Back to School/ University....it's just around the corner!

Summer is a great time to spend with the family during the holiday period. There has been much going on with events and social outings, along with holidays, being enjoyed by many. A great distraction from the autumn months when new school terms start and the reality of funding this education need, from uniform costs to school/ university fees as examples, to be considered and planned for. All very topical subjects this month with exam results being released and the Government making its announcements on a new Child Care cost system (August 2013) from 2015.

These education issues are a concern to many parents and grandparents alike and, like pension planning, planning early and funding correctly can be used to meet future requirements. I have detailed some thoughts on this financial planning topic below. As I am sure you would expect, the team at Chapters Financial Limited can help you with meeting your financial planning strategy for this need.

University – Tuition Fees and Costs

Recently, the Government introduced legislation which allowed Universities in England to charge tuition fees for attending their courses. The current permitted maximum tuition fees within English universities is £9,000 pa (2013) for UK/EU based student nationals. Almost three quarters of universities in England are planning to charge the maximum £9,000 pa tuition fee for some or all of their courses, according to Office for Fair Access (Offa - their website can be accessed using the following link http://www.offa.org.uk/ ).

With estimated living costs, of approximately £10,000 pa, and upwards, on top of the tuition fee then a standard 3 year honours degree could cost anything in the region of £57,000. Considerably more if postgraduate study is undertaken. This would be a tremendous burden of debt for any graduate to start off their future career.

Currently, there exists the option of a Tuition Fee Loan which is paid directly to the university or college. Currently the maximum loan available is £9,000 for a full-time English / EU student. The loan would start to be repaid when the income of the student / graduate is greater than £21,000 gross pa. The interest rate charged on the loan is rate of inflation, Retail Prices Index (RPI), plus up to 3% pa (depending upon study period and income) and applies until the loan is paid back in full. More details on student finance can be found at the Government Student Finance website (https://www.gov.uk/student-finance).

Private School Fees

According to the latest census by the Independent Schools Council, average fees have risen by 3.9% to £4,765 a term (or £14,295 pa in 2012/2013). Further information can be found on the Independent Schools Council website at (http://www.isc.co.uk/ ). If you want your child to board then this could increase to an average of £10,054 a term (£30,162 pa) in Greater London, for example.

As you can imagine, if the choice / option to send your children to an independent school, rather than rely on the state education system, has been made / is being considered then the total costs can be significant and could far outweigh the costs of attending university noted above.

Possible Solutions?

There are many different solutions to help plan for these future costs. One key area which should be taken into account is the effect of inflation, which could erode the real rate of return. Also, the time horizon available before the money will be required.

For example, we have commented in previous blogs on the use of Junior ISAs (JISAs) or Child Trust Funds (CTFs), however, these would not allow access to any capital until the child reaches the age of 18 and at that point it is the child/young person’s money, not the parent’s / guardian’s money, to do with how they wish. This raises the concern that they may not choose to spend it on education.

Another example, which may appeal to Grandparents, might be the use of the Annual Gift Allowance, which allows each individual to gift £3,000 pa and this money will be outside of their estate, for Inheritance Tax purposes, with immediate effect.

As an example, if this £3,000 pa was gifted to the child’s parent to save in an ISA arrangement for 15 years at £250 per month, to provide for university costs at a child’s 18th birthday, this might provide capital of £68,100 at that time.

Source: FundsNetwork illustration, with an Assumed Return after charges of 5.3% - not guaranteed, Past Performance is not a guarantee of future performance.) 

Summary

Is there an answer to the rising costs of education and the way it should be funded? Invariably, a combination of planning solutions are used and there is no simple answer apart from to start planning for the potential cost as early as possible and seeking financial advice from a professional Financial Planner.

No individual advice has been provided in the content of this blog. For individual advice on your education cost provisions and needs, please contact the team at Chapters Financial on 01483 578800

Simon Hewitt BSc (Hons) DipPFS
Financial Planner
Chapters Financial Limited

Chapters Financial Limited is Authorised and regulated by the Financial Conduct Authority.

Chapters Financial Limited is not responsible for the content of external websites.

Pension Lifetime Allowance /Fixed Protection and Individual Protection / HMRC Update

New guidance (and application forms) has become available from HMRC, on the morning of 12 August 2013, both for Fixed Protection from 2014 (must be applied for before 05 April 2014, if required) and for the plans for Individual Protection 2014, which can only be applied for after the start of the new tax year 2014/2015.

A link to this is available here: http://www.hmrc.gov.uk/pensionschemes/pension-savings-la.htm#5

The Member Guidance here is also useful: http://www.hmrc.gov.uk/pensionschemes/fp2014guidance.pdf

I wanted to get this information to you promptly for consideration and action, if required or needed.

In addition, the new HMRC entry on their website notes the expected (to be confirmed) outcomes of its plans for Individual Protection 2014 as follows:

As well as fixed protection 2014, the Government has announced that individual protection 2014 will be available when the lifetime allowance is reduced to £1.25 million for 2014-15. The details of individual protection 2014 will be confirmed later but it is expected that:

• it will give you a lifetime allowance equal to the value of your pension rights on 5 April 2014 - up to an overall maximum of £1.5 million.
• you will not lose individual protection 2014 by making further savings in to your pension scheme
• any pension savings in excess of your lifetime allowance will be subject to a lifetime allowance charge

You'll be able to apply for this from 6 April 2014.

You can hold both fixed protection 2014 and individual protection 2014 but you can't apply for them at the same time.

I hope the above information and the links are of interest to those that are affected by these issues.

If you would like to know more about this pension planning and your tax allowances/limits then please contact the team at Chapters Financial Limited on 01483 578800.

No individual advice has been provided in the text of this blog. You should seek bespoke financial advice in your own circumstances.

Keith G. Churchouse FPFS
ISO22222 Certified Financial Planner
Director and Financial Planner

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

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

The continuing conundrum for savers / 'Forward Guidance'

The new economic tool deployed by the new Governor of the Bank of England, Mr Mark Carney, in August 2013 was heralded as the opportunity to manage economic, and to some extent financial, expectations into the future. 'Forward Guidance' as it is known, provides all those affected by the economy with the opportunity to know how the Bank of England predicts the future, and more importantly, what they plan to do if these expectations are met.

As we have seen, Forward Guidance has linked the Bank Base Rate (currently 0.5%) to UK unemployment levels (currently 7.8%) with the plan that Base Rates will remain at their current level until the unemployment level falls below 7.0% (Subject to anything unexpected happening, which it can). With this plan in mind, the Governor does not expect the target of 7.00% being reached for around 3 years, and therefore does not expect Bank Base Rates to move either in this time.

This new direction provides the benefit of certainty for some (such as businesses and mortgage borrowers as examples), but also provides the negative certainty of continuing low returns for savers.

Many savers have seen returns falling in recent times, with Premium Bond returns also falling from August 2013 onwards. Many are resigned to this situation, sensibly using their tax efficient ISA allowances where possible to reduce the tax take on any gross savings earned.

Against this backdrop, some clients and enquirers are reviewing their attitude to investment risk, where appropriate, and applying this review to their future investment decisions. As an example, UK Dividend returns have remained relatively firm over the last year and these have typically been between 3.00-4.00% gross pa (Not guaranteed, past performance is not a guarantee of future performance). Obviously, by moving into this investment area, the risk to the capital invested increases significantly, with the value of funds varying daily. This volatility (and overall investment risk) is detailed on our Investment Risk Scale further here (Link). However, if an investor is prepared and able to accept this level of investment risk, this investment alternative may be suitable in some investment cases. It should be noted that diversifying any investment is usually worthwhile and we have noted that committing smaller sums initially may be worthwhile to get used to the chosen investment medium before committing larger sums.

Each investment plan and recommendation is different and individual to the Client. To consider your circumstances with regard to savings and investments, you should take individual financial advice. No individual advice is provided in the content of this Blog. The team at Chapters Financial can help you with your planning and look forward to working with you.

