A New Tax Year, A New Start For Your Finances

Creating a roadmap for your future financial success.

It’s always a good time to consider financial planning, but at the start of a new tax year, when you have a fresh set of annual allowances to take advantage of, you have the perfect opportunity to get your financial affairs in order and align them with your goals.

The UK tax year runs from 6 April to 5 April each year. These dates don’t change but tax rules and regulations do change and it is important to stay up-to-date.

Mitigating the COVID-19 economic impact

The UK government has accumulated massive deficits while trying to mitigate the economic impact of the coronavirus (COVID-19) pandemic on individuals and businesses.

Essentially, they have three options to try and reduce their debt burdens: implement austerity, including higher taxes, so that the borrowing can be repaid; deliver economic growth so that the debt burden to GDP falls; or allow inflation to erode the real value of the debt.

Meet your goals in a tax-efficient way

The good news is that if you start considering the recent and potential tax changes now, you should be able to mitigate some of the adverse effects. Taxes on savings, investments and earnings all come with bands, reliefs, allowances and exemptions.

Financial planning ensures that you take advantage of these by organising your finances to make the most of your money and avoid situations you may not have anticipated. Taxation can affect net investment returns, and maximising your net return will help you meet your financial objectives. There are a number of potential financial planning solutions to help you meet your goals in a tax-efficient way.

March Budget 2021 changes announced

These involve making use of tax allowances each year, assessing investments that suit your tax profile and considering long-term plans for you and your family. This might necessitate some financial restructuring. Business owners will also need to prepare and plan for the changes announced in the March budget.

The Chancellor of the Exchequer, Rishi Sunak, delivered Budget 2021 to Parliament on 3 March. Here are some of the key announcements around tax and financial planning.

Pensions

Despite predictions that the many tax advantages of pensions could be cut back, they were left untouched. The most significant change was the decision to freeze the lifetime allowance (the amount you can hold in pensions without paying a tax charge) at its current level of £1,073,100 until April 2026.

Pensions still remain one of the most tax-efficient ways to invest, particularly for higher and additional rate taxpayers. In addition to tax relief on what you pay in, any growth is free of UK Income Tax and Capital Gains Tax. And any remaining funds in your pension on death are usually free of Inheritance Tax after your death.

Individual Savings Accounts (ISAs)

The Chancellor left ISA allowances unchanged. Any proceeds from an ISA remain free of UK Income Tax and Capital Gains Tax and, therefore, this is a key consideration in financial planning. As soon as the new tax year started on 6 April, your annual ISA allowance limit was reset.

For the current tax year, savers can contribute up to £20,000 each across the four main types of ISA, which include Cash, Stocks & Shares, Innovative Finance and Lifetime accounts.

Capital Gains Tax (CGT)

Despite proposals to increase CGT, there were no new announcements, other than the decision to freeze the annual tax-free allowance at its previous level of £12,300 until April 2026.

As part of financial planning, it still makes sense to make as much use as possible of the valuable ISA and pension allowances, to ensure your funds are held in the most tax-efficient manner.

Inheritance Tax (IHT)

Again, no changes were made to the standard nil-rate band of £325,000 and the residence nil-rate band of £175,000, both of which have been proposed to remain frozen until April 2026.

If you’re thinking about how you can reduce the Inheritance Tax your beneficiaries have to pay when you die, there are various options you should consider.

Achieve your goals and future wellbeing

The purpose of creating a financial plan is to help you understand where you stand now and where you could be in the future if you take the right steps. It’s about creating a roadmap for your money to help you achieve your goals and future wellbeing.
Putting in place a comprehensive financial plan and keeping it updated will be amongst the most important decisions you ever make. It should include details about your cash flow, savings, debt, investments, insurance and any other elements of your financial life and wellbeing.

Even if you’re in a good position financially, there are various ways that financial planning could help improve your current situation, for example by:

improving the growth rate your investments are achieving
introducing new streams of income
minimising the tax you pay
recommending solutions and products you might not be aware of

Avoid costly financial missteps

Designed to help secure your financial future, a financial plan seeks to identify your financial goals, prioritise them and then outline the exact steps that you need to take to achieve these goals.

It can also help you avoid costly financial missteps, such as making a risky investment, being subject to an unexpected tax charge or underestimating the liquidity you need, resulting in the forced sale of your assets. But the value of financial planning isn’t just limited to the returns you get from it.

There are also practical and emotional benefits to receiving professional financial advice, for example by:

freeing up time spent managing your finances
reducing the administrative burden on you
removing financial stress, which could impact on your health
giving you peace of mind that you’re moving in the right direction

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION & TRUST ADVICE.

Will Your Pension Run Out Early?

Impact on people opting for early retirement as a result of the pandemic.

An increasing number of people have been forced into early retirement due to the economic impact of the coronavirus (COVID-19), with many worried about how they’ll make ends meet in the future. Because of the pandemic, we are currently in a challenging economic period. The global economy has taken over ten years to recover from the shock of the last financial crisis.

In a recent survey, the findings showed that 3% of people in the 55-64[1] age group have taken early retirement due to the coronavirus pandemic. And 4% of people in this age group have had to access some of their pension savings to cover living costs because their income has dropped due to redundancy or reduced pay. These percentages may seem small, but they represent hundreds of thousands of people.

Risks of early retirement

While early retirement may sound like a dream come true, for those with insufficient pension savings it can be a ticking time bomb. Every year of early retirement will have an impact on your pension, in that it represents both a year lost for saving and a year added for spending. Simply put, you’ll need to make less money last longer.

Unless you’ve budgeted carefully and are sure you have enough savings, you could run the risk of your pension running out in your later years. This is an expensive time for many people, due to the cost of financing care, and that can result in unexpected hardship.

Planning for early retirement

If you’re planning early retirement, you should consider the following steps:
1. Calculate all your savings in different pension pots to find out what your total is.
2. Track down any lost pensions from previous employers and add these to your total.
3. Check how much of the State Pension you can expect to receive, and from what age.
4. Create a budget for your retirement spending, making sure to include any additional future costs you’re aware of and a little extra for future costs you’re unaware of. Be honest about how much you’ll need.
5. Make sure that the total you have in pension savings, when combined with the State Pension you’ll receive, is sufficient to cover all your future costs.

Alternatives to early retirement

If your financial situation is forcing you to withdraw from your pension but you’re not ready yet to stop saving, there are ways to access your pension that do not affect your annual allowance and therefore allow you to continue contributing at the same rate in the future.

These include:

Taking up to 25% of your savings as a tax-free lump sum (from a defined contribution pension)
Accessing a defined benefit pension (if you have one)
Withdrawing a pension pot worth under £10,000 in its entirety under ‘small pots’ rules
Buying certain types of annuity

Can you afford to retire early?

We know that you work hard for your money, so you should be able to enjoy it as much as possible. When planning for retirement, there are now more choices available than ever before. By understanding precisely what you’ll need to get to where you want to be, you can ensure you’re prepared for the future.

So when working out if you can afford to retire early, your starting point should be to think about whether your savings and investments will be enough to cover all your outgoings, as well as all your essential living costs and any regular debt repayments you may have to make.

Source data:
[1] https://www.lv.com/about-us/press/covid-pandemic-pushes-more-than-154000-into-early-retirement

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028). THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION WHICH ARE SUBJECT TO CHANGE IN THE FUTURE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND YOUR ENTITLEMENT TO CERTAIN MEANS TESTED BENEFITS AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

Boost Your Pension Savings

Planning to achieve your retirement goals sooner.

Are you ‘mid or late career’ or planning to retire within ten years? If the answer’s ‘yes’, then you probably want to know the answers to these questions: Will I be able to retire when I want to? Will I run out of money? How can I guarantee the kind of retirement I want?

But, for many different reasons, planning for retirement is a commonly overlooked aspect of personal financial planning and this can often lead to anxiety as your age of retirement approaches. We’ve provided four ways to boost your pension savings and help you achieve your retirement goals sooner.

Review your contributions

Sometimes the simplest solutions are the most effective. If you want to boost your retirement savings, the simplest solution is to increase your contributions. You may think you can’t afford to, but even a slight increase can make a big difference.

For those lucky enough to receive a pay rise in line with inflation every year, increasing your pension contributions by just 1% could add thousands to your eventual pension pot. The reason why a relatively small increase in pension contributions can result in such a large increase in the value of your pension pot is because of the power of compounding.

The earlier you invest your money, the more you benefit from the effects of compounding. Adding more money to your pension pot by increasing your contributions just makes the compounding effect even better.

Review your strategy

A missed opportunity for many pension holders is failing to choose how their pension is invested. Some people leave this decision in the hands of their workplace or pension provider.

Firstly, you should know that you don’t have to hold a pension with the provider your employer has chosen. You can ask them to pay into a different pension, allowing you to choose the provider while considering the type of funds they offer and the fees they charge.

Secondly, many pension providers will give you several options for investment strategies. If you’re in the default option, you could achieve higher returns with a different strategy (though this will usually mean taking on more investment risk). Note that this may not be appropriate in all circumstances, particularly if you are close to retirement.

Know your allowances

When you save in a pension for your retirement, the government adds tax relief on top of the money you contribute, helping you to grow your savings faster. However, there’s a limit to the amount of contributions you can claim tax relief on each year, which is called your ‘annual allowance’. It’s currently £40,000 (tax year 2021/22), and in some cases may be lower.

If you want to contribute more than your annual allowance into your pension in one tax year (for example, if you’ve received a windfall and want to put it aside for the future), it’s worth knowing that you can use any unused allowance from up to three previous years.

So, if you have £10,000 of unused allowance in each of the past three years, that’s another £30,000 you can claim tax relief on this year. The tax relief on this amount would be at least £7,500, depending on your tax band.

Trace lost pensions

Usually, starting a job with a new employer means starting a new pension. And, when that happens, some people may overlook the pension they had with their last employer. As a result, many people have pensions with previous employers that they’ve lost track of – and rediscovering them can give a huge boost to your retirement savings.

You can trace old pensions by getting in touch with the provider. Look through any documentation you still have from your past employers to see if you can find your pension or policy number. If you can’t, you can contact the provider anyway and they should be able to find your pension by using other details, such as your date of birth and National Insurance number.

If you’re not sure who the provider is, start by asking your previous employer.

Goals based investing

Are you giving yourself the best chance of success?

Before you start, defining any goals you may have will help you plan, budget and choose the right investments. Your goals might be around enhancing your current lifestyle, planning for your family or your own retirement.

The sooner you start investing, the better off you will be. Match your long-term investment goals with your short-term lifestyle aspirations. When you have created your goals and time frames, define your budget. Be realistic about what you can afford to put aside for your investments.

To help you stick to your budget, look at your cash management and put strategies into place.

It’s well worth taking the time to think about what you really want from your investments. Knowing yourself, your needs and goals, and your appetite for risk is a good start.

How to get started checklist:

1. Goals

Be clear about what you’re investing for. Investing is generally most appropriate for medium and long-term goals (at least five years). If you want access to your money before that, you might want to think about saving instead.

2. Payments

Before you start investing, first make sure that you can afford your essential living costs, as well as any debts. It’s also a good idea to make sure you have some savings to cover emergencies.

3. Investment risk

Have a think about how much risk you feel comfortable taking with your money. You should also consider your other financial commitments when deciding how much risk to take. If you don’t want to or can’t take any risk with your money, then investing may not be for you right now.

4. Timescale

The longer your money is invested, the more opportunity it has to grow in value and reach your goal. Each year, not only will the money you invest potentially grow in value, you’ll also potentially get growth on any previous growth. This is commonly known as ‘compounding’, and over longer time periods it can make a significant difference to the value of your investments.

