HLFS Summer Newsletter – 2016

The first half of 2016 was certainly eventful and as we reach the end of summer, we thought it would be a good time to take stock of events in our first newsletter for some time.  We intend to issue newsletters periodically with comment on matters we hope you will find interesting covering, for example, investment market conditions, changes in pension and tax legislation, and financial planning tips and opportunities.

The Uncertainty of Brexit

In a year in which we expected to be talking about the most recent changes to pension legislation, new ISAs, changes to dividend taxation and perhaps even interest rates rises, our attention switched to the potential impact of the UK’s Referendum on European Union membership.  It is still too early to tell what the full implications of the result will be, and we expect a period of uncertainty that will undoubtedly impact on investment markets.

Whilst we understand that in times of uncertainty many investors will wish to consider liquidating longer term investments, there are very few alternatives to consider.  The recent reduction in base rates means that leaving cash on deposit will lose value in real terms, as a base rate of 0.25% is some 1.75% below the government’s long term inflation target.

It may take many years for the full political and economic ramifications of the referendum to play out as EU negotiations are complex, and financial markets are likely to remain volatile.  For example, it is likely that we will see a divergence in investment returns across asset classes as investments in domestically orientated UK and European companies are switched into those with more globally diversified earnings.   In this environment, a well-diversified and globally exposed portfolio, spread over a variety of assets classes and currencies, is likely to offer the best potential for capital protection while remaining invested for growth or income.

ISAs Subscription Rate and the Introduction of a Personal Saving Allowance

The subscription rate for ISAs remained at £15,240 for the current tax year, but will increase to £20,000 from 6th April 2017.  Remember ISAs are free of income tax and capital gains tax, and allowances can now be transferred to a surviving spouse.

ISAs have also been made more flexible as previously, if you needed to take money out of your ISA in the short term, you could not then replace it at a later date.  This has now changed and you can withdraw money and replace it, as long as this happens in the same tax year.  So for example, you could invest £15,240 in an ISA now, and if you had to take out money to help pay a major expense, this could be withdrawn and replaced prior to the end of the current tax year.

We expect Cash ISAs to become less popular following the introduction of a new personal savings allowance (PSA) from April 2016.  Basic rate taxpayers will now have a £1,000 personal savings allowance and interest up to that amount will be tax free.  For higher rate taxpayers, the allowance is reduced to £500, and additional taxpayers have no allowance.   Following the introduction of the PSA, all interest from bank and building society accounts will be paid gross without deduction of tax.  This means that if you can find a savings account that offers a reasonable rate of gross interest, there is no longer the same advantage to holding the account in an ISA where the interest generated is less than £1,000 for basic rate taxpayers.  Stocks and Shares ISAs however remain the most appropriate choice for the allocation of longer term investment funds.

Changes in Pension Legislation

In 2015, we witnessed significant changes in pension legislation with the introduction of Pension Freedom and Choice.  This introduced a greater amount of flexibility into the way in which registered pension scheme benefits could be accessed.  In 2016 we had a further cut in the lifetime allowance (LTA) for pensions, with the maximum limit for pensions savings reduced from £1.25 million to £1 million.  However, protection at the higher figure is possible and the new system for applying online for pension protection became available at the end of July.

In addition to the LTA allowance, there is an annual allowance (AA) that limits the maximum annual amount you can pay into a pension plan or accrue in benefits, if you are a member of a defined benefit pension scheme.  This is set at £40,000 a year, but is now reduced for high earners.  The tapering allowance was introduced in April 2016 and reduces allowances at a rate of £1 for every £2 of income for those with earnings in excess of £150,000.   The tapering will carry on until the AA allowance is down to £10,000.  This curtailment means that high earners may have to look elsewhere for investment vehicles.  We are therefore seeing an increase in more complex, but Revenue accepted, tax planning schemes such as Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS).

Whilst the figures mentioned for pension planning may seem high, more people are affected than it may appear, and it is important to ensure pension contributions and values are regularly reviewed to avoid any unwanted taxation in future.

On the death of a member it is now much easier to pass on unused pension funds to future generations.  As a consequence, we are seeing people changing their retirement strategy to include drawing down non pension assets during their lifetime.  This can lead to a reduction in tax paid on retirement income (or capital drawdown) and help reduce the impact of inheritance tax (IHT) on the Estate as pensions are normally held outside of the taxable estate.  However, it does mean that it is more important than ever to review pension arrangements and ensure the pension provider can facilitate the options available for the next generation and that appropriate beneficiary nominations are in place and regularly reviewed.

Our annual review process can help you with this and you should get in touch if you think you require guidance.

The New State Pension

The new State Pension is now in force following changes that came into effect in April of this year.  The amount of pension payable in the future will be calculated by reference to a flat rate set at £155.65 each week.  However, not everyone will get this amount.  It all depends on national insurance contributions.  To get the full amount, 35 years of full national insurance contributions is required and those who have already reached State Pension age will remain on the old rate, which has now increased to £115.95 per week.

It is possible to obtain confirmation of when you are entitled to State Pension and to obtain a forecast by either completing a form BR19 or requesting a forecast via the following link: –  https://www.gov.uk/check-state-pension

The Potential Impact of Inheritance Tax

Finally, something to look forward to for those concerned about the potential impact of inheritance tax (IHT).   The nil rate band has been at its current level of £325,000 now for 5 years.  This is the part of an estate where IHT is charged at 0%.  From April 2017 an additional nil rate band will be introduced intended to apply where an individual passes their main residence to a direct descendant on death.  The new residence nil rate band will start at £100,000 in 2017 and increase by £25,000 each year until it reaches £175,000 by April 2020.   We will cover this in more detail in a future newsletter, but it is a welcome addition that will potentially reduce the value of many estates below the threshold for IHT meaning more value can be passed on to the next generation.

We hope this newsletter has given you some food for thought and general guidance on investment markets and matters you should be considering as part of your wider financial plans.  Our intention is for future newsletters to be more specific and to highlight areas and opportunities that you should be aware of and discussing with your adviser.

We intend to issue future newsletters only by email. Please drop us an email at financialservices@hlca.co.uk to let us know that you are happy to be included for future newsletters, or to request that you are removed from our list.