April 2017 Wealth Management Update
Millions of people will get the wrong state pension!
It has been reported recently that up to four million people who will retire from this April could potentially receive either too much or too little state pension, due to a bug-ridden data calculation system used by HMRC. It has been worked out that, in relation to the contracted-out part of an individual’s pension, on average one in five of the calculations are incorrect.
In addition, because HMRC removed the rules forcing pension providers to collect the relevant data required in 2012, individual records could have deteriorated even further. This means that those people who have transferred their pensions, or those who are part of a group scheme where other members have transferred their pensions, may find that their records are incomplete.
HMRC are currently going through a mammoth data reconciliation project that will last until 2018, and plan to rectify any errors, including for pensions already in payment, after this is completed. We don’t envy them the task of checking and collecting data on millions of individuals, but this is one instance where HMRC cannot bury their heads in the sand any longer. None of us would know whether or not our pension statement was wrong, because we rely on the “professionals” to calculate this on our behalf using records and data that span many decades, and we expect them to get it right.
As the state pension is the only source of retirement income for some people, getting it right is fundamental. A miscalculation by only a few percent could affect the lives of millions on retirement.
If you apply for a digital calculation, make sure you also request a paper statement, as there have been reports that the calculations use different rates, resulting in discrepancies of up to £700 per year. If you get conflicting information or have a concern about your state pension entitlement you can contact the Future Pension Centre at www.gov.uk/future-pension-centre, or call on 0345 300 0168.
There are two certainties in the world … Death and Taxes!
From the end of April, both death and taxes will unite into one power force of fees!
The current probate fee is a flat rate of £215 for estates above £5,000. Below this level, it is free of charge. This is changing to a sliding scale, the details of which are below.
|Current||From May 2017|
|Size of Estate||Fee||Size of Estate||Fee|
|£0 – £5,000||Nil||Up to 50,000||Nil|
|£5,000 or more||£215||£50,000 – £300,000||£300|
|£300,000 – £500,000||£1,000|
|£500,000 – £1M||£4,000|
|£1M – £1.6M||£8,000|
|£1.6M – £2M||£12,000|
|£2M or more||£20,000|
The percentage increase from the original fees to the new tiered scale is astronomical. If your estate is in the region of £500,000–£1 million, the fees payable have increased by 1,900%! And if your estate reaches more than £2 million, the fees have increased by 9,300%.
That reminds us of the extortionate interest rates of a pay-day loan – basically something to be scoffed at and not taken seriously. But this is serious.
The annoying thing is that the probate process is not more complicated just because the estate is larger in value. An estate that is large in terms of assets could be very well organised, with up-to-date records and therefore easy to process. Similarly, a small estate that has not been managed well and does not have up-to-date records may require a lot of work to process. In fact, the size of the estate is largely irrelevant, as the fee is only for the granting of probate and not for any of the work carried out!
We feel that the fee increases are not justified by the work involved and we believe this to be just another way to extract taxes on death. This is a sure-fire way to create further bitterness about the amount of tax paid both during your lifetime and on your death, especially for those who have worked hard to build up an estate that they would like to pass on to their families.
It should be noted that these payments are due up front, are payable on both first and second deaths, and have no connection at all with inheritance tax which will be payable as usual and is also due before the estate can be distributed.
Please do contact us if you wish to discuss this further.
Battle of the Wills – Why you should have a Trust!
You may recall a widely reported case in 2015 about an appeal made by a daughter against her mother’s Will. The story began in 2004 when the mother died, leaving her entire estate of £500,000 to animal charities, with nothing to her daughter. Since then, her daughter has continually contested and appealed the contents of the Will.
At first glance, we may blame the mother for being insensitive, but who are we to judge? Your Will is your own to pass down your estate to whomever you wish.
As more details of the situation were released, we learned that the mother and daughter had been estranged when the daughter eloped to be with a man of whom her mother disapproved. Reconciliations were attempted but were never successful. In fact, the mother made it explicitly clear that her daughter was to receive no inheritance and asked her executors to fight any claims made on her estate.
