Tuesday 23 November 2010

The last post...

I'm delighted that Jane Smith Financial Planning's new website, including our blog, is now up and running. You'll now find all future blogs at www.janesmithfinancial.com, and hope that you continue to enjoy the information provided.

Tuesday 12 October 2010

Forestalling - a tax bolt from the blue?

The next tax bill from the Revenue could come as a bit of a bolt out of the blue for some. This might be the last chance to avoid a nasty surprise!

Unless your relevant income was below £130,000 for all three years ending 5th April 2010, you may have to pay a special annual allowance tax charge on any unprotected pension input amount in excess of the £20,000 special annual allowance, or the £30,000 enhanced special annual allowance (if applicable).

31st October 2010 will be the first opportunity for many clients to tell the Revenue about this. This is because, if a client is submitting a paper tax return for 2009/2010, they will normally need to get it to the tax office by 31st October 2010.

How does an individual report a special annual allowance charge?

It's actually surprisingly difficult! There's no obvious clue on the return but the answer is to tick the yes box at the end of the question 9 on the second page of the tax return.

You or your accountant must enter the amount of any pension saving that is in excess of the special annual allowance in box 9 on the back page of the additional information pages.

What are the consequences of not reporting a special annual allowance charge correctly?
The Revenue may make an incorrect assessment of a client's liability to tax if they're not made fully aware of the client's position.

Let's take a look at three possible scenarios:

a) If the charge arises because of an individual's contribution

If the relevant income for 2009/2010 is £130,000 or more and if their pension contribution is more than £20,000, it's likely that the Revenue will automatically calculate a special annual allowance charge on the excess contribution over £20,000 when they process the tax return.

The Revenue should enquire as to why the excess wasn't reported. They may launch a full investigation.

Of course, the Revenue's calculation may be wrong, perhaps because the individual is in fact entitled to an enhanced £30,000 allowance, or maybe because their pension contribution is protected, or for a number of other reasons?

Either way any tax bill and Revenue correspondence are likely to come as a bolt out of the blue. This would cause them a fair amount of anxiety - and extra accountancy fees.

b) If the charge arises because of an employer contribution, or because of a defined benefit scheme accrual
Even if the contribution is paid by an employer, it's always the member who's liable to pay the special annual allowance charge. But how will the Revenue pick up that there should be a special annual allowance charge in this situation?

It's a good question. There's nowhere on the tax return to report employer pension contributions or defined benefit scheme accruals. So it appears that if the individual or their accountant fails to report it correctly there isn't another obvious mechanism for the Revenue to pick it up.

However, it's highly likely that the provider or the scheme administrator will have sent correspondence to the member informing them of the pensions anti-forestalling rules and restrictions to higher rate tax relief. So the individual should be aware of their potential liability and their responsiblity to report any charge.

It's possible to get pension input amounts from scheme administrators. This is particularly useful for defined benefit schemes. And advisers' help in calculating the excess will be invaluable.

c) If the charge arises because the individual's relevant income was £130,000 or more in 2007/2008 or 2008/2009 how will the Revenue pick up that there should be a special annual allowance charge if the client's relevant income is less than £130,000 in 2009/2010?
This is another good question? It will require the Revenue to look back a thte client's previous two returns. In theory, they should pick this up, but we will have to wait and see how successful they are in practice.

If an individual completes an incorrect tax return, they may incur a penalty and interest will be charged on any underpaid tax. It could result in the client, and possibly their advisers, being liable to prosecution.

Wednesday 8 September 2010

Pensions and divorce - preparing for a new start

It is a sad fact of modern life that one in three marriages now ends in divorce. Even divorce amongst older couples in on the rise, but in this case, the financial impact can actually be even greater than it is for perhaps younger, less established couples.

The main issue for women is pensions provision. Statistically, women are likely to have much smaller pension pots than men, for two main reasons – they on average earn less than men and they are also more likely to have spent time out of the workplace raising children. In the event of a divorce, therefore, it is as important to consider the fair split of pension provision as it is the division of any other assets. If one spouse has no pension savings because they have stayed off work to support either house or family, while the other has worked and built a substantial fund, this should be taken into account when determining the settlement.

In reality, of course, you may not actually split the pension fund itself but instead, offset your rights to it against the value of something else - perhaps some investments, business assets or even the marital home. Particularly where children are involved, for example, the marital home may be a more precious asset to ensure minimum upheaval in the short term. However, the benefits of this then just need to be weighted against something more formally related to retirement.

If a more formal arrangement over pension assets is required, there are a couple of options. The first might be to earmark a portion of your ex-spouse's pension fund, deferring receipt of that benefit until they retire. However, such earmarking leaves one partner dependent on the other, reducing the chance of a clean break. You may have to wait years before benefiting – and, if your ex-spouse dies before retirement, you could end up with no formal provision at all.

However, it is also now possible to split a pension at the time of divorce. A dependent ex-spouse is now entitled to a portion of the main breadwinner’s pension, allowing them to move their share away from the original pension fund. This is a much “cleaner” approach, enabling both parties to move on and also allowing them full control over their share. If the main pension holder dies or either remarries, all retirement rights remain protected.

If you ever find yourself in such a position, it is vital to take both legal and financial advice before making any decisions. Whatever your personal circumstances, it is worth talking to your financial adviser up front, to ensure that, whatever the future might bring, you are well prepared.

Monday 6 September 2010

Finding help in an emergency

We are becoming increasingly familiar with the effects of an ageing population on pensions funding and the shortfall in State benefits. However, there is another serious issue that is not considered as often – the older we get, the more healthcare we potentially need. Indeed, just when the State is getting increasingly concerned by the demands on its funds, the costs of long-term care is rising. Many people are therefore looking for ways to help prepare for such an eventuality – either by a pre-funded policy or, if the situation has already arisen, by using an immediate care plan.

At the moment, what few pre-funding options exist are being rejected by many in favour of other priorities. As a result, the vast majority of people reach the emergency category without any specific funding provision. This may not be a problem if your income is sufficient, or you have significant savings - you may be able to make the payments from existing resources. In the case of short-term requirements, this could indeed be the most appropriate course. However, there are other considerations, particularly if your needs are long-term.

For example, what happens if your payments for care increase quicker than your income? If you are using your savings, how long will they last? Could they run down before your needs run out? What if you live much longer than expected? These are common concerns for anyone facing an immediate need for care. However, there is another option to consider - you can purchase an ‘immediate care plan’. This can guarantee to cover any shortfall between what you can pay and your actual care fees for life – or for as long as you need them, whichever is sooner.

Finding a lump sum may be difficult but thanks to house price rises, there may be equity in your house. This brings its own considerations – you may have to fund mortgage payments or sell the house and lose the family home from your estate. There are also some risks, primarily the that you die earlier than expected and therefore lose out compared with paying the fees yourself. In exchange for this risk, the provider takes on the happier possibility you will live longer than expected and therefore need more money than you invest. An adviser can help you through the maze - although, speak to a suitably qualified adviser and be aware that the FSA does not regulate some forms of Long Term Care and Estate Planning.

Thursday 2 September 2010

Speeding up the process

Recent investigations by the Office of Fair Trading (OFT) show that ISA savers may not be getting a fair deal. Around 11% of Cash ISA holders switch their deposits to a new provider each year. However, following a ‘supercomplaint’ from watchdog, Consumer Focus, the OFT found that cash ISA transfers take an average of over 26 calendar days (against industry guidelines currently set at 23 working days).

Having to wait nearly five weeks after you have made a decision is a long time. In addition, over this period, the OFT found that consumers not only miss out on the higher rates which pushed them to transfer in the first place, there is also a period of up to five days during which they receive no interest at all! The OFT has, unsurprisingly, deemed this unacceptable and has now reached agreement that transfers and interest rates on cash ISAs become more transparent. From 31 December 2010, the OFT recommends that transfers take no longer than 15 working days. Consumer group Which?, however, wants to cut this further, to no longer than 10 days, and also wants a fully electronic transfer system to be set up.

The OFT has therefore recommended that research be done to see whether an electronic transfer system is feasible. They also believe the new rate of interest should be paid from day 15 of the transfer period – even if the transfer remains incomplete – and that interest rates be published on statements (from 2012). Despite the final disagreements, after so many years delaying the process, it is good to see that something is finally going to be done.

Tuesday 31 August 2010

Extending the lifetime limit

As expected, the Chancellor of the Exchequer raised the rate of capital gains tax (CGT) in the Emergency Budget in June. CGT rose from 18% to 28% for higher rate taxpayers only, with immediate effect. However, the Chancellor also decided to alleviate the pain of higher CGT for small business owners by increasing Entrepreneurs’ Relief on business disposals. They now qualify for a reduced CGT rate of 10% on the first £5 million of lifetime gains made through the set up and disposal of small businesses, claiming Entrepreneurs’ Relief as many times as they like until this limit has been reached.

The coalition government used this as a way to demonstrate its support for smaller companies, and the new measures were broadly welcomed by their owners. However, some business groups were critical, believing the measures to be too limited; for example they did not extend to private-equity style investments, and general employees will not qualify for relief on any shareholdings they build in the companies they work for.
In order to qualify, entrepreneurs must have held the relevant assets for at least a year, must be an officer or employee of the company, and must have an equity ownership stake of 5% or more in the business. This means that, for some small companies, only the major stakeholders will benefit, and highly successful entrepreneurs who realise more than £5 million from the sale of businesses could actually end up worse off, as any excess will now be taxed at 28%.

Thursday 26 August 2010

Global market update

July saw a huge re-embracing of risk assets after the weakness in June. This was prompted at first by better economic news – though this had started to wane by the end of the month – and there were also some high-profile corporate earnings announcements, which gave equity markets a boost.

Equities were the top-performing asset class in July, with the UK the place to be. US equities also did well, while European equities performed roughly in line and Japanese equities saw weaker performance. Corporate bonds were largely flat and government bonds fell slightly on the month.

Equities were initially given a boost by an International Monetary Fund report that raised global growth forecasts from 4.2% to 4.6%. The UK was one of the few countries where growth prospects were downgraded, but the change had been largely expected on the back of the ‘austerity’ Budget in June. There was also better news from Europe where PMI data showed improved confidence in the manufacturing sector while the weaker euro finally seemed to be feeding into positive growth for companies in the region.

But the good economic news did not hold up. Mid-month, Federal Reserve chairman Ben Bernanke said economic conditions were “unusually uncertain” and the struggling banking sector and near-collapse in the Greek economy were delaying a US recovery. And so it proved at the end of the month when US GDP growth figures came in behind expectations – the economy grew at an annualised pace of 2.4%, compared to expectations of 2.7%.

There was also bad news from China as the announcement the country’s growth had slowed to “just” 10.3% – from its previous level of 11.9% – spooked economists. The more optimistic pointed out this was a natural consequence of Beijing’s strategy of withdrawing its stimulus packages and tightening monetary policy, but it still raised fears of a double-dip.

Back in Europe, the much-anticipated banking stress tests proved something of a damp squib. There were few surprises and most analysts thought them insufficiently rigorous, which means they essentially failed in their primary aim – of restoring confidence in the sector.

So why did equities hold up? Principally, the strength of corporate profits continued to support prices. July saw the start of the second-quarter reporting season and early signs were promising. Shell and Exxon, for example, saw a near-doubling of profits, which helped ride out the worsening economic news.