As you may be aware, one of the targets within the current coalition government was to raise the personal allowance to a limit of £10,000 within this parliamentary session. This process has been accelerated and will now come into force as from 06 April 2014. This sounds as though it is great news for everyone, as it appears as if no one will pay any tax on the first £10,000 of income in the tax year 2014/15. However, if an individual receives income in excess of £100,000 in the tax year then the personal allowance is reduced by £1 for each £2 of income in excess of £100,000.
60% Effective Income Tax Rate
So what does this mean for the people with income in excess of £100,000? It means that they have an effective income tax rate of 60% on any income between £100,000 and £120,000 in the tax year 2014/15 (between £100,000 and £118,880 in tax year 2013/2014). This is due to the 40% of higher rate income tax applied at this level, plus the loss of 20% of effective basic rate band allowance.
Penalty or Opportunity?
How can this be when the additional rate of income tax is meant to be 45% (as of 06 April 2013)? Surely a 60% effective rate of income tax is very punitive? Yes, I would have to agree that it is. So what can anyone do about this and try and mitigate this harsh effective tax band? The most immediate and effective option is to consider personal contributions into a pension scheme. If the spare capital and enough headroom within an individual’s maximum annual pension contribution allowance (£50,000 in 2013/2014) are available, then contributing an amount to effectively reduce one’s income to a level of £100,000 (or closer to it) for the tax year could be an extremely effective method of mitigating, and in fact capitalising on this effective tax rate band of 60%.
Summary
If this situation applies to you and you do have annual income in excess of £100,000, have you considered the benefits of engaging a professional Financial Planner to consider your options at these threshold points?
No individual advice has been provided during the course of this blog. The use of allowances and contributions into pensions should be planned for carefully and if you would like to receive individual advice on the topics above, then please contact the team at Chapters Financial Limited on 01483 578800.
Simon Hewitt BSc (Hons) Dip PFS
Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.
The Financial Conduct Authority does not regulate Tax advice.
Monday, 8 April 2013
Wednesday, 27 March 2013
Tax Year Allowances – The old & the new
As we approach the end of tax year (05 April 2013), and approach the new tax year of 2013/2014, you will probably see much in the press, on our website and in our newsletters about how tax allowances and tax rates will change from the start of the next tax year (06 April).
As the old saying goes “there are only 2 things in life which are certain, death and taxes”. With careful financial planning and implementation, you may be able to mitigate the tax you pay on your assets and investments in the future.
I have highlighted below some of the areas where careful use of individual allowances can help with your financial planning, provided they are implemented before the end of the tax year.
Of course, some allowances, such as the ISA are usually renewed each year, so you can use your allowance again early in the forthcoming tax year 2013/2014.
Individual Savings Account (ISA) £11,280 2012/2013 and £11,520 2013/2014
This is the most obvious allowance to most investors, allowing either tax-free savings, via a Cash ISA, or tax efficient investment, via a Stocks & Shares ISA. The only tax which applies to the Stocks & Shares ISA is the 10% dividend tax credit which applies to any dividend income which the investment produces and this is non-re-claimable.
The annual allowances must be used within the tax year or there are lost forever, i.e. “Use-it or Lose-it” basis. In the current tax year (2012/13) an individual (not a minor) has a total allowance of £11,280 of which up to a maximum of 50% can be placed into a Cash ISA with any balance remaining is available for investment into a Stocks & Shares ISA. The total annual allowance for tax year 2013/14 (starting 06th April) rises to £11,520.
Junior Individual Savings Account (JISA)
Being very similar to the adult ISA, the Junior ISA allows a child under the age of 18, who was not entitled to a Child Trust Fund (CTF), to have either a Cash Junior ISA or Stocks & Shares Junior ISA or both but the total annual amount is £3,600. The child owns the Junior ISA and will take control of it after their 16th birthday, however cannot access the funds until after their 18th birthday. This allowance is due to increase in the new tax year 2013/2014 to £3,720.
When the child reaches the age of 18 the Junior ISA will automatically switch to an ISA. Some suggest that this can be a very useful method of saving / investing for future further education/ university fees.
Capital Gains Tax (CGT)
On most assets, whenever an individual buys an asset and realises a gain on the asset then Capital Gains Tax could potentially be applicable. Currently this is set at flat rates of 18% for nil and basic rate income tax payers and 28% for higher and additional rate income tax payers.
However, every individual has the use of an annual capital gains tax allowance, currently £10,600 in tax year 2012/13. This allowance increases in the new tax year 2013/2014 to £10,900.
For reference, Trusts also have the use of a CGT allowance at half the standard individual amount.
Pensions
Relatively recently (06 April 2011), the annual allowance for investments, from all sources, into pensions was severely reduced from £255,000 gross (tax year 2010/11) to £50,000 gross in a year. This annual allowance continues until the beginning of the tax year 2014/15, when it is due to reduce to £40,000 gross.
However, unlike the ISA and the CGT allowance already noted, previous unused years allowance can potentially be carried forward into the current tax year (where available and legislation continues).
Therefore, this option can be attractive to a higher, or additional, rate income tax payer receiving relief at either 40%, or 50%. Advice should be sought from an Accountant to ensure that an individual has the capacity to contribute tax efficiently within the allowances.
