You can download our Autumn Statement Summary and Financial Planning Highlights here.
It seems that the autumn statement is given as much attention now as the actual budget in the spring. Not a bad thing for holistic financial planning as it gives us time to understand what is on the horizon. Thanks to the people at Technical Connection who have helped us compile the financial planning highlights to ensure that we understand how any of the changes to taxation effect your savings, retirement planning, investments and protection plans.
You can download our Autumn Statement Summary and Financial Planning Highlights here.
How everything has changed ! When I first started my career, in the late 80's, it was in life assurance sales, we weren't consultants, we weren't advisers and neither we were financial planners or wealth managers. We were sales people. It was sales that counted and our managers said the best route to a close, and to have the client signing on the dotted line was to disturb. To create the fear factor. I don't think I was tremendously good at following the party line.
I wanted people to buy from me because I was nice. However, as life and my career has gone on, I' have realised that those stories designed to disturb are rooted in someone's real life experience. So as we go into Hallowe'en here's a belated attempt to disturb you into taking action.
1. If you waited until you are 35 to make the same pension contribution you could have made at age 25, your pension fund at state retirement age will be 67% lower.
2. If you are a 53 year old, you have 168 months before reaching state retirement age and if you want to quit working that's 168 pay packets or salary slips to get as much saved as possible.
3. It costs £154,400 to raise a child to the age of eighteen. Add on a further £47,000 if you want to help them through university. How would your children fair financially if they lost your income and how would that effect their future ?
4. £31,627 per annum is the value of a Mum if she was to go on the payroll. £23,971 per annum the value of a Dad and £23,946 the value of the annual amount of domestic work a parent does around the home.
5. 61% of Dads own life assurance and 51% of Mums own life assurance. Only 13% of parents own income protection and when asked 49% of parents didn't know how long their savings would last if they lost their income due to ill health or disability. If you lost your income through ill health, how would your lifestyle be effected and what plans would you have to cancel ?
6. It is estimated by the government that total receipts for inheritance tax will be £3.3 billion for the tax year 2013 /2014. Less than 4% of estates had to pay inheritance tax and it is sometimes called the voluntary tax for the well advised but do you know what the impact would be on the beneficiaries of your hard earned wealth ?
7. There is no inheritance tax to pay on transfers between spouses and civil partners. Just because you own property ( bricks and mortar) jointly and one party dies it doesn't mean the survivor has no inheritance tax to pay. I see a lot of fathers and sons owning property jointly, mothers and daughters, fathers and daughters etc and where there is no spousal exemption the survivor is deemed to inherit the deceased's half of the property and this becomes assessable for inheritance tax, with the usual rules for the nil rate band applying.
Sources: The Cost of Delay in Pensions Calculator - Scottish Widows
The Value of a Parent 2013 Research - Legal and General
House of Commons Standard Note SN93 - Author Antony Seely - Parliament UK Briefings
Don't hesitate to get in touch if any one of those seven points has made you think and question your financial planning. Here to help.
It was one of those mornings, pelting with rain in which everyone and their brother took to their cars and caused gridlock on Sheffield's roads. Fortunately I had left enough time to get across town to the Advanced Manufacturing Park , where Sheffield Life and Pensions Society were hosting a breakfast presentation from Sam Simpson, the Bank of England's northern representative.
With a cup of tea and a chocolate croissant we sat down to listen to Sam as he gave an overview of the role of the Bank of England and the contents of the Financial Stability Report. As well as setting interest rates, the bank actively monitor and report on risks to the UK economy. You can view the slide presentation at the foot of this blog.
I have to admit that much of the content was possibly more on topic for the investment analysts and discretionary fund managers in the room, but in between "signs of compressed risk premia and increased spreads" there was information of more immediate impact for my clients, especially if you have found it difficult in recent times, to get the mortgage of your dreams.
We are still in an unprecedented period of low interest rates, apparently the lowest for 320 years, I never knew records were kept for so long ! This has led to investors perhaps taking more risk than they need to in the search for yield plus an expansion of credit, both of which were judged to be negative. But the B.O.E doesn't want to put interest rates up by any great amount, as this would impact on household economies, which on average have £200 left at the end of the month, according to their research.
A great deal of work is done by the Bank of England in assessing short term risks to financial stability caused by house price inflation. Although prices in Sam's home of Scotland have only risen by 5%, London has risen on average by 17% in the last year. In order to keep a check on indebtedness the bank has ordered to significant measures:
"When assessing affordability, mortgage lenders should apply an interest rate stress test that assesses whether borrowers could still afford their mortgages if, at any point over the first five years of the loan, Bank Rate were to be 3 percentage points higher than the prevailing rate at origination.
"The Prudential Regulatory Authority and the Financial Conduct Authority should ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5. This recommendation applies to all lenders which extend residential mortgage lending in excess of £100 million per annum. The recommendation should be implemented as soon as is practicable."
If you add this to the impact that the Mortgage Market review has had on the level of new mortgages being offered, you will appreciate why mortgage borrowing has become more difficult and why you need to have a larger deposit than before. The Bank of England are well aware of "leakage" where borrowers denied a residential mortgage are turning to the buy to lector sector for lending solutions. In view of this they have recommended that the same checks and measures apply to the Buy to Let sector.
Interest rates will inevitably rise and Sam informed us that the likelihood would be frequent small increases in the region of 0.15% beginning in March 2015.
Let's see if it is the case and let's see if regulation of the Buy to Let sector will create a fairer market for first time buyers seeking to make a home and landlords seeking to make an investment.
I don't know whether the focus on investment analysis had rubbed off in anyway but the rest of this week's client work seemed to be more dominated by analysis. There was much work to do on moving clients pension funds onto the open architecture that platforms provide and I am pleased to report that our platform fees are lower than the popular d.i.y. provider based in the west of England. I am also pleased to report that clients with generalist insurance company managed funds can benefit from improved performance with less volatility. More about that in another blog.
My thanks not only to Sheffield Life and Pensions Society for putting on this event but also to Jason Hallam of Investec for agreeing to look at a bunch of share certificates. My client who has enduring power of attorney for his father's financial affairs has become a little overwhelmed with all the paperwork. His father has made some interesting share purchases but alas has lost the capacity to let us know which are current and which have been sold. I look forward to my meeting with Jason.
Click here to access the Bank of England presentation on the Financial Stability report.
I listened with anger and frustration to a recent feature on Radio Four's “You and Yours” programme. Our profession is seemingly brought into disrepute yet again, by unregulated and unscrupulous individuals, who were cold calling individual pension scheme members to “unlock” their pension funds. One seriously ill man thought he was doing the right thing and responded to a cold call in order to unlock his pension.
There were quite a few things that got my hackles up. In part, I feared regulated professionals would be tarred with the same brush but also this practice and the disastrous consequences for individuals is, unfortunately, nothing new. The banking crisis of 2008, the slow road to recovery and the difficulty some businesses have in borrowing, has led to the targeting of pension funds as a way to release money, that in turn, can be diverted to organisations seeking working capital. Now it would seem, the forthcoming changes in pension legislation and the fact that not everyone is up to speed with the implications, are creating new opportunities for scams and criminal activity.
In 2013 the Pensions Regulator initiated a consumer campaign with a black scorpion, a creature with a sting in its tail, to raise awareness of various pension scams. Commonly they go something like this...
Members of pension schemes or those with personal pensions are cold called via text or telephone and promised that they can get their pension money early. They are promised that their pensions can be “unlocked” and they will either receive their pension money back or for it to be diverted into something else with better or guaranteed returns such as holiday lets, bio-tech start ups and in the case of this current radio programme, to apparently fund the construction of storage units. It's frighteningly easy to set up a glossy looking website and work out an 8% guarantee on the “back of a cigarette packet”. These alternative investments are not regulated and come with no guarantees or consumer protection.
What these unlocking organisations also fail to mention is their charges and any tax penalties. They will charge you 10-20% commission for their part of the process which will be deducted from the money. Taking pension money before the age of 55 is seen by HMRC as receiving an unauthorised payment so it will not be long before a brown envelope hits the doormat with a demand for 55% of the gross money received ( ie any unlocked money including any commissions deducted) as a tax charge by HMRC as they look to claw back the tax relief throughout the life of the pension. Even if you are unfortunate enough to lose all your money to these scams you will still be responsible for the tax charge.
