Please click the link below for our latest monthly figures for the five model portfolios. The figures show the performance of our model portfolios versus various indices over the month of April.
Establishing a regular savings plan using surplus income can be an extremely effective route to building wealth and achieving your financial goals over the medium to longer term.
There are a number of benefits to “drip-feeding” even modest sums into an investment portfolio each month via a direct debit, as outlined below.
First, regular contributions can help in achieving smoother returns and mitigate timing risk. Part and parcel of investing is the fact that investments go up and down in value. Investing after prices have fallen means buying into your portfolio at a lower level and bringing down the average price you have paid since the start of the investment. This is known as “pound-cost averaging” and through regular investing, the peaks and troughs will be ironed out or ‘smoothed’ over the longer term.
Second, market timing is extremely difficult and even investment professionals do not have a crystal ball and cannot predict, with any certainty, which direction markets will move in the short term. Regular investing helps take the guess work out of when to invest, as investments will be made automatically on a given date each month. Empirical evidence indicates that the average investor tends to follow the crowd – allowing the herding instinct to displace rational thinking – investing more when the markets rise and disinvesting when it falls; this can lead to inferior long term rewards.
Third, investing smaller sums on a regular basis could enable you to start investing sooner than if you were to wait for a lump sum to build up. This gives you more time to take advantage of the growth potential of compounding investment returns.
Fourth, you do not have to commit to a fixed amount each month; you can change the amount invested as required, to suit your circumstances. Even investing a relatively modest sum each month can lead to a significant pot over the long term, as shown in the following table, which assumes net investment returns of 4% per annum.
|Monthly Investment||10 Years||20 Years||30 Years|
Fifth, and finally, you will not forget to invest, as the investments are made automatically and you will come to view the contributions as part of your regular monthly spending. Indeed, after time, the regular debits will become of no consequence – and when that happens, it is possibly time to raise the ante!
When it comes to investing, we highly recommend that you seek financial advice and we are happy to discuss your requirements with you.
By Elliot Gothold, Consultant.
Current pension rules limit the amount of tax relievable pension inputs that can be made into a pension scheme in each tax year. This is known as the Annual Allowance. Exceed this Allowance and you are likely to face a tax liability, known as the Annual Allowance Excess Charge.
Pension inputs can take the form of monetary contributions in money purchase schemes or the ‘deemed’ contribution, in the case of a defined benefit scheme. The Annual Allowance is made up of all pension inputs you, your employer and/or a third party make to your pension.
If your threshold income remains at £110,000 or lower, then you retain an Annual Allowance of £40,000 for that tax year.
Where threshold income is in excess of £110,000 and adjusted income rises above £150,000 in a tax year, you lose £1 of your Annual Allowance for every £2 of adjusted income. By the time your adjusted income reaches £210,000, your annual allowance will be tapered down to the minimum level of £10,000.
The Annual Allowance Excess Charge will only apply if, in addition to using all of your Annual Allowance in the current tax year, you have also exhausted your unused annual allowances from the previous three years. This is known as carry forward. If, however, having accounted for all carry forward, you still have an excess tax charge and it arises on a money purchase pension, then you have the option to ask the Scheme to pay some or all of the tax on your behalf, out of your accumulated fund. Simple. There are some restrictions around this, which may differ on a scheme by scheme basis. But what is the position for Defined Benefit schemes, where there is no fund to pay from?
If you are a member of a Defined Benefit pension, such as a “final salary scheme”, again you have the option to ask the Scheme to settle this tax charge via “Scheme Pays”. This gives you an alternative to paying the tax due from your already taxed income, but the trade-off is that your eventual pension is reduced in retirement. The Scheme has paid the tax on your behalf after all.
The way it works is complicated, but think of it as similar to a loan that sits alongside your pension. It will likely attract interest at a rate equivalent to the Consumer Price Index (CPI) or higher. This interest is accumulated year on year. It has no impact on the accruing pension, until you choose to retire and crystallise the pension. At that point, the initial loan – equivalent to the amount of tax paid by the scheme – plus the accrued interest, crystallises. The Scheme actuary will then apply a “Scheme Pays” commutation factor to this sum and reduce your pension accordingly. This can often be advantageous, particularly for larger pension pots, where there are likely to be dependents.
The calculations to determine whether the scheme pays option is good value are complicated and naturally we would recommend you seek our advice about whether it may be appropriate for you. Everyone’s situation is different and therefore we review your pension on an individual basis.
Threshold Income is defined as an individual’s total income minus allowable deductions such as member pension contributions.
Adjusted Income is defined as an individual’s total income, less allowable deductions, but plus the total pension inputs arising in the tax year.
Last weekend our Managing Director, Adam Katten, appeared in the Saturday Times talking about pensions and the fact that it’s never too early to start financially planning your later years.
Coming not long after two successful lectures for final year students at the British College of Osteopathic Medicine, as a father of four children himself (aged 20-27 years) he understands the difficulty in conveying to a 22 year old the importance of putting aside money each month into a pension, especially when it can’t be touched until the ripe old age of 57.
When we also factor in living expenses, studying, potentially moving away from parents for the first time, pension planning for the younger generation is challenging although the figures clearly speak for themselves.
As Adam explained “The tax reliefs associated with pensions are generous, as they attract tax relief at source. Therefore £100 invested into your pension only costs £80 for a basic rate tax payer and £60 for those paying tax at the higher rate. The growth of your pension is tax free and when you reach retirement, 25% of the fund can be drawn tax-free.”
“The benefits of starting a pension aged 25 rather than 35 can be illustrated by comparing the projected pension fund at 65 based on an individual earning £50,000 per year with a growth rate of 4% above inflation. Starting at 25, this individual will achieve a pension fund of £741,000 at 65 years old whilst starting a pension at 35, would reach £437,000. Those extra 10 years made the pension fund almost 70% larger!”
As demographically we are living longer, it is more important than ever for younger people to recognise the importance of starting to save as early as possible and give themselves the opportunity to spend their money during retirement. We would even encourage parents or grandparents to start pensions for younger children as there are no minimum ages.
Please click the link below for our latest monthly figures for the five model portfolios. The figures show the performance of our model portfolios versus various indices over the month of March.
Last month our Managing Director Adam Katten gave his second lecture in financial education to final year students at the British College of Osteopathic Medicine.
The college are offering students the opportunity to gain a better understanding of financial planning before they leave and step into the world of work, either through joining a current osteopathic practice or setting up as self-employed consultants.
The first lecture that Adam gave late last year focused on financial and protection planning; March’s lecture concentrated on pensions and investment opportunities to help students make informed decisions on maximising tax efficiencies and starting to save for their futures as early as possible.
With financial education now part of the secondary school curriculum, children are starting to learn the basics of budgeting, savings and getting to grips with bank accounts, however it isn’t until they leave home for university, or to work, that the responsibility of paying rent and bills becomes a reality. Combine this with potentially running your own business, thinking about pensions with or without auto-enrolment and tax implications, the fact that the College are providing financial education is a great way to increase students’ preparation and awareness.
One student commented “I felt Adam’s lecture was really interesting and gave useful information for financial planning. I would certainly trust him for information or advice in the future!”
With the average pension pot for people aged 45 years currently at only £60,000, it’s critical that young people start saving as early as possible and learning how to make their money work efficiently and NLP Financial Management are delighted to be involved in initiatives such as these.
After a busy few weeks for our advisers, Saturday 6 April marked the start of a new tax year.
Here are some of the key tax changes from a financial planning perspective:
- The personal allowance is now £12,500 per annum.
- The threshold at which higher-rate tax kicks in has also increased to £37,500.
- Therefore, the higher-rate tax band will apply once income exceeds £50,000 per annum.
- The annual capital gains tax exempt amount for individuals now stands at £12,000 per annum. Trusts get half this limit.
- The lifetime allowance limit has increased to £1,055,000. Pension savings above this limit will be subject to pension tax charges.
- The Junior Individual Savings Account limit has increased to £4,368 per annum.
An essential part of our service which our clients value is helping them stay on top of these changes and ensuring their affairs are managed as tax-efficiently as possible.
Looking at the changes, our view is that given the generous uplifts in thresholds from an income tax point of view, now may be the time to deliberately generate more income from portfolios and we will be considering such planning for our clients. This could be done by increasing income from taxable sources such as pensions and Investment Bonds.
At the same time, certain rules remain unchanged and require careful planning, such as
- The additional-rate threshold also stays unchanged at £150,000, bringing even more clients into the top tax rate of 45%.
- If your income exceeds £100,000 per annum, your personal allowance will reduce by £1 for every £2 of income above the £100,000 limit.
- The National Insurance contribution thresholds have been increased by nearly 8%, so the upper earnings limit for employees and the upper profits threshold for the self-employed is rising to £50,000.
- Individuals with earnings in excess of £110,000 gross per annum need to keep an eye on Tapering rules in terms of pension contributions.
It is never too early in the tax year to check and plan and we will be reviewing our clients’ affairs and considering suitable planning at regular reviews. However, please do not hesitate to get in touch if you would like a review now.
It’s something none of us want to think about, but unfortunately there are two certain facts in life – we’ll all pay taxes and we’ll all die at some point, however, we may also fall seriously ill so we need to consider protecting ourselves and our families should the worst happen.
Life expectancy in the UK steadily improved throughout the 20th Century, meaning we now have a larger and older population, which is mainly due to people looking after themselves more, smoking less and improvements in the treatments of illnesses. However, in the last few years life expectancy in the UK has slowed down and virtually ground to a halt, according to ONS data (Office for National Statistics) *. The data showed that as of 2016, a female baby born in the UK would on average be expected to live until 82.9, while a boy would be predicted to live until 79.2.
Although cancer survival is at a record high and smoking rates are at an all-time low, every 2 minutes someone in the UK is diagnosed with cancer and every 4 minutes someone in the UK dies from this disease**. Shocking as these statistics are, this is now the harsh reality of cancer in our day and age and despite on-going research, there are more than 360,000 new cancer cases reported in the UK every year – nearly 990 every day (2013-2015).
Whilst most of us don’t think twice about insuring our homes and our cars, worryingly, only one in four UK “main household earners” have a life insurance policy in place according to the Association of British Insurers ***. We may all feel that “it’ll never happen to me” but if something does, the impact of not having insurance can add to the stress and shock of receiving that news.
The research by comparison website MoneySupermarket.com showed that more men than women have Life cover, with 45% having a policy in place compared to 38% of women. Women often work part-time or opt to take a career break and stay at home to bring up children, so if they fall ill, or worse, this could effectively wipe out the family childcare, meaning the father would need to take time off work to look after his children. This is especially significant when a child is ill or has a long-term medical condition that requires full time care. Critical Illness (CI) insurance can provide a form of security as it pays out a tax-free lump sum on the diagnosis of one of a number of serious illnesses; this can apply to both the parents and children, as a parent can add their children to their own CI policy providing some financial peace of mind at such a difficult time.
Just one in five women have CI cover in place, compared to one third of men, according to research by comparison website ActiveQuote.com**** with only 13% of women with dependent children choosing to be covered, according to insurer Scottish Widows. They found 40% of mothers have life insurance cover, yet a critical illness claim is far more likely. The importance of taking out private CI cover grows with more women working part-time, not at all or being self-employed meaning they won’t have protection benefits through an employer.
With regard to Life cover, your policy pays a one-off payment to your dependents when you pass away and there are no income tax or capital gains tax liabilities on the proceeds. However, all proceeds that fall into your estate attract potential inheritance tax liabilities. This is chargeable at 40% after the nil rate band is taken into consideration. it is therefore recommended to set up a life insurance policy within a trust so that the proceeds do not form part of your estate.
One particular use of life assurance is for the payment of inheritance tax. For a married or co-habiting couple, this is set up on a “joint life second death” basis and placed in trust for the beneficiaries. The type of policy used for this purpose is usually a “Whole of Life plan”. By covering the expected amount of inheritance tax with this policy, the entire value of the estate can pass to the designated beneficiaries.
It is always recommended to seek independent financial advice when planning critical illness cover, life assurance cover and for estate planning. Protecting your family is critical as no-one knows what is around the corner for them health wise.
If you would like financial advice on the different Life Cover and Critical illness policies or Whole of Life policies covered in this article; please contact us at [email protected]
NLP Financial Management Limited is authorised and regulated by the Financial Conduct Authority. Estate planning is not regulated by the Financial Conduct Authority.
The British College of Osteopathic Medicine, located 50 yards down the road from our offices in Finchley Road, is internationally renowned as a leading specialist learning institution in osteopathy. It was one of the first educational establishments to be accredited, meeting the quality standards set by the General Osteopathic Council – the industry’s main governing body (GOsC).
Earlier this year NLP Financial Management were approached by BCOM to take part in their Undergraduate Masters in Osteopathy Course for their last year students, being both award winning and local Independent Financial Planners.
BCOM offer a course for their final year students to assist them in their financial education, before they branch out as associates in osteopathy practices or become self-employed. Receiving hands-on financial knowledge before they are qualified will give students a better understanding of how to plan not only their own personal finances but also how to run their business in a tax-efficient way and take advantage of pension and other financial planning opportunities.
This was the first time NLPFM had worked with the college and Adam Katten (Managing Director) is delivering two detailed lectures, the first one in October advised on the importance of financial planning and protection planning including critical illness and life insurance, the second lecture in March focused on pensions and investment opportunities.
Annie Osborne, BCOM final year student said “Adam’s lecture really opened my eyes to some important considerations for financial planning into the future. He helped us to reflect on factors such as income and critical illness protection that we hadn’t necessarily considered before. Thank you Adam, I’m really looking forward to part 2!”
The more educational institutions – and companies – that can provide this form of learning, the easier students will find it to manage their money and make it work for them. As they develop both their careers and their lives, fewer people will be left with extensive gaps between their current wages versus their projected retirement income, so can look forward to enjoying their later years.
Professional Adviser has recently announced their shortlists for its 2019 adviser and provider awards, which is now in its 14th consecutive year and we are delighted to announce that NLP Financial Management is once again a finalist.
The awards are designed to demonstrate excellence in both the financial advice profession and also within the wider financial services sector. We won the Adviser Firm of the Year (London) both in 2014 and 2018, having been shortlisted now for 6 years running – and we will find out at a black-tie ceremony held in the Brewery, London in February, if we have been successful for another year.
Being nominated as a finalist is a great accolade and reinforces our continued efforts to remain a leading firm of advisers.