5. What you’ll get back

The final value of your investments will depend on three main factors: how much you pay in, how your investments perform, and how long you’re invested for. Generally speaking, the more you pay in, the better your investments perform. And the longer you can keep your money invested, the more you’re likely to get back at the end.

6. Mix it up

Putting all your money in one type of investment can be a risky strategy. You can help reduce that risk by spreading your money across a mix of investment types and countries. Different investments are affected by different factors: economics, interest rates, politics, conflicts, even weather events. What’s positive for one investment can be negative for another, meaning when one rises, another may fall.

7. Be tax-efficient

You can do this by putting your money into your pension or using up your Individual Savings Account (ISA) allowance.

8. Review, review, review

Make time to regularly review your investments to check they’re on track to meet your goals.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Advice matters

Life events that professional financial advice can help you navigate.

In the current climate, we understand that you may be feeling worried about your work, your finances and what the future holds.

Research carried out by the Office for National Statistics (ONS) found that, since the outbreak of coronavirus (COVID-19), over 25 million people have experienced ‘high’ levels of anxiety[1].

Professional financial advice offers so much more than just practical, financial benefits. It also helps to improve your emotional wellbeing by making you feel better about your money and yourself – especially in times of crisis.

And receiving advice isn’t just for the very wealthy; most people can benefit from an expert overseeing their finances. Let’s explore what it means to take advice and what it might be able to do for you.

Here are five situations you’re likely to encounter in your lifetime when professional financial advice could help you and ensure you avoid making costly mistakes.

Consolidating your pensions

These days it’s common to have multiple pensions from previous jobs, and there are various benefits to consolidating them, such as managing all your money in one place and paying just one set of fees.

However, you could lose out on pension benefits when you transfer funds to a different provider and may also encounter unexpected fees. Your professional financial adviser will advise on the most appropriate options.

Making financial gifts

You might want to help your family members by making a financial contribution towards their education or home, or to celebrate a special occasion. But unless you know the complicated rules around Inheritance Tax and gifting, you might leave the recipient with a potential tax bill in the future.

Your professional financial adviser can ensure that you make tax-efficient financial gifts within the specified limits. They can also assess how much you can afford to give away without causing yourself financial difficulty.

Leaving assets to loved ones

When you make a Will, you’ll want to ensure that your money, assets and property go to the intended recipient. But if your estate is larger than the current threshold of £325,000 (2020/21 tax year), Inheritance Tax of 40% may be applied, meaning that a large portion could be taken by HM Revenue & Customs.

Your professional financial adviser can suggest options that will protect your wealth from tax and ensure that it goes to your loved ones.

Starting to invest

Investment always involves an element of risk, but the level of risk involved varies significantly between different asset classes, markets, industries and geographical areas, to mention just a few. It can be very difficult to assess the level of risk involved in an investment. Your adviser will help to match you with investments that are appropriate for your goals and investment risk.

Being targeted by scammers

When you’re contacted unexpectedly by someone with an incredible investment opportunity, the returns they promise can make it very difficult to turn down. Unfortunately, these opportunities often turn out to be scams.

If you’re considering an opportunity or have already handed over money to someone you suspect is a scammer, your professional financial adviser is there to help. They can suggest legitimate ways to safeguard and grow your money.

Source data:
[1] Office for National Statistics Research, Personal and economic wellbeing in the UK, May 2020

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION AND TRUST ADVICE AND WILL WRITING.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Passing on pension benefits

Providing for your loved ones after your death.

If you’ve spent a lifetime saving for retirement, you’d probably like any remaining money to go to a loved one after your death. But whether pension benefits are payable to a beneficiary, and how they’ll receive them, is dependent on the type of pension you’ve chosen and how you’ve accessed it in your retirement.

Thanks to changes in the way that pensions are taxed, more of your fund can survive your death and provide an income or nest egg for your loved ones to enjoy, long after you are gone. Since April 2015 it has been easier to safeguard your pension for your heirs, but it’s important to make sure you’re keeping up with the changes.