Its been eighteen months since the black scorpion campaign was launched yet it was reported in August 2014 in a Money Marketing article that some £495 million of people's pension funds have been lost to pension scams despite the checks and measures put in place by HMRC, The Serious Fraud Squad, The Financial Conduct Authority and The Pensions Regulator. The same article reports that small self administered schemes are now the target of ever sophisticated organisations.
And as if matters couldn't get any more dramatic, the seriously ill man who has twice survived cancer, has had to chain himself to offices in Speke, near Liverpool, in order to try and get recompense.
So what's the answer. Education, education, education.
The government wants us to save more and is placing pensions at the heart of their strategies. Legislation has been introduced to make Auto Enrolment into workplace pensions compulsory and yet, so many people don't know the basic facts as to how pensions work.
Here's some basics......
1. Pension schemes registered with HMRC are eligible for tax relief on contributions. If you are an employer or running a business, pension contributions are a tax deductible expense. If you are an employee and you make a pension contribution you make a contribution net of basic rate tax relief . Pension funds grow free of income tax and capital gains tax.
2. Upon crystallisation of benefits a maximum of 25% of the crystallised funds can be taken as a tax free lump sum.
3. Taking money out of pension funds before the age of 55 is considered an unauthorised pension payment and subject to a 55% tax charge.
4. Special provision exists for people with serious illness, subject to the lifetime allowance and medical assessment the entire pension fund could be released as a serious ill health lump sum commutation with no tax charge.
Please please don't let fraudsters and scamsters benefit from your life time savings through ignorance. If in doubt contact the Financial Conduct Authority, HMRC or a trusted regulated financial adviser.
My name is Jill Turner and I work hard to make financial planning engaging. It might seem strange that an investment professional states, “that I care more about how my clients are doing than how the markets are doing”, but let me explain what I mean in this article, which is an expanded version of the latest sixty second presentation to my business referral group.
My inspiration came from what has affectionately become known as the patchwork quilt, to the left. Designed for investment professionals, it graphically represents the rise and fall of different asset classes, ( e.g Gold, UK Smaller Companies, Property, Large US companies etc. ) showing the percentage growth or loss in any given calendar year. If you're struggling to see the small print, it might be handy to download a full page version here and refer to as I go through two, possibly polar extreme examples, of investment journeys that both start at the beginning of 2005. At least you will be able to check my calculations.
For our first journey, let's dust off our crystal ball and chase the investment returns. At the beginning of 2005, we invest £1,000 in Japan and benefit from a cracking return of 40.49%. It would be tempting to stay put and hope for a repeat of these gains but along with our crystal ball we have a nephew working in the City who gave us the inside track that markets were getting tricky. So we sell our Japan fund and invest everything into Gold where we remain until the end of 2008. We managed to keep our powder dry, ready to invest on the gun fire and surely enough as equity prices fall we sell our Gold funds and buy into a UK Smaller Company fund. We stay with this asset class until the end of 2013 and our £1000 has become £8,439 in nine years.
An extraordinary return, an average of 93.7% per annum but remember we were relying on our crystal ball.
But it could have been so different. It's the beginning of 2005 and we open the Sunday papers. There in the money section journalists tells us that Japanese funds are the winners for 2005 and as luck would have it, we get a good return. That's great we file the annual statement and look forward to similar returns next year and the next. As we haven't reviewed our arrangements we don't realise that our Japanese fund has gone down three years in a row. Okay its not too bad, we grit our teeth and hold out for a gain but after another year of losses we get impatient and sell our fund, keeping everything in cash where inertia takes hold and there we remain until the end of 2013. An overall loss of £118 or 1.3% each year and our £1,000 is now worth £882.
So where does this leave me as an adviser and my clients.
I can't influence the markets. My role as a financial planner is strategic planning. This includes working out how much volatility you can tolerate, why you are saving or investing, what timescales you have allowed, recommending an asset allocation and calculating the expected returns and therefore how much you need to save to achieve your goals. Can we second guess the markets or effectively time the markets and know where and when to invest? Maybe with the use of technology, information feeds, inside knowledge, constant monitoring of the markets, talking with politicians about impending changes in legislation and monetary policy. But do we have the time that all of this takes and can my clients in turn afford extra fees for all the extra time this takes? And if its that straightforward to chase returns by switching in and out of different asset classes, why aren't all funds chasing “the next big thing”?
High risk, that's why.
The majority of clients will have their needs satisfied with model portfolios or multi manager multi asset funds, where funds and assets are selected to work together, to create the broadest diversification and to harness expertise across the various asset classes as well as different market conditions. This in turn helps to reduce volatility and give a smoother client journey. Where my clients have more bespoke needs we work in partnership with a number of discretionary fund managers. With market monitoring and outsourced investment solutions taken care of I can devote my time and concentrate on what I do best, caring about how my clients are doing.
How easy do you find it to make investment decisions ? Get in touch and tell us about your investment successes and disasters or use the comment section below for a free copy of "Our Guide to Investing".
Jill Turner 26th June 2014
Up in smoke - is based on today's recent 60 second presentation to my local business referral group. It came about after reminiscing over my very first "proper" job, running the art department in a social services day centre for people with long term mental health challenges. Cigarettes became a type of currency, with an exchange rate pitched at 10 pence, designed in the main, to be a deterrent to smoking. On a personal level, quitting smoking was probably one of the best things I did and it all got me thinking, if you ever wanted a greater financial incentive to stop smoking, then read on.
Did you know..... that in 2014 the price of a pack of twenty Benson and Hedges is now a staggering £8.87 (according to the Tesco website). For someone who smokes twenty cigarettes a day that's £3,237.55 a year. Bear with me and my financial planning twist but if you gross that up by the basic rate of tax at 20% that will give a £4,406.25 annual pension contribution. For a higher rate tax payer this would become £5,395 per annum.
According to a recent report by a well known nicotine replacement patch manufacturer, the average age for someone quitting smoking is 27. So, imagine if you quit smoking twenty cigarettes a day and instead, the money that would have gone up in smoke was invested into a pension plan. By the age of 55 you could have a fund worth £301,000. This has been calculated based on contributions increasing by 2% per annum, investment growth of 5.4% and factoring in 1% for investment fees. Under current legislation, you could take 25% of that as a tax free lump sum giving £56,250 immediately, leaving the remainder to provide ongoing income. That's all due to change soon but that;s the subject of another blog.
So, for now, if you or anyone you know are trying to quit smoking please give them my contact details as this could be a huge financial incentive. Now, I did say at the beginning this was the basis of a 60 second presentation at a business referral group and not a technical blog, but if this has caught your attention please read on for details of how we can also help you to access the Allen Carr EasyWay to Stop Smoking programme at no charge to you, saving you even more money.
I work closely with Pru Protect, one of the world's leading providers of life insurance, income protection and serious illness cover for my clients. They are the only provider who actively offer incentives and rewards to improve your health. Now that's actually quite sensible of them really because the healthier their policyholders are, the less claims they will pay and in return they will reduce your premiums as you get fitter. Its the only life insurance product that I know where premiums can reduce and stay reduced over the term of the policy.
Pru Protect do this through their Vitality programme, designed to engage you with improving your health and rewarding you. Not only do your premiums go down as you achieve your health targets, you can also benefit with discounts various things including, gym membership, health checks, special offers on bicycles, free cinema tickets and what got me started on this, the free quit smoking course.
Here's the link to the Allen Carr EasyWay to Stop Smoking courtesy of Pru Protect. Yes, you have to be a policyholder but life insurance, income protection or serious illness cover its pretty helpful in its own right and once you've been free of nicotine for twelve months, your premiums will come down in price and you will benefit from non smoker rates, a saving of 30-40% on rates charged to smokers for the extra risk they pose in making a claim on their policy.
Most importantly you will be adding 10 years to your life according to a recent reports from the NHS.
If you want some local motivation in Sheffield we are pleased to recommend Suzy Newson of Train with Suzy.
Its not everyday that lawyers open their doors, provide refreshments, showcase videos and invite you to discuss your divorce concerns for free, but it seems as if SSB Law are not your everyday lawyers.
