Should I make a payment protection insurance claim?
31/05/2011
Banks gave up their legal fight to avoid compensating customers who were wrongly sold Payment Protection Insurance (PPI), and have had to set aside £billions in expectation of a claims deluge.
Should you make a claim, and how do you go about it?
Background to the problem
Payment Protection Insurance provides protection to cover a loan or credit card repayments in the event of being unable to work due to sickness or unemployment.
The product itself is not necessarily a bad one, but many offer poor value, and were mis-sold. Many lenders stated that the insurance was compulsory. Indeed they had a right to do this in order to protect their repayments against sickness or unemployment, but the lender had no right to insist on its own product. Many of these in-house policies offered poor value.
Worse than that, many consumers were “forced” to take out these policies even though they were never eligible to claim and therefore had no cover. Examples were those who were, unemployed, retired or self-employed.
Some already had pre-existing conditions, or an illness which prevented them from working, and some had the same cover elsewhere but were not asked if they had existing cover.
What did the regulator do?
The Financial Services Authority (FSA) addressed the PPI mis-selling issue by issuing selling rules, and indeed has already fined providers large sums for poor selling practices.
Adding a single payment PPI policy onto your loan, thus paying interest on your premium, has been banned.
The FSA have also ensured that PPI cannot be sold at the point of loan/credit purchase, so that the consumer has time to compare policies elsewhere.
What does the High Court ruling mean?
The FSA not only altered the rules on how PPI should be sold, but backdated them, thus upsetting the main providers, i.e. the banks.
The reason that the banks have given up their legal fight to avoid compensation claims is that the High Court ruled in favour of the FSA, resulting in the banks having to review past cases, and forcing them to ask their customers if they think they have been mis-sold PPI cover.
However, customers should not wait for their banks to contact them. They should lodge a complaint directly as soon as possible.
Was I mis-sold PPI?
You may have a claim if:-
- If you did not receive all the necessary information, and had it explained to you
- If you only found out that you had PPI when you started to receive statements
- The box on the application form had been pre-ticked
- Were in formed that it was compulsory to take out their PPI insurance
- Your loan would be denied if you did not take out their PPI policy
- Were sold shorter policy term than would cover the loan
- If you would never have been able to claim – i.e. were retired, self-employed or have a pre-existing medical condition
It would be wise to find out if your bank had already been fined for mis-selling.
Who should I complain to?
You must contact the provider first. There are many template letters available on the internet if you need guidance.
They are likely to reject your claim, at which point you should contact the Financial Ombudsman Service (FOS) and follow their instructions.
If the FOS finds in your favour it can order the provider to refund you the premiums you have paid and award anything up to a maximum of £1,000 in compensation.
The process may take months but the FOS have found in favour of three out of every four cases.
We believe, like all financial products, you should seek fee based independent financial advice before proceeding.
Payment Protection Insurance (PPI)
13/05/2011
The British Bankers’ Association (BBA) has announced it will not appeal the High Court’s ruling against its challenge to how payment protection insurance (PPI) compensation claims should be handled.
The High Court last month dismissed the BBA’s action against the Financial Services Authority (FSA) guidelines on compensation for PPI mis-selling.
It said in a statement: ‘In the interest of providing certainty for their customers, the banks and the BBA have decided that they do not intend to appeal.
‘We continue to believe that there are matters of important principle which we will be taking forward in other ways with the authorities.
The BBA’s move follows Barclays’ decision to join Lloyds in declaring it would not back any appeal. Barclays said it had made a £1 billion provision for the costs of PPI compensation, while HSBC said it had set aside $440 million (£268.7 million).
Barclays said it had agreed with the FSA to begin to process all on-hold and new PPI complaints. Chief executive Bob Diamond said: ‘We have taken this decision because it is in the best interests of our customers, as well as for Barclays and its shareholders; creating certainty, particularly regarding past issues, is of benefit to all parties.’ ‘We don’t always get things right for our customers; when we get them wrong, we apologise and put them right. That’s our commitment to our customers, and it applies to the way in which we will deal with PPI complaints.’
Lloyds said last week it had made a £3.2 billion provision for the cost of covering claims.
The UK economy and small companies
06/05/2011
A gap has emerged between the growth of small and large companies.
A survey has shown that companies with less than 50 employees have reported less growth in profits than those with more than 250 employees.
Small businesses are suffering from reduced margins, as many companies are still overall generating revenue growth.
Furthermore, the rate of recovery of small businesses has reduced over the past quarter and sales fell and job reductions increased in this sector over the period.
The exception is small manufacturing companies which largely have increased their sales over the quarter.
Although banks have promised £190 billion to small firms, they have been accused of choking Britain’s economic recovery by not lending or charging high rates of interest.
The gap between rates of interest charged to smaller companies and larger firms has risen to record levels.
This gap is being widely publicised and the feeling is that banks have pulled the wool over eyes of the government, so perhaps pressure may be applied to them to aid economic recovery
Super Injunctions – The Rights and Wrongs
06/05/2011
Super injunctions don’t usually fit within the financial world, having more of a place in the celebrity world, shielding those who wish to keep their ‘extra curricular activities’ from the worlds press.
The matter has now become of public interest thanks to a certain Fred Goodwin former head of the Royal Bank of Scotland before it’s near collapse and £45 billion bailout from the government in 2008. Goodwin took out a super injunction to shield his private life, no alarm bells there – just another person in the public eye gagging the press from reporting on their extra-marital dalliances. What is of grave concern and in public interest is that he could be using the injunction to hide information relevant to the collapse of the Royal Bank of Scotland.
The super injunction means that not only will journalists be barred from reporting the story but astoundingly also bars them from actually reporting the existence of the Super Injunction.
This actually raises the issue of should the super injunction have been granted in the first instance? If it is the case and it is being used as ‘smoke and mirrors’ for the Royal Bank of Scotland failure then the tax payer had to foot the bill for the bailout.
If Goodwin is just attempting to shield his private life, he is clearly not doing a very good job as public interest relating to the scandal is greater than ever! Of course the other question raised is do these fancy super injunctions really even work when a few taps of a keyboard and a Google search will usually give you the answer you’re looking for.
What happens when QE2 ends?
05/05/2011
QE or quantative easing is effective “money printing” by central banks- the USA being the worst culprit at present resulting in the huge fall in the value of the dollar.
Where the markets are concerned the QE debate boils down to two basic fundamental positions of those that are profiting from the stocks and commodities bull markets against those of perma-bear persuasion that not only consistently miss whole bull markets but give up all of any gains they may have made during preceding bear markets. Now whilst some may conclude that it is a case of perma-bears arguing against perma-bulls, however that is not quite accurate for in a bull market Investors must be a Bull, likewise in a bear market, investors should be bears, because that is how one preserves and grows ones wealth and not by betting against EITHER bull or bear markets.
The whole point of QE money printing asset buying was to generate economic growth by means of boosting the wealth effect. What the central bankers such as the Fed and BoE never factored into their formulae’s was that the Banks would use the cheap money to buy stocks and commodities on leverage rather than make loans to main street, hence sending asset and commodity prices soaring well beyond even the real inflation rates of between 7% and 9%, despite the fact that they did the exact same thing during mid 2008 to crude oil.
Implication for stocks – Just as QE1 and QE2 were BULLISH (inflating asset prices) so will QE3 and after it QE4 that reinforces the primary bull market trend.
Will the U.S. stop printing money whilst the budget deficit remains anywhere near 10% of GDP (current approx 9%)?
Is there likely to be QE3 and potentially QE4? – I think so – it’s just we don’t know when!!
When QE1 stopped, the markets went into freefall and were only saved by the announcement of and enactment of QE2. This current phase is scheduled to stop at the end of June 2011.
Conclusion
In terms of market timing, weakness ahead (how much could the market drop?) at the end of QE2 in May/June and into the no mans land before the likely announcement of QE3.
Junior ISA’s
01/04/2011
Six million children who missed out on child trust funds (CTF) because they were born before the scheme was launched or after it was scrapped will be able to invest in a tax-free Junior Isa from 1 November 2011.
The government is set to confirm that the scheme will have a maximum annual allowance of £3,000, which can be invested in stocks and shares or in a cash deposit. But unlike the adult version any money invested will be locked in until the child is 18.
Junior Isa will be sold by high street banks, building societies, investment companies and friendly societies already selling Isas. The government expects 800,000 children a year to benefit from Junior Isas, on top of those already eligible, including children in care.
Optimistically, the government says that if parents contribute the maximum amount each year a child could see resulting funds of up to £80,000 – a 48% growth rate.
CTF holders will not be allowed to apply for a Junior Isa, but the CTF investment limits will be increased to £3,000 a year from the current £1,200 to make sure holders do not miss out. All children born between 1 September 2002 and 3 January this year automatically received a CTF voucher for £250 or £500 (for those from low income families) at birth, and again on their seventh birthday.
John Reeve, chief executive of Family Investments, a friendly society with more than a million CTFs under management, welcomed the development: “The Junior Isa will be a welcome tool to help families save towards university fees.”
Our view is that although it makes sense to save for your children’s future needs the fact that they can fully access the money at 18 is a concern.
Unless you are fully using your own ISA allowances annually we believe these new ISA’s should not be utilised.
As always good independent fee based financial advice is essential.
What does the Budget 2011 mean for you?
01/04/2011
Income Tax
Take home pay for many will reduce and more will pay higher rate tax. In order to minimise tax you should consider maximising pension contributions and possibly get below the basic rate level. Hold investments which do not generate taxable income such as ISAs and life company bonds. Also ensure that the lowest tax-paying partner holds the investments as much as possible.
National Insurance Contributions
The earnings bands and rates are changing, again reducing take home pay for many. Sacrificing salary in lieu of other benefits, such as pensions, will become more attractive for employers and employees alike.
Corporation Tax
Reduction in main rate
Legislation will be introduced in the Finance Act 2011 to reduce the main rate of corporation tax for all non-ring fence profits from 28% to 26% for the financial year beginning 1 April 2011, and from 26% to 25% for the financial year beginning 1 April 2012. The main rate for ring fence profits will remain at 30%.
Reduction in small profits rate
The small profits rate of corporation tax for all non-ring fence profits will be reduced from 21% to 20% for the financial year beginning 1 April 2011. The small profits rate for ring fence profits will remain at 19%.
The main rate will reduce over time and so companies at the main or marginal rate may wish to make pension contributions for directors or employees sooner, in order to maximise tax relief.
Capital Gains Tax
The capital gains tax annual exemption amount (currently £10,100) will be increased in line with the consumer price index rather than the retail price index. Parliament will still be able to override this if it determines a specific amount should apply. This will apply for the 2012/13 tax year. Individuals should seek investments which utilise their annual exemptions.
Entrepreneurs’ relief
The lifetime limit on gains qualifying for capital gains tax entrepreneurs’ relief will be increased from £5m to £10m for qualifying disposals on or after 6 April 2011
Inheritance Tax
The inheritance tax nil rate band has been frozen so more estates will pay tax.
From April 2012 the bill will reduce by 10% if 10% of the net estate is given to charity. In other words, if you donate 10% of your estate (after tax) to charity, then you will pay 36% inheritance tax on the estate over the IHT nil rate band. The detailed implementation is still to be decided, but it would appear that, although beneficiaries will not profit from the alteration, it is a cost-effective way to give to charity or reduce the estate tax bill.
However, there are some tax-savings with regards to pensions, and these are highlighted below.
Pensions
Pensions Tax Relief & Annual Allowance
Proposed changes now come into effect in April 2011, meaning that those expecting to invest more than £50,000 into pension should consider other savings products such 3rd party pension contributions, ISAs, insurance bonds, OEICS & unit trusts.
Those who planned to make large pension contributions in the year of their retirement will need to start earlier due to the change in current exemptions.
The current restriction for higher earners has been altered and allows those individuals to catch up on missed contributions.
Lifetime Allowance
The maximum fund which you can accumulate without paying tax on it, is reducing. Protection is to be introduced to protect those with or expecting have funds of over £1.5m.
Those with large funds sizes should consider Relevant Life Policies for their life assurance so that they will pay less tax and not affect their lifetime allowance.
Pension Annuitisation
Also known as the ‘age 75 rule’, the changes commence from April 2011.
Most people will still prefer to take an annuity to provide their pension income, but given that there is now a 55% tax charge on lump sum death benefits after age 75 it is unlikely that individuals will leave their funds uninvested after this age.
For those over age 75, it might be worth considering income recycling by taking maximum cash and buying pensions for partners and/or children.
Drawing down income might be considered to mitigate the 55% death benefit charge.
Alternatively individuals may consider producing income for dependants (income benefits do not attract the 55% charge).
Inheritance Tax and Pensions
Where an individual failed to take benefits from a registered pension scheme as an income, then inheritance tax could be applied to the fund on death. This will be removed from April 2011.
For scheme members new inheritance planning options may be available. For instance, a member could defer taking benefits until age 75, and using the new rules, draw down income to make immediately exempt gifts out of income into a trust.
The use of a specific trust could allow a member to supplement income when required yet protect the estate on death.
State Pension Age
The SPA will be increased to 65 for women and then to 66 for men and women. The government is also considering the timetable for increasing the SPA to 68. Anyone born between 1953 and 1960 may need to review their retirement plans.
Approved mileage allowance payments
Regulations will be laid immediately to increase, from 6 April 2011, the rate of approved mileage allowance payments for cars and vans from 40 pence to 45 pence for the first 10,000 miles of business travel in a tax year.
In Summary
Although the 2011 Budget appeared to be relatively dull, there are some opportunities for estate planning, pensions and protection. As usual, these are complicated and you should seek the advice of a qualified, independent financial adviser
European gender ruling
07/03/2011
Politicians and insurance experts have attacked a ruling from the European Court of Justice which prevents insurers treating men and women differently when assessing risk. The decision has huge implications for pensions, life cover and car insurance.
How has this happened?
European judges have put a ban on insurance companies from assessing risk based on gender, which in turn completely changes the pricing of, motor insurance annuities life and medical cover and turns it on its head.
Assessing risk based on gender has been standard practice for years for insurers to ascertain rates in these areas according to proven statistical differences between male and female.
Using these proven statistics it is said that women, in general live longer than men and have when it comes to female road users have fewer road accidents than men. The term ‘boy racer’ does tend to spring to mind! Fewer road accidents mean lower car insurance for women but lower annuity rates when converting their pensions into a retirement income stream.
The European Court of Justice in Luxembourg ruled that using behavioral differences between men and women when setting premiums breached EU rules on equality. ‘Taking the gender of the insured individual into account as a risk factor in insurance contracts constitutes discrimination,’ the court said.
Implications:
Research for the Association of British Insurers shows women under 25 could see their car insurance premiums leap by 25% on average. Men may pay slightly less than they do now,
In pensions women could benefit from a 6% rise in annuity rates though men could suffer an 8% fall, reducing their retirement income.
Similarly, life insurance for women could soar by 20% while men could see a fall of 10%.
However, there is great uncertainty as to what will actually happen. The ruling is not due to take effect from 21 December, 2012. There are fears that insurers will exploit the confusion to push up their margins. They will also face one-off costs changing their systems in light of the ruling.
‘Madness’
In their decision the judges followed advice from the court’s advocate-general that ‘higher-ranking’ equality provisions set out in the Charter of Fundamental Rights of the Lisbon Treaty must now apply. Discrimination in setting insurance rates until now had been permitted under EU rules, if gender was a ‘determining risk factor’ backed up by actuarial and statistical data.
The leader of Britain’s Conservative MEPs, Martin Callanan, blamed the last Labour government for the outcome. ‘By signing us up to the Charter of Fundamental Rights in the Lisbon Treaty they have opened the floodgates to nonsense court rulings like this one.’
Is the current system unfair?
The judges issued the ruling in response to a challenge by a Belgian consumer group, Test-Achats. It had argued that the current exemption for insurers contradicted the wider European principle of gender equality.
David Trenner of Intelligent Pensions said the verdict could lead to a more sophisticated underwriting of annuities. He pointed out that differentiation based on gender alone had always been a ‘very crude’ way of estimating life expectation.
‘My late grandmother and Queen Elizabeth the Queen Mother were both born in 1900. Both were females, but whereas the Queen Mother died in 2002, my grandmother died in 1972 a full 30 years earlier, he said. ‘This example highlights very strongly that gender alone does not determine life expectation!’
Martin Lewis, the creator of MoneySavingExpert.com, said there was ‘some logic’ to the ban in regard to car insurance. ‘Gender price differences there are based on behavior. Why should one man pay more because others behaved badly? Would we allow the same to happen based on racial differences?’
However, Lewis went on to say that in the main, the ruling was ‘ridiculous.’
Another blow to pensions
Pensions expert Dr Ros Altmann warned that annuities would become more expensive as four-fifths of annuities are bought by men. ‘Currently, men buy around eight out of every ten annuities sold in the UK and all of them risk receiving much lower pensions as a result of this decision,’ she said. ‘This means that future UK pensioners will be even poorer than they otherwise would be. ‘
Laith Khalaf, pensions analyst at Hargreaves Lansdown, said the firm expected a reduction of between 5-10% in male annuity rates. ‘It remains to be seen how much of an increase women get when they buy their pension,’ he noted.
A 65-year-old man with about £100,000 would currently receive an income of about £6,500 a year from an annuity, Khalaf said, reflecting a rate of 6.5%. The European court ruling would move that rate down to about 6.2%, he pointed out.
‘If you think about what that means in terms of your annual income, if you’ve got that £100,000, you are moving from £6,500 a year to £6,200 a year – that is a loss of £300, that is around 5% of your annual income that you are losing,’ he said.
Warning over income drawdown
Billy Mackay, marketing director of pension provider A J Bell, warned that the ruling could also have a knock-on effect in the long run on the rates at which men can draw down income from their pension pots as well, because these are intended to reflect annuity rates.
‘GAD [Government Actuaries Department] rates have only just been reviewed,’ he said, referring to the official limits for income drawdown. ‘Another review to reflect this ruling is a distinct possibility.’
Meanwhile, Gemma Goodman, head of operations at Alexander Forbes Annuity Bureau, said the anticipated drop in male annuity rates was small compared to the bigger problem of people failing to shop around for the best annuities. By simply buying their annuity off the company they had saved with ’66% of people miss out on potentially a 35% increase in income’, Goodman said.
Inheritance tax changes may be coming
21/02/2011
Inheritance tax -IHT is a concern for many clients and some may be looking to carry out
estate planning in such a way that the liability to IHT is mitigated as far as possible.
‘Liability’ should be discussed in two separate ways. Liability itself is concerned with who must actually send any IHT due to the revenue. Who bears the ‘burden’ of IHT may be different and not something that HMRC is concerned with but will undoubtedly be of interest to your clients.
Lifetime Chargeable Transfers:
IHT charged on the value of a lifetime chargeable transfer (taking into account
the Nil Rate Band) normally falls due six months after the end of the month in
which the transfer takes place however, if the transfer takes place between 6th
April and 30th September then IHT is due on 30th April the following year.
The liability for and burden of IHT in lifetime transactions lies with the
transferor although it is possible for the transferee to agree to pay the tax. There
is only likely to be a lifetime chargeable transfer where assets are put into a
discretionary trust (as gifts to individuals are a PET). If the tax is not paid by the
transferor by the due date then the trustees will become liable.
Where a person dies within 7 years of making a lifetime chargeable transfer on
which tax was due then additional tax may become payable though credit will
be given for tax paid. This will be due six months after the end of the month in
which the death occurred. The primary liability for this tax lies with the transferee
(i.e. the trustees). If the tax remains unpaid then HMRC can seek payment
from anyone who has an interest in the settlement or from the personal
representatives of the deceased’s estate.
PETS which become chargeable:
Where death occurs within 7 years of making a PET and a tax liability arises it
must be paid six months after the end of the month in which the death occurs. The transferee is primarily liable for the tax and bears the burden. If the tax is unpaid then the personal representatives of the estate are liable.
IHT due on death:
IHT payable on death is again due six months after the end of the month in
which death occurred. Where the liability and burden for IHT fall depends on the
property comprised within the estate. On the deceased’s free estate the personal
representatives will be liable for the IHT. If the Will is silent as to the burden then
tax is normally borne by the residue. If the testator has stated in the Will that
gifts are to bear their own tax then this direction will normally prevail.
Where the estate contains settled property in which the deceased had an
interest then the trustees are liable for the IHT due. The burden falls on the
property held by the trust.
If there is property that passes outside the Will or intestacy then it is the
beneficiary of that asset that bears the burden, although liability still rests with
the personal representatives.
As all the current IHT rules are currently being reviewed you should act sooner rather than later to put IHT mitigation into place.
Life Expectancy is rising
21/02/2011
News was slow over the Christmas period but when the Pensions Minister, Steve Webb, issued a statement to say that 17% of the current UK population would reach the age of 100 the press made the most of it. Headlines included – over 10 million centenarians but it was not made clear that this would take many years to happen.
This really should not have come as a shock, life expectancy has been rising for many years but the change will not happen quickly. At the present time the 100+ population of the UK is very small. Only 11,800 people in 2010 received a telegram from the Queen but in 1984 it was just 3,300. In 2021 this figure is predicted to rise to 26,000, in 2035 97,300 and in 2080 627,000 with at least 21,000 of those will be aged at least 110.
Figures also suggest that around 3m of today’s under 16s will reach 100 and 5.5m of those aged 16-50. Only about 12% of today’s 51-65 years old will achieve a three figure age.
As National Statistics says in its latest edition of ‘Population Trends’, ‘The major contributor to the rising number of centenarians is increased survival between the ages of 80 and 100, owing to an overall improvement in medical treatment, housing, living standards and nutrition’.
As none of as know how long we are going to live the question is – What are the implications of outliving my money and what are the implications of my money outliving me?
Financial planning and Estate planning is essential and should not be put off until its too late
Top 10 bizarre UCIS (unregulated collective investment schemes).
10/02/2011
Life Settlements
The track record of betting against the lives of elderly and ill Americans is problematic, and there are plenty of new players entering the unregulated life settlement space.
Teak
Teak is a popular building material due to its unique hardness and durability and managers claim its investment in sustainably managed Brazilian team plantations offers low volatility and consistent returns.
Polish Property
Investing in unusual properties in unusual places is a favourite for UCIS especially the Polish, Croatian and Romanian property markets.
Violins
The invests in rare violins and Violas with the aim of generating non-correlated returns with a target of 15% per year. It invests in Stradivarius instruments which can often cost millions.
Film Schemes
The movie business is uncertain but that does not deter investors looking for a revenue stream unrelated to the stockmarket. When a film does well the backers reap big rewards but there are almost no guarantees.
Esoteric Finance
The sidelines of the corporate finance world have proved a popular target for UCIS funds. One of the most successful funds provides financing for small companies in the UK, Europe and Canada and has delivered annualised returns of 17.91% since its launch in 2004.
Art
Art has always been popular for high net worth investors and institutions. Some funds have attracted $100 million of assets under management.
Wine
The value of fine wine has risen in recent years fuelled by an interest in premium brands from China and South East Asia. Wine auctioneer Sotheby’s made record sales last year of $73M.
Legal Financing
Litigation Financing is an expanding area and provides the cash needed to launch law suits – this fund has financed cases overturning credit agreements and pursuing negligent solicitors and aims for a return of 11% per year uncorrelated with the stockmarket.
Wind farms
Green energy is a great investment story given the twin drivers of climate change and the energy generation crunch facing the UK over the next 20 years.
We are not suggesting your invest in any of these types of investment without great due diligence. As always experienced investment advice is essential
Let the taxman help pay for your life assurance – Relevant life policies
10/02/2011
If you’re a company director and you have life assurance in place to protect your family, you could be paying more in premiums than you need to.
Relevant life policies are a way of providing death-in-service benefits on an individual basis no matter how small your business is.
Who are Relevant Life Policies suitable for?
• Small businesses that do not have enough eligible employees to warrant a group life scheme.
• High-earning employees or directors who have substantial pension funds and do not want their benefits to form part of their lifetime allowance.
• They are not suitable for the self-employed or equity partners, although their employed staff could be covered.
What are the benefits?
Although the company pays the premiums, they are not normally assessable to income tax on the employee as a benefit in kind. This can be a significant saving, particularly for a higher rate taxpayer. Savings of up 60% in actual costs are achievable.
Unlike a registered group scheme, the benefit will not form part of the employee’s annual or lifetime pension allowance.
These payments may be treated as an allowable expense for the employer in calculating their tax liability, as long as the local inspector of taxes is satisfied they qualify under the ‘wholly and exclusively’ rules.
In most cases the benefits are paid free of inheritance tax – provided the benefits are payable through a discretionary trust.
What are the advantages of using a discretionary trust?
There are restrictions in the legislation as to who benefits can be paid to. The use of the trust is the most practical way of ensuring these requirements are met. The beneficiaries who could be included are usually family members and dependants.
Having benefits paid through a trust ensures they cannot be taxed as part of the company’s trading income, nor do they form part of the company’s assets.
The trust is discretionary, allowing trustees to be flexible in who they pay benefits to. However the employee can advise the trustees of his or her intentions by completing a nomination form. Although this is not legally binding on the trustees, it helps to guide them. The trustees will normally be the directors of the company.
Using a trust also ensures that in most circumstances benefits are paid free of both income tax and inheritance tax.
Cover limits
• The legislation does have some limits to qualify for the tax concessions, and to ensure these are met the cover must be paid in a single lump sum before the age of 75.
• Only death benefits can be provided.
• Benefits must be paid through a discretionary trust.
• Beneficiaries are normally restricted to family members and dependants.
• Maximum cover of £5,000,000 or 15 times the employee / director’s remuneration. This can include salary, regular dividends paid in lieu of salary and any benefits in kind.
In Summary
Rearranging your life cover as a Relevant Life Policy paid by your company rather than personally could save 60% of the premium – potentially thousands of pounds over the term of the policy.
Like all changes to your financial plans ensure you get help and advise from an experienced financial planner and adviser
Barclays Bank closes financial planning arm
08/02/2011
Following a review Barclays is planning to stop offering financial advice through its retail branches by closing Barclays Financial Planning as it was deemed no longer commercially viable.
Barclays said it expected to offer retail investment advice online, and that it expected financial advice in bank branches to decline.
‘Barclays has been conducting a detailed review of its financial planning advice over recent months. This review has concluded that, given the changes to the retail investment marketplace, it is unlikely that this business would be able to deliver a return that would justify the investment required,’ said a spokeswoman.
Barclays said it will shift its focus to online execution only service Investor Zone and that existing plans and investments currently held by customers will continue to be serviced.
The bank was recently fined £7.7 million by the Financial Services Authority for mis-selling two Aviva funds.
The next big worry for the eurozone
08/02/2011
Spain
After a warning from the credit rating agency Moody’s that Spain’s credit rating might be downgraded, the euro slid hard against the dollar yesterday (16th December 2010). Spain is the big worry for the eurozone. Ireland and Greece were nasty blips, but they could be coped with.
A bail-out for Spain would be much harder to swallow. To sort that one out, the leaders of the eurozone would have to come to a much more long-term solution to the region’s debt problems.
Spain has three main batches of debt to worry about:
• the central government has to raise and refinance a very substantial sum in 2011, some €170bn
• loans from the regions, €30bn worth also needs to be rolled over next year
• and another €90bn of borrowing by the banks.
Foreign investors aren’t keen on eurozone debt at the moment and a further problem for Spain’s government is that it has historically relied on overseas buyers “for about 50% of all the money it raises.”
That’s all bad enough. But it could get worse. Moody’s is worried that banks might have to raise more capital, which would probably have to come from the Spanish government. And there’s also the danger that austerity measures aren’t being imposed strictly enough. In all, Spain could end up needing to raise a total of €365bn, or 34% of its GDP next year.
Portugal
Portugal is trying to borrow more money from the markets via a bond auction this week. It will be selling ten-year government bonds. It’s the first of the most indebted eurozone countries to try to sell its debt this year.
The problem isn’t so much that the auction might fail. The real problem is the rate at which Portugal has to borrow.
As Bloomberg notes, the yield on Portugal’s existing ten-year bonds has been driven up over 7% on ten of the last 62 days (in other words, the price of ten-year bonds has fallen). A year ago, it cost Portugal just 4% to borrow money for ten years.
Why is that significant? Because 7% seems to be the magic number at which countries are destined for a bail-out. “Greece needed a rescue within 17 days of its ten-year yield breaching 7%… while Ireland lasted less than a month after it cracked that level in October.”
Portugal’s real problem is that its economy is stagnant and its private sector is over-borrowed. As with so many other global economies, years of overly-lenient interest rates allowed consumers to party at a time when their economy should really have been reformed to improve productivity growth.
The problem is that if Portugal is bailed out, it reduces the amount of money left over in Europe’s big bail-out fund for other troubled countries. And there are at least two of those lining up. There’s Belgium, which has a large national debt and no government to tackle it. And then there’s Spain, which is trying to raise money from the market later this week too. The yield on ten-year Spanish government bonds is around 5.5%.
The good news for the eurozone is that both Japan and China have weighed in to say that they will support Europe. Japan has said it will buy bonds issued by the bail-out funds, while China has said it will keep buying Spanish debt.
What does all this mean for the euro?
All that can be said with any certainty is that the euro faces very uncertain times. And while its future is in doubt, there will be lots of volatility, as investors swing from optimism to pessimism with every new initiative announced by Europe’s leaders.
New deposit guarantee limit to be £85,000
11/01/2011
The Financial Services Authority (FSA) has recently confirmed that the new deposit compensation limit for the United Kingdom will increase from £50,000 to £85,000 per person, per authorised firm, from 31 December 2010. This is the Sterling equivalent of the €100,000 deposit compensation limit which comes into force in all European Economic Area (EEA) member states at the end of the year.
Further changes coming into effect on 31 December 2010 are:
• Fast payout rules, with a target of a seven day payout for the majority of claimants and the remainder within the required 20 days.
• Gross payout, which protects customers by ring fencing their deposits if they have savings and loans with the same firm. Currently, any outstanding loan or debt would be deducted from any compensation.
This new pan European requirement replaces the existing UK arrangement which has been in place since 2009, and which allowed for separate compensation cover for customers with deposits in two merging building societies.
Consumers need to understand the type of firm they are doing business with, and how this can affect which scheme would pay the compensation should anything go wrong.
The UK’s Financial Services Compensation Scheme (FSCS) covers deposits with UK banks and ‘subsidiaries’ of foreign banks which operate in the UK. However, deposits in ‘branches’ of EEA banks operating in the UK will not be covered by the FSCS, but rather by the scheme of the country where the branch has its headquarters.
Calls for capital tiered tax to replace IHT
11/01/2011
According to the Institute for Public Policy Research the Government should replace inheritance tax with a tired system to increase revenues.
A recent report by the IPPR named Death and Taxes illustrated that a capital receipt tax payable on cash and non-cash gifts over £150,000 would raise an extra £1bn.
Director, Nick Pearce for the IPPR say’s ‘Inheritance tax now only raises £2.2bn from a dwindling number of estates. There is no political prospect of radically increasing its scope and revenue so it’s time to give up on it”.
The Death and Taxes Report says the current rate of 40% payable over £325,000 should be replaced with a system which taxes gifts. The system would tax gifts worth between £150,000 and £300,000 at 20%, gifts worth between £300,000 and £450,000 at 30% and over £450,000 at 40%.
Julie Hutchison, Head of Estate Planning at Standard Life say’s, “It’s an interesting paper but I do not think it is possible to project what the impact would be. It’s high time there was a through review of wealth taxation”.
A report by The Office of Taxation Simplification is due to be published before the budget on 23rd March which will review six areas of inheritance tax relief , including potentially exempt transfers.
Gerry Brown, Prudential Tax and Trusts Technical Manager say’s, “The plan has it’s plus points but I have concerns about the complexity of administering it and the need to consider exemptions, particularly business and agricultural asset relief.
With the current state of the government coffers any review is likely to be to the detriment to most of our Clients.
Bluebond Investments specialise and are able to offer financial advice on Inheritance Tax Planning.
Changes to pension contributions
14/12/2010
The consultation this summer led us to believe that the annual allowance for pension contributions would be reduced to a £35,000 with effect from 6 April 2011. Instead the final figure has been set at £50,000 a year.
However, the draft rules also insert new clause enabling a carry-forward of unused annual allowances for up to three years. So this will ease the situation for those with irregular incomes, who might choose to make large payments on an infrequent basis.
You need to be a member of a pension scheme in order to generate an allowance that can therefore remain unused. The full £50,000 is available for carry forward, should your total contributions in any given tax year be nil. Unused allowances may be used in chronological order, i.e. the earlier year in preference to a later year.
As usual complicated transitional provisions have also been introduced for the 2011/12 tax year. There will be two separate pension input periods, a “pre-announcement” period, where the pension input period ends in 2011/12 and begins before 14 October 2010, and a “post-announcement” period.
Any other pension input period which ends in 2011/12 is a “post-announcement” period. The pre-announcement period is subject to the ‘old’ rules governing the amount of annual allowance, and the post-announcement period is limited with reference to the new £50,000 limit.
The transitional rules also assume an annual allowance of £50,000 for each of the three tax years preceding 2011/12 which is available for carry forward and use, assuming, of course, pension contributions in those years have not already used this notional annual allowance.
As always pensions require advice – so make sure you take independent financial pensions advice before proceeding with any plans.
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Everything changes for pensions
14/12/2010
Saving for retirement is now more attractive than ever thanks to welcome changes to pension rules.
After a lengthy consultation period, which started in July 2010, the Government have finally announced how they will fulfil their election pledge to end the system forcing pension savers to take out an annuity before they reach the age of 75 and converting pension pots into income.
From April 6th 2011 there will be new rules in place for the existing pension drawdown arrangement to give investors much more flexibility and control over their pension when they retire.
So now, if you wish to, you can pass on your unused pension savings to you heirs rather than see them swallowed up into profits for providers of schemes. If investors wish to live off the income that their pension pot delivers, rather than spending their capital, they will be entitled to do just that. Independent Financial Advice approaching retirement is now even more essential.
Basic rules:
As with anything related to pensions, retirement and tax the rules are somewhat complicated. Here are the basics of what the Government intends to do, from 6th April 2011
- End the effective compulsion to buy an annuity by age 75. Savers will be able to defer indefinitely any decisions on how they spend their pension. Investors do not have to enter into drawdown or withdraw a lump sum at any particular time or age
- You can carry on saving in a pension and enjoy the tax breaks that apply after reaching the age of 75
- The maximum amount of income that can be drawn will be 100% of a comparable annuity, based on tables produced by the Government Actuary’s Department (GAD)
- Flexible drawdown, those with an income of over £20,000 per annum from a mix of basic state and occupational pension or annuities will have no limit on the income they take from their drawdown. The income is subject to income tax and will need a fund in excess of £200,000 assuming full state benefit.
- Increase in tax which is paid on lump sum death benefits from drawdown increased from 35% to 55% but will not be subject to inheritance tax for those who die before age 75 without having taken a pension fund will remain tax free. So in summary, after 75, the unused portion of the pension pot can pass to your heirs, subject to the 55% tax with no further Inheritance Tax payable
- You can still buy an annuity if you so wish
- The changes also apply to those now in drawdown arrangements and come into effect at the next reference period, unless you are already over 75, in which case it will be sooner.
What this actually means
An annuity converts a pension fund into a guaranteed income for life. With the drawdown option, income payments are taken directly from the pension fund which remains invested in the stock market. With an annuity the income never runs out, with drawdown you may eat into you pension capital and ultimately end up with less income. With an annuity, when you (and your partner) eventually die, the income stops, but with drawdown any remaining lump sum will be paid to your heirs.
One of the biggest changes to income drawdown is the removal of the income limit on withdrawals each year. This will apply as long as there is a minimum lifetime pension income of £20,000 per annum is secured.
Those investors with money purchase pension funds who have yet to take benefits will now be able to continue investing, leave their fund untouched and defer indefinitely a decision to buy an annuity or go into drawdown. Any pension fund at age 75 can now remain invested until a decision is made as to what to do with the fund.
The conclusion seems to be the new rules will benefit those who do not wish to buy an annuity by age 75 or who want more flexibility and control over their pension with the exception of the increased tax on death payout. However, investors should still not discount the purchase of an annuity as this is arguably the less risky option of securing a guaranteed income for retirement. For those Clients who can generate a £20,000 annual income, they may consider withdrawing the pension fund (subject to income tax) to gift the money into trust to avoid Inheritance Tax
At Bluebond Investments we offer professional advice on pension investments and the best option to suit your personal circumstances.
The cost of clothes is rising
08/12/2010
It appears that on comparison in clothing retailers the prices seem to have risen by around 50% on last year.
This seems to ring true as retailers such as retailers Next, Primark and New Look have all warned of having to raise their prices (indeed this looks like it’s already happening).
But why? It’s partly because cotton prices have climbed by around 150% in the last two years, while transport costs are also rising. However, you can’t pin it all on these. Raw material prices have seen big moves in both directions in the past, yet the cost of clothes for UK consumers has been dropping steadily for ages. Indeed, the UK clothing consumer price sub-index has almost halved over the last decade.
No, the swing factor is what’s happening with wages in the countries that make the clothes sold by Britain’s retailers primarily China.
Those earlier rises in raw material and transport costs may in the past have been offset by lower labour costs. But the Chinese wage growth is now pushing these offsets.
This shouldn’t come as a great surprise. In the last seven years, China’s M2 money supply measure – how much cash is sloshing around the system – has increased more than threefold. In other words, there’s been a massive credit bubble. That has driven rapid economic growth – China is growing at around 10% a year just now.
As always we recommend clients budget their finances on a long term basis allowing for all types of expenditure to ensure they are making best use of their money.
Is your money really safe in Banks?
07/12/2010
At the present moment many Banks have exposure to Ireland, Portugal, Greece and Spain which means that they could have problems building up for the future. If any Banks go bust – how safe is your money?
An interesting fact for you:
Approximately 2 million people in the UK have savings with the Post Office, but did you know that these deposits are not guaranteed by the UK Financial Services Compensation Scheme. They are in fact guaranteed by the Irish government. But don’t panic the good news is that the Bank of Ireland (who operates the Post Office accounts) has begun the process of transferring its Post Office depositor base to fully fall under the UK regulator and compensation scheme.
This illustrated why savers like you need to be aware of the risks and make appropriate contingency plans.
UK Savers Emergency Plan:
- Ensure that you have at least 2 current accounts across different banking groups
- That you have procedures in place to ensure that you can act fast to initiate transfer of funds from instant access savings accounts, especially if your total funds with a particular banking group exceeds £50k / £83k (1st Jan 2011).The best strategy is to limit exposure per banking group to the limit of £50k
- Do not have ANY savings are fixed deposit exposure to banks that do not fall under the UK Financials Services Compensation Scheme
- Limit exposure to PIIGS banks, that is Greece, Ireland, Spain, Portugal and Italy as these are at the most risk of going bust thus triggering a lengthy process of Savers having to wait for compensation.
The following list represents Britians’ largest deposit taking banking groups and the banks that fall under each.
Banking groups have multiple licences as a consequence of mergers and takeovers, and may be in the process of merging licences so for ultimate safety one should remain focused on banking groups.
LLOYDS BANKING GROUP
Lloyds TSB Bank
AA Savings
Bank of Scotland / HBOS
Birmingham Midshires
Capital Bank
Cheltenham & Gloucester Savings
Halifax
Intelligent Finance
Saga
SANTANDAR GROUP
Santandar bank
Abbey National
Asda Savings
Alliance and Leicester
Bradford and Bingley
Cahoot
Moneyback
Honycomb
NATIONWIDE BUILDING SOCIETY
Nationwide Building Society
Cheshire Building Society
Derbyshire Building Society
Dunfermline Building Society
BARCLAYS GROUP
Barclays Bank
Standardlife Bank
HSBC GROUP
HSBC Bank
First Direct
Marks and Spencer Financial
ALLIED IRISH GROUP
Allied Irish Bank
First Trust
CITI GROUP
Citibank
Egg
CO-OPERATIVE GROUP
Co-operative Bank
Britannia
Smile
Unity Trust Bank
RBS Group
Royal Bank of Scotland
Nat West Bank
Direct Line Savings
Lombard
The One Account
Drummonds
Ulster Bank
Additional comments
Foreign Banks covered under the UK FSCS Scheme
ICICI (India),
First Save (Nigeria)
Small business are covered by the FSCS on the basis of 2 of following 3 conditions – up to a turnover of 6.5 million, less than 50 employees, balance sheet total not more than £3.26 million
Banks not under the UK FSCS.
Post Office (as detailed above)
ING Direct
Tridos – Dutch
Anglo Irish,
Bank of Ireland – Ireland
Don’t delay! Act today to form a quick personal savings protection contingency plan, otherwise you may wake up one day to find yourselves locked out of your funds Iceland style!
Current Euro economic crisis
19/11/2010
In light of the Ireland’s economy, here are a few facts brought together by some of the expert commentators:-
Ireland’s economy is effectively bankrupt and the big concern is that the debt crisis could spread to Portugal and Spain, Italy and even France where their deficit credentials are deteriorating by the day.
The concern was that Ireland was resisting pressure to take a European handout, but there is confidence that European ministers, having met in Brussels, are about to announce a recue package.
American markets are affected by the Eurozone crisis, but also by possible steps by governments in Asia to slow fast-paced growth prompting investors to stay away from risky assets.
Asian stocks have dropped due to concern that China will take further measures to slow economic growth.
UK markets have remained relatively stable and even shown positivity due to the possible imminent Irish bail-out.
Although UK tax payers are likely to be asked to help bail out Ireland, the effect on the UK economy should not be devastating.
The real problem for the UK would be if the other larger European economies mentioned here fail.
But, the immediate danger in Ireland would appear to be containable if the bail-out happens.
The UK may still suffer due to; a further fall in the Euro, increase in public debt due to a bail-out, British banking losses as a result of Irish banking exposure, and a reduction in Irish exports.
However, commentators think we could sustain all of that. The bigger issue would appear to be if Ireland leaves the Euro…
As normal we monitor the markets on a daily basis and so are in a good position to respond quickly to any changes in trends.
Isa’s account for a third of UK earnings
05/11/2010
The average UK salary is £26,075, interestingly just shy of a third of this is paid into Isa’s at £7,782 It would seem despite the recession people are taking advantage of the tax free benefits of Isa’s. Halifax are also urging saver to take advantage of the full annual allowance of £10,200
Across the country the highest ISA savings are 35 per cent above the UK average this accolade goes to the Derbyshire Dales at an average of £10,476
Over half the top 30 local authorities with the largest ISA balances in the South East and Greater London according to Halifax including Brentwood, Ewell and Epsom at approx £9,948 It would appear that Southwark and Hackney are feeling the effects of the current economic climate with the lowest balances at £4,675 and £4,791
In relation to average regional earnings Northern Ireland and Wales have the highest balances with the equivalent to 37% and 36% of average annual gross earnings.
Certainly advice would be to make the most of the full annual Isa allowance which, given the current climate, savers are having difficulties in maintaining their monthly deposit to existing plans.
Economist Nitesh Patel at Halifax said it’s great to see UK savers are taking advantage of the tax free benefit of an ISA by investing just under a third of their income. Frustratingly though, whilst Isa’s have been available for over a decade, savers are still not making the most of their savings by using their full annual Isa allowance with the UK average of just £7,782 being saved which is only 1.5 times the annual limit.
As financial planners we continue to include ISA and Investment arrangements in our services for our clients. In addition we would also recommend that clients invest their ISA at the beginning of the financial year on the 6th April rather than wait until the end. For clients who save regularly we save the money into a diversified portfolio of funds that make up our ISA portfolio during the year and then just add the ISA wrapper to that portfolio in April. This ensures that the full allowance is utilised for the full year every year if required.
Pre-nuptial and post-nuptial agreements revisited
25/10/2010
I refer you back to my blog posted on the 11th March 2010 regarding pre-nuptial and post-nuptial agreements where I promised to keep you up-to-date with the ruling of the Supreme Court when it took place.
Well, the Court has now made a landmark ruling by upholding a pre-nuptial agreement not recognised by British law. The ex-husband involved in the case has had his divorce settlement significantly reduced after the court upheld the pre-nup and the ruling now falls in line with an agreement made under German law (relevant because his ex-wife is German), that he would not make a claim on his wife’s £100 million fortune in the event of a split.
Until now courts in England and Wales have not considered pre-nups made abroad to binding.
So it would seem that it would still be beneficial to have both agreements in place as well as trusts to be as safe as possible. The potential benefits should be considered by most wealthy people for their children and for themselves. As financial planners we continue to include these arrangements in our estate planning discussions with our clients and can arrange meetings with the recommended law firm if required.
Protection to increase for savers in January 2011
25/10/2010
The protection limit for those who are lucky enough to have savings is to increase from £50,000 to the equivalent of €100,000 in January 2011.
Under the Financial Services Compensation Scheme (FSCS) people in the UK are currently entitled to £50,000 worth of protection per UK regulated institution. This means that if your bank goes bust, up to £50,000 of your money is safe – £100,000 in the case of joint accounts.
However, following European legislation, the FSCS has said that this limit will increase to the sterling equivalent of €100,000 on 1 January 2011.
The exact limit is not yet known but the FSCS has confirmed that once the Financial Services Authority decides what exchange rate is to be used, the limit will be fixed and so will change as the pound fluctuates against the euro. The FSA plans to issue a consultation in October.
The value to which people are protected against the downfall of financial companies became a matter of concern during the credit crunch as high street institutions such as Northern Rock, HBOS and Lloyds TSB were all in a precarious position and the collapse of investment firms such as Keydata has added to the public’s concern.
On the back of ‘inaccurate’ media reports suggesting that the FSCS had plans to reduce the compensation protection for investments, the FSCS has said: ‘The FSCS has no plans to reduce compensation protection for investments as suggested, nor is it able to do so. The rules that the FSCS applies when assessing clams are made by the Financial Services Authority. These include rules that set the FSCS compensation limits. The FSCS cannot depart from these rules’.
All of this is good news for those considering their estate planning and investments, whether they are small business owners, employed, self-employed or retired.
Downsizing or compromising?
25/10/2010
Andrew Tullley of Standard Life warns Advisers should make their Clients aware that they should not rely solely on a retirement income from downsizing their homes as UK property values do not support this.
In a recent survey conducted by Standard Life 45% of the people they spoke with viewed their main residence as their main source of income when they retire. Property being one of the favoured ways to invest in the UK, looking at property values across the UK it is apparent that peoples homes will not generate a large enough income to enjoy a reasonable standard of living. This is where the Financial Advisors role is crucial to increase the possibility of enjoying the life style they have planned for.
Many Financial Advisors will have already had conversations with their Clients regarding what they expect with regard to the standard of living once they retire. Clients who believe they do not need ISA’s or pensions as a platform for retirement need to realistically look at if their home will provide enough income.
A good way of starting to answer these questions would be to use a simple calculation resulting in a rough guide to what you can expect as an income. Compare the income generated by downsizing to a smaller property once retirement is reached against the two thirds of income prior to retiring.
With life expectancy increasing and people living approximately 30 years and possibly more into retirement age its worth bearing in mind just what equity the sale of your property would generate to provide one’s chosen lifestyle. With the average UK detached property values at £290,208 as at July 2010, compare this to the average UK bungalow at £192,373 the capital gain for retirement would be approximately £98,000 certainly food for thought.
Interestingly a survey by Scottish Widows carried out in 2009 illustrated only 38% of women over 50 reported they had enough savings to use for retirement. These figures reflect a drop of 15% compared with 2009 Although pension savings have been hard hit by the recession and many people choosing to lower their monthly payments, the over 50’s have been hardest hit according to the survey, this is true for both men and women saving less for their pensions than last year.
Ian Naismith of Scottish Widows, Head of Pensions say’s, “It’s a worrying sign that the group most vulnerable when it comes to saving is women over 50. While women’s career patterns often make it hard to save consistently for retirement, this is the time when they should be saving the most”.
He recommends we save 12% of your income to ensure a comfortable retirement. When most of us are being deterred form saving due to the recession, Naismith claims this should be the trigger for everyone to save more. A bold statement to make perhaps when 25% of individuals surveyed currently with a pension, not yet retired want to save more yet 29% claim they cannot save more than they already are
Spending cuts – it’s all been done before?
22/10/2010
The current spending cuts recently announced by the coalition government have sent shock waves around the country. Many people fail to realise that these plans were well in place by the conservatives before they were even elected.
The plans are mainly based on the action taken by Canada in the mid 1990s.
In the 1990s, Canada had also become one of the developed world’s most socialized economies, with the government accounting for 53% of the country’s GDP. Economic growth was stagnating, while debt levels were inexorably and dangerously mounting. At its scariest zenith, Canadian federal and provincial government debt amounted to 120% of GDP, with roughly 70% at the national level and an outrageously bloated 50% owed by the provinces. Moreover, unlike in our present situation, Canada’s interest rates were rising due to worries about the nation’s solvency. Its coveted AAA credit rating was yanked, and the market was treating it as an increasingly unreliable borrower.
In other words, it was much like the situation a number of European countries and the UK find themselves in today.
The reality is that Canada achieved stunning progress and turned it around in a mere three years. Further, this time frame was consistent at both the federal and provincial levels. In case you think I’m exaggerating the speed and magnitude of the rehabilitation, let me provide some specificity:
- Paul Martin, the finance minister for the national Liberal Party, unveiled a budget in early 1995 that shocked all the cynics accustomed to smoke-and-mirrors accounting. It reduced program spending by 8.8% over two years (and our politicos quiver over a mere hint of spending freezes).
- As part of this radical spending rationalization, federal government employment was reduced by 14%.
- Federal grants to the provinces were reduced by 14% as well, but the trade-off was that they were allowed to control how the money was spent. Provincial governments also needed to provide half of all funding (i.e., put skin in the game).
- While some taxes were raised (and, according to the authors, these worked against the recovery), spending cuts were 4 ½ times tax hikes.
- Canada’s welfare system was dramatically modified. Rather than just providing a blank check to the provinces (which administered the welfare programs), Ottawa incentivized them to put the funds to better use. Benefits were cut for single, employable individuals and aggressive efforts were made to get them back in the work force.
- Despite accusations from the far left that the poor would suffer due to these changes, the percentage of welfare recipients fell in just a few short years from 10.7% of the population to 6.8% by 2000. From 1997 to 2007, the percentage of Canadians classified as low-income plunged by over 30%.
- The tax structure was dramatically redesigned. Corporate tax rates were cut by nearly a third, taxes on corporate capital were abolished, and personal income and capital gains taxes were reduced.
- The General Services Tax (basically a consumption tax or VAT) was instituted to pay for the tax cuts described above. While initially very unpopular, it was a key part of the rehab plan.
- The Canada Pension Plan (CPP), the country’s version of Social Security, also underwent major surgery. Instead of payroll taxes gradually rising to 14%, the increases were pulled forward but capped at under 10%. This produced immediate surpluses that were invested in higher-returning corporate securities. The CPP today is well-funded and actuarially sound.
As a result of these actions, and many others I’ve left out, the federal budget was balanced within three years.
After achieving this remarkable feat, Canada went on to produce 11 straight budget surpluses. This allowed Canada to reduce their federal debt from 80% of GDP to 45%. Further demonstrating how quickly good policy can turn things around, the provinces enacted similar measures. Most of them also moved to balanced budgets or surpluses within just three years.
Do the measures taken by Canada remind you of any plans recently unveiled?
I hope it all works out the same for us.
RICS survey suggest house prices are heading for a fall
20/10/2010
44% of 265 Royal Institute of Chartered Surveyors working as Estate Agents surveyed said they had seen house prices fall during the past 3 months. Out of the 265 members surveyed 6% had seen a rise whilst 50% reported prices had been stable.
