How we can change your life this week

May 31, 2013

Much of human understanding of the world is built on models that attempt to recreate complex systems in a simpler form. This ranges from the reactions of the economy to a reduction in government expenditure to the effect of CO2 on climate change.

No model will ever be perfect as there are too many intricate relationships at play, but I am sure that most would agree that we are better to have some understanding of how these systems work than nothing at all.

Now let’s consider financial planning. It is one of those disciplines that, whether you are interested or not, it still applies to you. Every single person reading this blog will, in the simplest sense, have things they want to do, a number of years ahead of them, and an exhaustible amount of money flowing in and out.

timelineThere are different attitudes to this problem. Apathy is one. Some may not want to think about it because it will stop all of today’s fun.  Some may have a vague idea it will all work out. Some people may have fashioned a rudimentary spreadsheet in Excel to try and boil the situation down into hard numbers, but once the projections involve discounted values of future contributions and the timescale stretches out, things can get complicated very quickly.

At OAM, equipped with the market leading cash flow modelling software, Voyant, we can produce charts, projections, balance sheets and inheritance tax ledgers. We can put in key events such as weddings and the sale of a business. We can even kill you off next year, just to see what happens. We can tweak every assumption that lies behind the model to make it as realistic to your circumstances, and the wider economy, as is possible.

The level of detail is quite astonishing. Every change from HMRC on future tax rates are factored into models automatically, within days of announcement.

This week we made a big difference to a couple’s life, confirming that which they suspected: they don’t actually need to work anymore. They have accumulated more than enough to last comfortably until their assumed mortality age (itself selected by the client on the grounds of family history and the Office of National Statistics).

assetsIn the past we have helped clients assess their inheritance tax liability, choose between different redundancy options, set the amount of savings contributions required to pay for their children’s education and more.

As stated above, every model has its limitations, but it is worth coming to see us to gain some understanding of how your future looks rather than earning and spending money in the dark. And as we see confirmed every day when small tweaks are made to client’s plans, a change today can make life quite different in 20 years.

Malcolm Stewart

Share:

It’s financial planning, stupid!

April 8, 2013

As I write there have been a few tweets this morning about managers of active funds using index or passive structures for their own investments.

Not earth-shattering news probably, but does make you really question the real worth of active management at those prices if those who do it, won’t pay!

The thread of the tweets led on to question further where the current CEO’s of investment platforms invest their own money.

Do they put their own money where their mouths are?

We await the answer to that particularly thorny question…

All this idle speculation did lead me to consider whether or not these CEO’s (or fund managers for that matter) had actually submitted themselves for some financial planning in the first place.

One question begets another as they say. What would these CEO’s or fund managers actually consider as financial planning?

Would they approach their local bank manager, accountant, solicitor or would they seek out advice from within their own industry?

Would a plain ordinary IFA be the port of call or do they require something a bit more in keeping with their status?

Wealth Management (our current transatlantic term of choice) sounds so much more sexy and enticing than plain-jane Financial Planning and might be sufficiently high brow enough to attract the CEO, but what is it?

Well…its Financial Planning I think.

Which is what we do here. I had a discussion with Malcolm our Client Project Manager today about what Wealth Management actually means and we’ve agreed it’s Financial Planning.

It’s the heart of providing elegant, efficient solutions to making sure you get the best from your money, making sure it goes to the right people when you’ve gone, and that your family won’t be compromised if you die early.

Tax efficiency and legal structures that avoid challenge are provided too.

In other words, a Financial Planning service that takes care of all your current needs and will adapt as your circumstances change in time.

We won’t be getting to carried away with changing our terminology on the website but for all you CEO’s and fund managers out there, before you get concerned about active v passive or if you should put your own money onto your own platform, please see us for some Wealth Management or our particular version which we like to call Financial Planning.

Oliver Asset Management. We do Financial Planning.

Roland Oliver

Share:

Budget 2013

March 22, 2013

George Osborne budget

George Osborne revealed his mid-term budget on Wednesday 20th. Here is our summary of the most relevant points for your future financial planning:

Inheritance tax – As mentioned in our blog recently, the amount of an estate that can be passed to the next generation tax free will remain at £325,000 until April 2018 (anything above being taxed at 40%). Another 5,000 estates are expected to become taxpaying estates by this time. If this is you, careful use of allowances today can reduce your bill.

State pension – this will rise by 2.5% to £110.15 per week. The Basic State pension and State Second Pension will be combined in April 2016 to a flat £144 per week (in today’s money). This should make it easier to plan for the future.

Pension drawdown – From Tuesday 26th March capped income drawdown rates will rise from 100% to 120% of GAD. While this could be useful for those of you that need more income, please be aware there is no guarantee your pension fund can sustain this. GAD is also set to be overhauled which should lead to good news in the future.

Capital gains tax allowance – the amount of gains that you can make on disposal of assets before having to pay tax increases to £10,900 for 2013/14. The rate remains at 18% for non and basic rate taxpayers, 28% for higher rate taxpayers.

ISA (tax free savings vehicle) – The stocks and shares ISA allowance will be £11,520 and the cash ISA allowance will be £5,760 in 2013/14. Please contact us for details of how you could use these depending on your circumstances. If you are yet to use your £11,280 allowance for 2012/13 contact us ASAP!

Income Tax – The personal allowance, currently £8,105, will increase to £9,440 in April this year and then £10,000 in April 2014.

Pension allowances will be cut next year – Personal annual contribution allowance down from £50,000 to £40,000 and lifetime allowance down to £1.25m.

Abusive tax avoidance – The Government will publish a report on how it will tackle tax avoidance and evasion this week. Needless to say, any tax mitigation strategies recommended by OAM are not abusive and are a key part of good financial planning.

That concludes our non-exhaustive list of points to be taken from Wednesday’s budget. The above points are based solely on our understanding of intended HMRC rules and should not be used to influence planning decisions on their own.

If you are a current client and require any clarification on how the above might affect you then please get in touch.

If you are not, then we would be happy to give you a second opinion on any aspect of your planning. There’s never been a better time to contact us.

Malcolm Stewart

Share:

Inheritance Tax Nil Rate Band to stay at £325,000 after all

February 15, 2013

After the last budget we had been expecting the inheritance tax nil rate band to increase from £325,000 to £329,000 in 2015. This has now been set back to 2018, by which time it will have been frozen for 10 years. This means the potential saving of £1,600 per estate (40% of £4,000) in each of those years is lost.

The extra tax revenue for the Government will go towards paying for the imminent capping of long term care costs at £75,000.

These two decisions together form an interesting blend from an advice point of view.

The introduction of the cap is designed to encourage individuals to begin saving towards the possibility of needing care in later life. Long term care costs are currently both unpredictable and uncapped, and as a result there’s been little focus on saving for it. When a target is both unknown and unlimited it is hard to turn it into a realistic goal.

The cap will allow planning with greater certainty and with a known funding target. In addition, if care isn’t needed, individuals would still have access to their savings or they could be passed on through their estate.

So, from a holistic advice point of view, it makes sense to mark this down as something to work towards.

In terms of the change in the planned IHT band, careful planning can more than offset the £1,600. The use of allowances and exemptions over time, for example regular income gifts or one off larger gifts can help wealthier clients stay on track to minimise or remove inheritance tax as a problem. Of course this is better started sooner rather than later, as these allowances do not accrue year by year.

If you have any questions about planning for later life, be it covering the costs of long term care or passing your estate on to the next generation, please get in touch and we will be happy to advise.

Share:

Modelling Your Estate and Inheritance Tax

November 30, 2012

We are currently carrying out a large exercise for a client to ensure that the inheritance tax on her estate is mitigated as much as possible.

As well as taxation and trust work, the use of our cash flow modelling system has become an important part of this.

We are able to enter all of the client’s assets into the system and simulate an immediate estate scenario (a nice way of putting it!). This provides balance sheet style view of everything that needs to be taken into account, and performs the appropriate calculations. Any beneficiaries of the estate can also be entered into the planning, as well as potentially exempt transfers.

Please click on the image below for a basic example of this.

In this case, the estate will be distributed to two children, John and Jen. The system automatically collects anything that would be part of the estate and performs the calculations. This can be as simple or as complicated as necessary to correctly simulate your planning. The detail can drive down into the way certain policies are set up. For example, the Whole of Life insurance policy that the example client above holds is written in trust, and therefore the payment is outside of the estate.

The example above shows one solution in inheritance tax planning, whereby the £100,000 Whole of Life policy in trust pays out enough to cover the inheritance tax charge of £94,140.

For a detailed look at your inheritance tax position and to see what we can do for you please get in touch.

MS

Share:

Modelling Your Legacy

August 21, 2012

As part of the Wealth Management service we offer a comprehensive look at your entire financial position. If you have significant assets, an important part of your planning is the future of your estate in the event of your death. This entails the obvious legal aspects such as having a will prepared but also how exactly these assets are arranged.

The basic things to consider are as follows:

– Inheritance tax is only due if your estate – including any assets held in trust and gifts made within seven years of death  is valued over the current inheritance tax threshold (£325,000 in 2012-13 tax year).
– Tax is paid at 40% on the amount over this threshold
– Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies – to as much as £650,000 in 2012-13. Their executors or personal representatives must transfer the first spouse or civil partner’s unused Inheritance Tax threshold or ‘nil rate band’ to the second spouse or civil partner when they die.*

Step one when producing an estate solution is to model your complete financial situation. This allows us to not only calculate what your immediate legacy or joint immediate legacy is, but also what it is likely to be factoring in rates of income and expenditure, as well as growth and inflation over time.

With this in place we can firstly analyse whether there is an inheritance tax liability at all. If there is, we will also be able to quantify just what this liability is and also, if desired, designate the estate split amongst other members of the plan.

