Search

Clarke Nicklin Financial Planning

'protecting your wealth and helping your investments grow'

Month

September 2016

Prepare for the big life events as soon as possible

None of us know exactly what life’s got in store for us, but we know that there are a handful of major events that we’re likely to encounter at some stage. Some of the great milestones of life, such as buying a property, getting married, starting a family, funding university education, buying a holiday home or planning for retirement.

It’s essential to start thinking about preparing as soon as you can. Often this means saving for major expenses that may not yet be in sight but are awaiting us just over the horizon.

Readily accessible savings

Before you start investing for the medium to long term, initially it’s important to keep three to six months’ worth of living expenses in a readily accessible cash savings account – don’t invest that money! Don’t invest any money that you may need to access in a hurry in the event of a short-term emergency.

By investing in stocks and shares, you’ll gain access to potential returns that saving in cash alone cannot offer. Of course, there is an inherent risk that some or all investments may not keep pace with cash or may even go down in value, but real risk should be seen as the permanent – not temporary – loss of capital.

Temporary market sentiment

While investors must accept the short-term fluctuations of markets, those investing for the long-term are usually in a position to ignore day-to-day gyrations in asset values. Over the long run, asset prices follow their fundamental values – either up or down – rather than being affected by temporary market sentiment.

Timing the right moment to enter the market is notoriously difficult. While you may have a lump sum that you’d like to invest, implementing a regime of regular investment might be a lower-risk approach, even though you might forgo the opportunity to invest your money at the bottom of the market when an asset is at its cheapest.

Timing the market

Investing regularly reduces the danger of making a one-off investment at the top of a market cycle before asset values fall. At some points, you may have to pay more than if you had made a lump sum investment, but at others you could pay less – unless of course the price of the asset rises (or falls) each and every month onward. By keeping to a regime of regular investment, the emphasis shifts away from timing the market to time in the market.

Pound-cost averaging

You also benefit from ‘pound-cost averaging’ by investing the same amount each month, perhaps through Direct Debit. When the price of an asset is high, you will buy less of it, and when the price is low you will buy more.

The effect of ‘pound-cost averaging’ means that, on average, the price paid is lower than the average asset price over the period. There is no guarantee that pound-cost averaging will result in better returns than lump sum investing, but it can help smooth the ups and downs of market volatility.

Generating extra returns

The earlier you commit, the longer your money can work in the market. Reinvested gains can themselves generate extra returns, creating the effect of compounding, which, in a growing market, is larger the longer money is invested.

It follows that the nearer to the time when you plan to realize your investments, the less time your money will have remaining to achieve compounded returns. It is worth bearing this in mind when regularly reviewing your investments, which themselves should be updated to take account of any changes in your circumstances or priorities.

Percentage of your salary

Much as your pension contributions, when a percentage of your salary, will automatically rise in line with any salary increases, it could be worth applying the same principle to the amount you regularly invest.

Failing to increase your regular investment contributions means that, over time, their real value – and the quantity of assets they will buy – will normally fall. To improve the chance of your investments growing over time to meet your future financial goals, make sure you review your monthly contributions regularly so they don’t fall behind both inflation and your means.

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.

 

Advertisements

Pension reforms – How the lifetime allowance reduction could impact on your retirement savings

The Government has introduced comprehensive reforms to the pension rules over the previous few years. One important change, which may have been overlooked by some savers, is the reduction of the lifetime allowance that applies to pension savings. The lifetime allowance is the total amount you can hold within all your pensions without incurring an additional tax charge.

Inflationary increases

The Government has indicated that this allowance will increase each year in line with inflation (CPI) but only from 6 April 2018. It was reduced from £1.25m down to £1m from 6 April 2016. If you have more than £1m in your pension pot or are likely to do so at retirement, you can apply to protect it against reductions to the lifetime allowance.

Taking action

While some may not be affected by the lifetime allowance, it’s important to take action if the value of your pension benefits are approaching, or are above, the lifetime allowance. As pensions are a long-term commitment, what might appear modest today could exceed the lifetime allowance by the time you want to take your benefits.

Tax consequences

Exceeding the lifetime allowance could have significant tax consequences, for example, any lump sum withdrawals you take from the excess amount within your pension are taxed at 55%, and if you retain the excess amount within your pension fund a 25% tax charge is made (and any income taken from the fund will be taxed at your marginal rate of Income Tax).

