outlook for their respective economic recoveries. It will also be interesting to see if this news will have any impact on UK monetary policy and its future direction.

Consumer Price Index (CPI) is on the rise

During October, the CPI continued to increase on the back of rising prices for energy, fuel and the second-hand car market. The year-on-year CPI figure rose to 4.2% in October, compared to 3.1% in September. This has increased the likelihood of an interest rate rise in the very near future. As we have reported in previous reviews, the Bank of England (BoE) do not expect these inflationary pressures to subside any time soon. They have predicted that we could see a figure as high as 5% by April 2022.

Base rate remained the same in the UK

Somewhat surprisingly, the BoE did not increase the base rate in their November meeting, leaving it unchanged at 0.1%. Members of the Monetary Policy Committee (MPC) voted 7-2 in favour of no change. However, the BoE Governor, Andrew Bailey, made it very clear that it had been a narrow escape in the meeting as to whether they should have been raised. It is now widely expected that the base rate will rise in the very near future, with the next MPC meeting due in December. However, it will be interesting to see if the new Omicron variant will have any bearing on their decision making in the short term.  During November the FTSE 100 index fell by 2.5%.

In the US...

A similar tale can be seen in regards to inflationary pressures. Much like us, higher energy prices and food prices are driving up inflation. During October, the US consumer price inflation went to 6.2%. Unlike the BoE, the Federal Reserve System (Fed) seems to be looking to take a patient view in regards to inflation. They expect the inflationary pressures to continue into next year but are predicting that they will fall back during the second or third quarter of 2022. With this in mind, The Fed has indicated that they can take a watching brief in regards to any thoughts of tightening interest rates. In November, The Dow Jones Industrial Average Index was shaken by the Omicron variant news and fell by 3.7%.

In the Eurozone...

The same issues were in play as in the UK and US. Rising energy prices saw the Eurozone’s rate inflation hit a record high 4.9% during November. Much like The Fed, the European Central Bank does not intend to raise its rates at this time. Their fear is that any policy tightening could have an impact on the economic recovery in 2022. For this reason, they have so far indicated that an increase in 2022 is unlikely to be seen. Meanwhile, in Germany, Olaf Scholz is set to succeed Angela Merkel as Chancellor. This follows a coalition agreement between the SPD, the Greens and the FDP. Germany’s Dax Index fell by 3.8% during November.

In the Far East...

Japan’s economy saw an annualised fall of 3% in the third quarter. Supply chain issues undermined export activity, consumption and capital spending. Over the month of November, the Nikkei 225 Index went down by 3.7%.

 

Many investment targets are set as x% above inflation and this is because you need to achieve an investment return at least equal to inflation to maintain the purchasing power of your funds.

This is the issue with keeping funds in cash, which many regards as risk-free whereas generally, any interest earned is less than inflation, so funds are falling in value in real terms. As noted above in much of the western world and indeed elsewhere, the increased energy costs and food costs are fuelling rises in inflation. Investments will need to work harder.

For those still in the accumulation phase where the emphasis is mainly on capital growth, the aim will be to ensure that the investment managers have reacted to this and have holdings in sectors that do well in inflationary times.

For those who have moved into the decumulation phase and are seeking at least some income, then a refocus of your investments may be required to be able to continue to draw income without impacting too greatly on the capital value. If these issues are worrying you then we are available to review your portfolio and your wealth planning and reassure you or make adjustments as necessary

As always, I hope that you find this market review useful. If you have any concerns regarding your investment and the impact of the Omicron variant, please do not hesitate to get in contact with us.

 

 

We helped our client, a beneficiary of their father’s pension fund, to receive these benefits in the most tax-efficient way possible, minimising the potential large amounts of income tax.

 

Sadly, our client passed away at the age of 79. We had previously advised them to complete a pension drawdown nomination form, and they had elected their partner, son and daughter to receive these funds.

The son wished to take his benefit in the form of a lump sum death benefit, equating to £60,000.

As our client passed away over the  age of 75, the death benefit is taxable at the beneficiary's marginal rate.

Therefore, the lump-sum would be added to the son’s other income in the tax year, and he would be taxed accordingly.

 

The son had a salary of £40,000. This meant if he had taken the lump sum of £60,000, he would have paid £22,000 tax in total (£10,000 at 20% plus £50,000 at 40%), giving him a net benefit of £38,000.

Instead, we advised that the son should use inherited drawdown; which is taxed only when the beneficiary withdraws an income from their inherited fund.

Using inherited drawdown, the son withdrew £10,000 per annum over six years. This meant no higher income tax was payable (£60,000 at 20% = £12,000).

 

By advising the son to use inherited drawdown, we saved him a significant £10,000 in tax, allowing the son to receive more of his father’s hard-earned pension benefits.

Inherited drawdown provides beneficiaries with the ability to spread tax over many tax years. The beneficiary has the control to withdraw monies when they wish, and this flexibility can help utilise tax allowances and limit the amount of tax payable.

This case illustrates the importance for clients to have nomination forms for their pension funds, to ensure these benefits are passed onto the people they wish, and to update these when circumstances change.

 

Don't hesitate to contact a member of our team to talk about your personal circumstances.

Robert Young, Hanover Financial Management, pensions and employee benefits specialist reflects on the latest budget update and dissects what these changes actually mean for individuals with businesses, pensions, savings and investments.

 

Pensions 

Pensions tax relief

There are two ways in which tax relief is granted on employee pension contributions, net pay and relief at source. Currently, low earners receive tax relief under the relief at source method as the pension providers claim the 20% basic tax relief directly from the Government. As a result low earners who pay little or, no tax still receive the tax credit.ar

However, under the net pay scheme, pension contributions are deducted from pay before tax is calculated so higher earners receive tax relief at their highest marginal rate directly in payroll but lower earners who pay little or no tax lose out.

The Government have stated that they will introduce legislation to make top-up payments directly to the pension arrangements of low earning savers. It is anticipated that payments will start to be paid from 2025 to 2026 in respect of contributions made from 2024 to 2025. This will bring the two tax relief methods into line.

 

Allowances

No changes have been proposed about the annual allowance or money purchase annual allowance which remain at £40,0000 and £4,000 respectively.

The Lifetime Allowance is to remain fixed at this year’s amount of £1,073,100. It will no longer rise in line with the Consumer Price Index (CPI). This will not just impact high earners, but particularly in the short term will impact long-serving employees at a senior level in the medical and teaching professions.

This means more pension savers may be impacted by the LTA charge so this is an important issue to consider in deciding how to take retirement benefits.

 

Green NS&I product

The Chancellor announced in the budget a “Green Bond” launching in the summer by National Savings and Investments (NS&I). These bonds will raise funds for “green” projects and help the country on its journey to being carbon neutral, while at the same time helping to boost saving. The terms are not yet known but with government backing through NS&I it is anticipated these will prove to be popular, given the growing demand for sustainable investments.

 

National Insurance

The previously announced increase in National Insurance contributions to help cover the increasing cost of social care and the funding of the NHS was confirmed. National Insurance contributions will increase by 1.25% for the 2022/23 tax year.

Although National Insurance rates will return to current levels on 6 April 2023, the extra 1.25% will remain but as a separate Health and social care levy which will be ring-fenced to ensure that the funds raised are used for social care and the NHS. Unlike National Insurance contributions, this levy will apply to those over State Pension Age.

Employers pay on earnings over the Secondary Threshold and this will increase from £8,840 in 2021/22 to £9,100 in 2022/23.

 

Other

Employees currently pay 12% on earnings between the Primary Threshold and Upper Earnings Limit and 2% on earnings over the Upper Earnings Limit. So these rates will rise to 13.25% and 3.25% respectively. The Primary Threshold is £9,568 in the current 2021/22 tax year and will rise to £9,880 for 2022/23 and the Upper Earnings Limit which is £50,270 for 2021/22 will remain frozen at this level.

Salary exchange arrangements where an employee elects to give up salary in return for a higher employer pension contribution, offer National Insurance savings for both employees and employers and the maximum potential savings will rise significantly in 2022/23. Employers who have not previously considered this should now do so.

 

Dividends

In order to help fund social care and the NHS, dividend tax rates will also rise by 1.25% from 2022/23. The £2,000 dividend allowance will remain but thereafter the tax rates will be:

  • 8.75% for basic rate taxpayers
  • 33.75% for higher rate taxpayers
  • 39.35% for additional rate taxpayers

Shareholding directors will be used to managing their remuneration strategy with a mix of salary, dividends and employer pension contributions. Many will have adopted a strategy of main dividends and although this is likely to remain more tax-efficient than paying salary, the position should be reviewed in the light of these changes to determine the impact on post-tax income. Pension contributions remain even more tax-efficient up to the annual allowance.

