In this month’s Vlog, Matthew provides updates on the market and the performance of the Buckingham Gate Portfolios. Matthew speaks more about so-called ‘transitory’ inflation and explains how we are going to approach registering our clients’ trusts. Matthew tells of the outcomes (or lack of) from the 2021 Budget announcement and lastly explains that we will be bringing you some more advanced financial planning ideas in future vlogs.
Care Fees Update
We have this week finally seen the much-hyped changes to care fees announced.
This is an issue that has been ignored and deferred by successive governments. There have been countless consultations and suggestions over the years, but none of them have really moved far off the starting line. But now we have a new care fees system.
I think most people will now be aware of the key points which are as follows:
The ‘full fees capital means test’ limit will be increased to £100,000. This means that if you have over £100,000 of capital assets (including the family home, unless it continues to be occupied by a partner, relative or dependent aged over 60), you will be responsible for your care fees in full.
There will also continue to be a lower limit of £20,000 below which assets will not be taken to fund care fees.
For those with assets between £20,000 and £100,000, there will be a partial contribution required towards care fees, with this increasing the closer you are to the £100,000 asset limit.
In addition to the above, there will remain a (very significant, but far less publicised) income based means test that says that if you have sufficient income to pay your own care fees (regardless of capital), then a contribution could still be required.
All of the above will be subject to a cap on what an individual will be expected to contribute to their care fees. The cap will initially be set at £86,000. Beyond this point, no individual will have to pay towards their care costs.
So far so good, however, as usual, we have been looking beyond the headlines to try and find some of the devil in the detail.
The most significant point not really being covered in the mainstream media is that the whole set of rules above only apply to your personal care costs, not your ‘hotel’ costs (‘hotel’ costs being the cost of staying in accommodation, food, utilities etc).
As such, the amount an individual could pay in their lifetime for how they would view their ‘care fees’ could well be much greater than the £86,000 cap when you factor in the ‘hotel costs’.
Now, to be clear, this has always been the case. Hotel costs have always been assessed separately from actual personal care fees, but people often don’t appreciate that there is this distinction.
As such, the new proposals are a welcome addition to the care fees system and at least provide some degree of certainty.
What is perhaps more interesting is that these proposals could well pave the way for insurers to re-enter the long-term care market and produce the first real insurance products for long-term care in several decades.
We will continue to monitor developments and will of course report on anything significant that becomes apparent in the months ahead.
National Insurance & Dividend Tax
In order to pay for the above, the government has introduced an additional 1.25% levy to be added to national insurance as an interim measure and then split out as essentially a third kind of tax on employment income.
Moving forward, you should see your income tax, national insurance and a ‘health and care premium’ on your payslips.
In addition, the dividend tax rates have also had 1.25% added, meaning the basic rate of dividend tax will rise from 7.5% to 8.75%. Dividends will still represent a tax efficient income source for most people, although of course these changes make them slightly less attractive.
What they also do is increase the relative attractiveness of capital gains as a form of ‘income’, especially when levied on shares and bonds, as this is charged at a basic rate of 10% and a maximum rate of 20%, even for higher rate taxpayers.
Finally, we do now also have a confirmed budget date of 27th October 2021. This budget will be particularly telling as the UK continues to recover from the Covid pandemic.
We will of course continue to monitor any proposed tax changes and will report to clients anything that might be relevant to their financial planning.
– Market Update
– Buckingham Gate Portfolio Performance
– Budget Outcomes
– Tax Day Outcomes
The Chancellor has just finished presenting his budget speech to the house. The Buckingham Gate team is now busy analysing the budget document in detail and searching for any devil in the details. We will report back on any significant findings that become clear in the coming days, however, as expected, today’s budget was rather benign from a personal financial planning point of view.
– Market Update
– Budget/Tax Changes Looking Likely
– Budget/Tax Changes Looking Unlikely
– Tax Consultations
– ‘In The News’
As budget day approaches, the volume of rumour, speculation and mistruth is stepping up in traditional fashion.
Of course, there are the old favourites (you know, the things that the media report ‘might’ happen in the budget every single year, but never seem to actually occur) such as the removal of the 25% tax-free cash on pensions and restrictions to pension tax relief (for what it’s worth, I don’t believe we are likely to see either at this coming budget).
It is refreshing to open an update with at least a paragraph or two not on Coronavirus (but more on that in a moment). We are pleased to report that we have completed our analysis of the Spring 2020 Budget document and the impact on personal financial planning is incredibly minimal. Except for some increases to National Insurance thresholds and some tweaks to fringe tax benefits such as Entrepreneurs Relief, there is little in the budget that will have any effect on current planning.
Perhaps if there is one good thing to come from the present situation, it is that we have yet another fairly benign budget from a personal financial planning point of view and this means that the current fairly generous personal tax regime will be maintained.
Back to the virus now and it is fair to say that the market is searching for direction. Headlines from yesterday reported some of the worst stock market falls since 1987. It is interesting to observe that at the time of writing this (which I will quote as 12:28pm on Friday 13th March given the minute-by-minute changes we are seeing) the FTSE 100 is up around 8.7%, effectively re-gaining much of yesterday’s loss.
Assuming it closes at this level (and there is a whole 4 hours for things to change before then!), don’t be surprised if this barely gets a mention in the media, despite the huge reports on falls of a similar magnitude yesterday. This only goes to show just how volatile things are at the moment and how rash decisions can have an impact on your wealth over the long term. The current volatility is almost entirely driven by emotion and not logic. There is almost no conceivable way that the long-term intrinsic value (over the next 30 years) of all of the worlds great companies (think Apple, Unilever, HSBC, General Motors etc) fell by 10% yesterday only to grow by 10% today!
Having consulted with our partners at Square Mile again, the view is now that most markets are starting to offer very good value and there are some real opportunities to purchase the worlds great companies at a significant discount versus where we were just 3 short weeks ago.
A couple of weeks ago, I attended the latest Personal Finance Society (PFS) Regional Conference, and as the Professional Qualifications Officer for Kent, I presented some slides to other financial professionals on the initiative by the PFS for members to provide pro bono financial education sessions within local secondary schools.
The content is in the form of a board game and looks to provide students with tips on understanding investment risk and financial budgeting, but for me the most important objective is helping young people to avoid financial scams. It reminded me of an article that I’d read on the BBC website a couple of days earlier about London Capital & Finance which went into administration after taking £236 million from investors.
Their marketing campaign targeted first-time investors with promises of fixed interest returns of 8% from secure ISA’s and would spread investment risk over hundreds of companies. The reality was that 25% of the investments made were paid as commission to the marketing agent, and then funds were lent to a total of 12 companies – four of which had never filed accounts and nine were less than three years old!
The financial crisis of 2008 showed that even well-known and reputable financial firms are not immune from the perils of administration, but in the current low interest rate environment, a guaranteed investment offering a return of four times the best Cash ISA rate on the market would be treated with scepticism by the majority of experienced investors.
The government have introduced incentives such as Junior ISA’s and automatic enrolment to encourage younger people to start saving earlier in life, but it is important that we educate them on managing money responsibly. For those children fortunate enough to have parents and/or grandparents funding Junior ISA contributions, they will take over sole responsibility for the management of the account on their 18thbirthday. What’s to stop them investing in the scheme they saw on social media promising double digit returns, and looks so much more interesting than their existing investment?
I’ve done a number of surgeries to talk to people about the pension benefits offered by their employer, and some of the people I speak to are just out of school or university. For the majority this is probably the first conversation they have ever had about pension provision, and while there are those who are lucky enough to have parents who they can turn to for help, I’ve met young people who struggle to understand how deductions from payroll such as Income Tax and National Insurance operate.
Matt wrote a blog a couple of months ago about our intention to host workshops to provide the tools the next generation needs to be successful financially, and while the goal of any investment is to make some money, it is probably more important to teach the lesson of how not to lose it all.
One of the more predictable elements of the summer Budget was the introduction of a new ‘Property Nil Rate Band’, which will mean that eventually individuals can pass on a further £175,000 tax free to their direct dependents, in addition to the current £325,000 nil rate band that exists at present.
As with all new legislation however, there are some things to be aware of.
First of all, the new allowance will be introduced in tranches as follows:
- 2017/18 – £100,000
- 2018/19 – £125,000
- 2019/20 – £150,000
- 2020/21 – £175,000
These amounts are given with reference to the date of death of the deceased.
In addition, the new Nil Rate Band will only apply to a family home (i.e your main residence), passed onto direct descendants, which in the legislation are taken to mean children and grandchildren. There is some further consultation on where the property could be left to certain types of trust.
As with all new legislation, it is important to review you current plans to make sure you get the full benefit. Any older will that include gifts into trust, may not be eligible to claim the new nil rate band, and this could also be true for those who do not own a home, or who choose to leave their home to people not considered to be direct descendants.
We will be covering the new changes in detail during our updated Estate Planning Seminars, running from September onwards. You find out more information here.