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Tax allowances: Use them or lose them

If you’re a saver, the next few weeks are extremely important for the health of your finances.

As we approach spring and – fingers crossed – emerge blinking into the post-Covid sunlight, the Chancellor will be casting a critical eye over the state of public finances.

As we pointed out in last month’s newsletter, thanks to the pandemic, the government has had to run up our national debt to more than £2 trillion. That’s not sustainable, the books will have to be balanced and that suggests tax rises, perhaps in the form of reduced allowances. This could come as soon as the next tax year, which begins in April. There has been speculation, for example, about the reduction of relief on pension contributions by higher rate tax payers, or dropping the annual tax free amount for Capital Gains Tax, or double-taxing heirs on both CGT and Inheritance Tax.

Therefore, as part of our end of year tax planning campaign, we are urging clients to go through the annual tax check list. This year in particular you should be taking advantage of any valuable tax reliefs before the end of March, or you risk losing them and, potentially, thousands of pounds.

Here’s our usual annual checklist for you, whether you’re still working, or retired.

In work

If you’re still working, maximise your pension allowance as much as you can afford, up to the £40,000 annual limit. The generous tax relief immediately grows your pension in a way that would otherwise take years. For a basic rate taxpayer, this relief is 20%, so the government will add £8,000 to a £40,000 contribution – double that, if you’re a higher rate taxpayer.

If you have unused allowances from three years ago, this is your last chance to use them. Someone who hasn’t paid in anything this year or the previous three could pay in up to £160,000.

If you’re worried that you might need access to cash, bear in mind, if you’re 55 or are approaching that age, in making these contributions, you’re not putting that money beyond your reach. You can start to access your pension from the age of 55.

If you own your own company, pension contributions made to you by the business as your employer are a tax efficient way of extracting profits - useful if you’ve accumulated cash in the business, as you’ll not only save yourself 19% in corporation tax but also benefit from the pension relief.

Under the exchange salary for pension contributions scheme, by mutual agreement with their employer, an employee can exchange some of their remuneration, whether that’s salary or bonus, in return for a larger pension contribution from their employer. This saves on National Insurance that would have been paid by both the employer and employee.

Also, don’t forget your ISA, your own personal tax haven, where dividends and capital growth are income tax and capital gains tax free. You can contribute up to £20,000 to your ISA or ISAs in any tax year, but these allowances can’t be carried forward. Again, it’s a case of use it or lose it.

Retired

Don’t forget to ensure that you and – if married - your spouse are making the most of your personal allowances. Tax allowances aren’t transferable and those of both partners should be used to the full. By using both personal income tax allowances, two people can have a joint income of £25,000 a year tax free.

Couples who are drawing income from their pension funds, can top up the tax free element by using ISAs which are tax free.

Also, remember, if you have reached retirement and have no earned income, you can still contribute up to £3,600 gross a year to your pension and benefit from the tax relief.

Conclusion

As you endure lockdown, take some time out from the jigsaws and baking banana bread and talk to your Reeves adviser to go through the end of year tax checklist.

The content of these articles are for information only and should not be seen as advice or recommendation to act. If you do wish to take action, seek independent advice first as your circumstances may be different to what has been discussed in these articles. When investing, your capital is at risk and it may go down as well as up. You may not get back the original capital invested. Pension investment should be seen as a long term investment. Please note that pension legislation can and may change in the future.


How Reeves can help you save tax.

Jim Carlton joined us as a client when he was aged 58. He was still working as a freelance software engineer but was hoping to retire within a few years and he was on track to fulfil this ambition, having built up a reasonable pension fund.

However, like many people, Jim had also put by significant cash savings – in his case, about £25,000 – as a rainy day fund. After reviewing his situation and plans, we decided together that he was unlikely to have to call upon this much money and we pointed out to him that, with extremely low interest rates, these savings, for which he had no management and no plan, were not working for him as they could. In fact, with the rate of inflation being higher than interest rates, keeping these funds on deposit was costing him money.

Our advice to Jim was that, while he was still working and earning, it was crucial that he fund his pension as much as possible. The allowance for how much can be paid into pension is determined in part by earnings. Once you stop working, your annual pension allowance drops significantly.

So, following our advice, Jim paid £16,000 from his personal savings into his pension fund. This was immediately boosted by 25% as the taxman gave him £4,000 by way of income tax relief to further add to his pension. This was even before the funds were put to work by the pension fund manager to achieve further – tax free – growth.

If Jim had been a higher rate tax payer, he could have received up to an additional £4,000 refunded back to him by HMRC, so the £20,000 added to his pension, would only have cost him £12,000.

As a result of this decision, Jim brought his retirement ambitions closer, while still retaining £9,000 cash for any emergencies.

Another Reeves client was Mary McAndrew. Mary, who retired when she was 63, had also built up a respectable sum in cash, in addition to her pension fund. When she became a client, she explained that her plan was to live off these cash savings for a couple of years to allow her pension funds to grow before she needed to draw on them.

This is a common attitude and it’s not unreasonable, as it’s a good thing to allow our investments to work for us, for as long as possible, to allow them to build up momentum under the powerful force of compounding.

However, in Mary’s case, she wasn’t taking into account her tax position. Like any other adult, she had a personal income tax allowance of £12,500 a year – that is the amount she could earn without paying any tax. But, as she was retired, she wasn’t receiving any taxable income and so her allowance was unused and going to waste. The personal income tax allowance cannot be carried forward to another year, you either use it in the current tax year or lose it. This same income, drawn later in life, may have fallen into the basic rate tax bracket, meaning Mary would have lost £2,500 when accessing it from pension.

We advised her to draw £12,500 from the taxable element of her pension. Even though she didn’t need that money to live on, she could reinvest it, so that the money could still continue to work for her, while she was making full use of her personal allowance. A case of making the best of both worlds.

Leigh and Rita Collinson were in their fifties. Leigh was a manager for a packaging firm who had worked his whole adult life, during which he had built up a reasonable pension pot. Rita, on the other hand, had given up her career as a hotel receptionist in order to bring up their two children. She had worked in retail once they both reached school age and, while she had saved a modest pension, it was significantly smaller than Leigh’s.

So, when they first consulted us, they had the view that in retirement they would largely be relying on Leigh’s pension, as he had been the traditional `breadwinner’, to provide their required joint income of £24,000 after tax.

We pointed out that the income tax allowance of £12,500 can be doubled for a couple retiring together, that’s £25,000 drawn from taxable environments tax free.

If the income Leigh and Rita wanted was £24,000 a year, by using both of their pensions, they could draw that from a taxable environment, so 25% of their pensions could be drawn tax free. They didn’t have to touch this but it could be saved for when needed and when it was more tax efficient to access it. We used these income tax allowances to pay them their income and the £1,000 surplus was reinvested to continue working for them.

These are just three examples to underline how Reeves has helped people to use the tax rules and allowances to boost their savings.

The content of these articles are for information only and should not be seen as advice or recommendation to act. If you do wish to take action, seek independent advice first as your circumstances may be different to what has been discussed in these articles. When investing, your capital is at risk and it may go down as well as up. You may not get back the original capital invested. Pension investment should be seen as a long term investment. Please note that pension legislation can and may change in the future.

**Names have been changed from real client case studies, with written consent. All other names and studies are fictional to highlight our advice.


Give the gift of financial security.

Here at Reeves Independent we believe that everybody deserves the chance at a brighter and more sustainable financial future, that is why we have launched our referral campaign this month so you can help us, help others.

We are always thrilled to hear from our satisfied clients, and love to read your impressive reviews on Trustpilot. Our award-winning services help us to maintain our 99% client retention rate and in 2021 we would like to ensure we are helping as many people as possible.

From early retirement planning to making sure you are on the right track to meeting your financial goals and reassuring you in times of need, we truly believe that with the right financial support and advice you can focus on the things in life that you enjoy.

Whilst the past year has been an uncertain one for many, there has never been a more prevalent time to give the gift of financial security.

Simply by signing up to our referral programme you can recommend our services to friends and family ensuring that they are on the right path to a brighter future.