Keith Churchouse FPFS
Director
ISO22222 Certified Financial Planner
Chartered Financial Planner
Chapters Financial Limited

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

Nearly new regulatory regime 2013

We are now entering the eighth month of the inception of the Retail Distribution Review ( or RDR for short) process implemented at the very start of 2013.

As noted on our websites front page, Chapters Financial Limited moved to a transparent  fee based client agreed remuneration policy in 2007 (May). Because of this inspired change, we have found the regime transition less complicated than many of our competitors and are proud to have retained our independent status. This may be a reflection of the significant fall in the numbers of advisers in the UK (with numbers still falling) over the last year. (Source: www.imas.uk.com website). Personally, I am saddened by this reduction in numbers, because the access to financial advice that many enjoyed in the past has fallen away, with the anticipation that the Internet will fill the void left by the loss of these services. (See www.advicemadesimple.com as one example).

As a reminder, the headlines of the FSA's planned customer/ client outcomes for the RDR were:

• Advisers qualified to a high standard (Qualification 4 or above).
• Transparent fee based charging structure for both initial and on-going services ( a ban on commission for most services). 
• Choice to use an Independent (IFA) or Restricted financial advice service
• As an additional note, in April 2013, the Financial Services Authority was replaced by a new financial regulator, the Financial Conduct Authority (FCA).

What have been some of the initial effects of these changes we have witnessed?

Many retail financial advisory providers have struggled to comply with these new requirements and this has added to the numbers exiting the profession. It has also been interesting and concerning to note how many existing policy providers (namely some of the big insurance based companies) have been unable to meet the changes required for transparency, confirming that in some cases existing plans cannot accept additional or changed contributions.

Chapters Financial has seen an increase in focussed enquiries in 2013, ranging from pre-retirement, retirement and inheritance tax planning to many SME owner/ director/ managers now getting closer to their company’s  Auto-Enrolment date. It will be interesting to see how the legislation introduced for Workplace Pensions will affect retirement savings in generations to come.

More evidence of the benefits of this regime change will come in future times. It will be interesting to see in time if all the changes have been a success for those seeking financial planning advice.

No individual advice has been provided in this blog and you should seek financial advice (IFA) for your own individual or company’s needs and requirements. Speak to the team at Chapters Financial Limited on 01483 578800

Keith Churchouse FPFS
Director
Chartered Financial Planner

ISO22222 Certified Financial Planner

Chapters Financial Limited

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

From capital growth to income. The possible life phases of Investment & Savings

Everybody tends to move through their personal life phases over time. It would be natural for their money to do the same as their needs develop and evolve.

This usually requires some financial planning and I have considered below some of the issues that might need to be considered through the phases of a lifetime.

Starting the savings process 

Capital accumulation usually needs (amongst others) time and money. This might sound a bit obvious, but the sooner you can start saving the better, and the more you can put in at the earliest points usually creates the most capital (not guaranteed ) for the future. This might start with smaller amounts in your early working years and build as the pressures of household and family expenses come under control and household income rises as your career develops.

The desire to save can be fuelled by any number of objectives, from buying a house, to saving for a wedding, to paying for school fees, to name just a few examples. It might be simpler than that, just paying for this year’s summer holiday.

Accumulation phase / Capital Growth 

As you move through your working life, and savings are invested, many will focus on capital growth as the objective. They have no real need for additional income and their investment objective is capital growth, with any income produced being re-invested accordingly.  Savings might be invested in tax efficient plans, such as ISAs and pensions, and also balanced across spouses/ partners to ensure that annual allowances are maximised where possible. This last point also has the potential to help balance income using income tax allowances in later years, such as retirement.

Attitudes to investment risk might be balanced or aggressive in this phase to endeavour to maximise returns, accepting that this is likely to import volatility in returns. More information on investment risk (and notes on volatility) can be found on our website here. The important issues of volatility can be considered further at our Investment Risk Scale here.

