Budget 2014: Your ISA is now NISA

The chancellor has just completed his budget speech and one of the key announcements was a reform to the ISA rules to make ISA savings simpler and more flexible. The government has decided to replace the ISA with the New ISA or NISA as it is referred to in the budget document. I wonder if this name will stick!

This change is positive in all senses and will surely encourage savings in the UK.

The changes in summary:

  • The ISA allowance will increase to £15,000 per annum from July this year.
  • The stocks and shares and cash limits will be merged into one.
  • Transfers will be permitted from stocks and shares ISA’s into cash ISA’s for the first time.
  • The junior ISA limit will increase to £4000 per annum.

All in all this simplification is great news for UK savers and investors and can do nothing to harm savings culture in the UK. When considered in tandem with the pension reforms announced today, it will be more important then ever to take a holistic view on retirement planning, as i alluded to in my blog a couple of months ago.

Budget 2014 – As It Happened

1:32pm – We are just analysing the details but the chancellor also announced that the 55% tax on pension savings taken as a lump sum will be reduced to fall in line with income tax rates.

1:30pm – These announcements would seem to spell the end of the ‘default’ option of purchasing an annuity with your pension pot on retirement. This is probably the most significant change to the pension and retirement savings landscape in a generation.

1:29pm – Budget announcement over – All in all an impressive package of measures for savers and investments. Im struggling to see where the point of attack from the other side of the house is!

1:26pm – HUGE pension tax changes. Flexible drawdown limit reduced to £12,000, capped drawdown limit increased to 150% of GAD, £10k small pot limit and advice provided for retirement. Too much to detail here. Further analysis later.

1:21pm – Big news – A new single ISA will merge the stocks and shares and cash ISA’s and the limit will increase to £15,000 per annum. Great news for savers and investors!

1:18pm – The personal allowance will rise to £10,500 in April 2015 as expected. We are still waiting for the big surprise!

1:16pm – Tobacco duty will continue to rise at 2% above inflation, 1p off a pint of beer, duty on whisky and other spirits has been frozen.

1:15pm – Good news for bingo fans – Bingo duty reduced to 10%!

1:14pm – Fuel duty frozen once again. Gambling duty increased.

1:13pm – “We want to help hard working people keep more of what they earn and more of what they save”. I think this could be the personal finance part!

1:08pm – The seed enterprise investment scheme or ‘SEIS’ will be made a permanent feature of the UK investment landscape. This scheme allows individuals to invest in small start up businesses and receive valuable tax relief.

1:05pm – An additional £140m for repairs to flood defences and £200m for repairs to roads following the harsh winter.

1:03pm – As already announced, the ‘help-to-buy’ mortgage and housing scheme will be extended until 2020.

1:02pm – From next year passengers on long haul flights will pay a lower rate of air passenger duty. For those of us lucky enough to have a private jet, taxes will rise!

12:59pm – Stamp duty will now be 15% for all residential properties worth over £500,000 purchased through a “corporate envelope”. This change takes effect from midnight tonight.

12:57pm – Confirmation that inheritance tax will not apply to the estates of military personnel who die in service.

12:56pm – Fines from LIBOR manipulation will continue to be directed towards military and emergency charities.

12:54pm – It is worth noting that this does not impact the widely accepted tax mitigation schemes such as conventional trusts, ISA’s and pensions etc.

12:53pm – Government is renewing its commitment to tackling tax avoidance schemes and the number of registered tax avoidance schemes has fallen by 50%. People using sophisticated or controversial tax avoidance schemes will be required to pay tax up front.

12:48pm – Growth is forecast to be around 2.5% for each of the next 5 years. This type of consistent growth would be good news for the UK economy.

12:46pm – Mr Osborne is now doing the PR for his new 12-sided £1 coin.

12:42pm – Some rather scary budget deficit numbers being banded around. Just as a reminder, the budget deficit is the amount the UK overspends each year, not to be confused with our national debt which stands at something close to £1.4 trillion.

12:41pm – The OBR has reduced its forecast for the budget deficit in every year covered. 18/19 is predicted to show a small budget surplus.

12:39pm – “No major economy growing faster than the UK”. Can you imagine having heard that a year ago?

12:35pm – “Hard working people will keep more of what they save”. Definitely seems to be a hint of some sort of reduction in savings taxes –  capital gains tax perhaps?

12:34pm – Apparently if you are “a maker, a doer or a saver, this budget will be for you”.

12:30pm – Mr Osborne has ‘taken the stand’. “The economy is recovering faster than expected”

12:27pm – The chancellor is just about to make his annual announcement and if the BBC news coverage is anything to go by he has a “surprise” for us. We will be live blogging throughout the budget announcement with updates on the key announcements and will be providing detailed analysis and reaction throughout the day.

Budget 2014: Uncertainty Remains

In contrast to the previous 2 budgets, with one hour to go until the budget speech, there is still a high degree of speculation about what Mr Osborne’s red box might contain.

There is talk of a higher than expected personal allowance and some significant changes to pensions tax allowances.

We will be watching the budget announcement as it happens and will be providing updates and analysis throughout the day. Stay tuned for more.

5 Days To Go!

In 5 days time George Osborne will deliver his 5th budget as chancellor of the exchequer. If the leaks and predictions are anything to go by (which they seem to be if the past two years are anything to go by) then this budget could have significant impacts from a financial planning perspective.

We are all too aware of the fragile state of the economic recovery and as such we expect this budget to be “cost neutral”. That is, any tax cuts or spending increases, will have to be paid for from increased takings elsewhere.

There is speculation that the chancellor may announce yet another increase to the state pension age (as I alluded to in my previous blog), as well as making yet further reductions to the annual or lifetime pensions allowances.

Add in the fact that there could well be a significant change to income tax legislation, and a reform of the capital gains tax rules, and we have a budget that anyone who is interested in financial planning will want to keep a close eye on.

We will be watching the budget and blogging live as it happens. We will also be preparing a short guide to the major announcements and providing specific advice to clients over the coming months.

If you would like to find out how the budget will impact on your finances, please get in touch to arrange your discovery meeting, provided at our expense,

Eliminating An Allowance

At present the amount of pension savings that can be accumulated by an individual is limited by both an “annual allowance” and a “lifetime allowance”.

As the names would suggest the “annual allowance” is a limit on the amount of tax advantaged pension savings and individual can make in a single “pension input period”, not to be confused with the tax year. This allowance used to be £255,000 per annum, which meant that it was not a concern for all but the most wealthy pension savers. Recent legislation has sought to reduce this allowance though, and on 6th April this year it will reduce to £40,000 per annum.

The “lifetime allowance” restricts the amount of pension savings one can accumulate in their lifetime. Any excess over the allowance carries a rather severe 55% tax charge. Like its annual counterpart, the lifetime allowance has been on the chopping block in recent budgets, falling from a previous £1.8m to £1.25m on 6th April 2014.

Some commentators are predicting that the government will announce the abolition of the lifetime allowance in the 2014 budget (at least for some individuals). This is one prediction which I do hope turns into reality.

It seems counterintuitive to limit an individuals lifetime pension savings, which are influenced by market growth and other factors over which they have no control, when we are already setting a limit on the annual pension input amount.

Surely it makes far more sense to simply limit the annual level of contributions, and stop taxing people on the growth in their pension funds. After years of increasingly complex pension legislation, any move to simplify things is surely a step in the right direction.

If you would like assistance with your own pension provision, please get in touch to arrange your discovery meeting, provided at our expense.

The £10,000 Pot Plan

Rumours have been circulating amongst the financial press today that the chancellor will make an announcement in the budget to increase the previous “small pots” limit of £2,000 to £10,000 or even £15,000!

The “small pots” legislation allows people to take the proceeds of their pension funds as a cash lump sum if the total value of any single plan is under £2000. This prevents people from having to purchase an annuity with such a small pension fund, which in todays’ market, would secure an income of only around £8 per month.

By taking the pension as a lump sum, you avoid the fees and charges usually associated with an annuity, which would be disproportionate for such a small fund.

If the rumours are to be believed, the small pots limit is to be increased to £10,000 or more. This would be great for people who have a single small pension fund, as an annuity rarely represents good value for people in this situation.

The risk is however, that people will be tempted to take multiple pension pots, all as a lump sum, and thus deprive themselves of a lifetime income.

It is easy to transfer pension pots from one provider to another and this may be the best option for those of us who have accumulated several smaller pensions over our lifetime.

By combining the value of your pension funds you will benefit from economies of scale when making a retirement income purchase and the fees involved might seem a bit more proportionate.

What represents the best option will depend very much on your individual circumstances, retirement goals and attitude to risk. Taking high quality advice is key at this “at retirement” stage where many life long, irreversible decisions will be taken.

If you would like assistance in managing your retirement income, please get in touch to arrange your discovery meeting, provided at our expense.

Could You Spare 1/3rd Of Your Time?

I have recently finished work on a set of new investment portfolios for our clients. This is arguably my most important task as a financial planner because this is where I recommend my clients invest their money. It is a large responsibility, and one that I take extremely seriously.

This process has taken almost a whole month of solid work. I would approximate 130 hours in total. This is the amount of time required to conduct proper research, analysis and due diligence on the daunting amount of investment options available in the marketplace. What’s more, this is a process we will undertake every 3 months to ensure we keep up to speed with the fast changing world of investments.

Our process focuses on finding funds and investments that will meet our clients’ objectives, represent good value for money and that don’t expose our clients’ funds to excessive risk (however some risk is required in order to generate above average returns).

We repeat this process once every 3 months to ensure that our investment portfolios remain suitable for our clients’ needs. All in all then, this investment process takes up around 1/3 of my working time and even then we rely on external research and analysis conducted by experts in various fields to assist us in our endeavours.

While some people can and do “self invest”, I would suggest that they are unable to dedicate 1/3rd of their working life to such tasks. While some people feel confident taking this approach, most would feel more comfortable knowing that they have left the selection of their investments to an experienced professional, who can dedicate 1/3rd of their time to researching suitable investments and protecting their clients money.

If you would like to know more about our investment process or to find out how we could help manage your portfolio, please get in touch to request your discovery meeting, provided at our expense.

Should Planning Be Compulsory?

In an interview with the Financial Times, Legal & General chief executive Nigel Wilson has called for several financial products to become compulsory, namely income protection and long term care insurance, in addition to the already launched auto enrolment pension system.

The case made is that the state cannot be expected to continue to provide for us in the event that we fall ill or require long term nursing care. Wilson suggests that insurance for these needs should be compulsory, however perhaps this is a bit too much of a one-size-fits-all approach.

While I agree that most individuals do require further planning and protection in these areas, is compulsion really the solution? It would seem that if we are going to force people to take out these insurance products, then an increase in taxation and state provision would be the simplest, if not the most desirable solution.

Many people certainly need to do more to protect themselves in the event of a spell of time off work, or the need for long term nursing care, however, there are many ways that this protection can be achieved.

One way for example, is to hold a sufficiently large emergency fund in cash and other investments. The fortunate people who already have this type of provision in place would justifiably feel a little aggrieved if they were forced to purchase insurance to cover a need that they have already taken care of.

Income protection and certainly long term care insurance are complex products with myriad different options. Surely it would be better for individuals to have a say in the type (and cost) of the cover that they require, rather than trying to fit all individuals into one mass solution.

How To Control Your Inner Pigeon

An interesting article on IFA online today likened investors to pigeons. While some might say that this is a little offensive, the similarities can be stark in some cases, when it comes to investing.

The premise of the report is an experiment in which pigeons were given a red light and a green light to peck on. The green light would dispense food 60% of the time and the red light would only give a morsel of food 40% of the time.

Now it seems obvious that the pigeon should continuously peck the green light, as this is the one that will distribute food most often. What the pigeons did however, was try to “time” their pecks and they would peck the green light 60% of the time and the red 40%.

What they were in effect doing was trying to “time the market”, thinking that they could correctly select which light was going to give food at any given time. It goes without saying that this was not a good strategy and the pigeon would have been more successful by sticking to the green light alone.

Investment markets are cannily similar to the above example and markets post gains in around 60% of months and losses 40% of the time. The issue is knowing which months will be winners and which losers. Some people will try to “time” their entry and exits from markets to take advantage of its ups and downs, however this is a strategy most likely destined for failure.

Multiple studies have shown that long term “buy and hold” investors are far more likely to be successful than short term traders. While there is an argument for small “tactical” allocations into different markets to take advantage of opportunities, the general position within a portfolio should be long term holdings.

As investors we need to “control our inner pigeon” and make logical, long term investment decisions, otherwise we will find ourselves pecking more lights than we need to and receiving less food!

A Light Bulb Moment With Cash Flow Modelling

On paper a cash-flow forecast seems quite simple really, it’s a summary of your expenditure, both now and forecast into the future, along with an idea of the income and capital that can be used to meet that expenditure. The net result of the exercise is a good idea of how long your money will last. This is something that clients ask us about all the time.

The data that drives this plan, however, is very complex and requires a significant investment of time and effort on our part to get right. We will need to establish suitable assumptions for inflation, asset class performance and earnings growth as well as considering the impact of unexpected market events on the plan.

The foundation for any good cash-flow model is the “base plan”. This is what your financial future could look like based on todays position and known future income and outgoings.

Following the completion of this base plan, we can then consider various “what if” scenarios. These allow us to model the impact that different courses of action will have on a clients’ overall financial plan.

For example, if the initial (base plan) cash-flow model had identified that a clients assets would only last until the age of 76, we could consider the impact that downsizing their home would have on the picture. This might generate sufficient funds to last until the age of 80. Following this, we could then calculate the investment return that a client would require to ensure that their funds would last until the age of 90, and then make an appropriate investment recommendation to make this a reality.

A client had a real light-bulb moment when we were completing his cash-flow model a few months back. The gentlemen in question was desperate to retire in 6 years time at the age of 68, but was unsure as to whether this was realistic based on his current level of investments and pension provision.

We put together a detailed cash-flow projection for him which not only showed that he had sufficient funds to support his desired retirement lifestyle right now, but also that he would be able to sustain that level of expenditure until the age of 107!

Based on the outcome of our cash-flow modelling the client felt secure enough to take an early retirement, a whole 6 years before he had planned. He is very much looking forward to spending this time with his grandchildren. He has also now gained the confidence to start to pass down some of his wealth to help fund their education.

The output of cash-flow modelling may just look like a fancy graph, but it is fantastic lifestyle outcomes like this that make it so much more than that! Cash-flow modelling is, in fact, a powerful, enlightening, life changing tool.