: Autumn 2018
What is an ISA? An Individual Savings Account (ISA) is a taxefficient 'wrapper' that provides a home for a number of different types of investment. The ISA wrapper ensures investors pay no tax on income or capital gains generated from the investments it contains. The ISA allowance for the 2018/19 tax year stands at £20,000 and savers can invest in cash, stocks and shares, or a combination of the two. ‘Junior ISAs’, with a current annual allowance of £4,260 are available for children under 18. A cash ISA can be used to access your choice of a range of deposit accounts, National Savings investments and/or certain qualifying cash funds. A stocks & shares ISA can be used to access a whole range of stock market and fixed income investments, including units or shares in collective funds. The kinds of investments that are eligible for inclusion in a stocks and shares ISA are numerous and include authorised unit trusts, investment trusts, openended investment companies (OEICs) and individual shares listed on recognised stock exchanges. They also encompass qualifying fixed income investments. Moreover, you can maintain a cash balance within a stocks and shares ISA without incurring a tax charge, although you are likely to receive a more competitive rate of interest within a specific cash ISA. ISA investors can transfer their ISAs between providers (subject to their provider’s rules) without forfeiting any of the tax benefits by completing a “transfer request” from their new provider.
Wells Financial is a financial advisory service, specialising in mortgages, insurance, pensions and investments.
Funding a decent retirement income Whenever you start thinking about retirement planning, it is worth beginning by working out how much income you think you are going to need. Generally, few people need as much income in retirement as they did when working. With more leisure time available, however, you may have some ambitious plans for travel or family. All these expectations need to be considered carefully so you can set realistic targets. Once your target figure has been determined, you can begin to decide how much money needs to come from a pension and how much can come from other sources. For example, the flatrate, singletier basic state pension is £164.35 per week (for 2018/19), plus you may have money in Individual Savings Accounts (ISAs) or from rental income from a second property. You may also decide to take some other type of temporary paid employment. Pension plan savings are the first step in working out how to make up the difference; however, unless you already have a significant work or personal pension arrangement in place, some form of additional saving is likely to be necessary for you to meet your target. Just to give you an idea, a pension fund valued at £100,000 will buy a 65yearold an annual income of less than £5,400, with no builtin guarantees. If you wish to retire earlier than that, the cost will be even higher. The amount you need to save could, therefore, be considerable.
Protecting your share In small businesses, a shareholder agreement can ensure that remaining shareholders get first refusal on a fellow director’s shares if they should become incapacitated or die early. Established alongside an insurance policy, it ensures that the business remains with the people who created its vision, and also supplies funds to compensate beneficiaries for the surrender of any inherited share. Although it is difficult to consider – particularly in the early days of a small business – it can help to ensure that part of the company is sold to a third party without the consent of the remaining directors or partners.
Planning for inheritance For the 2018/2019 tax year, the threshold at which you begin to pay inheritance tax (IHT) starts at £325,000 (£650,000 for married couples and civil partners), with an additional “main residence nilrate band” of £125,000 per person. However, a little planning can help you to access various annual allowances and exemptions. Regular gifts can be made from income without liability; small gifts can be made annually to children and for weddings and larger sums can become exempt if the donor survives seven years. Alternatively, you can organise funding for beneficiaries to pay the IHT bill via an insurance policy.
Use your tax breaks In the view popularly attributed to Benjamin Franklin, nothing is certain except death and taxes. However, using the tax allowances granted by the Government can help to mitigate your tax liability. To begin with, you have a personal income tax allowance, an annual exemption from capital gains tax, plus numerous tax credits dependent on your circumstances. Schemes like Gift Aid offer tax relief on charitable donations and there is also an Inheritance Tax (IHT) threshold below which nothing is due. Alongside, there are taxefficient investment products such as Individual Savings Accounts (ISAs) and pensions that provide relief from income and capital gains tax (CGT) to differing extents. Moreover, some individual assets are specifically exempt from CGT: for example, your main home, your car, and UK Government bonds (gilts). In terms of IHT, the threshold is £325,000 (£650,000 for married couples and civil partners) for the 2018/19 tax year with an additional main residence nilrate band of £125,000 per person. The value of your estate above this is liable to tax. This can force beneficiaries to sell family heirlooms to pay the tax bill. However, there are exemptions available from this tax as well, and a little planning can help you to access the range of annual exemptions and allowances in advance, allowing you reduce the liability as far as is practical – or provide the means by which your beneficiaries can pay it without having to sell items of sentimental value.
What is NEST? The National Employment Savings Trust (NEST) is a defined contribution workplace pension scheme set up by the UK government to support autoenrolment. NEST provides one pension pot per person, ensuring a simple, costeffective, easytotrack pension scheme for individuals who might subsequently change their job or stop working altogether. Although NEST used to cap the amount of money that a member could save into their pot, these restrictions were removed in April 2017, allowing workers to save as much as they like. Any UK company can choose to use NEST to help them meet their new obligations. An employer can use NEST as its only workplace pension scheme or alongside another scheme. If NEST is unsuitable for the entire workforce, the employer can choose to use NEST for one group of employees and another pension scheme for employees who fall within a different category. NEST members can choose from a total of six funds in which to invest their pension pot. Retirement Date Funds target the year in which the saver expects to withdraw their money, and NEST also offers Ethical, Higher Risk, Lower Growth, Preretirement, and Sharia options. However, the majority of members are expected to opt for the defaultoption Retirement Date Funds. NEST’s charges are relatively low, comprising an annual management charge of 0.3%, and a charge of 1.8% for each contribution. At present, NEST is available free of charge for any UK employer who wants to use it.
No winners in a global trade war During July, President Donald Trump imposed US$34 billion in tariffs on Chinese goods, prompting China to respond with US$34 billion of levies on US imports. The US announced plans to implement a further US$200 billionworth of tariffs in September. China’s monthly trade surplus with the US climbed to almost US$29 billion during June. Having grown by 6.8% during the first three months of 2018, China’s economy expanded at an annualised rate of 6.7% over the second quarter. The Shanghai Composite Index rose by 1%. In a summit between China and the EU, European Commission President JeanClaude Juncker urged China to continue to open up its economies to foreign companies. European Council President Donald Tusk called for China, the US and Russia to work with Europe to alleviate trade tensions, saying: “There is still time to prevent conflict and chaos”. Elsewhere, at a meeting of the BRICS (Brazil, Russia, India, China and South Africa) nations, the countries’ leaders signed a declaration promoting an “open world economy”. China’s President Xi Jinping warned that there would be no winner in a global trade war, and pledged that China would continue to develop itself “with the door wide open”. Brazil’s stock market rose strongly over July as a whole, posting a gain of 8.9% over the month. Sentiment was boosted by expectations that interest rates in the US will continue to rise as economic growth gathers pace. However, Brazil’s economy is performing below potential, according to the International Monetary Fund (IMF), which concluded a technical visit to the country during July. The IMF highlighted high and rising levels of public debt, and “uninspiring” mediumterm prospects for economic growth; Brazil’s recovery remains vulnerable to risks including uncertainty about reforms and tightening global financial conditions. Having upgraded Russia’s credit rating in February 2018, ratings agency Standard & Poor’s (S&P) affirmed its “BBB/A3” rating in July. S&P believes that Russia’s economy should be able to withstand any shocks resulting from further sanctions. The IMF expects emerging and developing economies to grow by 4.9% this year and 5.1% next year. In comparison, advanced economies are tipped to expand by 2.4% in 2018 and 2.2% in 2019. The IMF maintained its 2018 forecast of 6.6% for China, but trimmed its prediction for India from 7.4% to 7.3% and cut its forecast for Brazil from 2.3% to 1.8%.
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