Archive: Dec 2018

  1. Christmas markets aren’t the only ones to watch

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    If you started getting financially organised this year, then you should have set yourself some outcomes in January. The Money Plan is a book and a system I created to getting people on track, which includes splitting the year into quarters where you can ‘check in’ to assess your progress towards your goals.

    By Q4, those following the plan will have financial foundations in place, including a will, lasting power of attorney and an emergency reserve of cash. Some people will be in the phase of paying down their debt; others will be considering investments and saving for the future, which often means investing in the stock markets.

    The markets have been very volatile lately. There are two main reasons for that: first is the uncertainty caused by events around the world, from the trade stand-off between the US and China, Brexit and its impact on Europe, and the mid-term elections in America

    The stock-market is a forward-thinking machine and because politicians don’t know what the outcomes of these and other events will be, the market doesn’t know either. That causes concern, and prices go up and down accordingly.

    The second reason for the volatility is the widespread rise in interest rates globally, which among other things is causing companies to pay more when they’re looking to borrow to grow.

    My feeling is that we’ll continue to see volatility as we move into and through 2019, with neither of the reasons above going away anytime soon.

    People can get nervous about investing when the market is fluctuating, but it’s important to remember that when you’re investing you should be in a long-term mindset – preferably at least seven years or more and it’s important you have a future vision, a reason why you’re investing in the first place.

    You can reduce your risk by investing in instalments. If you’re investing on a monthly basis rather than with a lump sum, you’re doing what’s called pound cost averaging. By investing at regular intervals, in a volatile market you’ll be purchasing more shares when prices are lower and fewer shares when prices are higher. If the markets do fall then pound cost averaging is advantageous.

    So should you wait? The numbers say not.

    The long-term return of the FTSE All Share is around 9.5% per annum on average. I’d always recommend people diversify globally, buying into collective investment funds around the world, which may also add a further premium to that figure.

    The current returns on deposits and savings is somewhere around 1.5% at best. Although if you invested in the market now you might see it fall in the short-term, you shouldn’t be investing for three, six or 12 months; you should be investing for five to seven or more years.

    Put simply, you’ll never be able to predict where the market is in terms of buying in at the bottom. That’s why we have an adage in financial planning: the best time to invest in the market was yesterday. The longer you’re in the market, the better your experience will be.

    If you’re investing a chunk of money which is considerable to you and you’d feel nervous if it quickly fell in value, then phase the money in over six months, a year or longer if you need to. This way you’ll take advantage of pound cost averaging, but if the markets do rise, you’ll just have to put it down to a learning experience.

    Academic research proves that pound cost averaging isn’t the optimal way to invest over the long-term, because most of the time the market is going up so you’d be better off putting your lump sum into the market in one go. But I’m a big believer in psychology and if you’re going to lose sleep at night, it’s not worth it – phase your money in over time and you’ll feel better about your investment experience.

    Warren Shute MSc. is a multi-award winning Certified Financial Planner and author of the bestselling personal finance book The Money Plan available on Amazon for £11.79.

  2. Enjoy your Christmas – and the New Year too

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    Christmas is one of those times of year where sensible people do some silly things. We might have been good all year when it comes to our health, diet or money, but then the jingle bells come on the radio and the streets are decorated with magic, and we forget everything and overindulge!

    When it comes to your money, this time of year is all about being organised. Start by looking back on your goals for 2018: what did you want to make happen this year when you started out in January?

    If you’ve achieved what you set out to do, then give yourself a big pat on the back, that’s worth celebrating, that’s important.  If you haven’t achieved your goals yet – life gets in the way sometimes – then don’t give yourself a hard time, just think about what needs to happen now to get you moving towards them. The year’s not over yet!

    If we let our inhibitions go and spend a little (or a lot) too much over Christmas, then it can take us a long time to recover.  We can spend far quicker than we can repay our debts, just like we can consume calories quicker on a night out than we burn off in a gym session!  It doesn’t usually take just a few weeks in January to make up for an extravagant December; it can take us a good few months, which means you could be writing off the whole of Q1 2019 just to get back to where you are now. Is it worth it?

    I believe giving is living, it’s part of our human nature to see joy on someone’s face when we give them a gift and make them happy, however having an enjoyable Christmas doesn’t come from judging it on the size of our gifts or how much we spend. Instead, we need to judge it on how much fun we can have. Your children won’t remember all the gifts they receive, but they will remember the fun you have, the games you play and the family traditions you enjoy.With your children perhaps limit your children’s gifting to – something they want, something they need, something they could wear, something they would read?

    Above all else, don’t spend what you don’t have: do not use credit cards to buy gifts and think ‘I’ll worry about that in January’. It will just put you in a worse position in 2019. Set a budget for your remaining shopping and stick to it. You’ll be glad you did.

  3. Maxing a tax efficient difference with our gifts

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    Many of us will gift to charitable causes regularly throughout the year, using Gift Aid or Payroll Giving, but fewer of use appreciate how this works, we purely give from the goodness of our hearts to help others less fortunate.

    Gift Aid

    Gift Aid works similar to how personal pension tax relief would work. When you make a donation to a charity though Gift Aid, basic rate income tax relief is added to the payment by HMRC and the total amount, known as the gross payment, is paid across to the charity. If you are a higher rate i.e. 40%, or an additional rate i.e. 45%, income tax payer, you can enter the total gross payments you make in a tax year onto your self-assessment tax return and claim further tax relief, few people appreciate this additional tax claim.

    Some 52% of those who donate money to charity said they used Gift Aid on their donation, according to the UK Giving 2017 report, by the Charities Aid Foundation. You need to ensure you complete a Gift Aid declaration form for each charity you wish to donate to.

    This is how the numbers work;

    Gifting £100 to a charity via Gift Aid would mean they would claim 25% of the contribution and a total of £125 would (eventually) end up in the charity bank account. The £100 has effectively been ‘grossed-up’ by the 20% income tax you have paid (100/20%) = £125.

    If however you pay income tax at 40%, you can enter the £125 gross payment on your self-assessment and effectively claim a reduction in your end of year tax payment of a further 20% or in this example £125 x 20% = £25.

    So for every £100 you give as a higher rate tax payer, you reduce your income tax bill by £25.

    It goes further if you are an additional rate income tax payer (i.e. you have total income over £150,000pa), you clam 25% (45%-20%) of your gross contributions, or £31.25 for every £100 you pay to a charity.

    This additional tax refund makes the effective net cost to you far less, as shown in the table below;

    Tax payer Payment Total charity receives Net cost to you
     Basic or 20%  £100  £125  £100
     Higher or 40%  £100  £125  £75
     Additional or 45% £100  £125  £68.75

    Do I have to pay tax to use Gift Aid?

    It’s important to know you need to pay tax to use Gift Aid, and it’s the donor’s responsibility to notify the charity if they become a non-tax payer. You cannot claim more tax in Gift Aid than you pay.

    How do you claim tax relief?

    Complete the charitable giving section on your annual self-assessment tax return or ask HMRC to amend your tax code which is used to calculate how much tax-free income you’re entitled to. You can reach HMRC on 0300 200 3300.

    How long can you claim back for?

    If you forget to – or were unaware you could – claim tax relief you have four years to submit a claim for tax ‘overpayment relief’ to HMRC. That’s four years after the end of the tax year your claim relates to.

    For example, currently it’s the 2018/2019 tax year and it ends 5 April 2019, so you could claim as far back as the 2014/2015 tax year which ended 5 April 2015.

    Payroll Giving

    An alternative to Gift Aid is Payroll giving, or I have also seen this referred to as Give As You Earn. If you donate to a charity through a payroll giving scheme at work, donations are taken out of your gross pay – that’s your pay before tax (and national insurance) is deducted. So there’s no tax relief to claim and it’s far easier.

    Gifting to a charity in our will

    If the art of living is giving, what about our final bequest?

    Many of us don’t appreciate the benefits of leaving a charitable legacy through our will.

    All gifts to a charity are exempt from inheritance tax, so if you left your whole estate, or at least the excess of your estate which is over the tax-free allowances – your estate would pay no inheritance tax.

    Each estate has a tax-free ‘nil rate band’ of £325,000 per person and possibly a tax-free ‘residential nil rate band’ which is currently £125,000 per person (if your main residence is left to your direct descendants ) up to these amounts, you would pay no inheritance tax and for estates valued over this amount, you would likely pay inheritance tax at 40% on the excess. It’s important to note that both of these tax-free allowances can be inherited from your spouse, if they predecease you.

    However, for most, this is a step too far and this may upset the surviving family! So, leaving 10% or more of your taxable estate to a charity would have the effect of reducing your inheritance tax rate from 40% to 36%.

    Therefore in this example, a married couple, with a will and an estate of £1m, could deduct two lots of £325,000 and two lots of £125,000 (assuming they meet the criteria) to give a taxable portion of their estate of £100,000.

    Ordinarily, this would be taxed at 40% or £40,000 inheritance tax, however leaving 10%, or £10,000 to a charity, reduces the inheritance tax rate from 40% to 36%, and would make the remaining £90,000 estate taxable at 36% or £32,400 inheritance tax.

    Here are the numbers;

    Estate value: £1,000,000
    Nil rate band (times two): £650,000
    Residential nil rate band (times two): £250,000
    Net taxable estate: £100,000

    No charity payment – 40%: £40,000

    With a £10,000 (10%) charity payment – 36%: £32,400


    Of course there is the finer detail to any financial planning, but the concept of leaving a legacy in your will to a charity is very tax efficient and helps others, from beyond the grave and will reduce the amount of inheritance tax your executors will need to pay.