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Tax Year End Planning Checklist

The end of the tax year is approaching again; therefore it’s time to think about maximising allowances, minimising taxes and taking all the other steps to ensure your tax position will be as favourable as possible going forward. Although there are still almost two months left, it’s better to start now rather than leave it all to the last days, for some of the necessary steps can take some time to process.

When going through the checklist below, you may find this page useful. It contains all the key thresholds, rates and allowances for 2015-16 as well as 2016-17.

Income Tax and National Insurance

If possible, delaying an invoice (if you are self employed), salary, bonus or dividend payment (if you have a company) until 6 April can save, or defer, a considerable amount of taxes. Company owners should also find the right mix of salary and dividends to minimise taxes. Don’t forget to include all of them when making the decision – personal income tax, both employee’s and employer’s NI, corporation tax and dividend tax.

The key figures are:

  • £5,824 = Lower Earnings Limit – minimum to qualify for State Pension and other benefits
  • £8,060 = Primary Threshold – employee’s NI (12%) kicks in
  • £8,112 = Secondary Threshold – employer’s NI (13.8%) kicks in
  • £10,600 = Personal Allowance – basic rate income tax (20%) kicks in
  • £31,786 = higher rate income tax (40%) kicks in

Many company owners choose to pay themselves a salary equal to the Primary or Secondary Threshold, in order to avoid paying NI, and take the rest in dividends. However, if your company is eligible for the Employment Allowance (first £2,000 of employer’s NI free), it could make sense to pay yourself up to the Personal Allowance (£10,600) in salary. Of course, your other income, family situation and other circumstances could alter the figures and must always be considered.

Pension Contributions

Making pension contributions can save you a lot of money in taxes, as long as you stay within your annual allowance, which is £40,000 for the 2015-16 tax year. At the moment, pension contributions are subject to tax relief at your marginal tax rate, which makes them particularly attractive to higher and additional rate taxpayers.

Normally you need to make the contributions before the tax year end (5 April), but this time it is recommended to act before the Budget Statement, which is due on 16 March.

There is high risk that Chancellor George Osborne will announce important changes which may affect the tax relief. The exact outcome is not known, but experts have been speculating about a flat rate replacing the marginal tax rate (this would effectively reduce or eliminate the tax relief for higher and additional rate taxpayers). The Chancellor has also mentioned the idea of cancelling the pension tax relief altogether and using a completely new mechanism for taxing pensions in the future, perhaps similar to ISAs (after-tax money in and tax-free money out).

It is not clear if this will eventually materialise and when any changes would come into effect. However, pension tax relief has clearly been one of the Chancellor’s primary targets in the effort to reduce the deficit and raise tax revenue. In light of the uncertainty, the safest approach is to make pension contributions before 16 March to avoid potential disappointment.

Note that if you didn’t use your full allowance in the three previous tax years, you might still be able to get that money in, on top of this year’s £40,000. The previous three years’ allowances were £50,000, £50,000 and £40,000, respectively. One condition is that your total contribution must not exceed your earned income for the current tax year. Another thing to watch out for is the lifetime allowance (currently £1.25m, but falling to £1m in April), as exceeding that could be costly when you retire.

NISAs

If you have the cash, you should always use your annual NISA allowance to the maximum. A NISA is a tax wrapper which allows you to build savings and investments without incurring taxes on income and capital gains going forward. The allowance is £15,240 for 2015-16 and it is use it or lose it – if you don’t deposit the money by 5 April, this year’s allowance is gone forever. You may also want to use your partner’s and your children’s allowances (£4,080 per child under the so called “Junior ISA”).

If you have existing cash ISA accounts, now is also a good time to review them and check the interest rates. Banks like to lure savers with attractive rates, only to slash them after 12 months or some other period. In such case you may want to transfer the funds elsewhere. There are two things to keep in mind:

  • Always transfer from ISA to another ISA directly. If you do it via your regular bank account, once you have withdrawn the money, it loses the ISA status (and withdrawals do not increase your annual allowance – that will only change the next tax year).
  • Each tax year you can only deposit money to one cash ISA account and one stocks and shares ISA account.

Capital Gains Tax

You can often save on capital gains tax even outside ISAs. There is an annual CGT allowance, which makes the first £11,100 (for 2015-16) of capital gains tax-free. You need to realise these by the tax year end; otherwise the current year’s allowance is lost forever.

Depending on the investments you are holding, whether there are unrealised gains or losses and whether you want to sell any of them, the decisions to make can become quite complicated, but may save you a lot in taxes. A potentially large CGT bill can be reduced (by crystallising losses) or deferred (if you wait with the sale until 6 April). On the other hand, if you are well within your CGT allowance you can crystallise gains to reduce future taxes.

Always keep in mind that tax issues are an integral part of any investment strategy (and tactics), as taxes can affect net return substantially. At the same time, don’t forget to consider transaction costs.

Inheritance Tax

If your estate is likely to exceed the IHT threshold (£325,000 for individuals or £650,000 for couples), you may want to take steps to reduce it. Estate planning can obviously become very complex, but the easiest thing you can do is make gifts to your beneficiaries. These are subject to annual allowance of £3,000. If you didn’t use the allowance last year, it can still be used now (making it £6,000 in total), but after the tax year end it is lost. As long as you live for seven years after the gift, it is out of your estate.

Other Considerations

The above are the most common points which apply to most people. Depending on your circumstances, there may be other opportunities, further allowances and other things to do before the tax year end. In any case, it is best to discuss your entire financial and tax position with your adviser, as some actions might have unexpected consequences. Don’t forget the key date is 5 April, with the exception of pension contributions where it is safer to act before 16 March this year. Also remember that some actions will require longer time to process and don’t leave everything to the last days.

 

 

 

 

Bear Market Coming? Stick with Your Strategy

Following a multi-year rally, 2015 wasn’t particularly successful in the global markets and, so far, the start of the new year hasn’t been any good either. The UK’s FTSE 100 index is below 6,000, lowest in more than three years. It’s times like this when various doomsday predictions start to appear, warning against events “worse than 2008”, using words such as “crash” and “meltdown”, and pointing to factors such as rising interest rates, growing political tensions, China, rising commodity prices, falling commodity prices and many others.
The truth is that no one really knows what is going to happen. Not the TV pundits, not the highly paid bank strategists and stock analysts, not even the Prime Minister or the Bank of England Governor.
That said, when you have significant part of your retirement pot invested, it is natural to feel uneasy when you hear such predictions, especially if they come from an analyst who got it right last time and correctly predicted some previous market event (he was lucky).
When the markets actually decline and you see your portfolio shrinking in real time, the concerns may become unbearable. Fear and greed get in charge, both at the same time. It is tempting to think about selling here and buying the stocks back when they are 20% lower a few months from now. Easy money, so it would seem. Nevertheless, that would be speculating, not investing. The problem with the financial industry (and the media) is that these two are confused all the time.
Time in the Market, Not Timing the Market
While some people have made money speculating, academic research as well as experiences of millions of investors have shown that it is a poor way to save for retirement. When a large number of people take different actions in the markets, some of them will be lucky and get it right purely due to statistics (luck). However, it is extremely difficult to repeat such success and consistently predict the market’s direction with any accuracy.
In the long run, the single thing which has the greatest effect on your return is time, not your ability to pick tops and bottoms. The longer you stay invested in the market, the more your wealth will grow. You just need the patience and ability to withstand the periods when markets fall, because eventually they will recover and exceed their previous highs.
Time Horizon and Risk Tolerance
The key decision to make is your risk tolerance – how volatile you allow your portfolio to be, which will determine your asset allocation. While personality and other personal specifics come into play, the main factor to determine your risk tolerance is your investment horizon. The longer it is, the more risk you can afford and the more volatility your portfolio can sustain. If you are in your 40’s and unlikely to need the money in the next 20 years, you should have most of your retirement pot in equities. If you are older and closer to retirement, your portfolio should probably be more conservative, because you might not have the time to wait until the markets recover from a possible crash. It is important to get the risk tolerance and the asset allocation right (an adviser can help with that) and stick with it.
How to Protect Your Portfolio from Yourself
Because the above is easier said than done, here are a few practical tips how to protect your retirement pot from your emotions and trading temptations:
1. Have a written, long-term investment plan. It is human nature to consider written rules somehow harder to break than those you just keep in your head. It is even better if you involve your adviser to help you create the plan. Not only is an adviser better qualified and more experienced in the investment process, but another person knowing your rules makes them even harder to break.
2. Do not check fund prices and the value of your portfolio every day. This doesn’t mean that you shouldn’t review your investments regularly. But the key is to make these revisions planned and controlled, rather than emotion-based. You will be less likely to make impulsive decisions, which more often than not are losing decisions.
3. Maintain an adequate cash reserve. This should be enough to meet any planned short-term expenditure and also provide a reserve for unexpected expenses. It will help you avoid the need to encash investments at a time when investment values are low.

Would you like to discuss this article with an adviser?

Who would predict the price of oil?

The price of crude oil has fallen around 40 per cent since a recent peak in June this year. This has a profound effect on economies and markets around the world as the cost of manufacturing and transporting goods falls along with oil producers’ income and the currencies of oil-rich countries.
The theory goes that consumer spending will rise because people have more disposable income; that inflation will fall as the price of goods eases; and that companies with high energy bills will become more profitable. If lower prices hold, the effect might become political and environmental as the balance of world power shifts from oil exporters to oil importers, and the impetus to develop cheaper clean energy wanes. Oil seeps so deep into the global economy you might think that to be a successful investor you need to have an accurate view on its price and its impact on asset prices. But you would be wrong.

No-one with an opinion about oil knows whether their view is right or wrong, and only the changing price will confirm which they are. Market prices are a fair reflection of the balance of opinion because they are created by many buyers and sellers agreeing on individual transactions. As an investor you can take a view of whether that balance – that price – is right but, like all other people with an opinion, you have no way of knowing whether you are right or wrong until the price moves.

Knowing this, it seems irrational to take a view (or a risk) on something so random as the direction of the oil price. In fact, why would one take a view on anything related to the changing price of oil; the US economy, for example; or the price of Shell; or Deutsche Post; or anything else?
The rational approach is to let capital markets run their course and to have a sufficiently diversified portfolio that allows you to relax in the knowledge that, over time, you will benefit from the wealth-generating power of your investments as a whole; without risking your wealth on a prediction that might go one way or the other.

Pensions Institute: ‘Almost all’ active managers fail to beat the market

Pensions Institute: ‘Almost all’ active managers fail to beat the market

This article confirms something that those of us involved in looking after client money have known for quite a while, namely that most active fund managers, despite charging extra for the pleasure, are incapable of beating the markets. This underpins our evidence based investment philosophy. To cut a long story short, the evidence from years of academic research, in many cases by Nobel Laureates, firmly suggests that the factor which has the greatest eventual impact on the returns (strictly variability and therefore expected returns, to those of you who are investment boffins) of a portfolio is the high level asset allocation, i.e. the split between equities and bonds. Strategies such as market timing (when should I buy or sell or should I hang on a little longer for the turn?) and stock selection (should I buy Tescos or M&S?) have been shown to have very little impact. Since these are the main methods supposedly used by active fund managers to add value, it comes as no real surprise that most of them fail. I say ‘supposedly’ because many simply track the markets and charge extra for doing so!

So, if you are looking for a portfolio that collects as much as possible of the market rate of return, according to the level or risk that you wish to take, start with the high level split. Then choose low cost funds and perhaps tilt towards sectors that have demonstrated an ability to provide extra returns given a certain amount of extra risk. Above all, avoid succumbing to the perfidious temptations of the financial porn which is regularly pushed out by the active fund management industry. They are thinking about themselves, not you.

Bridgewater’s new website is here!

Bridgewater’s new website is here!

We are pleased to re-launch our website which contains information about the services offered by Bridgewater Financial Services Limited, Independent Financial Advisers based in Sale Cheshire, serving clients in the UK and worldwide.