: Autumn 2017
Taxefficient options As life expectancy in the UK continues to rise, financial planning is becoming increasingly important. If you are thinking of saving for retirement, then you might consider a pension to be the best way to ensure you have enough to live on when you are older. However, this is not the only way to achieve your retirement goals, and Individual Savings Accounts (ISAs) can form a useful component in your longterm financial plans.
Wells Financial Ltd is a financial advisor specialising in mortgage, insurance, pension and investment advice for individuals and small businesses.
Pensions and ISAs receive different tax treatment. Payments into your pension will qualify for tax rebates upfront at your highest rate of income tax (subject to certain limits) and 25% of any withdrawals can be taken taxfree; however, the income you receive will be taxable. In comparison, ISA contributions come from taxed income, but any withdrawals are taxfree. Also, it is important to remember your pension income counts towards your personal taxfree allowance, whereas your ISA withdrawals do not. As such, the choice between pensions or ISAs could seem to boil down to the relatively straightforward question of rates. If someone receives higherrate tax relief on their pension contributions, but only pays lowerrate tax on their income at retirement, pensions appear to make the most sense. Meanwhile, for those whose income may be greater in retirement, the opposite appears true. The reality, however, can be less clearcut. Tax rebates on pension contributions are important as they add value upfront, and investors welcome the effect of compounding on their portfolios, which helps to influence the size of pension ‘pot’ that can be accumulated. Equally, if you eventually decide to buy a pension annuity – and pension rules have changed to allow greater flexibility for savers – those payments can be guaranteed for life, whereas withdrawing the equivalent sum from an ISA is rather less predictable. Pensions offer additional attractions: employers can contribute to a company or stakeholder pension scheme, and annual contribution limits for pensions are much higher than for ISAs. Nevertheless, an ISA offers flexibility: you usually have to wait until you are 55 to make withdrawals from a pension, whereas an ISA can typically be accessed at any time. Ultimately, it is not necessarily a question of whether an ISA or pension is better; rather, it is a question of planning your finances to make the most of both. Your financial adviser can offer further help here.
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Inflationary pressures bite The thumbscrews are starting to tighten on UK consumers. Although the cost of living continues to rise, wage growth is not keeping pace with inflation. Inflation’s rise has been rapid, stoked by the pound’s weakness following the Brexit referendum; in fact, it is less than two years since the UK was in deflationary territory. The UK’s annualised rate of consumer price inflation (CPI) rose to 2.9% in May, compared with April’s rate of 2.7%, reaching its highest levels since for almost four years. The Bank of England (BoE) has a rolling target of 2% and, if inflation rises above 3% – one percentage point above target – BoE Governor Mark Carney will have to write an open letter to Chancellor of the Exchequer Philip Hammond setting out the reasons for the move. Once adjusted for inflation, average weekly earnings fell at an annualised rate of 0.6% in April. The higher cost of living, combined with low wage growth, is likely to hamper consumer demand. UK retail sales fell at an annualised rate of 0.4% in May, according to the British Retail Consortium (BRC), which warned that the slowdown was “indicative of a longerterm trend of a decline in consumer spending power” as inflationary pressures squeeze household budgets. The UK base rate has remained at an alltime low of 0.25% since August 2016. Looking ahead, recent data are likely to trigger renewed speculation over the likelihood of an increase in interest rates.
2017/18 limits for ISAs Individual Savings Accounts (ISAs) are taxefficient savings vehicles that allow you to save without paying any tax on the income or capital gains generated within your ISA. They are provided by banks, building societies, asset managers, insurance companies, and the stateowned National Savings & Investments (NS&I). You can invest your entire £20,000 ISA allowance for the 2017/18 tax year into cash, stocks and shares, or any combination of the two. Moreover, you can transfer your ISAs between providers freely (subject to your providers’ rules). Please note that the levels and bases of, and reliefs from, taxation are subject to change.
Considering protection Life assurance can be an important safeguard. It pays out a lump sum on death; however, if you are a single person with no dependants, it could be a waste of money. After all, unless you are in significant debt, you leave no financial burden. For the main breadwinner in a family with small children, however, the need for life assurance is obvious. The unexpected removal of that main income could seriously undermine the family’s financial stability, compounding its worries at an already stressful time. Therefore, it is important to ensure that you have carefully considered your own family’s situation.
Your choices at retirement When you reach retirement age, you have important choices to make. Reforms introduced from April 2015 drastically increased the amount of freedom and choice available for pension savers. Individuals can now choose how and when they access their pension pot, and can tailor their approach to their personal circumstances. * An annuity will provide a predictable income stream, but annuity rates are low and do not necessarily offer good value. * Flexiaccess drawdown: you can take up to 25% of your pension pot taxfree, and reinvest the remainder to generate a regular, taxable income. However, income is not guaranteed and you could run out of money. * Take the entire pot as cash in a single withdrawal: 25% of each withdrawal is taxfree and the remaining 75% will incur income tax, so you could incur a substantial tax charge. * Take lump sums when you choose: this spreads your 25% taxfree allowance. However, your pension provider might restrict the number of withdrawals you can make in a year, and you could incur a tax bill if your withdrawals push you into a higher incometax bracket. *Alternatively, you can leave your pension pot untouched until a later date, allowing it to continue to grow. Above all, having spent years building up your pension pot, it’s important that you take time to make the right decision. Talk to your financial adviser; alternatively, Pension Wise (www.pensionwise.gov.uk) is a governmentprovided service that provides free, impartial guidance on your options.
Time in the market not "timing" the market It’s impossible to predict the “right” time to enter or exit the market consistently. Financial markets move very quickly, so getting in at the bottom or out at the top is a matter of luck rather than judgement. Over the long term, history has shown that, the longer you remain invested, the better your chance of achieving a positive return. Dipping in and out increases the risk that you will miss out in the longer term. Ultimately, it’s not about timing the market – it’s about time in the market. With this in mind, it’s worth considering the benefits of “poundcost averaging”. This might sound complicated; essentially, however, it is just regular saving. Smaller amounts that are regularly invested over time will incur a range of prices; if you regularly invest smaller amounts of money – rather than one large lump sum – in your chosen investment, you will reduce your portfolio’s sensitivity to shortterm market fluctuations. Moreover, investing a small amount of money every month will help you to get into a regular savings habit without putting too much pressure on your cashflow. It’s true that, during periods of increasing prices, regular savings won’t reap the full benefit of the initial rise in the same way that a lump sum would have done. However, during periods of market instability or decline, your regular sum will invest at a lower price, buying a greater number of shares or units in your chosen investment.
Considering a remortgage Most mortgage providers offer introductory discounts to attract borrowers that help to minimise the amount you pay each month when you first buy a house. However, once this introductory discount with a lender ends, you will revert to their standard variable rate (SVR) of interest – a rate set according to Bank of England base rates and company profitability. This can be quite high compared with any previous deal so, when it happens, you might want to consider remortgaging. Although house prices have fluctuated over recent years, they are still higher on average than during the financial crisis. Therefore, if you’ve owned your house for a while, you might find deals that were previously not available to you, simply because your equity in the property has increased. Of course, moving your mortgage will incur fees and you should balance these costs against the savings that you might make by moving. Some lenders might help with these costs or your existing lender might offer a rollover deal that could minimise these fees. Such deals are less common than they were a few years ago, when lenders were less discriminating about the amount and quality of business they took on. It is worth remembering that, if you took out a very competitive mortgage, you might find yourself trapped by early repayment charges, even after your discount has ended. However, rather than accepting whatever is on offer, it is always worth checking the alternatives. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
The benefit of mortgage advice The mortgage market is highly competitive and lenders constantly bring out new deals. They are required to provide Key Facts Illustrations, but many can only provide information – they cannot advise on whether their loan or another provider's is best for you. In the UK, residential mortgage advice is regulated by the Financial Conduct Authority (FCA). Advisers use their research skills and sourcing systems to keep abreast of all the latest mortgage products so they can find the best rates and deals to meet your requirements. So, if you want someone to do the hard work, ask an independent expert. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE