Emergency Budget Snapshot 2010

The Chancellor has announced today the Coalition Government’s first Budget.
This is not intended as an in-depth analysis of the Budget speech (we will leave that to the real experts) but we hope this quick snapshot helps you gain a quick grasp on the key points:

Tax
VAT to increase to 20% from 4 January. Current zero-rated items to remain exempt for whole of current Parliament.
CGT to increase for higher-rate taxpayers to 28% from 23 June 2010. CGT to remain 18% for basic-rate taxpayers and the CGT tax-free allowance to remain £10,100 this year.
The CGT entrepreneurs rate of 10% to be extended to the first £5 million of lifetime gains.
Personal income tax allowance to be increased by £1,000 in April 2011 to £7,475. Higher rate threshold to remain frozen until 2013.
The April 2011 introduction of taper on higher rate tax relief on pension contributions by high earners to be reviewed.
Insurance premium tax to be increased from 2011. Higher rate to be 20%, standard rate 6%.
Councils that propose low council tax increases to be offered additional funds to allow them to freeze the tax for one year from April 2011.

State benefits and pensions
Benefits, tax credits and public service pensions to be increased in line with CPI rather than RPI from 2011.
Basic state pension to be linked to earnings from April 2011.
Pensions guaranteed to rise in line with earnings, prices or 2.5%, whichever is greatest.
The increase in the state pension age to 66 to be accelerated.
Child benefit to be frozen over the next three years.
Tax credits to be reduced for families earning over £40,000 from 2011.
Child element of the child tax credit to be increased by £150 above indexation in 2011.
Sure start maternity grant to go to the first child only.
Cap on housing benefit to be introduced - from £280 a week for a one-bedroom property to £400 a week for four bedrooms or larger.
Medical assessment for Disability Living Allowance to be introduced from 2013 for new and existing claimants.

Businesses
Corporation tax to be cut to 27% in 2011 and by 1% a year over the following three years to 24%.
Small companies rate to be cut to 20% in 2011.
Employer’s NI threshold to increase by £21 a week above indexation in April 2011.
Tax relief for video games industry to be scrapped.
Bank levy to be introduced in January 2011 to apply to balance sheets of UK banks and building societies and UK operations of foreign banks.

Duties
No increases in fuel, alcohol and tobacco duties.
Planned increase to duty on cider by 10% above inflation reversed.

Public sector pay
Two year public sector pay freeze to be introduced on staff earning more than £21,000.
People earning less than £21,000 to receive a flat pay rise worth £250 in each of the two years.

Internet
Planned landline tax to be scrapped.

If in doubt, disclose

When taking the decision to buy any type of protection policy, you do so to gain the peace of mind that, should something happen, your income or your family will be covered. However, we are continually hearing that policy providers find ways to turn down claims - and always this happens just when the people concerned needed the money most. So why would a provider turn down a claim? The primary reason will be that the insurer finds some incorrect, missing or incomplete information on the original application forms. This is called 'non-disclosure' and examples include details such as claiming to be a non-smoker, reducing your weight significantly, not checking the status of a dangerous hobby (sailing, skiing or maybe even horseriding) or simply not owning up to an existing medical condition, even if you thought at the time it was irrelevant. If such details are uncovered, they can make any policy you thought you bought in good faith, completely invalid. For this reason, particularly for any sickness related plans (eg: critical illness or income protection), it is sensible to seek Independent advice. Such plans may all carry the same name but the conditions they cover and the exact definitions they use for those conditions can vary widely. Covering yourself against any unforseen circumstance can appear to be an expensive business when you first start the conversation. It is therefore absolutely vital that you get the type of cover right - and don't give your insurer any reason to be able to get out of your claim should you ever have reason to need it.

How to build your portfolio

The word 'portfolio' is simply a shorthand term for the collection of investments you own across all your accounts. Ideally this will be spread across a variety of assets - equities, bonds, property and cash - in a mix that has been determined by that your specific objectives. The process of deciding how much to invest in each asset class is known as asset allocation. For example, equities have traditionally offered higher returns over the long term but at the price of increased risk while, at the other end of the scale, cash has offered both security of capital and stability but with a fluctuating income and no chance of capital growth. Actual returns are dependant on many variables, such as the health of the economy in which you are invested, inflation, interest rates and market sentiment. The elements that impact each asset class vary and as a result, one asset might be doing very well at the exact same time another is doing badly. However, it is difficult to predict which one will be doing well - or badly - at any one time. Hence, if you mix the asset classes together and have a little bit of exposure to each, this can help balance out the peaks and troughs of the individuals. Your age, your financial position and your attitude to risk are all crucial considerations to make sure you get the proportions right and build the most appropriate portfolio. It is therefore helpful to speak to an expert who can more easily help you achieve the right mix.

A new political dawn

After a couple of nail-chewing weeks, the UK finally has a new government. It may not be quite what markets would have wished for - equally it is not as bad as they might have feared. But this is unchartered territory with the UK coping with an economic crisis and a political set-up not seen for a generation. Do investors need to prepare themselves for a bumpy ride? Or are the new government’s policies likely to bring stability? First, it must be said that some measure of certainty is welcome. Markets hate uncertainty and the mere fact that a government has been formed has allowed them to concentrate on other areas (like the crisis in the Eurozone). The pound has seen a small rally against the Euro since the election, though this may be more a function of the potential weakness across Continental Europe than a vote of confidence in the new government. More certainty of government is good for gilts, as is the fact that all the major rating agencies said that the outcome of the election had not changed their view on the outlook for the UK. That said, many other problems remain: Over-supply continues to be an issue and the rating agencies may not look so favourably if credible steps are not taking relatively quickly to deal with the deficit. All eyes will be on the new budget on 22nd June. Coalition is not a disaster. Markets had expected a hung parliament and the current compromise is probably as good as they could have hoped for. The true extent of the compromise is unlikely to be seen until the first budget. Watch this space.

What does it mean?

What does our new coalition Government mean for your financial plans? The UK economy is running an unprecedented deficit so we can be sure that somewhere, one or two taxes will rise. In the spirit of compromise, there will be no imminent rise in the Inheritance Tax threshold and the priority is instead a rise personal income tax allowances. Alongside, however, the Prime Minister has given indications that there maybe changes to Capital Gains Tax coming. Rumour also has it there will be rises in VAT. Until we see the Budget Statement on the 22 June, we will not know anything for sure. However, now may be a good time to start a review of your own plans so you are ready to make a change should that be required.

The Coalition Government making its presence felt

An increase in capital gains tax (CGT) will be at the heart of any package of reforms. Currently, at a rate of 18% on "non-business assets", this is likely to increase to close to 40%.

The income tax threshold is likely to rise to £10,000 from April 2011, with plans to ditch the employee part of the proposed National Insurance increases.

The £1 million threshold on inheritance tax was always unlikely, while the Lib Dems have had to give up on their "mansion tax" on properties worth more than £2 million.

Public sector pensions are to come under scrutiny, with a commission to assess their sustainability.

Victims of the Equitable Life scandal in 2000 will benefit from a new compensation scheme that goes beyond that devised by the Labour government.

Save thousands with salary sacrifice

High earners should exploit salary sacrifice rules when planning their pension saving, allowing them to avoid some of the tax rises imposed by the Budget and pre-Budget report.

In brief, from 6th April a 50% upper rate of tax has been introduced for income over £150,000, and the personal allowance (the first slice of income on which no income tax is due) is also to be gradually removed. Currently staning at £6,475, this allowance will reduce and completely disappears for those earning approximately £113,000 or more. From 6th April 2011, National Insurance contributions will also increase by 1%, both for employees and employers.

These rises coincide with a wider range of changes that will make pension saving less tax efficient for those with high incomes. For the moment, those with incomes of more than £130,000 are to be hit, but are the government just lining up for further changes?

These changes make the option of salary sacrifice, where people give up some of their salary in return for an employer pension contribution, more attractive.

Social Care White Paper is welcome but people entering care will continue to need proper financial advice.

The Social Care White Paper seeks to set up a National Care Service (NCS). However, even if Labour wins the next two elections, it will take at least 5 years to conduct a proper examination of the funding options and delivery of a NCS. This means that many of the people entering residential care homes in the next 4 years will have died by the time a NCS is established.

