How to kill two taxes with one stone (ok, maybe not kill exactly)
I am under no illusions that an article on tax is going to capture the imagination but please bear with me!
Now that we are at the start of a new tax year, there is one particular area I wanted to bring to your attention. Don’t worry I have no intention of staring into a tax crystal ball and predicting what may change in the future.
There are however two well-established tax traps that are all too easily missed but, in many cases, can be equally easily avoided if you know where to look. It is also possible to help a child or other family member avoid them which creates a win-win against both Income Tax and Inheritance Tax.
The first is the snazzily titled ‘High Income Child Benefit Tax Charge’. Imagine, if you will, someone a bit like me but only in so far as they are married and have 2 young children. If either my wife or I earned over £50,000 then not only would we start paying higher rate tax but we would also have to start paying back child benefit.
Now, imagine my wife earns £60,000. If she did then not only would she have paid 40% income tax on the income between £50,000 and £60,000 but she would have to repay the child benefit in full which is another £1,820 giving a total effective tax rate of 58.2% and leaving her walking away with just £4,180 in her pocket from £10,000.
Imagine, instead that you could turn that £4,180 back into £10,000 and the only catch is that it was in a pension to help fund her retirement. That’s a pretty attractive 239% return!*
The detail of how this works is below but I think it is important to make people aware of this. From experience, if that were indeed my wife, cashflow can be tight with 2 children but there is no reason why a parent couldn’t make this contribution on behalf of an adult child. If this were treated as a gift either out of income or by using the £3,000 annual Inheritance Tax (IHT) exemption then it is win-win as it also helps pass money to the next generation efficiently as far as IHT is concerned.
The second trap I want to cover is the loss of Personal Allowance for income exceeding £100,000. The ‘trap’ in this case exists for people earning between £100,000 and £125,140. For every £2 of income above £100,000 then £1 of personal allowance is lost.
This creates a punitive tax rate of 60% for this section of income. This comes from 40% income tax and an 20% extra tax for the amount of lost personal allowance.
I’m sure you get the idea now with pension contributions, but this can be another point at which pension contributions become incredibly tax efficient.
I will leave it there for now. If you think this could affect you, a family member or someone you know why not get in touch with your Planner and see if we can help.
*In practice the individual would make an £8,000 initial outlay into the pension. The scheme would reclaim £2,000 within the scheme giving a total of £10,000 in the pension. Higher rate tax (a further £2,000) would be reclaimed via a tax return taking the net cost to £6,000 and the Child Benefit of £1,820 can be kept making the net cost £4,180.
Financial Planning Director & Chartered Financial Planner
I must confess to having had a bit of a dilemma last Friday evening. France hosted Scotland in the final game of the Six Nations and who to support as an Englishman? The first emotion of “get behind the Sweaty Socks” was then swiftly followed up with a stronger emotion “Allez les Blues” because a France win by a certain margin meant Wales would come second overall and there would be much crying and gnashing of teeth down in the valleys.
Growing up in the 70s on the back of countless Welsh hidings has instilled in me such an unwholesome knee jerk reaction of ‘anyone but Wales’, which I am the first to agree with is not to my credit. But there you go – you get emotional about matters and you invariably make the wrong decision. Having had a stern word with myself I painted my face blue, sang Flower of Scotland like a warrior from Brave Heart, and watched an epic game to crown an epic tournament. Well done Wales (yes really) and well done Scotland who won the game at the death in dramatic style and came of age.
Many get emotional over investments both on the upside and on the downside, and indeed if they drift for too long. Emotion and investments become a heady cocktail, which leads to poor decision making. We have begun planning for the May rebalance when all portfolios are realigned back to their original asset allocation, an exercise that happens twice a year. Having zero emotion about such an important decision means that there is no soul searching about market timing or navel gazing about how much to sell and how much to buy. We have etched the investment process into tablets of stone and implement it at specific dates in the year. We complete comprehensive ongoing research and due diligence on the portfolios but will not be sucked into short term tactical decisions.
True to our word though when we stated earlier this year that any changes in our portfolios would have to favour a sustainable mandate, we will be adding the Liontrust Sustainable UK Growth fund to the IronBright Core Satellite range and introducing the Stewart Investors Asia Pacific Sustainability fund to the IronBright Sustainable range at the rebalance. We like both Liontrust’s and Stewart Investors basic belief that those companies that will survive and thrive are those which improve people’s quality of life, be it through medical, technological, or educational advances.
Most clients who I have spoken with over the past year have accumulated surplus cash, partly I would like to think down to our investment prowess, but probably more so because there has been very little to spend it on. With the Easter break only a few days away, the prospect of Summer on the horizon and the joyful promise of further relaxing of ‘The Rules’ even I am, on reflection, becoming a bit emotional …. nearly time to go face down in an enormous chocolate egg and spend a bit of accumulated cash planning a family holiday…. what could possibly go wrong!
From me and all of my colleagues may I wish you a very happy Easter.
We enjoy working with people of all ages. One of our recent new clients Miranda Parkinson, is in her 20’s and is a creative writer specialising in media. Having worked with her to establish her investment objectives we asked her to share her perspective on Pensions and whether she feels this is something that resonates for her and her peers. She’s based in London and currently looking for her next position in content creation and writing. Here are Miranda’s thoughts which you may wish to share with young members of your own family.
You heard your parents talking about them once. You’ve got a friend of a friend with a fancy job who’s already started putting heaps of money into theirs – probably. You vaguely remember a teacher mentioning them at school…
…but you’re still not entirely sure what they are.
Never fear – you’ve come to the right place. We’re going to give you the lowdown on pensions, from how to get one and who exactly pays into it to why it’s so important to suss it out early.
Simply put, a pension is a special type of savings account where you put money to be used when you retire. Everything you put into a pension is invested over years so when you get around to using it, it’s had plenty of time to grow.
But how exactly do you start one? In the UK, you’re automatically enrolled into a pension once you’re 22 and earning at least £10,000 a year. Your employer is required to enter you into a pension scheme and contribute at least 3% of your salary. The type of scheme and how much your employer pays will differ – but your employer will fill you in on that.
As well as your own pension, there’s the state pension – money that the government gives you. At the moment, the basic state pension is £134.25 a week and this kicks in when you reach the current retirement age, 66. Without your own personal pension, this money would have to cover accommodation, bills, food and any other living costs you might have.
And here’s the bad news: this is going to change. As of April 2028, the state pension age will be 68 years old, so there’s really no telling what it will be in the future. The age of retirement will increase and the state pension might get lower – or at some stage in the future it might not even exist!
But it’s not all doom and gloom. The younger you start investing in a pension, the bigger the rewards are going to be. One of the main benefits of putting money in early is the effect of compound growth. Let’s say we decide to invest £100,000. If there was growth of 5% next year, it would be worth £105,000. Then, if there was 5% growth the year after that, it would be on this larger amount. This means our money would increase to £110,250…and so on. Even investing small amounts has a powerful effect over time.
Research has traditionally shown that young people are the least likely age group to save money and for many, the idea of putting money away can seem really daunting – especially in something like a pension, where you can’t get at it until you are much older or retire.
If you don’t feel ready to start investing in a pension, opening a LISA is a good alternative. This is a new type of ISA (individual savings account – the L stands for lifetime) created by the government that gives you a bonus of 25% on everything you put in. This can be up to £4,000 a year and all you have to do is open one before you’re 40. Like a pension, delaying opening one could actually lose you money in the long run!
Although we probably won’t be earning much when we start working, investing a small amount gives it more time to grow and it’ll seem much less painful! Instead of having to invest something like 20% down the line, you could invest 5% over a longer period – and thanks to our friend compound growth, you’ll end up saving more.
A healthier bank balance and a growing pension pot? Sign me up!
Benjamin Graham once famously said that “The investors chief problem and even his own worst enemy is likely to be himself.” Graham was a British born American economist and professional investor who sadly died in 1976. Warren Buffett described him as the second most influential person in his life after his own father.
Since 1994, Dalbar, in the US have been producing an annual study that looks to measure the effects of investor choices to buy, sell and switch into and out of different investments over short and long timeframes. The results are startling over all time periods.
If we just look at the last five years, the US stock market as measured by the S&P 500 returned 8.49% per annum. Over the same period, the average US equity investor achieved a return of just 3.96% per annum.
To put this in context, investors underperformed the market in which they were invested by a whopping 4.53% a year.
The only explanation for this huge difference in returns is INVESTOR BEHAVIOUR. That is, that they made decisions based on emotions rather than sound academic foundations. They simply sold out at the wrong time or they bought in at the wrong time.
The research supports our belief that the dominant determinant of long-term, real-life investor returns is the behaviour of the investor himself. Many investors believe, and have been lead to believe by their financial adviser that their returns depend on being in the right funds or types of investments, or, whether they are in or out of the market at the right time. The dominant determinant is behaviour, NOT selection and certainly not timing.
It is undeniably clear that investors can almost double their return by simply avoiding harmful timing decisions and by maintaining a disciplined and rigorous buy-and-hold strategy.
Carl Richards, a US based adviser and creator of the Sketch Guy column in the New York Times, refers to this phenomenon as the “Behaviour Gap” and wrote a book on this subject in 2012. When we were moving office in September, I stumbled across a box of Carl’s books. I’d like to give these away and will offer a copy (signed by Carl) to the first eight people to message me at email@example.com. I’m just sorry I don’t have more copies of this great book.
One of the many pleasures of my work is that I meet people from all walks of life who bring different perspectives to their financial planning. Different people will often view money differently too; some want to know that they have just enough for their lifetime while others who have perhaps inherited their wealth or act as an Attorney feel a real sense of responsibility and stewardship to pass their money on or to use it for a specific purpose. What is equally fascinating is the different ways they and we value money and the other elements that make up our lives, be it health, family, work, or those special items that we save up for.
At the end of last year, I listened to the Reith Lectures delivered by Mark Carney the former Governor of the Bank of England and now the UN Secretary-General Special Envoy for Climate Finance. Mark Carney has a real skill for communicating and my observations above came to mind as what he said really chimed with me. In these lectures which I wholeheartedly recommend if you have the time and interest, he looks at how as a society we have come to prioritise financial values over human values and the consequences of this.
It’s true that value and indeed success is often measured in financial terms for example a company’s profit, someone’s salary and the contribution goods or services make to a country’s economy (GDP). These are all essential to make our economy’s function but in isolation they can give money undue power. This single minded vision can also contribute to financial crises, our climate crisis. As my nephew aged 14 commented “so not only have you messed up the planet, but you have messed up the economy too”. I don’t think he is holding me solely responsible but for a number of decades money has been the primary concern at the expense of all else. It seems that our social values have often sat outside the financial markets.
HOWEVER……….. all is not lost as we are seeing a real shift in the role money has to play, which for a number of reasons will be more than a passing phase. This started before the pandemic (yes there was such a time!) and has since been accelerated by recent events. It was driven largely by the climate crises and the targets set by Governments worldwide including the UK’s ambitious target of achieving net zero carbon emissions by 2050 whereby we remove the same level of carbon from the atmosphere as we emit, with a significant reduction to be made by 2030.
Governments are not going to be able to achieve this alone, they will need large corporations, private finance, and the investment markets to all pull in the same direction. Companies will need to adapt and change their practices hugely to ensure they minimise their carbon emissions and operate in a climate friendly way – those that do not will not succeed.
We have also seen in the last year how Governments have prioritised health over the economy. We have come to value those who work in the healthcare sector and parents experiencing home schooling have come to value teachers. We have seen generous displays of civic duty with vast numbers of people volunteering, without them the vaccine rollout would not be the success it is, and many more people are wanting to be active in their community.
We are moving towards an alignment of monetary and social values where we are seeing that the companies who are doing well are those whose purpose is not just to create a profit but also do good for society.
I am lucky enough to have a number of clients in their 20’s and for them this is the norm, they are wondering why we have only just arrived at the party.
So, the future is bright, and we are all making a difference. I hope you have a great weekend, it doesn’t look as though its going to be a good one for gardening. If gardening is an interest the daughter of one of our clients, Tamsin Westhorpe, who is a renowned Gardener has written an excellent book that is providing me with lots of practical tips each month ……. perfect rainy day gardening!
Veronica Devereux DipPFS
The Chancellor’s self-promotion and prominent position in the Cabinet have led him to be dubbed Dishy Rishi by his admirers. And in the run-up to Wednesday’s Budget, Sunak was hardly camera shy. The 40-year-old posted an almost six-minute-long video on Twitter on Monday reflecting on his past year in No 11 – which has since been viewed more than 700,000 times. Can anyone imagine ‘spreadsheet Phil’ being on Twitter and having a video of himself prior to his last budget. I understand, this has raised eyebrows in Westminster and seen the Chancellor installed as the 5/2 favourite to be next prime minister by Ladbrokes. Sunak has an approval rating of 41 per cent, according to a YouGov poll, making him one of the most popular chancellors in recent years. Watch out Boris. Time to visit the Barber (once they open in April of course).
So, here are a couple of the headliners from the Budget and our thoughts:
These are also very much worthy of a mention, especially as we follow our roadmap out of lockdown:
As you know, I like to add in a few little news stories that have either made me smile or cringe!
In the news this week, we have:
…and finally, you may remember I did my little obituary to Eddie van Halen a few months ago. For all you cycle fans, you must see this paint scheme for a custom bike which was inspired by the iconic Eddie Van Halen ‘Frankenstrat’ guitar. Firstly, I love the paint job and who would not want to own a bike by the UK bike brand Windymilla. Inspiring!
As always, stay safe, healthy and keep a sense of humour.
Like most of my colleagues my days are very varied. In my dealings with clients, I keep getting reminded about the fragilities of life. It is impossible to keep some conditions at bay, but I am aware that keeping healthy is important (especially for a long retirement), so I start the day with a run.
Typically, the working day starts by heading into the office to deal with any messages that may have been sent overnight via our portal or email.
Then onto a meeting with my team – Harriet and Katy setting out the priorities for the day ahead. Harriet is my Paraplanner providing technical information/report construction etc. and Katy deals with the wide ranging administrative tasks (and there are many!).
Around 11am I may have the first client meeting of the day. Today with new clients who I had met before and wanted to retire but didn’t know if they had enough to do so. Harriet, Katy and I had worked to gather their information, looking at their ‘wish list’ of what they wanted to do in retirement and how much it would cost. The construction of the cashflow reports takes time but is so key in demonstrating what is possible. On this occasion, it was a privilege to let them know that they could retire. You can ‘feel’ the weight almost lift off their shoulders when you say this and the whirring in the brain and excitement of ‘what’s next?’.
After lunch my second meeting of the day is an Annual Planning Meeting with an existing client. They are in the fortunate position that they have enough income for their lifestyle and have said they don’t want to end up ‘the richest in the graveyard’. During the meeting, we talk about a gifting programme to ensure that the right people get the right money at the right time. Many clients have said that they would far rather gift money now to their family when they need it and get a pleasure out of seeing how the gift can help rather than waiting until they die. This is a good conversation to have and a plan is developed.
Talking to my colleagues we are all looking forward to getting back to having these meetings face to face.
I speak with many clients who have been and are going through different stages in life – especially retirement. This has influenced my own thinking of what life after work could look like for me, of course everyone is different. I have many years to continue planning for this as with a 10 year old in tow, I am aware that demands on my wallet will only increase!
Someone once told me that in terms of travelling I should work from the ‘outside in’ – this means travelling to the furthest countries that I wish to visit during my early years and work my way back closer to the UK, as travel becomes more challenging the older you get.
Another tip I picked up from a GP whose friend was a Geriatrician – his advice was walking every day (at least 3 mph) and get a dog. That’s the second GP who’s advised getting a dog in retirement, and not just for exercise – there may be something in that as our cat tends to just walk from the sofa to his food bowl. You don’t get healthier the older you get – a generalisation I know, but reasonably accurate. In other words, ensure that you do the most physically demanding and fun travel/projects as soon as possible.
All things to consider and I’m sure many more ideas will be relayed to me over the coming years.
Have a good weekend and if you have a dog, enjoy exercising in this spring weather and if you don’t, perhaps think about it!
Chartered Financial Planner
It has been widely reported that Tesla has invested $1.5bn in Bitcoin, which is trading at a record high at the time of writing. The investment is to create a liquid position in Bitcoin as Elon Musk hopes customers will be able to use the cryptocurrency to buy his Tesla cars. All well and good.
However, among all the excitement and interesting articles it dawned on me that there is something that bothers me about cryptocurrencies, but I am not sure why. It is a fascinating story and not for the faint hearted, despite what Mr Musk’s tweets imply. It is certainly not a store of value as “its price volatility at 80% is a dozen times higher than the Euro and sevenfold of the Russian rouble”. It remains a speculative asset and given its current fixed supply is at the mercy of sentiment, good and bad. It is also a dead asset, much like Gold, as it does not do anything, does not produce anything, not even a dividend.
The conclusion is that it is not so much I do not like cryptocurrencies as a commodity, it is that I like other methods of investing better. Investments that actually do something, something that is good and looks beyond short term individual gratification.
The end of the last decade brought with it one of the most difficult years for investors of all hues, but it marked a watershed moment for “Sustainable Investing”, which moved from the periphery to centre stage. The rate in change of investor sentiment has been rapidly supported by more and more high profile financial institutions who have begun to develop a meaningful footprint. There is now a diverse range of providers in the marketplace allowing investors a greater choice in terms of investment style and philosophy.
The performance story is strong for Sustainable funds now with a long term track record for many. Fund houses such as Edentree and Robeco have debunked the whole myth that investors are forced to give up returns to keep their values. Their funds give access to international companies well positioned to forge ahead in the future such as Renova, the Japanese renewable energy generator, which had a strong 2020 after the Japanese government committed to ambitious targets for green energy generation; Siemens Gamesa Renewable Energy, the European wind turbine manufacturing benefitting as the market revalued it in the light of Joe Biden’s victory in the US election …. the list is not endless, but you get the point.
Our IronBright Sustainable portfolios launched in 2020 have hit the ground running and are well placed to deliver on their impact and return objectives. Many of the underlying companies that investors have access to are looking forward to exciting futures: healthcare businesses responding to the need for better preventative solutions; technology companies creating a cleaner, more connected and safer world; companies with strong management teams that have looked after their workforce during 2020 who will emerge stronger and all the others addressing the urgent issues of climate change.
We may all still be locked up, bored rigid, waiting for the vaccine but we can still exert choice and influence about what are money does for us and the world around us. At your next review have a chat with your adviser about the investment options that you now have at your fingertips.
Stay safe and happy and like you we’re all looking forward to a Summer holiday!
This week, we are happy to introduce you to India Dagger. India is a Client Services Assistant and has been with the firm a little over two years. Here, she shares some of her experiences with the firm and how she spends her typical day.
