ontrak Financial Planning

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in my glass

Are your family going to benefit from a £140,000 Inheritance Tax reduction?

Back in the summer budget of 2015 a new residence nil rate band (RNRB) was introduced which has been designed to exempt from Inheritance Tax (IHT) family homes up to the value of £1 million. The Bill has passed through Parliament and the new rules are due to come into effect from April.

The eye catching headline of a new £1 million IHT free allowance is not as simple as it sounds. The rules are complex. However, they do provide opportunities to reduce the IHT burden in the right circumstances.

The RNRB, which can apply on a person’s death, will start at £100,000 for 2017/18. It will then increase during the next three tax years by £25,000 per annum, until it reaches £175,000 in tax year 2020/21.

Like the standard nil rate band of £325,000, the RNRB will be transferable between spouses if unused on first death. This means that where none of the standard rate band or RNRB is used on the first death, and if the second death occurs after 6 April 2020, married couples with a main residence worth at least £350,000 will be able to potentially leave a total estate of £1 million before any IHT is payable.

This is good news but there are several pitfalls for the unwary, and the main ones are covered below.

  • The RNRB will only be available if the main residence passes to children (including stepchildren) or grandchildren; and or surviving spouses of those children/grandchildren. Property left to a discretionary trust will not qualify for the RNRB even if all the beneficiaries of the trust are children/grandchildren.
  • There are some trusts that do qualify – often referred to as immediate post death interest and absolute trusts – providing the beneficiary is a spouse, child or grandchild.
  • Care needs to be taken when deciding the age at which children inherit the main residence as any entitlement beyond the age of 25 is likely to render the estate ineligible for the RNRB.
  • The RNRB is reduced by £1 for every £2 if the deceased’s net estate exceeds £2m. Net estate means everything the deceased is beneficially entitled to after deducting all liabilities such as loans. It is important to note that property that qualifies for business property relief and agricultural relief is included in the estate for this purpose. Pensions are excluded as they do not form part of someone’s estate.Tapering will apply to reduce any transferable RNRB where the estate of the first to die exceeds £2m. For married couples, if the estate on the second death is sufficiently large, both the RNRB of the survivor and any transferable amount could be lost altogether.
  • For married couples who are leaving everything to the spouse on first death, the practical effect of this is that in the 2017/18 tax year the RNRB will be lost altogether on second death where the estate exceeds £2.4m, rising to £2.7m from April 2020.

Considerations to preserve entitlement to the RNRB could include:

  • For married couples there is the option, where appropriate, to transfer assets between each other to reduce each individual’s estate to below £2m.
  • Leaving a share of the main residence to children or a discretionary trust on first death; or other assets up to the value of the standard nil rate band (£325,000). The RNRB will not be used and will be available for transfer to the surviving spouse.
  • Making lifetime gifts of assets. There is no requirement to survive seven years so there is scope to make gifts even a short time before death and reduce the net estate to a level where the RNRB will not be lost.

Those who have downsized or disposed of their property before death will not lose out on the RNRB, providing there are other assets in the estate that are broadly equal to the lost RNRB and are inherited by children or grandchildren.

While the RNRB will help people to reduce their IHT liability who are planning to leave a main residence to direct descendants, it is important they are informed of the ways they can maximise its use and not take action (or inaction) unwittingly that may result in it being lost. The starting point should be to review wills made before the changes were announced to check whether they are tax efficient.

For wealthy individuals it is unlikely their IHT liability will disappear, so other planning will still be necessary.

What’s going to be in your glass?

When choosing wines for Christmas Day my view is not to labour too long about this and just enjoy the experience of buying wine.

I do think sparkling wine is a winner to kick start proceedings. There is a wide range of choice here from Cava, Prosecco up to top end Champagne. My preference is for Champagne and I will be popping the cork off one of my favourites; Louis Roederer Brut NV. From the maker of Cristal this is a really classy Champagne with a rich complexity that you rarely find in other non vintage Champagnes. Although it is more expensive than most others I think you get a bigger bang for your bucks!

To follow I have chosen a Macon Fuisse from Domaine Cordier. They makes top class wines (I think I have tried most of them!) and they are a great introduction to the charm of white Burgundy and much kinder on the wallet compared to the more illustrious names in the region. This wine has good depth and body (which it needs to have after the fizz) and I think would go well with turkey for those who prefer white over red.

For me, it is definitely red with turkey. This is one of the few times of the year when I drink claret because I like to go for something with a bit of bottle age, which can be harder to find from other regions. I have chosen Chateau Moulin a Vent (not to be confused with the village cru in Beaujolais). I have yet to try this wine but have been informed it is drinking really well and is from the much acclaimed 2010 vintage.

