Topic: Pensions

Care Fees Update, National Insurance & Dividend Tax & Budget Date

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.

Budget Date

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.

What’s the Difference?: ‘Green’ Investing

Financial planning is an industry that tries to make the complicated more simple but I always tend to find that it fails to do that in the realm of investing sustainably. In writing this article I had to consider what to put in my title: green, ethical, sustainable, responsible, socially responsible, ESG, impact, thematic… the list goes on! How then can we go about breaking down the differences to make it easier for everyone to understand and more importantly: to provide solutions in line with people’s views.

Lies, Damn Lies and Speculation

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).

Top Rated Adviser’s 2020

This month two Buckingham Gate Chartered Financial Planners have made it into VouchedFor’s Top Rated Adviser Guide for 2020.

The guide is distributed nationally in The Times and digitally through the Telegraph’s website and so this is a great achievement that Buckingham Gate are tremendously proud of.

Congratulations Matthew Smith and Peter Ditchburn for receiving such well-deserved recognition for the fantastic advice you provide to your clients.

What makes their inclusion in the guide so much more special, is knowing that it was thanks to their lovely clients for leaving such powerful reviews on VouchedFor.

VouchedFor is a leading review site for Financial Advisers and helps those looking for advice, find the right adviser for them.

Our unique combination of expertise, makes us a one stop shop for your retirement, investment and estate planning needs.

Matthew and Peter would like to say a huge thank you to their clients for taking the time to leave a review, it really means a lot to them.

If you’re looking for financial advice, you would definitely be in good hands with these two!

Buckingham Gate Portfolio Review – December 2019

Lindsell Train UK Equity : The importance of liquidity

The demise of the Woodford Equity Income fund has shown just how important it is for a fund to be able to manage it’s outflows. For those who need reminding, the fund had suffered from a run of redemption’s over a period of time and was suspended in early June when it was unable to meet the request from Kent County Council to withdraw its investment of circa £250 million in the fund.

The reputational damage incurred has since led to the decision to remove Neil Woodford as manager of the fund in October and an announcement that the process of winding up the fund would begin in January 2020. This leaves the reputation of Neil Woodford, once considered as one of the most successful fund managers during his tenure with Invesco Perpetual, in tatters and seems very unlikely that he will ever recover from this and return to a position where he is trusted to manage other people’s money.

The fallout from the implosion of this fund has seen analysts much more focused on liquidity risk than ever before, and one of the casualties of this enhanced inspection has been the Lindsell Train UK Equity fund. Following our latest portfolio review in early November, Square Mile have taken the decision to downgrade the fund over liquidity concerns and it was removed from all of the Buckingham Gate portfolios on the 18th November 2019 and replaced with the Liontrust Special Situations fund.

The Lindell Train UK Equity fund has long been considered one of the most successful UK Equity funds, and under the management of Nick Train since it’s inception in July 2006, has generated a return of 377% compared to 119% from the FTSE All Share over the same period. However, performance over the last six months has been poor, and the fund has seen significant withdrawals over recent months with September seeing its largest ever monthly outflow of £374 million. While these withdrawals can be explained by a lack of appetite of investors for UK equity markets as a whole due to Brexit etc, the level of withdrawals and the structure of the Lindsell Train fund are causes of concern.

While there are a great deal of differences in the investment approaches adopted by Neil Woodford and Nick Train, there are similarities in that they both have the courage of their convictions in choosing the companies that they invest in. Nick Train’s investment process has been characterised by a low turnover approach and the ability to invest heavily in companies that he believes in. This highly concentrated portfolio approach has been one of the main reasons for his success, but also has the potential to be his downfall.

Square Mile’s analysts are very concerned that the large concentration of assets in the fund’s top 10 holdings could see the fund struggle to sell these at a cost effective price should significant outflows persist.

It is important to reiterate that Square Mile have no immediate concerns about the ongoing viability of the fund, and it has consistently met its performance objectives and redemption requests. However, the fall from grace of the Woodford Equity Income fund has made analysts very mindful of history repeating itself and are keen to look at other investment strategies that may work better in current market conditions.

There is absolutely no way of telling if this will be a good or bad decision for the portfolios in the future, but it is clear that Square Mile are very conscious of avoiding the trap that what has worked in the past will continue to work in the future.