 

Income tax

In England, the personal allowance and basic rate tax bands will remain frozen for 2022/23 so the personal allowance remains at £12,570 and higher rate tax will start to be paid on income over £50,270. Scotland and Wales set their own rates.

The tapering of this relief for those earning over £100,000 is to remain so that £1 of the allowance is lost for every £2 of income over £100,000 reducing to zero once income reaches £125,140. The effective tax on income in this band is 60% so employees with income at this level should certainly consider making additional pension contributions or exchanging income for additional employer pension contributions.

 

Inheritance tax

Tax (IHT) threshold is to remain frozen at £325,000 and the residential nil rate band will also be fixed at £175,000 until 5 April 2026. The result is that more and more people will fall into the IHT net so now is a good time to take advice and review what actions you can take to reduce or remove your liability to IHT.

 

Capital Gains tax

The annual exempt amount is to remain frozen at £12,300 until April 2026.

 

State pension

The Budget confirmed that the earnings element of the triple lock will not apply for 2022/23 so the increase will be 2.5% or the increase in CPI which for September was 3.1%. As a result of this the New State Pension is anticipated to rise from £179.60 per week to £185.15 per week in 2022/23.

With costs such as energy costs rising significantly and much faster than the inflation index, and energy costs being a major expense for many retired people, this change is likely to have a significant impact on the standard of living for many who are retired.

 

Normal minimum pension age

The Budget confirmed that the previously announced change would proceed and legislation is to be included in the Finance Bill 2021-22. This will increase the earliest age at which most pension savers will be able to access their pension arrangements without incurring an unauthorised payments tax charge, from age 55 to age 57. This increase, however, is not to take effect until April 2028.

 

Aspects of the budget relating to businesses and business owners

Corporation tax

It was confirmed that the Corporation Tax rate is to increase to 25% but only for financial years beginning on or after 1 April 2023 and for businesses with profits over £250,000. For small businesses with profits below £50,000, the rate will remain at 19%. There will be marginal relief introduced for businesses with profits between £50,000 and £250,000. Businesses both incorporated and unincorporated will be able to carry back trading losses for three years rather than just one year in 2020/21 and 2021/22 subject to certain thresholds. Businesses should look at the fine details of these changes and take advice on their impact.

 

Support for hospitality and leisure businesses

Recognising that the hospitality and leisure sectors have been particularly hard hit through the recent lockdowns as a result of the coronavirus, the Chancellor announced measures that should enable 90% of businesses in these sectors to receive at least 50% off their business rates in 2022/23.

In addition, it was announced that the business rate system would be reviewed and reformed to make it fairer, more responsive ad more supportive of investment.

 

Research and Development (R&D)

To ensure that the United Kingdom remains at the forefront of innovation, an increase to £20bn in public investment in R&D by 2024/25 was announced which represents around a 25% increase.

Plans to reform R&D tax reliefs to support modern research methods and further support to private R&D investment by increasing the funding for core Innovate UK programmes were also announced. The changes will also be designed to be more focused on domestic activity.

 

Shipping

The budget announced the first reform to Tonnage Tax since 2000, with changes to be introduced from April 2022. The changes aim to attract ships to register in the UK and for more shipping companies to base their headquarters in the UK, use the UK maritime services industry and fly the UK flag. The changes have been generally well-received by the UK maritime industry as a move to strengthen the UK maritime industry.

 

To discuss the impact of the budget on your business, investments, pensions or savings please get in touch. We will be happy to discuss your requirements and ensure your funds are working effectively for you.
For more financial advice, don't hesitate to get in touch with a member of our team.

 

Hanover Financial Management Limited is an appointed representative of Culver Financial Management Limited which is authorised and regulated by the Financial Conduct Authority No. 114852. Hanover Financial Management Limited is registered in England and Wales with number 8586887. Culver Financial Management Limited is registered in England and Wales with number 01157569. The Financial Conduct Authority does not regulate tax advice or trusts. The value of investments can fall as well as rise. You may not get back what you invest.

The Financial Ombudsman Service is available to sort out individual complaints that clients and financial services businesses aren’t able to resolve themselves. To contact the Financial Ombudsman Service please visitwww.financial-ombudsman.org.uk.

 

 

 

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