Income Phase 

It is possible that at the end of a working life (and usually the end of the accumulation phase), savings and investments would be re-balanced with the emphasis being focussed on income generation (rather than capital growth previously targeted) to boost income in retirement.  Attitudes to investment risk should also be checked at this time to re-test tolerance to risk and capacity for loss (ability to withstand falls in the value of the investment and/or reductions in the amount of income it can generate). Some may want to reduce their previous investment risk ratings, becoming less accepting of significant volatility in the capital they have accumulated.

This income phase may sometimes be deferred if not needed, being initiated when higher costs are incurred in later life, such as Long Term Care. More information on this topical point can be found on our website here.

Summary 

As the notes above indicate, a regular review of the allocation of your investment assets is worthwhile, partly to ensure that they continue to match your attitude to investment risk and partly to ensure that they match the life phase (and its requirements) that you reach. Past performance is not a guarantee of future performance.

No individual advice has been provided in the content of this blog. For individual advice on your pensions, savings and investments needs, please contact the team at Chapters Financial on 01483 578800.

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

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

How to save for your Children’s future

We are often asked by our clients what is available for them to start saving for their children’s futures? The question is a valid one as they want to ensure their children have as good a start as possible. However, what many people don’t realise is that if a parent gives money to a child, and that money generates more than £100 per year in income, then the income is taxed on the parent’s marginal tax rate and not the child’s.

 

Children, the same as adults, have a personal income tax allowance of £9,440 in the current tax year (2013/2014) which is the amount they can receive as income before income tax is liable. So what are the options available to parents? I have given brief descriptions below of some of the options which could be utilised. This is not an exhaustive list, but provides some ideas for your consideration.  

 

Child Trust Funds

 

These were available to children who were born between 01 September 2002 and 2 January 2011 and who lived in the UK. The Child Trust Fund (CTF) is a long-term tax free account which allows £3,720 a year to be added into the account. The money belongs to the child, however the fund cannot be accessed until the child reaches 18 years old.

 

There are 3 types of Child Trust Fund accounts: 

• Stakeholder (certain rules apply, such as you must invest in more than one company and move to lower risk investments when the child is 13)
• Share Account (Equity based fund)
• Savings (Deposit based fund)

The Government is currently considering whether to allow Child Trust Funds to be converted into Junior ISAs (described below) but this is purely at the consultation phase and has not been passed into legislation. There is no guarantee that any changes will be made.

 

Junior Individual Savings Accounts (JISAs)

 

The Junior ISA effectively replaced the Child Trust Fund and was initially made available from 01 November 2011. The child is able to own a Junior ISA if they are under the age of 18, live in the UK and were not entitled to a Child Trust Fund (CTF). Any income or gain is free from tax other than the 10% dividend tax credit produced by equity holdings which cannot be reclaimed.

 

The account can be opened by the child if they are at least 16 years old or by the person with parental responsibility. The account is owned by the child but operated by the parent / guardian until the child reaches the age of 16. The money cannot be accessed until the child reaches 18. When the child reaches the age of 18 the Junior ISA is automatically converted into a full adult ISA.

 

Similar to adult ISAs, there are two types of Junior ISA – a Cash Junior ISA and a Stocks & Shares Junior ISA. You can choose either type, or both, but the combined maximum annual contribution is limited to £3,720 (2013/2014).

 

Pensions

 

Any UK resident is allowed to contribute 100% of their earnings or up to £3,600 (gross), whichever is greater, in each tax year and receive tax relief at their marginal rate up to a maximum of £50,000 (2013/2014).

 

Therefore, the majority of children could, as an example, have contributions of up to £3,600 gross per year into a pension fund which grows tax efficiently. This means that to receive the total maximum gross contribution of £3,600 the money invested on behalf of the child would only have to be £2,880, with the remainder (£720) being paid by the government in the form of tax relief at 20%.

 

It should be noted that the fund which is accumulated within a pension cannot be accessed until the age of 55 (under current legislation). From the age of 55, the fund can provide a tax-free lump sum of up to 25% and the balance providing a taxable income.

 

Summary

 

These options could be very useful in the early financial planning of any child’s future, however professional financial advice should be received before implementing any savings for children. There are other tax efficient savings options available, such as Premium Bonds, and it is sensible to consider these before finalising any savings plans you have for the future.

 

If you would like to know more about this area of financial planning, your children’s tax allowances, and the different types of accounts available to children then please contact the team at Chapters Financial Limited on 01483 578800.

 

No individual advice has been provided in the text of this blog. We would urge you to seek independent financial advice (IFA) on your own individual circumstances and needs.

 

Simon Hewitt BSc (Hons) DipPFS

Financial Planner

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

 

Pensions – Lifetime Allowances – Reductions and Protection

Pensions planning for higher earners is likely to become extremely topical in the balance of 2013 and early 2014.  

 

In previous Chapters Financial Blogs, we have referred to the forthcoming reduction in the Pension Annual Allowance from £50,000 to £40,000 from tax year 2014/2015. Another important allowance in respect of pensions is the Lifetime Allowance (LTA) which is the total deemed benefit amount held by an individual in all pension arrangements above which tax charges would apply.

 

I have looked at a few of the points you might want to consider below.

 

Lifetime Allowance (LTA) – Limits

 

The Lifetime Allowance was introduced on 06 April 2006 through legislation. The Lifetime Allowance (LTA) is currently £1.5M (tax year 2013/2014) and is due to reduce to £1.25M at the beginning of the new tax year, from 6 April 2014. This limit has already dropped from £1.80M (tax year 2011/2012) and the apparent trend may continue as the Treasury tries to garner more taxable funds. There is no guarantee this is the case and only time will tell.

 

Tax on Excess above LTA

 

If individuals’ total benefits accrued are greater than the Lifetime Allowance (without suitable protection), then a punitive tax charge would apply on the excess benefits of 55%, if taken as a lump sum, or 25% if taken as taxable pension income. Therefore, it could be more beneficial to remain within the Lifetime Allowance limit and divert any disposable income to other tax-efficient wrappers / products.

 

HMRC Consultation

 

It should be noted that HMRC have launched a consultation paper (June 2013) on possible smaller changes to the application of the LTA and this can be found here:

 

https://www.gov.uk/government/consultations/pensions-tax-relief-individual-protection-from-the-lifetime-allowance-charge

 

Please note that this is a consultation and we will endeavour to keep our readers posted on any agreed changes.

 

Chapters Financial is not responsible for the content of external website information.

 

Protection of Benefits

 

The government is allowing individuals to protect deemed pension benefits which have accrued greater than £1.25M prior to 06 April 2014. Confirmation and the documentation to achieve this should be available from autumn 2013.

 

This protection will be known as Fixed Protection 2014 (or FP14) and Individual Protection 2014 (or IP14). Each protection offers a different type of pension protection to the individuals’ benefits and are applied for at different times.

 

·         FP14 must be applied for prior to 06 April 2014.

 

·         IP14 can be applied for in a 3 year window from 06 April 2014.

 

It should be noted that IP14 is still in the consultation phase and has not been passed as legislation.

 

Defined Benefit Schemes

 

It is worth noting that Defined Benefit schemes (such as a Final Salary scheme) are valued, against the Lifetime Allowance, using a factor of 20, plus lump sum where applicable.

 

As an example, any pension income benefit accrued over approximately £62,500 pa (with no tax free cash) could breach the new reduced £1.25M Lifetime Allowance (2014/2015).

 

You should seek individual advice on this topic if it affects you.

 

Professional Advice

 

Whenever changes to pension legislation are due to come into force then considered financial planning should be sought from professional independent financial advisers.

 

If you would like to know more about this pension planning, your tax allowances and the different types of protection available then please contact the team at Chapters Financial Limited on 01483 578800.

 

No individual advice has been provided in the text of this blog. You should seek independent financial advice (IFA) in your own individual circumstances and needs.

Simon Hewitt BSc (Hons) DipPFS

Financial Planner

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