January is always a tricky month, a bit of a downer after the Christmas and holiday festivities, a cashflow drought after paying lots of bills compounded by the holiday overspend and tax payments for the self employed. Maybe as a consequence, it also happens to be the month when cracks in relationships start to show and the number of divorce enquiries received by solicitors increases.
With this in mind the family team at SSB Law launched a series of free coffee mornings where anyone can meet professionals and discuss those niggling questions running around in your mind. Danielle Barbereau, an experienced relationship and crisis coach was available to discuss any emotional issues and Angela Lally, Head of Family was there to share her knowledge and expert legal advice.
As a financial professional it was a priviledge to be invited to be part of the team, on hand to answer any queries people may have regarding pensions, financial assets, mortgages and life cover. I was quite nervous, wondering if someone might ask me a question that I wouldn't immediately know the answer to. There is of course so much we have to retain and after a disturbed night with my daughter teething I worried if my powers of recall would be sufficient. But this wasn't Question Time or Mastermind and what I learnt, is that people don't generally have the day to day knowledge of financial products and financial planning, that I perhaps take forgranted. It is easy for what I consider to be a relatively "simple to solve" problem, to occupy someone's thoughts and create sleepless nights.
I left the coffee morning feeling pleased that we didn't need to engage in conversations concerning reductions in yields, cash equivalent transfers, projected benefits and annuity rates, all the issues that fill my head and are the subject of current client reports. Instead, it was the simplest of questions, " Will I be able to afford the mortgage on my own" and it was the answer, Yes, that gave the greatest peace of mind.
So next time I am networking or someone asks me what I do, I'll keep it simple and say, I help people sleep at night.
Employers are undertaking one of the biggest changes to pension provision in UK history, with major with major implications for advisers. So there we all were, a gathering of the clans coming together for the quarterly conference of the Personal Finance Society. Advisers young and old, sole practitioners and large firm representatives, tied and independent all waiting to hear the latest update on 'Auto Enrolment and the Duties of the Employer' from Gareth Hughes, Senior Financial Planning Manager at AVIVA.
It is fair to say we generally expected to hear, firstly an overview of the current experience of auto enrolment, and ways in which we as advisers can help business owners and finance directors navigate the process. What we didn't expect to hear was one bombshell after the other.
To begin with, we heard that traditional pension offices are beginning to cherry pick and close their doors to all but the largest employee schemes. It perhaps makes short term economic sense to turn away employers only willing to make the initial 1% of salary contribution, particularly if they only have have half a dozen employees.
Employers must auto enrol their workforce into a workplace pension by their staging date and have a payroll system that doesn't just manage the pension collections but is also capable of the more sophisticated reports that are needed.
Now for the next bombshell. Speaking from his own company experience, AVIVA, Gareth said that companies with six months or less to their staging date are being turned away, "We can't help if you are six months away from your staging date. My daughter always wishes that she started her homework earlier, its no different, you can't start early enough with this".
Auto enrolment has already started for the largest employers with 1.7 million already enrolled into workplace pensions. According to the Department of Work and Pensions, there is going to be a huge spike in numbers of companies with a staging dates from April to August of 2014 with an overall number of 40,000 companies needing to comply with auto enrolment and possibly £130,000 employees per month needing to be "processed".
Now the third bombshell, the government and the Office of Fair Trading are looking at a charging cap on the annual management charge for schemes used for auto enrolment and it seems likely that this will be set at 0.75% per annum. Yet this still has to be passed by government, who are looking to make an announcement in April 2014 for implementation by 2015. A date after which many companies will have auto enrolled and, if they have chosen to use schemes where the annual management charges are above 0.75% then they may well have to be unravelled in order that lower charges can be applied.
So are we heading for a meltdown - possibly but if not a meltdown employers might only have recourse to N,E.S.T to comply with auto enrolment.
Perhaps not if you take Gareth's advice, " you can't start early enough with this". Accepted advice from the experts is you that employers need to start planning for auto enrolment eighteen months before the staging date. This can be found out by entering your PAYE reference number on The Pensions Regulator Website.
Here is a short breakdown of issues that you might want to consider in the workplace around auto enrolment.
1. Identify your staging date and basic duties as an employer.
2. Assess your staff and identify who is classed as a worker, who is an eligible job holder, a non eligible job holder and an entitled worker.
