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How degree subject and university choice add value

How degree subject and university choice add value

Over 1.7m UK students will start a degree at a UK university in September. Many have made subject and university choices based on what they are interested in and also what they excel at. Research from the Institute for Fiscal Studies has shown how degree subject and university choice can add value; but also, that gender and social background have an impact on earnings potential.

In general women that are degree educated can expect to earn on average £250,000 more over their lifetime than non-degree educated women. For men the impact is smaller adding £170,000 to the average expected increase of lifetime earnings when compared to non-degree educated men. However, male graduates earn on average 8% more than female graduates one year after graduating, and the upward trend continues; after five years they earn on average 14% more than female graduates. The factor that is influencing earnings is not so much gender as it is subject choice. Women on the whole choose subjects that pay less, for example: psychology, nursing, creative arts, sociology; whereas men choose better paid subjects such as: computing, architecture and engineering.

When well-paid subject choice and Russell Group university choice are combined eg University of Oxford and Economics, or Imperial College and Engineering; graduates earn on average 40% more than graduates with humanities degrees (eg philosophy) from non-Russell Group universities such as The Open University.

Over time the earnings potential gap widens; male students of management studies, law, or economics that studied at the London School of Economics can expect to earn over £300,000 per annum when in their 30s.

Both male and female graduates from households where the income is over £50,000 will earn 20% and 14% more respectively than male and female graduates from households with lower incomes, by the time they are in their early thirties.

Despite ‘Love Island’ being a quicker route to wealth than Oxford or Cambridge – as reported in the Financial Times on 26 July – a degree does add value to earnings potential.

We would advise parents and grandparents that are considering funding further education for offspring to consult an Independent Financial Advisor.

Having the right level of protection assurances such as life, critical illness and income protection policies is important when considering a further education funding plan. As house value is changing fast in the current economic climate; revisiting mortgage terms including life assurance policies with a specialist IFA is recommended.

Cash ISA investments may have been made when children were young, very often they attract an initial fixed interest rate and then after a pre-set term fall back on the providers’ variable rate, which can be quite low. All investments including Cash and Stocks and Shares ISAs should be reviewed to check that they are performing as expected or as planned for.

Planning to fund further education for family members may coincide with retirement and Inheritance Tax planning.

We would recommend speaking to a retirement planning financial expert, and having prepared a budget plan of outgoings and income for the consultation (see our tips on How to prepare to meet an IFA). It is a good idea to consider goals and ambitions for the life-stage that is being entered, this will help the IFA to give specific advice so that desired outcomes can be achieved.

Please call our team of Chichester-based IFAs on 01243 532 635 to arrange a consultation.

To discuss pensions, retirement and investment plans (including ISA’s) with us please ask to speak to Richard Smith.

To discuss Life, serious illness, equity release (to provide for retirement income) and income protection insurances please ask to speak to Hamish Gairns.

To discuss mortgages and insurances please ask to speak to James Mayne.

Don’t lose out on 2017 allowances

Don’t lose out on 2017 allowances

The 2017-18 Tax year closes in just over a month, and it is important that you don’t loose out on any allowances. Here is a quick recap on what you are able to save:

  1. The Lifetime allowance on pension contributions is still set at £1m; however, from April 2018 it will be increased by £30,000 to £1,030,000. This is the first rise since 2010. The value of savings is tested when pension pots are accessed, on death, or at the age of 75. Tax penalties are incurred if pension savers exceed their lifetime allowance.
  2. ISAs are tax-free savings accounts for cash or stocks and shares investment savings. The total ISA allowance for 2017-18 is £20,000. The ISA can be a blend of a Help-to-buy ISA, an innovative finance ISA, cash or stocks and shares ISAs, or a the new Lifetime ISA. But the total amount saved must not exceed £20,000 in this tax year.
  3. More on Lifetime ISAs – launched in 2017 savers can invest up to £4,000 pa in a Lifetime ISA. The state will add a 25% bonus on top, which is paid until you reach 50 years of age. The maximum bonus is £32,000. To qualify savers would have to open an account on their 18th birthday and save £4,000 per annum.
  4. More on Help-to-Buy ISAs – designed to help first time buyers save for a deposit for a first home, these ISAs can be grouped by individuals to fund a house purchase. Individual savers can deposit £1,200 in the first month and then £200 per month thereafter. The state will top up 25% up to the value of £3,000 when the ISA is used to fund a house deposit. If the total Help-to-Buy ISA value exceeds £12,000 the state will still only top up a maximum of £3,000.
  5. We shouldn’t forget Junior ISAs which; replaced Child Trust Funds in 2011. Parent or Grandparents can save up to £4,128 per annum on behalf of a child. The savings can be a blend of cash and stocks and shares ISAs, however cash JISAs can be held with one provider only. Children are able to take control of JISAs aged 16 but cannot access the JISA until they are 18 years’ old.

What to expect in the Spring Budget 2018

The Treasury has moved to play down the Chancellor’s budget which; is to be delivered on 13 March. The purpose of the budget is to update the economic forecast for the UK, and the speech should take no longer than 15-20 minutes. Apparently there will be no red box, no official documents, no tax changes and no spending increases.

Relieved perhaps at this news will be landlords and landladies who have seen profit margins slimmed considerably with recent changes to property tax, and property finance tax breaks.  According to UK Finance there were 20% more buy-to-let mortgages in significant arrears in the last quarter of 2017, as compared to the last quarter of 2016. Coupled with this the biggest decline in homeownership is amongst 25-34 year old middle-income earners. The Institute of Fiscal Studies site the reason for homeownership shortage is that house prices have risen seven times faster than income growth for this group.

Good news for pensioners however, who come April 6, will have greater control over where and how they invest their pensions.

It is clear, with the fast changing UK economy, that individuals would be well-advised to consult a local Independent Financial Advisor about any financial concerns or queries that they have.

Please call our team of Chichester-based IFAs on 01243 532 635 to arrange a consultation.

To discuss pensions, retirement and investment plans with us please ask to speak to Richard Smith.

To discuss Life, serious illness, equity release (to provide for retirement income) and income protection insurances please ask to speak to Hamish Gairns.

To discuss mortgages and insurances please ask to speak to James Mayne.

Brains v brawn; is a university education worth the investment?

Brains v brawn; is a university education worth the investment?

As this year’s undergraduates prepare for university and parents and grandparents unlock savings to fund degrees, we ask: Is university education worth the investment?

Firstly – let’s take a look at university education costs:

  • From September 2017 universities in England and Wales may charge up to £9,250 (~$11,940) per annum for tuition fees. Standard degree courses last for three years bringing teaching fees in at a total investment of £27,750.
  • The introduction of two-year fast track degree courses has not reduced this three-year course tuition price as they cost £28,000 in total.
  • Average living costs are estimated at £12,000 per annum, though London prices are considerably higher. But, taking average living costs the total living costs for a three-year degree are £36,000.
  • The student loan interest rate was recently increased from 4.6% to 6.1% meaning that new under-graduates would pay an additional £5,800 in interest on tuition fees alone.
  • Assuming a standard three-year degree course with interest on tuition fees at 6.1% plus average living costs for three years that brings the sum of the total investment to £69,550.

Obtaining a degree in England can cost more than obtaining one from a state funded university in America, but lower cost tuition fees are applicable to in-state American students only. Otherwise tuition fees at American state and private universities are higher, in general, than those of universities in England and Wales.
Europe is an option for EU and for EEA members where over 30,000 international degree courses are offered. The average annual tuition fee for a BSc degree in Europe is: €4,500 (~£4,160) and for an MA it is: €5,100 (~£4,715) or around half what English and Welsh universities charge. In Germany and also in the Netherlands courses are taught in English and the cost of living is lower than it is in England or Wales.
But to return to our initial question:

Brains v brawn; is the outcome worth the investment?
Put simply – yes – graduates do earn more than non-degree qualified people.
However…
How much more graduates earn (in comparison to their peers) and
How soon they start to earn more than their peers does not have such a simple answer.

In addition to the Teaching Excellence Framework (TEF) – launched by government to assess the quality of teaching delivered by UK universities; the Department for Education (DfE) measures ‘education outcomes’ by analysing the income tax returns for graduates five years after they have graduated. The government hopes to add weight to TEF benchmarking by using DfE analysis of graduate earnings. Currently the majority of universities charge maximum tuition fees regardless of the subject studied or of the prestige of the academic institution.

The Economist has appended further ‘study data’ including: subject studied, which university the graduate studied at, the location of the university, school exam results, family income, age and whether or not graduates attended private school to predict ‘expected earnings’ and match that with actual earnings.

Here are the main take-outs of the Economist findings:

  • Graduates that studied a maths related subject (economics, engineering, medicine, veterinary science and maths) earned more;
  • Universities that selected under-graduates that had performed particularly well at school and also used selection criteria produced better-paid graduates.

By way of example dentistry and medicine graduates earn £47,000 per annum five years’ after graduating whereas creative arts graduates earn £20,000 per annum. The most selective universities produce graduates that on average were earning £40,000 per annum five years after graduating compared with non-selective universities whose graduates were earning £20,000 per annum on average – this regardless of subject studied.

Based on the Economist’s university impact on earnings analysis there is good news for universities local to Chichester-based MarchwoodIFA; Portsmouth, Bournemouth, Brighton, Southampton Solent and Chichester universities were all ranked in the top 15 for boosting graduate earnings, with Portsmouth university taking first place.

And how does a university education play out over time?
The main factor influencing later-life income is a degree qualification. The UK still favours services industries – finance, media, management consultancy and tech; where intelligence impacts the quality of service. Over a quarter of degree qualified 65-69 year olds are in employment, compared with 14% of the same age group that did not qualify beyond secondary school. In fact degree qualified 65-69 year olds are more likely to be in employment that unqualified 16-24 year olds.

The gap between rich and poor disposable income in retired households, grew by one third between 1984 and 2014; the same pattern of a growing rich and poor gap is true of working age households. This would indicate that investing now in a university education for a young person may well be a worthwhile long-term ‘future earnings’ investment.

As always, we would advise you to seek financial advice from your IFA.

To arrange a consultation with Marchwood IFA please call 01243 532 635. We have specialists that are able to discuss specific options with you.

To discuss retirement and investment plans with us please ask to speak to Richard Smith.

To discuss insurances and equity release please ask to speak to Hamish Gairns.

To discuss mortgages & insurances please ask to speak to James Mayne.

 

*British pound conversions to USD and to EURO as at 25 Aug 2017 published exchange rates.

Protecting nest eggs

Protecting nest eggs be they a pension, property, savings or other investments is of interest to most people that are in their 40’s and beyond. For one, the middle-aged are likely to have earned more than younger people which; means that they should have some investments that need protecting.

In the last 17 years the rate of pay (the number of people in work, divided by the number of hours that they work, and the income that they earn) has fallen from three to one. In addition the cost of living and inflation have both risen whilst interest rates on savings have fallen from 17% in the 1980’s to 0.25% now. This in turn has meant that young people have not had as much disposable income, and even if they did, putting savings in a bank account now yields a low return. The savings pinch has been felt in pension contributions, savings and investments and also in rising rent costs; as first-time buyers have struggled to save for a deposit and mortgage for a home.

The story for occupational or workplace and private pension enrolment is rather similar. Though private sector pension enrolment peaked in the 1960’s at around 8.1m, pension membership was at its lowest level in 2001 at 2.7m. The number of self-employed people has grown from 3.4m to 4.8m in the last 20 years, but private pension contribution has declined to 1:10 from 3:10 amongst this group. The age of guaranteed ‘final salary’ pensions which; was experienced by those born in the 60s and 70s is now over.

For those who are not yet retired private pensions are worth considering to top-up pension pots, here are some key points:

  • Contributions made into a pension are subject to tax relief.
  • A quarter of the pension fund value is available as a tax-free lump sum from the age of 55.
  • There is flexibility at retirement as to how you wish to draw your pension eg as an ‘income for life’ or perhaps as a ‘flexible drawdown’.
  • Flexibility with death benefits.

And for those who are drawing near to taking a retirement income, consideration could be given to protecting pension pots my making use of ‘Life styling’ options available on certain pension schemes. This allows the member to effectively de-risk their pension fund the closer they get to their nominated retirement age. This is done by moving parts of the fund over a period of time into more cautious investment areas such as fixed interest securities, gilts and cash.

The housing market has recently been described as static, by mortgage lender the Halifax and also by the Royal Institute of Chartered Surveyors (Rics). Average house prices have increased exponentially over time having been at £3,465 in 1966 and now being at £313,655 (Apr 2017). Though the government has launched first-time-buyer ISAs for homeowners, and the popularity of mortgages for the over 55’s is growing, there are still financial challenges for ‘rich retirees’ regarding insurances and protecting their inheritance whilst also enjoying later life.

There are a range of insurances to be considered:

  • Whole of life policies to protect investments until the end of life.
  • Convertible term policies for example to cover investments including mortgage final payments for a period of time.

And for would-be homeowners the help-to-buy or maybe a Lifetime ISA might suit.

  • To be eligible for a help-to-buy ISA the applicant must be saving up for a first home. The government will contribute up to 25% on top of savings up to the value of £3,000 on top of individual ISA savings totalling £12,000.
  • To be eligible for a lifetime ISA the applicant must be a UK resident aged between 18-39 years’ old. One lifetime ISA per person per tax year may be opened with a maximum investment of £4,000 per tax year. The government will top up savings by £1,000 tax-free, per tax year (25%); if you have saved £4,000.

Whatever your circumstances we would advise you to contact your IFA to obtain expert tailor-made advice. The fast paced changes of government and policy post Brexit means that the UK economy is a shifting landscape.

We are here to advise and help you on finance matters. Please contact one of our independent finance experts to discuss insurances, equity release, mortgages, ISAs, investments and pensions.

