Winter 2012/13 Newsletter

: Out of the mouths of babes… changes to Child Benefit More than a million UK families have found themselves a little bit worse off in 2013, following changes to the payment of Child Benefit. Until recently, Child Benefit was paid to more than 7.8 million families with some 13.7 million children. However, from 7 January 2013, families in which one parent earns above £50,000 a year have lost their entitlement to some or all of their Child Benefit payment.

In the coalition government’s 2012 Budget, Chancellor of the Exchequer George Osborne announced a plan to recoup a proportion of Child Benefit payments from families in which one parent earns above £50,000, via that parent’s self­assessment tax return, and to remove it completely if the individual’s earnings rise above £60,000 a year.

Winter 2012/13

Welcome to the Winter 2012/13 addition of the Wells Financial newsletter, our quarterly update on the important changes in the world of financial services.

Please contact us if you would like to discuss any of the articles in this issue or have any other financial requirements.

In cases where one parent earns above £60,000, the parent who claims Child Benefit can opt to stop claiming it or to continue to receive the payments, which will then be recovered from the higher­earning parent through their self­assessment tax return. However – and somewhat controversially – these rules do not apply if each partner’s earnings are below £50,000 a year but their combined earnings are above £50,000.

At present, Child Benefit is paid at a rate of £20.30 a week for the first child and £13.40 a week for each additional child. During the tax year 2011/12, Child Benefit is calculated to have cost £12.22bn and the new measures are expected to generate savings of £1.7bn every year from 2014/15. About 1.2m families have been affected by the changes, with around 70% of these losing their entire Child Benefit and the remaining 30% losing a proportion. HMRC calculates the average loss will be approximately £1,300 a year.

Some families will feel the loss of their Child Benefit payments more keenly than others. Either way, the changes represent a good time to re­examine your family’s savings and investments and to ensure that they are structured as efficiently as possible. Are you, for example, making the most of tax allowances and tax­free savings structures such as individual savings accounts (ISAs) and Junior ISAs? Perhaps you could consider transferring income­generating assets to your spouse, if they pay a lower rate of tax. Moreover, it is worth remembering that certain adjustments to your income – such as contributions to a pension scheme – could reduce your total income below the level at which you start to lose your entitlement to claim Child Benefit.

Contact Details Wells Financial Ltd. Christ Church Centre, High Street, Tunbridge Wells, Kent TN1 1UT t: 01892 517171 e: info@wellsfinancial.co.uk w: www.wellsfinancial.co.uk

“It’s taking time...†Chancellor George Osborne has admitted the UK government will not succeed in bringing the country’s deficit under control by the 2015/16 tax year. In his Autumn Budget Statement, the Chancellor reported that, having fallen by one­quarter in the last two years, the deficit is expected to decline from 7.9% of GDP to 6.9% this year, and to reach 1.6% by 2017/18. Government spending as a proportion of GDP is expected to decline from almost 48% of GDP in 2009/10 to 39.5% in 2017/18.

The personal allowance – how much an individual can earn before paying tax – was raised by £1,335 to £9,440 from April 2013. However, the threshold at which individuals begin paying higher­rate tax was increased by a below­inflation 1% in 2014/015 to £41,865. Most working­age benefits will rise by 1% during each of the next three years, generating savings of £3.7bn by 2015/16.

Tax relief on the pension pots of the wealthiest will be reduced, generating annual savings of £1bn. From the tax year 2014/15, the lifetime allowance for tax relief will be cut from £1.5m to £1.25m and the annual allowance will fall from £50,000 to £40,000. Meanwhile, the basic state pension will increase by 2.5% to a weekly rate of £110.15 next year.

Having previously forecast growth in the UK economy of 0.8% this year, the Office for Budgetary Responsibility now expects the economy to contract by 0.1% while credit ratings agency Fitch warned that the UK’s failure to meet its target on debt reduction “weakens the credibility of the UK’s fiscal framework”.

A long term view Over the long term, the stockmarket has traditionally tended to outperform cash.

However, past performance is not a reliable indicator of future performance and the market is also volatile. This tends to worry investors, tempting them to sell at the first sign of trouble.

However, selling after a sharp fall can be a knee­jerk reaction. Falls can be followed by upward movements and, over the long term, short­term ups and downs should have no serious impact on achieving your objectives. Share prices do go down as well as up and are not guaranteed, but think before you act. Have your needs changed? Has your attitude to risk changed? If your portfolio has been set up to fit your aims, time should be all it needs.