The way that you decide to take your pension will affect what you can do with it when you pass away. And while it’s not always easy to talk about, the way you eventually pass on your pension has the biggest impact on other people, so it could help if you talk to your spouse, partner, children or other people close to you when you’re deciding how you take your pension savings.

Pension death benefits

If you have not yet accessed your pension, or you have made withdrawals from your pension but left some money invested, it can usually be passed to a beneficiary after your death. The specifics, for example, in what form they will receive these death benefits and whether they will pay tax, will depend on your individual circumstances (such as your age) and the scheme rules.

You should always obtain professional financial advice to assess your specific situation. But if your pension scheme allows you to choose a beneficiary, ensure you have named the person you intend to leave your money to.

Annuity death benefits

If you have used your pension savings already to purchase an annuity, this can only be passed on to a beneficiary in certain cases, which must be established when the annuity is purchased. A typical lifetime annuity only provides a guaranteed income for the lifetime of the annuity holder, regardless of how long this is.

For your annuity income to go to a loved one after your death you must choose either an annuity with a guarantee period (which provides an income for a set period, whether you are still living or not) or a joint life annuity (which provides an income for life for whichever partner lives longest).

State Pension inheritance

In certain circumstances, your partner can continue to receive your State Pension after your death. For example, if you’re a man born before 1951 or a woman born before 1953, and you’re receiving the Additional State Pension, this can be inherited by your partner (husband, wife or registered civil partner) after your death if they have reached the State Pension age.

Combined finances

Planning ahead for your financial future together.

Some couples may prefer to keep their finances separate, while others share everything. Whichever method you’ve chosen, when it comes to retirement saving, it’s worth planning together to ensure you’ve made the most of all the allowances and benefits offered to couples.

Your golden years may ultimately be the best of your relationship if you understand each other’s future goals, needs and expectations.

Set your budget

The first step of planning for retirement is to look at how much money you’ll need to cover your outgoings. Start by analysing your current spending, and then identify where your spending might increase and decrease over the years.

If you have different perspectives on how extravagant your lifestyle will be, it’s best to discuss this openly and early on as you’ll need to come to an agreement. One of you might be underestimating how much you’ll need or overestimating what you can realistically afford.

Remember to plan for different circumstances. Hopefully, you’ll enjoy a decades-long retirement together, but your finances might look very different if one of you were to fall ill or die. It might be unpleasant to discuss but is essential to plan for.

Assess your finances

Next, look at the income you’ll both have from the State Pension and any private pensions. Set aside some time to trace pensions from previous workplaces that you might have forgotten about or not known an employer was paying into, as many people find extra cash that way.

Make sure you understand all of your options for withdrawing your pensions, as the amount you get back from your pension depends, in part, on which option you choose. Consider, for example, whether you want to take a tax-free lump sum of up to 25% of your pension savings at the start of your retirement, and how best you could use that.

If you have any debts or savings you haven’t mentioned to your partner, it would be wise to open up about these now.

Top up your savings

If your existing pension savings won’t provide the income you think you’ll need, look at ways to address the shortfall. Could you make some lifestyle changes now to save more for later?

If one or both of you have less than 35 years on your National Insurance record, you can make voluntary contributions to receive more State Pension.

It’s worth obtaining professional financial advice about using both of your pension allowances, and whose pension it is more sensible to contribute to. You both have an ‘annual allowance’, which is £40,000 in the 2020/21 tax year, or 100% of your income if you earn less than £40,000.

This means with the current annual allowance limit, someone paying Income Tax at the standard rate of 20% would receive a maximum sum of £8,000 of pension tax relief towards their pension pot. If you pay tax at the higher rate of 40% you would receive up to £16,000 of tax relief, while those in the additional rate band of 45% would currently receive £18,000 of tax relief.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL 55 (57 FROM APRIL 2028). THE VALUE OF YOUR INVESTMENT (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAX ADVICE.