Inheritance Tax
Many people are aware of the Inheritance Tax (IHT) threshold, known as the nil-rate band (NRB), per individual is currently £325,000 (2012/13). Above this value, the remaining estate is liable to IHT at a flat rate of 40%.* Many of these people are also aware that the unused portion of IHT NRB is passed to the surviving spouse, or civil partner, to use on their death for their estate.
Making sure a valid and robust Will is in place is a cornerstone of financial planning and you may want to re-visit this issue with your solicitor.
However, what many people are not aware of is the annual gift allowance of £3,000 per donor, which falls outside of their estate immediately. Again, if the previous year’s annual gift allowance has not been utilised then you can effectively gift a total of £6,000.
* You may be able to reduce this tax rate by making a gift from your will to Charity. Please read our webpage ‘Charitable Giving’ for further details.
Summary
The time is of the essence whenever the tax year end is concerned, both to use up available allowance where prudent and possible in this tax year and to look at the new allowances early in the forthcoming tax year 2013/2014.
No individual advice has been provided during the course of this blog. The use of allowances should be planned for carefully and if you would like to receive individual advice on the topics above, then please contact the team at Chapters Financial Limited on 01483 578800.
Simon Hewitt BSc (Hons) Dip PFS
Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.
The Financial Services Authority does not regulate Tax advice.
As the old saying goes “there are only 2 things in life which are certain, death and taxes”. With careful financial planning and implementation, you may be able to mitigate the tax you pay on your assets and investments in the future.
I have highlighted below some of the areas where careful use of individual allowances can help with your financial planning, provided they are implemented before the end of the tax year.
Of course, some allowances, such as the ISA are usually renewed each year, so you can use your allowance again early in the forthcoming tax year 2013/2014.
Individual Savings Account (ISA) £11,280 2012/2013 and £11,520 2013/2014
This is the most obvious allowance to most investors, allowing either tax-free savings, via a Cash ISA, or tax efficient investment, via a Stocks & Shares ISA. The only tax which applies to the Stocks & Shares ISA is the 10% dividend tax credit which applies to any dividend income which the investment produces and this is non-re-claimable.
The annual allowances must be used within the tax year or there are lost forever, i.e. “Use-it or Lose-it” basis. In the current tax year (2012/13) an individual (not a minor) has a total allowance of £11,280 of which up to a maximum of 50% can be placed into a Cash ISA with any balance remaining is available for investment into a Stocks & Shares ISA. The total annual allowance for tax year 2013/14 (starting 06th April) rises to £11,520.
Junior Individual Savings Account (JISA)
Being very similar to the adult ISA, the Junior ISA allows a child under the age of 18, who was not entitled to a Child Trust Fund (CTF), to have either a Cash Junior ISA or Stocks & Shares Junior ISA or both but the total annual amount is £3,600. The child owns the Junior ISA and will take control of it after their 16th birthday, however cannot access the funds until after their 18th birthday. This allowance is due to increase in the new tax year 2013/2014 to £3,720.
When the child reaches the age of 18 the Junior ISA will automatically switch to an ISA. Some suggest that this can be a very useful method of saving / investing for future further education/ university fees.
Capital Gains Tax (CGT)
On most assets, whenever an individual buys an asset and realises a gain on the asset then Capital Gains Tax could potentially be applicable. Currently this is set at flat rates of 18% for nil and basic rate income tax payers and 28% for higher and additional rate income tax payers.
However, every individual has the use of an annual capital gains tax allowance, currently £10,600 in tax year 2012/13. This allowance increases in the new tax year 2013/2014 to £10,900.
For reference, Trusts also have the use of a CGT allowance at half the standard individual amount.
Pensions
Relatively recently (06 April 2011), the annual allowance for investments, from all sources, into pensions was severely reduced from £255,000 gross (tax year 2010/11) to £50,000 gross in a year. This annual allowance continues until the beginning of the tax year 2014/15, when it is due to reduce to £40,000 gross.
However, unlike the ISA and the CGT allowance already noted, previous unused years allowance can potentially be carried forward into the current tax year (where available and legislation continues).
Therefore, this option can be attractive to a higher, or additional, rate income tax payer receiving relief at either 40%, or 50%. Advice should be sought from an Accountant to ensure that an individual has the capacity to contribute tax efficiently within the allowances.
Inheritance Tax
Many people are aware of the Inheritance Tax (IHT) threshold, known as the nil-rate band (NRB), per individual is currently £325,000 (2012/13). Above this value, the remaining estate is liable to IHT at a flat rate of 40%.* Many of these people are also aware that the unused portion of IHT NRB is passed to the surviving spouse, or civil partner, to use on their death for their estate.
Making sure a valid and robust Will is in place is a cornerstone of financial planning and you may want to re-visit this issue with your solicitor.
However, what many people are not aware of is the annual gift allowance of £3,000 per donor, which falls outside of their estate immediately. Again, if the previous year’s annual gift allowance has not been utilised then you can effectively gift a total of £6,000.
* You may be able to reduce this tax rate by making a gift from your will to Charity. Please read our webpage ‘Charitable Giving’ for further details.
Summary
The time is of the essence whenever the tax year end is concerned, both to use up available allowance where prudent and possible in this tax year and to look at the new allowances early in the forthcoming tax year 2013/2014.
No individual advice has been provided during the course of this blog. The use of allowances should be planned for carefully and if you would like to receive individual advice on the topics above, then please contact the team at Chapters Financial Limited on 01483 578800.
Simon Hewitt BSc (Hons) Dip PFS
Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.
The Financial Services Authority does not regulate Tax advice.
Wednesday, 13 March 2013
Employee Benefits – Are they worth it?
The new world experience of having to reduce costs and tighten our belts is no different for employers, as it is for household economies.
One area which we have experienced employers aiming to reduce costs is to look at the existing employee benefits package they have. Employers are now sensibly ‘shopping around’ for the most competitive terms, whilst still providing their staff with benefits to ensure that they remain a content and productive workforce, importantly feeling (and being) cared for by their employer.
Annual Review
I wholeheartedly agree with this review process (usually annually), aiming to ensure that the benefits (and providers) are reviewed regularly to ensure that costs are kept to a minimum, whilst still providing valuable terms. I have commented further on this at the end of this blog.
Legislative change
I believe that one of the key reasons why employers are starting to investigate the range, and providers, of their employee benefits is due to the legislative changes taking place around workplace pensions. We have noted these changes, known as Auto-Enrolment, many times in previous blogs / articles. These changes mean every eligible jobholder will be automatically enrolled into a workplace pension over the next few years. Unless the individual “opts-out”, the employee, the employer and the government (in the form of tax relief) will all contribute into the individuals’ retirement fund once enrolled.
Often legislation changes around taxation can have both a positive and a negative impact on benefits packages.
Taxation
Depending on the structure and type of employee benefit, the cost could be treated as a legitimate business expense and therefore tax deductible for corporation tax. Alternatively, the benefit provided could be classified as a benefit-in-kind (such as Private Medical Insurance/PMI) and taxable the hands of the employee.
These are important points and you may want to check these with your company Accountant before proceeding.
Cost Benefit of Employee Retainer
This change in pension legislation has prompted many employers to revisit the scope of the employee benefits they offer. Examples might be life cover, private medical insurance, travel insurance, income protection, dental or eye care and obviously pensions. This is only a small range of benefits which are at the disposal of an employer to offer their workforce. Staff attrition and high turnover rates can be a large business cost and significant time burden. If an employer can retain a satisfied and productive workforce through the offering of the appropriate employee benefits, then, in our communications with the businesses we work with, cost benefits usually follow.
Professional Advice
Whenever employee benefits are considered for introduction, or amendment, careful consideration should be taken for many reasons.
The most obvious, and easily calculable, is cost both on the employer and the employee. A more difficult issue to contemplate could be the political impact within the workforce if an unfair action is taken, e.g. the removal / reduction of a particular benefit. There are many instances where a contractual right to a particular benefit is included in an Employment contract.
I believe that a carefully designed, planned and implemented employee benefits package can be a useful method in attracting and retaining a quality workforce, whilst allowing a business to grow. I recommend professional independent financial advice should be used to assist the employer through the structure and agreed implementation of an appropriate employee benefits package to meet their individual requirements and budget.
No individual advice has been provided during the course of this blog. Employee Benefits should be planned for carefully and if you would like to receive individual advice on this subject, then please contact the team at Chapters Financial Limited on 01483 578800.
We look forward to working with businesses and partnerships across the South East & London.
Simon Hewitt BSc (Hons) Dip PFS
Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899. The Financial Services Authority does not regulate Tax advice.
One area which we have experienced employers aiming to reduce costs is to look at the existing employee benefits package they have. Employers are now sensibly ‘shopping around’ for the most competitive terms, whilst still providing their staff with benefits to ensure that they remain a content and productive workforce, importantly feeling (and being) cared for by their employer.
Annual Review
I wholeheartedly agree with this review process (usually annually), aiming to ensure that the benefits (and providers) are reviewed regularly to ensure that costs are kept to a minimum, whilst still providing valuable terms. I have commented further on this at the end of this blog.
Legislative change
I believe that one of the key reasons why employers are starting to investigate the range, and providers, of their employee benefits is due to the legislative changes taking place around workplace pensions. We have noted these changes, known as Auto-Enrolment, many times in previous blogs / articles. These changes mean every eligible jobholder will be automatically enrolled into a workplace pension over the next few years. Unless the individual “opts-out”, the employee, the employer and the government (in the form of tax relief) will all contribute into the individuals’ retirement fund once enrolled.
Often legislation changes around taxation can have both a positive and a negative impact on benefits packages.
Taxation
Depending on the structure and type of employee benefit, the cost could be treated as a legitimate business expense and therefore tax deductible for corporation tax. Alternatively, the benefit provided could be classified as a benefit-in-kind (such as Private Medical Insurance/PMI) and taxable the hands of the employee.
These are important points and you may want to check these with your company Accountant before proceeding.
Cost Benefit of Employee Retainer
This change in pension legislation has prompted many employers to revisit the scope of the employee benefits they offer. Examples might be life cover, private medical insurance, travel insurance, income protection, dental or eye care and obviously pensions. This is only a small range of benefits which are at the disposal of an employer to offer their workforce. Staff attrition and high turnover rates can be a large business cost and significant time burden. If an employer can retain a satisfied and productive workforce through the offering of the appropriate employee benefits, then, in our communications with the businesses we work with, cost benefits usually follow.
Professional Advice
Whenever employee benefits are considered for introduction, or amendment, careful consideration should be taken for many reasons.
The most obvious, and easily calculable, is cost both on the employer and the employee. A more difficult issue to contemplate could be the political impact within the workforce if an unfair action is taken, e.g. the removal / reduction of a particular benefit. There are many instances where a contractual right to a particular benefit is included in an Employment contract.
I believe that a carefully designed, planned and implemented employee benefits package can be a useful method in attracting and retaining a quality workforce, whilst allowing a business to grow. I recommend professional independent financial advice should be used to assist the employer through the structure and agreed implementation of an appropriate employee benefits package to meet their individual requirements and budget.
No individual advice has been provided during the course of this blog. Employee Benefits should be planned for carefully and if you would like to receive individual advice on this subject, then please contact the team at Chapters Financial Limited on 01483 578800.
We look forward to working with businesses and partnerships across the South East & London.
Simon Hewitt BSc (Hons) Dip PFS
Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899. The Financial Services Authority does not regulate Tax advice.
Friday, 1 March 2013
Why we add value
The new world of UK retail
Financial Services commenced on 31st December 2012. If you haven’t
heard of these new initiatives and changes, they are called the Retail
Distribution Review (or RDR for short) introduced by the professions regulator,
the Financial Services Authority (FSA). We have posted other informative blogs
on this website relating to RDR changes that will affect clients and advisers
alike.
Change always brings challenges
and the RDR is no exception.
From a client’s perspective, what
should they now be looking for when seeking financial advice and help?
From Chapters Financial Limited’s
point of view, how we help you add value to your personal financial planning?
Transparency
Chapters Financial has continued
to operate a transparent Client Agreed Remuneration (CAR) model for the past 6
years. This is the model which the FSA has closely adopted for its new advice
regime. We are proud to continue to offer independent advice based on enquirers
needs and requirements.
Professional Service
The team provides an open,
friendly and professional service based on integrity, values and commitment to
the financial planning process. The initial meeting is usually provided at our
cost. If during this meeting we do not believe we can add real value, then we
tell the clients or enquirer accordingly.
Delivery
At the end of our initial
meeting, if agreed, we will produce documents which detail our clients’
objectives, how we aim to achieve those objectives and the fee/charges which
the client will incur for engaging our service. This relaxed and professional approach
means that we meet with the client’s requirements in a timeframe to suit them.
Chapters Financial Limited continues
to offer financial planning, advice and service as Chartered Financial Planners.
If you would like to discuss your Financial Planning with
one of professional advisers then please contact us on 01483-578800.
We look forward to working with you.
Chapters Financial Limited is authorised and regulated by the Financial
Services Authority, number 402899
Monday, 25 February 2013
A response to Moody’s downgraded UK Government bond rating
As many will already know, Moody's ‘downgraded the domestic- and foreign-currency Government bond ratings of the United Kingdom by one notch to Aa1 from Aaa.’ on February 22nd 2013. You will have seen much press comment on this issue and its potential consequences.
The purpose of this blog is to consider this issue further. The reality is that there is very little intrinsic value in this news; both the downgrade and the reasons for the downgrade were widely anticipated. It should be noted that the judgements of the ratings agencies have only a limited influence on the relative attractiveness of G7 Government bonds.
The UK’s new, lower credit rating
The UK has enjoyed the highest possible credit rating from Moody’s since March 1978. A little over a year ago, on 13 February 2012, Moody’s warned of a potential downgrade when it altered the outlook from ‘stable’ to ‘negative’.
We are not alone, and now, Britain joins France and the US, leaving just Canada and Germany among the G7 with an Aaa rating.
An Aa1 credit rating is the second notch in a rung of 21 possible ratings (see table 1), which are detailed below for reference and consideration:
Table 1. Moody’s Investor Services
Moody’s justifies the UK’s standing at this high rating as follows:
‘...the UK's creditworthiness remains extremely high, rated at Aa1, because of the country's significant credit strengths. These include (i) a highly competitive, well-diversified economy; (ii) a strong track record of fiscal consolidation and a robust institutional structure; and (iii) a favourable debt structure, with supportive domestic demand for Government debt, the longest average maturity structure (15 years) among all highly rated sovereigns globally and the resulting reduced interest rate risk on UK debt.’
In applying a ‘stable outlook’, Moody’s are not anticipating any change to the current rating in the next 12 to 18 months.
‘The stable outlook on the UK's Aa1 sovereign rating reflects Moody's expectation that a combination of political will and medium-term fundamental underlying economic strengths will, in time, allow the Government to implement its fiscal consolidation plan and reverse the UK's debt trajectory. Moreover, although the UK's economy has considerable risk exposure through trade and financial linkages to a potential escalation in the euro area sovereign debt crisis, its contagion risk is mitigated by the flexibility afforded by the UK's independent monetary policy framework and sterling's global reserve currency status.’
You might wonder then, why it is that Moody’s has downgraded UK Government debt...
Reasons for the downgrade
To consider this further, Moody’s suggest that there are three interrelated ‘drivers’ for its actions.