What is to follow is yet to be decided – so an excuse to pay a visit to the wine shop again! With Christmas pudding I think late harvest Pinot Gris works really well if your preference is for something with a sweet, intense style. This is the same grape as the ubiquitous Pinot Grigio but worlds apart in style and quality. There are some really good examples from Austria and Germany which can be found in specialist wine shops.

A quirky lighter alternative is Moscato d’Asti. This is a sparkling wine made from the muscat grape. Off dry in style, it is light and frothing and very moreish.

If there is any room for cheese Port is always hard to resist or you could just continue with the dessert wine. I find the Late Bottle Vintage Ports offer good value for money and if you prefer a lighter style with more bottle age then a 10 or 20 year old aged Tawny would fit the bill. If you feel in the mood for treating yourself then a Hungarian Tokaji would be a great choice – liquid gold in a glass!

Whichever wines you decide to drink – enjoy!

This Book Could Change Your Life!

enoughTime is going quicker and quicker as each year passes. We are getting short of time and most people need to lift their heads out of the day to day stuff and reflect. It’s all too easy to get wrapped up in the ‘busy, busy, busy’ of life and lose focus on the things that are important.

In recognising this, Paul Armson, respected peer and friend, has created a book called Enough? How Much Money Do You Need For The Rest Of Your Life? It is quite hard hitting at first but sends out a very powerful message throughout.

It all comes down to a simple question. How much money is enough?

It is a wake up call for people who maybe trapped in the noise and complexities of everyday life; and haven’t undertaken any financial planning. I myself have found it a very powerful reminder that life is not a rehearsal.

The book introduces the concept of  Lifestyle Financial Planning and uses real client stories to set it apart from traditional financial advice; showing the incredibly positive impact proper financial planning can have when a strategy is in place towards achieving a desired lifestyle; before it is too late.

It’s only when you know what you want your future lifestyle to look like, that you can start to make sense of your money. Most people and most ‘financial advisers’ do this the wrong way around. It’s the not knowing that causes people to invest with no real plan in place, in products they don’t need, with advisers that incur unnecessarily high fees – all the things that cause major financial stress. The divide between Lifestyle Financial Planning and traditional Financial Advice is huge.

Enough is enjoyable, informative, easy to understand and doesn’t take an eternity to plough through – a couple of hours is all; it’s actually rather amusing in parts and you will probably enjoy a chuckle or two along the way.

It is 5 star rated on Amazon and sells for £12.99. Because the message this book sends out should not be ignored I will happily send you a complimentary copy of Enough. Just reply via the ‘contact us’ page with your name and postal address and a copy will be forwarded to you.

So, here’s to your bucket…may it always be filled with ‘enough’ (you will understand what your ‘Bucket’ is when you read the book)!

Which Money Type are You?

From my experience, I believe there are just three client types.

They are:

Type 1 : The ‘Not Enough’s’ – their money is going to run out.

Type 2 : The ‘Got Too Much’s’ – they are going to have too much money.

Type 3 : The ‘Just Right’s’ – they have the right amount of money but might not realise it!

The ‘Not Enough’s’

This group of people are unlikely to have enough money to last their whole life. They need to know how much is ‘Enough’ and then to understand how to plan their future to avoid their money running out.

The Financial Services Industry hasn’t helped the ‘Not Enough’s’ as most financial advisers have only been interested in selling products, and earning an associated fee, when they should have been answering this much bigger question and planning properly for their clients’ futures.

If you’re currently a ‘Not Enough’ type of person, you are going to be unable to maintain your current lifestyle, which means your lifestyle will have to be ‘turned down’ unless something changes. The good news is that something can be done about it, step by step. Once you begin to understand ‘How much is Enough’ there is a strong motivation to do something about it. This is especially true for business owners who can utilise their greatest asset (their business) to help build their wealth (which will be the subject of a later blog).

The ‘Got Too Much’s’

These are people who have more than enough already, or are heading that way and are likely to go to their graves with too much money; who wants to be the richest man or woman in the graveyard?!

So, it all comes back to knowing how much is Enough to last your whole life through, based around the lifestyle you want. When you know exactly what your Enough figure is, you can plan your life accordingly – spending and gifting more and feeling good about it. Remember life is not a rehearsal and it’s important to do stuff while you’re still able and see the benefit in passing on money to those you want to help. It’s also an opportunity to create your legacy; help good causes and create something that lives on long after you’re gone.

Also, once you recognise that you’re a ‘Got Too Much’ person, you can reduce investment risk, which will bring you more peace of mind and less stress. Why try and make more money when you don’t need to, thereby creating a potential situation where the only person who ultimately benefits is the tax man?

The ‘Just Rights’

There are many people who have just the right amount of money for the rest of their life. The only trouble is they don’t know it, because no one has ever shown them that they actually do have Enough!

This group of people are more than likely to be stressing and worrying about money when they don’t need to be. They may even be taking too much risk which can potentially erode their capital if they have got the wrong investments in place.

You may well be one of these people – one of many possibly missing out when you could be enjoying yourself, working when you could be playing, or, still saving when you should be spending!

The money pages of the newspapers don’t help; the Financial Services Industry wants you to feel insecure, they want you to make sure you don’t know what your Enough figure is, so you keep reading their scaremongering articles helping them fuel their advertising coffers, and buying the wrong products.  By knowing you’re going to be OK you can relax, simplify your affairs and enjoy your wealth whilst ignoring all the media noise.

It’s the process of Lifestyle Financial Planning that will identify which type of group you fall into, setting out with clarity where you’re heading financially; and aligning a strategy to achieve and maintain your desired lifestyle. Such a process can truly be life changing.

Our transparent approach to fees

Looking after all of our clients’ interests is our top priority, so for us that also means adopting a new and fairer approach to charging for our services.

‘Traditional’ advisers will charge a percentage based on how much money you invest with them; so basically, the more you have invested, the higher fees you pay.  We don’t think that is fair. This approach to fees means that other firms are often incentivised to invest their client’s money at a higher level, in order for them to earn higher fees.

So, what happens when the market goes up? Over extended periods of time, global investment markets tend to go up and this means that the ongoing cost to you is also going up if it’s linked as a percentage to the money you’ve invested. In this instance, your financial adviser will be earning higher fees with the probability that no additional service is actually being delivered.

But what happens when the market is falling? This is a time when you will certainly be relying on your financial adviser to pull out all the stops and give you sound advice, guidance and reassurance. However, this is also a time where they will be earning lower fees from your falling investment, and possibly may not be that keen to invest too much personal time in you.

If the fee is linked to a percentage of your investments they may not be that keen in encouraging you to spend and enjoy your money either as this would result in them being paid a lower fee!

But this all assumes that you need to invest your money, which may not necessarily be the case. Through Lifestyle Financial Planning you will begin to understand what level of return you need on your money to achieve your objectives. What if you found you could achieve your objectives without taking any risk with your money whatsoever? If that was the case why take any risk in the first place? Traditional advisers want you to take risk so they can get their hands on your money and get paid.

What makes us any different? All of our planning and advisory fees are flat – which means we give you expert advice which focuses on you and not your money, helping you avoid the mistake of investing in things you don’t need; our sole purpose is to help you achieve your financial and lifestyle goals and help you make sense of your money. We believe our flat fee charging structure removes any potential conflict of interest, strengthens client confidence in us and creates a relationship that is 100% with you – and not with your money.

Our fees have no worrying and confusing percentages. You will have complete financial clarity about our advice costs presented in a way that is totally transparent and easy to compare.  Most importantly, we are confident that the value of service we offer, will far outweigh our fees.

 

 

Don’t let your money be taken by the ‘GOO’!

We invest money with the aim of achieving a return in excess of cash, and this should be as simple, painless and low cost as possible.

However, there is an obstacle – and it’s called the Financial Services Industry. They like to make things complicated for investors with a constant flow of exciting and shiny new funds that it can sell to unwary investors, who get sucked in!

I’d like you to imagine a great big room. At one end of the room is you (and many other investors like you). You’ll all be wanting to receive an investment return on your money; some will require a low return and some will require a higher return. This will very much depend on where they are now and where they are trying to get to on their lifestyle financial planning journey. Unfortunately, and sadly, this is a step that most investors, and those trusted to provide investment advice, fail to take.

So, we are back in this big room and you are at one end and far across the other side of the room loom the financial markets. But that’s ok, because these markets over time will deliver a return. Some markets will offer a low return and some a higher return. Because risk and return are related, over longer timescales, the riskier assets tend to perform better than the lower risk assets. Be aware, though, that the journey is likely to be a lot more turbulent with the risky investments because of the ups and downs and unpredictability of the stock market.

Standing at one end of the room is you, wanting a decent return, and the investment markets at the other end of the room delivering that return to you. Simple. Sounds straightforward enough doesn’t it? So, where is ‘the GOO’ in all this?

The trouble with this scenario is, that standing slap, bang in the middle of the room, is a voluminous great big pile of ‘GOO’ and that ‘GOO’ is the investment industry; sucking considerable charges out of your money with the likelihood being that the return you require from the markets is rarely, if ever, achieved.

All charges made by the investment industry are being taken straight out of your money – dealing charges, annual management charges, fund charges the list goes on and on. To make things worse, you probably aren’t even aware that these charges exist. And even worse still, if they do a bad job and your money goes down they still take their charges, leaving you with even less!

Depending on the type of investment vehicle and funds you hold, you could be paying anything from 1.5% to 3% per annum to ‘the GOO’ (although, good investing should not cost more than 0.5% to 0.75% a year – which we should see reduce in the future)!

But all is not lost, there are ways of eradicating ‘the GOO’ which can have a dramatic and positive effect on saving significant sums of money.

The first step is align your investments with what you want your money to do for you in the future and don’t take any unnecessary risk.

The second step is to put your money into a mix of savvy investment building blocks that have a good chance of getting you there and use products that allow as much of the market returns you make to go directly into your pocket – and not to ‘the GOO’.

Avoiding tactical trading, airing caution and sticking with the right mix of investments doesn’t sound exciting and it isn’t; but your money is precious, so investing it should be simple, painless and low cost – and as low risk – as possible.

Don’t listen to industry noise and hype that may make you think otherwise.

 

Paying Yourself Whilst Protecting Your Pension – Avoid the Tax Trap

Tax…that well known four letter word!

Show me one person who is happy about paying tax…I think you’d be hard pushed to.

Before April, business owners could enjoy paying themselves dividends up to the higher rate threshold without paying any basic rate tax on this income. The 2016/17 fiscal year marked the start of a new dividend tax regime, specifically targeting shareholder directors who use high dividends in place of salary/bonus payments.

The salary versus dividend conundrum continues but despite this change, dividends are still likely to be the preferred option at the point where employer and employee National Insurance Contributions start to bite.

Add to the mix pension contributions! Since April 2016, the pension annual allowance will be potentially reduced from £40,000 to £10,000 for high earners. This will be triggered if all income (salary, bonus, dividends and investment income) is in excess of £110,000 PLUS the value of any employer or personal contributions. If the aggregated amount exceeds £150,000 the pension annual allowance will reduce by £1 for every £2 over this threshold, subject to a maximum reduction of £30,000.

If all income is less than £110,000 there will be no restriction in the level of pension contributions that can be made, subject to the annual allowance and any available carry forward allowance. So, with that in mind, it may well be more prudent to wait until the end of the tax year to make any significant pension contributions when (hopefully) it is known with greater certainty what income levels are likely to be.

How you pay yourself now will have even more crossover with the level of future pension contributions. The tax landscape is becoming a very rocky and complicated road with many changes in the area of personal taxation affecting different areas of financial planning.

For personal pension contributions it is important to make sure that the gross value of these contributions do not exceed the level of salary as tax relief can only be claimed up to 100% of salary.

There are many traps for the unwary! However, all hope is not lost!

The potential to channel funds through a working or shareholding spouse should also be considered to reduce the tax liability of the company owner and to maximise the pension contributions that can be paid. Furthermore, it’s best to try and keep the total income of the owner/manager below £100,000 to maintain the full personal allowance and avoid a 60% tax charge.

For those aged 55 or over there’s another avenue to consider, in terms of drawing pension benefits rather than salary/dividend as a source of income and making an employer pension contribution to compensate the pension fund for the drawn benefits. We will explore this option in more detail in a later blog.

So, there is scope to save significant amounts of tax but you need to know how to avoid the tax traps that lie ahead and maximise the opportunities that are available to you. After all, the benefit of reducing tax liability is to have more money in your pocket which you can spend personally, invest towards an end goal or give away as you please.

Holding firm in an uncertain Europe

calculatorstocksMedia and political scaremongering around the vote to ‘leave’ or ‘remain’ and predictions of potential market falls are rife, but it’s important to ignore the media hype and not to be tempted to make knee-jerk adjustments to your investments.  It’s an anxious time of course, but focusing on the short term impact and making panic-driven decisions isn’t wise. It is instead much smarter to focus on the long game.

I believe most non-advised investors do not understand the consequences of their investment decisions and are therefore much more likely to bail out when markets (and their portfolios) are falling. The advised client, who is likely to have a greater awareness of how their portfolio could perform in such circumstances, is far more likely to panic less, stay the course and achieve a positive outcome.

We simply cannot second guess the market and smart investors will ignore the current headlines and resist the temptation to react to bad market news. For instance, by the time you’re even aware of good or bad news, the rest of the market already knows and has included the impact into existing prices.  It is the ‘unexpected’ news that alters future pricing and by definition the unexpected is absolutely impossible to predict.  Also, any buy or sell trades, whether they work or not, ultimately cost money.

Many investment houses will be making tactical changes to portfolios by increasing their client’s allocation to cash but this flight to safety in itself creates the issue of when to get back in, with the likelihood of missing any potential upside if we vote to remain.

Our financial confidence as a nation is wavering following sensationalised news headlines reporting steep market declines in the event of Brexit; and it’s important to put this into perspective. The key investment fundamentals around all of this is to ‘super’ diversify globally to dampen market risks with an allocation to both risk and defensive assets and to hold tight. It is essential that when investment decisions are made due consideration is given to the following:

  1. The level of risk that can be realistically and emotionally tolerated.
  2. The investment returns that are required, and
  3. The financial ability to absorb falls when they occur.

I mentioned before about playing the long game and ‘time horizon’ is a key factor here as the longer the investment term (minimum 5 years as a guide) there is greater probability of riding out the ups and downs of the markets and achieving a positive return and successful investment outcome.  So whether we leave or remain, if we fast forward 5 years, it’s more likely those investors who have held their nerve and withstood this current turbulence, will come through it with a positive outcome.

I therefore believe the best course of action we can take right now is to embrace the turbulence we are currently experiencing. Market falls illustrate just what risk feels like when it happens and it can be very bumpy and not much fun. However, if these sorts of risks never occurred, the market would not be expected to deliver long term premium returns to those who are willing to ride out the pain.

So ignore the scaremongers, sit tight and don’t let the gloom and doom news drag you down or cause you to make potentially damaging financial choices.  Instead, stay invested and focus on the things that you can control and that really matter to you in order to achieve your longer range plans.

 

Proud Sponsor of the League & County Cup Champions!

SWRFCCongratulations to Saffron Walden 1st XV for winning their league and securing promotion to London North East Division 1.

They have had a fantastic season, playing an expansive and open style of rugby which has been great to watch.

Back in March they also won the Cambridgeshire Cup beating Shelford 2’s at the impressive Cambridge University ground.

They are definitely a young and confident team on the up, and I’m sure further successes will follow.

Well played guys!

Precious time is slipping away

IMG_0062I’m going to ask you a very powerful question. What would you do if your doctor told you that you only had 5 to 10 years left to live?

You won’t ever feel ill, but you also won’t have any notice of the moment of your death. What would you do in the time you have remaining? Would you carry on as you are now or make the most of your time? How would you change it and realistically, would you have the financial power to change it?

Makes you think doesn’t it? How often do we work too long hours and get wrapped up in the unimportant day to day stuff, putting the things that really matter to us on the back burner? People say that ‘life just gets in the way’ or ‘one day…’. Isn’t now the time to make time to do things you want to do? To share experiences with loved ones? To create memories?

In childhood we probably all wished, at some point, that we were older – wanting to be a teenager, then a young adult, and basically wishing our lives away.  Now as grown-ups we wish we could put the brakes on a little as life is happening all too fast and it’s scary; the months and years zip by and precious time is flying.  One day we may just be too old to start enjoying ourselves in the way we had envisaged and regret not doing what we wanted sooner.

It doesn’t always have to be material; you could spend more time with the people who matter, tend to your garden, do what is important to you and makes you happy.  We all have different lifestyles and they come in different shapes and sizes.

But what if you want more? The lifestyle you want could be sailing a yacht around the world, leaving a legacy, retiring earlier than you thought possible or simply being able to live a ‘comfortable life’. So what does this mean in relation to money?

The power and purpose of proper financial planning is to match people’s money to achieve and maintain the life they want. It’s not about products or investments, but having peace of mind and security of knowing where you are heading financially and knowing whether your desired lifestyle is affordable and what you need to do to secure it. Most people today don’t know for certain if there’s enough money available to deliver the future they want, and for some they may already have enough but don’t know it and are wasting precious time!

There’s a very poignant sign hanging on our office wall that simply says ‘Life is not a rehearsal, make every day count’. It’s a constant reminder to focus on the important things that can be controlled rather than the things that can’t; and to concentrate on achieving a desired lifestyle because when time has caught up with us all, it’s better to be able to say ‘I’m glad I did’, rather than ‘I wish I had’.