If you have any questions on the above, please do not hesitate to get in touch with us by calling 020 3478 2160 or emailing [email protected]

The Perfect Week In Retirement

When we work with clients on their retirement planning, we often ask them to complete an exercise we call the ‘perfect week’.

In this exercise, clients are asked to map out what the perfect week looks like for them in retirement. We create a grid with the days of the week along the top and we divide each day into an AM, PM and evening slot, making a total of 21 ‘slots’ to fill for the week.

Most clients find this exercise fairly simple. Most of us have a pretty good idea about what we would like to do for a week in the ideal world.

Most people will build in some form of travel (perhaps spending the whole of their perfect week on holiday). There will often be meals out with family and friends and ‘experience’ activities like going to the theatre or sailing.

This exercise is incredibly valuable, but it is not the full story.

Retirement is about so much more than just a single week.

As such, we then ask clients to think about repeating this exercise 52 times for each week in the year (to be clear, this is a theoretical exercise – we don’t ask people to actually fill in 52 perfect week sheets).

At this point, people are often a little stuck. It is really easy to visualise a single week or even two or three weeks, but planning out a whole year is a bit harder.

Most people don’t want to (or couldn’t afford to) be on holiday all of the time, so some more thought is required to map out a year.

Once people have given some thought to the 1-year picture, we then ask them to repeat this exercise 30 or 40 more times. This is because there is now a very real possibility that retirement could last 30, 40 or dare I say 50 years for some people.

Thats a total of between 1560 (30 years) and 2600 (50 years) weeks. That’s a long time to plan for.

But plan for it we must. Research has shown that those people who spend significant time planning their retirement are quantifiably happier when they actually do retire than people who have done very little or no planning.

The irony here is that the average American (and one assumes the average person in the UK also) spends longer planning a 2 week holiday than they do a 30 year retirement!

If we are to live a long, and more importantly happy, retirement, we really must give retirement planning the time it deserves.

 

The New Science Of Spending

In the good old days, retirement was simple.

You worked for 30 years with the same employer, received your gold watch for long service and then retired with a 2/3rds final salary pension – what could be more straight forward!

Nowadays, things are a little more complex.

We don’t tend to work for the same employer. Gone are the days of the final salary pension, leaving individuals to take more responsibility for their own retirement income. This retirement income will often come in many forms. Gone are the days of a single employer final salary pension that was completely automatic (no thought required).

Now we often work for 5 or more employers, collect various personal pension plans, company pensions, ISA’s and other savings vehicles for our retirement.

All of this needs far more management and input than has previously been the case. We no longer have the automated final salary pension where your retirement income was simply dictated by your final salary and length of service.

Now we have decisions on how much to pay in, what investment funds to choose, how much tax free cash to take and so on.

Now, the new auto-enrolment legislation has gone a small way to automating the pension system again, but most people acknowledge that this is just a sticking plaster and much more will need to be done to see the population at large enjoy a prosperous retirement.

The psychological shift

Perhaps the biggest shift (and one that people are yet to fully get their head around) is the psychological shift from an accumulation to a de-cumulation mindset when people retire.

Back in the days of fixed income final salary pensions, you didn’t really have to worry about this. You never accumulated a pot of money in the first place, you simply earned membership in the pension scheme which gave entitlement to an income in retirement.

At retirement that income turned on and you then had a nice monthly deposit into your bank account.

In the new world of pension freedoms, people will spend 20, 30, 40 or dare I say perhaps 50 years accumulating a pot of money. All of a sudden, when they retire, they then need to start de-cumulating (i.e. spending) that money.

The problem is that this is not an easy shift to make

When you have spent a lifetime saving money and building up your nest egg, it can be very distressing to see it start to fall in value.

Various studies have shown that in the investment markets, human beings feel the pain of loss about twice as strongly as the pleasure of gain.

I suspect that the same psychological forces are at work when we start to spend down our nest-egg – it hurts!

This often results in people holding back on their retirement spending plans because they simply don’t want to see the value of their pot fall. But this can lead to some real problems.

Occasionally we meet people who are living on a shoestring, despite having 7 (and sometimes 8) figure retirement portfolios and this is all because they don’t want to see the value of their precious nest egg go down.

But go down it must if we are to enjoy a great retirement – indeed, one must ask the question – if you wont spend the money in retirement, when exactly will you spend it?