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Clarke Nicklin Financial Planning

'protecting your wealth and helping your investments grow'

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March 2016

Investing for success

Achieving your goals by weighing the potential risks alongside the prospective returns

A well-defined investment strategy is one of the cornerstones of a successful financial life. Investing is about building wealth slowly rather than getting rich overnight.

While investment techniques vary widely, all good strategies are built on the same foundation. The principles for investing over the long term require holding a portfolio of investments and weighing the potential risks alongside the prospective returns.

Taking a long-term view

The longer you invest, the greater the potential effect of compound performance on the original value of your investment. Many investors will be familiar with the term ‘compounding’ from owning cash savings accounts. The term refers to the process whereby interest on your money is added to the original principal amount and, in turn, earns interest. Over time, compounding can make a significant difference.

Your investments can also benefit from compounding in a similar way if you reinvest any income you receive, although you should remember that the value of stock market investments will fluctuate, causing prices to fall as well as rise, and you may not get back the original amount you invested.

Spreading risk – the importance of diversification

Shares, bonds, property and cash react differently in varying conditions, and opting for more than one asset class can help to ensure your investments won’t all rise or fall in value at the same time.

It’s important that you aim for a level of risk you are comfortable with which reflects your investment objectives.

Understanding your investments

While a well-constructed portfolio should generate a healthy return for investors, the opposite is also true. It’s easy to incur permanent losses by putting money into an asset that behaves in an unexpected way. Investors should always set aside time to try and understand what it is they want to hold.

Focusing on the real rate of return

Inflation and taxation are factors that can affect the real rate of return on your investment. There are certain options that can reduce costs, including the use of tax-efficient wrappers, namely Individual Savings Accounts (ISAs), pension plans and employment ‘save as you earn’ schemes.  There are also inflation-protected instruments, such as index-linked bonds (interest-bearing loans where both the value of the loan and the interest payments are related to a specific price index – often the Retail Prices Index), National Savings investments or commercial property holdings, where rents can often be increased in line with the rate of inflation.

Making the right investment choices

To make the right investment choices, you need to ask the right questions. And when it comes to answering those questions, we can help you find the best way forward. If you would like to get a sound point of view about what may be right for your unique situation, please contact us. We’ll review and discuss your financial situation, help you set goals, suggest specific next steps, discuss potential solutions and provide ways to help you stay on track.

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.

 

Keeping it in the family – ISA subscriptions now available to a surviving spouse

Last year, the Chancellor announced a significant change to Individual Savings Account (ISA) inheritance rules – a change that has the potential to improve the situation of around 150,000 widows or widowers a year.

Tax-efficient status

When an investor passes away, the savings in their ISA lose their tax-efficient status, and whoever inherits the ISA investments (often the surviving spouse) starts paying tax on any income or returns received from the investments held within the ISA.

Under the new rules, additional ISA subscriptions are now available to a surviving spouse or registered civil partner where the ISA holder passed away on or after 3 December 2014. This applies whether or not they inherit the deceased’s ISA.

Additional Permitted Subscription

This comes in the form of an Additional Permitted Subscription (APS) ISA allowance (additional to their personal annual ISA), equal to the amount that was held in the ISA on the day the holder died.

These changes mean that the APS ISA allowance is now available to their spouse or registered civil partner, even if they are not resident in the UK.

New investment options

This APS can be invested in either stocks and shares or cash. If you stay with the same ISA provider as your spouse, you can invest the cash value in the investments available to you or use the assets that they held in their ISA as an ‘in specie’ subscription (a transfer of assets from one person to another without those assets being sold), assuming that you inherit those assets.

The additional allowance can also be transferred between ISA providers, but you will need to select from the new provider’s investment options (the in specie option will not be available). However, it is important to note that this additional allowance has to be used within a specific time limit.

Tax-efficient savings

Significantly, these allowances are available whether or not the surviving spouse or registered civil partner inherited the deceased’s ISA assets, so even if a spouse decides to bequeath the investments held within the ISA to an alternative beneficiary – perhaps passing them on directly to children or grandchildren in their will – their surviving spouse will still benefit from the equivalent worth of tax-efficient savings potential.