The Council of Mortgage Lenders figures reported 51,600 mortgages were approved last month, a figure that had fallen by 8% in August despite the fall it was still 3% up on the same period in 2009.
Figures from RICS only highlight the overall picture illustrated by other surveys indicating prices have drifted downward in recent months, despite the gloomy outlook, new data from the government released on Tuesday 5th October saw prices had risen by 0.7% in August from July.
Other respondents to RICS survey suggest the down turn pointing to forthcoming Government cuts in public spending undermining consuming confidence and potential buyers.
Government figures also published Tuesday illustrated a rise of 0.7% in UK house prices in August compared with July, the average value of a home stood at £213.116 in August compared with July according to the Department of Communities and Local Government.
Greece’s recovery
17/09/2010
According to the International Monetary Find (IMF) Greece has made a strong start in getting its finances in order but the government risks being over complacent about its ability to grow the economy in the medium term. Money was lent to Greece by the IMF and Eurozone members in exchange for far-reaching spending cuts and led to violent protests on the streets.
With further payments given to Greece last Friday reflecting the positive start the country had made in cutting its spending the IMF had to warn the Greek government not to be complacent about the country’s informal economy to keep the country growing in the future.
The IMF warned ‘risks exist on the revenue outlook as the economy will be contracting, and spending is not under full control in sub national entities of government.’
But despite the stringent cuts the IMF said the recession in Greece is unfolding in line with expectations although inflation is higher than expected from indirect tax hikes.
The Spanish property market
17/09/2010
With 20% unemployment and tales of Britons who brought property in Spain only to become embroiled in legal disputes over land ownership or that their pensions could not sustain them when the pound slumped against the euro Spain has had a terrible recession. And yet, just as we’ve seen in the UK, the market seems to have managed to take the strain. In the second quarter of 2010, house sales in Spain rose by nearly 25%, driven mainly by growth in “second-hand” home sales
Yet there are estimated to be about a million empty new-build homes in Spain. Says the FT, “most experts say it could take another three to four years to absorb surplus stock.” And that’s despite a collapse in the number of homes being built, from 800,000 in 2006 to fewer than 100,000 this year.
But by and large, what’s propped up prices in Spain is the same as what saved the British property market from harder falls – interest rates being slashed.
How long can the market hold out?
So how long can this state of affairs last? The trouble is, while prices have held up, it’s been at the expense of market liquidity. Put simply, people aren’t moving home the way they used to. And first-time buyers are a rarity in Spain as well as the UK. Without first-time buyers coming on to the market, it’s hard to see where further price gains can come from. It might be cheap to borrow, but it’s not going to get any cheaper.
Indeed, the biggest threat to Spain’s market might be the fact that Spanish banks own so much of it. As Mark Mulligan notes in the FT, “after three years of bankruptcies, defaults, foreclosures, debt-for-equity and debt-for-asset swaps, and the winding up of several property funds, Spanish banks have become the country’s biggest landlords and property agents.”
The Bank of Spain reckons that lenders now have €60bn worth of land and property on their books. However, says Maharg-Bravo, “new rules will force banks to set aside provisions of 30% of the property’s value if they haven’t been sold after two years. This is a powerful incentive for banks to dump the inventory.” She estimates that roughly 175,000 properties are in banks’ hands, “not all of which have hit the market.”
The end of interest only mortgages
17/09/2010
Following Coventry Building Societies announcement that they will no longer allow interest-only mortgages for first-time buyers – does this spell the beginning of the end of interest only mortgages?
The Council of Mortgage Lenders seems to believe that the FSA could well kill off interest only mortgages with its proposals for regulating the loans in the Mortgage Market Review.
The FSA wants to ensure that borrowers have plans in place to repay the capital element of the mortgages and that lenders are then responsible for monitoring this. Due to the potential costs to the lender to achieve this it could, therefore, lead to the withdrawal of interest only mortgages.
The CML says “It is far from clear that the costs and the impact of restricted choice for consumers would be matched by any wider benefits. There is clear evidence that the FSA’s approach had already resulted in more restricted availability of interest only mortgages. Some lenders have announced they will no longer offer them to first-time buyers, or to those wanting to borrow more than £500,000.
This could well leave borrowers who do not want repayment mortgages unable to remortgage.
No more transfers from final salary pensions to defined-contribution schemes.
17/09/2010
From April 2012 the Government are considering making it impossible for people to transfer out of final salary pensions into defined contribution schemes.
The DWP are working on a consultation settling out the draft legislation for the abolition of contracting out. Some pre 1997 benefits called excess benefits will be exempt from the change as well as non-contracted out defined benefit schemes.
The consultation also says that “in addition to contracting out terms, references to transfers between contracted-out defined benefit and contracted out defined contributions schemes have been removed as this will no longer be possible post-abolition”.
The industry is not happy about these plans and views them as taking away consumer freedom and choice.
This mainly affects people whose spouse does not need a guaranteed pension on their death or a single person. In these cases it is often possible to produce a higher income stream by giving up the spouses benefits on retirement.
Anyone in this position should seek advice as soon as possible.
Does your business need protection?
09/09/2010
The day-to-day pressures of running a business could mean you rarely get the opportunity to think about the ‘what-if?’ scenarios that face you every day.
To help you best prepare for the future you should ask yourself a series of health check questions that will potentially highlight any potential dangers to your business.
- Would your business be able to continue paying any loan payments if the business owner or key person died or suffered a critical illness?
- What would be the effect on overall cash flow if you or one of your fellow business owners died or became seriously ill?
- Do you have sufficient funds to buy the available shares of the business and retain control if a shareholder / partner died?
- Could your business borrow more money if cash flow were affected following the death of a key individual or shareholder?
- Are you aware of any additional security you may have already provided to your bank for any existing debt?
- Do you have a succession plan in place if one of the shareholders/ partners were to die or become seriously ill?
Most importantly when did you last review your business protection plans with an independent financial adviser who specalises in business advice?
Business planning is more than just growing sales and profits – think about the risks too.
Is higher rate tax relief on pensions under pressure?
31/08/2010
The new limit of a £40,000 annual allowance for higher-rate tax relief on pensions may be under pressure
Abolishing higher-rate relief has been on the LibDem manifesto for some time. The TUC has argued it costs the Treasury more than public sector final-salary pensions.
The Centre for Policy Studies’ report suggests that as well as limiting tax relief for pension contributions with the annual cap, that tax relief could either be changed to a flat rate, rather than being given at the marginal rate or that, over the longer term, pension savings should be aligned with the Isa regime, with no tax relief up front but growth and income from retirement savings could become exempt.
If George Osborne likes the sound of the report, it will mean massive changes to the way that advice on pensions is given
A flat rate of 20 per cent tax relief across the board would save the Treasury about £7bn a year, every year, a massive contribution to reduction of the deficit, which is the Government’s number one priority.
What would the consequences be?
The majority of those in company schemes would continue to save because of the employer contribution and the very wealthy, who get most of the higher-rate tax relief, would save elsewhere.
They will never be poor in retirement anyway, so, from a Government point of view, what is to be lost?
Cutting the Conservatives’ electoral base’s tax relief in half would not go down well in the shires, or in the press.
Suggestions are that the chances of higher-rate relief surviving another two years at less than 50 per cent.
If it is not higher-rate tax relief that goes, then the Treasury will surely look again at tax-free cash. Abolition would save around £2.5bn a year – halving it to 12.5 per cent would generate half that figure. These are significant sums when compared with the cuts that government departments are being asked to make over the next few months.
Some have pointed out that such an overhaul, just four years after A-Day, would be nearly impossible because of the complexity involved. That has never stopped them in the past.
If we do head into a double dip, the chances of Osborne having to call on the extraordinary measure of getting rid of higher-rate relief will rise. Even if he does not get rid, there is nothing to stop him from chipping away at the £40,000 limit.
Action to take
If you are a higher rate tax payer perhaps you should review the amounts you are putting into your pension now, However with the stock markets in a very volatile state good investment advice is essential.
Posted in Employed People, Financial Planning, Investments, Retirement, Tax Planning | No Comments »
Past performance is no guide to the future
26/08/2010
Chief Exec of Pimco and a FT commentator, Mohammed El-Erian believes that investors have lived the past 20 years under a belief where investment rules of thumb worked.
But no more! The past is no longer a guide to the future (if it ever was).
Instead, he says, the dispersion (or variation) in policy-maker’s expectations is unusually wide for basic economic variables such as growth and inflation and the likelihood of policy mistakes (such as interest rate or tax & spending policy) is greater than it has been for the past 25 years.
As a result, few investors are likely to see ‘average returns’ on their investments. Instead, some will perform much better than the average and some will perform much worse.
Which begs the question; can this be the fault of the investment manager? And if not, on what basis does the wealth manager recommend investments or pension funds to his or her clients?
Tough investment questions don’t go away
Okay, let’s firstly acknowledge that the decision or recommend or select an investment manager, pension fund manager, unit trust or other collective investment has always been a tough decision. Nothing new here.
However, for many years onshore and offshore wealth managers have been able to back up their investment decisions (and in many cases were legally required to do so) with evidence of past performance.
If past performance is becoming less and less linked to future performance what does the wealth manager do?
What now counts as a good reason to select an investment manager or product’?
El-Erian goes onto explain some more
- Fluctuations in price will increase / widen and this will create short term investment opportunities (and risks).
- There will be a gradual movement away from assets where the predictability is reduced, such as equities, along with a greater desire to hold liquid assets and this shift in demand will drive prices accordingly.
- Historical benchmarks will be challenged and broken, so investment strategy will need to begin with first principles.
- Some investments will simply melt-down, we’d better get used to this
- Asset diversification is no longer enough to reduce risk.
El-Erian is telling us that we simply need to invest from first principles (or current strategy), not on the basis of past performance and that we need to find a way to more actively manage our investments.
Or to put it another way, if your share goes up more than you expected, sell! It is probably a happy accident that will be reversed.
Equally, if a share falls more than expected – then consider buying (slowly), as it might be an unhappy accident that will be reversed.
Conclusion
The critical conclusion here is that there is less and less benefit from the traditional buying and hold strategy. When a stock, asset or investment index reaches an unusual or unexpected high, sell it and take profits.
Therefore, passive investment vehicles, such as index tracker funds, are unlikely to deliver decent returns (or even average returns) for the level of risk taken.
Hence, active management, with a clear investment strategy is the best route forward and proactive wealth managers are in an ideal position to help their clients.
Diversification (and hence risk reduction) will only be achieved not by investing in different assets classes but by investing in different investment strategies.
Inheritance tax – No time to lose!
18/08/2010
The wealthy have no time to lose in planning their IHT mitigation
The recent announcement that inheritance tax (IHT) mitigation via transfers into trust is likely, in future, to be included in the Disclosure of Tax Avoidance Schemes (Dotas) regime is not good news.
The Treasury and HM Revenue & Customs (HMRC) proposal is what was expected following the Finance Act 2010’s blocking of two specific trust schemes which dramatically (and arguably artificially) reduced the value of assets gifted into trust.
The new government has firmly declared its IHT plans by freezing the inheritance tax threshold, the nil rate band (NRB), for five years, it is backing this approach by supporting legislation to plug as many “leaks” as possible.
The consultation document introducing the Dotas requirement does not seem unreasonable in the circumstances, as it does not impact on most conventional IHT mitigation work using the various trust schemes that are widely available.
So what exactly is being suggested as far as disclosure is concerned?
The new rules will not require any existing schemes used extensively by Bluebond and well known to HMRC to register, such as flexible and discounted gift schemes, because they are being ‘grandfathered’ into acceptability. The only new trust schemes that have to be registered will be those that involve:
- chargeable transfers beyond the donor’s current allowances, including any unused NRB. In other words, where property becomes ‘relevant property’;
- an ‘advantage’ in relation to the IHT entry charge: an advantage being defined as the avoidance, reduction or deferral of a charge.
This avoids any requirement to disclose straightforward situations where an individual simply transfers property into trust and relief, or exemption is available in the same way it would have been had the property been gifted directly to another individual. This is generally the case with most of our of trust-based mitigation arrangements.
The government’s proposal is only at the consultation phase so it is too early to be unequivocal about the requirements for plans launched in the future.
However, the grandfathering facility will ensure all existing plans of which HMRC is aware and future plans that adopt the same principles as existing plans will be safe. This is the nearest we have ever come to having a blanket approval from HMRC of all existing plans.
What does this mean for tax planners and their clients?
The proposals are bad news for taxpayers who have been relying on either the indexation of the NRB or, more recently, the Tory commitment to a transferrable £1 million NRB, to lift them out of potential liability. The coalition government has a much less generous approach to inherited wealth than that promised by the Tories.
Freezing the NRB for five years when the knock-on impact of quantitative easing is likely to be rampant inflation down the line is serious. Inflation is already rearing its ugly head, no matter what interest rates are doing.
Looking further ahead, there has been plenty of speculation that the coalition might continue until another term of government, especially if next year’s referendum delivers backing for the alternative vote electoral model. This will mean the cautious approach to raising IHT allowances will continue.
This means taxpayers who are currently close to a potential IHT liability will be severely disadvantaged by the NRB freeze, assuming inflation of 4% over the next two years followed by 8% for three years.
