Time is running out

Have you fully used your 2012/13 ISA allowance?

In times like these, every penny counts. Interest rates are at historic lows and rising inflation can erode our buying power. But one way to mitigate these effects is to shield savings from tax by investing through an Individual Savings Account (ISA).

A flexible ‘wrapper’

An ISA is not itself an investment – it’s a flexible ‘wrapper’ under which a wide range of investments can be made, and the proceeds are free of capital gains or income tax. You can choose from two types of ISA – Stocks & Shares ISAs (shares, bonds or funds based on shares or bonds) and Cash ISAs. Stocks & Shares ISAs are also known as Equity ISAs.

Your questions answered
The 5 April ISA deadline is fast approaching and, if you don’t invest by then, you will lose your 2012/13 tax year ISA allowance forever.

Here are answers to some of the most common questions we get asked about ISAs.

Q. What is an ISA?
ISAs began on 6 April 1999. With an ISA you are entitled to keep all that you receive from that investment and not pay any tax on it. You can save up to
£11,280 in the current 2012/13 tax year. A tax year runs from 6 April to 5 April in the following year. The ISA scheme provides different ways of saving to meet people’s different needs. You can plan for the short term or put your money away for much longer.

Q. What are the different types of ISA?
 There are two types of ISA: Cash ISAs and Stocks & Shares ISAs. In each tax year you can put money, up to certain limits, into one of each. Cash ISAs may be suitable for short-term savings, so that you can get at your money easily.

Stocks & Shares ISAs may be appropriate if you can afford to leave your money untouched for longer than, say, five years.

Q. Can I have an ISA?
You have to be aged 16 or over to open a Cash ISA, or 18 or over to open a Stocks & Shares ISA. You also have to be resident and ordinarily resident in the UK for tax purposes, or a Crown employee, such as a diplomat or a member of the armed forces, who is working overseas and paid by the government. The spouse, or civil partner, of one of these people can also open an ISA. You cannot hold an ISA jointly with, or on behalf of, anyone else.

Q. How many ISAs can I have?
There is a limit to the number of ISA accounts you can subscribe to each tax year. You can only put money into one Cash ISA and one Stocks & Shares ISA.
But, in different years, you could choose to save with different managers. There are no limits on the number of different ISAs you can hold over time.

Q. How much can I put into ISAs?
In the tax year 2012/13, which ends on 5 April 2013, you can put in up to £11,280 into ISAs. Subject to this overall limit, you can put up to £5,640 into a Cash ISA and the remainder of the £11,280 into a Stocks & Shares ISA with either the same or another provider.

So, for example, you could put:

£5,640 into a Cash ISA and £5,640 into a Stocks & Shares ISA; or
£3,000 into a Cash ISA and £8,280 into a Stocks & Shares ISA; or
nothing into a Cash ISA and £11,280 into a Stocks & Shares ISA

Q. What are the tax benefits of an ISA?
You pay no tax on any of the income you receive from your ISA savings and investments. This includes dividends, interest and bonuses. UK dividend income has been taxed at source at the rate of 10 per cent and this cannot be reclaimed by anyone. You pay no tax on capital gains arising on your ISA investments (losses on ISA investments cannot be allowed for Capital Gains Tax purposes against capital gains outside your ISA). You can take your money out at any time without losing tax relief. You do not have to declare income and capital gains from ISA savings and investments or even tell your tax office that you have an ISA.

Q. Can I put money into an ISA for my child?
Junior ISAs are a popular way for family and friends to build up tax-efficient savings and investments to help with the cost of university, provide a deposit for a house or simply give children a start in life. Any child resident in the UK qualifies who wasn’t eligible for a Child Trust Fund (CTF):

Children born on or after 3 January 2011
Children (aged under 18) born on or before 31 August 2002
Children born on or between 1 September 2002 and 2 January 2011 who didn’t qualify for a Child Trust Fund. Most children born between these dates did qualify for a CTF

The current maximum allowance per child per tax year is £3,600 and this will increase to £3,720 for the 2013/14 tax year. The account is held in the child’s name and a parent or guardian can open and manage the child’s account. Once a parent or guardian opens the account for their child, anyone, friend or family, is able to make a contribution up to the annual limit. No withdrawals are permitted until the child reaches the age of 18, at which point their account is automatically converted into an ‘adult’ ISA giving them full access to their investments and savings.