So while ISAs don’t currently offer the upfront tax relief of pension schemes, the ability to make withdrawals and take a tax-efficient income means they can play a valuable part in retirement planning.

An integral part of your retirement savings

Now that there is arguably much greater flexibility to move money between types of ISA – and the ability to pass the tax savings on to a spouse or registered civil partner – many more investors may choose to make ISAs an integral part of their retirement savings.

Source data http://www.gov.uk

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.

 

State pension changes on the horizon from this April

Pensions have been transformed by the arrival of freedom reforms on 6 April 2015 which now give much greater flexibility over what you can do with your pension pot, these are some of the key points you need to know.

The new State Pension will be a regular payment from the Government that you can claim if you reach State Pension age on or after 6 April 2016.

It’s designed to be simpler. But there are some complicated changeover arrangements which you need to know about if you’ve already made contributions under the current system.

You’ll be able to get the new State Pension if you’re eligible and:

  • A man born on or after 6 April 1951
  • A woman born on or after 6 April 1953

If you reach State Pension age before 6 April 2016, you’ll get the State Pension under the current scheme instead.

You can still get a State Pension if you have other income such as a personal pension or a workplace pension.

How much you can receive

The full new State Pension will be starting at £155.65 per week. Your National Insurance record is used to calculate your new State Pension.

You’ll usually need ten qualifying years to get any new State Pension. The amount you receive can be higher or lower depending on your National Insurance record. It will only be higher if you have over a certain amount of Additional State Pension. You may have to pay tax on your State Pension.

Working after State Pension age

You don’t have to stop working when you reach State Pension age, but you’ll no longer have to pay National Insurance. You can also request flexible working arrangements.

Defer your new State Pension

You don’t have to claim the new State Pension as soon as you reach State Pension age. Deferring the new State Pension means that you may get extra State Pension when you do claim it. The extra amount is paid with your State Pension (for example, every four weeks) and may be taxable. After you claim, the extra amount you get because you deferred will usually increase each year.

What this means for your pension

Your State Pension will be lower if you’ve ever been contracted out of the Additional State Pension.

How this affects you depends on whether you reach State Pension age:

  • Before 6 April 2016
  • On or after 6 April 2016

Changes to contracting out from 6 April 2016

On 6 April 2016, the contracting-out rules will change so that if you’re currently contracted out*:

  • You’ll no longer be contracted out
  • You’ll pay more National Insurance (the standard amount of National Insurance)

*only applies to members of contracted out defined benefit pension schemes

Basic and Additional State Pension

If you reach State Pension age before 6 April 2016, you can apply for both:

  •  The basic State Pension
  • The Additional State Pension

The basic State Pension isn’t affected by being contracted out. However, your Additional State Pension will be reduced according to how long you were contracted out.

You have a workplace, personal or stakeholder pension

If you were contracted out of the Additional State Pension in the past through a workplace, personal or stakeholder pension, you either:

  •  Paid lower National Insurance contributions
  • Had some of your National Insurance contributions put towards your workplace, personal or stakeholder pension

Your starting amount for the new State Pension may include a deduction if you were contracted out in certain:

Earnings-related pension schemes at work (for example, a final salary or career average pension) before 6 April 2016

  • Workplace, personal or stakeholder pensions before 6 April 2012

You may not receive the full new State Pension when you reach State Pension age if you were contracted out.

If you’re reaching retirement and need to make sure you have the right plans in place, the countdown is on.

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY 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

New dividend tax regime

What could the new system mean to you?

From April this year, the notional 10% tax credit on dividends is to be abolished and will be replaced by a new tax-free Dividend Allowance. The Dividend Allowance means that you won’t have to pay tax on the first £5,000 of your dividend income, no matter what non-dividend income you have.

The allowance is available to anyone who has dividend income, and headline rates of dividend tax are also changing.

Income tax will apply to any dividends received over £5,000 at the following rates:

  • 7.5% on dividend income within the basic rate band
  • 32.5% on dividend income within the higher rate band
  • 38.1% on dividend income within the additional rate band

This new system will mean that only those with significant dividend income will pay more tax. If you’re an investor with modest income from shares, you’ll see either a tax cut or no change in the amount of tax you owe.