A potential liability of nil at the beginning would become a liability of around 40% of £117,814 after five years that is more than £47,000, simply resulting from inflation.
Hope for the best but prepare for the worst
IHT planner Charles de Lastic constantly reminds his clients to ‘hope for the best but plan for the worst’. This has served him well over many years of capital tax planning.
The message here is that everyone who, since 2008 when they were given false hope by the last labour goverment, has put off their IHT mitigation planning has no time to lose.
Remember: hope for the best but plan for the worst; start your IHT mitigation planning today.
Inflation falls but is still above target
17/08/2010
The cost of Transport fall, but prices for food rise as inflation drops to 3.1%, but is still well over above the 2% target.
Inflation dropped down in July, but remains far above the government target imposed on Bank of England.
The annualised 3.1% rise in consumer inflation for July was down on June’s 3.2% increase, but still above the 2% target. This means that the BOE governer will have to write yet another letter to the government explaining why price rises are above target.
Bank of England Governor Mervyn King blamed anumber of one-time factors, including the rise in sales tax in January, past rises in oil prices and the continued effects of higher import prices following the devaluation in the British pound since mid-2007.
King reiterated the bank’s projections that inflation will remain above the target until the end of 2011 — a year longer than it was predicting just a few months ago — but would then fall back as the effects of higher sales tax, energy price rises and import price increases drop away.
King said last week that inflation was likely to fall back below target in 2012, but in Tuesday’s letter to Treasury chief George Osborne he acknowledged that the recent strength in inflation had surprised the bank’s rate-setting committee and “how fast and how far inflation will fall are both difficult to judge.”
Transport costs were the main factor in the slight drop in inflation with the price of second-hand cars falling between June and July. Petrol prices also fell.
Conversely, food and non-alcoholic beverage prices added upward pressure on the overall figure. With the current prices rises in wheat this is likely to continue.
The same factors also saw the RPI measure of inflation – used for indexation of pensions and state benefits – drop slightly from an annualised 5% to 4.8%
The Bank of England said that inflation will stay above the 2% target for longer than it forecast back in May. The Bank’s new forecasts showed inflation above target until the end of 2011 but falling after that as ‘temporary’ factors such as the increase in VAT next year fade.
Inflation in the UK is higher than in the EU as a whole, where consumer inflation was measured at 1.9%.
Consumer confidence
17/08/2010
Consumer Confidence
This week saw consumer confidence drop to its lowest level for 15 months, it also saw the pound falling against the US Dollar as investors became nervous about the state of the world economy.Consumers are perhaps worried about the level of disposable income they will have over the months ahead and the emergency budget and inflationary pressures such as rising food and petrol costs are adding to this worry.
U.K. house prices dropped again in July and will, probably, struggle to gain for the rest of the year. Prices in England and Wales rose 0.1% from June, when they fell by the same amount. Values are up 8.1% from a year earlier to an average £220,685. The decrease in house prices in July was the first since February and came as the number of transactions rose 11% from June to about 72,100 as more people put their properties on the market.
Regional data for June showed the drop in average prices across England and Wales was led by a 0.5% decrease in the Yorkshire and Humberside region, values in London fell 0.4%.
How long till the economic outlook will be considered “normal”?
09/08/2010
Bank of England governor Mervyn King believes it will be a long time before the economic outlook will be considered “normal”.
Wider economic problems around the world underline the fact that we cannot be confident that the recovery in demand, output and employment in the UK will be sustained. The fiscal tightening measures proposed by the Government will not choke off recovery, but it will slow economic growth over the next two years.
Of course it is encouraging that we have learnt recently of the strong 1.1% estimate of GDP growth in the second quarter, however we must be careful not to read too much into one number. We continue to face the challenge of rebalancing the economy away from consumption towards net exports and raising our national savings rate.
The new coalition’s plans to cut the deficit are certainly ambitious but with the additional tightening set to come in the second half of the parliamentary term, the recovery should be firmly entrenched and the economy should be able to deal with the headwinds from the Budget.
On the assumption that the government is able to implement the overall reduction of £40 billion set out in the budget, the UK growth is likely to struggle to reach 1% this year but should gradually speed up in the following years to give the UK a high-quality recovery based on trade and investment.
According to Ernst & Young base rate will remain at a record-low 0.5 % until the end of 2013. They said it would be necessary to keep base rate low in order to offset the effects of the Government’s spending cuts and to prevent inflation falling below 1%. If this forecast is correct should you consider how your savings are invested? Is cash still a good option or are other low risk, higher yielding products more suitable for some of your savings?
Default retirement age in the UK to be scrapped.
09/08/2010
In October 2011 the government is proposing to scrap the default retirement age and has launched a consultation process about scrapping the rule.
Currently employers are able to force an employee to retire at the age of 65 without paying any financial compensation but they must hold a meeting with the member of staff concerned to discuss their plans at least 6 months prior to their 65th birthday.
“Forced retirement makes you feel pretty rotten, as if you’re stuck on the shelf and put to one side” said John White, 70, a retired postman.
Some campaigners are delighted with this news – Rachel Krys of the Employers Forum on Age said, it was “really unfair” that people had been forced out of jobs because of their age. “We have to stop these blunt discriminators,” she added.
The charity Age UK, which has led the campaign to end the default retirement age, also welcomed the government’s plan. “We have fought a four-year campaign to achieve this historic decision so Age UK is absolutely delighted that the government is finally setting a clear date for the abolition of this arbitrary and unfair law,” said Michelle Mitchell, Age UK charity director. “Everybody stands to win from scrapping forced retirement. People over 65 will have full employment rights for the first time. The economy will benefit from older workers’ precious skills and experience and their increased buying power.
Benefits
For the Government – it will reduce the unemployment figures as there are many who would choose to work past 65 meaning more people filling jobs which might otherwise remain unfilled whilst also easing the burden on state pensions.
It will also give workers more freedom of choice. As people tend to live longer these days and are in better health overall, many people would actually prefer to remain active and continue to work for both the social interaction work provides and their desire to still contribute their skills to a particular job or career.
Perhaps a better reason is financial planning as many people find that only by continuing to remain in employment, be that full or part time, can they continue to maintain a reasonable standard of living and not simply to survive on a basic state pension.
We would recommend that people plan as early as possible so that they are able to retire comfortably and not just survive.
Emergency money lending – where to turn when you need cash
21/07/2010
Apart from the obvious one for those still blessed with the option of the ‘Bank of Mum and Dad’, who do you turn to for a quick, short-term loan?
Payday loan companies thrive on high interest rates and huge APRs, but some people love them. Personally, I think I’d be put off by being charged an effective interest rate of 458% for borrowing £200 for a couple of weeks when my car broke down, but that’s not the case for everyone. Even the Office of Fair Trading has just finished looking into the payday loan market and has concluded that the market works ‘well’ and that there is no need to put caps on the charges involved.
I personally don’t entirely agree with this. It is true that the charges are made clear – if you look on the website of say Wonga and you will see just how much you will be charged for however much you borrow. The total you will repay is clearly stated, as is the typical APR – 2689%. So that’s all good, honest and above board. If you need money in real hurry – and are able to pay it back before things slip away from you – it’s a straightforward way to borrow money.
However, if you aren’t absolutely desperate; it’s a totally mad way to borrow money! Wait for things until you have the money put away for them is the most responsible way of spending. This is not always the most practical though is it? What about when the car breaks down, for example. What are the alternatives?
Credit cards, authorised overdrafts all have a part to play. Some more than others depending on your arrangements with your bank. Starting with the latter, authorised overdrafts have an average interest rate of around 13-14% (with the exception of banks like the Halifax Bank of Scotland and Lloyds, which is soon to introduce a monthly fee). Admittedly, unauthorised overdrafts, or going over your overdraft limit, can cost you much, much more and may even make the payday loan a more reasonable option.
And so to credit cards. If you have the right card, you can easily borrow £200 for 20 days at not cost at all. If you pay your bills off in full every month, you shouldn’t have to pay any interest on most credit cards. If you need money for more than 30 days, you can still find some cards offering 0% rates on new spending for the first 12 months of holding them. The downside to a 0% card is that after 12 months your deal will run out and you’ll want, or need, to move on. In that case, you may find a low APR card, which you won’t need to change after 12 months, more interesting and easier. One that I know of has an APR of 6.9% – which in the context of short-term loan rates sounds good to me! Just make sure that you don’t use one to withdraw cash to pay the garage with – otherwise there will be an instant fee, 2.075% in the case of this particular card, and then a rate of 27.95% from withdrawal until you pay it back – no interest-free period. It is, however, still around a tenth of what you’d pay with a payday loan.
Even the credit cards aimed at those with bad credit are still a ‘cheaper’ option. The Aqua card for example. It charges an APR of 35.9%, but no interest is charged if you pay in full by the payment date, and it is still less than payday loan rates.
Remember, there are choices, even during a recession. So, before undertaking any kind of loan or credit card, there are two things that you absolutely must do.
- Shop around and,
- do your sums!
Capital Gains Tax – Just where are we now?
21/07/2010
Pre-Budget Report, 9th October 2007 – CGT flat rate of 18% for gains on non-business assets made on or after 6th April 2008.
6th April 2010 – income tax rate of 50% for those with incomes in excess of £150,000.
This all adds up to a differential of 32% for those individuals. Was this sustainable?
The new Coalition Government seemed to put the writing on the wall for this state of affairs with their document entitled “Our programme for Government”, published on 20th May 2010. It included the sentence:
“We will seek ways of taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities.”
Just what did that mean? Speculation began. Well, we’ve now had the Emergency Budget and what we’ve ended up with wasn’t as bad as some commentators thought. The position is now as follows:
- The effective rate of CGT for gains qualifying for entrepreneurs’ relief will remain at 10%. However, the lifetime limit on gains which qualify for entrepreneurs’ relief will increase from £2 million to £5 million for disposals on or after 23rd June 2010.
- The rate of CGT on gains made by individuals, personal representatives and trustees before 23rd June 2010 remains at 18%. These gains will not be taken into account in determining the rate(s) at which gains arising to individuals on or after this date should be charged.
- For disposals made on or after 23rd June 2010, the rate of CGT will remain at 18% for individuals whose total income and net gains when added together fall within the basic rate income tax limit.
- A rate of 28% will apply to gains made by those who are above the basic rate limit.
- Therefore, some people will pay tax at 18% on part of their gains and 28% on the balance.
- The annual exemption for 2010/2011 will remain at £10,100 for individuals and £5,050 for most trusts.
- For trustees and personal representatives, the rate is increased to 28% for gains on disposals made on or after 23rd June 2010.
All of this means we have gone back to a system that is similar to the one that we had before 6th April 2008, in that gains are added to an individual’s income as the top slice, and the rate of CGT will depend on whether the total of the income and gains is within or in excess of, the basic rate income tax limit. This time however, there is no taper relief and the indexation allowance is no longer available. Meaning that the gain after applying the annual exemption is taxed at the flat rate of either 18%, 28% or a combination of the two where:
- part of the gain falls within the basic rate income tax limit, and
- part is in excess of that limit.
The increase in the lifetime limit for entrepreneurs’ relief was very welcome for that type of person. Entrepreneurs have had a good few months. Following the increase in the limit from £1 million to £2 million, announced in the March Budget, the limit has now risen to 5 times the level that it was on 5th April 2010. This could be beneficial, as the less tax there is to pay on the sale of a business means there is more capital to invest in appropriate tax wrappers.
What other opportunities are there now? Well, inter-spouse/civil partner transfers are back as far as tax planning is concerned. Prior to these changes, the only point in transferring assets to a spouse/civil partner from a CGT perspective was to ensure that both annual exemptions could be utilised. This is still important, but now an unconditional transfer of assets from a higher rate or additional rate taxpayer to a basic or non-tax paying spouse/civil partner will result in a tax saving on a subsequent disposal by the recipient.
Another area that should be looked at is the single premium bond versus collective investments. An increase in the rate of CGT will make bond investment look more attractive, in spite of the CGT planning opportunities mentioned above. The reduction in the basic rate income tax limit which will be introduced from 2011/2012, as a result of the increase in the personal allowance to £7,475, will also make the need for independent financial advice greater than ever. It is anticipated that this increase will cause an extra 700,000 individuals to become higher rate tax payers. Use of pension contributions could have a double benefit here as this will effectively provide a person with more basic rate band and possibly also result in a lower rate of CGT being payable.
Finally, the introduction of the 28% rate for trustees and personal representatives will make it even less attractive for trustees to hold equities direct. This is because every disposal which generates a gain in excess of the annual exemption (£5,050 for most trusts) will produce a 28% tax liability. The popularity of multi-manager funds may increase but this higher CGT rate will make single premium bonds look even more attractive for trustees of discretionary trusts and accumulation and maintenance trusts than they already did before.
So, even more reason to seek an independent financial adviser for tax planning, estate planning and investment advice.
The world of pensions according to consultation!
12/07/2010
I watched the Emergency Budget with anticipation to see if and how the pensions world would suffer. Before the Election we had several parties with differing views on pensions and we ended up with a Coalition not knowing how their policies would eventually look.
I came away from the TV thinking that there wasn’t much in the budget about pensions. But now I realise there was – although mostly subject to consultation.
- There was confirmation that the basic state pension will be increased each year by the greater of the increase in inflation, the increase in national average earnings and 2.5% per annum.
- There will be a consultation on the possible repeal of the high income excess tax relief charge (as proposed by the last Government) and its possible replacement by a reduction in the Annual Allowance to between £30,000 and £45,000. Any change must deliver the same savings to the Treasury.
- Confirmation of a review of the timescale for increasing the State Pension Age to 66 – this review has already started.
- A review of the age 75 rule. There is no requirement to buy an annuity at age 75 but there will be a review of the options available.
- Confirmation that the default retirement age of 65 will be removed.
- The introduction of legislation to enable the National Employment Savings Trust (a compulsory pension scheme for employers and staff to be introduced soon), to be treated as an occupational scheme and therefore able to benefit from normal tax reliefs.
- Confirmation of public service pension provision to be undertaken by the Public Service Pensions Commission.
It’s also worth noting that confirmation was given that Employer Financed Retirement Benefit Schemes (EFRBS) are within the scope of proposed legislation that will take action to consider arrangements which use trusts to avoid restrictions on pensions tax relief. There will also be consideration of a general anti-avoidance rule (GAAR).
So, lots of changes, but quite what they’ll be, we will have to wait and see. It is clear that we should all encourage a savings culture, as we all want our retirement to be an enjoyable period. You should contact an independent financial adviser if you need any pensions advice. Or contact us by phone: 01582 839280 or email.
Posted in Employed People, Financial Planning, Investments, Retirement, Self Employed | No Comments »
VAT – Budget rise in sales tax was ‘unavoidable’ says Chancellor
12/07/2010
We all pay it and we’ll all feel it. The increase in the rate of VAT to 20% from 4th January next year will bring in £13 billion of extra revenue over the lifetime of the current parliament.
In his first Budget as Chancellor, George Osborne said that the rise in VAT from its current rate of 17.5% was necessary. ‘The years of debt and spending make this unavoidable,’ he continued. ‘That is £13 billion we don’t have to find from extra spending cuts or income tax rises.’
VAT exemptions for food, children’s clothing, books and newspaper will be preserved for the course of this parliament.
The Chancellor has also increased VAT on general insurance premiums to 20% from 17.5% for the higher rate, which will mean more on travel insurance and product warranties for consumers. The standard rate of insurance premium tax will also increase to 6% from 5% which will impact on the price of car and home insurance.
Retailers may benefit from this impending rise come Christmas as shoppers may not put off purchases until the January sales. Others are sure to ‘cash in’ now too. Have a quote now for new windows – as long as the price is held for 12 months. You could benefit even if you don’t want to make the purchase in 2010.
Rise in CGT could also hit basic rate taxpayers
12/07/2010
The rise in Capital Gains Tax will hit some middle income earners who have invested in assets such as property over many years, tax experts have warned.
The announcement made in the budget last month by Chancellor George Osborne, revealed that the CGT rate for high earners will increase from 18% to 28%. However, lower earners could also be hit by the rise if the sale of an asset takes them into the higher income threshold. Any gain from such a sale would be added to your income and may push you into the higher rates of tax.
Property has been used by some investors instead of a pension and they may now be better off holding on to the properties and renting them out if they can. That way, they can benefit from the monthly rental income, rather than using a lump sum from a sale for a pension (and being charged CGT on the lump sum).
Fortunately, the rental market is currently quite strong. The government’s move can be seen as quite positive as it had not raised CGT for higher rate taxpayers to the 40% rate it was at before the flat 18% rate was introduced. If you bought your investment property years ago, you will still be better off, as 28% is still less than the previous of 40%.
Financial regulation in the UK
05/07/2010
On 16th June 2010, George Osborne gave his first Mansion House speech as Chancellor of the Exchequer. In his speech, he announced radical changes in the UK’s financial regulations, which includes the abolition of the current tripartite system.
To replace it, the Bank of England (BoE) will be given responsibility for macro and micro-prudential regulation. The FSA will be wound down with its remaining responsibilities being taken up by the new Consumer Protection and Markets Agency. These changes will be completed by 2012.
George Osborne said that the tripartite had failed ‘spectacularly’ and that the new government wanted to learn from previous mistakes. ‘When it came to the crunch, no one knew who was in charge.’
The Chancellor’s announcements were pretty much set out in the Conservative Party’s Financial Services White Paper, 2009. The coalition government agreement document did not give many details of policy in this area, although it did state its intention to give the BoE control of macro-prudential regulation and oversight of the micro-prudential regulation.
Following George Osborne’s speech, Mark Hoban, Financial Secretary, announced further details of the planned changes to Parliament, including an insight into how insurance will be dealt with under the new arrangements.
The plans announced by the Chancellor will see the current tripartite system replaced by a ‘twin-peaks’ regime which will distinguish prudential supervision from consumer protection. The FSA will be abolished with its regulatory powers passing to the BoE and the consumer remit will go the new Consumer Protection and Markets Authority. There will also be a new Financial Policy Committee, which will be responsible for financial stability as well as a body responsible for financial crime. The new regulators are expected to be funded by a levy paid by firms.
In his speech, the Chancellor also announced a single body to tackle financial crime, the introduction of a banking levy and the creation of a banking commission to look at splitting retail and investment banking operations.
A full consultation will be held on the changes to financial regulation, and a detailed document has been promised before the summer recess in July. The Labour Party questioned the speed of change and whether the new system would give rise to regulatory issues ‘falling between the cracks’.
Posted in Business Owners, Employed People, Estate Planning, Investments, Retirement, Self Employed | No Comments »
Latest inflation figures
28/06/2010
And so, inflation continues to alter. In the UK price inflation, as measured by the Consumer Prices Index (CPI), has dropped to 3.4% for the year to May with falls in the prices of food, non-alcoholic drinks and petrol. This is a fall from 3.7% and is bigger than expected.
The CPI inflation was forecast to be at 3.5% for the year to May and this slightly bigger than expected fall has meant that sterling has lost ground against both the dollar and the euro.
The Retail Prices Index (RPI) measure of inflation, which includes housing costs, also fell in May. It is now at 5.1% down from 5.4% in April.
Whilst inflation is still above the Government target, this new data should ease some concerns about UK inflation and a need to increase interest rates to control rising inflation.
The Bank of England’s rate-setting monetary policy committee will now no doubt be hoping that inflation will continue to fall towards its target of 2%. This new data for the year to May could be the beginning of this process, or it could be just a respite in recently rising inflation figures.
Make sure you don’t lose private residence relief if you work from home
28/06/2010
Working from home is growing in popularity. However, have you considered if it could affect your Capital Gains Tax (CGT) private residence relief when you come to sell?
One of the best known tax reliefs, private residence relief allows a person to sell their main home without triggering a liability to CGT. When someone owns more than one residential property, you can choose which one is the main residence for the purposes of the relief. It does not have to be the one in which you spend most time in and you change which property is regarded as your main residence, although only one can be the main residence at any one time.
Relief from CGT is given on the disposal of all or part of a qualifying property.
Private residence relief is not available in respect of any part of the property that is used exclusively for business use. Relief is denied for that part of the property that is used exclusively for business use. Therefore, where there is exclusive business use, any gain on the sale of the property must be allocated and the proportion on the area relating to exclusive business is subject to tax.
For example, if I run a graphic design business from home. My house has seven rooms and I use one exclusively as an office. On the sale of my property, I receive a gain of £40,000. One seventh (£5714) of that will be subject to CGT. As my annual exemption (£10,100 for 2010/11) remains available, the gain will be sheltered and the result is that no CGT is payable.
The same applies for people who are employed workers but work from home and set aside a dedicated area exclusively for work.
Relief is only lost where there is exclusive business use of part of the property. To protect the exemption, all that is necessary is to ensure that any part of the home that is used for business purposes is also available for private use. For example, a room used as an office during the day could also be used by the taxpayer’s children to do their homework in the evening.
By making rooms used for business purposes also available for domestic use, it is possible to work from home and ensure that private residence relief remains available for the whole property.
Non-exclusive business is a ‘good thing’ for protecting the full entitlement to private residence relief; however, the same cannot be said for income tax. Relief for expenses is available to the when they are incurred wholly and exclusively in relation to that business. Where a room is used exclusively for business, a greater deduction is permitted. Where the use is non-exclusive, the permitted deduction is reduced as costs must be allocated between business and domestic use.
In summary
If part of the property is used exclusively for business, all is not lost from a CGT perspective. Depending on the amount of any gain in relation to the business part, it may be possible to shelter the gain with the annual CGT exemption. This makes it possible to use part of your house exclusively for business and to sell the house without paying any CGT, while enjoying the maximum possible deduction for expenses in the process.
Overview of the emergency budget
23/06/2010
This has been one of the most debated and highly anticipated Budgets in recent times. The Chancellor and the Coalition Government face three tests:
- to communicate the size and scale of the measures necessary to reduce the deficit
- to convince the markets they have a realistic plan to tackle the issue
- and to convince the wider public that the pain is required but will be shared (this last test will be a hard one and it will take time to ascertain the Coalition’s success in getting its message across)
While pre-Budget polling has shown a public acceptance of the need for action it is not clear how this will hold up when local services and benefits are affected.
It is usually said that it takes a few days before the real impact of a Budget can be properly assessed. Given the ambition of this Budget to set a time horizon of up to five years, it may take longer to assess this particular Budget’s impact. Indeed, the other half of the equation – the spending review of Government departments – will not come until the autumn. In political terms this budget will be the first real test of the Coalition Government.
General
In opening his first Budget speech, the Chancellor told the House that at present £1 in every four spent by government is borrowed. He said there was a need to put in place a “credible plan” for reducing the deficit, describing this as an “unavoidable Budget”. He called for a more balanced economy, one which moves away from an over-reliance on the success of one sector – financial services – to one where industries across all parts of the country grow. The Coalition’s plans to reduce the deficit are currently based on lower spending rather than higher taxes – with the Chancellor working on a 77/23 split between spending cuts and tax rises.
Growth estimates (from new Office of Budget responsibility)
Growth is estimated to be 1.2% this year – lower than the 1.3% forecasted by the OBR last week. The reason for the difference is that the latest figure takes into account the measures announced in the budget. Growth will then be 2.3% next year, and 2.8% in 2012 – thereafter, 2.9%, 2.7% and 2.7%.
Unemployment
The rate of unemployment is predicted to peak this year at 8.1 %. It is then expected to fall to 6.1%.
Debt
There will be a fixed target for debt, ensuring that it falls as a share of GDP each year up to 2015/16. In the structural current deficit should hopefully be in balance at the end of this same period. The OBR expects the Government to hit these figures. The Chancellor said that he expected these targets to be met a year earlier in 2014/15.
Inflation
Consumer price inflation is expected to hit 2.7% at the end of this year and to then decline to target in the medium term. The target will remain at 2%.
Borrowing
Borrowing for this year is forecast to be £149bn. By 2014/15 it is expected to have dropped to £37bn and by the following year 2015/16, it should be £20bn. In terms percentage of GDP borrowing will drop from 10.1% this year to 1.1in 2016.
Government spending
Many Government departments (with the exception of health and international development), will see a cut of 25% to their budgets over the life of the current Parliament. The results of the Comprehensive Spending Review will be published on Wednesday 20th October.
Highlighted elements of the Budget announced 22nd June 2010
CGT rate to increase to 28% but annual exemption remains untouched
An increase to the rate of Capital Gains Tax has been set at 28% but will only apply to trustees and higher rate taxpaying individuals.
Individuals
New capital gains tax measures effective from 23 June 2010 will see a return to a link to income rather than a flat rate charge. The annual exempt amount has escaped any cuts and will remain at £10,100.
The Finance Bill will introduce a new rate of 28% payable by individuals with capital gains in excess of their annual exemption which when added to their income exceed the income tax higher rate threshold (£37,400 – 2010/11). Where the income and capital gains do not exceed the threshold, the existing rate of 18% will apply. Any gains going across the threshold will pay 18% on the amount of gain below the threshold and 28% above it.
Example
Mr Jones has total income of £38,875 and incurs a capital gain on 22 August 2010 of £30,100 on the disposal of a portfolio of OEICs.(Open ended investment companies)
Total income £38,875
Personal allowance £6,475
Taxable income £32,400
Capital gain £30,100
Annual exemption £10,100
Taxable gain £20,000
Gain added as top slice of income
£5000 (£37,400 – £32,400) x 18% = £900
£15,000 (£52,400 – £37,400) x 28% = £4,200
Total CGT payable £5,100
Where an individual has made capital gains in the current tax year but before 23 June 2010 these will continue to be taxed at the flat rate of 18% and are not added to income to determine the rate payable on any further gains made in the tax year.
The new rates will also apply to deferred capital gains, for example, where EIS deferral relief or CGT holdover relief applies and a disposal takes place after 23 June 2010.
Trustees & Personal Representatives
Capital gains for trustees or the legal personal representatives of a deceased’s estate will be taxable at a flat rate of 28% on gain above the annual exempt amount. Gains arising on bare trusts are not taxable upon the trustees but instead are taxed upon the beneficiary and the new rules for individuals will apply.
CGT entrepreneurs’ relief limit extended to £5M
The Government’s pledge to encourage entrepreneurs has seen them extend the lifetime limit on CGT entrepreneurs’ relief from £2M to £5M.
CGT entrepreneurs’ relief is available on the disposal of entrepreneurial businesses, subject to certain conditions, providing an effective rate of CGT of 10% on disposals within a lifetime limit. The Finance Bill will raise the lifetime limit to £5M with effect from 23 June 2010 and simplify the method of providing the relief to a flat 10% on the amount within the lifetime limit. Gains which exceed the lifetime limit will be subject to the new CGT rules and taxed at either 18% or 28%.
Where disposals in excess of the previous £2M limit have been made prior to the 23 June 2010, no additional relief for the excess will be given. However, further disposals can be made after 23 June 2010 to benefit from the additional £3M of lifetime limit now available. This is excellent news for business owners expecting to sell their businesses.
2011 high earner pension tax rules under review
The Chancellor announced in his emergency budget statement that the complex rules for high earners from 2011 introduced by the Finance Act 2010 will be repealed. The Government will consult on the construction of simpler rules to achieve the same aim of restricting the cost to the public purse of tax relief on pension funding.
Full details will emerge as the consultation progresses. There is already a suggestion that the main feature of the 2011 changes is likely to be a reduced pension annual allowance in the range of £30,000 to £45,000 a year.
This may not be entirely what was hoped for, but is a change for the better on previous proposals. In particular, it would have the benefits of:
• Reinstating a level playing field for all pension savers
• Maintaining the principle of tax relief at the highest marginal rate on personal contributions
• Adhering to the original ‘pension simplification’ principles by providing a simple, clear yearly allowance for pension savers to use
The consultation will also aim to resolve related practical issues (such as the valuation of defined benefit rights and the treatment of those in special situations such as redundancy) to ensure that the new regime works properly and fairly.
The changes are likely to be introduced in a Finance (No.2) Act 2010 late this summer.
There will be no changes to the interim pension anti-forestalling regime for the current tax year.
Pensions – requirement to purchase an annuity deferred from age 75 to age 77
The Government’s Coalition Agreement confirmed that the requirement to purchase an annuity at age 75 from a money purchase pension scheme would be abolished. This is planned to be introduced from 2011/12, and in the meantime, the age at which an annuity must be purchased has been increased from 75 to 77 with immediate effect.
The planned abolition of the requirement to purchase an annuity is now set for 2011/12. To help those approaching their 75th birthday, the requirement to purchase an annuity will be put back from age 75 to age 77, so they will be able to benefit from the formal abolition next year. This will be within the Finance Bill(2) 2010 and have effect from 22 June 2010.
Those reaching age 75 on or after 22 June this year, and already in unsecured pension (USP) will be able to continue on the same basis, and not be forced to adopt the alternatively secured pension (ASP) limits. Those with unvested money purchase pensions will still have to crystallise immediately before their 75th birthday, paying out any pension commencement lump sum and the balance will become USP.
In this interim period, before the changes due in 2011/12 arrive, the death benefits for those continuing in USP from age 75 will be the usual 35% on any lump sum paid for deaths after 22 June 2010. The potential IHT that could have applied on death in ASP will also not apply for those reaching age 75 after 22 June.
However, it would appear that the normal ASP income limits and death benefit options (with associated IHT issues) would still apply for those who reached age 75 prior to 22 June and already entered ASP, even if they are still below age 77.
For the formal abolition of the requirement to purchase an annuity in 2011/12, a consultation will be soon launched to look at the issues.
State Pension age increase to 66 to be brought forward
The Government intends to accelerate the increase in the State Pension age to 66 and a review will be launched shortly.
The review is expected to be conducted quickly – there were no suggestions of the timescales for this within the Budget documentation, but the Coalition Agreement suggested that the date State Pension age would start to increase to 66 would not be sooner than 2016 for men and 2020 for women.
The information can be found in the main budget document on the Treasury website, in section 1.109.
Default retirement age of 65 to go
The Chancellor confirmed in his emergency budget statement that the promised consultation on the removal of the statutory retirement age of 65 will take place shortly. The Government’s aim is to phase it out from April 2011.
This change will allow employees of all ages to continue working as long as they are able to meet the demands of their job and thus removing an anomaly in the UK’s anti-age discrimination law.
The consultation is likely to centre on the practical implications of the change for employment terms and pension provision.
Corporation tax rates reduced
The main rate of corporation rate will be reduced to 27% from 1 April 2011 with further reductions over the next 3 years.
The main corporation rate will reduce by 1% to 27% from 1 April 2011. Further reductions of 1% will take place each year until 1 April 2014 when the main rate will be 24%. For companies with profits below £300,000, the small profits rate of corporation tax will reduce from the current rate of 21% to 20%. No further reductions in this rate have been announced.
This change may be an incentive to any company that is considering making a pension contribution. If the company contributes before the 1 April 2011 they will receive an extra 1% of corporation tax relief on their contribution.
U-turn on corresponding deficiency relief changes
The Government has scrapped the planned changes announced in the March Budget to extend deficiency relief to apply to income taxable at the additional rates of tax.
Deficiency relief provides relief for higher rate tax paying individuals who realise a loss on the full surrender on a life assurance policy (such as an investment bond) where the loss is as a result of a previous chargeable gain on part surrender. The March Budget extended the relief to also apply to income taxable at the additional rate and dividend additional rates and also intended to introduce anti-avoidance legislation to limit the relief where the previous chargeable gain was not also subject to the additional rates. These changes were to be effective from 6 April 2010 with the legislation expected in the next Finance Act.
However the new Government did not feel it necessary to extend this relief for additional rate taxpayers and the expected changes will not go ahead. Deficiency relief will continue to apply but will be restricted to the higher rate only.
Disclosure of tax avoidance schemes
The Government will consult over the summer on extending the disclosure of tax avoidance schemes (DOTAS) regime to inheritance tax plans using trusts. Trusts set up before these new plans are put into place are likely to be exempt.
Settlor interested trusts and reclaiming income tax
The budget on 24 March 2010 announced that measures would be introduced requiring the settlor of a settlor interested trust to repay to the trustees any tax which he reclaims from HMRC. Due to lack of time this did not make it in to the first Finance Act 2010 will now be included in the next Finance Bill and will apply to reclaims from 6 April 2010.
Currently, if a trust is settlor interested, the settlor is liable to income tax on any income received by the trustees, regardless of whether income is paid to them. However, the trustees have the primary liability with the settlor taking credit for the tax paid by the trustees. The settlor is then able to make a reclaim from HMRC for any difference between the settlor’s own marginal rate and the tax paid by the trustees. There is no legislation which compels the settlor to pass any tax reclaimed back to the trust and if the settlor chooses to do so it would represent a transfer of value for IHT.
From 6 April 2010, settlors who are able to make a reclaim in this way will be required to pay the reclaimed tax back to the trust. As this is no longer a discretionary payment to the trust it will not be considered a transfer of value for IHT.
ISA limits to be increased by RPI
From 6 April 2011 the annual ISA subscription limits will be increased with reference to RPI on an annual basis.
The current limits of £10,200 of which half can be invested in cash, will be increased from 6 April 2011 with reference to the RPI for September 2010. This will be rounded to a multiple of £120 to allow an easily divisible figure for monthly savers. In future, this procedure will occur on a yearly basis, with ISA limits remaining unchanged in the event that RPI is negative. The cash ISA limit of half the value of the stocks and shares ISA limit will continue.
Personal tax allowance
The personal allowance for 2010/11 remains at £6,475. However, the basic personal allowance will rise to £7,475 from April 2011, with a commitment to further increases towards the £10,000 target by the end of the present parliament.
Tax bands
The income figure above which higher rate tax becomes payable will be reduced from April 2011. Thereby, higher rate taxpayers will not benefit from the increase in personal allowances.
National Insurance Contributions (NICs)
As per previous announcements, there will be no increase in employer’s NICs, although employees’ NICs will increase by 1% from April 2011. The threshold before NICs become payable is to be increased (by an as yet unspecified amount), so that lower paid workers will be better off.
As the upper limit is being reduced to allow 40% income tax to be paid sooner and the upper earnings limit for NI purposes is linked to this, the upper earnings limit will be reduced. Whether this means that higher paid employees will pay less NI is yet to be seen, but any benefit is likely to be wiped out by extra income tax at 40%.
State Pension
From April 2011, State Pension benefits will be increased each year by at least 2.5%.
Under a ‘triple lock’ pensions will rise by a minimum of 2.5%, or in line with earnings or prices, whichever is the greatest amount.
Pension contributions
The annual allowance, i.e. the maximum contributions allowed in any year, is currently £255,000. This will be reduced from April 2011 as part of a simplification of the previous proposals intended to limit higher rate tax relief for contributions. The Government will discuss the changes with interested parties, but expects that a reformed annual allowance may be in the region of £30,000 to £45,000.
Child Benefits
These are to be frozen for three years.
Child and Working Tax Credits
The Child Tax Credit will increase by £150 above the Consumer Price Index in April 2011.
From April 2011 the following changes will also apply: The baby element of the Child Tax Credit will be removed and the second income threshold for the family element of the Child Tax Credit will reduce from £50,000 to £40,000. Both withdrawal rates will increase to 41% and the level of in-year rises of income that will be disregarded from calculations of tax credit entitlement will decrease from £25,000 to £10,000. Also worth noting, from April 2012, the facility to register and claim tax credits from an earlier date will be reduced from the present 3 months to just one month.
Alcohol duties
Previous increases in the duty on cider products have been reversed and all other duties remain unchanged.
Landline Duty
Due to have been effective from 1st October 2010, this duty to have helped fund the roll-out of Next Generation Access, will no longer be implemented.
Inflation rises
14/06/2010
CPI annual inflation – the Government’s target measure – was 3.7% in April, up from 3.4% in March. The largest factors to the change in the CPI annual rate between March and April came from the rise in prices for clothing and footwear, food and non-alcoholic beverages and alcoholic beverages and tobacco.
Is it a good thing, or a bad thing?
Certainly, not everyone is concerned about the recent rise. Some homeowners are even welcoming it thinking that it will lower the value of their debt and lessen the burden on them in the future.
This could be a mistake. It is true that in theory, inflation may erode the real value of the debt. However, it can’t reduce the monthly burden of the debt unless wages are rising too, and they are not. We know that the government is planning a freeze on all public sector salaries above £100,000, but it isn’t just the very well paid who are likely to see their nominal wages stay still and their real wages fall.
The retail price index may be rising at over 5% a year, but it is not likely that the tax-paying public will agree to a nominal wage rise of 5%+ for any public sector workers. That suggests that real wages for the millions of people who are dependant on public sector money are on the way down.
It’s the same for the private sector. Unemployment is high and rising and there is little or no pressure on companies to offer higher wages than they already are. Statistics show that real wages in the private sector are also coming down.
What is inflation actually doing for those people with debt? Their cost of living has risen (via rising oil and food prices), thus leaving less money for interest and debt payments. So, the higher it goes the more of a burden the debt becomes – not the other way round.
It might work the other way for small business owners if they can raise prices whilst keeping real wages down.
If you have debt, via your mortgage and credit cards, please don’t think that today’s inflation rate might be good for you as it probably won’t be! Contact an experienced independent financial planner if you think you need help and financial advice.
House price surprise
14/06/2010
It’s no surprise to hear that the country’s finances are ‘in a mess’. It is surprising to learn that house prices continued to rise in May and are now just 9.5% below the October 2007 peak, according to figures from Nationwide.
This is more surprising as a higher unemployment level is usually bad for house prices. When people lose their jobs, they find it difficult to keep their homes. Higher repossessions and worsening bad debts for banks is one reason why the banks don’t want to lend money to lots of people now.
So, why are house prices still rising? Basically, the number of sellers has dropped, increasing competition between buyers for those properties on the market.
This situation is unlikely to last. As more sellers join the market, prices will begin to drop. Depending on the timing of the coalition government’s capital gains tax rise on the housing market, some second home owners and buy-to-let landlords may decide to sell before the higher rate is introduced. This could alter the supply/demand balance to move in favour of buyers and ease the current upward pressure on house prices. If the new rates are effective immediately after Budget day on 22nd of June, then potential sellers will not have time to react and this will be one factor that doesn’t then affect housing supply.
Another reason why house prices have stayed high may be that real long-term interest rates – measured by index-linked gilt yields – have been low. A low index-linked yield means that investors expect real short-term interest rates to be low in the future, which means people can afford to take on higher mortgage debt. Or a low long-term real interest rate means the net present value of future rents is high, which should mean house prices are high.
‘No real answers then’, I hear you cry. To be honest, no. But I don’t think this rise in house prices is likely to bring about a repeat of the early 2000s boom as this would need index-linked yields to fall sharply. As they are already under 1%, this is not going to happen – thus eliminating one factor behind a house price boom. However, I do believe house prices have now ‘bottomed out’, except for a short-term blip relative to the new CFT implications. Buy-to-let might now be worth looking into.
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