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Mowatt Financial Planning: 2010

Tuesday, 21 December 2010

Compensation limits

From 31st December 2010 the deposit compensation limit under the Financial Services Compensation Scheme (FSCS) will increase to £85,000 from £50,000. This means that an individual can hold up to £85,ooo with a financial institution and be protected if that institution were to become insolvent.

The moneysavingexpert site gives detail on financial institutions that are linked an also on institutions not protected by the FSCS.

It's important to keep your exposure to any one financial institution within the compensation limits.

Thursday, 9 December 2010

New Annuity rules

The Treasury has just announced changes to how pension income can be taken. It's good news as it is giving more flexibility. The changes come into effect from 6th April 2011.

The most significant change is that a flexible drawdown option will be introduced allowing withdrawals above a capped limit as long as a minimum guaranted lifetime income of £20,000 per annum can be verified.

The capped limit refers to one of the other options whereby income can be taken between £0 and 100% of the basis amount which is broadly in line with the amount from an annuity.

Of course an annuity will very often be the right choice for the majority of people but this additional flexibility is a welcome development which can hopefully increase the appeal of pensions.

Wednesday, 1 December 2010

Individual Savings Account limits

In case you had not spotted this. The limit for investment in an ISA (Individual Savings Account) will be increased to £10,680 from 6th April 2011. As is currently the case 50% can be invested in a Cash ISA and 50% in a Stocks and Shares ISA.

Wednesday, 24 November 2010

Financial Planning Week - Savings Tips

By savings I mean the kind of savings account that you would have with a bank. Your savings could be for a rainy day or some specific goal that you have in the next few years. The intention is that there is no capital risk with this money.

Savings Tips
1 Consider using your annual Cash ISA allowance of £5,100. My thinking here is to cover your emergency fund of 3-6 months outgoings with a cash ISA.

2 If you are a couple then make sure that you spread your savings to minimise any tax that is taken. For example if one of the couple is earning and the other is looking after the family and does not have an income; the savings can be held in the non-earning person's name and the first £6,475 in income will not be taxed.

3 Spread your risk. Only hold £50,000 with one financial institution (each for a couple) to make sure that your savings are protected by the Financial Services Compensation Scheme. See Are Your Savings Safe? on the moneysavingexpert.com website.

4 Look at how long you can leave your money invested as you can get better interest rates for fixed term accounts. Personally I wouldn't fix for more than 3 years as you would be leaving your money for a long time and the future course of inflation is an unknown.

5 Shop around! Click on the link here to find a selection of current interest rates and compare this with the interest rate that you are earning. It's important to keep reviewing the rate you get. Check the rates you can get on the Moneyfacts site here.

Monday, 22 November 2010

Financial Planning Week

Today sees the start of Financial Planning Week (22nd to 28th November).

The Financial Planning 2010 survey shows that the need for Financial Planning is greater than ever:

The survey found that 43% of people worry about money "more often than not" and 17% worry about it "all the time".

The situation has got worse than in 2008 when 26% of people said they have financial goals they are working towards compared with just 14% in 2010.

More worringly, when asked how they intend to improve their future financial position, 36% of respondents said their hopes rest on winninmg the lottery!

There is a dedicated website www.financialplanningweek.org.uk where there are financial planning tools and tips.

Monday, 25 October 2010

State Pension

In the spending review last week, the government announced an accelaration in the increase in the State Pension age to 66.

Previously the state pension age was being equalised for men and women at 65 by 2020 and then increased from 65 to 66 for both men an women over a 2 year period from 2024 to 2026.

It will now be 66 for both men and women from 6th April 2020 with the increase from 65 being phased in from December 2018 to April 2020.

According to research by Towers Watson the biggest losers are some of the women born around 1954. A woman born on 5 April 1953 will still be able to claim her state pension when she is just 62 years, 11 months and one day old. A woman born a year and a day later will have to wait until she is 66.

You can check your state pension age here although it hasn't yet been update for the latest changes.

Note that the planned increase in the state pension age to 67 and 68 is also likely to be accelerated. I think there is a good chance that we will also see a state pension age of 70. We might see more on this later in the year when there is a green paper expected on state pensions reform.

Friday, 15 October 2010

Pensions - annual allowance

Yesterday the government announced a change to the annual allowance for pension contributions. The allowance will be £50,000 from 6th April 2011 which is a significant reduction on the previous allowance of £245,000.

In the current tax year the anti-forestalling rules apply for individuals with earnings of more than £130,000.

The government also announced a reduction in the lifetime allowance to £1.5 million from £1.8 million.

The impact will mainly be on very high earners and has the merit of being much simpler than other options that had previously been considered. Relief will be available at an individual's marginal tax rate.

The detail on transitional arrangements for anyone who exceds the new lifetime allowance has still to be set.

Friday, 8 October 2010

Equity Markets - Where Next?

I went to an interesting session from Mike Lenhaoff of Brewin Dolphin on the outlook for equity markets.

The key message from Mike was that the current situation is "not great but not as bad as it is made out to be".

His view on the FTSE 100 is that it will end the year at 5500 which is slightly below where it is today. This is consistent with what he expected at the start of the year although we have seen greater volatility than he forecast. See chart showing last 12 months here.

The main concern he could see was the tension between the US and China on exchange rates if this led to any form of protectionism. Not an immediate concern but something that could knock the equity markets if it occurred.

One interesting fact that he shared with us was that 50% of the earnings of FTSE 100 companies comes from what is known as the emerging markets. Although these are global businesses it's interesting to see the extent of the exposure to these markets. So even if you invest in UK Equities via FTSE 100 you are obtaining significant exposure to the developing economies.

Friday, 17 September 2010

U3A follow up

I got a nice write up in the Easingwold Advertiser.

There is also a link to the presentation I did here.

Will

Friday, 3 September 2010

U3A

I was invited to do a presentation at the Easingwold branch of the University of the 3rd Age. It was well attended and I got some good feedback after the session so hopefully some of the attendees found it useful. I thought it would be a useful reference to post my key messages here:

Savings strategy (for money you will need in the next 5 years)
  • Shop around for a good return and keep shopping around
  • Fixing for longer periods (more than 3 years) gives exposure to inflation risk
  • Up to £50,000 is protected with one financial institution
  • There are specific options available for income needs
Sites I would suggest to check on rates are:
Moneyfacts
Moneysupermarket
Moneysavingexpert is also very useful

Investment strategy (for money you won't need in the next 5 years)
  • It's important that this is invested in line with your attitude to risk
  • Don't put all your eggs in one basket
  • Review your strategy and investments regularly
Income Tax
  • Use your ISA allowance
  • Transfer assets between couples to ensure personal allowances are used
  • Avoid the age allowance trap if possible
  • Consider assets which produce capital gains rather than income
  • Consider Investment Bonds
Capital Gains Tax
  • Manage gains and losses and use your annual allowance to avoid CGT
  • Share gains between spouses
The points above are generic and in practice will depend on personal circumstances. Any specific questions please get in touch.

Wednesday, 21 July 2010

The Budget and Financial Planning

It’s been a few weeks since we had the emergency budget. To an extent the dust has setlled so it's worth a look at how the Budget measures can affect financial planning.


Personal Allowances

The personal allowance will be increasing by £1,000 to £7,475 with effect from April 2011 for those under 65. This will not affect higher rate tax payers as the basic rate limit will reduce to compensate for this.

Financial planning tip:

The personal allowance means no tax is paid on the first £7,475 of income. Where a husband and wife have savings and one of the allowances is unused or not fully used, it is tax efficient to move the savings to the individual with an unused personal allowance.


Capital Gains tax

The rate of Capital Gains tax has increased from 18% to 28% for higher rate income tax payers from 22nd June 2010. Each individual has an annual Capital Gains Tax Allowance of £10,100. This means that the first £10,100 of gain is exempt from tax.

Financial planning tip:

Capital Gains should be reviewed on an annual basis to consider realising any gains below the annual exemption to avoid this tax. In addition, assets transferred between a husband and wife are not treated as a gain and so it is possible where one spouse has used the annual exemption to pass some of their gain to the other spouse to use the annual exemption of both.


Pension Tax Relief

The previous government had made some very complex changes to the tax relief of pension contributions. Although the 2010/11 measures remain in place, there is to be consultation on a simpler approach which is likely to include a lower annual allowance of between £30,000 and £45,000.

Financial Planning tip:

For those individuals earning less than £130,000 per annum there is an opportunity to make a significant contribution in the current tax year (up to the current annual allowance of £255,000). For those individuals earning more than £130,000 the options are more restricted but they should also consider making an additional pension contribution in the 2010/11 tax year as the scope for doing this in future years is likely to be reduced. This is a complex area where it is important to take professional advice.


Scrapping the age 75 rule

Before the 22nd of June it was compulsory to buy an annuity from age 75. This has been changed to 77 as an interim measure while there is consultation on the detailed changes.

Financial planning impact:

Although this affects a minority of individuals, those who are approaching age 75 now have more flexibility in how they take their retirement income.


State Pension Age

The government are looking to accelerate the increase in the state pension age to 66.

Financial Planning impact:

Those who decide to retire before the state pension age will need to bridge the gap between their chosen retirement age and state pension age for a longer time.


Basic State Pension

The Basic State Pension will increase in line with the higher of average earnings; Consumer Price Inflation or 2.5%.

Financial Planning Impact:

The basic state pension will increase at a higher rate than previously expected. This will in some part help pensioners who have been exposed to a higher rate of inflation than the population as a whole.


Final Salary Pension increases

In contrast to the Basic State Pension from April 2011, the statutory requirement to increase final salary pensions and the State Second Pension will change from the Retail Price Index (RPI) to the Consumer Prices Index (CPI). The impact is likely to reduce the strain on final salary pension schemes as the CPI has historically been lower than the RPI.

Financial Planning Impact:

At an individual level, the expected retirement benefits are likely to be lower once they are paid and will increase at a lower rate than had previously been expected. In actual terms, although it will result in lower pensions, the impact will depend on the extent to which the CPI increase matches the actual cost of living increases for pensioners.


ISA limits will increase in line with inflation

The ISA limit for future tax years will increase in line with reference to the Retail Price Index in September each year. The cash ISA limit will be half the value of the Stocks and Shares ISA limit.

Financial Planning Impact:

This is a useful measure which will maintain the ISA limit in real terms. This follows a significant increase in the overall limit from £7,200 to £10,200 introduced by the last government.


Clearly the overall impact of the Emergency Budget will mean that the bulk of people will be worse off in the short term. However, the opportunity to manage your finances and ensure that you are being tax efficient remains as important as ever.

Tuesday, 22 June 2010

Budget Day

Following on from the non-Budget on the 24th of March, there is the first Budget from the coalition government today.

I've been invited into the Minster FM studio to give some comments as the Budget unfolds. This is likely to be a hard hitting budget with more winners than losers. Just to remember the problem that we have:
UK Government Debt is £13,000 per person and is predicted to rise to £20,500 by 2012-13.

The areas where we can expect to see some action are:

VAT to increase
Reduction in child tax credit for middle and high earners
Capital Gains Tax to increase in line with income tax
Increase in basic rate tax
Restricton in pension tax relief

and some good news....
Increase in personal allowance for lower earners

Tune into Minster FM from 12.30 if you get the chance.

Tuesday, 8 June 2010

Interesting fact

I was at a Personal Finance Society conference today where one of the speakers shared an interesting fact. In the UK 95% of those who are meant to pay tax do so, compared with 5% in Greece. Incredible! It does mean that we have more options for paying back debt than the Greeks so there is some hope for us.....

Wednesday, 19 May 2010

What will the coalition mean?

The Conservative/Liberal coalition are likely to change a few things that will affect our finances. The emergency budget is planned for the 22nd June so nothing definite until then. Some of the anticipated changes are:

Personal allowances
- increase from 2011 focussed on lower earners

National Insurance Contributions
- the proposed (under Labour) employee contribution increase from 2011 to go ahead but employer contribution increase will not

Increase in Capital Gains Tax to 40%

End to compulsory annuity purchase with pension fund at age 75 - although whether it is moved to 80 or this will apply only after a minimum income has been secured is unknown

Child Trust Funds/Child Tax Credits
Reduction in the number of families who will qualify

Obviously we will know more detail come the 22nd of June. The need for action now is limited but if a CGT liability is going to be unavoidable, it could make sense to sort this now to avoid a potentially higher tax.

One thing is certain - this emergency budget is likely to be a lot more interesting than the last Labour budget.

Will

Wednesday, 21 April 2010

Back from Oz

I'm just back from a fantastic 3 weeks in Australia. We had a lucky return as we got back on Thursday morning just before the airports were closed. On Thursday night I fell asleep listening to the election debate which I put down to jet lag (or was it?). However, I think I've now caught up with things.

The Austarilan economy certainly feels in better shape than ours and also feels to be in a more stable state. The equivalent of the base rate is at 4.25% (0.5% in the UK) with savings rates of above 5% and mortgage interest rates of 6% and above. The election is obviously going to play a part but it's probably a few years before we will see a more normal market in the UK.

Will

Tuesday, 16 March 2010

Budget 24th March

This year's budget is just over a week away. Some of the tax moves that are currently being rumoured are:

Capital Gains Tax (CGT) - the current rate of 18% is likely to increase given that the highest rate for income tax will be going up to 50% from 5th April 2011.

Income Tax - either the basic rate (20%) or the next band (40%) could go up by around 2%. Personal allowances could be frozen.

In the case of CGT if you have any gains that you need to realise in the near future it might be worth realising them now rather than after an increase in the CGT rate.

What's certain is that we won't see the full weight of any tax changes in the budget as the government won't want to get too much bad news out before the election.

Will

Saturday, 20 February 2010

Savings and Inflation

The latest inflation figures announced during the week show that inflation has risen to 3.5% (Consumer Price Index) and 3.7% (Retail Price Index). This means that your savings have to work pretty hard to produce a real return.

In fact for a higher rate tax payer you need to be earning 5.83% and for a basic rate tax payer 4.375% just to be standing still in real terms.

Clearly these figures are for January and what's important is the future trend for inflation. From what I've read and heard the consensus is that we will continue to see inflation but it is likely to fall back from this level. This is confirmed by a You Gov expectations survey which has a 12 month view of inflation around 2%.

Below is a chart which shows the best rates available according to Moneyfacts:


What is important is when you will need any money you have invested. If it's more than 5 years you can afford to introduce a bit of investment risk with the aim of getting better longer term returns. If it's under 5 years you will generally want your money to be safe. If you are able to invest for 3 years or more, index-linked savings certificates are a good way of making sure your money holds it's value in real terms. The returns are also free of tax. There are two series available; one for 3 years and one for 5 years and both pay 1% above inflation. It's possible to invest from £100 to £15,000. You can get more details on the National Savings and Investments site.

Assuming inflation is at 2%, a basic rate tax payer would need to earn 3.75% and a higher rate tax payer 5% to get equivalent returns. There is also the certainty that if inflation is higher you will be protected against this. If you know that you can leave the money for 3 years, index-linked certificates look like a good option whereas if you know you will need the money sooner you have to accept that your money could be losing value in real terms.

Will

Friday, 12 February 2010

Investment outlook

I attended a presentation by Invesco Perpetual yesterday which was very interesting. Key points of interest for me were the following:

  • 2009 was an easy year for investments as most markets made money; 2010 is likely to be different
  • Invesco view is that although Emerging markets offer good long term value they are currently expensive
  • UK will have to find around £100 billion a year to reduce debt
  • As a rule of thumb this will be £80bn of cuts and £20bn of taxes
  • The result will be low growth and weak sterling
  • Invesco view is that UK interest rates will stay low for 3 to 5 years given the other measures that will have to be taken
Invesco see opportunites around Global Bonds as they will give dollar exposure which should strengthen against the pound.

They also see opportunities in defensive stocks (Pharmacy, Telecomms, Tobacco, Utilities) which can be accessed through Defensive funds.

Will

Tuesday, 12 January 2010

Income Protection

Good article on Income Protection in the Yorkshire Post: Get protected...for the worst can happen. An under used insurance.

Will

Thursday, 7 January 2010

New Year resolutions


Above is the famous Oor Wullie from the Sunday Post. Of course most of Wullie's resolutions were for his Ma and Pa!

I read an article in the Guardian recently which mentioned a study carried out by the University of Hertfordshire which showed that the failure rate for New Year resolutions is quite high. However, the key tips for success are as follows:
  • break your goal into smaller steps
  • reward yourself when you achieve one of these
  • tell your friends and family about your goals
  • focus on the benefits of success
  • track your progress
Here's a suggestion - why not have a New Year's resolution to sort out your finances?

Good luck and best wishes for 2010.

Wullie
 
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