These people urgently need care funding advice now. This issue is significant with 130,000 people entering residential care homes in England each year, of which 41% or 53,000 people are wholly self funding. Of this number only 7,000 receive proper financial advice about how to fund their care needs.

And this does not include the 20,000 co-funders or the hundreds of thousands of people who require domiciliary care.

As the ageing population rapidly grows IFAs will continue to provide vital specialist financial advice, although as a consumer you should ensure that you seek out an adviser that is appropriately qualified, holding the CII CF8 qualification, or similar.

What can parents do to save enough for their children's higher education?

Universities are expected to cut their budgets. There are also calls to stop subsidised tuition fees for higher earning families. Experts predict the change will be aimed at households with annual incomes of more than £25,000, so the middle classes will be hardest hit by any possible changes. With fees likely to rise, and the lack of likely financial support, the rising costs of living, and so on, is it surprising that so many students graduate with debts in excess of £20,000? The debate for many parents is whether or not they should be supporting their children.

When considering university education, as a parent you should be asking:
1. What will it cost to send my child to university for a year? As a rough guide you might consider:
Tuition fees £3,000
Accommodation £5,000
Books, beer and beans on toast £4,000
TOTAL £12,000
2. Can I afford it?
3. Before committing a great deal of hard-earned cash, is your child suited to university and will future employers see the benefit of this huge investment once your child is “released” into the big wide world?

So the question is, how best to provide the right amounts, at the right time in the most tax-efficient, least volatile and secure manner.

Cash provides security, but in today’s low interest rate climate, most deposit accounts offer little potential for growth. You could consider Cash ISAs, where the interest will be payable with no further liability to income tax, but again you need to do your homework to ensure you get a decent rate, and review it regularly.

Investments in equities over the long term might prove to be a more favourable choice. But, that all assumes you have time. Our advice would be to start as early as you can – the longer you have to save the less you need to put aside each month.

Some will favour child trust funds, but I have to say that I am not a fan of giving children control of large sums at a young age. They might prefer the beach in Bali, or might have some awful boy/girlfriend in tow! If the money is in the parent’s name, they retain control. You may agree to fund Bali or the awful boy/girlfriend, but it will be your choice!

100 families a day helped by CI

More than 100 new families are now claiming each day on their life and critical illness (CI) insurance policies, according to data published recently by the ABI. The average claim was £52,000, double the average UK annual salary.

Where to find advice you can trust

Saturday's Telegraph Your Money article was excellent. They focussed on the achievement of the nine regional winners of the New Model Adviser of the Year award.

All nine winners shared some positive characteristics, which might help consumers dtermine whether their IFA is the right one for them:

Genuinely fee based - and so more likely to provide unbiased advice. These advisers all had clear charging structures.

Highly qualified - all were either run by or employed IFAs who have qualified as either certified financial planners (CFP) or chartered financial planners. These are the two highest qualifications IFAs can attain. Don't confuse CFP with the certificate in financial planning, which is the most basic qualification all IFAs must have.

Satisfied customers - all the winners regularly survey their customers to see if they are satisfied. Not only were the results good, the fact they conduct the surveys showed these were well-run firms.

I'm delighted that we at Jane Smith Financial Planning can also offer these same characteristics!!!

Financial Planning

We were delighted to move to our brand new offices in Olney last June, subject to the standard BT teething problems etc...

Now well settled in our new home, we're keen to let people know about the service that we offer, and how this is so far removed from your standard visit to your traditional IFA or financial adviser. We speak in detail with our clients about what they want to do for themselves, what they'd like to do for their children, where they see themselves going with their careers, when they'd like to slow down and eventually retire and what will need to happen to make these changes happen. We help our clients to visualise what they really want life to look like and then help them to create a clear plan of action as to how they will achieve the lifestyle they desire.

Through using detailed cashflow analysis in a very client friendly way, we can demonstrate to our clients how the decisions they make will impact on their financial security.

If financial products are required, our independent status means that we are able to choose the products best suited to our clients' needs. We are not tied to one product provider or a panel of products when advising our clients - we are completely impartial.

I look forward to posting more blogs in 2010 - Happy New Year!