Wealth Management Update – January 2016

Pensioner Bond rates halved!

NS&I have announced that the Pensioner Bonds introduced last year will not be renewed, despite the clear popularity of the product. These bonds were designed to encourage savings by the over 65s and offered high returns on cash savings compared with the market place, over either one or three years.

However, the one-year product will see a rate cut of 50% as early as January. The rate will fall from 2.8% down to 1.45%, which is lower than could be achieved with a cash NISA at your local high street bank!

The three-year bond will return only 1.9% instead of the 4% they were originally offered at. This doesn’t seem nearly enough reward for locking your money away for three years!

WARNING – it has been suggested that if you do nothing, your bonds will be automatically reinvested at the lower rate on your one-year anniversary!

It is clear that money invested in these bonds will have to be moved to an alternative provider to get the best rates available. If you are affected and need some advice on how best to invest your proceeds then please get in touch.

Second-hand annuity market – coming soon!

Because of the change in pensions legislation, it has become obvious that there is a need for a second-hand market for pension annuities. As people have been given more freedom with their pensions, they now want this to apply to one of the most inflexible of pension options, and why not?

It has been announced that a fully operational second-hand market system will come into place on 6^th April 2017. This will give those who take income from an existing annuity the chance to sell it for a lump sum or to place it into drawdown. At present, if you wish to sell your annuity you face a tax charge ranging from 55% to 70%. However, in 2017 you will be charged only at your marginal rate.

Whilst keeping an existing annuity will be the best course of action for many people, for some it will allow a greater freedom of choice to move away from a system they may find restrictive and unsuitable.

We can never be sure that these proposals will eventually become reality, especially with the amount of pension reform we have seen recently. However, if the second-hand market is indeed introduced, it is almost certain that advice will be mandatory before any changes can be made – so let us know if you are considering this option when the time comes.

US interest rates rise by 0.25%

The US Federal Reserve has made the decision to raise interest rates by 0.25%, the first rise since 2006.

This move is set to strengthen the Dollar and, as this is a more common currency for trading, the change in exchange rates could see people trying to take advantage of the situation, or at least avoid any negative implications.

The rise in interest rates is likely to have effects across the entire international market place, with this show of confidence in the American economy boosting Eastern and Western economies in turn, and making it more probable that others will follow their lead.

Whilst the Bank of England voted this month to keep our interest rates at 0.5% until late 2016 or early 2017, this move could put more pressure on the UK to bring a rise forward to match the upward movements of the US. As the USA and UK agree that any interest rate rises should be gradual, we will not see a large increase any time soon, but we should be prepared for a slow climb to the desired 2–3% by 2018.

More pension changes

In April, the Government will reduce the lifetime allowance for pensions, which is the amount you can accumulate in pensions before any additional tax charges may apply when amounts over this limit are taken. The lifetime allowance will reduce from £1.25 million to £1 million. This is further to cuts already made that brought the lifetime allowance down from its 2010 high of £1.8 million.

While pension savings of more than £1 million sound like a large amount, if you have a final salary or defined benefit pension that is set to pay you over £40,000 a year in retirement, the calculations involved mean this is actually worth £1 million in terms of your lifetime allowance. Also, if you have additional personal pensions, you could easily go over the limit.

The good news is that you don’t need to take any action to protect the higher lifetime allowance until you decide to take benefits. Therefore, if you have yet to draw on your pension benefits, and plan to do so after 5^th April 2016, you will need to apply before you draw from any of your pensions so that you can be tested against the higher £1.25 million allowance. HMRC are planning to introduce an online application for this from July 2016. More information will be provided as and when we have further news.

Don’t forget the tax relief

We recently spoke with a client who pays £500 into their pension from their bank account. The client is a higher rate tax payer and so is entitled to higher rate tax relief.

Basic rate tax relief is 20% and higher rate tax relief is 40%.

You might find it amazing, but if you make a £100 contribution to your pension and are a basic rate tax payer, the tax relief is not £20 but £25! This is because you need to ‘gross up’ the payment. This means paying £80 to get £20 tax relief. This makes an incredible difference for higher rate tax payers because they get £66 of tax relief on a £100 payment.

But here’s the thing: whereas basic rate relief is given automatically, you must claim higher rate relief. Our client had not been doing this.

If you make payments into a pension and are a higher rate tax payer, you must reclaim the additional relief. To do this you must complete an annual self-assessment tax return. If you have not done so, you can go back four years to claim unused relief. To do this, you will need to send a letter to your tax office with details of your claim.

Book of the month

We start this year with a novel as our book of the month. Not an ordinary novel but something that we guarantee you will not have read the likes of before. The Bees by Laline Paull is a novel that is … well … all about bees. Why read it? Firstly, you will learn a lot about bees (although in real life I don’t think they talk) and secondly because it will make you think about the establishment, society and what is fair in life. If you read fiction you will enjoy this book, but if you don’t read fiction, this might be a good place to start.

Best Saving Selections

Top Three No Notice Accounts without Bonus

Top Three Monthly Interest Accounts

Top Three Cash ISA’s

Please check with the terms and conditions before opening any account. If in doubt consult with your financial adviser directly as the above are for information only.

Source: Moneyfacts Magazine January 2016 Edition