esmartmoney The DIGITAL personal finance magazine
REPORT were you a winner or a loser?
FINANCES IN SHAPE have you considered the potential effects of a recession?
don’t leave your heirs facing an unexpected tax bill
Also inside this issue Corporate matters cost-effective solutions for today’s challenging business environment
Protecting your lifestyle covering the costs that result from a serious illness
Savings compensation scheme how safe is your money?
PRE-BUDGET REPORT 2008... PROTECTING YOUR LIFESTYLE... CORPORATE MATTERS... NEWS IN BRIEF...
want to explore your personal finance options? Tell us what you need?
In this issue
27 16 30
IN THIS ISSUE
Take a look at your tax…
Surprise interest rate reductions…
09 09 10
are you paying more than you really need to?
lowest levels for over 50 years
Corporate matters… cost-effective solutions for today’s challenging business environment
Savers disadvantaged by lower interest rates… in general, savings rates are now lower compared with last year
Pre-Budget Report 2008…
14 Getting your finances in shape… have you considered the potential effects of a recession?
Protecting your lifestyle… covering the costs that result from a serious illness
45 per cent tax rate for high earners…
Open Market Options…
the wealthy could face substantial tax rises
speeding up the time it takes payments to be made to pensioners
Savings compensation scheme…
don’t leave your heirs facing an unexpected tax bill
how safe is your money?
Long term care home fees…
Holding out for an early retirement…
a postcode lottery
but have you made the necessary arrangements?
were you a winner or a loser?
In this issue
Inside this issue
elcome to the first issue of our financial digital magazine for the New Year, featuring articles designed to help you make more of your money and prepare for any economic situation. From declining financial markets to a troubled and crisis-ridden housing sector, we are being continually bombarded by a plethora of news stories and media coverage about the state of the UK’s financial health. In times of economic turbulence or market downturn, it is prudent, if you haven’t done so already, to start considering and planning for the potential effects a recession could have on your investments and pension. Turn to page 12 to read the full article. The Chancellor’s message to the country as he delivered his second Pre-Budget Report last November was to ’spend, spend, spend’, at least for the rest of this year, to benefit from the reduced 15 per cent VAT rate. We shall all start paying for the tax reductions by 2011, assuming the government is re-elected. On page 10 we look at the main points announced by the Chancellor that are aimed at seeing us through these turbulent times, and on page 28 we consider how the business sector fared. On page 6 we look at how an economic slowdown could have considerable implications for most people’s taxes. Whatever your position, now is an excellent opportunity to take a look at your tax. In some instances, people may be oblivious to the fact that they are paying more tax than they really need to and they subsequently never claim this sum back. At the time of going to press, the global financial crisis and events are changing very quickly, and some further changes are likely to have occurred by the time you read this issue. A full content listing appears on pages 3 and 5.
Need more information? Please email or contact us with your enquiry. If you would like us to email a copy of our digital magazine to someone you know, please email us with their details and we’ll send them a copy.
28 IN THIS ISSUE 23
Square Mile will fight back from the recession…
Reducing home repossessions…
Wrapping assets in a SIPP…
Listed investment companies…
enjoying a new age of prosperity
helping those who might be hardest hit in tougher times
a solution for your specific requirements and financial objectives?
Report 28 Pre-Budget for business… a wide-ranging package
global competitiveness… 29 London’s
report highlights the need for improvements to the UK tax regime
29 Splitting the sector…
all change for the UK equity income and growth sector
30 ISA returns of the year… sheltering your returns from tax
proposals welcomed to provide certainty on UK funds’ tax status
Content of the articles featured in this publication is for your general information and use only and is not intended to address your particular requirements. They should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.
TAKE A LOOK AT
ARE YOU PAYING MORE THAN YOU REALLY NEED TO?
An economic slowdown could have considerable implications for most peopleâ€™s taxes. Whatever your position, now is an excellent opportunity to take a look at your tax.
In some instances, people may be oblivious to the fact that they are paying more tax than they really need to and they subsequently never claim this sum back. Also, many will earn less and accrue lower investment income. Some self-employed workers could see profits all but disappear, while others will forego dividends from family businesses. If you are employed and taxed under Pay As You Earn (PAYE), your personal allowance for the current 2008/09 tax year is £6,035, which is divided by 12 and then deducted from your monthly salary. However, if you do not work the whole year, you will have unused personal allowance which will be refunded to you. On that basis, you may also have paid too much higher rate tax. Even larger sums could be at stake if you are selfemployed or pay tax at the higher rate on substantial investments. If you pay tax in advance of finalising your returns and accounts by estimating what your income will be, you may have paid too much, given falling share dividends and the general economic slowdown. If applicable to your situation you may be required to pay tax in two amounts, each amount being half of the previous year’s tax bill. In some cases, this could now seem too high, given that the credit crunch began during the middle of last year. If your earnings dropped sharply in the second half of last year, or if you did not receive the dividends expected, it’s important to take action now to make sure you calculate your assessment correctly and claim any money back that is due. In January, not only do your 2007/08 tax affairs have to be finalised, but you begin making payments on account in respect of the 2008/09 tax period. Due to the economic downturn, it may be prudent not simply to pay the usual required half of the previous year’s tax bill. Before you make a payment, take a realistic look at your earnings and dividends and what they are likely to be by the end of the financial year. If they are lower, you can apply to make a lower payment than usual, but you need to request this by filling in a form SA303. You should also keep a close eye on the dividends you receive, especially once they fall below £10,000, as
HM Revenue & Customs (HMRC) may sweep them up into PAYE. Not only are payments made earlier this way, but shareholders may be overcharged. It is possible to apply for dividend tax to be kept out of PAYE, as HMRC cannot compel you to pay tax on dividends via your coding notice. Pensioners benefit from higher personal allowances in the current 2008/09 tax year: £9,030 at age 65 and £9,180 at age 75. But if applicable to your situation, you lose 50p in every pound of income above £21,800. However, this clawback stops once your income falls below this threshold. If a dividend slice means you fall below the £21,800 threshold, you will at least no longer suffer from the income clawback. But you should make sure you inform HMRC fully of dividend cuts, or you could be overtaxed. There may be opportunities for small business owners to claw back overpaid tax. If small companies make a trading loss, it is possible to carry that loss back to the previous year and obtain a tax rebate, which could offer valuable cash flow advantages. Partnerships may be able to extend the current accounting year to, say, 15 or 18 months to reduce payments on account. This is a timing difference rather than an actual tax saving, which can give hardpressed professionals a bit of breathing space. In an economic downturn, falling asset prices can also benefit those planning for the future. If you wish to pass on assets, whether property or shares, to members of your family for inheritance tax planning purposes, there are opportunities presented by lower property and share values. You could opt to give the gifts outright. If you survive for seven years, they become tax-free. Alternatively, you could place them in a trust, which may still involve a 20 per cent charge. However, this can be circumvented by opting instead for a family limited partnership, which, although not as flexible as a trust, can still be worth considering. Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investment can go down as well as up and you may not get back the full amount invested.
