Financial planning summer bulletin 2024
As the summer season unfolds, albeit with unpredictable weather, we are excited to present our Financial Planning Summer Bulletin.
As expected, we have a new government and with this we anticipate potential shifts within the financial landscape. It is essential to view financial planning as a progressive journey, adapting to changes to keep your plans aligned with your goals. If you have questions around the change in government, we urge you to read our latest insight ‘The tax landscape under a labour government’.
In this bulletin we cover a range of pertinent topics:
Savings: We emphasise the importance of having readily accessible savings, and we can guide you on how to ensure your savings work hard for you with good cash management.
Tax matters: We address the impact of frozen tax bands and provide guidance on maintaining accurate and up to date National Insurance records with HMRC.
Retirement: Regardless of your proximity to retirement, it is vital to prepare for the financial requirements. It is important to make sure you have what you need, when you need it.
Long-Term Illness: We explore the financial burden that long-term illnesses can bring and offer you strategies to protect your finances against unforeseen events.
Protect your money: With the rise of financial scams, we ask you to be careful and always consult with your adviser prior to making any financial decisions.
Our commitment is to help you secure your financial assets and we are here to protect your money.
For any queries about the bulletin or other financial concerns, please contact your adviser. Wishing you a pleasant and enjoyable summer from everyone at Moore Kingston Smith.
Managing something in reserve?
It pays to expect the unexpected, particularly when it comes to your finances — so a rainy-day savings fund can make all the difference.
Setting aside money can be challenging, but a reserve fund offers long-term benefits in a range of circumstances, from unexpected expenses to a drop in income due to redundancy or ill health.
The link between financial well-being and mental health underlines the importance of building some kind of resilience into your planning. A financial cushion lets you manage budget shortfalls without borrowing or tapping into other investments or pension funds.
Private pensions can be accessed from age 55, but withdrawing funds early can have downsides: you might sell investments during a market downturn or incur tax charges, and future pension contributions could be restricted. B Having a back-up savings fund means these retirement savings and pensions can stay invested for the longer term, maximising growth opportunities.
Easy access
Rainy-day savings for emergencies should be in an instant access account. Using a cash ISA means all interest is earned tax-free. On ordinary savings accounts basic-rate taxpayers can earn £1,000 in interest a year tax-free, with higher-rate taxpayers’ tax-free interest set at £500; beyond this interest is taxed at the saver’s marginal rate. With rising interest rates, more savers might face tax on savings interest, making cash ISAs more appealing. The annual ISA allowance is £20,000, shared across all ISA types.
As a rule of thumb, you should aim to build funds through regular savings that would cover your usual expenses for three months.
With the first reduction in the Bank of England’s Base Rate expected as soon as the 1st August 2024, the amount of interest savers can secure is expected to decrease. To maximise returns while maintaining some liquidity, consider securing tranches of capital in products maturing at different dates. This strategy allows savers to lock in competitive rates while they are available and still retain access to funds when needed.
Some savers will utilise a Cash Management platform to easily distribute funds between multiple providers, all in one place. This approach not only allows savers to view consolidated information across all their cash savings accounts but also manages risk by ensuring protection for their money up to the FSCS limit of £85,000 per UK bank, or £170,000 for joint accounts.
Investments do not offer the same level of capital security as deposit accounts. The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.
How well will you be able to retire?
You may need to review your retirement planning after updated figures show some increases of over a quarter for retirement income needs.
Source: Pensions and Lifetime Savings Association, February 2024
How much income do you need in retirement?
If you find yourself struggling to answer, you are not alone. It is never easy to calculate as each of us has our own ideas about what we want from retirement. A study by the Pensions and Lifetime Savings Association (PLSA) has shown that 77% of savers did not know how much they would need, while only 16% could provide a figure.
Since 2019, research by Loughborough University for the PLSA has regularly addressed the how-much question by considering three different retirement living standards, defined as:
- Minimum: Covers all your needs, with some left over for fun.
- Moderate: More financial security and flexibility.
- Comfortable: More financial freedom and some luxuries.
These categories are used to review spending across six broad areas, ranging from housing to helping others. They are costed separately for single people and couples and for London residents and those living elsewhere in the UK. For example, under the heading of holidays and leisure, the three standards currently assume:
- Minimum: One week-long UK holiday.
- Moderate: A fortnight 3* all-inclusive holiday in the Med and one long-weekend break in the UK.
- Comfortable: A fortnight 4* holiday in the Med with spending money and three long- weekend breaks in the UK.
The yearly income requirements for each standard are net, which means at the higher levels tax is a significant factor. For instance, the £45,000 of net income required to provide a comfortable retirement for a single person living in London equates to a pre-tax pension income of over £54,000.
This year’s update revealed a 26.8% increase A in the income needed for a couple based outside London to enjoy a moderate living standard. For a single person, the rise was even greater – 34.3%. The PLSA attributes the jump to two main factors:
- Disproportionately higher food, household energy and motoring costs; and
- What the PLSA described as “changes in the expectations of what should be included”. For example, the latest research revealed that being able to give financial support to family members has become more important.