The planning can be as detailed as appropriate

 

The calculations are presented in a detailed report. Once the liability is recognised we can then start to prepare what the best solution or solutions will be in discussion with the client, from gifting strategies to whole of life insurance policies.

You don’t have to be planning on leaving an inheritance to make the most of these tools. For some clients we have been able to take a different approach; how much can they afford to spend annually to make the most of their assets and gradually exhaust them? By adding in an arbitrary expense we can make an estimate. We can carry this out on a worst case scenario basis as well.

In this scenario we see liquid assets gradually being used up over time.

 

This approach takes a lot of the uncertainty out of inheritance tax planning and is of great benefit to our clients in this stage of their lives.

If you feel that this side of your planning hasn’t been looked at appropriately please get in touch. We offer a free second opinion service to anyone unsure about their current plans.

* Legislation from HMRC correct at the time of writing.

Share:

The Lost Generation

February 21, 2012

There have been two recent conversations of late that serve to illustrate the worrying lack of understanding of how much retirement might cost.

The first was from someone wondering how we might get more income from his retirement pot.  Put more money in I said, not entirely tongue-in-cheek.

Secondly, a young woman said she would save what was left of her income once her bills were paid and her “fun” money was set aside.

I’m not sure you can owe your pension plan the contributions, but you get the picture.

This from the MetLife 2011 Retirement IQ:

“2011 shows a significant increase of respondents who say that the greatest financial risk facing retirees is longevity. Sixty-two percent of respondents answered correctly in 2011, compared to 56% in 2008, and 23% in 2003.”

I’m genuinely concerned that our mighty Financial Services industry has not managed to get the message to the public that you need to plan to stop work and that you’ll need money to do it.

It’s a pretty simple concept and to take more from the MetLife’s Mature Market Institute research, even if people are prudent, sensible and save for retirement, longevity and market risk are leading to generations that will run out of cash before they have the good grace to die.

Whichever way you slice it, a large dose of reality has to be brought to bear when doing retirement planning for clients.

Wealth modelling plays a great part in determining the numbers, (Voyant is our system of choice) but it has really struck me that we, as financial planners, have a huge burden of responsibility to make clients aware of what’s involved in getting to your “number”

Taking this a stage further I got to thinking about whether we work with our clients, for our clients or do we take orders?

I’m sure we are more in category one and two rather than three, but it requires a genuine want to get involved at much more personal level.

David Jones of Dimensional Fund Advisers recently mentioned to me the idea of the one number on the fridge door that should anything happen to the couple, the family could ring the phone number and person on the other end of the phone would understand and be able to sort out the financials.

Does your current financial adviser educate you, train you and make you do what you need to get to retirement in the shape you need to be?

And is he or she your trusted number on the fridge door?

I know Shane Mullins of Fiscal Engineers of Nottingham is rightly focussing on the “trust” part of the relationship between client and adviser and I too believe that this is the key part of our makeup.

I await his tweets with further interest.

So what am I saying?

Guiding clients to retirement requires reality, discipline and commitment from clients and a desire from the adviser to understand the client and their family’s needs and be seen as someone who can be trusted to deliver the plan.

We can’t get to the numbers until we put the time in to establish a relationship with the client that’s based on mutual respect and understanding.

So when your adviser tells you to put more money into your retirement plans because he thinks it is a good idea and it will benefit you and not him, you know you’ve got the right man and can post his number on your fridge.

We need to make the public understand that there is a big difference between going to see someone who will sell you a pension (insert you own local favourite or bank here) to working with trusted adviser who will have a genuine interest in helping you retire in good shape.

One final point; MetLife research would point to income guarantees being very important in retirement for clients and with the continued erosion of annuity purchasing power, is this the way forward?

0131 273 5202 – Cut out and stick on fridge.

Roland Oliver

Share:

Do You Have A Large Pension?

February 10, 2012

Urgent Action Needed by the Deadline – 5th April 2012 

Who does this concern?

Anyone who expects their overall pension value to be above £1.5m by the time it is crystallised.

Individuals in final salary pensions schemes who are expecting pensions of £65,000-£75,000p.a.

What is happening?

From April 6 2012, the Lifetime Allowance (LTA) – the overall maximum that can be drawn from a pension fund before tax penalties are imposed – will fall from £1.8m to £1.5m. Any pension benefits over and above the LTA will incur a tax charge of 55% for a lump sum and 25% plus income tax for regular payments.

However, the government has softened the blow for those currently expecting their benefits to be worth more than £1.5m by allowing individuals to lock into the current £1.8m limit.

How?

They must apply for fixed protection with HMRC.

Downside

  • You cannot start a new arrangement other than to accept a transfer of existing pension rights
  • You cannot have benefit accrual
  • You will be subject to restrictions on where and how you can transfer benefits

What are the consequences of not having fixed protection?

If you take a lump sum having exceeded the LTA, the tax charge is 55%. If you take the benefits as income, the charge is 25% plus income tax at the member’s marginal rate.

For more details please contact us forthwith!

Share: