At present the prime minister has said no new entrants would be accepted to the scheme after 2011. If you have a strong view on this and wish to protest against its implementation, you can join over 50,000 others who have done so since the protest was launched on the Downing St website at the end of September. the link is http://petitions.number10.gov.uk/keepvouchers/

According to data from the Council of Mortgage Lenders new purchase mortgage lending is also on the rise with 56000 mortgage being approved in July, 24% up from June and 19% up from July 2008.

Now lets look at the facts. Many economists believe these rises are the result of basic economics where demand outstrips supply  with many “reluctant” landlords preferring to let their property rather than try to sell at a reduced price? As more and more of these landlords decide to sell (which is already starting to happen) the supply of property will more than likely increase above  the demand and therefore effecting prices.

Realistically  the only way property prices can sustain a long term recovery is when lenders decide to ease their lending criteria to make it possible for the average person on the street to secure a reasonable deal instead of having to provide unattainable deposits, pay large arrangement fees and endure rates well in excess of the current Bank of England base rate.  At the moment finance is extremely hard to obtain so once the current crop of cash rich landlords buying up cheap properties reduces  the demand for property will reduce.

Many  economists and commentators within the industry believe that lending will not improve in the near future as banks are taking healthy profits to make up for large losses. There are a number of lenders waiting in the wings (including bank of China) that see the UK mortgage market as very profitable but not enough  to make a marked difference to the terms on offer.Add in an inevitable increases in interest rates (which is likely to happen at some point in the next 2/3 years) and rising unemployment, especially in the public sector as they cut spending, and I believe the writing is on the wall for a sustained recovery at this point.

What does this mean for the future? I do not have a crystal ball but reading several articles from commentators within the property industry the general conclusion is that property price rises are expected to slow down at some point next year as supply of property outstrips the available demand (ie those people wanting to buy who can finance the property) and as unemployment rises prices could start to fall. Recovery could take 4/5 years before prices reach the heady heights of 2007!

So if you are wanting to buy property or move upmarket I believe there is no great rush. Also bear in mind that any finance taken out at present will offer poor  value so make sure you negotiate any deal to your advantage as much as possible. As supply rises so will choice and thus so will your ability to negotiate better deals.

In the  longer term, basic  fundamentals of supply and demand  should prevail pushing up prices as current housing stock is reported to be short by 1 Million houses by the backend of 2010 and with current builders under producing by an estimated 150,000 homes per year this will only get worse (based on a report  by the Town and Country Planning Association).  As demand rises when credit eases prices should rise due to the lack of supply.

• The types of risk you face with your money
• Balancing the risk you need to take -v- the risk you are willing to take
• The value of guarantees

The first premise is to understand and accept it is not possible to avoid risk with ones money. Ironically, our experience strongly
indicates those individuals who are most risk averse, inadvertently take some of the highest risks in their quest to avoid risk.

The vast majority of individuals and trusts have their money in one or more of the following asset classes,

Cash, Gilts and Bonds, Equities and Property. Each of these is subject to one or more of the following risks;

Capital Risk (reducing in value in absolute terms)
Interest Rate Risk (if an investment provides a fixed return and interest rates increase generally, its return becomes less attractive)
Inflationary Risk (if net returns are less than inflation, the capital is decreasing in value in real terms)
Liquidity Risk (a lack of readily accessible capital could lead to a forced sale of an asset or investment in adverse market conditions)
Exchange Rate Risk (A gain on investments made abroad, subject to a foreign currency, could be eliminated through unfavourable changes in the exchange rate)
Stock Selection Risk (The risk of failing to accurately and consistently select what to buy and what to sell)
Market Timing Risk (The risk of failing to accurately and consistently buy and sell assets at the right time)

In addition to the above, are further risks associated with either the individual or a specific holding;

For many there is a real risk of severely depleting capital due to the impact of one or more of the following, operating expenses, taxation and the income demands placed on the capital.

Here are two typical examples;

An individual who professes to be risk averse, places £300,000 on deposit split equally between two banks. After tax, he is getting a net interest rate of 3%. Inflation is running at 2.5% and he requires £12,000 p/y (inflation proofed), to supplement his other income. After deducting inflation he is getting a net ‘real’ return of 0.5% yet he needs an income of 4%. Thus he has depleted his capital by 3.5% this year compound. If he continues to draw this level of income he is likely to exhaust the capital in circa 17 yrs.

In addition, should one of those institutions fail, only the first £50,000 is ‘protected’ under the Financial Services Compensation Scheme, (FSCS).  There is a double risk here;
Firstly the loss of £100,000 not covered by the FSCS. Secondly, the guarantee on the remaining £50,000 provided by the scheme is NOT a ‘guarantee’ but a ‘promise’. The institutions pay a levy to the scheme which would meet modest pressures upon it. Should there be a serious demand in excess of the reserves, this is supposedly guaranteed by the Government of the day. Yet if the public purse is empty; the Government would be required to go to the money markets to borrow the money to meet its commitment, if the markets think the Government will default on the loan they may either not lend or apply punitive interest rates.  In short the Government is backing up the FSCS with a ‘promise’ to meet excess demands upon it, subject to it either having the means or being able to borrow the monies.

Thus this individual is subject to Inflationary risk, Taxation risk, Capital Risk (as he is depleting it through his demand for a level of income it cannot support) and further capital risk in the event of the failure of one of the institutions.

Example two;

It is now quite common place for us to deal with individuals who own an investment property portfolio, be it residential or commercial. So here we have an individual who owns 6 Buy to Let properties valued at £1,200,000. There is a gross income yield of 5% (£60,000). These are geared at 60%, thus total borrowings of £720,000 on interest only mortgages, at an average interest rate of 4.5%. He thus has £60,000 in income from which he pays out £32,400 in mortgage interest payments. At face value this shows an attractive surplus of £27,600 for the year.

However, if we dig deeper we find the balance shifts. We need to assume there are rental voids, (which there almost invariably are), conservatively at 10%. Thus Gross rent is now £54,000. From this we need to deduct, ground rents, maintenance charges, property maintenance costs, Landlord certificates, letting agent fees, utilities, insurances, accountancy fees, typically 15 to 20%. We will be generous and assume 15%. Thus net rents are now £45,900. After the interest charges, this leaves net rent of £13,500. Deduct tax at 40% and this reduces to £8,100 net income return. That equates to 0.0675% return on the assets, (ignoring potential for growth in value over the long term). An alternative way to look at it, is the return on the individuals ‘own’ money tied up in it, (the amount in excess of the borrowings), in this case, £480,000. Then it would be a net return of 1.68%.

If inflation was averaging 2.5% he is losing money in real terms and is reliant upon the first elements of capital growth in the properties to rectify the shortfall in return against inflation. Only then is he going to make money unless he can rely upon progressive real increases in rents going forward.

In this case the risks faced are even greater, interest rate risk, (increasing rates in the future), taxation, capital risk (falling property prices and net returns below inflation), stock selection, (which properties to buy and sell), market timing, (when to buy and sell them), liquidity, (have excessive amounts of capital tied up in illiquid assets could cause him problems elsewhere in his life), possible exchange rate risk, (if some of the properties were abroad), operating expenses, (there could be significant increases in labour and material costs in the future).

In summary, the means of securing the lowest levels of risk is to diversify across the various asset classes and to take only the degree of risk with you capital necessary to meet your lifetime objectives. If the risk you need to take is greater than you are comfortable with to secure your required return, then you have to find an acceptable balance between discomfort and moderating the demands you make on the capital, thus reducing the returns you require of it. Additionally, prudent tax planning, can also reduce the strain on the returns you require of your capital.

• Risk and return are related.
• To capture the long term returns available from the stock market (the capital markets) you must remain invested through good times and bad.
• After charges have been deducted it is not possible to consistently outperform the average market return by stock picking and market timing and as such a portfolio should be built of pure asset class funds and not “trendy” fund managers offerings.
• It is imperative that fund management costs are kept as low as possible as these simply eat in to growth or compound losses.
• Academic studies by Nobel winning laureates in economics have shown that a small tilt in your investment portfolio towards smaller company and value stocks gives you the opportunity on a long term basis to outperform the market average.

 So how has this philosophy worked over the last 12 months which has seen the world economy go through the biggest financial crisis since the great depression.

To answer this let us begin by looking at the FTSE all share index and how it has moved during this period of extreme volatility that many media pundits were forecasting was the end of capitalism as we know it.