RDR overview You may have heard about the Retail Distribution Review (RDR) but do you know what it is all about? RDR sets out to ensure that, as the client of a financial adviser, you are offered a transparent and fair charging system for advice; are clear about the service you receive; and obtain advice from highly respected professionals. As things stand, all the changes required for RDR compliance will come into effect on 31 December 2012 and will apply to every adviser across the retail investment market, including independent financial advisers, wealth managers and stockbrokers as well as banks and other providers of financial products.

Your choices at retirement When you reach retirement age, with interest rates at historic lows, your most important choice will probably be between taking an annuity or using an unsecured pension product to defer that decision, potentially indefinitely. The former will lock in a guaranteed income for you, whereas the latter option allows you to stay invested, at least partly, whilst you decide whether markets will get better ­ or worse ­ and whether you should actually take the plunge.

An annuity is specifically designed to provide a guaranteed income stream for life. This provides security and stability but does also mean you give up all right to the original capital. Without any guarantees, if you die earlier than expected, your descendants could be left with nothing. With an unsecured pension you can retain entitlement to the capital but draw an income from it until you decide annuity rates are attractive enough to replace it. However, this latter option might provide less than you would receive from an annuity whilst you wait.

Unsecured schemes offer access to a wide range of underlying investment funds, so you can assess the risk you are prepared to take and allocate your fund accordingly. Or, indeed, you might decide to combine the two approaches, keeping part of your fund invested whilst taking an annuity with the rest. If you are unsure, however, speak to a financial adviser and make sure you have covered all your options.

A shake­up for UK pensions 2012 could well come to be seen as a watershed year for UK pensions thanks to the introduction of auto­enrolment. The scheme, which is intended to provide wider access to pension savings, has been described as “the biggest shake­up” in UK pensions for more than a century.

According to the Department of Work & Pensions (DWP), approximately 13.5 million workers did not contribute to a pension during 2011 – the vast majority of them in the private sector. Pension saving has declined across all age groups, but the drop among 20­somethings has been particularly marked.

People working in industries such as construction, distribution, hotels and agriculture are the least likely to have a workplace pension. Even pension saving in financial sectors has declined sharply.

The DWP estimates up to 11 million people will qualify for auto­enrolment. From 1 October 2012, those between 22 and state­pensionable age, who earn more than £8,105 a year and who are not already enrolled in a qualifying pension scheme, will be enrolled in their workplace pension scheme. The worker and the employer will contribute to the scheme unless the worker decides to opt out. Eventually, workers will contribute 4% of earnings and the employer will contribute 3%, with a further 1% in the form of tax relief.

The largest companies will start auto­enrolment first, with the whole process having to be completed by April 2017. Around 600,000 people are expected to be enrolled by the end of 2012 and as many as 4.3 million by May 2015.

Taking the flexible approach to mortgages Flexible mortgages are a relatively new development in the market and are defined primarily by the way they calculate interest payments. Traditional loans used to take the value of your capital on a single day of the year and then add interest for the whole year based on that amount. Flexible mortgages calculate interest daily ­ which means that any overpayments have an immediate impact on the amount of interest due. For those making overpayments regularly, flexible mortgages could significantly reduce the overall cost of your mortgage.

As individuals seek to take a greater level of personal control over their finances, flexible mortgages have become hugely popular. If you make a repayment to capital today, that payment is reflected today, rather than being deferred to a future date. For this reason, a flexible mortgage can be a particularly good idea for people who receive a sizeable bonus every year or, for those with unpredictable income levels which mean that they sometimes want to overpay, but perhaps also sometimes underpay.

Of course, if you have a very predictable income, you might not need this flexibility. Savings from flexible mortgages accrue over time, so the initial rates are not always the cheapest. However, their popularity has meant that even some mainstream mortgages now offer the same benefits. It is important, therefore, to determine exactly what you need from a mortgage and find one that suits.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

Taking a slice of the rent The taxation of rental properties can be complicated. As a landlord, you would be liable for income tax on rental income, at your marginal income tax rate, though it is possible to offset mortgage interest payments against this to reduce the liability.You could also offset cleaning charges, the cost of ground rent, any service charges, buildings and insurance cover (including for white goods & plumbing), advertising and, indeed, the depreciation of any furniture inside. Any letting agents’ and accountants’ fees can also be discounted. When you finally sell a buy­to­let property, Capital Gains Tax becomes due on any profits made, but again, there are charges and depreciations ­ plus an annual allowance ­ which can offset here as well.

Issued by Wells Financial Ltd. which is authorised and regulated by the Financial Services Authority. The contents of this newsletter do not constitute advice and should not be taken as a recommendation to purchase or invest in any of the products mentioned.

Before taking any decisions we suggest you seek advice from a profession, impartial adviser.