No two days are the same
When I am asked ‘What do you do for work?’, I often say ‘I work as an administrator for a financial planning company’ because this is the easy answer – but the role of a Client Services Associate (CSA) is hugely varied. As a CSA, I support our paraplanners and financial planners in their client work. I am involved in almost every step of the client journey and am a key point of contact in assisting in maintaining the client relationship.
My favourite aspect of my role is speaking with clients and getting to know them, as well as having the responsibility of assisting with their finances. It is lovely to chat with clients about something other than their ISA or Pension! I also really enjoy the variety the role offers as no day is ever the same and I am often involved in new and exciting projects (such as the new IronBright platform transition and our marketing initiatives).
Before I joined Brunel just over two years ago, I worked in the marketing team for a property developer in Bristol. However, both my parents have worked in financial services for their entire careers and having undertaken work experience with an asset manager in London and a wealth management firm in Bristol this sector has always interested me. I studied Business, Economics and English Literature at A-Level.
My CSA role has helped me to gain technical knowledge as I have exposure to so many different client situations and possible financial solutions. I have learnt so much about financial planning and client service in the relatively short period I have been with Brunel. We have a great team who have been brilliant in helping me to develop my learning and skills.
During the pandemic I have continued with my studies for the Regulated Financial Planning Diploma and have joined our new Trainee Financial Planner program as I aspire to progress through the company to the role of a Financial Planner.Outside of work I enjoy cooking (particularly Asian food) and all things equestrian. My sister and I have ridden for most of our lives and have horses – we love to compete with our local riding clubs. I also enjoy keeping fit, taking our dogs for a long pub walk and socialising with my friends and family. I am really missing the office culture at Brunel and hope we can welcome clients to our new office as soon as possible.
Client Services Associate
At Brunel we love our team. They are a big part of what we do and what we are about.
In addition to hearing from the Directors in these updates, on occasions, you will be hearing from one of the team, with the aim of introducing themselves and providing an insight in to their role and how it affects our clients. This week, I am delighted to introduce Jamie Havard.
My name is Jamie Havard; a 26-year-old who harks from across the Severn Bridge and works as a paraplanner at Brunel. Aside from matters of financial planning, I enjoy homely cooking, rowing up and down the Avon, and more recently, finding other ways of staving off lockdown-tedium.
I’ve been at the company since November 2019, when I left my role as a statistician at the Office for National Statistics for a career in financial planning. I join you today from behind the scenes to shine some light on the role as Paraplanner within Brunel.
The majority of conversations about my job as a Paraplanner tend to go like this:
“What is it that you do again?”
“I’m a Paraplanner!”
“Oh, that’s great.… but hang on, what is that again?”
From these exchanges, it seems Paraplanning is one of the more unknown roles of the financial planning world. I guess this is quite understandable really given we tend to lurk behind the scenes.
As clients of Brunel, you will have had many dealings with the Financial Planners – the advisory faces of the firm – and the Client Services Associates (CSAs) who contact you regarding implementing and administrating their advice. So where in all of this, do the Paraplanners fit in?
Within Brunel, we work collaboratively with the Financial Planners using our technical knowledge to provide the best outcome for our clients. For example, when a planner advises on the retirement provision of a client, I will start with information gathering to form a picture of our client’s current situation. From there we look at how we can help them achieve their desired lifestyle simulating various scenarios. This all culminates in our recommendation report, so having an eye for numbers as well as words is needed.
A large part of our role involves supporting the Financial Planner by enabling them to spend more time with their clients. Having us paraplanners working solely on acquiring technical knowledge, financial compliance and writing up formal recommendations, enables the Planners to do this.
More recently, I have been attending client meetings to get a better understanding of clients’ needs, and adding more context to the work I do for you.
Alongside my paraplanning role I am also part of “Team Vision” which shines a spotlight on of some of the important issues that affect us as individuals and as a company from sustainability to gender equality.
So, there we go; a brief explanation on what a paraplanner is within Brunel. Now, time for me to scuttle back behind the scenes…
Jamie Havard DipPFS