On the 18^th of September 2008 (the week after the credit crisis was officially agreed to have commenced following the collapse of Lehman Brothers) the FTSE all share index (representing 98% of all UK stock market capitalisation) stood at 2,496 points. It then fell to a low of 1,755 points at the beginning of March 2009 representing a fall of some 741 points or 30%. It was during this period that many fund managers, stock brokers, investment advisers and IFA’s were advising clients to tactically move out of equities and to sit in cash as the outlook was bleak and the markets could continue to slide inexorably downwards.

Once again the entirely false premise that we were somehow entering a new investment paradigm was a belief widely held by investment professionals who wished to base their thinking on “noise” and media speculation rather than historical evidence. The result of this was that for the last 6 months many of these private investors who have been sat in cash have missed out on the subsequent rise in the equity markets.

On the 18^th of September 2009 exactly 12 months later the FTSE all share stood at 2,658 points some 6.5% higher than it did 12 months previously and rise of 51.4% since March 2009. To those advisers who find this a great shock and somehow unprecedented should look no further than our own economic history of the 1970’s. For during 1973 to 1974 the FTSE all share fell by 51.6% and once again the doom mongers were predicting an end to capitalism as we know it. However the following year the market rose by 151.4% eradicating all the previous losses and in fact providing those who had the courage to remain invested with a healthy profit.

However the sad truth of the market rally in the 1970’s and the one we have just experienced is that hardly any investors benefited from the full upturn because they were disinvested either as a result of their own trading or because of the active management strategies employed by their fund managers.

Our investment philosophy does not pretend in any way to be able to identify when market falls or rises will occur but merely to ensure that on average and over time, if you remain invested you will receive the benefits of the returns available from the capital markets. This has been our philosophy all along and as such any accusation that this article is written with the benefit of 20:20 hindsight is simply wrong.

Sadly however, this is not the experience of many private investors over the last 6 months as many of them traded out at low points in the market thus crystallising their losses and remained out until now thus missing the significant gains. These are profits that they will never be able to recover over their investment horizon and as such a now consigned to a long term underperformance of the market average in their portfolios. This may well have the ultimate impact of reducing their retirement incomes if it were pension funds that were disinvested, or providing funding problems for their children’s education costs if it were ISA funds.

If we therefore examine the performance of our portfolios we should find that they reflect these market movements fairly closely depending on the risk profile adopted by the investor at the outset. Using our balanced portfolio (60% equities 40% fixed interest) over the same date range we find that net of all charges and fees the portfolio has returned a 5% growth rate. Thus only 12 months after the most catastrophic period in global financial history after the great depression, we are very pleased to tell our clients that their investment portfolios are showing a profit.

It is just a shame that so many other investors are cradling painful losses through the smoke and mirrors that is active management.

If you would like to know more about our investment strategy or any other financial or tax planning opportunities please just contact Baxter Fensham ltd.

Nick Crabbe CFP

Baxter Fensham Limited is authorised and regulated by the Financial Services Authority

The guidance and/or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK.

 All data on the FTSE all share index is sourced from http://uk.finance.yahoo.com/q?s=%5EFTAS or Dimensional Fund Advisers matrix Book.

All data on the performance of the Baxter Fensham balanced portfolio is sourced from Transact and is available on request.

The additional tax will work as follows:-

For every £2  you earn above £100,000 you will lose £1 off your annual personal allowance. The current personal allowance stands at £6,475 (assuming no benefits in kind and ignoring any additional allowances for pension contributions) thus if you earn £112,950  (£100,000  + 2 x Personal allowance @ £6,475) you will lose your personal allowance altogether.
The impact this has on your personal tax position is outlined below:-

Position prior to budget change:-

Earnings £112,950
Personal Allowance £6,475�
Tax @ 20% £7,480
Tax @ 40% £27,630
National Insurance £4,889
Total deductions £39,999
%age tax and NI Take on gross Earnings  35.41%

Position from April 2010

Earnings £112,950
Personal Allowance £Nil
Tax @ 20% £7,480
Tax @ 40% £30,220
National Insurance £4,889
Total deductions £42,589
%age tax and NI Take on gross Earnings  37.7%

Reduction in take home pay   £2,590pa or £215 pm

It is this additional 2.29% rise in income tax or £2,590 pa in actual terms that is likely to have a more profound impact on most higher earners income position in 2010 than  the new 50% top tax rate, as most higher earners are earning between £100,00  and 150,000.

However if you do earn above the £150,000 level then the impact will clearly be even greater and as such additional tax planning could well benefit you.

