In Focus: ISA and Pensions Special
Events overtook us, and it’s certainly the case that what’s happened in recent weeks has had results for the financial markets that few could have...
<big>Your quarterly financial planning
<b>ISA and Pensions Special
Welcome to the latest edition of <i>In Focus</i>. This special issue is dedicated to helping you make the most of your ISA and pension savings.
But first - a letter from the Editor, in light of recent events.
We prepared this In Focus special edition a few weeks ago with a view to publishing it in time for the end of the tax year.
Events overtook us, and it’s certainly the case that what’s happened in recent weeks has had results for the financial markets that few could have foreseen only months ago.
Many people are, or will be, affected by the coronavirus pandemic and its consequences will be felt in many sectors. At Punter Southall Aspire we’re adjusting to this new way of life and you can read more about that, and our resources for businesses and individuals affected by COVID-19, here.
Yet in the midst of the pandemonium in stock markets, there may be some investment opportunities for those in a position to take advantage of them. If that’s the case for you, then why wait until next year to get the best deal from your allowances in 2020-21? By acting now, your savings and investments may well thank you in 12 months’ time, once the coronavirus crisis has (we hope) passed.*
In the meantime we hope you’re staying safe and well, and look forward to seeing many of you in person again soon.
And of course, if there’s anything financial you’d like to discuss with us please get in touch - we’d love to hear from you.
Managing Director, Retail Advice
Punter Southall Aspire
*Bear in mind that the value of investments and any income they generate can go down as well as up, meaning you may not get back what you invest.
Why wait until March 2021?
Start your 2020-21 tax planning now
ISAs - How to take full advantage in 2020-21
As you know, the UK tax year runs from April to April.
What isn’t as commonly known, however, is that April also represents the cut-off point for many unused tax allowances. Take your ISA (individual savings account) as an example. At present, you are allowed to save up to £20,000 per tax year into your ISA(s). The money you place into this “wrapper” is then shielded from tax. If your ISA generates interest, for instance, then this will be tax-free (even if your earned interest outside of your ISA has exceeded your £1,000 Personal Savings Allowance). The same applies to dividend income earned or capital gains made from your ISA investments.
Just as any unused ISA allowance for 2019-20 will have expired by the 6th April 2020, the same will apply at the end of the next financial year (unless the rules change). You will be unable to “carry over” any unused allowance into the 2020-21 tax year. So, if you want to avoid trying to frantically scramble any assets together at the nth hour in March 2021, consider already making a plan for the year ahead. Speak to your financial adviser about how to gradually leverage your ISA allowance across the tax year, if you are able to do so. Consider the impact that would have over ten years, where one might accrue up to £200,000 in tax-free savings and investments!
Pensions & 2020-21
There is still a perception in the UK that retirement could be funded later in life; perhaps using the proceeds from selling a business or second home. Such plans are often complicated by the UK’s annual allowance rules, which in 2019-20 limit each person to contributing up to £40,000 (or up to 100% of their earnings) into their pension per tax year. This isn’t to say that a future house or business sale couldn’t form an important part of a retirement plan. However, it might not necessarily be the most tax-efficient strategy in the long term.
Similar to the ISA situation outlined above, moreover, the 6th April 2021 arrives the opportunity to contribute up to £40,000 (or 100% of your earnings) for the 2020-21 tax year will close. You then have another twelve months to make use of your new annual allowance. For higher earners in particular, it’s important to not miss the opportunity to make important decisions in the coming weeks which could have a big impact on your lifestyle in retirement.
Remember, the benefits of contributing to a pension are significant.
Under current rules, Basic Rate taxpayers receive 20% tax relief on their contributions, whilst those on the Higher Rate benefit from 40% tax relief. For the latter, therefore, for every £100 you put into your pension the government will give you £40 extra (i.e. £480 per year).
This tax relief can add up to significant wealth growth over the long term, even when excluding growth from the compound interest generated by your investment returns.
The good news with your pension annual allowance is there is slightly more flexibility than your ISA.
Under the current rules, you are allowed to carry forward any unused allowances from the previous three tax years subject to not contributing more than 100% of earnings. However, bear in mind that this still means that April 6th represents closure on any unused allowance from four years ago. So if you have a large sum of spare cash sitting in a regular savings account (e.g. from recently coming into an inheritance or selling a high-value asset), consider speaking with your financial adviser about whether any of this capital could be committed towards your long-term future via a pension fund.
A practical example
To encourage you to take action well ahead of time this 2020-21 tax year, consider the following illustrative example (which assumes that the tax landscape is broadly the same as 2019-20).
Susan earns £140,000 per year in her senior sales job. She has already contributed £10,000 into her pension, which means she can contribute a further £30,000 for the 2020-21 tax year (assuming the money purchase annual allowance doesn’t apply). Susan also has £25,000 carry forward available from the past three tax years, which means she could contribute up to £55,000 before the 5th April 2021.