Reduce your Inheritance Tax bill

10 ways to protect your estate for your loved ones.

Even those who believe they have moderate wealth levels may still need to take action to minimise Inheritance Tax, particularly if they own property and have savings and investments.

Inheritance Tax is payable in the UK on death, and sometimes when you give away certain assets during your lifetime. It can be a great concern for individuals with wealth exceeding the current £325,000 nil-rate band (2020/21 tax year).

Naturally, you’ll want to pass on as much as possible to your loved ones, rather than paying 40% to HM Revenue & Customs (HMRC). Are you worried your family could be left with an Inheritance Tax bill after you’re gone?

Here are 10 tips to pay less or avoid Inheritance Tax:

1. Potentially exempt transfers

One of the better-known ways to pass on wealth free from Inheritance Tax is to gift it more than seven years before your death. Of course, there is a degree of unpredictability in the outcome. If you were to die within seven years of making the gift, Inheritance Tax may be charged, though the rate will be reduced if more than three years have passed.

2. Personal gifts

Gifts up to a certain value can be made free from Inheritance Tax, even in the last years of your life. Your allowance includes: large gifts totalling no more than £3,000; unlimited small gifts of up to £250; and wedding gifts of up to £5,000 for your children, £2,500 for your grandchildren, or £1,000 for others

Gifts made within your regular pattern of income and normal expenditure (for example, quarterly payments towards a grandchild’s school fees from your annual income) can usually be made free from Inheritance Tax, although you may need to document this pattern for three or more years.

3. Charitable gifts

Gifts to registered charities can be made entirely free from Inheritance Tax, which can help you to reduce the size of your estate to within the Inheritance Tax threshold.

Additionally, if at least 10% of your total estate is gifted to charity, it will reduce the rate of Inheritance Tax payable on your remaining estate (above the nil-rate band) from 40% to 36%.

4. Insurance

It is possible to take out a life insurance policy written in an appropriate trust that can provide a lump sum on your death to be used to pay the resulting Inheritance Tax bill. If this policy is within a trust, the lump sum paid out will not count towards your estate.

Insurance can also be taken out when making large financial gifts to cover the Inheritance Tax bill if you were to die within the following seven years (for example, before they are excluded from your estate). This is called a ‘term assurance’ policy.

5. Pensions

Typically, though with some exceptions, pensions are excluded from the calculation of your estate and can be passed on free from Inheritance Tax. It is important to name a beneficiary to whom you wish to pass on your pension benefits.

It is also possible to make payments in your lifetime into another person’s pension, which will protect this money from Inheritance Tax. For example, you can set up a Junior Self-Invested Personal Pension for a grandchild under the age of 18 and pay in up to £2,880 a year. But they will not usually have access to this money until they reach age 55.

6. Discretionary trusts

A discretionary trust can help you to reduce your Inheritance Tax liability by holding money in the name of your beneficiaries while you retain control. You can use your nil-rate band to pay in up to £325,000, which will be excluded from your estate after seven years. Funds above the nil-rate band may attract a lifetime tax charge.

7. Loan trusts

If you would like to protect your money in a trust but need to know you can withdraw it if you need it, it’s possible to loan money to a trust. You will always have the option to withdraw the original capital you loaned, but any growth on that capital will be protected within the trust from Inheritance Tax.

8. Discounted gift trusts

If you would like to earmark some wealth to be passed to a beneficiary or beneficiaries on your death, but you want any income generated to be paid to you in your lifetime, you can do this through a discounted gift trust. This will exclude the contents of the trust from your estate for Inheritance Tax purposes but still provide you with regular payments from it.

9. Business Relief

Business assets can usually be passed on either in your lifetime or after your death with Inheritance Tax relief of up to 100%. A business, interest in business or shares in an unlisted company will usually qualify for 100% Business Relief. Land, buildings and machinery related to the business will usually qualify for 50% Business Relief, as will shares controlling more than 50% of the voting rights of a listed company.