What Can You do About it?

in the last 5 years the government has clamped down on a large number of tax avoidance schemes for higher earners but there are still opportunities for those who have capital to invest. These opportunities are now even more advantageous due to the very poor sub inflation returns (based on the Consumer Price Index)  that most deposit accounts are returning.  One such scheme allows the investor 20% income tax relief up front with a structure that is designed to return all the invested capital net of fees and charges after 3 years. It also allows for the deferral of any capital gains tax (CGT) liabilities  that has been crystallised in the last 3 years giving the possibility of “arbitraging” on the CGT rate from 40% to 18%.It would work as follows:-

Higher rate tax payer’

Cost of investment in to the scheme £50,000
Less income tax relief (20%) £10,000 of the qualifying investment
Effective cost of investment  £40,000
Estimated net exit proceeds £50,000

This is equivalent to the following:-
Net tax-free return £10,000
Net tax-free rate of return 7.7% p/a
Gross equivalent return 12.83% p/a*

*(to a 40% taxpayer if the £50,000 were invested in a deposit account instead)

WHAT WE HAVE ASSUMED
The annualised returns are calculated net of fees with an investment life of 3 years.
All tax benefits are used to reduce the effective cost of the investment.
The investment generates only enough returns to cover all fees.

The scheme is a recognised scheme by the Inland Revenue and as such qualifies for the tax advantages detailed above. The scheme however does have a degree of risk associated with it but it has been designed to mitigate this as far as possible. There is a risk however and as such this needs to be considered very carefully by any potential investor.

If you would like to know more about this scheme or any other tax planning opportunities please contact the Directors at  Baxter Fensham ltd.

This type of scheme is not suitable for all investors and you may get back less than your original investment.

FSA closes final Salary sceme.

http://www.citywire.co.uk/personal/-/news/money-property-and-tax/content.aspx?ID=354779
�
West Bromwich Buidling Society closes final salary scheme.

http://www.citywire.co.uk/Personal/-/news/money-property-and-tax/content.aspx?ID=350127

Business and Personal Financial Planning

The previous article highlights the importance of management information and reporting, enabling a more efficient and profitable business model. The result of getting this right makes for a more enjoyable working environment for all the staff as we all feel in control. It means that we can set time aside to work both ‘in’ and ‘on’ our businesses, and to look at the kind of lifestyle that we would wish to enjoy, now and in the future, away from our places of work.

One of the major pitfalls of financial planning is that business owners continually separate business from personal, but the reality is that they are inextricably linked. There are valuable tax reliefs available through a business, that are different to the personal tax regime, but so often these are captured at the expense of the other. Furthermore, by seemingly providing a solution within a business, a problem may be compounded when one’s personal finances are considered. Let’s consider some of the issues:-

How many business owners rely on the sale value of their respective businesses to provide a retirement income when they stop work? Does goodwill exist today? Do you own the property that you operate from?

How can an owner extricate monies from the business now, and what are the tax implications?

Should I incorporate? What are the financial benefits of this action?

What impact will the new contracts have on my earning ability, and what are the implications of my practice moving away from the NHS to a fully private practice?

How many businesses have restrictive partnership agreements in place? Do they even have a partnership agreement, and if so, how would it cater for one partner’s family in the event of him or her having a long term illness or even dying.

In 2006, there was a change to pension regulations called ‘simplification’ and this brought with it greater clarity and flexibility, together with much larger contribution scope. However, there was also a lifetime limit introduced, and if your pension fund exceeds this limit, then there will be penalties to pay!

Some of these issues are not new, but they have a renewed layer of importance attached by dint of regulation changes. It is so important that you talk with specialists that understand the nuances peculiar to your profession, and to that end, personal and business planning should be aligned.

What kind of lifestyle can I have?

Yes, this must always be your starting point, as you need to quantify what it is you want from your life so you can prioritise how to achieve your objectives. Remember that a want is distinctive from a need. One may NEED food, clothing and shelter but may WANT caviar, luxury goods and a holiday villa. We are not all the same and indeed not everyone is materially aspirational; some may prefer a more conservative protection of accumulated wealth.

Some questions you could start asking yourself could include:-

• What you do away from work? Any plans to take up other hobbies or interests in the future? What is stopping you doing them now?
• How do you feel about your job? Is it a necessary evil or do you really enjoy what you do? How do you see the future as far as work is concerned?
• What does retirement mean to you? For example if you are in good health, will you keep working even though you could afford to retire?
• Will your retirement be a well earned extended holiday filled with foreign travel and spoiling grandchildren, or will it be cold winters with the heating on low and too much day time television?

