Month: December 2019

Now’s not the time to play ‘financial chicken’

Sometimes it’s good to be the odd one out!

The election is over, now let the dust settle

Finally we have the outcome and a new strong direction for the UK, with Brexit now happening in the way that Boris Johnson has planned. There will be international reactions to the new political landscape and the markets will no doubt respond too. In fact, at the moment the exit poll was announced Sterling rose significantly; and we can expect to see further fluctuations across the board in the UK markets. Which is why, whatever way you voted, I’d like to just focus your attention on your finances and what you should and shouldn’t do next. 

Psychologists tell us that we have been hardwired over the last 100,000 years to behave the way we do. With most of these behaviors being based on primal instincts that determine our survival as individuals and as a species. So in many ways, these behaviors are so deep routed at a biological level, we don’t stand much of a chance of avoiding them as individuals. That is of course, if they are not pointed out and guarded against.

The modern world really is an extremely new phenomenon, especially when we look at it through the lens of evolution. The vast interconnections and the exchange of up to the minute information and ideas are truly phenomenal. So have some sympathy for that part of your brain that has been hardwired to live in a world that lasted for around 98,000 years and now no longer exists; and never doubt the influence it still has over you and your finances!

Here’s how a caveman still influences your decision-making

We all carry around these hardwired modes of behaviour; and one that may come to the forefront in the next couple of months is what psychologists call ‘The Bandwagon Effect’

There is an incredibly powerful compulsion to follow the herd. It’s been bred into us at the very base level of our existence; and in uncertain and stressful times, it comes right to the front of our thinking. That’s because for tens of thousands of years, belonging to and conforming to a group was a very successful strategy for survival. Staying with the group is far better for survival than going it alone. Hence, over thousands and thousands of years the desire to follow the herd has been bread into all of us over time – and is now a fundamental human instinct. 

How many times have you fallen for the appeal of a busy mediocre restaurant verses a fabulous empty one saying “Let’s eat here, it looks full so it must be good”?.. It’s the Bandwagon Effect in full swing.

When the wheels come off and that impacts your finances

An excellent and extreme example of The Bandwagon Effect causing financial problems was laid out in the dramatic rise and crash of Bitcoin. That particular bandwagon was one that people couldn’t get on fast enough, despite common sense telling them that it wouldn’t last. For the majority of ordinary investors, they bought Bitcoin at the height of its value only to watch the value plummet. 

Whilst Bitcoin is an extreme example, I use it to illustrate the Bandwagon’s grip on sane minds. So my words of caution are aimed at the post-election markets in general, over the short-term.

March to the beat of your own drum

Over the next few weeks or months the markets are going to react to the first quarter of the new Government. That may well create fluctuations and the odd perceived stampede toward the Bandwagons. My advice would be to bide your time and wait. 


Think about theold adage ‘If you see a bandwagon, it’s already too late’

Markets hate uncertainty and have been reacting to the political deadlock that we have been living with through the post Brexit Referendum. 

However, now is the time for the markets to settle again. It’s certainly not the time to take peer-pressured decisions on investment acquisitions or disposals. If you spot an opportunity whose value is created by a sudden influx or departure of groups of investors, please think again. Remember that bandwagons often artificially alter a market for the short term. So get some impartial advice and consider your options calmly and pragmatically. Please bear in mind that the powerful drives to follow the herd have been with us for over 100,000 years and have served us incredibly well. However, they are your worst enemy when it comes to the financial markets.

Unleash your inner Spock!

I’m not sure if there is such a thing as The Bandwagon Effect on Vulcan. However, I would say that approaching the financial markets with a Vulcan like emotionless clarity, and a determination not to get carried along with the crowd, is the only way to overcoming the possible pitfalls of market hysteria. 

The markets are probably ahead of you anyway

Most of the serious financial markets have had any political upheavals already costed into them. So what you will be witnessing in any fluctuations is merely a settling of the market.

Also, don’t forget that the markets are now interlinked throughout the world. So, whilst the UK General Election may seem incredibly important to us, to the international markets it’s just a small bump in a very long and well-established road – and nowhere near as significant to performance than many of us believe.

Don’t just take our word for it though – talk to us too!

If you have any questions or worries regarding the current or future financial and investment markets, then pleasecontact us at Bridgewater Financial Services where we will be delighted to help guide you through your individual options and strategies.

Life Assurance

Here’s a lovely Life Assurance idea..

..how about the taxman pays around half of yours?

If you take out a Relevant Life Plan, then he (or she) will.
If you want to provide yourself and your employees with an individual death in service benefit that pays a lump sum if the individual insured dies or is diagnosed with a terminal illness, thena Relevant Life Plan (RLP) is something you should seriously consider.

Is it for you and if not why not?
If you’re an employer, looking to give the peace of mind that Death in Service cover can provide, but you don’t have enough employees to justify a group scheme, then a RLP could be just what you’ve been looking for.

If you’re a Director wanting your own individual Death in Service cover, without including your employees, then a RLP could be for you.

If you’re a high earning individual where Death in Service isn’t currently a part of your lifetime allowance of £1,055,000 (2019-2020), then considering an RLP could prove to be advantageous.

However, if your business is a sole trader, equity partnership or equity members of a Limited Liability Partnership, and doesn’t have an employer/employee relationship, then unfortunately a RLP won’t be suitable.

How does the tax saving work?
Almost all company directors who have some life assurance are paying the premiums personally. This usually this means that they are paying premiums out of pre-taxed income or they’re paying through their company and attracting a P11D benefit-in-kind penalty. However a RLP is paid directly by the company, with premiums allowable as a business expense. This obviously means that Corporation Tax Relief can be claimed and no Employer’s National Insurance is payable either. But that’s not all, the RLP policy does not count as a benefit in kind, so it doesn’t attract Income Tax or National Insurance payments either.

For example, the real cost of a £200 per month insurance policy, to a high rate taxpayer, after tax and NI is around £392 gross. By taking out a RLP, and paying premiums through the company, avoiding the income tax and NI; the remaining £192 produces an extra £98pm of net income available to the high rate taxpayer, whilst providing the same cover. This is a real saving of 49% and for a basic rate taxpayer; the saving is around 36%.

So why isn’t everyone doing this? 
It seems like a no-brainer that anyone who falls into the category of qualifying for a RLP would immediately switch to one. So why aren’t they more popular?
The simple answer is most company directors and, I’m sad to say, their accountants simply haven’t heard of a Relevant Life Plan.

That’s possibly because when the RLP was originally launched, it was only offered by one provider and the message didn’t really get out to a wide audience. Fortunately for you, you read my blogs and I’m here to tell you all about it

Who can you talk to regarding a Relevant Life Plan?
Not so long ago there was only one company who spotted the opportunity to offer a RLP. Their unique approach took advantage of pension simplifications, which meant that due to the way that life insurance was set up under trust, and because the limited company paid the premiums, no benefit in kind issues impacted upon the director or employee.

Understandably other providers held back from entering the RLP market, whilst they waited to ensure that the legislation that the RLP took advantage of was robust and unchallenged. Happily, now that the principles have gone unchallenged, a further half a dozen or so big name providers have now also entered the RLP marketplace, which helps ensure that premiums remain low.

Let’s have a quick look under the covers
The first question people generally want answering is, how much cover can I have?

Just like any other Death in Service policies, the sum assured with a Relevant Life Policy is based upon a multiple of the insured annual remuneration. As a director, remuneration is based upon salary with the addition of dividends and the addition of any bonuses.

Depending upon the provider you pick for the RLP, the multiples may vary depending upon the age of the director being insured. Usually though, you can expect the range to be anything from 10 to 25 times remuneration. So get some independent expert financial advice, before picking your RLP provider.

Get the right advice
As always, if you have any questions regarding your current or future financial situation, especially regarding a Relevant Life Policy and which provider best suits your individual needs, then please contact us at Bridgewater Financial Services where we will be delighted to help guide you through your individual options and strategies.

Smart thinking AIMed to reduce your inheritance task exposure

An IHT opportunity you may not know about

As the game of cat and mouse continues with the government and taxpayers, the scope of tax planning opportunities that are legitimately open for high earners has been steadily reducing in number and variety.

The latest industry figures show that taxpayers paid £5.3bn in inheritance tax in the last year to February 2018. That’s a rise from the £4.7bn paid in 2016/17. UHY Hacker Young, have suggested that there is a real scope to use Business Relief (BR) to further lessen Inheritance Tax (IHT) bills to HMRC. With forecasts predicting that the value of BR to have risen 8% in 2017/18, from £655m in 2016/17.

Investing in the Alternative Investment Market (AIM), with an Inheritance Tax (IHT) Plan,enables qualifying taxpayers to reduce IHT bills, through investments made in unlisted companies and other business assets.Not only that, but both investors and the government seem to like what’s on offer; as it can produce healthy savings and returns, as well as contributing to the wider economy and create jobs and growth.

An alternative to a Trust that’s worth considering

When you invest in the AIM market, most companies are eligible for Business Relief (BR); and, if held for at least two years, the shares are classed as business assets, so are completely free from IHT.

An AIM Portfolio IHT Plan can also provide you with greater flexibility than a trust and can also be less expensive and time-consuming to set up.

Unlike a Trust, you don’t have to wait for seven years in order for your assets to escape the remit of IHT, as your AIM IHT Plan qualifies for tax relief after just two years as opposed to seven – provided the AIM shares continue to be held thereafter.

Another benefit over a Trust, is that you no longer run the risk of losing access to your investments, as you retain control of your assets at all times. You are also free to increase contributions in the future, as well as possibly earning equity related returns on your AIMs investments.

You can even utilize an existing, or new, (ISA) 

You can either transfer an existing ISA, or set one up in your AIM IHT Plan. Which has the double advantage of the holdings in the AIM companies qualifying for BR. You’ll also be exempt from any income tax on dividends and capital gains tax on profitable disposals. 

How are savings on Inheritance Tax achieved? 

Providing you have held the shares for over two years then, under the current taxation rules, there us unlimited exemption from IHT on all shares that qualify for BR held by you when you pass away.  

Pretty much all of the companies traded on AIM, with the exception of those principally engaged in property or investment activities, qualify for BR. Which means that, under the current legislation, all of the applicable shares in your AIM portfolio will be seen to be business assets, which means that they are exempt from IHT if owned for more than two years.

As the IHT exemption is only available on the qualifying shares, held at the point of death, any AIM IHT Plan should be viewed as a medium to long-term investment, with a view to keeping it for a minimum of five years. 

Upon your death, your portfolio can be sold, or transferred to a spouse, without attracting IHT. 

Is an AIM IHT Plan right for you? 

If you’re concerned that a large portion of your wealth may not get to the people you wish to leave it to, because of the likely IHT charges to be made on your estate, then the AIM IHT Plan could be just what you are looking for.

As it provides you with an investment opportunity that could not only deliver a strong performance, but can also reduce your IHT liability. 

If you are considering investing in an AIM IHT Plan, then it’s important that you get the right kind of independent advice. As it should always be viewed as a long-term investment option that carries a slightly higher risk than other investments and my not necessarily be the best option for your immediate requirements.

The usual minimum investment you should consider with an AIM IHT Plan is £100,000. An additional contribution of a minimum of £25,000, or the full annual ISA contribution, can be made at any time after you start the plan.

A cautionary word about the Plan

Firstly, it’s important to appreciate that the current rate of IHT as well as the value of this option regarding IHT savings and the exemption afforded by an AIM IHT Plan could all change in the future.  

Having said that, BR has been around for a number of years and under various different Governments, and doesn’t appear to be drawing attention in any of the current manifestoes. 

It is important to recognise the long-term, and higher risk, aspect of the plan. As I would suggest that you especially consider the following points, in order to ascertain whether this type of investment fits your personal investment profile:

  • As most AIM shares tend to be illiquid, it might be more difficult to sell them. Also obtaining reliable information regarding their value and the risks they are exposed too can also more difficult to find.
  • Any AIM company can revert to private status. This would mean that shares may become impossible to trade and the value and protection offered by AIM would end. 
  • Like the FTSE, past performance is no guide to the future and the value of shares purchased on AIM (and income received) may go down as well as up; and you may not get back your full investment
  • Not all investments into the AIM market qualify for BR, plus the amount of tax relief available may change at any time. 

Need to know more?
As always, if you have any questions regarding your current or future financial situation, especially around AIM IHT Plans, then please contact us at Bridgewater Financial Services where we will be delighted to help guide you through your individual options and strategies.