Financial Planning

The 12 months between the March 2020 budget and the one delivered on 3^rd March 2021 has been, to coin a popular phrase – “unprecedented.”  We have seen 3 lockdowns, the economy shrink by 9.9%, Coronavirus support measures costing upwards of £280 billion and a tragic death toll within the UK from a pandemic we simply never saw coming.

As a result, Government borrowing – the budget deficit – is expected to rise from a forecasted £55 billion to about £355 billion by the end of 2020-21. Meanwhile, national debt is already approaching 100 per cent of GDP at £2.1 trillion and could rise to 120 per cent of GDP during the first half of the decade according to the Office for Budget Responsibility (OBR).

The widely respected Institute for Fiscal Studies (IFS) warned late last year that around £40 billion of tax rises will be needed by the middle of the decade to keep borrowing down to £80 billion a year and debt down to 100 per cent of GDP, prompting intense speculation that they could come as soon as this Budget.

With the Conservatives having committed in their 2019 General Election Manifesto not to raise the rates of Income Tax, National Insurance or VAT, there was much speculation about where and how the Chancellor would start to recoup these huge losses and over what period of time.

Thankfully, the UK is feeling the optimistic effects of a robust vaccination programme which at the time of writing has seen more than 20 million people vaccinated against Coronavirus, with set dates in the diary for the pathway out of lockdown.

So what does this new Budget mean for you and your personal finances?  Read more in our highlights document and as always, if you have any questions about your financial goals, investments or portfolio please do get in touch.

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 January.

January 2021 Panel Performance Figures

Click here for further information on the investment management service we offer, or contact one of our consultants.

There are a number of tax wrappers available when building an investment portfolio, and this article explores what offshore bonds are, their tax treatment and how they can be effectively used in certain circumstances to invest tax-efficiently.

The advantages can be summarized as follows:

Managing Investment without Tax

An offshore bond is an investment wrapper offered by a life insurance company, held in a jurisdiction with a favourable tax regime, like the Isle of Man.  The funds grow in a virtually tax-free environment, in what is referred to as “gross roll-up”.  The gain on the bond is ultimately subject to income tax when a “chargeable event” occurs but in the meantime, you can buy and sell funds within the bond without paying tax.

Annual Tax Deferred Income

Investors can withdraw up to 5% of their original investment each year for 20 years, without incurring tax and unused allowances can be carried forward.  For example, someone investing £200,000 into an offshore bond could withdraw £10,000 per annum without any immediate tax liability.

Chargeable events include surrendering the bond, withdrawals in excess of the 5% tax-deferred allowance or the death of the life assured.  When such an event occurs, a calculation takes place to assess the tax liability and the gain is subject to income tax at one’s marginal rate.

Bonds are split into “segments”, and withdrawals can be taken by either encashing whole segments or across the whole policy, providing further flexibility depending on one’s circumstances.

Going Abroad

Offshore bonds can be effectively used when an individual retires abroad.  For example, someone who emigrates from the UK can potentially encash the offshore bond and avoid tax altogether!

IHT and Other Tax Planning

Parents may use offshore bonds to save for children, as they retain control of the investments until they feel it appropriate to gift them where importantly such gifts do NOT give rise to income tax.   Therefore, the option to gift part or all of a policy to a lower rate taxpayer can reduce tax on gains.  They can also be used effectively through the tax deferred withdrawals to fund school fees.

Investment Management

Many providers offer access to a wide range of investments within offshore bonds, including Discretionary Fund Managers, enabling diversified portfolios to be implemented to suit different risk profiles and objectives.  Bonds can sit alongside ISAs and Unit Trust portfolios as part of a broad investment strategy.  With a Unit Trust portfolio, gains above one’s annual exemption of £12,300 are subject to Capital Gains Tax, and whilst CGT rates have historically been lower than income tax, this may change in the next Budget, making offshore bonds an attractive alternative in certain cases.

In summary, offshore bonds provide tax-efficiency, access to the funds, broad investment opportunities and flexibility.  However, they can be complex and are not suitable for all investors, so it is essential to seek financial advice.

Elliot Gothold is a Chartered Financial Planner with NLP Financial Management Limited and can be contacted on 020 7472 5555 or at [email protected].

Our latest webinar, delivered on 11^th November, was focused on both Macroeconomic updates and Investment opportunities within our Sustainability portfolio.  It was in fact our first webinar hosted jointly by both businesses, as we benefit from a highly experienced investment analyst team who advise across the group.

The speed of the recovery in markets earlier this year was discussed, noting this was in contrast to previous crashes, being driven partly by  tech giants such as Apple, Amazon, Facebook etc who have seen their shares soar.   Monetary policy has pumped money into the economy alongside huge fiscal measures taken by the Government to support the UK, a move echoed by many other countries as the world rallied to battle the pandemic and support economies.

Our message throughout these last few months has been not to panic.  It’s important to stay invested during these times, as long term investors need to see through short term market volatility and we’ve seen that the markets have indeed recovered.

So what does the new normal look like?  The US elections have not caused any major changes so far, and markets have historically performed well under both Republicans and Democrats.  Brexit is looming on the horizon causing some peaks and troughs, however EU deals could see a rally in markets.  China is seemingly recovering following one of the strictest lockdowns as the pandemic unfolded.  And closer to home, there’s no doubt that cash use is falling and e-commerce is booming with sustainability becoming a far higher priority for many investors.

We provided an overview of actions we took within the last few months, which you can watch in our video, but our investment team have liaised with over 200 fund managers since the pandemic began and will continue to do so as the rest of the year runs its course.

We then discussed the case for Sustainable Investing, noting that this is one of our portfolios that has grown considerably.  Our climate is facing several challenges including plastic pollution and waste, where it is estimated more plastic will be in our oceans than fish by 2050 – a shocking statistic.  Temperatures are rising and our consumption is accelerating sharply, causing significant rises in diabetes.  Whilst investment was at already reasonable levels within healthcare, the pandemic has raised its own challenges with even more money being pumped into this sector.  This in turn drives opportunities to invest in healthcare markets.  Digitally speaking the transformation of tech use was stated as “two years’ worth of digital transformation in two months” by the CEO of Microsoft earlier this year.  Microsoft in fact, forms a foundational holding within our sustainability portfolio which incorporates 4 themes – sustainable innovations, secular trends, quality fundamentals and ESG (environment, society, government) ethos.

We believe sustainable Investing is resilient in terms of outperforming during downturns and we went on to cover how our Sustainable portfolio is broken down.  We also demonstrated how this portfolio kept up with the markets and held its nerve during the initial downturn in March.  We do believe there are positive opportunities ahead for investors within all our portfolios across both businesses, to fund positive change whilst providing attractive returns through a diversified approach and controlled risk – always within our safe hands approach.

The video of the full webinar can be viewed at https://youtu.be/ADTRerWFBrE

As part of our client review process, we review existing life insurance arrangements and often note that such policies are not subject to a Trust.

Putting a life insurance policy into trust has many benefits, in particular, protecting any pay out from inheritance tax.

I provide a brief overview of Trusts below.  If you would like to find out more about writing a Life policy into trust, please contact one of our Financial Planners, who can help you.

What is a Trust? 

A Trust is a standalone legal arrangement.

The owner of a Life policy (the Settlor) can arrange a Trust and apply it to their new or existing protection policy.  Once applied, the proceeds of any future claim will be paid into the Trust, rather than to the beneficiaries of the estate directly.

The Settlor can select Trustees, and in the event of a claim, the Trustees will distribute any proceeds to beneficiaries either immediately or at a later date.

How do I arrange a Trust for my life policy?

This is straightforward.  Most insurers can provide trust arrangements for their policies and we can advise on which Trust is most appropriate.  We can help you with the paperwork and outline the main considerations, such as appointing suitable trustees and beneficiaries.

In certain instances, it may be appropriate for a solicitor to arrange a Trust for you.

Why would I want to put my policy into a Trust?

• To avoid inheritance tax.  If the policy is not placed in trust, it is possible that the proceeds will be subject to inheritance tax.   The proceeds from a policy held in trust should not form part of a deceased person’s estate for inheritance tax purposes and there may be a significant inheritance tax saving.

• To avoid Probate.  If a policy is not placed in trust, the proceeds will not be distributed to beneficiaries until Probate has been granted, which can take time.   If the proceeds are paid into trust, probate is not required and proceeds can be distributed to beneficiaries much sooner.

• Keeping control. If a policy is not subject to trust, the proceeds may not be distributed in accordance with the wishes of the policyowner.  A Trust arrangement means that after a claim, the trustees can consider what the best options are in terms of distribution and can distribute proceeds accordingly.

What types of Trusts are there?

The two main types of life insurance trust are Absolute and Discretionary:

Absolute Trust:  You will select beneficiaries at outset and you cannot usually make any changes to the beneficiaries or their share, once the Trust is in force.

Discretionary Trust:  these are more flexible.  You do not need to nominate beneficiaries and their share at outset.

I wish to review my existing life policy and Trust arrangements?

If you would like us to carry out a review or just have a general chat around estate planning and protection, please do not hesitate to contact one of our Financial Planners.

NLP Financial Management Limited is authorised and regulated by the Financial Conduct Authority – FCA.  The FCA does not regulate trust advice.