By Joe Coten
There is no shortage of discussion topics that present themselves: the market turmoil, caused in large part by the Chinese economic slowdown not to mention the after-tremors still reverberating from the 2008 banking crisis, the Brexit referendum and its likely effect on share and currency markets, to name just a few.
Most of us have real concerns about how these political and economic issues are going to affect our own situation. These issues do of course have an effect but it isn’t ever easy to predict what it will be. The best we can do, I believe, is to keep things simple: develop a coherent plan and then follow it through. The plan needs to be firstly to minimise tax wherever possible, and secondly to make your money work for you.
Some 4.6 billion pounds was paid in tax unnecessarily last year, according to research carried out by unbiased.co.uk, a company that connects consumers with a local independent financial adviser. Depressingly, more than two thirds of those surveyed admitted to having done nothing at all about reducing their tax bill! I trust that not too many of my readers fall into this shameful category! There are surely more deserving causes than HMRC.
Some simple tax planning, it seems, would have saved just under £600m in inheritance tax and a further £200m in Capital Gains Tax. In many cases it is a matter of just using available allowances. The fact that there are in the region of 65 million current accounts held in the UK and only 10 million or so ISAs open, tells us a lot about how high inertia levels are. Everyone using their annual ISA allowance would have resulted in a saving of £1.9 billion according to the survey.
Surprisingly only a quarter of all ISA subscriptions are to stocks and shares ISAs. For longer term savings this is in itself wasteful, as the chances are that even rolling up tax-free interest, the value of your money is unlikely to keep up with inflation in a cash ISA, whereas a stocks and shares ISA at least has the potential to do so. The reason for this bias seems to be the apprehension that the phrase “stocks and shares” generates, with its association with the Wall Street Crash and periodic fear-inducing news bulletins. If cash ISA holders realised that by accepting a relatively small amount of volatility and investing in stocks and shares ISAs holding say just a small percentage of shares with fund mainly made up of cash, government bonds and corporate bonds, they could then enjoy a return twice or possibly three times as high as the return on cash, there might be more of a take-up. True there is an element of uncertainty attached and it is certainly possible that there are some fluctuations in value, however volatility levels are generally low. This is especially so as over time the capital itself has the potential to increase in value.
This is particularly important where ISAs are being used to provide retirement income. A poor albeit tax-free flow of interest plus a capital sum reducing in value year on year isn’t much help in maintaining your standard of living over the longer term.
An insurance bond can also be a useful tool for retirement planning. This is simply put an insurance policy designed to act as an investment vehicle. Over the course of its life you have the option of withdrawing up to 5% of the original investment as a tax-free return of capital and there is no personal liability to tax whilst your money is growing. Basic rate tax is deemed as having been paid by the life office, so it is only if you are a higher rate tax payer when you make an encashment that a personal liability to tax might be triggered. At this point it is worth remembering that for every seven higher rate taxpayers during their working life, only one remains a higher rate tax payer in retirement. This also favours pension investment where tax relief is granted at the taxpayers highest rate, more of which later. The insurance bond has other advantages too. It can be useful when undertaking inheritance tax planning as policy segments can be assigned to children or grandchildren. The policy can also be put in trust at a later date.
Although much of the tax planning I’ve briefly mentioned is relatively straightforward, there are of course instances where professional advice is needed and where substantial tax savings can be made with proper advice. With property values forever spiralling upwards, the combined nil rate band IHT allowance of £650,000 doesn’t go very far in the Barbican. Added to which many of us hold on to money in our own name in vehicles that are highly disadvantageous when it comes to estate planning. There are ways of having your cake and eating it, in the sense that you can hold on to your money and at the same time keep it out of the grasp of the taxman. This is an area where you do need specialist advice, needless to say.
A final point: assuming your copy of Barbican Life lands in your postbox in time, it may be worth making a pension contribution before the Budget on 16th March if you’re a higher or additional rate taxpayer. There are rumblings that higher rates of relief may be abolished.