Dividends received by pension funds that are currently exempt from tax, and dividends received on shares held in an Individual Savings Account (ISA), will continue to be tax-free.

From 6 April 2016, you have to apply the new headline rates on the amount of dividends you actually receive, where the income is over £5,000 (excluding any dividend income paid within an ISA).

The Dividend Allowance will not reduce your total income for tax purposes. However, it will mean that you don’t have any tax to pay on the first £5,000 of dividend income you receive.

Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000 allowance.

These are two examples of how the new Dividend Allowance works:

You don’t need to pay any tax on dividends up to £5,000, no matter what other income you get. That first £5,000 is tax-free under the new rules.

1 – You have a (non-dividend) income of £18,000, and receive dividends of £22,000 outside of an ISA

Tax you need to pay on the £22,000 dividend income:

  • The Dividend Allowance covers the first £5,000
  • The remaining £17,000 of dividends to be taxed at the new basic rate of 7.5%. This would need to be done through a tax return

Had your other non-dividend income been £30,000, the tax due on the £17,000 dividend income would be made up of 7.5% for the amount within the basic rate band, and 32.5% on the balance.

2 – You receive dividends of £600 from shares invested in an ISA

As is the case now, no tax is due on dividend income within an ISA, whatever rate of tax you pay.

Shareholding directors

If you’re a company director who takes dividends instead of a salary, you should obtain professional financial advice to find out how you could be affected by the upcoming changes in the next tax year and what steps you can take to be as tax-efficient as possible.

Taking dividends may still be a good option, but there are other tax planning opportunities to explore, such as paying into a pension that might reduce the amount of tax you pay.

Taking dividends may still be a good option, but there are other tax planning opportunities to explore, such as paying into a pension that might reduce the amount of tax you pay.

Tax advice which contains no investment element is not regulated by the Financial Conduct Authority

 

Realising life-long ambitions

You now have more options than ever before to help you find a solution

For many people, retirement now represents an opportunity to realise life-long ambitions, pursue new passions or help family members with their income needs. Since pensions freedoms, you now have more options than ever before to help you find a solution.

We all want to save enough to ensure that we have a comfortable retirement. But the challenge is to know just how much income we’ll need as a pensioner – and how to work out how much we’ll need to save now to accumulate the right sum.

Be honest about how you want to live in retirement

It’s important to make realistic estimates about what kind of expenses you will have in retirement. You need to be honest about how you want to live in retirement and how much it will cost.

Estimate your retirement costs by looking at your current expenses

Part of the process is to estimate your retirement costs by looking at your current expenses in various categories, and then estimate how they may change. For example, your mortgage might be paid off by then – and you won’t have commuting costs. Then again, your health care costs are likely to rise.

To achieve the retirement income you require, you will need to know the answers to these questions:

  • What is the value of your pension pot?
  • What are your other sources of retirement income likely to be worth? (These include the State Pension, Individual Savings Accounts, property, and other savings and investments)
  • How long will your money need to last?
  • How much will you require to achieve your essential and additional income needs in retirement?

It’s important to make a distinction between essential income needs and additional requirements.

Essential income needs: the minimum level of income for basic lifestyle needs.

Additional requirements: these could include travel, hobbies, starting a business or helping younger generations onto the property ladder.

Unexpected costs: healthcare costs, family emergencies.

Leaving a legacy: passing on an inheritance.

Give yourself the best chance for a happy and secure future

Whether your retirement is fast approaching or decades away, many people are unable to retire when they’d like to because of their financial situation. With careful planning, you can avoid this predicament. Planning ahead for retirement allows you to decide when and how you will retire, and whether you will continue to work. Even if you have not begun to plan, you can still start preparing yourself at any time – it is important to give yourself the best chance for a happy and secure future!

Time to review your retirement planning calculations?

Once you have retired, your main source of income ends and your expenses will be covered out of savings, investments and retirement income streams. Spending is perhaps the biggest variable in retirement planning calculations and needs to be considered as part of your pension planning. To discuss your situation, don’t leave it to chance – please contact us.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY 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.

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

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