We would love to say thank you for recommending us too by giving you and your referral a £100 amazon voucher EACH. Not only that, but we will also place you into our prize draw to win a luxury holiday worth up to £5000.

Drawn at the end of each quarter, our luxury prize holiday draw will see 3 clients win 3 holidays, totalling £2000, £3000 and £5000, simply by recommending a friend to Reeves Independent. We will be hosting a virtual event too, our first happening on the 6th of April, where we reveal the winners of the luxury holiday prize draw. Of course, given the current climate, holidays will follow all appropriate government guidelines and travel restrictions, as necessary.

What is even better is that you can refer us as many times as you like!

That is a voucher for you and your friend EACH time and an entry for you into our prize draw. Once we have received the letters of authority from your referral, you can reap the rewards.

It really is that simple.

  • Sign up to or referral programme: SIGN ME UP!
  • Share your unique link with friends and family
  • Receive rewards following the safe receipt of your referrals LOA’s to Reeves Independent.


A chance to paint yourself a new future

Amanda Brewer turned 62 this year. She was a senior manager for a pub chain, for which she had worked for twenty years.

She enjoyed her job, relishing its fast pace and particularly enjoyed navigating the inevitable crises that the trade threw at her. A long-standing Reeves client, she had always planned to retire at the age 65, but she was ambivalent about this, fearing that she would miss her work and the adrenaline rush.

In the event, the covid 19 epidemic gave her a taste of what a slower pace would mean as she was furloughed twice in 2020. She has expected that this would be highly stressful and that she wouldn’t be able to turn off and would be bored to distraction.

However, to her own great surprise, she found herself enjoying her enforced leisure. In her youth she had been a keen amateur painter, so she dug her easel and brushes out of the loft and took it up again. The old skills only returned gradually, but her love of applying watercolour to canvass came back with a rush. Soon she wasn’t giving work a second thought and, when her second furlough did end, she found it hard to summon up her old enthusiasm for the job.

She raised this with us during her annual review and we suggested we take a look at her options. She had recently paid off her mortgage, which significantly reduced her monthly outgoings and, taking into account her likely lifestyle in retirement and remaining core household expenditure, we presented her with some figures. To her surprise and delight, she found that she didn’t need to continue working and, from April 2021, she is going to retire and devote herself seriously to her painting.

Amanda is by no means the only person for whom 2020 has prompted a radical reappraisal.

Many like her, have discovered that – for them – there’s more to life than work. Some have found that the various covid-related restrictions, which have meant fewer opportunities for spending money, have made them realise how much unnecessary expenditure they have and how some permanent cutting back makes retirement possible. Others, who had their own businesses, have just found that enforced shutdown has prompted the decision to call it a day and enjoy retirement.

Of course, it doesn’t take an event as dramatic as a global pandemic to justify a reassessment of your life and retirement plans. In fact, at Reeves, we encourage this as a regular exercise, which is why, for all our clients, we sit down with them and conduct a review of their situation and ambitions.

But, remember, we’re here for you all the time. If you want to take a fresh look at things, even if you’re not entirely clear in your own mind yet what you want to do, get in touch with your Reeves adviser, who will be only too happy to talk things through with you. Many people are pleasantly surprised to find just what unexpected options are open to them.

Perhaps, like Amanda, you’ll discover that your future is a blank canvas.


Investing is a balancing act

Diversification is key to investment success and a good portfolio is always a balanced portfolio.

This is not some obscure or complicated financial technique. It merely means achieving a spread of investments – in other words, not betting the ranch on one asset class, or not putting all your nest eggs in one basket.

The reasons underpinning this principle are straightforward. If you were to put all your money into one industry, or sector, or geographical region, you would be giving a hostage to fortune. If they do badly for any reason, then so will the value of your whole portfolio.

But, if you’ve put together a carefully chosen and balanced range of investments, then, not only will your exposure to one type of asset be limited, but often, falls in the value of one, will be compensated by rises in another, as other investors shun the poorly performing and drive up demand for alternatives.