1. The continuing weakness in the UK's medium-term growth outlook, with a period of sluggish growth which Moody's now expects will extend into the second half of the decade;
2. The challenges that subdued medium-term growth prospects pose to the Government's fiscal consolidation programme, which will now extend well into the next parliament;
3. And, as a consequence of the UK's high and rising debt burden, deterioration in the shock-absorption capacity of the Government's balance sheet, which is unlikely to reverse before 2016.’
In short, the UK appears to be stuck in a protracted and unusually slow period of recovery. This has suppressed tax receipts; just as it inflates Government spending and all the while it remains in recovery it also remains highly vulnerable to any kind of external shock.
What could the impact be?
It is not possible to say with any certainty what the impact of this downgrade will be, but... as I wrote in my opening remarks there is very little news contained in Moody’s announcement. It was increasingly odd that the UK maintained the very highest rating when the US, which has made far greater progress toward a sustainable recovery, lost its Standard & Poor’s AAA rating 18 months ago.
There is some sympathy for Martin Wolf’s view, expressed in his Financial Times column on 23 February, which says:
‘The judgment of the ratings agencies adds next to nothing to understanding of the economic condition of such a well-known issuer... Armies of official and private economists understand the underlying data and closely follow developments. In this crowd of commentators, the rating agencies are just another voice... At most, Moody’s has reminded the world of what it knows... Partly for this reason, the downgrade is unlikely to damage the UK gilt market.’
The yield on the 10-year gilt was 32 basis points (0.32%) more than the equivalent German bond this time last year when Moody’s applied a ‘negative’ outlook for the UK. That ‘spread’ subsequently fell to 13 basis points in August last year, in defiance of Moody’s judgement, before rising steadily to a current spread of 55 basis points. I’ll leave it to you to decide if Moody’s are responding to the market’s judgement or if the markets are responding to Moody’s judgement.
Summary
Gilt yields have risen, of late, in lock-step with equity markets just as German, Japanese and US Government bond yields have. This will remain the dominant factor affecting gilt yields.
Moody’s downgrade follows a growing perception that the outlook for Britain’s fiscal position has not progressed. Underlying this are serious challenges for policymakers in the UK. Thus far, the Chancellor of the Exchequer has pressed ahead with austerity measures that have, by now, proven unwise in voracity at the same time as placing too much faith in the ability of the Governor of the Bank of England to support the economy single-handedly. A fall in sterling’s trade-weighted exchange rate is already underway. Perhaps the downgrade from Moody’s will add just a little impetus to sterling’s decline.
Past performance is not a guarantee of future performance. Fund values can fall as well as rise and are not guaranteed.
At Chapters Financial, we have been planning client’s investment planning for many years, offering high quality independent financial advice. Because each consumer is different, as is their financial planning needs, no individual advice has been provided in this Blog.
Keith G Churchouse,
Chartered Financial Planner, Director,
Chapters Financial Limited Chapters Financial Limited is Authorised and Regulated by the Financial Services Authority. Number 402899
The purpose of this blog is to consider this issue further. The reality is that there is very little intrinsic value in this news; both the downgrade and the reasons for the downgrade were widely anticipated. It should be noted that the judgements of the ratings agencies have only a limited influence on the relative attractiveness of G7 Government bonds.
The UK’s new, lower credit rating
The UK has enjoyed the highest possible credit rating from Moody’s since March 1978. A little over a year ago, on 13 February 2012, Moody’s warned of a potential downgrade when it altered the outlook from ‘stable’ to ‘negative’.
We are not alone, and now, Britain joins France and the US, leaving just Canada and Germany among the G7 with an Aaa rating.
An Aa1 credit rating is the second notch in a rung of 21 possible ratings (see table 1), which are detailed below for reference and consideration:
Table 1. Moody’s Investor Services
| Rating | Description |
| Aaa | The highest quality and lowest credit risk |
| Aa1, Aa2, Aa3 | Rated as high quality and very low credit risk |
| A1, A2, A3 | Rated as upper-medium grade and low credit risk |
| Baa1, Baa2, Baa3 | Rated as medium grade, with some speculative elements and moderate credit risk |
| Ba1, Ba2, Ba3 | Judged to have speculative elements and a significant credit risk |
| B1, B2, B3 | Judged as being speculative and a high credit risk |
| Caa1, Caa2, Caa3 | Rated as poor quality and very high credit risk |
| Ca | Highly speculative, near or in default, some possibility of recovering principal and interest |
| C | Lowest quality, usually in default, low likelihood of recovering principal and interest |
Moody’s justifies the UK’s standing at this high rating as follows:
‘...the UK's creditworthiness remains extremely high, rated at Aa1, because of the country's significant credit strengths. These include (i) a highly competitive, well-diversified economy; (ii) a strong track record of fiscal consolidation and a robust institutional structure; and (iii) a favourable debt structure, with supportive domestic demand for Government debt, the longest average maturity structure (15 years) among all highly rated sovereigns globally and the resulting reduced interest rate risk on UK debt.’
In applying a ‘stable outlook’, Moody’s are not anticipating any change to the current rating in the next 12 to 18 months.
‘The stable outlook on the UK's Aa1 sovereign rating reflects Moody's expectation that a combination of political will and medium-term fundamental underlying economic strengths will, in time, allow the Government to implement its fiscal consolidation plan and reverse the UK's debt trajectory. Moreover, although the UK's economy has considerable risk exposure through trade and financial linkages to a potential escalation in the euro area sovereign debt crisis, its contagion risk is mitigated by the flexibility afforded by the UK's independent monetary policy framework and sterling's global reserve currency status.’