After interrogating what you want from your life, it is vital that you create a ‘context’ for any planning that you do. One of the most powerful and empowering tools available to you through an independent financial planner is a ‘Cashflow Modeling Analysis’ or ‘Lifeplan’.

Create a Lifeplan

You need to understand the relationship between what your objectives are, the amount of risk you are comfortable with and how much money you are prepared to commit. These are the strategic decisions that you need to consider.

The first thing to do is to organise your current affairs into a financial plan. You should be given tools to help you determine what you will be spending your monies on at different stages of your life. This demonstrates how far your existing arrangements come to helping you achieve your financial goals. It will also enable a planner to identify areas of weakness and vulnerability. The most important purpose that this exercise plays is that it helps identify and quantify any shortfalls you may have in your planning as it stands.

The next stage is to meet to reaffirm your objectives by interrogating your cash-flow model. This would outline the strategy you should adopt to achieve your objectives. This will incorporate wealth creation, using a structural investment process, or wealth preservation to ensure that once financial independence is achieved your position is protected.

This plan would then need to be underpinned with insurances to guard against illness or death; you don’t want your plans to fail because of this.

Investment Solutions and Wealth Management

Mark Twain once said “There are two moments in a man’s life when he should not speculate: the first is when he does not have the means, the second is when he does.”

You need a financial planner to help you to manage the relationship between the risk of your portfolio and the amount of money you need to invest to achieve your objectives. It therefore goes without saying the more successful your investment experience is the happier you will be with your planning in general. This can be achieved by:-

• Varying the ratio of equities to short term bonds to meet your risk tolerance.
• Spreading risk as far as possible through Global Diversification.
• Using a mix of Domestic, Foreign and Emerging Market funds.
• Using short term, lower risk, high quality bonds to meet known or probable cash needs.

You could construct a huge roulette wheel of the hundreds of active fund managers out there and “gamble” on which one will have predicted the right firms, in the right sectors, in the right markets, at the right time and do it consistently EVERY year. Alternatively you could simply take advantage of the vast amounts of academic research that has won Nobel Prizes, costs less and is bespoke to your individual requirements.

Risk plays an integral part to financial planning. The dictionary defines risk as:

‘the possibility of suffering harm or loss; danger’

When most people think of risk associated with money they think of the negative. This is probably because we are conditioned to think of risk in terms of loss. After all, if someone says something is risky they don’t tend to see the positive side! However, there is a positive side to risk. Every day on the stock-market money managers are using tools to reduce the amount of risk involved.

No risk, no reward: There is no such thing as a risk-free investment. In order to build assets, you must undertake some type of risk. Greater potential return is the reward for undertaking greater risk.

Choose appropriate risks: Know and understand the risks involved in various savings and investment vehicles. Make sure you are comfortable with the risk level of the investments you choose.

Manage risk, do not try to avoid it: Diversify: holding a variety of investments and shares lessens the negative impact of an investment that performs poorly. Invest over time to offset market fluctuations. Monitor your investments to be sure that the risk/reward guidelines you have set have not changed.
Maintain a long-term perspective: Plan to own funds over a long time to help lessen the effects of price fluctuations and market volatility.
The problem with defining risk is that your personal definition will be based on your experiences, knowledge and perception of what risk is and what it means to you. Only when you sit back and think about what level of risk you are comfortable with will you be able to reach a happy medium.
The less risk you take the more likely you are to achieve your objectives, but you’ll need to invest more money to get there. Conversely, if you take a higher level of risk you are less likely to achieve your objectives, but you’ll need to invest a lower amount to reach your goals.
In summary, reaching your goals and objectives is driven by getting the balance between the level of risk you are willing to take and the amount of money you have available to invest.

Why You Need A Financial Planner

No one can guarantee you investment success, but a well thought out, sensible investment plan tailored to your unique needs can greatly improve your probability of meeting your future financial goals.

Appointing the right financial planner will give you the freedom and peace of mind to pursue more satisfying activities with loved ones by:

• Creating an overall investment strategy that reduces costs, minimises risk and maximises returns.
• Serving as a partner and guide to make important financial decisions.
• Working with your accountant, lawyer and other professionals to protect your assets and interests.
• Delivering easy to read and understand investment and performance reports.
• Providing you with ongoing investment education.
• Establishing open communication and access to personal and objective advice.
• Helping you to become financially well-organised.
• Consolidating your financial arrangements to simplify your life.