Fixed protection

If you could be affected by the reduction in the lifetime allowance, there are some actions you could take to help protect yourself from this potential tax charge. However, if you have accrued pension benefits since 6 April 2016, fixed protection will not be available, so you should obtain professional financial advice to look at the options available to you.

Taking benefits

If you are already taking benefits from a pension, this will also impact your lifetime allowance. It is important to note that the allowance applies to the value of your pension when you eventually come to draw money from it (and not the value on 6 April 2016). This means that even if your pensions are currently worth well short of the new £1m limit, you could still be affected by the reduction and may need to take action now.

High earners

Another pension change which came into effect from 6 April 2016 is a reduction to the annual allowance for high earners. The allowance of £40,000 will reduce by £1 for every £2 of income received above £150,000 (the threshold for the additional rate of income tax). The reduction is limited to £30,000, meaning anyone with income of £210,000 or more will have a £10,000 annual contribution allowance. Bear in mind that ‘income’ for this purpose includes employer pension contributions.

Are you on track to breaching the allowance

While £1m may sound like a generous sum, it is surprisingly easy to breach this limit, meaning that you could be subjected to a tax bill of up to 55% on some of your pension pot. Whether you’re a saver in the middle of your working life or nearing retirement, it’s crucial you know if you’re on track to breaching the allowance.

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.

 

Savvy investors – Time to shelter income and capital gains

For long-term investors, Individual Savings Accounts (ISAs) are a very tax-efficient wrapper that can hold cash savings as well as investments in stocks and shares. Savvy investors are also able to shelter income and capital gains.

ISA flexibility

The limit on how much can be saved in an ISA each year has doubled since 2009; you can add up to £15,240 to an ISA in the 2016/17 tax year. Cash that you withdraw from a flexible ISA can be replaced during the same tax year without counting towards your annual ISA allowance, which is known as ‘ISA flexibility’. What sets ISAs apart from other savings and investment accounts is that any interest on cash savings, gains from investments or income from dividends are tax-efficient, and you don’t have to declare ISAs on your tax return.

Added advantage

Because of their tax benefits, ISAs can help your savings and investments grow faster over time. Investing your ISA in stocks and shares has the added advantage of helping safeguard you from a potential Capital Gains Tax (CGT) bill in the future. CGT is a tax on the gain you make when you sell or dispose of assets such as investments. It is currently charged at 20% for higher-rate taxpayers on gains made that exceed the yearly tax-free allowance. Currently, the CGT allowance is £11,100.

Additional allowance

Rules on ISA death benefits introduced in April 2015 allow for the transfer of an extra ISA allowance to the deceased’s spouse if they passed away on or after 3 December 2014. The surviving spouse can use an additional one-off allowance, which is equal to the value of their partner’s ISA savings, as well as enjoying their own usual yearly allowance. An additional permitted subscription (APS) can be used for up to three years from death.

Inheritance Tax

You qualify for the additional allowance whether or not you inherit the actual assets of the ISA. The deceased’s ISA assets are distributed according to the terms of the will or intestacy rules, and any Inheritance Tax liability will remain in the usual way (except ISAs qualifying for Business Property Relief, for example, Alternative Investment Market [AIM] ISAs). No actual funds are transferred, and the extra allowance can be made up from your own assets. Also, as well as being married or in a registered civil partnership with the ISA holder, you need to have been living together – if you were separated, either under a court order, Deed of Separation or any other situation that was likely to become permanent, you can’t use the additional allowance.

Compounding effect

Long-term investors that can afford to invest at the start of the tax year rather than at the last minute not only gain a year’s performance, but these extra gains will be reinvested in the market until they need the money. Over time, the effect of compounding can be significant. The more you invest, the greater the potential impact of early investing. Likewise, the longer you are investing for, the larger the compounding effect. Also, investing early in the tax year to benefit from compounding is most pertinent not only for those saving for retirement but also for parents investing for their children’s future through dedicated Junior ISAs (JISA).

Building a long-term investment strategy

If you are unsure about the suitability of your investments, you should always obtain professional financial advice. For the effects of compounding to work requires two things: the re-investment of earnings, and time. The more time you give your investments, the more you are able to accelerate the income potential of your original investment, which takes the pressure off of you. To discover how we can help you build a long-term strategy for your investments, please contact us – we look forward to hearing from you.

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.

Create a free website or blog at WordPress.com.

Up ↑