3. Identify what is considered as qualifying earnings, re-examine contracts of employment
4. Examine your existing scheme, are the charges compliant, are the contribution levels sufficient and compliant
5. Budget for cost of options, for consultancy fees and for any improvement to the payroll.
6. Is the payroll system robust, does it have an integrated approach, do you require a third party system ?
7. Is your employee data clean and wide enough to allow assessment. Is hiring and firing done on the same site?
8. Evaluate your communication strategy with the workforce.
9. Send communications to the workforce
10. Train someone within the company to manage the new payroll and reporting responsibilities.
11. Conduct some dummy runs.
.....and at the end of all this if as an employer you fail to stage and auto enrol your workforce in time there is a fixed penalty of £400 plus daily penalties, ranging from £50 for small employers with 1-4 workers to £10,000 per day for those with 500 or more. For wilful failure to comply the employer could face a custodial sentence.
More information can be found at:
It's the money that goes into a pension plan in the earliest years, with the longest time to grow that really makes the difference. Meet my youngest pension clients age four and five.
Thanks to their grandmother, who is paying pension contributions on their behalf, these boys will have a real head start. Whilst they won't be able to access any of the benefits until age 55, if contributions are maintained at the current level there pension funds will be £2,070,000.
They won't have the worry of having to make huge pension contributions in their middle years "to catch up" and there's some great tax advantages to this arrangement too, which benefit the whole family. Let me explain.
Their grandmother, unfortunately widowed, was left financially secure thanks to a number of large life assurance policies and a portfolio of properties generating a secure and increasing income.
As part of the strategy to reduce her estate and ultimately the burden of inheritance tax for the next generation, our grandmother is utilising all the annual gifts and adopting some other strategies. In addition, she is making regular payments as part of her normal expenditure, utilising the fact that third parties can make pension contributions for someone and benefiting from the H.M.R.C. rule that states : " any regular gifts you make out of your after-tax income, not including your capital, are exempt from Inheritance Tax. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle and include monthly or other regular payments to someone. "
Now another H.M.R.C. rule allows tax relief on pension contributions at 20% for non earners for gross contributions up to £3,600 per annum. In practical terms, our grandmother can make pension contributions of up to £2,880 for each grandchild, each year. A reduction in her estate of £5,760 each year , without reducing her lifestyle . If this continued for at least twenty years, assuming the property portfolio continued to generate rate this would amount to £115,200 leaving her estate and a potential saving of £46,080 in inheritance tax. Our two grandchildren as recipients of the contributions will be entitled to the tax relief at 20% and will receive £3,600 into their pensions each year. By the age off 55 if the contributions are maintained their funds will be £2,070,000.
Having agreed the framework for the pension contributions part of my work, as a financial planner has been completed. The next stage, that of implementation involved, setting timescales, an assessment of the attitude towards investment risk and capacity for loss. Capacity for loss was an easy one, our grandmother wanted to reduce her estate and therefore could afford to lose the money. However, someone had worked hard for that money and it would be wrong to be complacent, indeed our grandmother has a very cautious attitude and if it made sense she would keep all her money in cash deposits. The boys will be benefiting from the gift of pension contributions, therefore it is their attitude towards risk that we must consider. As they are minors we adopted the risk attitude of their father and given his experience of investments and the timescales involved he felt comfortable with taking an adventurous approach.
With this aspect agreed, it was time to research which included the formulation of an asset allocation, selecting appropriate investments , comparing the annual management charges between different products and platforms before making the final recommendation. The investments also included some ethical investments that although equity based and didn't fit with our grandmother's cautious nature, they did fit in with her ethical outlook so that was an added bonus for her.
Extract from HMRC - IHT Manual
HMRC guidance on IHT exempt gifts
Whilst reading the blog articles please be aware of the following:
Welcome to the blog curated by Jill Turner. The pages are not intended to give advice, they are just the real life stories from a real life financial planner and the wonderful people I get to meet.
I want the pages to be engaging, informative and purposeful.
The information contained within this blog is based on our understanding of current government proposals and tax
law, both are liable to change in the future.
Jill Turner is a member of the Personal Financial Society