How To Pay Your Planner

Commission-based advisors such as banks, insurance companies, investment managers, stockbrokers and the vast majority of financial advisors are not equipped to assist people with investing. The commission-based pay structure of the industry sets up a conflict of interest. It could be argued that the traditional model of commission based compensation invites advisor abuse, with their clients as their victims.

What good is advice, if it’s not objective? Unlike stockbrokers who have every incentive to maximise commissions and costs, a fee based financial planner will have strong incentives to minimise your costs and maximise your account value.

The result is that you have a service that is more proactive, more holistic in terms of the areas covered and more comprehensive in terms of the level of advice that is being given. It will only work however if you have complete trust and faith of the impartiality of the advice and service being given. It will not work if the adviser has to sell you something to get paid nor will it work if what you buy determines the amount the adviser earns.

A commission based service places both the client and the adviser in the vulnerable position where one of them will nearly always be compromised. The only way to ensure the impartiality of the advice and the service is to make it fee based.

Summary

Hopefully, this has given you a brief insight into the importance of planning your finances with your two ‘hats’ on. Your business activities can be driven by a specific plan to inform your personal life, which must surely come first. It is then how you use your business to enable your personal aspirations to be met.

My advice to you would be to ensure that your advisers have the ability, facilities and commitment to your care to apply this degree of analysis. If done correctly, you should not find yourself out of your depth. Neither should you find yourself walking away from opportunities that would be reasonable for you to seize.

The above information should be considered for guidance only to improve awareness and is not intended as, nor should it be taken as, specific advice. The points mentioned are only summaries of what are complex areas, therefore before taking any action you should seek advice from a professional adviser.

The author Simon Fitton, is a director and certified financial planner with Baxter Fensham Ltd, www.baxterfensham.com

Baxter Fensham Limited is authorised and regulated by the Financial Services Authority The guidance and/or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK.

The personal income tax allowance (£6,475 in 2009/10) will be withdrawn at the rate of £1 for every £2 of income over £100,000 from 2010/11.

There will be a top rate of income tax for 2010/11 of 50% (42.5%on dividends)
for individuals with incomes of more than £150,000. The rate applicable to trusts
will also rise to 50% (42.5% on dividends) from 6 April 2010.

ISA limits will be raised to £10,200 (£5,100 for cash deposits) in 2009/10 for
anyone aged 50 or more. The higher limits apply to all investors from 6 April 2010.

Tax relief on pension contributions will be restricted to the basic rate for
individuals with incomes over £180,000 from 6 April 2011. Relief will be tapered
for incomes over £150,000. From 22 April 2009, only basic rate tax relief on
contributions will be available where contributions exceed the greater of £20,000
a year or the individual’s ‘normal pattern of contributions’.

For the five years from 6th April 2011, the standard lifetime allowance and annual allowance will be frozen at their 2010/11 levels of £1.8m and £255k respectively

The furnished holiday lettings rules will be repealed from 2010/11. Until then, the
rules will be extended to apply to qualifying holiday lets in other EEA countries.

The temporary reduction in the standard rate of VAT to 15% will end on 31st December 2009.

The small companies corporation tax rate will remain at 21% for the financial year
2009 as previously announced.

For broadly the next two years, businesses will be able carry back their trading
losses of up to £50,000 for three years rather than just one year.

A first year capital allowance of 40% will apply to qualifying capital expenditure if
it exceeds the £50,000 annual investment allowance in the 12 months from April
2009.

If you would like to know more about these issues or would like to consider any tax planning opportunities, please just contact Baxter Fensham Ltd.

Simon Fitton CFP

Baxter Fensham Limited is authorised and regulated by the Financial Services Authority
The guidance and/or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK.

Position prior to budget change:-

Earnings £112,950
Personal Allowance £6,475
Tax @ 20% £7,480
Tax @ 40% £27,630
National Insurance £4,889
Total deductions £39,999
%age tax and NI Take on gross Earnings 35.41%

Position from April 2010

Earnings £112,950
Personal Allowance £Nil
Tax @ 20% £7,480
Tax @ 40% £30,220
National Insurance £4,889
Total deductions £42,589
%age tax and NI Take on gross Earnings 37.7%

Reduction in take home pay £2,590pa or £215 pm

It is this additional 2.29% rise in income tax or £2,590 pa in actual terms that is likely to have a more profound impact on most higher earners income position in 2010 than the new 50% top tax rate as most higher earners are earning between £100,00 and 150,000.

However if you do earn above the £150,000 level then the impact will clearly be even greater and as such additional tax planning could well benefit you.

What Can I do About it?

in the last 5 years the government has clamped down on a large number of tax avoidance schemes for higher earners but there are still opportunities for those who have capital to invest. These opportunities are now even more advantageous due to the very poor sub inflation returns (based on the Consumer Price Index) that most deposit accounts are returning. One such scheme allows the investor 20% income tax relief up front with a structure that is designed to return all the invested capital net of fees and charges after 3 years. It also allows for the deferral of any capital gains tax (CGT)liabilities that has been crystallised in the last 3 years giving the possibility of “arbitraging” on the CGT rate from 40% to 18%.It would work as follows:-

Higher rate tax payer’

Cost of investment in to the scheme £50,000
Less income tax relief (20%) £10,000 of the qualifying investment
Effective cost of investment £40,000
Estimated net exit proceeds £50,000

This is equivalent to the following:-
Net tax-free return £10,000
Net tax-free rate of return 7.7% p/a
Gross equivalent return 12.83% p/a*

*(to a 40% taxpayer if the £50,000 were invested in a deposit account instead)

WHAT WE HAVE ASSUMED
The annualised returns are calculated net of fees with an investment life of 3 years.
All tax benefits are used to reduce the effective cost of the investment.
The investment generates only enough returns to cover all fees.

The scheme is a recognised scheme by the Inland Revenue and as such qualifies for the tax advantages detailed above. The scheme however does have a degree of risk associated with it but it has been designed to mitigate this as far as possible. There is a risk however and as such this needs to be considered very carefully by any potential investor.

If you would like to know more about this scheme or any other tax planning opportunities please just contact Baxter Fensham ltd.
Nick Crabbe CFP

This type of scheme is not suitable for all investors and you may get back less than your original investment

Baxter Fensham Limited is authorised and regulated by the Financial Services Authority
The guidance and/or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK.

Each year we get a number of enquiries concerning Ill health Retirement from the NHS pension scheme. As such, we have put together a brief article outlining the main requirements that have to be met in order to be awarded the benefit, along with the amount of benefit a member would receive.

Background

The number of members of statutory pension schemes such as the NHS taking ill health retirement increased significantly through the 1990’s and early to mid 2000’s. So much so that the cost to the public purse was becoming too great and the Government felt that action needed to be taken along with a wholesale restructuring of some of the final salary statutory schemes. These major changes will not be covered here as we will only concentrate on the changes to the Ill Health Retirement (IHR) rules.

The Old System

Prior to the changes, if a member of the NHS pension scheme had at least two years service and qualified for IHR they would receive a pension based on their actual service or an uplifted service record and a multiple of final salary. If the member had been working 2-5 years in the service they would get that number of years service multiplied by 1/80th of their final salary for each year of this service. If they had worked for between 5 and 10 years the number of years service would be doubled.

Thus if they had done 8 years they would be credited with 16 years and would receive 16/80ths x final salary. If they had service between 10 and 20 years they would automatically be credited with 20 years service or have their service enhanced by 6 2/3rd years whichever was the most beneficial. Thus if they had 18 years service they would be credited with 24 2/3rd years. More than 20 years service would result in a pension uplift of 6 2/3rd years up to a maximum of what they could have achieved if they had worked their full career to normal retirement age.

The New System

The new system has become more complicated and there are now two tiers of IHR. Tier 1 and Tier 2. Again members can only qualify if they have at least 2 years NHS pension scheme membership.

Tier 1

Qualification
To qualify for the IHR benefit under Tier 1 the Scheme member:-

• Needs to be accepted by the NHS Pension Schemes medical advisers as being permanently incapable of doing their current NHS job;
• Or a former Scheme member needs to be accepted by the scheme medical advisers as being permanently incapable of earning an income by doing regular work.

Benefits
The benefits payable under Tier 1 are based on the number of years service in the scheme to date with no actuarial reduction for early payment or enhancement for ill health. Thus if a member had 14 years service in the scheme and a pensionable salary of £72,000 they would receive 14/80 x £72,000 = £12,600 pa as an income, plus a tax free lump sum of 3x this figure, so £37,800.

