Wealth Management Update January 2023
PENSIONS: YOU DON’T KNOW WHAT YOU DON’T KNOW
1 in 3 people dip in to their Pension without advice!
The problem with life is that we don’t know what we don’t know, and that’s never been truer than when it comes to Pensions.
Ask any Financial Adviser, or technical specialist how long they had to study to get their Pension qualifications, the answer will be too long! With the FCA requiring six basic assessments resulting in a Diploma just to talk to people about Pensions advice, and additional advanced qualifications required to cover defined benefit pension transfers, Pension Income planning and Tax Planning is not for the faint hearted.
With Professionals required to know so much and be qualified to such a high level, it’s a wonder why people are allowed to draw on their Pensions without taking advice, which a recent study of 205,641* pensions investigated. In the study, 1 in 2 people did not take advice and yet took money out of their Pension.
I have a Black and Decker drill at home, but I’m not going to drill my own teeth rather than going to the dentist, and so I find it hard to understand why people wouldn’t get advice before taking an action that they cannot reverse.
Did you know, for example:
- If you take a single cash payment out of your pension in the wrong way, HMRC will think that it is a regular payment and charge tax assuming that is the case!!
- If you access tax-free cash and you have a personal allowance, you will probably have used tax free cash when you don’t need to!
- Pensions, if set up correctly, pass to your beneficiary free of IHT. Therefore, why would you access this money rather than accessing taxable IHT money?
- If you are still contributing to a Pension, and you take money out of another pension you will restrict future contributions!
- When you draw money from a Pension most companies automatically draw from all the investments in the Pension equally, even though this will probably make no sense at all!
Most advisers will meet with you at no initial cost to advise you what to do and how to do it.
If you want to draw on a Pension, or know someone who does, please get advice. It’s better to be safe than sorry.
DO YOU TRUST THE NEXT GENERATION?
According to recent research, 1 in 4 baby boomers do not trust the younger generation when it comes to gifting or Inheritances. The reluctance to hand over control of your life savings is understandable, after all, you have worked your whole life to build up your wealth in most cases.
It may be that you want to spend all your savings to enjoy life or retirement, and why not!
However, if you did want to make gifts during your lifetime, or have peace of mind that any Inheritance passed down will be managed sensibly, luckily there is a solution, in the form of Trust arrangements.
Whether you want to make direct gifts, invest money for your beneficiaries or organise how your estate is distributed on your death, we can help you establish Trust arrangements that meet your objectives and give you reassurance that your funds will be used in the way you intended.
Obviously, this can be a tricky conversation to have with family or friends and is something we would be happy to support you with. It is also why we recommend that all Trustees gather for a Trustee Integration Meeting to sign all of the documents, so the arrangements can be explained to them, and any questions addressed.
If you or someone you know would benefit from this type of arrangement, then please let us know.
THE DOWNSIDE OF CASH SAVINGS
If you have a chunk of your savings on deposit with banks, then the rise in interest rates may seem like a welcome uplift, but it could mean you end up paying tax!
This is because we each have a Personal Savings Allowance (PSA) as below:
• Basic-rate (20%) taxpayers can earn £1,000 in savings interest per year with no tax.
• Higher-rate (40%) taxpayers can earn £500 in savings interest per year with no tax.
• Additional-rate (45%) taxpayers do not get an allowance.
Having had incredibly low interest rates in the past meant you had to have a significant amount in savings to be at risk of breaching the PSA, but with interest rates now widely available at 2% or more on the high street, this is now much more of a consideration.
For example, when it was common to see the best interest rates at 0.5%, you needed £200,000 to reach £1,000 of savings interest. With a rate of 2% plus and many one-year fixed rates over double this number, the amount needed to reach your PSA drops to just £50,000 and £25,000 respectively, and half again for the higher rate taxpayer.
Whilst investing the funds or having them managed by a Financial Adviser does not automatically avoid the charges associated with exceeding the PSA, it certainly means that your taxation can be better managed overall, with as many tax mitigation measures applied as possible.
If you are holding large sums on deposit and want to look at the benefits of having them added to an existing or new investment portfolio, then we would be happy to help you get the most out of your savings.
THE CGT RACE IS ON
The Capital Gains Tax (CGT) allowance is due to reduce from the current level of £12,300, to £6,000 from April 2023. So, if you want to make use of the higher existing CGT allowance, you will need to take action pretty soon!
If you have a GIA, directly held shares or other holdings that would be subject to CGT when sold, it may be beneficial to sell these assets and place them in more tax efficient investments such as ISAs or Pensions.
Being able to do this will be subject to whether you have any ISA or Pension allowances available, so you would need to get in touch with us or your existing Accountant, to discuss your individual circumstances. You can then get personal advice and a recommendation on what is the best action for you.
If you are a client, this may have already been discussed with you by one of our advisers, but if you think you could benefit from this allowance before the April reduction, then check with us to make sure you don’t miss out.
Not a new scam, but one that grew more popular in 2021/22 was Authorised Push Payment (APP) fraud.
APP fraud is where victims are tricked into transferring money to an account controlled by fraudsters. They do this by pretending to be a trusted organisation like the Financial Conduct Authority (FCA), HMRC, law enforcement, your bank or investment provider. Sometimes they’ll even pretend to be someone you know like a family member or friend.
They often say that your money is at risk, and it needs to be urgently moved to a ‘safe’ account.
The worst bit is that once the money has been transferred it cannot be cancelled or reversed. Unlike credit card fraud, banks can also be less willing to refund any monies that are part of an APP scam as the transfer is directly authorised by the account holder, and so it’s harder to determine that it was in fact fraudulent.
Keep alert and trust your instincts. Fraudsters are good at what they do and can be very convincing.
If you think you’ve been scammed, you should report it to Action Fraud either online or by calling 0300 123 2040.