Tax Year End Planning Checklist

With three weeks left until the tax year end, it’s time to review your finances and check whether there are any actions you can take to make your current and future tax position as efficient as possible. As every year the key date is 5 April, and as always we provide a tax year end planning checklist to guide you through the main optimisation opportunities, which you can find below.

Income Tax and National Insurance

If you have some control over the size and timing of your income, e.g. you are self-employed or own a company, there may be opportunities to optimise your income tax and NI bill, such as delaying an invoice or finding the right combination of salary and dividends.
The main income tax and NI figures for 2016-17 are as follows:

  • £5,824 (£112 per week, same as previous year) = Lower Earnings Limit – minimum to qualify for State Pension and other benefits
  • £8,060 (£155 per week, also unchanged) = Primary Threshold for employee’s NI (12%)
  • £8,112 (£156 per week, also unchanged) = Secondary Threshold for employer’s NI (13.8%)
  • £11,000 = Personal Allowance – basic rate income tax (20%) applies above this amount
  • £32,001 = higher rate income tax (40%) kicks in

All the various rates, thresholds and allowances for this and the next tax year are available on this page on


If you have the option, make sure you use your tax-free dividend allowance, which is £5,000 for both 2016-17 and 2017-18 (it will go down to £2,000 in 2018-19, as Chancellor Philip Hammond revealed in his last week’s Budget speech).

Beyond the allowance, dividends are taxed at 7.5%, 32.5% and 38.1%, respectively, for basic, higher and additional rate taxpayers. The taxable amount includes dividends you receive from your own company, as well as any other investments you directly hold, such as shares or funds. It excludes dividends received within tax wrappers such as your pension or ISAs – powerful tax planning tools which certainly deserve your attention before tax year end.

Pension Contributions

The annual pension contribution allowance remains the same as last year at £40,000 for most taxpayers, but for high earners it is tapered at a rate of £1 for every £2 you earn above £150,000, up to £210,000 (as a result, above £210,000 the pension allowance is fixed at £10,000). HMRC provides official guidance here.

Keep in mind that you can also use any unused allowances from the three previous tax years, as long as your total contributions stay below your earned income for the current year. You should also keep an eye on the Lifetime Allowance (LTA), currently at £1 million.

5 April 2017 also marks the deadline for Individual Protection 2014, which allows you to get a higher personalised LTA as a compensation for the April 2014 LTA reduction (LTA was cut from £1.5m to £1.25 in April 2014 and further to £1m in 2016). We have covered this in detail last month.


Besides pensions, ISAs are some of the most effective ways to save for retirement and the trend in the recent years has been towards higher allowances and more flexible rules. The range of products and investment options available under the ISA scheme has been expanding. You can invest in the traditional cash ISAs, stocks and shares ISAs and the recently introduced innovative finance ISAs.

The annual ISA allowance for 2016-17 is £15,240 (it will go up to £20,000 next year). Unlike in the past, if you have made any withdrawals during the year, it is now allowed to put money back in without reducing your allowance (provider and product specific rules may also apply).
In any case, the deposit must be made by 5 April, otherwise this year’s allowance is lost. Note that some ISA providers can take several working days to process deposits – make sure to send the final deposit at least a week before the tax year end to avoid disappointment.

Capital Gains Tax

Outside an ISA or pension, capital gains tax (CGT) normally applies when you sell an investment at a profit, with the rates being 18% and 28%, respectively, for basic and higher rate taxpayers. There is an annual CGT allowance, making the first £11,100 of capital gains tax-free. Like the dividend allowance or the ISA allowance, it is use it or lose it, and can’t be transferred to following years.

If you are holding investments with unrealised capital gains, you may want to sell and reinvest part of them in order to use the CGT allowance and reduce the tax bill in future years. You can also reinvest the proceeds in an ISA (a “Bed and ISA” transaction), which effectively earns your investments a tax-free status going forward. Of course, transaction costs apply and may outweigh the tax benefit. Taxes are only one of the many things to consider when deciding your investment strategy and actions.

Inheritance Tax and Gifts

If you have a large estate and inheritance tax (IHT) is a concern, you should also consider maximising your annual allowance for tax-free gifts (called the annual exemption). You can give up to £3,000 a year to your beneficiaries and, if you continue to live for at least seven years, the gift is out of your estate and free of IHT.

More Information and Help

Tax planning is obviously a very complex area and the above are just the main points which apply to most taxpayers. Depending on your circumstances, there may be other opportunities available to you. If you need more information concerning the above listed issues or need help with your particular situation, please do not hesitate to contact us.

Spring Budget 2017

The Rt Hon Philip Hammond MP

Spring Budget 2017

Chancellor Philip Hammond delivered his Budget speech on Wednesday 8th March 2017. It did not contain as many surprises or major changes as some of George Osborne’s Budgets in the last years, but there were a few (mostly unfavourable) points worth noting with respect to individuals and savers.

Self-Employed NICs to Rise

In spite of earlier promises by the Conservatives to not raise National Insurance Contributions (NICs), the Chancellor has announced an increase in Class 4 NICs. As a result, self-employed individuals can see their tax bill rising by several hundred pounds per year.
Currently, those who are self-employed pay two classes of NICs. Class 2 is a fixed amount (£2.80 per week in 2016-17; £2.85 in 2017-18). Class 4 is a percentage, currently 9% of profits between the Lower Profits Limit (£8,060 in 2016-17; £8,164 in 2017-18) and the Upper Profits Limit (£43,000 in 2016-17; £45,000 in 2017-18), and 2% of anything above the latter.

In April 2018 Class 2 will be abolished, as previously announced by George Osborne. This will reduce the tax bill by £146 per year. At the same time, as Philip Hammond announced today, Class 4 NICs will increase from the current 9% to 10% in April 2018 and again to 11% in April 2019. Above the Upper Profits Limit the rate will remain at 2%.

The combined result will be higher NICs for anyone earning above approximately £16,000. The increase will be greatest for those earning at or above the Upper Profits Limit, who will pay approximately £600 per year extra (the exact amounts will depend on the Lower and Upper Profits Limits, which rise every year proportionally to inflation).

Dividend Tax Allowance Cut to £2,000

Another negative surprise in the Budget is reduction of the dividend tax allowance from the current £5,000 to £2,000 per year, effective from April 2018.

Besides company owners, who are the main target of the measure, it will also affect those with larger share portfolios held outside a pension or ISA. Depending on average dividend yield, equity portfolios from about £50,000 net asset value could fall below the new reduced allowance.
Make sure you maximise the use of tax wrappers such as pensions or ISAs. If dividend tax is a concern, you may also want to consider shifting part of your equity holdings from dividend stocks to growth stocks and use the generous capital gains tax allowance to extract profits (of course, taxes are only one of the many things to consider when deciding investment strategy and portfolio structure).

Tighter Rules on Overseas Pensions

With immediate effect (from 9 March 2017) a new tax charge of 25% applies to transfers from UK pension schemes to QROPS (Qualifying Recognised Overseas Pension Schemes). The measure is aimed at those transferring their pensions overseas solely for tax optimisation purposes. Exceptions apply in cases where a “genuine need” exists, e.g. when you are moving to live and work in a different country and taking your pension pot with you.

Transfers to QROPS requested on or after 9 March 2017 will be taxed at a rate of 25% unless at least one of the following apply:

  • both the individual and the QROPS are in the same country after the transfer
  • the QROPS is in one country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein) and the individual is resident in another EEA after the transfer
  • the QROPS is an occupational pension scheme sponsored by the individual’s employer
  • the QROPS is an overseas public service pension scheme as defined at regulation 3(1B) of S.I. 2006/206 and the individual is employed by one of the employer’s participating in the scheme
  • the QROPS is a pension scheme established by an international organisation as defined at regulation 2(4) of S.I. 2006/206 to provide benefits in respect of past service and the individual is employed by that international organisation

UK tax charges will apply to a tax-free transfer if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer.

UK tax will be refunded if the individual made a taxable transfer and within five tax years one of the exemptions applies to the transfer.

Overall, the new measures will make transfers to overseas pension schemes more difficult and less advantageous in some cases. Careful consideration of all tax and other consequences of such move is as important as ever.

Tax Allowances and Thresholds

Besides the main points discussed above, the Budget also confirmed tax allowances and thresholds for the next year, most of them previously known. Some of the most important figures are listed below:

  • The personal allowance rises to £11,500 in 2017-18.
  • The higher rate threshold goes up to £45,000.
  • The Chancellor has reiterated the Government’s commitment to increase the above to £12,500 and £50,000, respectively, by 2020-21.
  • The annual ISA allowance jumps to £20,000 for 2017-18.
  • Capital Gains Tax allowance rises to £11,300.

We will discuss these in greater detail, as well as possible last minute actions, in our traditional tax year end planning checklist, due next week.


In spite of the unfavourable changes discussed above, the Budget speech has not changed the overall course of the Government’s financial and tax policies, which in light of the upcoming Brexit negotiations can be considered good news. Here you can find the full Budget speech.

Lifetime Allowance Protection Deadline Is Approaching

With almost two months left, there is still plenty of time for the usual tax year end optimisation tasks (we will provide detailed guidelines at the beginning of March). However, this year’s 5 April also marks the deadline for Lifetime Allowance Individual Protection 2014 application, which may require longer time to prepare. If you are still unsure whether you should take advantage of it, now is the time to review your pension and make the decision. Below we will summarise the most important facts and rules.

Lifetime Allowance and Its Reductions

The Lifetime Allowance (LTA) caps the total amount you can draw from your pension throughout your life before triggering the so called LTA charge – a rather high special tax, currently at 25% for benefits taken as income and 55% for a lump sum.

In the recent years, as part of the overall effort to make public finances more sustainable, the Government reduced the LTA on three occasions:

  • In 2012 from £1.8 million to £1.5 million
  • In 2014 to £1.25 million
  • In 2016 to £1 million

LTA Protection

Those who have built up pension pots large enough to exceed the new lowered LTA have the option to apply for LTA protection, as a compensation for the unfavourable rule changes. There have been different versions of LTA protection, always specific to the particular LTA reduction (year) and subject to different conditions (e.g. whether you can continue contributing to your pension plan).

The one whose deadline is approaching now is Individual Protection 2014 (IP 2014), designed for those affected by the 2014 LTA decrease from £1.5m to £1.25m who have continued to contribute to their pension plans after 5 April 2014 or intend to make further contributions in the future.

What Individual Protection 2014 Does

IP 2014 sets your personalised LTA to the lower of:

  • The value of your pension at 5 April 2014
  • £1.5 million

For example, let’s say your pension was worth £1.4 million at 5 April 2014 – within the old LTA effective before the 2014 reduction (£1.5m), but above the new one (£1.25m). As a result, part of your pension would become liable for the LTA charge upon withdrawal. If you apply for IP 2014, you can have LTA set individually to £1.4 million, possibly saving 25% (income) or 55% (lump sum) of £150,000 in LTA charges.

Applying for IP 2014

IP 2014 is not granted automatically and you must make a formal application by 5 April 2017. After that date the opportunity is lost forever.

In order to do so, you first need to know the value of your pension (or the combined value of all your plans if you have more than one) at 5 April 2014. Depending on pension provider, this may take considerable time to find out, which is why we recommend to start immediately.

In general, an application makes sense for those with pensions worth above £1.25m at 5 April 2014. You can apply even if your pension was worth more than £1.5m (above the old LTA) – in such case your personal LTA would be protected at £1.5m.

If You Already Have LTA Protection

Note that you can have multiple versions of LTA protection at the same time. In other words, you can also apply for IP 2014 even if you already have some of the other kinds of LTA protection in place, such as a fixed protection (any of the years) or enhanced protection (but those with primary protection are ineligible).

Applying for IP 2014 can make sense even when you already have a more favourable LTA protection in place. Different versions are subject to different conditions, and some actions (such as making further contributions to your scheme) may invalidate certain kinds of LTA protection going forward – then you will be able to use the next best version you have.

More Information and Assistance

You can find more detailed official information on the HMRC website. We would be happy to provide more detailed explanation, or assist with obtaining pension scheme details and making the application. You can contact us here

Inheritance Tax Planning and the New Main Residence Nil-Rate Band

Effective from 6 April 2017, a new main residence nil-rate band (RNRB) will be available on top of the existing inheritance tax (IHT) threshold. It can potentially save tens of thousands in IHT, but at the same time, compared to the existing IHT threshold it is subject to stricter conditions. Let’s have a look at the key points.

Summary of Existing IHT Rules

First let’s start with the basic rules which are already in place and will continue to apply:

  • IHT is due when passing assets to your children, or generally to anyone other than your spouse, civil partner, a charity or a community amateur sports club.
  • The headline IHT rate is 40%, reduced to 36% if at least 10% of the estate is given to charity.
  • The first £325,000 of your estate is free of IHT. This is called the IHT threshold or nil-rate band. Unused portion can be transferred to your spouse, which effectively makes the IHT threshold £650,000 for couples.
  • Besides the IHT threshold, there are various reliefs applying to different kinds of assets and subject to different conditions, which can further reduce the IHT liability. The Business Relief is a common example.

The New Main Residence Nil-Rate Band

The new RNRB will be available on top of the existing IHT threshold. It will be phased in gradually over the next four tax years, from £100,000 in 2017-18 to £175,000 in 2020-21. From 2021 on it should continue to grow in line with inflation. The full RNRB will be available only for estates worth under £2 million. It will be reduced by £1 for every £2 above the £2 million taper threshold.

Like the existing IHT nil-rate band, the new RNRB will be transferable between spouses or civil partners. Transfers will be possible even when the first partner died before 6 April 2017, even though the RNRB wasn’t available at that time (the unused portion of the RNRB is transferred as percentage rather than amount).

Importantly, while the existing IHT threshold has no restrictions in terms of how many items or which kinds of assets are included or who the beneficiaries are, the new RNRB only applies to one residential property being passed to children or direct descendants.

Who Qualifies As Direct Descendant

The new RNRB can be used only when passing your property (or a part of it) to the following:

  • Your children and their lineal descendants (e.g. your grandchildren). There are no age restrictions – the beneficiary can be under or over 18 at the time when you die.
  • Spouses or civil partners of the above, also including widows/widowers.
  • Your step-children, adopted children or foster children.

On the contrary, your siblings, nephews, nieces and other relatives do not qualify.

What Qualifies as Main Residence?

The RNRB has been designed to reduce the tax burden for families when passing on the family home to the next generation. Therefore, it can only be used for one property where the deceased has lived at some stage. A holiday home may qualify. A buy-to-let property won’t. When the estate includes multiple properties where the deceased has lived, the beneficiaries or personal representatives can choose one (but only one).

If you downsize or cease to own your home prior to your death and lose access to the RNRB as a result, your personal representatives may be able to make a claim for the so called downsizing addition to compensate for the lost RNRB. Conditions apply and the claim must be made within 2 years after the end of month when you die.

What It Means for Inheritance Tax Planning

The new RNRB is a welcome tax saving opportunity, making the total potential allowance £500,000 for individuals or £1 million for couples. When used to its maximum potential, the RNRB can save a couple as much as £140,000 of IHT (2 x £175,000 x 40%, using the 2020-21 RNRB). A good understanding of the rules and careful advance planning are essential for minimising future tax liability.

Start the New Year with a Financial Health Check

New Year is a perfect time for a complete review of your finances. Run through all your financial arrangements, like investments, pension, insurance plans and bank accounts. The following checklist may help.

Setting Goals and Budgeting

Finances are a popular area where people make (and fail to fulfil) New Year’s resolutions. “Spend less” and “save more” are particularly common ones – and particularly bad ones. When setting goals, you are more likely to achieve them if they are specific and measurable. “Deposit £500 to my savings account every month” is obviously much better than “save more”.

That said, even a well-defined and accurate objective won’t work if it’s either too soft or unrealistic. Make your goals ambitious, but keep them within reach with respect to your current lifestyle and habits. Keep in mind that besides spending cuts there are other ways to improve your bottom line, especially in the long run. They are often less painful and easier to stick with, but can have enormous effect. For example, optimising your taxes or pension contributions, taking advantage of various allowances, changing the way you save and invest or choosing a better insurance plan.


Pensions are among the most valuable assets for most people, but they often do not receive as much attention as they deserve. Moreover, pensions legislation has undergone substantial changes in the last few years. If you haven’t reviewed your pension for a while, do it now. The following are some of the questions to ask:

  • Are you contributing the right amounts? Make sure you don’t contribute too little (you may have too little to live off in retirement)) or too much (you might create a problem with the reduced Lifetime Allowance).
  • Does the investment strategy still fit your changing situation, risk attitude and time horizon?
  • Will your current pensions allow you to take advantage of the new pension freedoms? Many older schemes don’t.
  • How does your pension fit in your retirement and estate planning?
  • If you have a Final Salary Pension, have you recently requested a transfer value? These have recently gone up quite a bit and this could provide a good opportunity for you to restructure.


Pay particular attention to ISAs. If you are not using them, you are again leaving money on the table. The annual ISA allowance is £15,240 for the 2016/17 tax year and it goes up to £20,000 for the next. These are significant amounts of money you can invest tax-free. Remember to use this year’s allowance by 5 April and don’t leave it to the last moment, as some providers take several working days to process a new deposit.


Do you have a proper investment strategy which is intended to achieve specified goals held by you? Do not confuse speculation with disciplined investment. The former is for fun and the thrill. The latter is what you need to do to achieve your financial goals. If you hold mutual funds, look at their latest reports and check where your money is actually invested. Is the risk exposure in line with your preference? When assessing investment risk, remember to always consider all your investments (including your pension, ISAs, funds and stocks) together, even when the money is technically in several different accounts and investment vehicles.


Risk management is an essential part of sound financial planning. At the same time, insurance is an area where you can waste a lot of money if you choose the wrong product.

Go through all your insurance plans. Check how much each costs, what exactly it covers and what it doesn’t. Changes in your circumstances (e.g. your health, family situation or driving experience) may not only require a different plan, but may also qualify you for a lower premium.

Wills and LPAs

Numerous studies have shown that more than half of adults living in the UK don’t have a Will, including many in their 50’s and 60’s. If you are one of those people, writing a Will is a good New Year’s resolution to make – and one that is not that hard to arrange or anything like as expensive as you would think. We have connections with a number of law firms and can refer you to appropriate specialists.

If you already have a Will, this might be a good time to review it. Check whether it still accurately reflects your wishes and make updates if needed.

The same applies to Lasting Power of Attorney (LPA). Incapacity can strike at any time, not only in old age. If you get it sorted before it’s too late, you will save your family considerable costs and lengthy dealings with the courts. If you already have an LPA in place, check that it’s still up to date.

Contact Us for Help

If you would like help with getting your financial affairs in order and keeping them that way, we would be happy to help. Contact us. We also offer specialist pensions advisory services.

Further Details

If you live in the UK visit UK pensions advisory service. If not, visit expatriate pensions advisory service.

Record High Transfer Values: A Good Time to Act?

In a world full of uncertainties and low interest rates, final salary pension schemes are widely considered a treasure but they can be inflexible and are often not specifically targeted at individual members’ needs. Members of such schemes often transfer out for a variety of reasons. These include: to access greater flexibility under the new pensions freedoms brought in last year; to draw their cash lump sum to reduce debt and to ensure that their families better benefit from the fund, in the event of their death.

In the recent months we have seen transfer values (the capital value of the benefits promised by a scheme, sometimes called the CETV or Cash Equivalent Transfer Value) at unusually high levels – sometimes as much as 40x the annual pension income. This has been driven by recent reductions in government bond returns brought about by the Brexit vote and also the measures taken by The Bank of England to prop up the economy. It is fair to say that this combination of factors is unusual and likely to be short lasting. When Bond returns revert to their traditional range, it would be reasonable to expect transfer values to reduce. So there is a bit of a window of opportunity to extract quite a bit of value for your pension, which can not be expected to last. This is definitely a good time to review whether your final salary pension is in the right place.

Differences Between Pension Schemes

One important thing to point out is that different pension schemes use a variety of factors when calculating transfer values. These include your current age and when you are entitled to draw the benefit, as well as the scheme specification in terms of escalation of benefits before and after retirement and any spouses and dependents benefits. In general, the closer you are to retirement, the higher the CETV multiple. Conversely, the more time left for the assets to grow, the lower the present value. The only way to know the exact figure is to request a CETV quotation from your pension provider. The state of funding and therefore the security of your benefits can have a bearing on the transfer value as well. If the scheme is very underfunded, transfers values can be subject to a discount.

When to Transfer (and When Not)

Guaranteed income is the main advantage of defined benefit schemes. When you transfer to a defined contribution scheme, you lose these guarantees and your future pension income will depend on returns earned on the invested assets. When you get a CETV quotation, you can actually calculate the exact rate of return needed to beat the income which you would have received from the old final salary scheme. The current high CETV multiples make these required rates of return lower than usual – sometimes as low as one percentage point above inflation.

When transferring out of a final salary scheme, investment risk shifts from the pension provider to you. One of the key things to consider when deciding about a transfer is your ability and willingness to take this risk. The former is mostly about your financial situation and whether you have other assets and income sources to possibly rely on in case your investment returns turn out lower than expected. The latter is mainly about your risk attitude and psychological factors.

Risk and return are major parts of the decision, but not the only ones. Your existing pension plan may come with other (often non-financial) benefits which you would be giving up. At the same time, final salary schemes are typically quite restrictive and inflexible – transferring out opens up new ways to access your pension pot and thereby new options for retirement and inheritance tax planning.

To sum up, those with more wealth and other assets besides their pension, those who intend to pass a substantial portion of wealth to children, or those looking for greater flexibility and control over their retirement savings are more likely to find a transfer suitable. Conversely, those with limited assets and those who prefer security and guaranteed income will probably want to keep their existing final salary scheme. These are, of course, generalisations – the actual decision will depend on the particular numbers, as well as many unique, personal factors.

The Window of Opportunity

While a decision to transfer a pension must never be taken lightly or made hastily, keep in mind that the current high transfer values are caused by recent short term market developments and these are unlikely to last. When bond rates go up, the CETV multiples can be expected to decline.

Contact us now for a free initial consultation to check out your options. You can find more details about our pension transfer advisory process by visiting our sections on UK Pension Transfers and Expat pension Transfers

Recent FCA Asset Management Study: A Case for Passive Funds

The Financial Conduct Authority (FCA) has recently published a comprehensive study examining the British asset management industry. While the report is over 200 pages long and most of it is of little interest to the end customer, there are a few points worth noting – and some reasons for concern. We will discuss the key findings below, as well as implications for your investment strategy.

You can find the full report here (interim report; the final is due in the second quarter of 2017).

6 Key Findings

  • The FCA has found weak price competition in the UK’s asset management industry, with negative effects on clients’ net returns. Generally, fund managers are unwilling to reduce their charges, as they don’t believe a resulting gain in volume would offset the fall in margins.
  • Not surprisingly, the cost for the client of actively managed funds is significantly (often as much as four or five times) higher than the cost of passive funds. The difference has actually increased in the recent period. While charges for passively managed funds have fallen in the last five years, actively managed funds have maintained their fees at broadly the same level.
  • When a fund is marketed as active (and priced accordingly), it does not necessarily mean that its investment exposures are significantly different from its benchmark, or from passively managed funds tracking the same market. In other words, clients often pay for active management which they don’t really get. This affects as much as £109bn of assets invested.
  • Overall, the FCA has found that actively managed funds (even when they do invest actively) do not outperform their benchmarks after fees. In other words, you are unlikely to get better performance by choosing an active fund over a passive fund – quite the opposite.
  • While some investors may want to invest in funds with higher charges, expecting these to deliver better investment management skills and higher returns, there is no evidence of this being the case. In general, more expensive funds do not perform better than cheaper funds.
  • While many investors consider past performance when choosing funds, it is not a good indicator of future performance. A vast majority of active managers are unable to outperform their peers for longer periods of time.

What It Means for the Investor

If you could summarise the report’s key message in one sentence, it would be the following:
Paying more for active management is usually not worth it.

This is nothing new. There have been many reports by various academics and research institutions, working with data from different markets and time periods, and most have come to the same conclusion. It is also in line with the Efficient Market Theory, which became popular in the 1960’s, but research with similar ideas occurred as early as the first half of the 20th century.

Beating the market is extremely hard, especially after the higher costs which inevitably come with active management. Even when a manager is able to beat a broad market index in one or two years, sustaining outperformance over a longer period, in different phases of the economic cycle and in different market conditions, is close to impossible. The massive growth of index tracking and passive funds in the last two decades is an evidence that investors all over the world have noticed.

Asset Allocation and Passive Management

The above does not mean everybody should just buy a FTSE 100 tracker and sit back. Different investors have different needs, time horizons and risk profiles, and therefore should have different market exposures. For instance, an investor in his 60’s and about to retire would most likely want to have a portfolio structured differently (perhaps more conservatively) than someone in his 30’s. This should be addressed in the asset allocation phase, where the approach should be highly individual. Passive management only applies once asset allocation (i.e. the weights of factors such as equities vs. bonds, developed vs. emerging markets, large vs. small cap stocks, or growth vs. value) has been decided.

At Bridgewater, we have sophisticated models in place to find the best asset allocation for the particular investor’s needs. Once portfolio structure is determined, we invest in passively managed funds, which deliver appropriate exposures to the individual factors at the lowest possible cost. You can find more detailed explanation of our investment approach here.

Autumn Statement 2016: Things to Know

Chancellor Philip Hammond has delivered his first Autumn Statement. Unlike most of his predecessor’s Budgets and Autumn Statements, it didn’t contain major pension or tax surprises and mostly confirmed the policies and trends previously announced by George Osborne, although there are a few new things worth knowing. The following are the key points with respect to your pension, investments and taxes.

Money Purchase Annual Allowance Down to £4,000

The most significant change concerning pensions is the Money Purchase Annual Allowance (MPAA) going down from the current £10,000 to £4,000, effective from April 2017.

The MPAA applies only to those who are over 55, have already taken cash from their pension using the new pension freedoms and are still contributing to their pension. For instance, when approaching retirement, you may decide to reduce working hours and start drawing from your pension to supplement your income, but keep contributing and benefit from employer’s contributions at the same time. Or you may return to work after a few years in retirement. Currently, you can contribute up to £10,000 per year under these circumstances and get a tax relief at your highest rate.

The intention behind the cut (same as the intention behind the very introduction of the MPAA in April 2015) is to prevent abuse of the new pension freedoms for “aggressive tax planning” or “pension recycling”, where taxpayers would withdraw cash from their pension and contribute it back, effectively enjoying an “inappropriate double tax relief” on the same amount. This, unlike the legitimate examples above, would be against the spirit of the pensions legislation.

Luckily, there are still ways to access your pension without triggering the MPAA in the first place. For example, you can take a tax-free lump sum without drawing income, buy a lifetime (non-flexible) annuity, or take up to three “small pots” capped at £10,000. Any of these will enable you to keep the standard Annual Allowance of £40,000.

The takeaway is: Before taking any cash from your pension, make sure you understand the consequences. Contact us for more details.

Salary Sacrifice Rules to Tighten, But Pensions Exempt

Salary sacrifice schemes allow employees to give up part of their salary in exchange for non-cash compensation, such as mobile phone subscriptions, gym memberships or health checks, provided by the employer and effectively paid for with the employee’s pre-tax income. Chancellor Hammond considers these tax perks “unfair” and has announced tightening of the rules. As a result, most will be taxed as standard cash income and no longer provide any tax or National Insurance savings.

Fortunately, pensions and pension advice won’t be affected, as well as childcare, the Cycle to Work scheme and ultra-low emission cars.

Unchanged or Previously Known Things

Besides the MPAA, the Autumn Statement does not change other pension allowances. The Annual Allowance remains at £40,000 and the Lifetime Allowance at £1m.

Income tax allowances and rate thresholds will grow as previously planned. The Personal Allowance, currently at £11,000, will increase to £11,500 in 2017-18. The Higher Rate Threshold will increase from the current £43,000 to £45,000 in 2017-18. Philip Hammond has reiterated the Government’s intention to increase these to £12,500 and £50,000, respectively, by 2020-21.

The Personal Savings Allowance remains at £1,000 for basic rate taxpayers, £500 for higher rate taxpayers.

The annual ISA Allowance will increase to £20,000 in 2017-18 as planned. The Chancellor did not mention Lifetime ISAs, which were first announced in the 2016 Budget and should be launched in April.

The triple lock will continue to apply to State Pension at least until 2020. Introduced in 2010, the triple lock guarantees State Pension to grow by the highest of inflation, average earnings growth and 2.5% per year.

Corporation Tax will decrease to 19% in April as previously announced. The Government still intends to cut it to 17% in 2020.

Autumn Statement 2016 in Full

The above are just the most significant points with respect to pensions, investments and taxes. You can find Philip Hammond’s full speech here.

Trump’s Presidency and Your Portfolio

The unthinkable has (again) become reality: Donald Trump will be the 45th president of the USA, contrary to forecasts by vast majority of pollsters, big media outlets and experts.

After an unusually emotional and hostile campaign, with numerous strong statements from both Mr. Trump and his critics, many investors are worried that Trump’s presidency could bring radical changes which would negatively affect the economy and their investments. Are the worries justified? Should you expect losses in the months and years ahead? Are there any actions you can take to minimise them, or even profit from Trump’s policies?

Market’s Reaction to Election Result

Many of the same experts who got their election forecasts all wrong were also predicting a potential Trump’s victory would cause a stock market sell-off, weaken the dollar and boost gold price. This is in fact exactly what happened in the first hours, as more key states like Florida and Ohio started to turn red. The US stock market was closed at night, but the Dow and S&P500 index futures, which trade round the clock, were down more than 5% at one point. However, the panic quickly turned to optimism and the major indices were actually up at the end of Wednesday’s trading session. The Dow Jones closed at a new all-time high the next day and finished the best week since 2011 on Friday. So is Trump good or bad for the stock market?

Key Points Many People Forget

Due to the sheer intensity of the election campaign and its coverage in the media, many people have become overly emotional about the outcome – not only in the US, but also in the UK and elsewhere. Whether you personally supported Trump or Clinton, it was easy to feel like the world would be coming to an end if your candidate lost. Because strong emotions are rarely useful when making investment decisions, let’s remind ourselves of several key points.

Firstly, things said during an election campaign do not always translate into actions (this is not specific to Donald Trump). In the first days after the election, we have already seen Trump becoming softer on some of his plans, like repealing Obamacare.

Secondly, while having undeniably an enormous power, a US president cannot and does not govern alone. As one of the strongest, most established democracies in the world, the US political system has a number of measures and institutions in place to insure against a president going mad.

Thirdly, Trump’s surprise win has overshadowed another very important outcome of the election night: the Republican Party’s success in retaining its majorities in the House and Senate. The Republicans are traditionally considered the more pro-business party and therefore their victory may justify careful optimism in the financial markets. That said, we can hardly consider Trump a typical Republican president. Many of his plans will face tough opposition from “his own” party and the future outcomes are very uncertain.

Trump’s Economic Program and the Markets

Trump’s plans are a mixed bag with respect to the economy, corporate profits and share prices.

Making the US more protectionist would certainly hurt the stock market. Punitive measures against corporations outsourcing production to China or Mexico would not only harm these particular companies, but might also cause inflationary pressures and thereby pressures for interest rates to go up, with further negative effects on both stock and bond prices. That said, it is unlikely that Trump will find sufficient support for taking these plans very far.

A wider Republican support is more likely for tax cuts, another key point of Trump’s economic program. While clearly positive for company profits, lower taxes could also further stretch public finances, possibly repeating the fiscal cliff and debt ceiling crises of 2011-2013. Trump’s promised infrastructure investments (those “bridges, tunnels, airports, schools and hospitals” from his victory speech) would have a similar combination of effects.

In today’s complex and interconnected world, individual economic policy measures often have a mix of both positive and negative consequences, as you can see from the examples above. Therefore, it is very hard to predict the aggregate effects on the markets, even if we knew how exactly the new laws and policies will look (even Mr. Trump himself doesn’t know that yet).

What to Do with Your Portfolio

Luckily, sound long-term investing is not about making predictions. With the risk of repeating ourselves, it is “time in the markets, not timing the markets” that builds wealth in the long run. This is easy to forget when a strong story like the recent US election occupies our minds.

To conclude, the appropriate action to take right now is stick with your long-term plan and avoid making impulsive, emotional decisions. That said, we will continue to carefully monitor the developments in the US and the global economy and may review our recommendations going forward.

Decumulation Planning: Risks and Key Questions to Ask

Most retirement planning advice focuses on the accumulation phase – how big a pension pot you need, where and how to invest, or how much you should save each month. However, there is also the decumulation phase, when you start to rely on your savings to finance part or all of your living costs. Savers (and advisers) often underestimate its importance and complexity.

Clear Objectives But Many Unknowns

There are two main objectives in the decumulation phase:

  • Make sure you don’t outlive your savings.
  • Enjoy the best quality of life possible.

Although these sound fairly simple, there are many uncertainties complicating your decisions.

Firstly, you don’t know how long you will live. This is called longevity risk.

Secondly, you don’t know how much income you will need in future years due to unpredictable inflation and lifestyle changes. For instance, you will probably spend less on travel or hobbies in older age, but the cost of healthcare may go up.

Last but not least, the remaining part of your savings will continue to be invested and therefore subject to market risk (and don’t forget currency risk, especially if you plan to retire overseas).

Key Questions to Ask (Yourself or Your Adviser)

With the above mentioned objectives and risks in mind, decumulation planning involves particularly the following decisions.

How much can you draw from your savings every month or every year?

The popular rule of thumb says that if you withdraw no more than 4% of your retirement savings in any individual year, you won’t run out of money before you die. Unfortunately, this rule ignores all the above listed risks (longevity, inflation and investment risk) and comes with assumptions which may be questionable in today’s world, when an increasing number of people live well into their 90’s, when interest rates are near zero and your portfolio is far from guaranteed to beat inflation, regardless of your investment strategy. Simple universal rules like this one can be taken as rough guidance or starting point, but you should never rely on them blindly and always consider your personal situation.

If you have multiple assets or accounts, which ones should you use first and which ones should you leave for further growth?

Most people retire with a number of different assets or savings vehicles, such as pensions, ISAs, stocks, mutual funds, savings accounts or property. Besides different risk and return profiles, these assets are also subject to different tax treatment or different rules with respect to inheritance. When deciding which ones to use for income now, consider not only the taxes payable in the current tax year, but also your future tax liabilities. Remember that tax allowances such as the Personal Allowance or the CGT Allowance can still be used in retirement.

What is the optimum asset allocation and investment strategy?

While the general recommendation is to make your portfolio more conservative than during your working life (due to shorter time horizon), there are no universal rules. Keep at least a portion of your wealth in very conservative instruments like short-term government bonds and even cash. These should cover at least your basic income needs for the next few years. At the same time, a part of your portfolio should remain invested in assets like stocks or high-yield bonds to allow further growth. Within your equity subportfolio, you may want to increase the weights of low beta or high dividend stocks to keep risk under control and boost income.

The exact weights and securities to choose depend on market situation as well as your personal circumstances – particularly your wealth and other assets you hold. In general, the poorer you are, the more conservative you should be, and vice-versa – if you have other assets to possibly use for income if some of your investments go wrong, you can afford more risk in your portfolio.

Should you buy an annuity?

Even with the new pension freedoms, buying an annuity is still an attractive option to many. When making the decision, treat it as a very conservative component of your portfolio. Its main purpose is to cover your essential income needs and to protect you from the already mentioned risks (longevity, market risk and – with some annuity types – inflation risk). Of course, this protection comes at a cost. Again, if you are wealthier and have other assets to use as potential reserves, you may not need an annuity at all.


One important thing to keep in mind is that decumulation planning does not start on the day when you retire. The two phases – accumulation and decumulation – are not isolated. Decisions made and actions taken during your working life can make your options wider and generally better in retirement.