Tier 2

Qualification
To qualify for Tier 2 IHR the NHS pension scheme medical advisers must be satisfied that the member;

Is permanently incapable of both doing their current NHS job AND permanently incapable of regular employment of like duration to their NHS job, taking account of their:

• mental capacity;
• physical capacity;
• previous training; and
• previous practical, professional and vocational experience,

irrespective of whether or not such employment is actually available to them.

Benefits
The benefits under Tier 2 are more generous than Tier1 and are calculated as follows:-
The service record of the member is based on the service to date but is then enhanced by 2/3rd of the prospective membership they could have achieved by normal retirement date.
For members of the 1995 section of the NHS pension scheme who successfully claim IHR before 31st March 2016 (which encompasses the vast majority of our clients) this 2/3rd uplift is subject to a minimum of 4 years but limited to the maximum service they could have achieved by normal retirement date.

Examples of the 1995 section of the NHS Pension Scheme IHR calculations
1. A member of the above Scheme, who has a normal retirement age of 60, is accepted as qualifying for Tier 2 ill-health benefits at age 48, after 28 years’ full time Scheme membership. Their ill-health pension would be calculated using total Scheme membership of 36 years, 28 years actual plus 8 years enhancement (2/3rds of the 12 years’ prospective membership to normal retirement age of 60).

2. A member of the above Scheme, who has a normal retirement age of 60, is accepted as qualifying for Tier 2 ill-health benefits at age 55, after 30 years’ full time Scheme membership. Their ill-health benefits would be calculated using total Scheme membership of 34 years, 30 years actual plus the minimum guaranteed enhancement of 4 years. This is because 2/3rds of the prospective membership to normal retirement age of 60 is less than the guaranteed enhancement.

Conclusion

The main effect of the introduction of the new scheme is likely to ensure that less members going forward will qualify for the “full benefits” available under the new Tier 2 scheme which in essence provides similar benefits to the old single scheme outlined above. In addition to this a tightening of the qualification requirements mean that it is likely that fewer members will qualify for any sort of IHR at all.

The Impact on your Personal Financial Planning

The main impact of these changes is the potential interaction they may have with an individuals personal Income Protection Planning. At present many senior medical staff insure their income based on the assumption that they will qualify for IHR benefits thus reducing the amount of income protection they require. This in itself is not bad advice and historically has been a reasonable assumption to make based on the old IHR scheme rules. This course of action also ensures that the client is also never over insured and thus does not pay a premium on an insurance product for which they may not receive a benefit should the IHR pay out.

However, with the likelihood that new IHR claimants will receive the reduced benefits under the new IHR scheme and the more stringent qualification rules it may be worth clients re-examining their position. The choice that clients are now left with is a trade off between insuring the whole income they earn (or an amount up to which they would require to maintain their lifestyles) to provide “Certainty” for their ongoing lifestyle, or to insure a reduced amount and hope that they receive the IHR under the new rules.

If they choose the first option they run the risk of being over insured if the IHR benefits are paid out because the income protection benefits they receive under their personal PHI policy will be reduced by the amount of IHR they receive*, resulting in possibly years of partly wasted premiums. They will however ensure that they receive the full income they require to maintain the family’s lifestyles irrespective of the outcome of any decisions made with respect to an IHR claim.

If they choose not to insure their full income they will save money each month on PHI premiums but if they become incapacitated and the IHR claim is not paid they are likely to have a considerable shortfall in their income to maintain their lifestyle.
It is therefore a choice the individual client has to make between ensuring the highest degree of “certainty” of outcome for their lifestyle in the event of incapacity and what they are prepared to pay on a monthly basis to achieve this.

Nick Crabbe
Certified Financial Planner and Specialist Adviser to the Medical and Dental Professions

If you would like to know more about the contents of this article or any other financial planning matters relevant to the Medical and Dental professions please call the Baxter Fensham office on 01132583258

Full details of the NHS Ill Health Retirement Guidelines can be found at:-

http://www.nhsbsa.nhs.uk/Documents/Pensions/Ill_health_Rtirement_Factsheet.pdf

*This assumes that the Personal PHI plan has a limitation of benefit clause in the contract. The vast majority of plans do have this policy condition but some older plans do not. It is important to check the status of your policy when taking advice on this subject.

Baxter Fensham Limited is authorised and regulated by the Financial Services Authority

The guidance and/or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK.