Wealth Management Update – December 2016
Should you aim to die with nothing?
The whole point of saving is to be able to enjoy your hard-earned cash at some point in the future on whatever takes your fancy. Well, apparently us Brits don’t seem to be doing that – quite the opposite in fact.
We tend to see capital as being “off limits” and income as being “available”. What we fail to remember is that all income and capital belongs to us, and we are free to use it for whatever we want while we are still here. However, we continue to defer consumption of our savings through fear of the unknown – what will happen tomorrow? What if I need it?
Now there is obviously a case for saving. You want to be sure you are comfortable in retirement, and you shouldn’t go off the other end of the scale into extreme extravagance. Your priority may also be to provide for your family after you die, if you think they need it.
But what is stopping you from enjoying retirement while you are able and if you can afford to? And also, is it really sensible to save to a point where there are no further inheritance tax saving methods available to you, meaning much of your savings will be taxed at 40% when you die anyway?
As financial advisers, obviously we want to encourage you to save and protect your assets, but we also need to make sure you enjoy your savings as well, and that means spending them! Because at the end of the day, you earned it!
Money in the bank will cost you money
It has been reported that £10,000 held in a high street savings account will be worth £9669 in two years’ time, effectively costing you £165.50 per year just to hold the cash!
This prediction uses an average interest rate of 0.76% for a fixed-rate 2-year account, which means while your money is costing you money, you can’t even spend it! If the prediction was based on an easy-access account, then the average interest rate drops to 0.65% and your £10,000 after 2 years will be worth £9848, costing you £76 per year.
This loss over the 2 years is due to inflation; that is, your money will be worth less in the future if the interest rates are not high enough to produce some growth. Actually, to break even you need to make 2.44%, not including fees, etc., and you will not get anywhere close to this for cash deposits on the high street.
For long-term savers this could add up to a massive loss over time and could mean that your savings are slowly eroding to be worth much less than what you deposited in the first place.
Whilst holding some cash on deposit for emergencies is wise, holding large amounts of cash in this time of low interest rates makes no sense. If you have large cash deposits you need to revaluate your situation and take action now to avoid your savings being eaten away.
Welcome to Trumpton …
Well, it actually happened! And it feels like Brexit all over again! Reading the news on that chilly morning of 9th November we really believed that when we went outside the world might be standing still. But it wasn’t, and it won’t.
It is the second time this year that the polls have been wrong. Right up until the very last second Hillary was favourite to win. It is thought that, as with the Brexit vote, many people concealed their real voting intentions to avoid animosity and to save embarrassment. However, we cannot deny that Trump’s message was resonating with many Americans; even those who outwardly admit they do not like Trump still voted for him!
Watching the run-up to the election from across the pond, we were wide-eyed and in shock that Trump could even be taken seriously as a candidate, let alone be elected President of the United States. But those living through it clearly had different perspectives.
It has been reported that many found Hillary to be too guarded, and not honest or open enough. Some thought she was too ‘pro-war’ and would ultimately drag them into a battle with Syria they did not want to be part of, and which could well ruin the economy.
On the other side, people praised Trump for his “what you see is what you get” approach, and found his outright honesty refreshing, even if they didn’t always agree with what he was saying. His business acumen will also have been a positive point for him, with many hoping he will be able to negotiate tough deals around the world that will help bring America out of debt and back into the black.
Ultimately, we think that the majority of Americans wanted to see the nation shaken up a little. They wanted change, and this was the only way that they could make their voice heard on such a large scale. And, boy, have we heard them now. In this way, this vote was not dissimilar to Brexit, though it has the potential to have a much more far-reaching and significant effect worldwide; but it is proof that when people want change they vote with their hearts rather than their heads.
Now that Trump has made contact with Putin, let’s hope that most of what he proclaimed during the election was for publicity and that the most powerful job in the world might ground him somewhat. He had apparently downgraded the wall between America and Mexico from a wall to a fence, and now has downgraded it further … to a “virtual” wall. Oh dear!
Tesco in crisis
Tesco has had a lot of bad press recently and is currently struggling to regain its previous high standing. The most recent setback was the cybercrime attack at the beginning of November that resulted in Tesco having to pay back losses of £2.5 million to more than 9000 affected customers.
The money was apparently stolen by a large-scale criminal gang that purchased thousands of low-price goods using the contactless mobile phone payment system across Brazil and the USA.
It is reported that Tesco knew of the weakness in their mobile banking apps that made them vulnerable to attack, and there are reports that they were subject to smaller-scale assaults just months before the large-scale hit. Should Tesco have done more to prevent this? Yes! Did Tesco deal with it promptly and efficiently? Yes! As soon as the attack hit, Tesco contacted its customers to reassure them that, whilst they had been left vulnerable, Tesco would rectify the situation and all monies lost would be compensated by the company.
If a large organisation such as Tesco cannot protect its own and its customers’ assets then it is in dire straits and will need to perform outstandingly to regain its previous status. Tesco has definitely lost the confidence of many of its customers and, with its share price dropping, many shareholders are making a swift exit to avoid substantial losses.
FCA cap on early pension exit
Well they were talking about it, and now they have actually done it.
From 31st March 2017, early exit charges on existing pensions for those wanting to access their benefits from the age of 55 will be capped at 1% of the value of the policy. That doesn’t mean pensions with early exit charges of less than 1% will be increasing their fees, we hope! Early exit penalties for new pensions, i.e. those set up after the new flexible pension rules came into force in 2015, will have their fees capped at 0% – even better!
The intention of the cap is to give those aged 55 or over more choice and flexibility in accessing their pensions, and to enable those who perhaps felt unable to access their benefits to now do so. Whilst the hope is that this does not encourage everyone to run out and withdraw their entire pension, it provides people with the freedom they deserve to make flexible investment choices.
Lifetime ISA – good or bad?
We have written a few articles on the Lifetime ISA since the government announced the scheme would launch next April. But is all as it seems?
The scheme has been under fire in the media recently for the high early exit penalties it imposes. As the government has just capped exit penalties on pensions, it seems strange that they would impose them on another method of saving for retirement. Is this a case of give with one hand and take with the other?
As you are probably aware, the Lifetime ISA is for the under 40s, and provides a way to save for either a first property or future retirement. But it is essential to be absolutely sure that you will not need to access the money invested in this account early, as there is a hefty 5% fine for early withdrawal, or withdrawal for a purpose other than purchase of a first property or retirement.
Nationwide has rejected the scheme because of the large exit penalties. This is surprising, as Nationwide is the largest high street ISA supplier and this is certainly a setback for those in support of the scheme. There are reports that a requirement to seek financial advice before a Lifetime ISA can be taken out may be introduced.
Certainly, this is a scheme that may not be for everyone. If you are considering it and aren’t completely sure, please get in touch.
£5000 dividend allowance not available to all?
As you are all probably aware, the new allowances for dividends introduced in April this year mean you can earn £5000 of gross dividend income before having to pay tax, no matter what kind of tax payer you are. Earnings above your allowance are then taxed as:
- 7.5% for Basic Rate tax payers
- 32.5% for Higher Rate tax payers
- 38.1% for Additional Rate tax payers
But what you may not know is that this does not apply to trusts or trustees. Any dividend income generated (regardless of whether it is paid out to the beneficiaries or not) will be taxed at the 38.1% rate, as all trust income is automatically taxed in the Additional Rate band.
If this dividend income is paid out to beneficiaries then it ceases to be dividend income but is instead considered to be trust income and is taxable at the highest rate of 45%; it is not allowed to be part of the individual beneficiaries’ dividend allowance.
It is quite aggravating that this allowance has not been transferred to trusts, as it means that those trying to protect their funds are losing out on effectively “tax free” income available to every other individual. The complex nature of trusts was probably too much to consider in this instance, but this just means that you need to be very careful when distributing funds from within a trust and you should almost certainly seek advice before doing so.
Book of the month
The 100-Year Life: Living and Working in an Age of Longevity by Lynda Gratton and Andrew Scott is not what it seems. It appears to be a self-improvement book about how to live a long life. But, when you read it, you find it is a study of how our lives, our communities, our businesses, governments, educational systems – in fact everything about our lives – must change as life expectancy extends. You will find much in this thoughtful study that you would not have considered. It is too easy to talk about the increase in care costs as life expectancy increases when this is but a tiny part of the impact of increased life expectancy.
The book is an easy read but it will take a while as you will often stop to think about the implications of what you have read. We think it’s well worth a few hours of your time.
Best Savings Selections
Top Three No Notice Accounts without Bonus
|Name||Contact||£1 Gross %||£500 Gross %||£1k Gross %|
|RCI Bank UK||www.rcibank.co.uk||1.00 (min £100)||1.00||1.00|
|Coventry BS||0800 121 8899||0.85||0.85||0.85|
|ICICI Bank UK||Via branch||1.00||1.00||1.00|
Top Three Monthly Interest Accounts
|Name||Contact||£1k Gross %||£5k Gross %||£25K Gross %|
|Charter Savings Bank||www.chartersavingsbank.co.uk||1.30||1.30||1.30|
|Charter Savings Bank|| www.chartersavingsbank.co.uk
|Kent Reliance||08451 220022||1.09||1.09||1.09|
Top Three Cash ISA’s
|Name||Contact||£1 Gross %||£10 Gross %||£100 Gross %|
|Coventry BS||0800 121 8899||1.10||1.10||1.10|
|National Sav & Inv||www.nsandi.com||1.00||1.00||1.00|
|Al Rayan Bank||0845 6060 786||n/a||n/a||1.55 (min £250)|
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 December 2016 Edition