Summer 2015 high (1)

: Summer 2015

Carry on tinkering Anyone hoping George Osborne had finished tinkering with the UK pensions system was left disappointed by the 2015 Budget. Despite campaigning from the retirement industry to let various recent changes bed down, the Chancellor announced modifications to the lifetime allowance and, importantly, to the rules on cashing in annuities.

Wells Financial is an independent financial advisor specialising in mortgage, insurance, pension and investment advice for individuals and small businesses.

The reduction in the lifetime allowance from £1.25m to £1m from 6 April 2016 will likely prove a headache for those nearing the limit and could see retirees diverting funds into alternative investments, such as buy­to­let. Now, if a pension pot grows above £1m, the tax payable when money is later withdrawn will be 55%.

More positively, CPI indexation of the lifetime allowance is now slated to start from 2018 although, with an election looming, that is far from assured. Also, if current rates of CPI inflation continue – it hit 0% in February – this is unlikely to be a significant advantage for retirees.

For now, the Chancellor did not amend the annual limits, though Labour has promised to do so if it wins power in the May election. Its current policy is to reduce the amount on which tax relief is payable from £40,000 to £30,000 and cut pension tax relief for those earning above £150,000, from 45% to 20%.

Osborne’s move to reduce the tax rate applicable on cashing in an annuity – from 55% to a retiree’s marginal rate – has proved controversial. While it seems fair existing retirees should also be allowed to participate in the new pensions flexibility, some commentators worry the prospect of a lump­sum payment could seduce pensioners into giving up a reliable income stream.

Still, the changes are perhaps not as radical as they first appear.

Pensioners will not be able to give up their annuities without first taking financial advice. Nor will they be able to sell their annuity back to the issuing company or to other private investors. The scheme relies on the involvement of institutional investors willing to take on the unwanted annuities in exchange for a taxed lump sum or flexi­access drawdown.

Nevertheless, for some retirees, it could offer new options. Historically low interest rates mean annuities have generally offered poor value in recent years and investors may be able to generate a higher income from a lump sum or drawdown, even after tax. Taking advice will be essential.

Contact Details Wells Financial Ltd 26 High Street Tunbridge Wells Kent TN1 1UX t: 01892 517171 e:info@wellsfinancial.co.uk w: www.wellsfinancial.co.uk

Tax­efficient options As life expectancy in the UK continues to rise, financial planning is becoming increasingly important. If you are considering how best to save for your retirement, you might consider a pension to be the most effective way to ensure you have enough to live comfortably when you are older. However, a pension is not the only way to achieve your retirement goals and Individual Savings Accounts (ISAs) can form a useful component of your long­term financial plans. Pensions and ISAs are taxed differently. Your pension payments will qualify for tax rebates up­front at your highest rate of income tax (subject to certain limits) after which, once you have taken out your tax­free lump sum, the income received will be taxable. In comparison, ISA contributions are made out of taxed income, although 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 although the reality can be less clear­cut. The tax rebates on pension contributions are important because they add value up­front – but an ISA can offer considerable flexibility. Ultimately, however, it is not necessarily a question of whether an ISA or pension is better but of how to plan your finances using both. Your financial adviser can offer further help here.

Q: What if I open two ISAs... ...in the same tax year?

A: Unfortunately HM Revenue & Customs makes no allowance for human error – a second ISA opened during the same tax year as an earlier application will become fully taxable.

You cannot nominate the second ISA as your preferred account for the year under any circumstances. This is particularly relevant for regular savers as the first payment after 6 April automatically opens a new ISA for the new tax year. If you wish to stop and/or move your investment before the new tax year starts, ensure you provide instructions well in advance or you might find yourself stuck for another year.

Keep track of your ISA progress Many people are quick to take advantage of the tax breaks offered by Individual Savings Accounts (ISAs). However, it would be wrong to think you can just squirrel away your money and then forget about it. About half of all investors in stocks and shares ISAs have little or no idea how their portfolio is performing, according to online investment service Rplan. If you want to ensure your ISA is still working well for you, it is important to keep abreast of performance – either online or through the financial press – as well as the level of fees you are paying.

From austerity to prosperity?

With the General Election a matter of weeks away, the coalition government’s 2015 Budget managed to hail economic recovery, gloss over spending cuts and serve up a raft of measures designed, among other things, to support savers and first­time house­buyers.

Chancellor George Osborne announced the launch of a new tax­free ‘Personal Savings Allowance’ worth up to £1,000. He also introduced new flexibility for cash Individual Savings Accounts (ISAs) that will allow savers to withdraw and replace money without forgoing their tax­free ISA allowance. Elsewhere, the Chancellor revealed measures designed to support first­time house­buyers through a new ‘help­to­buy’ ISA. Yet further reforms to the pensions system elicited a mixed response. From April 2016, pensioners who have already purchased an annuity will be allowed to sell that income to a third party in exchange for a lump sum that will be taxed at their marginal rate instead of the “punitive” rate of 55%. Meanwhile, the Lifetime Allowance for pension contributions will be cut in April 2016 from £1.25m to £1m.

The UK economy expanded more quickly than any other major advanced economy during 2014, registering growth of 2.6% – a level somewhat below the 3% growth forecast in December 2014. The Office for Budget Responsibility increased its growth predictions for 2015 and 2016, but trimmed its 2017 forecast. Debt as a share of GDP is falling more quickly than previously expected and the Chancellor of the Exchequer therefore intends to end the squeeze on public spending earlier than expected.

Election uncertainty 'Sell in May and go away', runs the old stockmarket adage – but what happens when May involves a UK General Election? The next General Election is scheduled to take place on Thursday 7 May 2015.

However, the result of the election – whether an outright victory for one party or some shade of coalition – is far from inevitable and uncertainty remains the sworn enemy of investors. The outcome is widely expected to be close and, as May approaches, investor sentiment is likely to be affected by this mounting uncertainty.

Nevertheless, it is worth remembering the UK equity market tends to rise in election years. Of the seven General Elections held since the beginning of the 1980s, the stockmarket has ended the calendar year higher in six cases – falling only in 2001. Many questions about the UK's future remain, as yet, unanswerable. Will we end up with another coalition? What can companies expect from the next government?

What will happen to the housing market? Should the banking sector brace itself for further punishment? And what role will the UK play in the EU? Recent newsflow has focused on geopolitical issues, from the terrorist attacks in Paris to ongoing developments in the Middle East and Russia. Meanwhile, the outlook for the eurozone's faltering economy and the future path of oil prices have continued to create headlines. Looking ahead, however, speculation about the outcome of the General Election and the UK's future prospects is likely to gain momentum.

Inflation update Attitudes to the UK economy entered a new phase in January 2015 following the news the annualised rate of inflation had dropped to 0.5% in December – thereby equalling its lowest­ever level reached in May 2000. The announcement triggered concerns the UK could be at risk of a damaging period of deflation. Prices were pulled down by falling fuel costs caused by plummeting energy costs. Prices for motor fuels fell at an annualised rate of 10.5% in December while food price inflation fell by 1.9% year on year in December, undermined by fierce competition between the supermarkets. While a cut in the cost of living might at first sight seem appealing, a deflationary environment discourages individuals and businesses from spending – after all, if prices are likely to fall, people are more likely to postpone purchases, putting a brake on economic growth. Inflation erodes the real value of your money, but it also erodes the real value of your debts. Conversely, an environment of deflation will actually increase the real value of your debts – not to mention those of the government. UK interest rates have been at their all­time low of 0.5% for almost six years, and an environment of falling inflation reduces the likelihood of an imminent rise. Looking ahead, if the rate of inflation continues to fall, dropping below 0.5%, this means beleaguered savers will finally receive a positive return on their cash, reducing their incentive to spend rather than save.

What is a corporate bond?

Corporate bonds are loans issued by companies and funded by investors. In exchange for your capital, companies agree to pay fixed interest payments at regular intervals and to repay the capital at a specified future date. This fixed nature of payments makes corporate bonds particularly attractive for investors looking to supplement existing income. The corporate bond market is divided into two principal categories – ‘investment grade’ bonds, which are generally considered more financially secure; and ‘high yield’ bonds, which offer higher interest payments than investment grade bonds so as to compensate investors for the greater risk they may default on payments.