The B word, Japan, and Timeless Wisdom

Nothing really to write about today. The personal finance world is quiet. Many planners have already all shut the doors for the year, safe in the knowledge that there is equilibrium in The Force. All is well in the world, and the gods of both tax and investment have been sated by our earlier sacrifices.

Or, you know, not that.

Quite the budget, wasn’t it?

Confirmation of pre-existing beliefs can be readily found online. It was either the worst thing since that dodgy Italian free kick in 2007, or a bit of a damp squib with the UK still a great place to do business.

I’m an optimist, and very much in the latter camp. Nothing really to do with the budget, and everything to do with the people, the ease of setting up, and our ability to carve our own path in the UK. I shall not be packing a bag for the tax-free hinterlands, and will instead shoulder on through the force ten gales, maintaining that sunny disposition that we Brits are so famous for.

Sorry, I’ll try and be serious now.

The short version summary is that advice is required now more than ever. Inaction could lead to, shall we say, “sub-optimal outcomes”. More on that later.

First, the positives. Tax free cash on pensions is alive and well. Tax relief is maintained at the current generous rate for higher and additional rate taxpayers. For a business owner looking to extract funds, pensions are the number one option for tax-efficiency. No limit on ISAs, capital gains tax didn’t get too extreme. Lifetime gifts survive for inheritance tax planning, as does the gifting from regular income exemption. All in all, nowhere near as bad as the rumour mill would have had you believe.

Yes, there were a few sore ones to take. CGT is up, but we all knew that was coming, and it wasn’t as bad as it could have been. Pensions being brought into the estate is also painful, yet unsurprising. Thankfully, it can be planned for. Clients of the firm, this will be a discussion point at your next meeting.

Salary sacrifice for companies is even more of an opportunity that it was previously. The marginal rate of corporation tax on profits between £50k - £250k remains too high (my view) at 26.5% (the formula used to calculate this is ridiculous, take my word for it), and anything that can done on this front is worth considering.

You can find our detailed summary here. If you’re in a rush, have a look at the handy planning points we have throughout the document, such as the one below:

This comprehensive document is given freely, without the often-seen requirements on marketing websites to “submit your email address so we can pester you 90 times a day, thank you”. Please share it far and wide with anyone that might find it useful.

Lots to digest.

Just in case the UK budget wasn’t enough for you all, we have a US election and a Bank of England decision on interest rates next week.

Lighter news

I’m in Japan at the moment with the family. What a place, and quite the cultural shift. Lots of bowing to one another – including the deer! – lots of lovely food, fantastic people, and very prompt trains. Poor planning saw us squeezed onto one of the Osaka rush-hour trains. You know the ones where there are people whose job it is to literally push straggling commuters onto the trains. An adventure and a half.

One of the things that surprised me is how clean Japan is, despite the fact that there are hardly any bins. It’s rude to eat in public here, you see, and even the tourists stick to the rule. There is next to no litter anywhere. The subway train floors were clean enough to eat from, never mind the spotless velvet (I kid you not) seats. The Japanese must be horrified when they visit London or NYC. 

Your respite is over – pension implications

Did you enjoy that little break? Daydreaming about a holiday, wistfully thinking of happy times? Well that’s gone now, and we’re back into the numbers. No rest for the wicked, and all that.

There is one thing I’d like to specifically highlight from the budget, and it revolves around pensions, which for many people is their chief investment/retirement asset.

The first thing to say is that these rules are not coming into effect until 2027 and there will be a lengthy consultation process. So, let’s wait and see how it pans out.

However, the fact remains that under the proposals there is one fairly nasty looking consequence from Wednesday.

If pensions are being brought into the estate, we must also be conscious of the change to income tax consequences for individuals pre and post age 75. For those under the age of 75, pensions – under the new proposals - will be assessed against inheritance tax (IHT) but paid free of income tax to nominated beneficiaries. That’s exactly how most assets are inherited at the moment. However, for those how pass away over the age of 75 the inheritance tax test will remain but any inherited pension will also be liable to income tax at the marginal rate of the recipient.

At its worst, this can create a tax charge of over 67% from the original value of the pension prior to death. Not fun, and not fair in my view. There is a point when the tax burden is too high, and we have reached that threshold here. Sound the klaxon and don the helmets. Fingers crossed common sense prevails and there are changes prior to implementation.

Assuming the rules did come in fully, where does that leave us? Should all tax-free cash be taken prior to the age of 75? Potentially, if the estate is going to be subject to IHT. Better to have the funds in the estate and suffer only 40% IHT than in the pension post-75 where they could suffer IHT and income tax. That’s like tunnelling out of jail only to emerge in a worse one.

Tax-free cash could potentially be used for gifting to younger generations or the funding of an insurance policy that would negate the inheritance tax implications. Lots to consider, and a reiteration of the earlier point that advice will be crucial.

I’m not suggesting any rash action. Quite the opposite. The house view here can be summed up as:

“Let’s wait and see what happens with the proposal. And if you’re significantly younger than age 75, it is largely as you were.”

 The cost of trying to time the market

In a media storm (when isn’t it, lately?), it feels nice to remind oneself of one of the timeless mantras of investment. As I have said on this medium before, attempting to time the market is largely a fool’s errand. You may get lucky once or twice, but doing it consistently is nigh-on impossible.

Not only that, but the consequences can be expensive. The good people at Dimensional Fund Advisors have put together this handy visual below:

Closing

So there we have it folks, it’s all nice and quiet on the western front.

See you next month for more of the same. No recommendations or good news section this month, as I am a little short of time and well, sometimes you need to focus on the big stuff.

All the best, and speak soon,

A

The compliance bit:

·        This newsletter is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.

·        The value of investments may go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.

·        The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

·        An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA.

A pension is a long-term investment and the value is not guaranteed. Any advice or considerations are personal to each individual’s circumstances