Are Your Children's Savings Invested Appropriately

How do you save for your children’s future, and are you saving with a particular goal – such as university fees – in mind? If so, are the funds invested in assets appropriate to the length of time until the money is needed?

With the current geopolitical situation causing stock market volatility, parents and grandparents may well be concerned over where best to save for the younger members of the family. However, it is important to bear in mind that most investments made for children are for a term of 10 years plus, and therefore investing in stocks & shares could well be a suitable route to take, on the basis that the investment is regularly reviewed.

It is interesting to note that three quarters of the £578 million subscribed to Junior ISA (JISA) accounts in 2013-14 is invested in cash, with only a quarter subscribed to stocks & shares arrangements. Although the interest rates offered on cash JISAs are superior to those offered to adults, with the majority currently paying between 2% - 3.5% gross AER per annum (source: Money Advice Service), any gains made are at risk of significant erosion by inflation over time. Investing in ‘real’ assets such as stocks & shares can help to protect against inflation and improve the overall return over time (not guaranteed).

Junior ISAs – a popular and tax-efficient way to save

JISA accounts have been available since 1 November 2011 to children under the age of 18 who do not own a Child Trust Fund (CTF) account (CTFs were available to eligible children born on or between 1 September 2002 and 2 January 2011).
According to recently published Government statistics, JISA account openings rose by 46% in the tax year 2013/2014, the second full financial year since the JISA took over from the CTF. £578 million was subscribed to JISA accounts in 2013-14 (source: HMRC ISA Statistics 2014 - http://tinyurl.com/n4l86sx ).

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We expect this figure to continue to rise, with a boost from April 2015 when parents will be allowed to switch funds currently held in CTFs to JISA accounts. It is likely that JISA accounts will prove more flexible and better value than the older CTF arrangements and we would encourage parents to seek advice on the new options available.

Are you taking enough investment risk?

In the current tax year (2014/15), parents and grandparents can invest up to £4,000 in a JISA. Even if you don’t save to this limit, and choose to set aside a small amount each month, this can add up to a substantial amount over an 18 year timescale if invested appropriately.
Understandably, some people will not be comfortable with exposing their savings on behalf of their children to stock market volatility. However, given the long time period over which money is likely to be invested, sheltering the funds in cash may prove counterproductive. An (example) 18 year period provides enough time to absorb short-term stock market movements and investments in stocks & shares offer the potential for real capital growth (not guaranteed).

Maximising the tax efficiency of saving for children

Children are entitled to the same income tax personal allowance as adults (currently £10,000 in the 2014/15 tax year). Most children won’t have ‘earnings’ as such, so this allowance is applied to the income they may receive from sources such as deposit savings or investments. If the return the child receives in a tax year is less than the personal allowance for that year, no tax will be due.
An important point to watch is that if you give your children money outside a tax-efficient investment such as a JISA, and this generates interest of over £100 gross in a tax year, the whole amount of this income will be taxed as if it were your own income, at your highest marginal rate.

This limit applies to parental gifts only, not to gifts from other family members. With Christmas approaching, it may be a good time for grandparents to consider gifting money to their grandchildren, either into a JISA if contributions have not been maximised, or into a savings account or other arrangement. This gifting would have the added advantage of using the grandparents’ annual gift allowance, if not already used. Each individual is allowed to give away gifts worth up to £3,000 in total in each tax year and these will be exempt from inheritance tax from the date of the gift. Any unused part of the annual exemption can be carried forward to the following year.

Summary

If you would like support and advice on saving for your children or grandchildren’s future and maximising the tax efficiency of gifting and investing then please do not hesitate to contact the team at Chapters Financial, who will be able to help you further. No individual advice is provided during the course of this blog. If you would like to receive further information regarding your own family situation and circumstances, please contact the Chapters Financial team in either Guildford or Woking.



Vicky Fulcher
Trainee Financial planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899

Independent Scotland. The (close) result is in!

I have watched the debate about the possible divide of our United Kingdom union with interest over the last few weeks. Let's face it, media coverage has made it unavoidable, but from a fiscal perspective with good reason. I remain surprised by the panicked 'surprise' of our senior politicians of all denominations that around 10 or so days before the crucial Referendum vote they realised that this was going to happen and was not just an idle threat.

Having now worked in the UK financial services world for 29 years, I started in the mid-80's with the introduction of 'Yuppies' and excess before experiencing my first economic recession at the end of that decade. What was instilled in me from this tender age was the strength (and at the time power) of Sterling as a global currency. I maintain that sadly we as a nation underestimate the real value of Sterling (or GBP) in the new digital-by-default era that we live in. This is especially relevant when we view the slow if not stopped progress of the Euro as a currency example.

Economies run in cycles. As I suggested in my book, The Recession is Over, Time to Grow, produced in the late spring of last year, an economy is like carrying a bucket of water. When it sloshes one way (prosperity), it will surely slosh the other way on the rebound (recession). The cycle is usually (not guaranteed) 10-12 years and this might point to a prosperous decade ahead with economic turbulence in the early years of the 2020's.

