Aside from the controversial “granny tax” there was little to surprise us in the budget due to the advance announcements that the 50% tax rate would reduce to 45% from April 2013 and personal allowances would be increased. 

Pensions tax reliefs

Good news here that the various rumours about changes to tax free cash and contribution limits proved unfounded. The annual allowance remains at £50,000 and carry forward of unused relief is still available, so there will be an opportunity for some to capitalise on the last chance to secure 50% tax relief over the coming year.

State pension

Details of the next step towards a flat rate of £140 per week state pension will be announced soon and in the summer, proposals will be set out to review state pension age to reflect increased life expectancy – expect age 75 retirement dates for your children!

Income drawdown limits

Despite strong lobbying, there were no changes on income limits, which have been drastically reduced following the reduction of the maximum limit combined with the impact of falling gilt yields.  We expect pressure to continue to review the position, but in the absence of any changes, we are working with our clients to ensure their income position is supported from other capital assets in the most tax efficient manner possible.

Cap on tax reliefs

A big change here was to introduce a cap on tax reliefs of 25% of total income for anyone claiming more than £50,000 in a year from 2013/14. This only applies to reliefs that are currently unlimited, so pension funding is unaffected, but this will restrict charitable giving, which would appear to be an unfortunate and perhaps unintended consequence.

Personal allowance still reduced on income over £100,000

From 6th April 2012, the personal allowance is reduced progressively for those earning between £100,000 and £116,210, resulting in an effective tax rate of 60%. This can be still be avoided by making a pension contribution and/or charitable donation.

Capital taxes

Thankfully, there’s no change to Entrepreneurs Relief or Capital Gains Tax this time around, which gives business owners significant tax advantages on exit.

On the Inheritance Tax (IHT) front, there’s a few good moves with consultation in the pipeline over changes to simplify the calculation of the 10 yearly tax anniversary and exit charges on Trusts and an increase in the amount a UK domiciled spouse can transfer free of IHT to a non-domiciled spouse.

We have clients who will be affected by both changes and we will report further details once the outcome of the consultation is known.

Stamp duty rise

In a surprise move from Budget day, a new Stamp Duty rate of 7% will apply to homes valued at over £2m and there will a 15% rate applied to those acquiring property via offshore companies. 

Many of our clients with London properties will be affected by this move and it is likely to have an impact on the property market in the South East in particular.

As always, please do call us for guidance at any time.

We asked Peter Stanyer, our independent economic consultant to share his view of the Budget and consider its implications for the economy and investors.

Less important for UK interest rates than what happens in the USA

Peter Stanyer

The Economist magazine has identified the essential importance of the 2012 budget as being that it was pro-business, and in particular, pro- big business. In case we missed the message, this is the significance of the stage managed announcement by the Prime Minister of new jobs from GSK. 

With luck, the hullabaloo about the “granny tax” (actually, the phased abolition of an anomalous tax break for one section of society) will dissipate quite quickly.

Important elements of the budget

These are, firstly, that George Osborne reiterated the government’s commitment to its chosen path of austerity. Secondly, that it announced that the UK is going to be a competitive place to both earn and to book profits. Mr Osborne is clearly keen to do what he can to attract corporate earnings and tax revenues away from other EU countries. The UK still has an horrendous budget deficit, but  Mr Osborne is determined to get it down.

The UK budget defecit 

The budget deficit in 2012-13 is still expected to total an eye-popping £121 billion, before allowing for an accounting  windfall from the transfer to HM Treasury of the Royal Mail pension scheme.  The deficit is now on a downward trend, helped by having to pay only ultra low interest rates on the enormous amounts borrowed in the past four years.  As a percentage of GNP, the budget deficit has declined from 11.1% in 2009-10 to a projected 7.6% in 2012-13 and is expected to be reined in further each year.

It’s the implications of the budget for financial markets that matter most for investors

Here the message is not very clear. Low interest rates are a severe restraint on many pensioners’ standard of living and the budget does little to suggest whether gilt yields and savings rates might soon return to more normal levels.  However, the UK budget might be the wrong place to look for help. 

The chart below shows the pattern of ten year plus yields on UK and US government debt since 2000.  They both have moved very closely together and probably will do in the future. The chart suggests that UK interest rates are unlikely to revert to more normal levels (a range of 4% to 5%) unless US interest rates do as well.   

In recent months there have been growing signs of recovery in the US economy, which is probably the key to a pick up in interest rates. It is signs of durable economic recovery that will persuade companies to invest their cash piles and recruit, and will persuade households to spend more and the Federal Reserve (as well as the European Central Bank and the Bank of England) to stop forcing down the yields on government bonds (by forcing their prices up). 