10. Agricultural Relief

If you own agricultural property (land or pasture used to grow crops or rear animals as part of a working farm), this can usually be passed on in your lifetime or after your death free from Inheritance Tax.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION AND TRUST ADVICE AND WILL WRITING. TRUSTS ARE A HIGHLY COMPLEX AREA OF FINANCIAL PLANNING.

INFORMATION PROVIDED AND ANY OPINIONS EXPRESSED ARE FOR GENERAL GUIDANCE ONLY AND NOT PERSONAL TO YOUR CIRCUMSTANCES, NOR ARE INTENDED TO PROVIDE SPECIFIC ADVICE.

TAX LAWS ARE SUBJECT TO CHANGE AND TAXATION WILL VARY DEPENDING ON INDIVIDUAL CIRCUMSTANCES.

Responsible investing

Invest today. Change tomorrow.

Responsible, sustainable and environmentally friendly investing is here to stay. But, while demand is growing among all age groups, genders and income bands, some savers and investors are missing their biggest opportunity for responsible investing, which is through their pension.

We all want to make responsible choices as more of us are becoming aware of global challenges, such as environmental issues, human rights and climate change. We’re also starting to care more about how our behaviours affect the planet and society.

Future success

Taking ESG (Environmental, Social and Governance) factors into consideration when investing is becoming more mainstream. It is acknowledged that companies that act responsibly to their employees, the environment and the public have a better chance of future success than those that don’t. Investing in these companies is a logical approach financially as well as ethically.

Many pension holders understand this approach and see the value of it. In a recent survey, more than one-third of respondents said that the option to invest their pension only in sustainable companies is important to them[1]. Nearly two-thirds said having clearly branded funds for investing in environmentally and socially responsible companies is important.

Pension investments

The same survey suggests that pension holders feel that sustainable investing isn’t just important, but interesting. More than half of respondents said that a fund focused on clean energy and lowering carbon would make them more interested in their pension. A similar number felt that way about a zero-plastic fund.

But while pension holders feel these issues are important and interesting, that isn’t yet affecting the way they invest. Most people don’t manage their pension investments themselves, instead leaving their pension invested in the default options set by a provider chosen by their workplace. So, more than two-thirds of pension holders do not know how sustainable their pension is.

Environmentally friendly

Many pension holders don’t know that they can choose their own funds, and therefore that they can choose sustainable or responsible funds. Around half are unaware of ways to ensure their pension is environmentally friendly.

Clearly, there is a large audience of individuals who would like to invest their pension more sustainably and responsibly but don’t know where to start. There are plenty of options, but without specialist experience, it can be difficult to select those that are truly responsible and environmentally friendly and will also deliver the financial return you’re seeking.

Source data:
[1] https://adviser.scottishwidows.co.uk/assets/literature/docs/2020-09-responsible-investment.pdf

Tax planning reimagined

Identifying the best options to preserve your wealth.

No one likes to pay tax on their hard-earned money. But due to the complexities of the tax system, without expert professional financial advice, some individuals could be paying more tax than necessary. Before the end of every tax year on 5 April, you have the opportunity to save money on taxes and plan for the year ahead.

As we approach the end of the tax year, now is the time to review your tax affairs to ensure that you have taken advantage of all reliefs and options available to you. If you think you may be overpaying tax, here are some ways in which you might be able to reduce your bill. This information should not be construed as advice and is applicable to the 2020/21 tax year end.

INCOME TAX

Keep your personal allowance

Income Tax rules appear simple at first: income under £12,500 is within your tax-free personal allowance, and increasing rates apply to income in higher bands.

But there is an additional rule: for every £2 you earn over £100,000, your personal allowance reduces by £1. Once you reach £125,000 your personal allowance is zero.

If you’re close to the £100,000 threshold, it may therefore be sensible to request tax-efficient alternatives to bonuses or salary increases, such as higher pension contributions.

Transfer assets to your partner

If you’re close to the £100,000 threshold and you have other income yielding assets, you could consider transferring these to a partner with a lower taxable income.