You might wonder then, why it is that Moody’s has downgraded UK Government debt...
Reasons for the downgrade
To consider this further, Moody’s suggest that there are three interrelated ‘drivers’ for its actions.
1. The continuing weakness in the UK's medium-term growth outlook, with a period of sluggish growth which Moody's now expects will extend into the second half of the decade;
2. The challenges that subdued medium-term growth prospects pose to the Government's fiscal consolidation programme, which will now extend well into the next parliament;
3. And, as a consequence of the UK's high and rising debt burden, deterioration in the shock-absorption capacity of the Government's balance sheet, which is unlikely to reverse before 2016.’
In short, the UK appears to be stuck in a protracted and unusually slow period of recovery. This has suppressed tax receipts; just as it inflates Government spending and all the while it remains in recovery it also remains highly vulnerable to any kind of external shock.
What could the impact be?
It is not possible to say with any certainty what the impact of this downgrade will be, but... as I wrote in my opening remarks there is very little news contained in Moody’s announcement. It was increasingly odd that the UK maintained the very highest rating when the US, which has made far greater progress toward a sustainable recovery, lost its Standard & Poor’s AAA rating 18 months ago.
There is some sympathy for Martin Wolf’s view, expressed in his Financial Times column on 23 February, which says:
‘The judgment of the ratings agencies adds next to nothing to understanding of the economic condition of such a well-known issuer... Armies of official and private economists understand the underlying data and closely follow developments. In this crowd of commentators, the rating agencies are just another voice... At most, Moody’s has reminded the world of what it knows... Partly for this reason, the downgrade is unlikely to damage the UK gilt market.’
The yield on the 10-year gilt was 32 basis points (0.32%) more than the equivalent German bond this time last year when Moody’s applied a ‘negative’ outlook for the UK. That ‘spread’ subsequently fell to 13 basis points in August last year, in defiance of Moody’s judgement, before rising steadily to a current spread of 55 basis points. I’ll leave it to you to decide if Moody’s are responding to the market’s judgement or if the markets are responding to Moody’s judgement.
Summary
Gilt yields have risen, of late, in lock-step with equity markets just as German, Japanese and US Government bond yields have. This will remain the dominant factor affecting gilt yields.
Moody’s downgrade follows a growing perception that the outlook for Britain’s fiscal position has not progressed. Underlying this are serious challenges for policymakers in the UK. Thus far, the Chancellor of the Exchequer has pressed ahead with austerity measures that have, by now, proven unwise in voracity at the same time as placing too much faith in the ability of the Governor of the Bank of England to support the economy single-handedly. A fall in sterling’s trade-weighted exchange rate is already underway. Perhaps the downgrade from Moody’s will add just a little impetus to sterling’s decline.
Past performance is not a guarantee of future performance. Fund values can fall as well as rise and are not guaranteed.
At Chapters Financial, we have been planning client’s investment planning for many years, offering high quality independent financial advice. Because each consumer is different, as is their financial planning needs, no individual advice has been provided in this Blog.
Keith G Churchouse,
Chartered Financial Planner, Director,
Chapters Financial Limited Chapters Financial Limited is Authorised and Regulated by the Financial Services Authority. Number 402899
Tuesday, 12 February 2013
Long Term Care, Care Costs and Inheritance Tax
I am not sure I have ever seen two high-profile financial planning issues linked so closely by Government before, namely that of Inheritance Tax and care costs for Long Term Care. The recently commissioned Dilnot Report has done much to correctly move the issue of care costs forward.
Both topics are emotive subjects for both families and those in their older ages. They will generate much text over the next few months. The new plans (subject to confirmation and detail) is to cap long term care costs at £75,000 with assessment for this cap starting at a new level of £123,000. With care costs for many running at around £1,000 per week, as an example, you can soon work out that with £52,000 per annum being spent on care costs, it is easy for estate values to fall quickly. Ironically, this has the 'advantage' of reducing future Inheritance Tax liabilities.
The 'generosity' of this change offered by the Government will not be without expense. We are all aware that they have no money and this change will need to be afforded. This is planned to be achieved by freezing Inheritance Tax (IHT) levels until 2019. In George Osborn's Autumn Statement at the end of 2012, the current Inheritance Tax nil rate band allowance for an individual of £325,000 was going to increase to £329,000 from tax year start 2015/2016. This plan has now clearly changed to accommodate this new planning.
The devil may well be in the detail and I am sure there may be a few more changes before these (apparently) now linked allowances are finalised.
No individual advice has been provided during the course of this blog. Both Long Term Care and Inheritance Tax should be planned for carefully and if you would like to receive individual advice for your circumstances, then please contact the team at Chapters Financial Limited on 01483 578800
Keith Churchouse, FPFS
Director, Chapters Financial Limited, Guildford, Surrey
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.
Both topics are emotive subjects for both families and those in their older ages. They will generate much text over the next few months. The new plans (subject to confirmation and detail) is to cap long term care costs at £75,000 with assessment for this cap starting at a new level of £123,000. With care costs for many running at around £1,000 per week, as an example, you can soon work out that with £52,000 per annum being spent on care costs, it is easy for estate values to fall quickly. Ironically, this has the 'advantage' of reducing future Inheritance Tax liabilities.
The 'generosity' of this change offered by the Government will not be without expense. We are all aware that they have no money and this change will need to be afforded. This is planned to be achieved by freezing Inheritance Tax (IHT) levels until 2019. In George Osborn's Autumn Statement at the end of 2012, the current Inheritance Tax nil rate band allowance for an individual of £325,000 was going to increase to £329,000 from tax year start 2015/2016. This plan has now clearly changed to accommodate this new planning.
The devil may well be in the detail and I am sure there may be a few more changes before these (apparently) now linked allowances are finalised.
No individual advice has been provided during the course of this blog. Both Long Term Care and Inheritance Tax should be planned for carefully and if you would like to receive individual advice for your circumstances, then please contact the team at Chapters Financial Limited on 01483 578800
Keith Churchouse, FPFS
Director, Chapters Financial Limited, Guildford, Surrey
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.
Friday, 1 February 2013
Sick Pay Cover – Do you have enough?
I recently completed a financial plan for a director of a successful local company. Amongst the usual planning for pensions and life cover, I also wanted to address a much overlooked (and vital) area, which is the protection of income in the event of inability to work due to ill health. In this case, the topic was especially relevant because the business was young and very much reliant on its director to drive sales. He was clearly good at this because of the trajectory of profits achieved so far.
With no cover elsewhere, other than capital achieved from sales within the company which would deplete quickly without its sales 'driver', this was an area of exposure that once identified, the director wanted to address promptly.
Far too few people consider the impacts on their household finances in the event of them being unable to work due to ill health. Statutory Sick Pay (SSP) only pays for a maximum of 28 weeks at a level of £85.85 gross per week (2012/13) paid by the employer with income tax and National Insurance to be deducted.
In this blog, I wanted to look at the factors that can affect the final monthly premiums offered on Income Protection Policies, all of which are subject to medical underwriting.
The obvious factors are existing health condition, age and if the applicant is a smoker (which would see premiums lift significantly).
The other main factors which now influence premium levels are as follows:
G-Day
The recent EU ruling on the equalisation of rates between men and women has seen the most dramatic increases on male applicants for income protection policies. In some cases the increase has been as high as 40-50% increase for a male applicant in comparison to pre-G-Day (Gender Equalisation day of 21st December 2012), although a more typical increase could be around 25-30%. Conversely, female applicants should see a reduction of their premium in comparison to their premiums pre-G-Day, although I don’t believe it will be as large a discount as the increases seen for males.
End date / Term
As noted above, the maximum term which SSP pays is 28 weeks, however most Income Protection Plans, also known as Permanent Health Insurance (PHI) policies, can be set with a cover period up until the applicants 65th Birthday, possibly even longer depending upon the insurer. Obviously the longer the cover period (especially with the policy term into the advanced age range of 55 to 65) will increase the premium accordingly, however this longer period can be invaluable when planning your protection needs because it allows for some income provision beyond the Statutory Sick Pay (or even an employers’ own sick pay arrangements).
Inflation uplift / Escalation
At the outset of the insurance policy you can select whether the cover amount will stay level (cheaper premiums) or escalate / increase (usually in line with inflation as an example). Escalation will increase the monthly premium, but if the policy is to be in force for many years (for example a 30 year term) then at the point of claim the escalation of benefit could prove very worthwhile if the claim is towards the end of the policy term.
Waiting Period
This is sometimes referred to as a deferral period and is the length of time the claimant has to be unable to work due to ill health before a claim will be paid. The longer you set the deferral period the cheaper the premiums will be, however planning should be taken to ensure that sufficient other funds / income are available to provide for loss of income during the selected waiting period. Examples of waiting periods might be 4, 8, 13, 26 or even 52 weeks.
Calculation of amount of cover (maximum)
One of the key drivers for insurance premium costs is obviously how much cover is required and, therefore, the amount the insurer will have to pay in the event of a claim. In my opinion, the key minimum cover should be the amount the individual pays towards household costs on a monthly basis. However, in most cases this is not the ideal and careful consideration should be taken in planning the appropriate level of cover.
Dividend v Salary
This is a very important issue, especially considering my example case mentioned above. This is because many business owners / directors pay themselves nominal salary and higher dividend amounts for tax, and potentially cash-flow, purposes. Many insurers may not include the dividends in their calculation of a claimants income, so the desired amount of cover may not be available, or even paid, in the event of a claim. Some insurers may apply an increase in premium to reflect that they will include dividends. Careful attention of the terms and conditions of the income calculation allowed must be considered before starting the policy.
Guaranteed / Reviewable Premiums
The final major point which could affect the premium illustrated is whether the premiums are guaranteed (i.e. they will not change, apart from escalation if chosen, during the term of the policy) or reviewable. Reviewable premiums allow the insurer to calculate premiums collected against claims amounts paid and if they believe that there is a discrepancy then they can amend the premiums accordingly. This review tends not to be done on an individual basis but rather on a demographic basis for the insurers “risk book”. Guaranteed premiums tend to be slightly more costly at outset, but at least you know what you will be paying during the term of the policy.
Individual or Employer pays the premium
Generally speaking, insurers have an understanding that all income protection policies which an individual can hold will pay a combined maximum of 50% of a claimants gross annual earned income. This will normally be paid on a tax-free basis if the individual pays the premium. If the premium is to be paid for by the employer, then the maximum available is usually 65-75% of the claimants gross income paid on a taxable basis.
As you would expect, each element noted above is likely to have an effect on the final premium offered. Being independent financial advisers (IFA's) we have the ability to use the whole market to search out competitive providers in most circumstances.
No individual advice has been provided during the course of this blog. Protection in the event of either death or ill health should be planned for carefully and if you would like to receive individual advice on this subject, then please contact the team at Chapters Financial Limited on 01483 578800
Simon Hewitt BSc (Hons) Dip PFS
Financial Planner
With no cover elsewhere, other than capital achieved from sales within the company which would deplete quickly without its sales 'driver', this was an area of exposure that once identified, the director wanted to address promptly.
Far too few people consider the impacts on their household finances in the event of them being unable to work due to ill health. Statutory Sick Pay (SSP) only pays for a maximum of 28 weeks at a level of £85.85 gross per week (2012/13) paid by the employer with income tax and National Insurance to be deducted.
In this blog, I wanted to look at the factors that can affect the final monthly premiums offered on Income Protection Policies, all of which are subject to medical underwriting.
The obvious factors are existing health condition, age and if the applicant is a smoker (which would see premiums lift significantly).
The other main factors which now influence premium levels are as follows:
G-Day
The recent EU ruling on the equalisation of rates between men and women has seen the most dramatic increases on male applicants for income protection policies. In some cases the increase has been as high as 40-50% increase for a male applicant in comparison to pre-G-Day (Gender Equalisation day of 21st December 2012), although a more typical increase could be around 25-30%. Conversely, female applicants should see a reduction of their premium in comparison to their premiums pre-G-Day, although I don’t believe it will be as large a discount as the increases seen for males.
End date / Term
As noted above, the maximum term which SSP pays is 28 weeks, however most Income Protection Plans, also known as Permanent Health Insurance (PHI) policies, can be set with a cover period up until the applicants 65th Birthday, possibly even longer depending upon the insurer. Obviously the longer the cover period (especially with the policy term into the advanced age range of 55 to 65) will increase the premium accordingly, however this longer period can be invaluable when planning your protection needs because it allows for some income provision beyond the Statutory Sick Pay (or even an employers’ own sick pay arrangements).
Inflation uplift / Escalation
At the outset of the insurance policy you can select whether the cover amount will stay level (cheaper premiums) or escalate / increase (usually in line with inflation as an example). Escalation will increase the monthly premium, but if the policy is to be in force for many years (for example a 30 year term) then at the point of claim the escalation of benefit could prove very worthwhile if the claim is towards the end of the policy term.
Waiting Period
This is sometimes referred to as a deferral period and is the length of time the claimant has to be unable to work due to ill health before a claim will be paid. The longer you set the deferral period the cheaper the premiums will be, however planning should be taken to ensure that sufficient other funds / income are available to provide for loss of income during the selected waiting period. Examples of waiting periods might be 4, 8, 13, 26 or even 52 weeks.
Calculation of amount of cover (maximum)
One of the key drivers for insurance premium costs is obviously how much cover is required and, therefore, the amount the insurer will have to pay in the event of a claim. In my opinion, the key minimum cover should be the amount the individual pays towards household costs on a monthly basis. However, in most cases this is not the ideal and careful consideration should be taken in planning the appropriate level of cover.
Dividend v Salary
This is a very important issue, especially considering my example case mentioned above. This is because many business owners / directors pay themselves nominal salary and higher dividend amounts for tax, and potentially cash-flow, purposes. Many insurers may not include the dividends in their calculation of a claimants income, so the desired amount of cover may not be available, or even paid, in the event of a claim. Some insurers may apply an increase in premium to reflect that they will include dividends. Careful attention of the terms and conditions of the income calculation allowed must be considered before starting the policy.
Guaranteed / Reviewable Premiums
The final major point which could affect the premium illustrated is whether the premiums are guaranteed (i.e. they will not change, apart from escalation if chosen, during the term of the policy) or reviewable. Reviewable premiums allow the insurer to calculate premiums collected against claims amounts paid and if they believe that there is a discrepancy then they can amend the premiums accordingly. This review tends not to be done on an individual basis but rather on a demographic basis for the insurers “risk book”. Guaranteed premiums tend to be slightly more costly at outset, but at least you know what you will be paying during the term of the policy.
Individual or Employer pays the premium
Generally speaking, insurers have an understanding that all income protection policies which an individual can hold will pay a combined maximum of 50% of a claimants gross annual earned income. This will normally be paid on a tax-free basis if the individual pays the premium. If the premium is to be paid for by the employer, then the maximum available is usually 65-75% of the claimants gross income paid on a taxable basis.
As you would expect, each element noted above is likely to have an effect on the final premium offered. Being independent financial advisers (IFA's) we have the ability to use the whole market to search out competitive providers in most circumstances.
No individual advice has been provided during the course of this blog. Protection in the event of either death or ill health should be planned for carefully and if you would like to receive individual advice on this subject, then please contact the team at Chapters Financial Limited on 01483 578800
Simon Hewitt BSc (Hons) Dip PFS
Financial Planner
Chapters Financial Limited
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.
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