The arguments and convictions proffered by the 'Yes' campaign were strong and cannot now be ignored by Westminster. With Scotland now secure (for the time being) in our union, I have no doubt that this has whetted the appetite of other regions to request additional and new autonomy. The physical landscape of the UK will not change, but the economic outlook for us all may look very different.

Yours Aye

Summary

If you would like to consider the points noted above further then please do not hesitate to contact the team at Chapters Financial, who will be able to help you further with your pension enquiries. No individual advice is provided during the course of this blog. If you would like to receive further information regarding your own individual situation and circumstances, please contact the Chapters Financial team in either Guildford or Woking.

Keith Churchouse BA Hons FPFS
Director, Chapters Financial Limited
Chartered Financial Planner
Certified Financial Planner
ISO22222 Personal Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

The Reality of New Pensions’ Flexibility

The Reality of New Pensions’ Flexibility

The spring of 2014 heralded the Chancellor's budget which was significant in the changes it proposed for financial planning and particularly the way pension benefits can be accessed into the future. Some of these changes have already occurred, with the main changes due in the new tax year (2015/2016). 

As the summer of 2014 has warmed many with its glorious sunshine, some enquiries have turned to the thoughts of accessing their pension arrangements sooner rather than later. Sadly, this might be a reflection of some of the historical and negative baggage that surrounded pensions in the last decades. Ironically, this seems to be in conflict with the new thrust of promoting Workplace Pensions via Auto-Enrolment.

The new flexibility imported by the budget certainly creates new financial planning opportunities and the ability for investors to use their funds in ways to meet their needs. This greater flexibility has been welcomed by most, however, in our experience at this time, the consequences of some of this flexibility have not been publicised as well as they could have been. I hope that these potentially negative outcomes are detailed by the press before April next year, rather than waiting for the inevitable ‘sob story’ of those who have drawn their pension benefits to great financial detriment.

Taxable benefit after the tax free cash

The first point to consider is that the Chancellor is effectively offering the opportunity of avoiding annuity purchase, based on gilts (gilt-edged securities which are government bonds), with the proviso that any amount drawn from a personal pension plan, as an example, above the 25% tax-free cash limit would be subject to income tax at the individual’s highest marginal rate in the tax year that the benefits are drawn.

Example:

As an example, if an individual was earning £30,000 gross a year and they had a sole pension plan of £30,000 (and were above the minimum benefit age) they could draw 25% of the fund as tax free cash (£7,500 tax-free) and the balance of the fund drawn would then be subject to income tax. If the total remaining pension fund of £22,500 was drawn, this would be added to their overall taxable income, bringing their total income in the tax year, in this example, to £52,500 gross. In this example, they could suffer higher rate tax (at 40%) on an amount of approximately £10,600.

Final Salary pitfalls

In a different example, we have also seen enquiries from those who maintain valuable final salary pension schemes, who have received transfer values and are looking to transfer this value out (usually to a personal pension) to draw benefits early. The most recent example we have experienced was for a final salary pension scheme that was left many years ago where the client was not aware that the benefits accrued increase with inflation, offers spouse’s protection, and that a significant actuarial reduction would be applied to the transfer value should they draw pension benefits before the normal retirement age of 65.

In the example concerned, the client had reached the age of 55. The combined actuarial reduction is likely to be around half the value of the pension scheme, in addition to any other reductions that may be applied. Therefore, the transfer value of, in this example, £42,000, offers the opportunity to withdraw £10,500 of cash with the balance being used to provide income or the ability to withdraw as additional taxable cash from April 2015 onwards. However, the real financial loss to the individual in doing so is likely to be somewhere in the region of £30,000-£50,000. Taking this latter point into account, the transfer value of £42,000 starts to look highly unattractive.

Guidance or Advice?

I am also concerned, and have written to the Financial Conduct Authority (FCA), with regards to their proposals to offer individuals ‘guidance’ (rather than advice) for the drawing of pension benefits. I have little conviction that ‘guidance’ will be able to go into such detail noted above and be able to confirm the potential for real financial loss to the client in drawing pension benefits early.

Full advice

The points noted above are only a taster of the complexities of pensions which offer significant value to clients both now and into the future, particularly from final salary pension benefits. We believe those who are considering drawing pension benefits early need to take full advice as to the ‘real’ consequences of their actions before being attracted by any tax-free cash sum or taxable cash that they could withdraw either now, under the newly increased HMRC  Triviality rules, or post-April 2015.

Summary

If you would like to consider the points noted above further then please do not hesitate to contact the team at Chapters Financial, who will be able to help you further with your pension enquiries. No individual advice is provided during the course of this blog. If you would like to receive further information regarding your own individual situation and circumstances, please contact the Chapters Financial team in either Guildford or Woking.

Keith Churchouse BA Hons FPFS
Director, Chapters Financial Limited
Chartered Financial Planner
Certified Financial Planner
ISO22222 Personal Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

Top up & take? / More State Pension changes

Top up & take? / More State Pension changes

We all know that as a demographic, we are living longer. To maintain our standards of living, many of us are also working longer, past the current State Pension age of 65 and beyond.

Whilst taxable earnings are available, some chose to defer their State Pension Benefits until they are needed. This in the past has been advantageous for most with an uplift in deferment of 10.4% pa for each full year deferred. The current standard full State Pension (in the tax year 2014/2015 is £113.10 per week (£5,881.20 pa gross) and you may also be entitled to additional State Pension benefits, such as State Earnings Related Pension (SERPS), Second State Pension (S2P) or a Graduated Pension).  

You may want check your State Pension to ensure you are up to date you can use the State Pension Forecast service here:  https://www.gov.uk/state-pension-statement

The Government has recently announced that this deferral uplift in their State Pension will be cut by almost half. These changes are being brought in because we are all living longer, as noted, and the comparatively generous rate of increase to date will not be sustainable into the future.

The Pensions Minister, Steve Webb, stated that when the new, single-tier State Pension system is introduced in April 2016, people who choose to defer their State Pension beyond state pension age will only receive a 5.8% increase in their pension if they delay payments for a year. Just over half the current increase of 10.4%.

Under the current rules, someone choosing to defer for one year would need to live for around another ten years to make the decision financially worthwhile. When the reduced rate of increase is introduced, you would have to live for about 19 years to benefit from their choice. If we knew how long we would live, this would make the financial planning a lot easier, although I am sure it would have many other undesired effects!

In monetary terms under the new regime for State Pensions to be introduced in just over 18 months’ time, an individual receiving the full flat-rate State Pension of approximately £155 a week (£8,060 a year) would see an increase in their total annual benefits of only £467.48 if they defer for a year. If you look at this over the course of retirement, say 25 years, someone deferring at the old 10.4% pa rate of increase would receive over £17,000 more from a State Pension of £155 a week than an individual under the new rules.

The good news is that anyone who reaches State Pension Age before 6 April 2016 can still get the 10.4% rate of increase if they choose to defer taking benefits. It’s disappointing news, though, for anyone who will retire after that date and had planned to delay their State Pension.

Deferral may still be a sensible move for someone in very good health who intends to carry on working, or who has substantial pension income from other sources. However, for the majority of retirees after April 2016, it may well be a case of ‘top-up and take’ – checking that you have accrued the number of years required to qualify for the full basic State Pension and, if you haven’t, make a lump-sum payment to rectify the situation – and then start taking benefits.

The ability to top-up the State Pension (voluntary Class 3A National Insurance Contributions) will currently become available (from October 2015) to those close to and over state pension age and full details can be found here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/300007/wms-state-pension-top-up.pdf

Chapters Financial is not responsible for the content of external webpages.

It would be worthwhile checking that any voluntary contribution offers the potential for value before proceeding to join in the new initiative.

The Chapters teams in Guildford and Woking are well placed to advise you on the impact of current and future changes to pension’s legislation on your finances. No individual advice is provided during the course of this blog. If you would like to receive further information regarding your own individual situation and circumstances, please contact the Chapters Financial team in either Guildford or Woking.

Keith Churchouse BA Hons FPFS   

Director, Chapters Financial Limited 

Chartered Financial Planner
Certified Financial Planner 

ISO22222 Personal Financial Planner 

  Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

2013, a year of change in the delivery of financial advice

2013 has been an interesting year in the financial world with, amongst other headlines, the Bank of England's base rate remaining at its historic low of 0.5% and a change of Governor, the growth in the FTSE 100, and unemployment remaining stubbornly high.

It was only a year ago that we, amongst many other financial advisory companies, were planning for the change in the way financial advice is delivered to the public in the UK. We saw some moving in a positive fashion, preparing to meet the demands of the Financial Services Authority (replaced by the Financial Conduct Authority (FCA) in April this year) under their Retail Distribution Review (RDR) requirements. However many providers, including most of the High Street Banks, found the significant changes too much and withdrew from the market. Each had their own reasons, but it reduced the access that some of the public have to financial advice, as confirmed by the FCA later in the summer of 2013, referring to their ‘concerns’ to the Treasury Select Committee in September 2013. To be clear, there have been benefits to the changes, such as transparency of charging, and we have been advocates of this for many years.

With these RDR changes now nearly a year old, the team at Chapters Financial has seen a significant increase in business over 2013. This may be partly due to a better economic environment, however, we would argue that this is also due to the reduction in advice providers and the maintenance and enhancement of the quality of advice our services provide. As you may have read on our website, we were delighted to have achieved BS8577 certification in late summer 2013, which confirms our high and consistent standards. To improve our coverage of West Surrey, we have also opened a new additional office in Central Woking.

We hope that 2013 has been as positive for you as it has been for Chapters Financial, as our chartered financial planning company heads towards the end of its first decade in business in the south east and London. We plan to expand still further in future years and hope that we can help many more clients, businesses (SMEs) and enquirers.

If you would like to receive further information with regards to your own individual situation and circumstances, then please contact the team, either in Guildford or Woking.

Keith Churchouse FPFS

ISO22222 Personal Financial Planner

Chartered Financial Planner 

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.