The current State pension of £11,502 is not even enough to cover the minimum retirement standard for a single person, although if a couple both have a full entitlement, it will just be sufficient – outside London. And, as has been the source of many complaints from the Women Against State Pension Inequality or WASPI group affected, the State pension does not now start until age 66, (67 from April 2028).
If you aspire to the Mediterranean fortnight rather than seven days of UK weather; or even hope to finish work before your State pension arrives, you need to accumulate sufficient personal retirement funds. Typically, that begins by assessing what you have already built up and then working out how much extra is required by the time you retire. Like the difficult question about retirement income, it is a set of calculations best left to experts.
The value of your investment, and the income from it, can go down as well as up and you may not get back the full amount you invested.
Occupational pension schemes are regulated by The Pensions Regulator.
The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.
Time to check in with HMRC?
Freezes and cuts to tax allowances mean that you may have something to report to HMRC.
Source: HMRC, OBR
A recent report from the National Audit Office (NAO) was highly critical of HMRC, noting that in 2022/23 its ‘customers’ (that’s you) spent the equivalent of 798 years on hold, waiting for an HMRC adviser to answer their call. As bad, only 53% of calls were eventually answered by an adviser.
Unfortunately for HMRC and its ‘customers’, matters are likely to worsen due to a combination of:
- the continued freeze in the personal allowance and higher rate tax threshold (both unchanged since April 2021);
- the two consecutive reductions in the dividend allowance and capital gains tax annual exempt amount; and
- higher interest rates: a personal savings allowance frozen since April 2016 leaves more savers having to pay tax on their interest.
If you are already within the self-assessment regime, then the extra tax liability will normally be dealt with via your tax return. However, if you (or your accountant) do not file a self-assessment return, things become more complicated.
What you cannot do is ignore the situation and assume that if HMRC does not contact you then you have nothing to worry about. If you have a tax liability, the law says you must pay it. Remember that HMRC automatically receives records of interest paid to you (from onshore accounts and, in nearly all cases, offshore accounts) as well as your earnings if you are an employee. Stay silent and you may eventually receive a probing letter from HMRC. The end result could be that interest and penalties are added to overdue tax…and HMRC makes you a five-star customer, worthy of close attention.
As for reducing the tax you pay in the future, why not give us a call? We promise not to keep you hanging.
The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.
Don’t fall for scams this summer
Make sure your finances don’t get burnt this summer, as fraudsters set their sights on unwary holidaymakers. Action Fraud, which aims to prevent scams and cyber crime, says sun-seekers lost £12.3m last year from targeted frauds, with the average loss being £1,851.
It isn’t just holidaymakers who need to be on their guard. Financial scams are rife, with fraudsters targeting bank accounts as well as pensions and savings. Phishing scams are among the most prevalent — where emails or texts are sent out, purportedly from a trusted company, encouraging people to disclose personal or financial details, or to visit a website which can download a virus onto their device to harvest further data.
Investment scams are also common. Here, fraudsters convince people to transfer pensions or other savings into schemes promising enticing returns. Of course, these too-good-to-be-true investments turn out to be just that. At best, they are high-risk, unregulated investments where there’s a strong chance that savers will lose money. At worst, they are pyramid schemes, where the money simply lines the bank accounts of the criminals targeting unwary investors.
Hundreds of people fall victim to financial scams every year. Last year over 800 people contacted a dedicated helpline set up by The Money and Pensions Services (MaPS), with losses totalling £13.6m, an average of £16,297 per caller.
There are steps you can take to help protect yourself though. Before putting money into any investment or pension product run the details through ScamSmart investment checker.
Remember the golden rules: never be rushed into making a financial decision and be extremely wary of any third party contacting you. And finally, don’t forget that if a deal looks too good to be true it is probably a scam.
The cost of long-term sickness
If you are or become ill, state support remains minimal.
In a speech on welfare in April, the Prime Minister attacked the UK’s “sick note culture”, observing that that a record 2.8 million people were off work with long-term illness. He proposed that sick notes (strictly “fitness to work notes”) be replaced with fit notes, issued by health and work specialists rather than doctors.
In the run up to the pandemic, the long-term sick population was fairly stable at 2.0 million. The significant jump since then has added to government expenditure, one of the factors concerning Mr Sunak. However, as many people discovered at the time of COVID-19, sickness benefits are far from generous:
- If you are an employee, statutory sick pay (SSP) is £116.75 a week, payable from day four of sickness for the first 28 weeks off work. Your employer may also provide sick pay but is not required to do so.
- If you are self-employed, you do not qualify for SSP but must claim Employment and Support Allowance (ESA), which is also available to employees once their SSP payments cease. For a couple, the basic rate is generally £142.25 a week, to which there may be various additions. For a single person, the corresponding figure is £90.50.
- If either of these payments is insufficient to cover your living expenses, then the next port of call is Universal Credit (UC). However, this is unavailable if you (along with your partner) have savings of more than £16,000. Pass that hurdle and the assessment still takes account of your partner’s income.
Were you to become unable to work through illness, would you and your family be able cope on what the State provides? If the answer is no, or not for long, then talk to us about your income protection options now, to put safeguards in place.
Basis year now means tax year
Are you aware of the changes to the way your profits are taxed if you are self-employed or in a partnership?
An old trick of Chancellors who cannot raise tax rates but need more revenue is to accelerate the payment of tax. The latest example was announced in October 2021 with the claimed objective of creating “a simpler, fairer and more transparent set of rules for the allocation of trading income to tax years”. As usual, such a promise should be treated with caution.
The change, which has now come into effect, means that for 2024/25, if you are self-employed (or a member of a partnership), you will generally be taxed on the profits made between 6 April 2024 and 5 April 2025. If your business’s accounting year is different and its year end is not between 31 March and 4 April (all treated as 5 April), then generally:
- For 2024/25 you (or your accountant) will need to apportion two accounting periods to arrive at profit based on the tax year.
- For 2023/24 you will be taxed on:
- the profit for your accounting period ending in that tax year plus
- the profits you make from the end of that period to 5 April 2024, calculated by apportionment.
The acceleration in 2023/24 is subject to two special treatments for the apportioned profits:
- They can be reduced by any overlap relief you have from earlier years.
- The apportioned profits less the overlap relief can be spread over a period of up to five tax years, with a 20% minimum applying for 2023/24.
Managing a higher tax bill
The extra taxable income could drag you into a higher tax band, or mean that your personal allowance becomes subject to tapering. However, you may be able to gain more tax relief by making pension contributions that offset some or all of the additional profit. For more advice on this and other planning opportunities created by basis period reform, please contact us.
The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.
Elections 2024 – what’s next?
Beware immediate reactions – the dust needs to settle.
The 2024 UK general election resulted in a landslide victory for the Labour Party. Chancellor Rachel Reeves ruled out a summer Budget because she wants a full report from the Office of Budget Responsibility (OBR) first. The OBR requires ten weeks’ notice to crunch the numbers, leaving only a small gap before party conference season begins.
In terms of what we already know the Labour Party are intending to deliver, please see our summary of the key tax proposals from their manifesto.
Hold off on big decisions
The Chancellor must also prepare a spending review, theoretically running for three years from April 2025. That review needs to be published by November. It is possible that there could be an interim one-year review, to give the new government more time to settle in and develop its spending plans. Consequently, the significant Budget may not be in the autumn, but next spring.
Those timings reinforce a lesson from many past elections: hold off taking rushed investment decisions based on initial results and reactions. The picture should be much clearer later in the year. However, if you are concerned about how any changes to taxation may affect you, including potential changes to capital gains tax (CGT), please let us know.
New tool for missing NICs
The government has launched a new web tool that allows people to check if there are gaps in their national insurance record, and ‘buy back’ missing years, to ensure they qualify for the full State pension.
The Check your State Pension tool is available via gov.uk or on HMRC’s app. A Normally people can only make voluntary payments for the previous six years, but until April next year there is the opportunity to buy back years as far back as April 2006.
Under the new flat-rate State pension, introduced in 2016, people need to have paid NI payments for at least 35 years to get the full amount, currently worth £221.20 a week. B The exact number of years depends on age, but this new tool shows people how many years they’ve paid to date, how many years they have missed, and what effect buying back additional years will have on their future pension entitlement.
News round up
Footsie reaches new highs
The FTSE 100 index hit a series of new highs in May, all comfortably above 8,000. Nevertheless, by most measures the UK stock market still looks relatively cheap. For example, in mid-May the FTSE 100 had a dividend yield of 3.56% and a price/earnings ratio of 14.36, while the US S&P 500’s corresponding numbers were 1.43% and 27.56.
The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance.
Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
Annuities regain popularity
Data from the Association of British Insurers shows that in 2023, pension annuity sales jumped by 46%, taking them back to the level of 2014, before pension flexibility began. Annuities’ new popularity reflects the more attractive rates on offer, thanks to the rise in long-term interest rates.
Investments do not offer the same level of capital security as deposit accounts.
The value of your investment, and the income from it, can go down as well as up and you may not get back the full amount you invested.
Interest rate cut hopes recede
At the start of 2024, the expectation was that the Bank of England would cut rates six times (to 3.75%) by the end of the year. By May, the experts were pencilling in two cuts by December, although the IMF thinks there could be three. The changed outlook reflects continued inflation risks, even with the CPI inflation yardstick hitting 2% in May. One worrying factor for the Bank of England is earnings growth, still at around 6%.
Contact us
Contact us if you have any questions regrading the issues raised in our summer bulletin.