HLFS Winter Newsletter – January 2017
When we look back at 2016, we will remember that it was dominated by two key political results: the decision for the UK to leave the European Union and Donald Trump winning the US election.
The uncertainty caused by these political events resulted in increased volatility in investment markets during parts of the year. However, since the third quarter of 2016 we have experienced a boost in investment returns as the post-Brexit-vote recovery rally continued across most stock markets around the globe. As a result, UK investment markets finished higher than expected at the end of the year, with investors enjoying strong returns for the calendar year.
As we look ahead to 2017, we may yet see the US Election result impact and there are also further uncertainties posed by political and economic events in Europe. Therefore, we expect market volatility will continue and, after a period of significant growth following the 2008 financial crisis, it is likely to prove difficult to generate these levels of returns going forward.
With this in mind, it is important to ensure that investments are held in a globally diversified portfolio spread over a variety of asset classes to help mitigate risks whilst still offering the potential to generate returns. Our core investment proposition is designed for this purpose, combining both passive and actively risk based managed funds. These portfolios now have a six-year track record, and many of our clients have benefited from growth in asset values without exposing their capital to unnecessary risk.
Please note that past performance is not necessarily a guide to the future and investments can fall in value as well as rise.
Those invested have also benefited from participation in our annual review process where we assess individual needs and circumstances, which will change over time. Our review service is designed to ensure that your finances and underlying investments are carefully managed in order to help you meet your financial goals.
The start of a new year is always a good time to review your finances, and we’ve taken the opportunity to remind you again of the importance of utilising your ISA and pension allowances before April.
New Year – an appropriate time to review your finances
The start of the year presents an appropriate time to review your finances and ensure that they are arranged appropriately to meet your needs and objectives.
With the tax year ending on the 5th April 2017, some of the most important areas to consider are making use of your tax efficient allowances:
The annual ISA allowance for 2016/17 is £15,240, which can be utilised in a Cash ISA, a Stocks & Shares ISA, or a combination of both.
An ISA shelters your money from income and capital gains tax, providing a tax efficient environment for your capital to be held.
It is worthwhile noting that from 6th April 2017, the ISA allowance will be increased to £20,000, offering the opportunity to hold a larger amount of your assets in a tax free environment.
Lifetime ISA (from April 2017)
The government is introducing a new Lifetime ISA (LISA) from 6th April 2017. This is a further ISA allowance that can be opened by savers from age 18 until they turn 40. The LISA is designed to help young people save flexibly for the long term, towards their first home, or for their retirement.
The contribution limit will be £4,000 per annum. This will be included in the individual’s overall £20,000 ISA allowance. The government will provide a 25% bonus on contributions at the end of each tax year. Individuals will be able to contribute to the LISA and receive the government bonus up until the point they reach age 50.
Individuals can withdraw from their LISA without penalty in two scenarios; to purchase their first home, with a value up to £450,000; or for retirement from age 60. An individual diagnosed as terminally ill can also withdraw their capital without penalty.
If an individual chooses to access their Lifetime ISA for any other reason they will lose out on the government bonuses added and they will also incur a charge of 5%. There are however further proposals currently being considered regarding the exit charge, and these will be clarified before the LISA is released.
Pensions offer significant tax benefits, allowing UK individuals to contribute the higher of £3,600 or 100% of their relevant earnings into a pension each year and receive tax relief. Capital accumulated within a pension also grows in a tax efficient environment.
Upon withdrawal, up to 25% of the fund can be withdrawn tax free with the remainder being taxable.
It is important however to consider the Annual Allowance when contributing to a pension. This limits the amount of contributions eligible for tax relief each year. This limit is currently £40,000, however, unused allowances from the previous three tax years can be carried forward if a larger contribution is required.
Rules introduced in April 2016 resulted in the Annual Allowance being tapered for high earners. Those with earnings in excess of £150,000 will suffer a reduction in their Annual Allowance of £1 for every £2 of earnings that exceeds £150,000, subject to a minimum Annual Allowance of £10,000.
Individuals affected by a reduction to their Annual Allowance may want to consider other tax efficient forms of saving such as Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS).
In addition, from 6th April 2016, the Lifetime Allowance was reduced to £1 million. The Lifetime Allowance places a limit on the amount of pension savings an individual can accumulate during their lifetime without incurring a tax charge. Any pension savings in excess of the Lifetime Allowance will be subject to a tax charge at the point of crystallising pension benefits.
There were two forms of Lifetime Allowance protection introduced in 2016 for individuals that may be affected by the reduction in the Lifetime Allowance, to help protect a higher individual Lifetime Allowance. An existing form of protection, Individual Protection 2014 can also still be applied for until 5th April 2017.
Please contact us if you require advice further advice towards your pension savings and the potential tax implications noted above.
Business Owners – have you considered the risks to your business
At Henderson Loggie Financial Services, one of the most important areas we feel business owners should consider is protecting themselves against the financial impact of death and serious illness.
The death or critical illness of a key employee or a co-owner can have a major impact on the business. It could lead to a fall in sales, the loss of a major contract and difficulty in repaying business loans. Without the cash to buy out a co-owner, the business could even end up in someone else’s hands.
Business owners may take steps to protect their businesses against major catastrophes and put together a business continuity plan to ensure its future if things go wrong. However, some owners may have given little thought to insuring against the loss of their most important business assets – themselves and their key employees.
Business protection is a type of insurance that helps protect a business against possible financial losses when illness or death affects the owners or their employees. By including business protection in a firm’s business plans, owners can help the business to survive and continue trading under seriously challenging circumstances.
We consider Business Protection as the protection of three key areas:
- Business Loan Protection – Helps a business pay any outstanding loan/debt, should a main Shareholder, Partner, Key Individual die or be diagnosed with a critical illness (if benefit chosen).
- Share Ownership Protection – Designed to provide the surviving business owners with the funds to purchase a deceased or critically ill Shareholder’s/Partner’s share of the business.
- Key Person Protection – Enables a business to insure itself against the financial loss it would suffer if a key person died or was diagnosed with a critical illness.
There are a range of insurance policies available to provide the necessary financial protection to businesses in the areas noted above. Business owners should ensure that they seek advice to determine an appropriate solution and level of cover to mitigate the risks that could impact their business.
Henderson Loggie Financial Services provides professional advice on arranging Business Protection policies to suit each individual business’s needs and requirements. If this is an area of advice that you require, please contact us.
Auto Enrolment – 3-year re-enrolment
Finally, whilst we are now in the last year of employers staging under the Auto Enrolment legislation, we are also entering the first of our SMEs re-enrolling at their 3-year anniversary.
This is the requirement, by law, to re-assess your workforce on a triennial basis, from your staging date. You may choose the actual date from any date that falls within a six-month window, starting three months before the third anniversary of your original staging date and ending three months from that anniversary. You must assess only the workers who have opted out or voluntarily ceased active membership of the scheme.
For employees who previously opted out of the workplace pension scheme, if they are eligible jobholders on the re-enrolment date, they will be enrolled into the workplace pension scheme and contributions deducted. Please note that there is no postponement at re-enrolment.
There are some exceptions which mean you won’t have to re-enrol workers, such as the member having opted out in the last 12 months, they are under note of dismissal, resignation or retirement, or a worker has informed you that they have relevant “protection” from HMRC in respect of pension savings in excess of the lifetime allowance.
You’ll also need to register your compliance again with the Regulator on their site, and they will issue penalty notices for non-compliance.
At this time, it may be a worthwhile exercise to review your workplace pension scheme to ensure that it remains fit for purpose.