Archive: Nov 2018

  1. NHS Pension scheme to permit voluntary scheme pay

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    Members of pension schemes are permitted to fund into the pension the lower of 100% of their earnings or £40,000.  However high earners (over £110,000) may have the £40,000 limit reduced, down to a minimum of £10,000.  This limit is known as the Annual Allowance.  When you exceed the annual allowance and have carried forward any unused annual allowance from previous years, you face an annual allowance tax charge.  The tax charge can be paid by the member, or in some circumstances, the pension fund itself.  When the pension pays the tax charge, it’s known as Scheme Pays.

    The NHS pension scheme has made a change to the scheme rules to permit voluntary scheme pays.

    A pension scheme must offer mandatory scheme pays as a mechanism to pay the annual allowance charge if the member has contributed in excess of the standard annual allowance (£40,000) and their annual allowance liability is more than £2,000. There is no minimum criteria for voluntary scheme pays to be used but it is up to the  pension scheme whether they offer it or not. Which schemes offer voluntary scheme pays has been brought to the fore because of the impact of the tapered annual allowance and the need for the individual to have to meet the annual allowance charge personally, in line with the self-assessment deadlines.

    For the NHS schemes (1995/2008 and 2015) voluntary scheme pays is available for the tax years 2015/16 and 2016/17 if the pension input amount in one or both schemes is under the standard annual allowance and the total pension input amount across both schemes is more than the standard annual allowance.

    For tax year 2017/2018 onwards, voluntary scheme pays is available if either:

    • the pension input amount in either the 1995/2008 or 2015 NHS Pension Scheme is under the standard annual allowance but over the tapered or alternative annual allowance or
    • the individual is a member of both schemes and the total pension input amount, from both scheme when added together, is more than the tapered, alternative or standard annual allowance

    From tax year 2017/2018 it’s no longer a condition of NHS pension scheme pays that you have an annual allowance charge of more than £2,000, across all your pension schemes.

    Members of the NHS pension scheme will need to complete a Scheme Pays Election Notice (SPE2) and return within HMRC’s deadline of 31 July, in the year following the tax year of the annual allowance charge.

    The NHS pensions website is being updated with new forms and guidance material, alternatively contact us for more details.

  2. The return of the probate fiasco

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    Cast your mind back to February 2016, when the Ministry of Justice (MoJ) published a consultation paper proposing a complete change to how probate fees will be charged.  Replacing the current flat fee approach with a set of bands which went up to a £20,000 fee for estates valued at over £2m. The consultation provoked an outcry with 810 out of 831 respondents disagreeing with the proposed fee scale.

    Probate is the legal process of administering an estate on someone’s death and the fees charged are supposed to  cover costs incurred.

    The Government nevertheless displayed the ultimate tin ear and announced in March 2017 that it would go ahead with the new scales from May of that year. The news prompted questions from the Parliamentary Joint Committee on Statutory Instruments about the legality of increases that were a de facto tax and could have required more than a mere statutory instrument to be put into effect. The prime minister then called her ill-fated election and with that the plans were abandoned for lack of Parliamentary time, not to mention electoral disapproval.

    Now, after a Budget which made no mention of inheritance tax reform, the Parliamentary Under Secretary of State for Justice has issued a written statement on increases to probate fees in England & Wales. The statement did not spell out the scale, which is to be found in a draft statutory instrument. The new and old proposed scales are detailed below:

    Value of estate Initial Proposal New
    Up £50,000 Nil Nil
    £50,001 – £300,000 £300 £250
    £300,001 – £500,000 £1,000 £750
    £500,001 – £1,000,000 £4,000 £2,500
    £1,000,000 – £1,600,000 £8,000 £4,000
    £1,600,001 – £2,000,000 £12,000 £5,000
    Over £2,000,000 £20,000 £6,000

    The new scale is set to come into force 21 days after the Statutory Instrument becomes law and is expected to generate an additional £145m for the MoJ in 2019/20, about half of what the earlier proposals would have produced. As the current probate fees (£215 for an individual, £155 for solicitors) currently cover the MoJ’s costs, the argument about whether the increases constitute a tax could reappear.

    The MoJ’s explanatory memorandum emphasises the overall cost of the Court Service as a justification for the increases, implicitly accepting that its action is a revenue-raising measure.

    The ministerial statement has already provoked criticism. In the current fractious political conditions, the Government may face challenges in pushing the increases through. The new banding offers the largest saving over the previous proposals to estates over £500,000, which could be a hard sell.

  3. Index Funds Vs Active Fund Management

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    This short video clearly explains why were believe in using the Index Funds rather than Active Fund Management.

  4. Path to Happiness

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    What if I said we have everything within us to live a life beyond our wildest dreams.  Would you believe me?

    For many, we feel we need something to make us happy, a new job, a new relationship, more money.  The fact is, although we may like having these things, they won’t make us happy.  We can decide to be happy with them, or without them because our happiness will not come from the outside, our happiness will only come from within.

    We are physical beings run by our emotions, we only need to think of our friend who turns into the Incredible Hulk when they get ‘hangry’ or how we feel when someone cuts in-front of us when driving home in rush hour.

    If we are run by our emotions, how can we control our emotions?  Diet and hydration play a big role in ensuring our body is in balance, but ultimately it’s the questions we ask ourselves during our internal dialog that effects our emotions.  Think how you continue to be annoyed or upset after the argument has finished, no new words have been spoken, but you continue to relive the argument in your head, this time spinning your own reality into the conversation in your own Hollywood blockbuster style movie – I know, because we are all the same, we’re human.

    It’s the origins of the saying; ‘there are three versions of the truth; yours, there’s and actually what happened’!

    We don’t experience reality, we experience our own interpretation of reality and we interpret reality through our own emotional filters.  You want a great reality, we need to clean up our filters.

    We can start cleaning up our filters by using a better internal dialogue, being kinder to ourselves and asking better questions.  Rather than saying ‘this is not fair’ or ‘why does this always happen to me?’, try asking ‘what could be good about this situation?’  or ‘what would need to happen for me to have an amazing year?’

    Just like asking a poor question occasionally doesn’t have much of an effect, neither does asking great questions occasionally.  We need to cultivate a habit which supports us to consistently ask better questions.

    Successful athletes and business leaders know the importance of having a clear vison of their future, what it is they want to achieve, and the direction of their career.  So why would it be any different for you and me?  This is why I spend the first third of my book, The Money Plan on developing a compelling vision statement.

    A compelling vision is a statement about our ideal self, how we want to live our life.  Ask yourself, ‘How do you want to live the rest of your life?’  Write it out without limits, but consider the implication of your choices, do you really want this, will it really bring you happiness?

    For many of us, where we are today, and our compelling vision are worlds apart, so we need to bridge the gap between now and what you desire.  We do this by setting destination markers, or outcomes.  A ten and five-year outcome tend to be more visionary, then the 36-and 12-month outcomes are more specific and clearer.

    If we don’t decide how we want to spend the rest of our life, someone else will decide for us.  It’s like a ship in the ocean without a sail or rudder, it will be directed by the environment, irrespective on where you want to go.

    Waking in the morning to a coffee, getting in your car and going to work, returning to watch TV is absolutely fine, if that’s your outcome.  But if making Starbucks the best coffee producer in the word, supporting your boss to run the best company he or she can and supporting Netflix to create global entertainment domination is not your outcome, then you need to ensure you steer your rudder to your outcomes and compelling vision.

    I’m often asked how to set goals and I believe to create a happy lifestyle your goals need to be aligned with your values i.e. what it is that is important to you in life.

    Ask yourself this question ‘what’s important to you in life?’ write down everything that comes to mind, one-word answers or full sentences, just continue writing until you can’t write anything else down.  Then ask yourself, is there anything else?

    Once you have exhausted your replies, cross off anything you really did not mean and prioritise the remainder, asking what’s more important, this or this.

    You will be left with your values for life, in order of importance.  Base your goals around your top five values, and ensure you keep these under review as they will change.  Make your goals ‘self-controlled’ what I mean is you are in control of them.  You can’t make another person fall in love with you, so don’t set this as a goal, but you can put yourself into the situation where chemistry may work.  You can’t control the bathroom scales, but you can control what you put into your mouth, and the workouts you perform.  You can’t control the stock-market returns, but you can control what you save and the investment risk you expose yourself to.

    Life is a journey, which we need to enjoy, it’s not the destination.  Precious time is running out for all of us, so be kind to yourself and live life on purpose.

    Remember, to have everything beyond your wildest dreams you just need to ask yourself better questions and steer your rudder towards your compelling vision.

    Warren Shute MSc. CFP is the author of the Amazon bestselling personal finance book The Money Plan prices £11.99 and lead writer at warrenshute.com

  5. Financial Clarity

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    Getting financially organised is important, because clarity is power. When you know your numbers, your finances are not as complicated as you might think. Clarity gives you the enthusiasm to make better decisions and live the life you want to live.

    To get started, put your income at the top of a spreadsheet and then list out each of your expenditure items that are on your bank statements. Having things written down means you can come back to your numbers once a quarter, check what’s happening and make any changes needed.

    Our income can come from several different sources, not necessarily just a salary, so getting organised means considering everything.

    Pensions

    There are three main types of pension: defined benefit (final salary), defined contribution, and the state pension. Pensions can seem complicated, but they’re much less so if you have your information to hand. Clarity is power!

    If you’re a current member of a defined benefit or defined contribution pension, you should receive a statement every year. If you’ve left the scheme because you’ve changed job, they may not send you statements, so you’ll have to contact them for a statement projecting what your pension will be. You should make time every year to do this as part of keeping your finances in order.

    To get a projection on your likely state pension, you need to fill out a BR19 form with the Department for Work and Pensions. You can do this online, or you can request a form and fill out a hard copy, which takes typically around two weeks to come back to you with your information completed.

    Your forecast will show you what you’ll receive if you carry on working until retirement age, as well as what you’ve accrued to date – so if you were never to work again, it will show you what you’d receive. If you’re close to retirement age, the numbers will be similar.

    Investments

    If you’ve been investing for a while, you may well have capital held with different providers, stockbrokers or accounts. You should contact each of them, asking for current and transfer valuations, which you can add to your spreadsheet.

    If you have unsecured debt like loans or credit cards, you should consider whether to pay those off before investing further, to free up disposable income.

    For most people, putting money into a pension rather than an ISA or other investment vehicle is a more efficient way of saving; a caveat to that is if you’ve earmarked the money to use before retirement.

    Self-employed

    One of the most common questions I’m asked by small business owners is, ‘How can I plan ahead when my income is variable?’ In a seasonal business for example, those variations can be significant. It comes down to having enough capital in the business to draw a fixed income from it.

    Look at your business income and expenditure and put together a 12-month cash flow (I prefer a 36-month cash flow, but one year at least gets you started) which predicts how much money is going to come in and go out every month.

    While your income might be variable now, a lot of your expenditure isn’t – office rent, wages, vehicle lease and so on are fixed costs. By looking at things over a year or more and seeing whether you’ll have a deficit or a surplus every month, you can work out the amount of money you need in the business to ensure positive cash flow.

    Once you know your numbers, you might need to put a lump-sum into the business to be able to take a consistent monthly income from it. But doing so means that when it comes to your personal finances, you’ve got a predictable, regular payment coming in, and a better opportunity to plan.

    Liabilities

    On my website warrenshute.com you’ll find a spreadsheet which will help you organise your unsecured debt, with tips on using my snowball system to pay it off. This differs from simply arranging your debts in order of interest rate, because for me the psychology behind getting out of debt is so important.

    The snowball system gives you a series of wins as you pay down your debt, keeping you motivated and energised to keep pushing forwards.

    To get started on the snowball, or any other kind of plan for paying off your debt, find out your interest rate, your current balance and minimum payment for each card or loan: once you have this information you can attack the debt.

    You don’t have to pay it off by Christmas or even in the next year, it’s a journey. What you do have to do is stop using cards and loans, put a strategy in place to pay them off over time, and enjoy the process of getting debt-free.

    The time to act is now!

    With only weeks of the year remaining, this is the perfect time to set yourself up to get organised. If you’re feeling out of control financially, then get on board with the 100-day Christmas Money Plan.

    The plan is a series of simple steps in the build up to the big day to help you enjoy your festive fun without the financial fret. It started in late September but there’s plenty of time to catch up, just search on warrenshute.com to find everything you need.

    If you’re worrying about your money then stop using your credit cards, even if it means having a different kind of Christmas this year. You’ll be much happier and ready to transform your finances in 2019.

    Warren Shute was named UK Certified Financial Planner of the Year. His bestselling personal finance book The Money Plan is available on Amazon.

  6. I’ll Help you to Save Scheme

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    The government has launched a new savings scheme called Help to Save.  The new scheme was initially trialled in January 2018, then rolled out in stages and is now available to all those who are eligible.

    The savings scheme offers a free bonus on your savings, so it makes it even more attractive than a regular bank savings account to use.  Most of us need to save more and when free money is offered, it makes it easier for us to get involved.

    Even if you have unsecured debts such as credit cards or loans, you need an emergency fund, a nest egg, of at least £1000, so the new Help to Save scheme could just be your answer.

    The Help to Save scheme is a government saving scheme to support working people on low incomes to build their savings.

    It enables regular savers to save up to £50 a month over four years (so a maximum of £2,400) and receive up to £1,200 in tax-free bonuses, that’s a 50p bonus for every £1 you save.

    You don’t have to save every month and at the end of two-years, savers will get a 50% bonus based on the highest balance achieved.  So even if you need to dip into your Help to Save scheme for an emergency, you still receive the bonus based on the highest balance you achieved.

    Customers can carry on saving for another two-years and get further 50% bonus on their additional savings.

    However, there are some criteria to having a Help to Save scheme.  It will be open to UK residents who are:

    • entitled to Working Tax Credit and receiving Working Tax Credit or Child Tax Credit payments
    • claiming Universal Credit and have a household or individual income of at least £542.88 for their last monthly assessment period

    Those living overseas who meet either of these eligibility conditions can apply for an account if they are:

    • a Crown servant – or their spouse or civil partner
    • a member of the British armed forces – or their spouse or civil partner

    An estimated 3.5 million people on working tax credits or universal credits will be given the option have open an account.

    How do I open a Help to Save account?

    You can open a Help to Save account online via the Government website. You’ll need a Government Gateway account, but if you don’t have one you can set one up during the application process.

    When you apply, you’ll need to provide your bank details. You can then make payments into the account using a debit card, bank transfer or standing order.

    A challenge for savers is finding a safe home for your money with a good return.  With banks and building society’s offering less than 2%pa, allowing people to save up to £50 a month and a 50% bonus, is a great solution.

  7. Budget Update: I giveth and I taketh away….

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    The tax system is unnecessarily complex, caused by multiple amendments over the years and these complexities make it difficult to initially understand the real impact of any changes, until you drill into the detail.

    This week Mr. Hammond announced his budget and what caught the headlines was that he brought forward their manifesto promised to increase the personal allowance and higher rate band for income tax, but there was a little more to it, than the headlines.

    The personal allowance will increase to £12,500 and the higher rate threshold to £50,000, a year earlier than expected (from 2019/20).  This is good news and saves you, if you earn £50,000 or more £860 per person in income tax.

    What was not highlighted in his speech, were the changes to national insurance contributions, which partly counter the income tax savings.  Currently employees pay Class 1 National Insurance contributions at 12% on earnings from the Primary Earnings Threshold (£8,424 pa) up to the Upper Earnings Limit of £46,350, over this level you only pay 2%.

    The budget increased the Upper Earnings Threshold to £50,000 which means you pay an additional 10% national insurance on income from £46,350 to £50,000.  Therefore, if you earn £50,000 or more you will pay an extra £340 in national insurance – making the income tax saving of £860 only worth £520, a little less attractive!

    Therefore, legal tax planning is essential and for basic rate income tax earners the utilisation of the transferable Marriage Allowance is a key step.

    For all couples, as a bare minimum, both should use their personal allowances, starting/basic rate tax bands and the dividend and personal savings allowances to the full. This is particularly beneficial where income can be legitimately shifted from a higher or additional rate taxpaying spouse to a non, starting or basic rate taxpaying spouse.

    For those with cash and investments this will usually be facilitated by an unconditional transfer of income-producing assets from the higher tax paying spouse to the other.

    Upon initial introduction in 2013 the take up of the transferable marriage allowance was very low however, it has significantly increased since then and couples should ensure that they do not lose out on the ability to transfer the allowance where eligible to do so.

    Any such transfers would usually be capital gains tax and inheritance tax neutral as transfers between spouses living together are treated as transfers on a no gain/no loss basis for capital gains tax purposes and transfers between UK domiciled spouses (living together or not) are exempt from inheritance tax without limit.

    Warren Shute CFP is a Chartered Wealth Manager and author of the Amazon bestselling personal finance book The Money Plan.