These factors are each underpinned by prospects for the US economy. This, rather than any detail in George Osborne’s budget, holds the key to a more prosperous future for cautious or balanced UK investors. 

Setting the right environment

However, by gradually making the UK economy more business friendly, the budget is important in setting an environment in which UK firms are more likely to thrive and employment is more likely to recover. But how the property market, for example, will respond to an eventual return to higher interest rates is still far from clear. But the optimist remembers that time helps to reduce imbalances in all markets.

March 23 2012

Peter Stanyer, FPC’s independent economist, is the author of The Economist Guide to Investment Strategy, Profile Books, 2010

Important Information: The comments and views expressed in this publication are solely those of FPC and are provided for information purposes only.

Paul Welsh, FPC financial planner, ran the Liverpool Half Marathon on 18th March this year in aid of the Mango Tree. He has been taking his training very seriously over the last three months, mainly by running with his childhood friend round the Crosby/Blundellsands area of Liverpool.

Paul Welsh relieved to finish the longest race of his life, so far…

He completed the 13.1 mile race in good time, finishing in just 1 hour 52 minutes - beating his personal target of 2 hours!

“I cannot stress how important it is that the communities receive the funds they need to look after deprived African orphans who have lost their parents to HIV/AIDS,” said Paul.  ”I have been overwhelmed with the amount of support I’ve received so far – thank you”.

Paul had already raised over £500 (including gift aid)  for the Mango Tree before the race began. He is keen to reach his milestone target of £1,000, so  if you would like to donate, it’s not too late – visit Paul’s Just Giving page  to make an online donation.

Now that Paul has caught the marathon bug, he plans to continue with long-distance running and maybe even a few more half-marathons – watch this space!

This year’s budget is on 21st March and speculation is mounting over what will be announced and how it will affect our finances and long-term planning. 

One area of concern is the Lib Dem’s proposal for a Mansion Tax, or possibly extending Capital Gains Tax to main residences above a certain value. 

Peter Stanyer comments on the economic and investment implications of this thorny subject.

An economist’s view…

Peter Stanyer
Independent Economic Consultant and author of the Economist’s Guide to Investment, Profile Books, 2010

To find out more about Peter’s extensive career, click here.

Land and housing represent a large proportion of the wealth of many families. Comfortable houses, holiday homes and helping children to buy homes for themselves are common goals for the well-off. So discussion of extra taxes on housing will worry many. Such concerns will be increased by the knowledge that a significant new tax burden would upset their carefully calibrated income plans.  

How seriously should we take this?

All will be revealed on 21st March when the Chancellor unveils his 2012 budget and we see whether a new levy is to be introduced. But a longer term perspective is also needed.  Economists are unusually united in believing that a tax on changes in housing values would have few negative effects on the economy. This means that housing tax will not disappear from the Treasury’s agenda. 

Effect on income and house prices

A housing tax would clearly reduce incomes and so spending by house owners. But it would not discourage work or enterprise, unlike taxes on wages and dividends. A tax on housing would not be a levy on building costs as the intention would be to tax the value of the land under the building. There would undoubtedly be transitional effects, but over time economists would expect the result to be somewhat lower house prices and not lower house building.   

A home or an investment?

One attraction of a tax on house values is that house price rises normally occur through no effort of the part of the house owner. They primarily arise because of restrictions on supply, with occasional relaxations of planning restrictions, for example, giving rise to substantial windfall gains. The experience of rising house prices in the UK stretching over decades has led to a widespread perception that housing can be relied upon as a hedge against inflation, a store of value, and even as a more dependable investment than the stock market.

Owners of housing in other countries, including the US, Japan, Germany, Spain and Ireland would have a different perception: housing as an investment can be just as dangerous and over long periods as disappointing as the stock market. In the UK, the threat of taxation and moves to ease planning restrictions should cause us all to question our assumptions about the reliability of housing as a low risk long term investment.

Peter Stanyer

March 2012

Contact us

As ever, if you would like to discuss anything relating to this article, please do not hesitate to call Moira, Bernice or Mark on 01704 571777.

If you consult an accountant, doctor or solicitor you expect them to be fully qualified to a high standard – so why should you accept anything less from a financial adviser and what qualifications should you look for in an adviser?

Chartered Financial Planner

This is awarded by the Chartered Insurance Institute and is achieved by the adviser attaining a minimum of 290 exam credits including 180 Diploma level credits, or they have completed the Advanced Diploma in Financial Planning.

Chartered Financial Planners must also have five years’ relevant industry experience and at least three years’ continuous professional development. The adviser must agree to follow the CII’s Code of Ethics and Conduct.

Certified Financial Planner (CFP)

This is awarded by the Institute of Financial Planning. It involves having either AFPC or Diploma qualification or equivalent from another professional body and three years’ industry experience.

The adviser must also successfully complete an assessed case study aimed at measuring the adviser’s financial planning abilities and application of technical knowledge. Holders of the CFP are required to maintain continuous professional development.

Proud to be Independent and Chartered

Financial Planning Week has been our opportunity to fly the flag for all Chartered and Certified Financial Planners in the UK who are committed to raising standards in our profession through formal study and continuing professional development. 

At FPC, we are completely independent and not part of any network, so we advise you without bias or conflict of interest. As well as holding individual professional qualifications, in 2008, we were one of the first firms in the UK to be awarded Chartered Financial Planner status, a standard that is assessed year on year.

Whilst the benefits of financial planning are being promoted to individuals in the UK, it is clear that the €urozone would also benefit from some comprehensive financial planning.

The politicians are still “kicking the can down the road” and with Greece, Italy and now Spain changing the team at the top we wonder who is next for the chop?

Merkel, Sarkozy and Obama all face re-election in 2012 and it would appear that as a result, rather than deal with the unpleasant consequences of their plight, they are all avoiding taking the decisive action that is required.

 As for the banks! 

The 2007/8 financial collapse was triggered by banks financing poor quality, over-valued, mortgage backed securities that had a high likelihood of default.  This time, banks have lent money to imprudent governments rather than individuals – perhaps evidence of the culture that exists within retail banks; one of short term profit over long term sustainability.

A plan of action

Firstly, there is a need to accept that the balance sheets of Europe’s banks (including those in the UK) are still in an unhealthy position.

There then needs to be an honesty session between Central Banks, regulators, politicians and bank shareholders, with all sides accepting that all of our futures are inextricably linked. Once a complete picture is established, those responsible could then develop a credible plan of action.

The wealthy investor’s dilemma

At FPC, we question why a wealthy investor would seek investment advice from a large bank, given their recent track record. There is a mistaken belief that they have extra special resources of global knowledge and expertise that others lack, yet we find no evidence to support it.

Do feel free to share your views and feedback, so we can end Financial Planning week with a round-up of your thoughts. Just email ku.oc.cpfnull@gniknihtprahs

Sadly, the recent issue of National Savings and Investments (NS&I) tax free Index Linked Savings Certificates proved too popular and were quickly withdrawn.

Not missing a trick, this gap in the market is being filled by similar-looking offerings from several major banks and even the National Grid and the Post Office.

But are they as attractive as they might first appear? 

According to the governor of the Bank of England Mervyn King, inflation is likely to fall significantly in the next 18 months, so the prospect of inflation-linked returns of 5% plus 0.25% is probably pie in the sky!

Nevertheless, we should still fear inflation as even with only 3% inflation, the purchasing power of your money almost halves over a 20 year period.

FPC’s view on the current offerings

None of the current offerings come close to that (previously) provided by NS&I, for two major reasons: taxation, and investor protection.

• Where gains are taxed as income, taxation will erode the gross investment return unless the product is held in an ISA or a SIPP, or the holder is a non-taxpayer.  This is in contrast to the NS&I Certificates, where any gains were free of all taxes.
• In terms of investor protection, NS&I is backed by the UK government and so is probably one of the ‘safest’ places for your money imaginable.  Some of the other offerings will be deposit-based, in which case up to £85K is usually covered under the Financial Services Compensation Scheme or FSCS.  However, some may potentially have no protection arrangements at all, e.g., if you are lending money to National Grid (or similar).

Without being too cynical, the products being offered by the banks are opportunistic and probably more for their benefit than the saver.

Our view is to hold fire as our government is going to need to raise more money soon so index linked savings certificates could make a comeback! 

Any questions?

If you have any questions about the NS&I offerings or other investment opportunities, please call Mark, Moira or Bernice on 01704 571777

According to new research produced by Clydesdale and Yorkshire Banks – almost half of parents believe that teaching children the value of money is one of the most important lessons in life but very little financial education takes place at school.

Junior ISAs

Teaching a young person to operate and manage their finances with a day to day bank account is a good place to start and from 1st November, millions of children (aged under 18) also became eligible for a Junior ISA, which replaces the Child Trust Fund (CTF). 

An overall annual limit of £3,600 per tax year can be invested and this limit will rise annually in line with inflation, starting in the 2013/14 tax year.

The account is opened by the person with parental responsibility for the child and from age 16 they can manage the investment until they assume full ownership from the age of 18. 

Anyone starting to twitch yet?! 

Potential benefits

The tax benefits are similar to ‘adult’ ISAs – no further tax to pay on income, and no tax on gains.