Past performance is not necessarily a guide to the future. The value of investments and the income from them can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.

Trust in your future

A renaissance period for investment trusts

Investment trusts have had to exist in the shadow of unit trusts for the past few decades. But in rising markets investment trusts generally outperform other funds and can deliver more stable, growing income streams.

Superior performance records
Investment trusts are in a renaissance period and are coming up on the radar of more people, far more than five to ten years ago. There is a lot more attention on the superior performance records of these trusts versus their equivalent open-ended funds.

Investment trusts can play a useful role in your investment line-up. They were born in 1868, are closed-end products listed on the London Stock Exchange and unlike their more popular rival, unit trusts, they have a fixed number of shares in circulation.

Broader economic market
You can buy these shares when the trust is first launched in the offer period or you can trade them on the stock market. Although a trust’s share price generally moves in line with the value of its investments, the price can be affected by a range of factors, such as demand from investors and the situation in the broader economic market.

Buying or selling shares when the price is below the value of the trust’s assets is called trading at a ‘discount’, while the opposite scenario of the shares being higher than the asset value means you’re trading them at a ‘premium’.

Increase your returns
In contrast to other types of fund, investment trusts can borrow money to boost investment. This is known as ‘gearing’. Although gearing can increase your returns when markets are on the up, it can exacerbate your losses if markets are falling. The more gearing the trust has, the more likely your gains, or losses, will be magnified. Gearing is one of the ways in which investment trusts have managed to beat their unit trust peers.

Aside from higher returns over the long term, investment trusts can provide a more stable, growing income. Whereas unit trusts tend to invest in equities or bonds, investment trusts have the ability to tap harder-to-access areas such as private equity.

Shopping and finding a bargain
The opportunity to buy a trust at discount is like shopping and finding a bargain you know is worth more than the price. But if you’re concerned about the price fluctuating or the discount widening even further, trusts tend to have ‘control mechanisms’ in place.

Historically, most investment trusts have traded at a discount and often traded at high discounts. Now, many have a discount control mechanism where the board can buy back the shares, which is a good thing, to ensure there are not discounts of 40-50 per cent.

Trading at a premium
On the flipside, if a trust is trading at a premium, it does not mean it’s worth writing off. You need to look at your time horizon. It’s less of an issue if you’re invested for ten years with a quality manager.

Investment trusts have tended to have lower charges, which can help to boost your gains over the long term. A major benefit of investment trusts is that they are usually cheaper than open-ended funds, and this should help to increase their popularity.

Past performance is not necessarily a guide to the future. The value of investments and the income from them can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.

Is 60 the new 40?

Retiring baby boomers are setting out a new model for later life

The UK is witnessing the march of a new type of retiree as the first post-war ‘baby boomers’ pass the old Default Retirement Age of 65. According to Aviva’s latest Real Retirement Report, more than one in three (39 per cent) over-55s are continuing to receive a wage and nearly half are intent on using their extra earnings to travel more when they finish full-time work.

Data from the latest census in 2011 showed there were 754,800 people aged 64 in England and Wales, and almost 6.5 million people are turning 65 over the next decade compared with 5.2 million in the previous decade. The spike is due to the post-war birth rate soaring when the armed forces returned from the Second World War, with the new-born generation dubbed the ‘baby boomers’.

Pushing back the boundaries
Allied with improved health care, more people are remaining active as they approach retirement age, and the report shows how they are pushing back the boundaries at work and in their leisure time.  23 per cent of 65- to 74-year-olds were still wage earners in December 2012, compared with 18 per cent when the report first launched almost three years ago in February 2010.