Surprise interest rate reductions Lowest levels for over 50 years Interest rates were cut to their lowest level in over 50 years on Thursday 6 November when the Bank of England cut its official rate by 1.5 percentage points to 3 per cent, a cut three times larger than any seen since the Bank’s Monetary Policy Committee was established in 1997. This was followed by another 1 per cent reduction on Thursday 4 December, bringing the rate down to 2 per cent, a level not seen since 1951, when Winston Churchill was in office. The Monetary Policy Committee explained its decision to cut rates far more than expected by saying there was evidence of a ’severe contraction’ in the economy during the coming months, and such a dramatic extinction of inflationary pressure that ’at prevailing market interest rates, [there is] a substantial risk of undershooting the inflation target.’ Traders and most economists took that to mean further rate cuts were likely to come.
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is our business... weâ€™re passionate about making sure your finances are in good shape for 2009. Our range of personal financial planning services is extensive, covering all areas from pensions to taxation and inheritance matters to tax-efficient investments. Contact us to discuss your current situation, and weâ€™ll make a New Years resolution to get your finances in good shape.
SAVERS DISADVANTAGED BY LOWER INTEREST RATES In general, savings rates are now lower compared with last year It’s an unfortunate fact that any interest rate cuts, although welcome news for borrowers and the business community, are the curse of savers, many of whom have been disadvantaged by higher rates of inflation.
Cost-effective solutions for today’s challenging business environment Implementing a successful employee benefits package should not only enable your business to meet its legal obligations in respect of making pension schemes available, it could also help to increase your successes when looking to recruit the best people. In today’s business environment, with budgets under constant pressure, it is even more vital to deliver more cost-effective solutions. Employee benefits should be regularly reviewed to take advantage of new developments and improved terms offered by providers keen to compete for business. Many employees today expect to have access to deathin-service cover or income protection as part of their financial package. Some also look to employers who give them the option of being part of a flexible benefit scheme that enables them to select their own benefits from a menu, using an agreed allowance that provides a more tailored employee choice. A business that wants to retain or recruit directors or senior executives may find it much easier to achieve this if they provide them with a suitably tax-effective remuneration strategy. This may also go a long way towards promoting loyalty and protecting them from the potential threat of the competition. It’s also important to protect your business against the unexpected death or serious illness of your key employees, shareholders or partners. Many businesses recognise the need to insure their company property, equipment and fixed assets. However, they continually
overlook their most important assets, the people who drive the business, and the impact their death or illness could have on the financial security of the business. Receiving the appropriate professional advice can help to ensure that premiums paid are competitive and set up in a tax-efficient manner. Services offered to corporate clients include: n n n n n n n
Corporate investments Individual pension plans Key person insurance Partnership insurance Employee benefit plans Business succession planning Group retirement planning Whatever the size of your business, if you require objective professional advice on corporate financial planning and employee benefits, please contact us for further information.
Did you know? A credit crunch happens when banks hoard cash. If the supply of loans evaporates, the economic outlook quickly becomes bleak. The credit crunch that began in August 2007 was sparked by bad loans in America’s mortgage market, sub-prime borrowing. It can be measured by the level of LIBOR, the interbank lending rate.
In general, savings rates are now lower compared with the higher rates that were available last year, when many of the banks were offering more attractive rates because they had become increasingly reliant on deposits from consumers to fund their mortgage lending. The only comfort to savers is that many banks still need depositors’ money and therefore may not pass on any future rate cuts. During much of 2008, returns on savings accounts were at sevenyear highs as lenders became increasingly reliant on consumer deposits to fund their mortgage book. But with lower interest rates, many of the savings rates have become short-lived. Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investment can go down as well as up and you may not get back the full amount invested.
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PRE-BUDGET REPORT 2008 WERE YOU A WINNER OR A LOSER?
The Chancellor’s message as he delivered his second Pre-Budget Report was to ’spend, spend, spend’, at least for the rest of this year, to benefit from the reduced 15 per cent VAT rate.
We shall all start paying for the tax reductions by 2011, assuming the government is re-elected. National Insurance contributions will rise by 0.5 per cent for both employers and employees, although the lower rate threshold will be increased to match the new personal allowance.
This will rise to 41.2 per cent this financial year, then to 48.2 per cent in 2009/10, 48 per cent in 2010/11 and 53 per cent in 2011/12, peaking at 57 per cent of GDP in 2013/14. The package confirmed that the government would suspend its rule that limits borrowing to 40 per cent of GDP.
Higher rate taxpayers will see personal allowances cut (for those earning over £100,000) and eliminated (for those earning over £140,000). In addition, there will be a new 45 per cent rate for those earning over £150,000.
Pre-Budget Report highlights Economics Fiscal package The government will inject £20bn into the economy in an attempt to stave off a deep recession.
Growth Growth forecast predictions have been downgraded for this financial year to between -0.75 per cent and -1.25 per cent from 2.5 per cent. The Chancellor predicted growth of between 1.5 per cent and 2 per cent in 2010.
Public finances Public spending Real terms capital spending will increase by 1.2 per cent a year. About £3bn of capital spending will be brought forward from 2010/11 to this financial year. The government will inject £535m into energy efficiency, rail transport and environmental protection.
Efficiency cuts The government confirmed that an extra £5bn could be saved in the public sector on top of the original £30bn of efficiency savings it had planned for between 2007 and 2010/11.
Borrowing The Chancellor said borrowing would reach £78bn this financial year, up from the previous forecast of £43bn. Borrowing will rise to £118bn in 2009/10, or 8 per cent
of GDP. From 2010 it will fall to £105bn, then to £87bn, £70bn and £54bn. By 2015/16 the government will borrow only to invest.
year. Differential increases in duty will be introduced from 2010. More polluting cars will see duty increased up to a maximum of £30, while less polluting cars will see no increase or a cut of up to £30.
Property Housing support package
Climate change levy
An extra £775m will be brought forward to invest in new housing and modernisation schemes.
The renewables obligation, which requires energy generators to use greener methods of production, will be extended for an additional ten years to 2037.
Air passenger duty
Family and investment Debt advice
A four-band tax duty is to be introduced. Long-haul passengers will pay more.
The government will provide £15m for the provision of debt advice.
Tax havens A review of the regulatory arrangements surrounding the Isle of Man and the Channel Islands has been commissioned and will report this spring.
Pensions and child benefit State pension Pensioners will see their payment increase from £90.70 to £95.25 a week. Pensioners on modest incomes will get an increase in pension credit from £124 to £130 and for couples from £189 to £198 from this January.
Income tax Income tax will be charged at 45 per cent on taxable non-savings and savings incomes over £150,000 with effect from April 2011.
Allowances Personal allowances will be scrapped for those earning in excess of £140,000 a year from April 2010.
Ten pence band The increase in the personal allowance to offset the scrapping of the 10p tax band is to be made permanent and increased to £145 a year from £120.
Pensioners and children with disabilities will gain an extra £60 to go towards energy bills from January this year. This will be £120 for couples.
From April 2011, National Insurance contributions will rise by 0.5 per cent for employers and employees, but those earning less than £20,000 will be exempted.
Child benefit This April’s planned increase in child benefit to £20 a week for the eldest or only child and £13.20 per week for other children will be brought forward to this January.
Energy Energy prices The government may introduce statutory powers to cut energy bills.
Insulation Up to £100m will be spent to help people to insulate their homes.
Environment Vehicle excise duty New tax bands will be phased in. Vehicle excise duty rates for all cars will increase by up to £5 this
Pension funds The standard lifetime allowance, £1.75m in 2009/10, will rise to £1.8m in 2010/11 and then remain at this level for the next five tax years (i.e. up to and including the tax year 2015/16).
Value added tax VAT The tax on sales was cut from 17.5 per cent to 15 per cent on Monday 1 December 2008 until the end of this year, after which it will return to the original rate. That reduction will be offset by increased duties on alcohol, tobacco and petrol.
The government will offer an overall housing support package worth £1.8bn.
Mortgage rescue scheme The government said that the scheme would be extended to those with a second mortgage.
Mortgage interest scheme The limit on the mortgage interest scheme is to be raised from £100,000 to £200,000.
Repossessions Main lenders agreed to wait three months before starting a repossession order against struggling homeowners.
Jobs and unemployment Adult training Up to £1.3bn in funding will be provided for training. Tesco, Centrica and Royal Mail were named as being among businesses that would work with Jobcentre Plus to help with training.
Unemployment The government will extend its rapid response service for those who have been made redundant.
Banks Credit guarantee The government said that banks would have access to £100bn under credit guarantee.
GETTING YOUR FINANCES IN SHAPE Have you considered the potential effects of a recession?
From declining financial markets to a troubled and crisis-ridden housing sector, we are being continually bombarded by a plethora of news stories and media coverage about the state of the UK’s financial health. In times of economic turbulence or market downturn, it is prudent, if you haven’t done so already, to start considering and planning for the potential effects on your investments and pension. Firstly, don’t make any knee-jerk decisions, especially if you are investing for the longer term. Our service is designed to assess your current situation and provide professional advice to help you make informed decisions. Selling any investments when the FTSE 100 index and other indices are at such a low point may not be the most appropriate course of action for most investors, and if you can wait for equity markets to recover before selling any investments, you have the potential to gain from the upside of any future recovery. Currently, some investors with a longer-term view and a higher risk-for-reward attitude may even find that some opportunities still exist by holding both UK and US equities. Investors who acquire UK, US and even European equities, all of which have fallen heavily, could benefit once markets eventually recover. If you have exposure to emerging market equities, they still remain high risk and are likely to require a longer time frame for any potential recovery. If you are concerned about the effects on your retirement planning, the value of your pension fund may have been affected by falls in equity and corporate bond prices.
For many people this will almost certainly be the case if they have a personal pension or are members of a defined contribution ‘money purchase’ occupational scheme. Time is often said to be a healer, and if you have the luxury of targeting a retirement date in excess of five years, continuing your contributions should be an important consideration as markets are expected to recover in the longer term. If you have less time before you stop working, though, you might want to consider phasing your retirement by using only part of your fund to buy an annuity to produce income, and keeping the rest invested in an unsecured pension or an alternatively secured pension. Phased retirement is a complex area of pensions and independent advice should be sought if this route is being considered. Working while your pension fund value has the potential to recover could be an alternative course of action you may wish to consider. During November last year, data from the Office of National Statistics showed that more people are choosing to do this, pushing the average retirement age for men up to a record high of 64.6 years,
and the average retirement age for women up to 61.9 years. If you have a defined benefit occupational scheme, your pension benefits will not be affected by a recession or stock market falls as the income you receive will be determined by your final salary. However, if you work for an employer whose solvency may be adversely affected by a recession, you should check how much of your pension will be protected if the company folds, and this is also true if you are already receiving your pension. Currently, 90 per cent of your employer’s pension up to a maximum of £27,000 per year is covered by the government’s Pension Protection Fund (PPF). If you are expecting to retire on more than this figure and have any concerns, please talk to us so that we can assess the options available to you. Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investment and income from them can fall as well as rise and you may not get back the full amount invested.
If you would like to review your current financial planning position, please contact us for further information.
PROTECTING YOUR LIFESTYLE Covering the costs that result from a serious illness Critical illness insurance can help you and your family cover the costs that may result from a serious illness, including medical expenses, moving house and protecting your business. You receive a tax-free lump sum if you are diagnosed as having one of the specific life-threatening
If you would like to find out more about protecting yourself in the event that you are diagnosed with a critical illness, we can help advise you on what type of policy is most suitable for your needs and circumstances. Please contact us for further information.
conditions defined in the policy and it is up to you how you use the money. Policies often offer combined life and critical illness cover. These pay out if you are diagnosed with a specified critical illness, or you die, whichever happens first. No single policy will cover all critical conditions, which is why, we believe, it is important to receive professional advice. Industry guidelines say that, to call itself critical illness insurance, a policy
must offer cover for: cancer, but only advanced cases; heart attack if sufficiently severe; and stroke if it results in permanent symptoms. However, there are differences between the definitions provided even on these. In practice, most policies cover more critical conditions than just these three. A basic plan will typically also cover coronary
bypass surgery, kidney failure, major organ transplants and multiple sclerosis. A more comprehensive policy will cover many more serious conditions, including loss of sight, permanent loss of hearing and a total and permanent disability that stops you from working. Some policies also provide cover against the loss of a limb.
Need more information? Please email or contact us with your enquiry. If you would like us to email a copy of our digital magazine to someone you know, please email us with their details and weâ€™ll send them a copy.
45 per cent tax rate
for high earners The wealthy could face substantial tax rises The Chancellor confirmed in his Pre-Budget Report last November his intention to introduce a new 45 per cent tax rate from April 2011 for high earners earning more than £150,000, which is estimated to affect the top 1 per cent of incomes. Such individuals will face a higher rate of 37.5 per cent on dividends, which is an effective rate of 30.5 per cent. These higher rates will also apply to most trustees. There is also a proposed increase in National Insurance rates of 0.5 per cent for employees, employers and the selfemployed. In addition, there would be a change to the personal allowances of high earners to end the anomaly of these being worth twice as much to higher rate taxpayers as those who pay basic rate tax. The personal allowance, which is £6,035 in this financial year, is the amount of earnings on which no tax is payable and all taxpayers receive the same allowance. From April 2010, people earning between £100,000 and £140,000
will have their personal allowances halved so they receive the same benefit as those earning less. For taxpayers earning more than £140,000 the allowance will be withdrawn entirely. From this April, the personal allowance for those under 65 will be increased by £145. This is in addition to the £600 increase from May last year, and increases the total to £6,475. Taxpayers aged between 65 and 74 will see their personal allowance increase in line with inflation to £9,490, while those aged 75 and over will get an annual allowance of £9,640. Plans were also announced to make permanent last year’s increase in the income tax personal allowance of £120 a year for basic rate taxpayers.
Open Market Options
From April Speeding up the time it takes payments to be 2010, made to pensioners people earning The Association of British Insurers between £100,000 (ABI) announced on 23 October 2008 details of its work with the and £140,000 will UK’s leading annuity providers to have their personal speed up the time it takes for Open Market Option payments to be allowances halved made to pensioners. so they receive the Fifteen providers, representing same benefit as those over 90 per cent of the annuities industry, have taken part in earning less. the initiative, which involved
the creation of an electronic information exchange, the financial services e-commerce standards body. The objective of the service is to reduce the time taken to set up an annuity when changing providers and will become the industry benchmark. The ABI said, ’The initiative marked a step change in the industry’s work to improve customer service around the Open Market Option. The ABI and the annuity providers involved are determined to make the annuity set-up process work better, and this service will reduce the time taken to transfer between providers. ’The ABI has already published new template wording for ”wakeup” letters sent to people who are approaching retirement. This will help make the options customers have at retirement clear and easy to understand.’ Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investment can go down as well as up and you may not get back the full amount invested.
ESTATE PLANNING Don’t leave your heirs facing an unexpected tax bill
An increasing number of households could be at risk of paying inheritance tax (IHT). The 40 per cent tax charge is payable on the value of an estate over the nil-rate band threshold, £312,000 for an individual and £624,000 for a married couple, based on the current 2008/09 financial year.
Loan trusts are designed for people who cannot give away assets because they need to live off the income, but want future investment growth to be IHT-free. When you add up the value of your property, savings and investments and other belongings, you may be surprised by how much your estate is actually worth and you could therefore be looking at a sizable tax bill. There are a number of ways in which, with some careful planning, you could mitigate or potentially remove an IHT liability against your estate, thereby ensuring that your heirs are not left with an avoidable tax bill. Unfortunately, though, some families do not start thinking about IHT planning until it is too late. The first thing to do is to work out if the tax will be an issue. Start by adding up the value of your savings, investments, properties and other personal possessions. You also need to include funds held in an Individual Savings Account. Although the proceeds are tax-free during your lifetime, they are subject to death duties. When an estate passes between a husband and wife, or from one civil partner to another, IHT is not payable. In addition, married couples or civil partners can transfer the unused element of their IHT-free allowance to their spouse when they die. By doubling up the allowance this financial year, a couple would escape IHT on £624,000. During your lifetime, giving away assets is a simple and legitimate way to reduce the value of your estate, as long as you do it in time. You can gift up to £3,000 a year and it is immediately exempt from IHT, or £6,000 if you did not make a gift of this kind in the previous tax year. A married couple giving for the first time could, therefore, hand over £12,000 to their children in one year. After that, the maximum for a couple is £6,000. You could also escape IHT by giving £250 to any number of people every year, but you cannot combine it with the above exemption.
Parents can give £5,000 to each of their children as a wedding or civil partnership gift. Grandparents can give £2,500 and anyone else £1,000. Gifts of any size to political parties or charities are also exempt. If a gift is regular, comes out of income and does not affect your standard of living, any amount of money can be given away and ignored for IHT. It is possible to make further tax-free gifts known as potentially exempt transfers (PETs), but you have to survive for seven years after making the gift. If you die within seven years and the gifts are valued at more than the nil-rate band threshold, it may be possible to apply taper relief. The tax reduces on a sliding scale if the gift was made between three and seven years earlier. You can give away most assets, but these have to be an outright gift from which you can no longer benefit. This excludes giving away your family home. If you hand it to your children and continue to live there, you have to pay a market rent, which can wipe out the tax benefits. It is important to make a note of such gifts to pass on to the executor of your will. Loan trusts are designed for people who cannot give away assets because they need to live off the income, but want future investment growth to be IHT-free. This type of arrangement is very specialist and you should always receive the appropriate professional advice before embarking down this tax-planning path. In most cases, IHT must be paid within six months from the end of the month in which the death occurs, otherwise interest is charged on the amount owing. Tax on some assets, including certain land and buildings, can be deferred and paid in instalments over ten years. Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.
There is a range of policies and strategies you can use to plan for IHT, but this is a complex area of financial planning, so it’s important to receive good professional advice. Finally, don’t forget to make or update your will.
Savings compensation scheme How safe is your money? If you have a savings or current account with a UK-based institution, up to £50,000 of your cash is protected through the Financial Services Compensation Scheme (FSCS) from 7 October 2008. If the institution collapses, you will be entitled to claim back 100 per cent of your money up to that limit.
The protection is for each account holder, so in a joint account up to £100,000 will be covered.
Savers are covered for that sum in each organisation they bank with, unless any of them share a banking licence. If, for example, you have money with Barclays and HSBC, which don’t share a licence, you will have up to £50,000 protected in each bank. However, if you have money with HSBC and First Direct, which do share a licence, only the first £50,000 of your total will be protected. The protection is for each account holder, so in a joint account up to £100,000 will be covered. The first £50,000 will be 100 per cent secure and you will be able to reclaim it in the same way as someone who holds less than the new limit. You may be able to recover some of your other money, but only after the bank has been liquidated.
savings account and have an outstanding mortgage of £200,000 when your bank fails, instead of getting any money back you would see your mortgage debt reduced to £170,000. When it comes to insurance, the FSCS will cover life insurance policies such as pensions, annuities and endowments, as well as motor, home and employers’ liability insurance. For these claims you will again have to fill in an application form from the FSCS (not from your insurer) in order for it to consider your claim. If you are making a claim against an insurance company that has gone bust, the FSCS could compensate you for the premiums you have already paid (if the insurer is unable to do so) and will try and help you transfer policies or pay you compensation.
If a bank or building society falls into difficulty, the FSCS will swing into action. It will get a list of customers from the administrators and, if you are on it, you will be sent a form to apply for compensation. You must fill this in and send it back to get your claim processed.
Compensation is unlimited under the scheme, but you will not get all your money back unless it is a claim for a compulsory insurance. The scheme covers 100 per cent of the first £2,000 you have lost, plus 90 per cent of the remainder of the claim.
UK savers with Ireland’s six biggest banks, including those with Post Office savings accounts, do not have to worry about the protection limits that apply to banks and building societies in this country. They will have 100 per cent of their deposits protected under the limited term guarantee announced by the Irish government.
If you are making a claim against an investment company that has gone under, you will have to supply the FSCS with specific details about your investment, such as its type, how much you invested and when. If your business with the company was only ever before August 1988, then the FSCS will not be able to help you.
If your mortgage and savings are with the same bank, your deposits are offset against your outstanding borrowing and you only get back anything that is left after this has been done. So if you hold £30,000 in a
The FSCS will usually ask you to send any documents relating to your investments which the company may have sent you. The more information you provide, the smoother the claiming process may be.
COMFORTABLE RETIREMENT... do you need a professional assessment of your situation to make this a reality? If you are unsure whether your pension is performing in line with your expectations, and that you’ve made the right pension choices – don’t leave it to chance. Contact us to discuss these and other important questions, and we’ll help guide you to a comfortable retirement.
Long term care
home fees A postcode lottery
Care home fees vary by almost 50 per cent across the UK, and are typically 3 times the average annual mortgage payment, reveals the first annual Saga Cost of Care Report published on 8 December 2008. The analysis, in conjunction with Laing and Buisson, shows Northern Ireland is the cheapest region for residential and nursing care and the Northern Home Counties the most expensive for nursing care with London the most expensive for residential care. Contrary to popular misconceptions, care is not free in Scotland and fees there are exposed as more expensive than Wales, Northern Ireland and the North of England.
By region, nursing homes were at their most expensive in the Northern Home Counties where on average the cost was £43,472 p.a., Northern Ireland had the cheapest nursing homes with an average of £27,976. Northern Home Counties nursing care is, on average, 47 per cent more expensive than that in the North of England resulting in a £13,988 p.a. difference. No nursing homes were found in Northern Ireland that cost more than £31,148 p.a. By contrast 93 per cent of nursing homes in inner or outer London all cost more than £31,200 p.a. Residential homes (providing accommodation but not nursing care) were at their most expensive in London where fees averaged £29,484 p.a. By contrast, Northern Ireland again provided the cheapest with an average cost of £20,904 p.a. 61 per cent of Scottish residential care homes were found to charge between £23,400 and £25,948 p.a. After property purchase, longterm care is likely to be the biggest expenditure in someone’s lifetime. However, unlike buying a property, the cost of care is something particularly difficult to plan for, especially when people are faced with such enormous regional differences. This makes it vital to seek advice if you find yourself in these circumstances. With the right advice however this frequently underestimated cost need not financially ruin someone’s estate and any potential future inheritance. On average someone who requires care in a residential care home may expect to pay in the region of £25,000 per annum, a huge ongoing sum of money to find at any age, yet alone in their later years. Compare that for example with the average mortgage cost
which is small by comparison at just £7,860 per annum. Contrary to popular belief, care is not free in Scotland. In the United Kingdom care is generally broken down into three component parts; accommodation costs, personal care, and nursing care. However, unlike in England, Wales and Northern Ireland, the Scottish state pays for personal care and nursing care. Since it’s inception in 2002, state funded personal care has meant that Scottish people requiring care can be better off than their English, Welsh or Northern Irish counterparts. But the truth is that Scotland does not have a ‘free care’ system, it is often misunderstood by those who use it and has distorted other charges made by care providers. If you need to stay in a care home in Scotland then the state will cover your personal care and your nursing care (currently £149 and £67 per week respectively). However you will still need to pay for your accommodation costs, which usually constitute the lion’s share of the total cost. Scottish care homes are unable to set the charge for personal or nursing care, and care home accommodation costs have increased by 69 per cent since 2002 when the new legislation was introduced, which compares to an average increase across the UK of 48 per cent. On top of the already high cost of care and massive regional differences, The Saga Cost of Care report also reveals that, in the last decade, care home fees have risen faster than general economy inflation. On average over the last three years care home fees have risen by 1.5 per cent more than the Retail Price Index. Further research from Saga which looks at the attitudes of people with parents facing the prospect of long-term care has revealed those regions most unprepared to foot the bill. Almost a third of people
in the Midlands (32 per cent) think that their parents will be forced to sell their homes in order to pay for care. People in Wales and the South West are the most concerned that their parents will be unable to afford the cost of care and will have to live with a relative rather than in a residential home (31 per cent). Children in the capital are most likely to be called upon by their parents to help subsidise their care fees, as parents are unable to foot the bill themselves. More than one in ten (13 per cent) Londoners are expecting to have to help their parents out financially. The cost of care is not a subject people talk to their parents about and as such the whole subject of care is only broached when it is required, usually at a time of crisis - never the best time to be making long term financial decisions. Long-term care planning can be a daunting prospect, but with proper advice people can achieve peace of mind and may prevent any unnecessary sale of a house.
On average someone who requires care in a residential care home may expect to pay in the region of £25,000 per annum, a huge ongoing sum of money to find at any age, yet alone in their later years.
Holding out for an early retirement But have you made the necessary arrangements? It is estimated that there are nearly two and half million of us, which equates to 7 per cent of the adult population who envisage retiring before we reach the age of 50, even though many of us have made no retirement provision whatsoever.
Baring Asset Management, a global investment management firm, identified in a study that a potential 2.4m UK adults are holding out for such an early retirement, but in a stark contrast, the number of people planning on working until they are at least 76 is just half that, at 1.2m. A further 4 per cent of those planning to retire before the age of 50, claim that they are relying on their property as an income in retirement, despite the current news and concerns surrounding the sector. Nationwide recently revealed that the average cost of a home was now almost 15 per cent lower than it was a year ago, which is the steepest drop since records began during the recession of 1991. Commenting on the findings, Marino Valensise, chief investment officer, at Barings, says: ‘These figures reveal a worrying trend of UK
adults assuming that they will be in a position to retire without having made the necessary arrangements for funding that retirement.
years later than they did last year at the age of 63, compared with an expected retirement age of 61 last year.
‘It is absolutely vital that we all start considering how best to build our pension fund from the day we start working. Unless we make the correct provisions now, that target age for retirement will slip further and further away.’
Some 40 per cent of non-retired Britons, or 14.1m people, expect to be able to retire between 61 and 65 years of age while 4m (13 per cent) expect to be able to retire before they reach 56 and almost 11m, at 31 per cent, are planning to retire between 56 and 60.
The research also found that on average, both men and women now expect to have to work until the age of 63 compared to 12 months earlier, when the same survey, showed the average expected age of retirement was 62. The credit crunch and subsequent financial turmoil has caused high levels of economic disillusion among young people when it comes to funding their retirement dreams.
But 15 per cent of Britons, at 5.1m expect to have to work much longer than this, though, as they do not plan to retire until 66 or later. Around 19 per cent of those who are not yet retired expect to be able to retire with a personal or money purchase pension while 34 per cent are relying on their final salary scheme to see them through retirement.
Those aged between 18 and 24 expect to retire on average two
REDUCING HOME REPOSSESSIONS
Helping those who might be hardest hit in tougher times
Square Mile will fight back from the recession Enjoying a new age of prosperity The Prime Minister on the 19 December last year revealed that a White Paper on protecting London’s position as the world’s leading financial centre will be published this year. Gordon Brown also predicted that the Square Mile will fight back from the recession and enjoy a new age of prosperity. His markedly upbeat tone came at the monthly number 10 press conference where he was challenged about Chancellor Alistair Darling’s gloomy admission that Britain may suffer a worse slump than other countries because of the sheer size and importance of the city. Mr Brown said:‘The financial sector in Britain is big... and obviously if you have a financial recession those countries with big financial sectors are going to be affected. ‘But my view is that our financial sector is capable of reviving, capable of doing well in the future, and we will shortly publish our views on how we can retain a world class sector in this country.’ Downing Street confirmed that the Paper would set out strategies to strengthen the city and retain its share of business. ‘Yes there have been difficulties but yes, also, I’m confident about the future,’ added Mr Brown, who said new customers from the Far East would help recover the city’s coffers.
The Premier set out to change his image of dour gloom to one of optimism. ‘Britain can and must be a beacon of hope and opportunity for the future,’ he said. ‘With our fighting spirit and our can-do attitude, I am confident that we can meet all the challenges ahead.’ Officials confirmed that an expansion of government backed lending to struggling firms is set to be unveiled. It could open the supply of billions of pounds in extra lending through high street banks to companies suffering from the credit crunch. Although £37bn was pumped into the banks as fresh capital in October last year to save them from going bust, lending to small firms has failed to improve. One option is for a new fund based on the existing £1bn scheme for loans to small firms, in which 75 per cent of the bank loan is made using government money. It means that taxpayers take on three quarters of the risk if the company folds without paying it back. The Prime Minister played down fears about sterling’s plunge against the euro, which has reached nearparity. ‘Of course there is volatility in every economy in the world and of course exchange rates are going to go up and down,’ he said.
Mortgage lenders will have to prove they have tried to help struggling homeowners avoid losing their property, under new rules brought in by the government on Wednesday 22 October 2008 aimed at reducing repossessions. Under the new rules, lenders seeking a repossession court order will be expected to show that they have tried to find alternatives when borrowers get into trouble with their mortgage repayments, the Treasury said. ’We need to make sure we help those who might be hardest hit in the tougher times ahead, ensuring repossession is the last resort, not the first,’ said the Chief Secretary to the Treasury. ’We also want to make sure that vulnerable homeowners are protected from exploitation and dodgy deals.’ The government also wants the Financial Services Authority to regulate firms that buy property cheaply from those struggling to keep up with their mortgages and then rent it back.
Wrapping assets in a SIPP A solution for your specific requirements and financial objectives? Unlike a traditional personal pension, a Self-Invested Personal Pension (SIPP) may offer for appropriate investorâ€™s far greater flexibility in terms of the assets that can be held within its wrapper. A SIPP enables investors to spread investment risk across various asset options, but also to select investments that meet any specific requirements and financial objectives set.
When you wish to withdraw the funds from your SIPP, between the ages of 55 and 75 (50 and 75 before April 2010), you can normally take up to 25 per cent of your fund as a cash lump sum, free from tax. The remainder is then used to provide you with a taxable income. There are also significant tax benefits. The main benefit of contributing to a SIPP is the fact that tax payments on contributions will be rebated to the fund which effectively means that, within pension funding limits, you can invest part of your income gross. Initially SIPPs and other similar pension plans were exempt from not only tax on contributions but tax on income and capital gains. There have been a number of changes over the years and it is vital that professional advice is taken before considering this retirement planning option. A vast array of investments can be held in a SIPP to meet the objectives of your investment strategy. Some of these funds are more common than others, and some are very complex.
Investments include: n UK and foreign equities n Collective investments such as unit trusts and investment trusts or OEICs n Offshore Funds n Cash n Gilts n Bonds n Commercial property (under review) Broadly, funds can be categorised into two main groups: Conventional, such as equity and bond funds, and Alternative funds. They can also be categorised by other criteria such as:
Types: n Open-Ended Funds (OEICs) n Closed-Ended Funds n Exchange Traded Funds (ETFs)
Investment themes: n Emerging Markets Funds n BRIC Funds
n n n n n
‘Frontier’ Funds Specialist Funds Ethical Funds Gold Oil
‘Soft’ Commodities Unlike individual shares or bonds, funds allow an investor quick access to a diversified portfolio, even with smaller investment amounts. They also allow investors access to illiquid asset classes, such as private equity, commercial property and commodities.
Types of funds Open-ended funds Unit trusts and open-ended investment companies (OEICs) are the most common type of open-ended funds. Open-ended means that the number of units, or shares respectively, in these funds increases and decreases depending on the level of new investments and redemptions. When you buy into an open-ended fund, new units are created. Conversely, if you sell, those units are cancelled. The value of these shares or units directly reflects the value of the underlying portfolio.
Closed-ended funds Investment trusts are an example of closed-ended funds. They typically issue shares which are then traded on a stock exchange. The number of shares is fixed. This means the value of the shares reflects both the “net asset value” of the fund’s underlying portfolio and the supply/demand for the fund’s shares. As a result, a closed-ended fund’s shares can trade either at a discount or premium to its underlying net asset value.
Exchange traded funds (ETFs) ETFs are funds designed to track indices. They are a hybrid between open-ended and closed-ended funds. They are open-ended as their number of shares is not fixed, but have characteristics of closedended funds, such as listing on an exchange and intraday dealing. They normally fully replicate the index they track, by holding all the constituents in their respective index weightings.
Emerging markets funds
Exposure to gold via funds
These funds aim to give investors exposure to stock markets in emerging markets economies either on a global basis or in specific regions, Eastern Europe for example. Emerging economies are considered those that have a low-to-mid per capita income, have ongoing economic development and reform programs, and are considered to be fast growing economies.
An investor can gain exposure to gold via ETFs designed to track the gold price, or via specialised funds investing in companies with gold exposure, such as mining companies.
BRIC funds In fund management jargon ‘BRIC’ stands for Brazil, Russia, India and China. ‘BRIC’ funds generally have the remit of providing exposure to only these four emerging economies.
‘Frontier’ funds Frontier funds allow investors to gain exposure to those economies classified as ‘frontier markets’. Frontier markets are generally defined as those markets that tend to have a smaller capitalisation, fewer traded securities and are less liquid than emerging markets. Countries within this frame can be at different levels of economic development, with gross domestic product per capita ranging from low, in countries such as Vietnam and Nigeria, to high, in the Gulf countries for example.
Specialist funds Funds can provide a way of outsourcing to a specialist investment manager. Specialist funds are funds that invest in a particular area or sector. For example, instead of buying a number of holdings in UK banks, an investor can buy a specialist financials fund managed by someone who is better placed to select the best mix of bank and financial stocks from a global perspective.
Ethical funds Ethical, or socially responsible, funds typically either look for companies that are actively pursuing ways of improving health and the environment, or avoid companies that they consider have a negative effect on society.
Exposure to oil via funds An investor can gain exposure to oil via ETFs designed to track the oil price, or via specialised funds investing in companies exposed to oil, such as exploration, development, production and servicing companies.
‘Soft’ commodities ‘Soft’ commodities is another term for agricultural commodities, such as wheat, cotton, palm oil and orange juice. An investor can gain exposure to soft commodities via ‘agricultural’ funds. These can either invest in future contracts on soft commodities, or in companies that are involved in, related to, concerned with, or affected by agriculture and farming related issues. Investors can also gain exposure to individual soft commodities by buying ETFs designed to track the price of single commodities. Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investment can go down as well as up and you may not get back the full amount invested.
Planning for a successful retirement requires professional advice to ensure that you fully achieve your retirement goals. For more information about the services we provide, please contact us.
YOU'VE PROTECTED YOUR MOST VALUABLE ASSETS... but how financially secure are your dependents? Timely decisions on how jointly owned assets are held, the mitigation of inheritance tax, the preparation of a Will and the creation of trusts, can all help ensure your dependents are financially secure. Contact us to discuss how to safeguard your dependents, wealth and assets, donâ€™t leave it until itâ€™s too late.
Proposals welcomed to provide certainty on UK funds’ tax HM Treasury released on 16 December 2008 three sets of proposals on fund tax reform and a further consultation on changes to the tax regime for listed investment companies. First, there are proposals to provide legislative certainty that UK funds will be treated as investing, not “trading”. At present there is a small possibility that a particular transaction could be treated as trading, which would lead to the whole fund losing its capital gains tax exemption - a “cliff edge” effect. The proposals further reduce the likelihood of a transaction being viewed as trading and, importantly, would remove the cliff edge should there be such a transaction. Secondly, the feedback statement on Tax-Elected Funds (“TEFs”) confirms the government’s commitment to progress the proposals. The Investment Management Association (IMA) is working with officials on an efficient and operationally practical way of ensuring that investors receive income with the
appropriate tax treatment (socalled “income streaming”).
Julie Patterson, Director of Authorised Funds and Taxation, said:
These two proposals are part of a package that already includes a new tax-efficient property fund regime and a workable regime for Qualified Investor Schemes (QIS).
“Today’s proposals are a landmark in our discussions with the government on reforms to improve the competitive position of UK funds and to provide certainty for investors. Together with changes secured last year and further technical amendments contained in amending regulations laid last week, these proposals signal the beginning of the home straight and the success of the IMA’s lobbying. In particular, the combination of certainty that funds will not be taxed as trading, a workable QIS regime and further progress in the TEF discussions, will provide an attractive regime for institutional investors in the short term.”
The third paper, on reform of the Offshore Funds regime, demonstrates that officials have taken on board the IMA’s comments on the draft proposals. It also consults on which investment vehicles will be deemed to fall within the regime, i.e. what is meant by a “fund”. Finally, the feedback statement to the recent consultation on the introduction of “income streaming” for listed investment companies indicates the government’s commitment to progress these proposals.
PRE-BUDGET REPORT FOR BUSINESS A WIDE-RANGING PACKAGE
Small business received a wide-ranging package of extra finance, including a scheme to spread tax payments and a new three-year loss carry-back rule for losses up to £50,000. In addition, the increase in small companies’ rate to 22 per cent is deferred for a year, to 2010. Corporation tax
The government will defer the increase in corporation tax for small businesses. Corporation tax for small firms was set to rise to 22 per cent from April 2009 from 21 per cent as part of a staged increase set out in the March 2007 Budget.
Small businesses will gain £1bn in export guarantees from this January through the Export Credit Guarantee Department.
Small and medium-sized enterprises (SMEs) The Chancellor announced he would deliver £1bn of tax cuts through the Small Business Finance Scheme and £2bn of loan guarantees.
Lending to SMEs
Tax repayments There will be an extension of a scheme to help businesses that were previously profitable but are now making losses. Losses of up to £50,000 can be offset against profits made in the past three years rather than just one year.
Banks will receive an extra £4bn to help SMEs. The Chancellor said banks should follow the Royal Bank of Scotland’s example of not increasing charges to SMEs.
The Chancellor introduced an exemption for companies’ foreign dividends from tax in 2009, in an effort to allay concerns over proposed changes to taxation of foreign earnings that have led some companies to shift their tax domicile out of Britain.
Business tax repayments
SMEs will be allowed to spread business tax payments over a period to help to ease cashflow and credit constraints.
Empty commercial properties will be exempt from business rates from 2009/10 if the rateable value is less than £15,000.
There will be an extension of a scheme to help businesses that were previously profitable but are now making losses.
competitiveness Report highlights the need for improvements to the UK tax regime A report reviewing the competitiveness of London’s financial centre, produced for the Mayor of London, highlights the need for improvements to the UK tax regime if London is to compete on a level playing field with centres like Dublin and Luxembourg which have succeeded in attracting funds away from the UK. The investment
industry is already working with government on a package of tax measures designed to enhance the competitiveness of UK authorised funds and make the UK a more attractive domicile for funds. Changes will also be required to regulation, particularly in the light of the current financial crisis.
Addressing the challenges of the current economic situation will need to keep uppermost the objective of restoring investor confidence in the financial system and the markets, and consequent reform needs to be well targeted to that end, according to the report.
Splitting the sector All change for the UK equity income and growth sector Following a review of its UK Equity Income sector, the Investment Management Association (IMA) is splitting the sector and providing a new definition for the new IMA UK Equity Income and Growth sector. As a result of the review, IMA has: n removed from the UK Equity Income sector all funds within the sector that fail the yield test based on 12 months’ look-back as at 31 December 2008, but taking
into account final distributions if these are out of step with a fund’s calendar year end, and amend the definition accordingly; n created a new sector known as the UK Equity Income and Growth sector effective from 1 January 2009; n offer funds that fail to meet the definition of the UK Equity Income sector (based on the yield criterion) a home in the
new sector, permitting the retention of track records, if they meet the definition; n f unds in other sectors may apply to move to the new sector if the fund is able to demonstrate that it has complied with the definition on an on-going basis; track record retention will not be automatic. Sector changes formally became effective on 1 January 2009.
ISA RETURNS OF THE YEAR Sheltering your returns from tax
As we enter a New Year, the tax clock is ticking and the countdown to the end of the financial year on 5 April approaches with increased vigour. If appropriate to your situation, one way in which you could hold a wide range of investments and shelter your returns from tax is to take advantage of an Individual Savings Account (ISA). Within an ISA gains are tax free and there is no tax to pay on the income. (Since April 2004, the 10 per cent tax credit on UK dividends cannot be reclaimed, regardless of whether the shares are held directly or within a collective investment scheme.) You don’t have to mention ISAs on your tax return. Inside the ISA wrapper you can also switch your investments whenever you like, but this could possibly lead to a switching charge. Currently, you can invest invest up to £7,200 in this financial year, which runs from 6 April to 5 April the following year. Any UK resident over 18 can invest (over 16 for Cash ISAs).
From 6 April 2008, the ISA rules changed. Mini and Maxi ISAs were replaced with Cash ISAs and Stocks and Shares ISAs, and the annual allowance rose to £7,200. This means you can invest up to £7,200 in a Stocks and Shares ISA, or up to £3,600 in a Cash ISA with the balance (within the overall limit) in a Stocks and Shares ISA. Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investment can go down as well as up and you may not get back the full amount invested.
As we enter a New Year, the tax clock is ticking and the countdown to the end of the financial year on 5 April approaches with increased vigour.
If you use your allowance every year, ISAs offer you the chance to build your own personal tax haven. However, miss the deadline for a tax year and you lose that part of your ISA allowance forever. For more information, please contact us.
Content of the articles featured in this publication is for your general information and use only and is not intended to address your particular requirements or constitute a full and authoritative statement of the law. They should not be relied upon in their entirety and shall not be deemed to be, or constitute advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.
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the digital personal finance magazine for the UK, covering the Pre-Budget Report and the economic dowtown