So how, then, has her daughter walked away with £50,000? Well, she was awarded £50,000 in 2007; this was revoked when she went back asking for more. In 2011 that decision was overturned and the court ruled she was “entitled” to £50,000. Entitled? We are not sure that is correct, looking at the facts. Why should a person be entitled to inherit from someone with whom they had no positive relationship and who had formed no part of their life since the age of seventeen? Entitlement seems the wrong word to use in this situation.
In 2014 the daughter appealed for more money from the estate, but was not successful. The decision was challenged in 2015 and the daughter was awarded a higher sum of £164,000. Finally, in 2017 the animal charities challenged this decision and the daughter’s sum was reduced to £50,000 once more.
We don’t know about you, but we are feeling a bit dizzy after that.
The final decision to award money to the daughter will no doubt divide opinion. On the one hand, she was a family member and received only 10% of the estate, with 90% going to charities of the mother’s choosing. On the other hand, why should she receive anything at all? She was explicitly removed from the inheritance, seemingly with good reason.
We think this case, in particular, may open discussions about the enforceability of Wills, and how and when people may contest their contents. This is why we recommend family Trusts as a way to protect your estate against challenges like this – Wills direct, Trusts protect!
February inflation higher than expected – What should you do?
There has been quite a jump in inflation over the last month or so, rising from 1.8% in January to 2.3% in February, above the Bank of England’s 2% target.
The Bank of England has said that inflation should peak at 2.8% next year but, as it has already reached 2.3%, economists now believe it will likely be in excess of 3%.
Mark Carney’s response to this jump in inflation is “don’t panic” – perhaps not in so many words, but he has stated that the Bank of England will not be pushed into increasing interest rates in response to rising inflation over just one month. They will obviously monitor this closely to see if an interest rate rise is needed.
The rise has been attributed to an increase in fuel and food prices, not helped by the fall in the pound making importing more expensive, with that cost being passed on to consumers. We should also expect these rising costs to be felt in factories, leading to higher priced goods in the future.
These higher prices mean that any wage increases or income payments you may have received will, more than likely, be eaten up by higher spending as a result of increased costs, and we will probably not feel as well off as we have in the past.
Added to this, our savings in the bank will be even worse off; that 0.5% interest you may be getting – minimal as it is to start with – will actually mean your savings are probably decreasing in value as inflation rises, making cash savings in the bank even less appealing.
Be prepared … PLAN!
So with everything that is due to come up over the next few years, planning will be vital to ensure ripple effects on your savings are kept to a minimum. The big decisions of last year, and the unpredictability of the world in general, mean that savers need to be prepared to battle through any eventuality.
As mentioned above, the cost of living is set to increase and inflation is already on the rise, so you need to ensure you are making the most of the opportunities available, some of which are outlined below.
- Use your ISA allowance in the new tax year. This allowance is rising from £15,240 to £20,000 and means that you are moving more of your savings into a tax-free environment, great for when you may need to access them without tax penalty. If you have investments with us, you can simply send in a cheque for the new allowance or you can contact us to move this allowance from other investments you may hold in your portfolio. The new flexible ISA rules also mean your money is not locked away if you want to use it, as any withdrawal you make can be replaced, providing this is done in the same tax year. You can also transfer ISAs you may hold elsewhere into your current portfolio or between different providers and this does not use up your allowance. This is a “use it or lose it” allowance, so make sure you use it!
- Do not put your savings in the bank. Providing you have a long-term savings outlook, the banks are not your friends. They are still offering rock-bottom interest rates, so the rate of inflation is more than likely eating away at your interest and your savings. We have seen great responses in the markets to some of the big events of last year, and where we thought there may be drops there has actually been the potential for real growth. You would obviously need to talk to your adviser before making a drastic change in your savings strategy but, for the majority, investment holds the best potential for growth over the next few years.
- Invest in your pensions. The best way to do this is to invest as much as possible while you are a tax payer, especially if you pay higher rate tax as you can get 40% in tax relief on your contributions, with 20% for basic rate tax payers. With the new flexible rules you can then phase income from your pension in retirement to avoid paying over the odds in tax. The ideal would be for you to be a non-taxpayer when making withdrawals, as you will have much more scope for taking tax-free income from your pension but will have received tax relief from HMRC on the contributions – effectively making more money for your retirement funds.
- Finally, be cautious. We all want to make a big windfall, but actually losing money in the markets is much more painful than the joy you get from seeing your funds increase. We always err on the side of caution as we want to avoid losses for all of our clients. But we also balance that with taking risks in the right areas. The next few years are sure to see both ups and downs, but we want to see fewer downs, as we are sure you all would. This is where you should rely on us to make those educated decisions for you, and trust that we have your best interests at heart. After all, our pensions are invested in the same funds as yours are, so your best interests are also ours!
BHS pension bailout too little, too late?
Sir Philip Green is in the news again, allegedly offering to bridge the gap in pension funds with a payment plan for his Arcadia Group empire, the parent group of establishments such as Topshop. He has been in talks with the Pension Regulator and the schemes’ trustees over the shortfall in the pension funds of approximately £500 million, following the demise of BHS last year.
Green has proposed a bailout to BHS of £363 million from his personal funds, to avoid the scheme having to go through the Pension Protection Fund which helps to resolve issues such as these. It has, however, taken him eleven months since the collapse of the department store to come to this conclusion, and we are sure this has caused a lot of stress and heartache for the pension fund members who have been in limbo since the stores were closed nationwide.
The public’s perception of Green has never been positive and this is largely because of the amount of money he received personally from his schemes in the form of dividends; with BHS he was given £400 million and with Arcadia he has reportedly received £1.2 billion. When you consider that as a result of his actions many members of his pension schemes may have lost their pensions or retirement funds, you can see why there may be some animosity towards him.
Is this gesture too little, too late? Many blame Sir Philip for the demise of BHS and for the trouble that the Arcadia Group are now in, and this bailout is unlikely to bring him back into favour with the 11,000 people who lost their jobs last year. In fact, many believe that this bailout arrangement was not a voluntary offering from Sir Philip, but was actually required by pension regulators – not that he is portraying it as such, obviously. We think he may just hang on to his knighthood for now, but we shall see what happens with his other ventures in the future.
Notes on Brexit
Article 50 was triggered by Theresa May on 29th March 2017 and so our European Divorce is underway. Whilst we have a 2-year period to negotiate the details of our exit from the Union, the Prime Minister has said that she expects this to be settled within 18 months, the final 6 months being used to ratify all agreements.
The first two to three months of this process is in the hands of the EU as they decide on the principles of the negotiation. The headline principles will be settled by 25th April, but it is anticipated that it will take until June or possibly even July to finalise the fine detail behind these headline principles. The UK has no input into the process during this period, so undoubtedly there will be lots of noise in the media from the usual suspects as these decisions are being made without them. We will be paying attention to each step of the negotiations and will provide a summary for you at each crucial juncture.
Book of the month
This month we recommend a simple six-chapter book that is one of the most interesting books you will ever read. How We Got to Now by Steven Johnson is a collection of six essays covering six innovations that took us from the medieval world to the modern world. Ask yourself – if you had to narrow the choice of important innovations to the six most influential, what would they be? It’s a great dinner party conversation. Reading this book is like having the best thinkers in the room with you, explaining their innovations.
Not only informative but also stunningly interesting in his writing style, Johnson covers how the modern world developed and how, without these six innovations, we would not be where we are today.
Best Savings Selections
Top Three No Notice Accounts without Bonus
|Name||Contact||£1 Gross %||£500 Gross %||£1k Gross %|
|RCI Bank UK||www.rcibank.co
|1.10 (min £100)||1.10||1.10|
|Yorkshire BS||Via branch||1.15 (min £100)||1.15||1.15|
Top Three Monthly Interest Accounts
|Name||Contact||£1k Gross %||£5k Gross %||£25K Gross %|
|Yorkshire BS|| Via branch
|Paragon Bank|| www.paragonbank.co.uk
Top Three Cash ISA’s
|Name||Contact||£1 Gross %||£10 Gross %||£100 Gross %|
|Yorkshire BS||0345 120 0100||n/a||n/a||1.25 (min £100, fixed rate)|
|Coventry BS||0800 121 8899||1.05||1.05||1.05|
|NS & I||www.nsandi.com||1.00||1.00||1.00|
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 April 2017 Edition