Fuelling the rise of income and savings
With 55 per cent of 55- to 64-year-olds also still in employment, compared with 41 per cent in February 2010, this trend looks set to continue as more baby boomers pass the age of 65. It has already fuelled the rise of income and savings among over-55s during the last three years. The typical over-55 now has an income of £1,444 each month along with £14,544 in savings (December 2012), compared with a monthly income of £1,239 and savings of £11,590 in February 2010.

Enjoying the fruits of your labour
Despite 80 per cent being concerned by rising living costs over the next six months (December 2012), the UK’s over-55s are determined to enjoy the benefits of extending their working lives. Nearly half (44 per cent) plan to use their extra time in retirement to travel more, while 42 per cent are focused on spending more time in their gardens.

Socialising is high on the agenda for many over-55s in retirement, with 37 per cent planning to invest extra time in their families and 33 per cent keen to socialise more with friends.

The most common motivation
They also have philanthropic intent: two-thirds (66 per cent) of over-55s would be interested in carrying out charity work or volunteering once they have retired. The most common motivation is to give something back to the community
(49 per cent) and to stay active by getting out of the house (48 per cent).

A new model for later life
It’s clear that the first baby boomers are setting out a new model for later life, and getting the most out of their improved physical health and the freedom to continue working for longer. Many people find that staying active in a job helps to keep them young at heart – with the bonus being that it boosts their earning and savings potential in the process.

The key to making the most of this opportunity is for people to start planning for their 60s and beyond well in advance. In this way, rather than accepting the old retirement stereotypes, you can have the freedom of choice about whether you continue to work or not, rather than feeling forced to carry on out of the demand to meet financial commitments.

Gender neutrality

New rules mean women could increase their pension income by over 20 per cent

The new 20 per cent uplift in capped income withdrawals will come into force on 26 March this year, and people could start to see the benefit of this uplift from the start of their new income year following that date.

New gender neutral rules
An income year is driven by the date a person first started taking income withdrawals from their pension. While people do not need to take any action for this uplift to take effect, women could see their income rise by over 20 per cent as a result of the new gender neutral rules, but they need to take steps to achieve this.

Changes to the maximum capped income calculation as a result of gender neutrality commenced on 21 December 2012. The factors that determine the amount of income withdrawals that men and women are permitted to take from their pension each year is now identical, which means the position for women has improved significantly.

Extremely beneficial for women
To benefit from the new gender neutral rates, an income recalculation point is needed for women. It could be extremely beneficial for women to take this action, especially if more income is needed to live on.

The 20 per cent uplift in pension income will happen automatically, However, women can now benefit from enhanced gender neutral terms, so if applicable to you, it is important you find out whether triggering a recalculation could increase your income even further.

Some pension schemes have the flexibility to recalculate the income annually, making it easy for women to take advantage of this enhancement. For those who are in a scheme that does not offer annual reviews, you could still trigger a recalculation by transferring new money into your capped income fund, but you should always seek professional financial advice to ensure this is the best option.

Top 10 tax tips

Tax planning checklist 2012/13 for you,
your family and your business

Make sure you take advantage of the wide range of year-end tax planning opportunities available this year. Here is our checklist of the main top ten areas to consider for you, your family and your business.

For myself AND my family I have…

Made the most of my 2012/13 Individual Savings Account (ISA) allowance

Taken advantage of increased pension contributions to reduce taxable income

Ensured that I have a tax-efficient gifting strategy

Used my annual capital gains tax exempt amount

Reviewed my estate planning and my Will

For my business I have…

Extracted profit from my business at the lowest tax cost

Made sure my staff remuneration packages are tax-efficient

Carefully considered the timing of asset purchases and sales

Recorded any appropriate constructive obligations in respect of employment awards

Planned the purchase of business equipment to take full advantage of capital allowances

Are you satisfied you are paying the minimum tax necessary? 

As everyone’s circumstances are different, we would be delighted to review yours with you so we can help you make the maximum tax savings. To discuss how we could help ensure that you are not paying any more tax than you absolutely need to, please contact us for further information.