At Reeves, diversification across various geographical areas allows us to reduce our portfolios’ exposure to region specific risks, such as, for example, Brexit. This means we can benefit from the growth potential of different regions, without fully exposing ourselves to the market risks that come with them. Alongside managing risk, looking at various regions gives us different opportunities, such as emerging/frontier markets, which might have a higher growth potential compared with more developed regions, albeit with higher risk and volatility.

As well as diversifying regionally, Reeves portfolios are also diversified across several asset classes. As different asset types act differently and carry different levels of risk it allows us the manage the risk of portfolios by changing our allocation to reflect our stance on the market. We see each asset type as a tool to manage our portfolios, each has its own merits which we use together to craft balanced portfolios to reflect each risk level

To further diversify and reduce the correlation of our portfolios we use different types of funds within the asset types. For example, a smaller companies equity fund will perform differently compared with an equity fund focused on larger cap companies. The aim is to add value through our fund selection, while further spreading the risk of the portfolio with funds which won’t necessarily react to global events in the same way.

It’s all a question of balance.


Do your Tax Planning for a prosperous New Year

On the threshold of a new year, it’s always worth looking back to see what lessons we can take from the one that’s just ended.

Well, if 2020 taught us one thing, it’s that you never really know what’s just around the corner.

However, some things always stay the same. As Benjamin Franklin said: “In this world nothing can be said to be certain, except death and taxes.’’

So, at Reeves, as we do every year, we’re launching our end of year tax planning campaign to remind our clients of the importance of making the best use of available tax allowances before the end of the tax year on April 5.

This can make an enormous difference to the value of your retirement savings. Tax planning is one of the most significant steps you can take to boost your savings and it’s also one of the easiest - and it’s risk free.

This year, it could be especially important. Thanks to the Covid pandemic, the government has had to spend eye-watering sums of money and this has resulted in our national debt topping £2 trillion.

At some point, the books will have to be balanced and that will probably mean tax rises, which could well come in the form of reduced allowances. There have already been suggestions of dropping the annual tax free amount for Capital Gains Tax to as little as £1,000, and double-taxing heirs on both CGT and Inheritance Tax. There is also speculation on the removal or reduction of relief on pension contributions by higher rate tax payers.

So, depending on individual circumstances, this year could be the time to take full advantage of the available allowances while you still can.

Personal contributions to your pension fund are limited to the amount of your annual salary, to a maximum of £40,000. A non tax payer or basic rate tax payer will have 20% added to the pension in tax relief and a higher rate tax payer will get the 20% relief and can claim back another 20%. An additional rate tax payer, can claim back 25%, in addition to the 20% added to the pension.

Employer contributions – which you can make if you are self-employed and have your own limited company – aren’t restricted by the salary limit, but are still limited to the annual allowance and there are carry forward rules. Even if you no longer have any earnings, you can still contribute £2,880, to which the taxman will add £720 in relief.

Also, if you haven’t used your allowances for up to the previous three years, this is your last chance to take advantage of them. If you haven’t paid in anything this year, or for the previous three years, you could pay in up to £160,000. This means that if you make a contribution of £128,000, the taxman will top it up with another £32,000.

You also have a personal annual ISA allowance of £20,000. Within the shelter of an ISA, any dividends, interest or capital growth are income tax and capital gains tax free.

Nor should you forget your personal income tax allowance of £12,500. If you’re drawing down your pension, make sure you have made full use of this year’s allowance and – as with all allowances – don’t forget to ensure your spouse makes full use of their allowance too.

The tax year ends on April 5, but don’t leave it until then to take advantage of these allowances. At Reeves, we will be happy to advise you, but do try to get in touch with us before March 19.

Meanwhile, as part of our end of year tax planning campaign, we will be holding the following webinars in the New Year.

  • End of tax year planning for directors of own company, hosted by Jack Ford - January 12th at 6:30pm and Sunday 17th at 6:30pm;
  • End of tax year planning for employees, hosted by Ollie Gibbs – January 26th at 6:30pm and Sunday 31st at 6:30pm;
  • End of tax year planning for the retired, hosted by Chris Lockerbie – February 9th at 6:30pm and Sunday 14th at 6:30pm.


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