Category: Pensions

A review of the 2018 Budget and what it could mean for you

In his latest and last pre-Brexit budget, the Chancellor Philip Hammond has declared an ending of austerity and has appeared to open up the public purse and do his best to spread some fiscal happiness.

The headline view of the budget suggests that most people will be paying a little less tax from April onwards, with some of the higher earners seeing that cancelled out by a rise in national insurance.

On the whole this should mean that you’d find the Chancellor has left an extra £155 a year in your pocket, if you earn between £12,500 and £50,000 – with an extra £566 for those earning between £50,000 and £100,000.

So let’s dive a little deeper into things and see what the budget might mean for you:

INCOME TAX

From April 2019 the personal income tax allowance will increase to £12,500, with the higher rate threshold climbing to £50,000.

Any changes to income tax rates and tax bands in Scotland will be announced by the Scottish Government in their budget on 12 December.

PENSIONS

Once again the Chancellor is raising the pensions lifetime allowance, with an increase to £1,055,000 from April 2019.

There are no changes to the pension annual allowance, with the standard rate remaining at £40,000 and the money purchase annual allowance (MPAA) staying at £4,000, (which applies where a drawdown pension income has been taken). There are also no changes to the high-income annual allowance taper rules.

ISA’s

Annual ISA limits remain at £20,000 per person, with the Junior ISA limit being raised to £4,368.

CAPITAL GAINS TAX

There will be an increase of £300 from £11,700 to £12,000 on the annual exemption for Capital Gains Tax, effective from April 2019.

INHERITANCE TAX

The nil band rates for inheritance tax will remain at £325,000 until April 2021, with the residence nil rate band increasing from £125,000 to £150,000 from April 2019.

TRUST

Once again, and following a similar announcement in last year’s budget, a consultation into the tax treatment of trusts was announced.

This consultation will examine ways to make the taxation of trusts simpler, fairer and more transparent. However, no date has been set for its publication.

Google and Amazon

During his budget speech, the Chancellor announced, “Digital platforms pose a real challenge for the sustainability and fairness of our tax system. The rules have not kept pace with changing business models.”

With that Philip Hammond then introduced a Digital Services Tax, which is estimated to raise £1.5bn over four years.
This new Digital Services tax will have an obvious impact on the tech giants, whose revenues are over £500m (such as the FAANG companies).

Following the announcement, shares in Google and Amazon dropped 2.3% and 4.5% in mid-afternoon trading. Although the FTSE 100 was up 1.3% to 7,026 points.

CURRENCY MARKETS

The Chancellor revealed that the Office for Budget Responsibility has increased its projections for GDP growth for 2019 from 1.3% to 1.6% next year.

Despite this, as well as having been up prior to the speech, sterling was down 0.11% at €1.1239 against the euro, while against the US dollar it also dropped 0.19% to $1.2804.

2017 BUDGET SUMMARY

Apart from a few corny jokes, Philip Hammond delivered another steady budget in terms of its implications in the world of financial services, with no radical changes to the landscape. That said, the future really depends on what happens with Brexit and that is looking very precarious. The Chancellor has indicated that he would need to revisit the a budget if the UK crashes out of the EU without a deal. Time will tell how that pans out!

As always, if you have any questions regarding a specific area of the budget, or your own personal circumstances, then please don’t hesitate to get in touch with us. We will be happy to help.

Ten reasons why you should consider using your pension to purchase your business premises.

As you may have spotted, I love lists. Especially when they are reasons to seriously think about a financial approach to things you may not have previously considered; and when they make as much sense as this list does!

If you are a business owner or interested in commercial property investment, then you need to read on. There are some real opportunities that you may not be aware of which could add a boost to your business and your property investments.

1. Your SIPP can invest in your own business’s property, or one for another business

One thing you can do with a SIPP is to take advantage of the opportunity it provides for you to buy and invest directly in UK commercial property.

This is obviously ideal if you are self-employed and wish to use your SIPP to assist you in buying your business premises. What you may not know however is that the property doesn’t actually have to be linked to the business you own.

2. The Tax Man – he’ll even help you buy the place!

Get the Tax Man to chip-in for the purchase of the property.
I don’t think I’ll ever get tired of writing that sentence, so I’ll
repeat it… “Get the Tax Man to chip-in for the purchase of the property”.

That’s because your SIPPS or SSAS pension contributions qualify for tax relief. So they automatically boost your own contributions, help purchase the property and make mortgage repayments too.

As you can imagine the system of tax relief is often complex. Put basically the rules hinge upon whether it’s your company, or yourself that’s making the contributions.

To try and simplify it here a Personal Pension Contribution of £10,000 would get £2,500 in tax relief – meaning a pension contribution of £12,500 would be made in real terms. With high rate taxpayers able to then claim an extra 20% with additional rate taxpayers able to claim even more.

If it’s a Company Pension Contribution, then all contributing amounts are treated as a business expense when calculating company profits and subsequent Corporation Tax liabilities.

3. Renting just makes your landlord wealthy

Lining your landlord’s pockets with rent, whilst repairing and up-keeping their property is only ever a fabulous deal for your landlord!

With rent and repairs often seen as dead money, more and more business owners are seeing the advantages of owning their own premises; and are utilising their SIPPS or SSAS to make this a reality.

4. The more you pay in rent – the more your pension grows

If your SIPPS or SSAS owns your company’s premises, your company is still a tenant, but it’s now your pension that will be the landlord. Which means that it’s your SIPPS or SSAS that receives all of your rent.

Not only does the rent increase your pension, but it’s also tax-free when there is a formal lease in place arranged on current commercial terms. Best of all, it’s treated as a business expense in the company’s accounts, reducing your profits and Corporation Tax bill.

5. Pay NO TAX on the sale of the property

Owning your own business premises personally, or through a limited company means that when it comes to a sale, any profits would potentially attract tax. Obviously there would be the normal Capital Gains Tax exemptions if you owned it personally – but there would usually be something to pay.

Owning your property through your pension means that no tax is payable when you come to sell the property.

6. Become the master, or mistress, of your own destiny

As long as you continue to pay yourself the rent on time and any borrowing commitments are met, you are in complete control. We’ve all heard stories about businesses being priced out of their premises by massive rent rises, or simply having the premises sold up from under them.
Owning your own premises through your SIPPS or SSAS pension puts you in the decision making seat and provides the certainty that you’ll always know what the plans are for the building you occupy and pay for.

7. A business asset you can bank on

Your SIPPS or SSAS pension can borrow up to 50% of its value to help fund the purchase of a property. That can be the one you’re in right now, or an additional property in the future.
With SIPPS or SSAS pensions able to borrow from a bank, just like your business would. In fact, pretty much all the banks are now used to lending to SIPPs and SSASs and have specialist departments dealing specifically with these types of loans.

8. Keep your options open

If you don’t have enough in your pension to buy your property outright, there are options available to help bridge that gap.
You could consider:
• Additional pension contributions
• Multiple pensions, multiple owners
• Joint purchases

Not having the capital right now shouldn’t mean you should rule out purchasing your property. To get an idea of how these work, speak to your financial adviser.

9. A cash injection for your business

If your business has already bought its own premises, then arranging to purchase it from your company via your pension can provide your business with a significant cash injection. As once the transaction is completed any cash held in your pension would transfer to your business and the property would now be owned by your pension, with all of the tax advantages that come with that.

Just be aware that this option isn’t for everyone. As any transaction has to be on commercial terms and at market price, determined by an independent valuation.
If any profit has been made on the sale, then that could trigger a tax charge. You will also have fees to pay like stamp duty, plus you won’t be able to access the income from the property until you’re at least 55 years old.

10. Lower taxes to pay when the door finally closes

Owning your business premises personally, outside a pension, means that it will be included in your estate when calculating any Inheritance Tax due on your death.

However, assets held in a pension are outside of your estate for Inheritance Tax purposes. There are other tax advantages too, which depend on when you die, but you need to consult your financial adviser for further advice on this.

Our office door is always open

If you have any questions regarding buying a commercial property with your SIPP or SSAS pension, then please contact us at Bridgewater Financial Services where we will be delighted to help guide you through the options available to you.

A New Year and a New Financial You

Happy 2018!

It’s that time of year again, when we all make our New Year’s resolutions. Whilst I can’t help you with getting fit, quitting smoking or learning the piano, I can certainly help with any resolutions you may have made regarding getting your finances in a better order.

Whether you’re planning to spend less, or save more, this blog may help guide you away from the many potholes that throw our best intentions off course.

I’ve broken things down into easily digestible sections. Covering Pensions, ISAs, Investments, Insurance and Wills and LPAs. With some hints and tips to help keep you on track with all of them.

As a rule, I would say that realistic and well-defined objectives work far better than general goals and ambitions. For example, if your goal is to build up a nest egg, then a defined resolution to put £500 into a savings account each month works far better than the general intention to just ‘save more’. It sounds obvious, but you would be surprised how a well-defined objective can achieve a successful outcome.

Another way of gifting yourself a head start in your quest for a ‘new financial you’ would be to examine your existing tax and pension position. Making sure that you are taking full advantage of the available tax relief, as well as ensuring you are getting the most out of investments and any insurance plans you may have. Again, a little effort here at the beginning of the New Year can pay dividends further down the line.

Ponder your Pension

I’ve deliberately started with pensions, as I feel that sometimes we don’t give pensions the attention that they deserve. They are one of the most valuable assets we can have, yet they are often overlooked. As legislation has changed massively in the last few years, if you haven’t reviewed your pension position, then now would be a very opportune moment.

Have a look at where you are with your current scheme and ask yourself:

• Have I got the level of my contributions right? Too little and you could find yourself wanting in retirement and too much could create problems with your Reduced Lifetime Allowance)
• Does my investment strategy still fit with my attitude to risk, time horizon and any changes in my current situation?
• Is my pension scheme able to take advantage of the new pension freedoms, or is it one of the older schemes that can’t benefit?
• Does my pension fit with my retirement and estate planning?
• If my pension is a Final Salary Scheme, then with the increases in transfer values, is it worth requesting a transfer value and restructuring my pension?

Although not an exhaustive list, these are certainly the questions you should know the answers to if you want to make sure that your pension is in the best place it can be.

Investigate an ISA

If you are not taking advantage of ISAs, then I would suggest that it becomes top of your list of things to consider.
You can invest in an ISA up to a limit of £20,000 of which £4,000 can be paid into a LISA (for those eligible). It’s a great way of avoiding tax on your investments and guaranteeing a fixed return.

Please also remember that the annual ISA deadline is 5 April. So you can take advantage of the rest of this years ISA tax-free opportunity before the deadline, then do the same again after. It’s also worth mentioning that some providers take several working days to process new ISAs, so don’t leave it until the beginning of April, or you may miss this year’s deadline.

Examine your Investments

Now is a good time to check that your investment strategy is on course to achieve your goals. Start by looking at the latest report regarding your mutual funds, check to make sure that they match your appetite for risk and that you are happy with where your money is being invested.
When considering your investments, especially your exposure to risk, always include your pension, ISA’s funds and stock together, even when the funds are spread around different accounts and investment products. That way you will get a better feel for your overall portfolio.

Revisit your Insurance

Although good insurance cover is an essential part of strong financial planning, the wrong product can end up costing you a great deal of unnecessary expense.

Now’s the time to review your insurance plans. Check what each plan covers and how much it costs. Any changes in your circumstances since you took the cover out may require a different plan and could even lower your premium.

Look into your Will and LPA

More than half of UK adults, including many in their 50’s and 60’s, don’t currently have a Will in place. If you’re amongst that number, then I would suggest that writing one should be high up your list of financial things to do in 2018.

The same can be said regarding Lasting Power of Attorney (LPA), as incapacity can strike without warning. Getting LPA sorted before it’s too late will save your family and your estate considerable costs and lengthy delays.

Putting a Will and a LPA in place is nowhere near as difficult or costly as many people think. We have contacts with a number of specialist law firms across the UK who can assist you in preparing both.

If you do already have a Will or LPA, then take the time to review it. Checking that it is up to date and that it reflects your current wishes.

We’re here to help the new Financial You

I hope that this blog goes someway to starting the new financial year off on the right foot and helps keep you focused and moving towards your goals for 2018.

If there is something specific you would like to talk to us about regarding your plans, then please get in touch. We’d be delighted to help.

Wishing you all a Happy and Prosperous 2018.

Record High Transfer Values

Final Salary Pensions, Hurry Whilst Shocks Last!

Well here’s something that doesn’t happen that often. The turmoil in the financial markets is actually presenting an interesting opportunity – and even Brexit may have had a hand in generating this particular happy shock!

I’m talking about Final Salary Pension Schemes here. In a world of future uncertainties and undetermined risk, a final salary pension can be seen as something to hold onto at all cost. But just consider the following for a second. They are often inflexible and are not usually targeted to accurately meet individual members’ needs. Which can cause members to transfer out to access things like greater flexibility under the new freedoms to pensions introduced last year. Or they might want to access a cash lump sum, to reduce debt or to ensure their families benefit more greatly from the fund in the event of their death.

Recently we’ve seen more and more people transferring values, by which I mean the capital value of the benefits promised by a scheme (sometimes called the CETV or Cash Equivalent Transfer Value) at unusually high rates. By high rates, I’m mean as much as 40 times the annual pension income!

So why are values so high and will it last?

The conventional wisdom here is that values have been driven up significantly by recent reductions in the returns one can achieve with government bonds, brought about by the result of the Brexit vote, combined with The Bank of England’s attempt to prop up the economy. Which is great for anyone looking to take advantage of the CETV on their final salary pension. But like all good things, it is likely that it will be coming to an end soon, because when the bonds return to their normal range, we can expect to see transfer values to reduce too.

So if you’ve been thinking, it might be time to start doing!

Right now there is an unusual opportunity to extract some significant value from your pension. However the situation is predicted to return to normality soon, so now is the time to act.

Working out your transfer value

It’s important to understand that there are a variety of factors that different pension schemes use to calculate transfer values. These usually revolve around your age now and what your age will be when you are entitled to start drawing the benefit. They may also include the specifics of the escalation of benefits before and after retirement as well as any benefits your spouse or dependents are entitled to.

As a rule of thumb, the closer you are to your retirement, the higher the CETV multiple will be. Oddly, the further away you are, with more time for the assets to grow, the lower the present value is. The state of your schemes funding and security of your benefits will also have an impact on final figures, as will the scheme being underfunded in any way.

The best way to know exactly what your potential opportunity might be, is to request a CETV quotation from your pension provider.

You can look before you leap

The main advantage with a defined benefits scheme is the guaranteed income. As you lose these guarantees when you transfer, your future pension income will depend upon the returns you earn on the invested assets. That’s why, once you’ve received your CETV quotation, it’s vital to calculate the exact rate of return you need to ensure you would exceed the income you were set to receive on your final salary scheme. But right now, the high rate of the current CETV multiples mean that these required return rates can be as low as just one percentage point above inflation to make the move a sound choice.

You should also consider that when you transfer out of a final salary scheme, the investment risk moves from the pension provider over to you. So you must consider your attitude toward risk. This will be influenced by factors such as your financial situation, other assets and income sources you might have that you could fall back on if you need to, should returns be weaker than predicted.

Apart from the questions of risk and return, there maybe other things to consider. Your existing plan may have other non-financial benefits attached to it, which you may not wish to give up.

Having said all that, final salary schemes are well known for their restrictions and inflexibility. So transferring out may open up some new ways to access your pension pot and therefore open some new options for your retirement and inheritance tax planning too.

So what does everyone else do?

Generally we find that individuals with more wealth and other assets beside just their pensions, who are looking for greater flexibility and control over their retirement savings; or are planning to pass a substantial portion of their wealth to their children are more likely to opt to transfer out of a final salary scheme.

Whilst those with more limited assets, who prefer the security of the guaranteed income, tend keep to their final salary scheme.
Like everything in financial services, it’s your individual circumstances and aspirations along with where you are in terms of your timeline that will help determine what’s right for you.

One thing’s almost certain – this opportunity won’t last

If you are considering requesting a CETV quotation, I’d do it sooner rather than later. As the current high transfer values have been caused by the short-term market developments I covered earlier – and the situation is unlikely to last much longer. As when we see the increase in bond rates, we will most likely see the decrease in the multiples you can currently secure with your CETV.

If you would like some help deciding what’s best for you, then call us now for a free initial consultation. We would be delighted to go through your individual circumstances with you and help you decide on the best option for you.

For more information of our pension transfer advisory process, you can visit our sections on UK Pension Transfers and Expat Pension Transfers.