Bearing in mind many young people are non taxpayers anyway (with their own personal allowance) this may not seen such a big deal but it can be a help for parents who are funding the arrangement as the current income tax anti-avoidance rule on parental gifts to children that generate more than £100 gross income, will not apply.

Also unlike the adult Isa, anyone can contribute to the junior Isa allowing parents, relatives and friends to save for the child in a single vehicle. This ought to be preferable to the fragmentation created when individual investments are all over the place.

A word of caution

Over a 10 year period, assuming modest investment returns of say 3% net of costs per annum and with contributions increasing in line with inflation (assumed 2.5%), this could result in a future fund value of around £47,290 (or £36,945 in today’s terms).

One would hope that the future 18-year old would have been persuaded that these funds are to be used for the sensible purposes of education funding, house deposit, or other useful venture however they could also be used to fund a really good time so, whilst we welcome another tax break (we need all we can get) we would urge caution.

You need to be very happy to sign this over to your offspring or grandchildren at age 18 before you embark upon any significant funding. You also need to make sure your own investment needs are met and that you are utilising your own ISA allowances before you utilise anyone else’s!

Helping the next generation

If you want to save for your children or grandchildren, we can help you with advice on estate planning opportunities, the creation of family Trusts and gifting programmes.

You can also download our handy guide to Inheritance Tax allowances which sets out all the gifting allowances available.
Are you using yours? 

Any questions?

If you need guidance, please call Mark, Moira or Bernice on 01704 571777

The maximum pension contribution on which an individual can receive tax relief has been reduced to £50,000, but there is an opportunity for some individuals to carry forward unused annual allowances from up to three previous tax years.

In certain circumstances, a contribution of up to £200,000 can be paid in the current tax year and tax relief obtained at your top rate.

This could be 50%, or 60% if you get your personal allowance back (it is progressively lost if your taxable income is between £100,000 – £115,000) or even more if you organise an employer contribution through salary sacrifice and save the employer’s NIC too!

An opportunity not to be ignored

This is an opportunity that should not be ignored. However, any decision needs to be viewed in the context of your overall financial planning and it is vital to consider the tax efficiency of the decision in the longer term.  

Questions you need to ask yourself

Will you benefit from at least 40% tax relief on the contribution?

Are you happy that the additional future pension benefits you will receive represent value for money compared to the loss of cashflow now?

Are you confident that you will not breach the upper Lifetime Allowance for pension funding (£1.5m) when you come to take benefits?

If you answer no to any of the above, pension funding should not be your automatic choice and you should seek advice before taking any action.

As ever, the smallprint

Care has to be taken to ensure that any contribution paid is accounted for in the correct tax year.

Just because a contribution is made before 5 April 2012, it is not automatically counted against the £50,000 annual allowance for 2011/12.  It all depends on the actual arrangement’s Pension Input Period (PIP) and in many cases this is not aligned with the tax year.

Personal contributions

Personal contributions need to be within 100% of the individual’s relevant UK earnings (exclude dividends and interest) for tax relief purposes in the actual year the contribution is paid.

Employer contributions

Employer contributions can also be used for carry forward and are therefore subject to the annual allowance. They can exceed an individual’s relevant UK earnings but will be subject to the HMRC ‘wholly and exclusively’ rules for corporation tax relief purposes.

Important point

HMRC confirmed that anyone who is a member of a registered pension scheme for a particular tax year will be able to make use of carry forward from that tax year. There is no requirement for the member to have paid any contributions or had benefit accrual.

Any questions?

Please call Mark, Bernice or Moira on 01704 571777.

But is it a good idea? 

A few points (and alternatives) to consider

Provision for retirement is vital, especially for the next generation who are typically disengaged from pensions funding in general. However, often a greater and more pressing objective is to become mortgage free as this generation typically has a far greater debt burden than their parents or grandparents, so help with mortgage repayment might be at the top of their list.

Also, if tax relief is only being secured at basic rate  a programme of ISA funding might give greater flexibility.  These funds could then be used in the future to make a pension contribution at a time when the individual can secure higher rate tax relief.

Will they have the discipline to save like you have? 

The advantage of all pension funding is that the funds are essentially tied up until age 55 at the earliest, so a forced discipline applies – they can’t spend the money!

However, we can’t guarantee what rules will apply in the future as they have changed continually over the years, so the certainty of access via alternatives such as ISAs might give greater flexibility.

Family ISAs

For those clients with existing ISA or personal portfolios on our platform, we can offer a family ISA, so do call us if you think this might be something you may want to consider.

We can also advise on more significant gifting, the establishment of Family Trust funds and school and university fees funding programmes.

Further guidance?

Please call Mark, Bernice or Moira on 01704 571777.