ISA allowance for this tax year FY16 runs out soon

ISA allowance for this tax year FY16 runs out soon

The end of the current tax year, 5th April 2017, is approaching fast; the opportunity for savers to invest up to £15,240 in an ISA (Investment Savings Account) will end at the same time. Savers can invest their annual savings allowance of £15,240 in Cash or in Stocks and Shares ISAs. From 6th April 2017 the individual annual allowance for Cash or Stocks and Shares ISA investments increases to £20,000.

ISAs explained

  • Anyone in the UK aged 16 or older;
  • Can save or invest up to £15,240 per tax year;
  • Without paying tax on interest earned on their savings, or paying reduced tax rates on investments including dividend payments;
  • Once money or individual company shares are invested in an ISA they remain tax free, or tax-efficient.

Cash ISAs explained

  • Cash ISAs are savings accounts that are tax free, there are two types of Cash ISAs – i) fixed ISAs where the money attracts a higher interest rate on savings but cannot be withdrawn, and ii) easy access ISAs where money can be withdrawn without attracting interest savings penalties;
  • Interest on savings for top paying easy access ISAs have consistently out performed easy access savings accounts over the last five years.

However the return on a Cash ISA investment is affected by rates of inflation (RPI) and also the interest rate on savings – Savings Rate. Since the recessions of 1999 and of 2008 the Bank of England has kept interest rates low to control inflation and to encourage economic growth, which means that both RPI and the Savings Rates have been impacted. Cash ISAs are not as attractive now, as they were in 1999 – see below.

Cash ISAs 1999-2017

April 1999, the landscape for cash ISAs is very attractive:

  • Average ISA Savings Rate 6.32%
  • Inflation (RPI) 1.60%
  • Tax Free Real Returns 4.65%

April 2017 the landscape is very different:

  • Average ISA Savings Rate 0.46%
  • Inflation (RPI) 2.50%
  • Tax Free Real Returns -1.99%

 Stocks and Shares ISAs explained

  • Investors can transfer current tax year Cash ISAs into Stocks and Shares ISAs, provided the whole amount is transferred.
  • Investors are also able to transfer any previous tax years Cash ISAs into Stocks and Shares ISAs without affecting the current tax year’s ISA allowance.
  • Stocks and shares ISAs provide investors with a way to invest individual company shares and money in a tax efficient The savings in the ISA can be invested in unit trusts, open-ended investment companies (Oeics), investment trusts, government bonds and corporate bonds where there is growth potential meaning that the value of the investments can go up. (Though past performance of stocks and shares investments is not a guide to future performance). Where investors pay higher or additional rate tax the advantages for tax-efficiency of Stocks and Shares ISAs is significant.
  • Spouses can inherit their deceased spouses ISA allowance regardless of their own tax and personal savings allowances.

Using your ISA allowance – up until 5 April 2017

  • If you haven’t yet taken advantage of a Cash or a Stocks and Shares ISA in this tax year, you still can up to the allowance of £15,240 and
  • For this tax year ‘without tax’ means that if your savings earn £100 in interest you will keep all of the £100.

Contact an expert

We know that personal savings allowances, inheritance tax, and other investments are subject to change come 6 April 2017.

For expert, friendly and considered advice about current investments, please contact Hamish Gairns or Richard Smith at Marchwood IFA.

hamish@marchwoodifa.co.uk or richard@marchwoodifa.co.uk

Autumn Statement

Chancellor Hammond in his Autumn Statement of 2016 mapped out the next decade as best he could. In contrast to former Chancellor George Osborne, where a keen eye was kept on national debt, Gross Domestic Product (GDP) and austerity measures post the great recession of 2008; Philip Hammond set out a period of extended borrowing, with a stop on welfare cuts and increased investment in businesses, transport and infrastructure.

 

All very well and good if you are an economist; but from a domestic perspective, a closer look at living costs, housing, technology, economic growth, business, transport and income will help to understand how the Autumn Statement will effect UK residents.

 

Living costs

The freeze on fuel tax is extended for the seventh year bringing an average annual car driver saving of £130 and an annual average van driver saving of £350.

There will be a further increase to Insurance Premiums Tax (IPT) from 10% to 12% effective from June 2017. This will effect: cars, homes and private medical cover insurances.

The average household is expected to pay an additional £51 in insurance annually. Measures have been announced to cut whiplash claims which; is expected to reduce car insurance premiums by £41 on average per annum.

Insurance industry experts have complained that this IPT increase follows two previous IPT increases, all of which have fallen in an 18month period. They expect that the rise in tax will increase premiums for 50m UK residents and have dubbed it “the stealth tax”.

 

Housing

As homeownership is in decline in the UK and private rent is increasing in price, the Chancellor has pledged additional funding to make housing more affordable for first time buyers, and also where there is significant housing demand.

Charging tenants fees for rented accommodation, (typically charges were made against tenants for reference and finance checks,) have been banned.

A fund of £2.3bn has been given over to Housing Infrastructure investment, a frequent blocker to planning permission being granted. The fund is to be allocated to open up sites for 100,000 new homes in high demand areas such as London and the southeast.

The construction of 40,000 affordable homes has received funding of £1.4bn. Funding for a right-to-buy regional pilot scheme will enable 3,000 housing association residents to buy their properties at a discounted rate.

 

Income, work and transport

As anticipated tax breaks are being given to the working population while some tax breaks are being refined to fund those that are working and Just About Managing (Jams).

Workers will be exempt from paying tax until they reach annual earnings of £12,500 or over.

Salary sacrifice; where employees are permitted to trade their salary for perks will be curbed but, ultra low emission cars, childcare and cycle to work schemes will be excluded from plans to scrap employee tax breaks.

Working families will be eligible for 30 hours a week of free childcare for all three and four year olds from September.

The National Living Wage is being increased from £7.20 to £7.50 per hour effective from April 2017.

Universal Credit the single monthly payment for people that are unemployed or on low incomes will be increased by £700m for an estimated three million families. Individuals will be paid £0.65, as opposed to £0.63, for every additional £1.00 earned by them through work over their work allowance threshold.

English local transport networks receive £1.1bn in funding, £220m for ‘pinch points’ on national roads, £450m to trial digital signaling on railways and £390m for development of low emission vehicles.

East West Rail receive £110m of funding and a commitment to deliver the new Oxford to Cambridge Expressway.

A new savings bond, with an interest rate of about 2.2% will be launched through National Savings and Investments. The bond will be available to those aged 16 and over, where a minimum investment of £100 and a maximum investment of £3,000 has been set. Savers must invest for three years. The new product will be available for 12 months from spring 2017.

New limits are to be placed on the reinvestment of pension pot savings. The new tax-free allowance falls from £10,000 to £4,000 in April, affecting all of those who would wish to take money from their defined contribution pension pot.

 

Technology

In an effort to boost productivity Hammond pledged £23bn to a new national productivity investment fund. Monies will be allocated towards technology and scientific innovation.

As part of Chancellor Hammond’s vision for the “UK to be a world leader in 5G” £1bn in funding goes towards 5G and digital infrastructure.

New fibre infrastructure will receive 100% business rates tax relief for the first five years.

 

Economic and business growth

Recognising the difficulties that start-up businesses face in funding Hammond pledged £400m for venture capital funds to unlock £1bn of finance for start-ups.

Noting the migration of workers to cities, more budgetary control and funding is being given to elected mayors and city-based Local Enterprise Partnerships (LEPs).

Taking £1.8bn from Local Growth Fund for English regions: £556m is given over to LEPs in the North of England, £542m to the Midlands and East of England, and £683m to LEPs in the South West, South East and London.

London will receive £3.15bn as its share of national affordable housing funding to deliver more than 90,000 homes, as well as full control over its adult education budget.

Corporation tax will be reduced from 20% to 17%.

 

Summary

In summary, though the UK will borrow £122bn more than predicted before the EU referendum over the next five years, growth forecasts and unemployment remain forecast as low but steady. Domestically there have been changes to pensions, income and wages, also insurance premiums which; effect the cost of living.

 

For expert financial and inheritance tax planning advice in fast-changing times, speak to a MarchwoodIFA expert.

Managing wealth – are the rich getting richer?

Managing wealth – are the UK’s rich getting richer or are the poor getting poorer?

A recent report released by Oxfam and global wealth manager Credit Suisse claims that the UK has the highest income inequality in the developed world. Here the richest 1% own 20 times more than the poorest 20%, and further, Oxfam point to a politically and socially marginalised Britain voting for Brexit. The Oxfam report is being used to pressure government over corporate reforms, however; prior to its publication, it was widely reported, immediately post-Brexit, that the UK’s older demographic including wealthy retirees had swung the ‘Out’ Vote. Which, rather conflicts with Oxfam’s wealth-gap and EU referendum vote conclusions.

Are we right to assume that the UK’s rich are getting richer?
Well, according to the Sunday Times’ Rich List the richest people in Britain have suffered the worst fall in fortune since the economic financial crisis of 2008. Those in the top 25 have lost from between 50-75% of their fortunes on average and the Queen doesn’t make it into the top 300 this year. The sharpest decline in wealth comes from those that had invested heavily in commodities markets. Those that have assets spread across property have retained high positions in the rich list. This is helped by the buoyant UK property market and high unaffordability of housing.

Property researchers JLL have noted that British house-builders do not build houses evenly across the house price range: from under £250,000 to over £1,000,000. In fact in 2015 under 5% of houses valued at below £250,000 we under constructed and less than 5% of houses valued at under £250,000 were completed. This compares to over 35% of houses valued between £250,001-£500,000 being under construction, and over 45% being completed; or 7% of houses valued at over £1m being under construction and 5% being completed. Meaning that it’s easier to source a house valued at over £1m in the UK than it is to find one valued at under £250,000. This would suggest that house-builders target the high-income over low-income.

Apart from property in the UK where do the wealthy invest their fortunes?
As we noted above since the economic crisis of 2008 commodities markets have been hard hit, and whereas Brazil and other parts of Latin America were once growth economies, because of their reliance on commodity exports, they are now economies that are in decline. However it is still the case that asset-management, looking after other people’s money, is lucrative. Global asset-management profits were worth $102b in 2014. Currently asset-managers look after funds totalling $78 trillion worldwide. In the UK changes in asset-management regulation in 2013 led to greater transparency over investment portfolios and how asset-managers commission or fees were paid. The US is set to follow suit, which means that at least in the UK asset-managed funds are ahead of the curve in terms of regulation. However, concerns were raised post Brexit by UK asset-managers over compliance with the Markets in Financial Instruments EU Directive (MiFID II). This piece of legislation is aimed at improving transparency across EU markets in the wake of the 2008 financial crisis, it concerns cross-border selling of products and services; and is due to be implemented in January 2018. It is yet to be seen whether this will affect the UK on going after Brexit.

The introduction of greater regulation and transparency over fees has given rise to low-cost competition in the form of private equity investment opportunities.

It is apparent that wealth management and investing wisely present challenges for individuals because of todays’ rapidly changing markets. Our advice is to make your first port of call your current financial advisor who should be able to guide you through your initial enquiries. If it is not their area of expertise, they will be able to recommend other financial experts accordingly.

For expert investment advice on mortgages, living inheritance planning, lifetime mortgages including equity release, pensions and ISAs contact MarchwoodIFA on: 01243 532 635.

Time is money and the money is yours

Saving and investment choices, where to save for the best return.

For many in the UK and other parts of the developed world, it has felt like savers are punished twice for investing money. Consumerist treats are forgone in favour of saving only to experience negative returns in real ‘after-tax’ terms. Since the 1990’s low savings interest rates coupled with lower stock market investment returns have driven this change. Low interest rates on savings and lower investment returns have also impacted company, or workplace pensions many of which are in deficit. So for both working families and developed world retirees (frequently termed rich…) the challenge of where to invest savings is ever present.

The majority of economists would argue that low interest rates are the result of too much saving. But, since the 2008 economic crisis interest rates have been kept low by the Bank of England. The hope has been to assist government budgets and austerity measures to keep inflation low, encourage trading and purchasing and to drive GDP (gross domestic product). According to the Economist ‘a “savings glut” means that the returns from investing have inevitably fallen’ – the double impact.

But has the 2008 crisis changed the way that people save?
Though Britain’s household-savings ratio (calculated as savings as a percentage of disposable income) reached a high of 12% in late 2012; in the fourth quarter of 2015 it was at 3.8%. This despite the average savings ratio being at 10% from 1963 to 2015*. Which means that this downward trend is unusual and possibly, in economic terms at any rate unhealthy. The other concern is that traditionally companies and businesses use the metric of household savings to finance expansion. But for much of this century UK corporations and companies in the developed world have been net savers. Perhaps companies like people are just being cautious about where and what they invest.

Is the choice as simple as savings accounts or stocks and shares investments?
Recently released findings from research where investment of cash in a best buy one-year deposit account was pitted against the return on investments in a stocks and shares tracker fund would suggest No – though it does depend on the length of time that the investment is made for. Paul Lewis, BBC Radio 4’s Money Box presenter found that over an 18-year period savings invested as ‘active cash’ in best buy one-year deposit accounts earned a 6% interest rate, whereas tracker funds returned a 5% interest rate on savings. However, savings invested for more than 18 years in stocks and shares tracker funds returned the highest interest rate. Critics of Lewis’s research have said that it is not feasible to move cash every year to best buy one-year deposit accounts, and that it leaves investors with little flexibility as regards accessing their savings. Their recommendation was that investors should discuss Investment Savings Account (ISA) options with an Independent Financial Advisor.

With savings and investments returning lower amounts is my money better invested in property?
Changes to stamp duties and the profitability of second homes in this tax year; mean that the answer to this question is not clean cut. However lifetime mortgages for the over 55’s are growing in popularity; and UK housing, particularly in London and the Southeast, is the most unaffordable globally, meaning that UK property can still be a good investment. We would advise you to book a consultation with your IFA and discuss the best saving and investment options that are available to you. If you are cohabiting we would advise that both of you speak to an IFA about investment options, one size, in our experience, most definitely does not fit all.

*Household Savings Rate – source the Economist based on ONS (office for national statistics) & Federal Reserve Bank of St. Louis figures.

Budget 2016 update

Budget 2016 update; good news for: savings, ISA investors, small businesses and landlords.

Savings and ISAs

In an effort to prepare for stormy economic conditions ahead the Chancellor has increased personal allowances, and the tax year savings limits on ISAs. He termed this “[acting now] so we don’t pay later”.

From April 2017:

  • A new Lifetime ISA will be available for adults under the age of 40. They will be able to contribute up to £4,000 per year, and receive a top up bonus of 25% from the Government. Funds, including the Government bonus, from the Lifetime ISA can be used to buy a first home at any time from 12 months after the account is opened, and can also be withdrawn from 60 years of age to help with retirement.
  • The total ISA annual limit will increase from £15,240 to £20,000.

Income, Corporation and Capital Gains Tax

Income Tax:

  • For tax year 2016/17 the personal allowance will increase to £11,000 and for 2017/18 it will increase to £11,500.
  • For tax year 2016/17 the higher rate threshold, the level after which taxpayers begin to pay 40% tax, will increase to £43,000 and for 2017/18 it will increase to £45,000. The higher threshold is expected to reduce the numbers of individuals paying higher rate tax.

Capital Gains tax changes from April 2016:

  • For disposals on or after 6 April 2016 the highest rate of capital gains tax for individuals will reduce from 28% to 20%, and the basic rate will be reduced from 18% to 10%

From April 2020corporation tax is to fall from 20% to 17%.

Housing, property and the digital economy

In order to encourage commerce, the Chancellor took several measures to support small business and micro-entrepreneurs. Osborne also introduced tiered stamp duty for commercial properties, and looked at funding to help with housing problems.

From April 2017:

  • Homeowners and landlords that let out their properties on economy sharing platforms like Airbnb won’t need to declare or pay tax on the first £1,000 they earn on the platform in the tax year. The same is true for other entrepreneurs that trade different services or products on other sharing economy platforms.

Speaking specifically to boosting a micro-entrepreneur economy the Chancellor said: “We’re going to help the new world of micro-entrepreneurs who sell services online or rent out their homes through the internet”.

From 17 March 2016:

  • The Chancellor has reformed commercial stamp duty introducing tiered payments which; are linked to the value of the property. The new rates will be 0% on properties valued between: £0 to £150,000; 2% on properties valued £150,001 to £250,000; and 5% on any property valued at £250,001 or more. The Chancellor said the new system would raise an extra £500m a year with only 9% of transactions paying more stamp duty than before.

From April 2017:

  • Small business rate relief will more than double permanently – from £6,000 to £15,000. The threshold for the higher rate business rates will also be raised. This will see 600,000 small businesses paying no business rates at all from April 2017.

Sugar tax and other duties

  • Osborne is increasing duty on tobacco but freezing taxes on home produced alcoholic beverages such as beer, cider, whisky and other spirits.
  • Fuel duty is to be frozen for the sixth year in a row.
  • The Government will fund longer school days for those that want to offer more activities including extra sport. The funding for extra sports will partly come from the sugar tax or levy on the soft drinks industry. The levy has been introduced because of the increasing problem of child obesity. The levy will raise £520m and will be assessed based on the level of sugar content in soft drinks that are produced, and also the volume of soft drinks sales.

Tax avoidance measures for large corporations and the public sector

  • Multinationals that over borrow abroad, and deduct the interest bills against UK profits to reduce their tax bills will be targeted, as will as other tax loopholes.
  • The Chancellor said that he will shut down disguised remuneration schemes, ensuring UK tax will be paid on UK property development, and also that he will change the treatment of remote gaming providers as regards tax.
  • Osborne also warned public sector companies that they will have to ensure their employees pay the correct tax; rather than allowing them an advantage if they are paid through personal service companies.

Funding increases

  • A fund of £115m has been allocated to help the homeless and those sleeping rough.
  • Spending on flood defences is to be increased by £700m funded by a 0.5 percentage point increase in the insurance premium tax.

Don’t forget the ISA allowances for this tax year end on 5th April – use it or lose it!
It’s not too late to contact a Marchwood IFA today, to arrange a consultation. Call 01243 532 635 for friendly up-to-the-minute investment advice.

Tax limits on Cash and Stocks and Shares ISAs explained

With the end of the tax year looming, we take a look at tax limits on Investment Savings Accounts (ISAs) and explain why cash, and stocks and shares ISAs are not dead.

ISAs explained:

  • Anyone in the UK aged 16 or older;
  • Can save or invest up to £15,240 per tax year;
  • Without paying tax on interest earned on their savings, or paying reduced tax rates on investments including Capital Gains tax;
  • Once money or individual company shares are invested in an ISA they remain tax free, or tax-efficient.

Stocks and Shares ISAs and Cash ISAs explained:

  • Cash ISAs are savings accounts that are tax free, there are two types of Cash ISAs – easy access where money can be withdrawn without attracting interest savings penalties and fixed ISAs where the money attracts a higher interest rate on savings but cannot be withdrawn.
  • Interest on savings for top paying easy access ISAs have consistently out performed easy access savings accounts over the last four years.
  • Stocks and shares ISAs provide investors with a way to invest individual company shares and money in a tax efficient way. The savings in the ISA can be invested in unit trusts, open-ended investment companies (Oeics), investment trusts, government bonds and corporate bonds where there is growth potential meaning that the value of the investments can go up. Though past performance of stocks and shares investments is not a guide to future performance. The way in which Stocks and Shares ISAs are charged (paid for) can vary investors should check rates with their IFA. Where investors pay higher or additional rate tax the advantages for tax-efficiency of Stocks and Shares ISAs is significant.
  • Any capital gains made from investments in Stocks and Shares ISAs are tax-free. However, the UK annual capital gains allowance is £11,100 for the 2015/16 tax year; meaning that Stocks and Shares ISAs will only offer a capital gains tax benefit if the owner realizes a return in excess of the Capital Gains allowance in a single tax year.
  • Investments in corporate bonds and gilts in Stocks and Shares ISAs, earn tax-free free interest, meaning a saving of 20% tax for a basic rate taxpayer, or 40% for a higher rate tax payer or 45% for an additional rate taxpayer.
  • Investors are able to transfer a previous tax year Cash ISA into Stocks and Shares ISAs without affecting the current tax year’s ISA allowance.
  • Investors can also transfer current tax year Cash ISAs into Stocks and Shares ISAs, provided the whole amount is transferred.
  • Spouses can inherit their deceased spouses ISA allowance regardless of their own tax and personal savings allowances.

 

Tax year 2015-16 (ends 5 April 2016)

  • For this tax year ‘without tax’ means that if your savings earn £100 in interest you will keep all of the £100 and
  • If you haven’t yet taken advantage of a Cash or a Stocks and Shares ISA in this tax year, you still can up to the allowance of £15,240

 

Following on from our recent article about the London and Britain housing market we are also taking a close look at the new Help to Buy ISAs which were launched for first time buyers to help them save for a mortgage deposit. The Help to Buy ISAs differ from other ISAs because the government will add a 25% cash bonus on savings between £1,600 and £12,000 to help first time buyers save more.

 

Help to buy ISAs explained:

  • First time buyer definition: A UK resident aged 16 or over who has never owned or had an interest in a residential property, either inside or outside of the UK, whether it was bought or inherited.
  • First time buyers can save up to £1,200 in the first month, and then £200 per month after that.
  • The £200 per month saving investment can be topped up if missed, but cannot equal more than £2,200 in the remaining 11 months.
  • The State adds 25% tax free to whatever is in the ISA when you use it for a deposit. There are two exceptions to this: there must be a minimum of £1,600 in the ISA, and, the maximum the State would add would be £3,000 tax-free on a £12,000 ISA. If the ISA is worth more than £12,000 it can be kept as a savings account.
  • The current scheme will pay out as described until December 2030.
  • The accounts are individual, meaning that so long as every account holder qualifies as a first time buyer (see above) couples, or groups of first time buyers can lump savings together when the time comes to buy.
  • It can be used for any UK residential property up to the valued of £250,000 (outside of London) or up to the value of £450,000 inside London.
  • Unlike cash ISAs (which can be opened every tax year) Help to Buy ISAs are exclusive meaning that you may only have one.
  • Though you cannot open a cash ISA in the same tax year that you open a Help to Buy ISA, you may have both types of savings accounts including stocks and shares ISAs so long as they were opened in a different tax year to the one in which the Help to Buy ISA was opened.
  • You can take money out of the Help to Buy ISA if you are not buying a property at present and enjoy usual cash ISA benefits.
  • It is worth transferring savings for a deposit into a Help to Buy ISA because of the State tax free allowance.
  • You will have to ask your conveyancing solicitor to apply for the cash bonus when buying a property and transfer the funds from the Help to Buy ISA.
  • Parents, guardians and carers can help their children to save for a mortgage deposit with a Help to Buy ISA, however, the child (age 16 years’ old or above) must open the account themselves and also qualify as a first time buyer.

We know that personal savings allowances, inheritance and capital gains tax, and other investments are subject to change come 5 April 2016.

For expert, friendly and considered advice about investments, please contact Marchwood IFA today.

To check that your investment portfolio has adequate protection, please contact Hamish Gairns our life assurance expert.

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