Claim tax relief for working from home

If you’re currently working from home due to the coronavirus (COVID-19) pandemic you may be entitled to tax relief for your increased costs, such as heating or broadband. You could claim the exact amount, based on bills and receipts, or a set amount of £6 per week.

Review your Child Benefit

Individuals with a taxable income of over £50,000 who claim Child Benefit will pay a higher income Child Benefit charge, which could be equal to the benefit you receive.

Your options for reducing this charge include keeping your taxable income below the threshold (by exchanging salary for tax-efficient alternatives), temporarily stopping your Child Benefit, or deciding not to claim.

DIVIDEND TAX

Use your dividend allowance

Dividend income is taxed differently to other income. Every taxpayer has a tax-free dividend allowance of £2,000, above which dividend income is taxed at 7.5% in the basic rate band, 32.5% in the higher rate band, and 38.1% in the additional rate band.

Company owners can therefore benefit by taking income from dividends rather than salary.

CAPITAL GAINS TAX

Use your Capital Gains Allowance

Every taxpayer has a tax-free allowance of £12,300 when realising capital gains. Careful consideration of the split of assets between spouses can have a significant beneficial impact on a couple’s Income Tax burden.

If you’re approaching this limit, you may want to consider transferring assets to your partner to use their allowance.

Invest for capital gains

Capital gains are currently treated more favourably than income and dividends for taxation purposes, at a maximum rate of 20% (28% for residential property), although this is currently under review.

So, for investments outside of a tax-efficient wrapper, for example, an Individual Savings Account (ISA), it can be more tax-efficient to target a return through capital gains than through interest or dividend income.

SAVINGS ACCOUNT (ISA)

Use your ISA allowances

All UK residents over the age of 18 have an annual ISA allowance of £20,000, which can be saved or invested in a tax-efficient environment. Under-18s have an allowance of £9,000 each.

Lifetime ISAs

Contributions into a Lifetime ISA qualify for a 25% government bonus. This can be a tax-efficient way to help adult children buy a home.

PENSION TAX RELIEF

Review your pension contributions

Whether you are about to retire or are still working towards putting your fund together for retirement, there are many things that you should consider when it comes to planning your pension.

Pension contributions made through your employer are often the most tax-efficient. So, discuss options with your employer to exchange some of your salary for larger pension contributions. If you own the company, this could also help you save on Corporation Tax.

Carry forward your pension allowance

Your pension annual allowance (the amount you can make in contributions while claiming tax relief) is capped at £40,000 and reduces for higher earners who exceed the limits on threshold income and adjusted income (as a guide, this typically applies only if your income is above £200,000).

So, if your taxable income increases above these thresholds, your annual allowance could drop dramatically. Carrying forward unused annual allowance from up to three previous years could allow you to claim more tax relief.

Make pension contributions for others

If you have used your annual allowance, you can still contribute to other people’s pensions, including your children and grandchildren, and they will receive tax relief.

Protect your pension

There is a Lifetime Allowance on pension savings, currently £1,073,100. Above that limit, you’ll be taxed severely when taking benefits. If you’re approaching that limit, you should seek advice on applying for protection before accessing your pension.

INHERITANCE TAX (IHT)

Use your IHT nil-rate band

Your nil-rate band for IHT is £325,000, plus any unused nil-rate band from a deceased partner. You also have an additional nil-rate band of £175,000 when leaving a home to a direct descendant.

Claim IHT relief on charitable gifts

If you leave at least 10% of your total estate to charity, IHT is applied on the portion outside of your nil-rate band at a reduced rate of 36% (otherwise 40%).

Use IHT reliefs while available

IHT reliefs currently under review include Agricultural Relief and Business Relief. Business owners in particular should look at how their estate is arranged to ensure their wealth can be passed on efficiently.

Update your Will

When there is any significant change in your financial circumstances, or to tax rules, reviewing and updating your Will can help to reduce your IHT exposure.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION AND TRUST ADVICE AND WILL WRITING. INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.