Assuming Susan can afford to commit the full gross amount to her money purchase pension (and her provider’s requirements allow her to do so), she will immediately get 20% tax relief at source, representing £11,000. Provided she submits a self-assessment tax return specifying her contribution, a £11,000 higher rate tax relief can be attained. From there, she can reduce her tax bill by a further £3,000 by reclaiming £7,500 from her income tax personal allowance.
Taken together, by acting before the 5th April deadline Susan achieves 45.5% tax relief.
For more help on making the most of your tax allowances, please do get in touch with one of our local advisers.
Planning for your life journey
Bringing financial advice closer to home
Planning for your life journey
When you look ahead to the future, what do you see?
Perhaps you envision paying off your house by your mid-50s, retiring early and then travelling the world with your significant other. Or maybe you visualise another goal.
With the current COVID-19-related turmoil in financial markets very likely to have affected your investments, it’s ever more true that whatever you imagine for your future, a sensible financial plan will be needed to help carry you there.
If you hope to leave a meaningful estate to your loved ones when you die, then you’ll need a strategy to build your wealth and optimise it for taxes.
Those wanting to generate a comfortable retirement income will likely need to build a sizable pension fund. In the more immediate term, you might hope to place a deposit on a house, get married and raise a family.
All these key life stages come with costs, and you will enjoy them more if you have the peace of mind that the money is there to cover them.
In this article, we outline the financial planning actions you can take to help you with each typical life stage.
Life stage 1: university
Starting from the very beginning with your life financial plan, most people will be immediately focused on their education. Not everyone will go to university, but it’s a good idea to consider planning for the costs regardless. After all, young people frequently change their minds about what they want to do with their careers. You might choose to attend university later in your career, and if you never go then your university savings could be put to great use elsewhere (e.g. a pension fund or a deposit for a home).
In 2020 university does not come cheap, even for Scottish students who can attend a Scottish university free of the £9,000+ fees faced by students elsewhere in the UK. Fortunately, home undergraduate students do not have to pay fees up-front, but your living costs still need to be addressed. Living costs vary across the UK, but a good starting point for accomodation, food and similar outgoings in 2020 is about £1,000 per month. You might be able to cover much of this through a Maintenance Loan, but higher-earning households are entitled to less financial support and are expected to contribute more towards covering their child’s living costs.
One option to consider at this stage of your life journey is the Junior ISA. Currently (April 2020), you are allowed to save up to £9,000 per tax year up until the age of 18. A good Cash Junior ISA might pay as high as 3.6%, and a Stocks & Shares Junior ISA could provide even higher returns (although your investments are at risk).
Life stage 2: buying a home
Once out of university, you will likely be carrying a lot of student debt. Try not to panic or focus on clearing it as soon as possible. However, remember that in 2020 you only start paying it back once you reach a certain level of earnings (e.g. £18,935 per year on 1998-2011 loans), and the debt is wiped after 30 years. As you start your career, therefore, it can make sense to turn your attention to saving for a house deposit.Of course, not everyone wants to buy a house and the necessary savings for a deposit vary across the country.
However, it is still very achievable and sensible for many people. Try to aim for at least 5% of the property price you are interested in. For a £100,000 flat, for instance, you’d need a minimum of £5,000. Bear in mind, however, that the higher your deposit the better the mortgage deal you are likely to secure.
Also, be careful not to neglect your pension or building an emergency fund during this time. Consider also investigating financial protection to help cover your new mortgage if you suddenly found yourself unable to work due to ill health or injury.
It’s worth considering whether the Lifetime ISA might be a useful financial planning tool as you start saving for a house deposit. Currently, you are allowed to save up to £4,000 per tax year into a Lifetime ISA and the government will contribute an extra 25%. The main condition is that you must either use the savings for a first home deposit, or after age 60 for retirement.
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Life stage 3: family
Unless you are quite certain it will not happen for you, according to national statistics there is a good chance you will settle down and start a family in your 20s or 30s.
This is a very important area of financial planning given the implications.
If you live with your partner/spouse, for instance, then having a child is likely to lead to a reduction in your household income at least for the first few years.
Here, you might want to consider expanding your emergency fund in case of joblessness. It’s also a good idea to draw up a legally-sound will to protect your loved ones’ assets, and to check that your financial protection covers the needs of your growing family.
Also, make sure you do not neglect your pension during this time. Stay-at-home mums, for instance, often stop making national insurance contributions as they take a career break to raise children, which can affect their state pension entitlements later.
Life stage 4: work & retirement
Much will likely happen in the decades between starting a family and getting ready to retire. Your children might start university, careers and families of their own. Perhaps you move home and change careers. Regardless, it’s important to keep your financial plan up-to-date and moving towards your goals during these years. During this time it is a good idea to continually develop your investment strategy, pay down any debts and ensure you always have an appropriate financial safety net in place. Even in your 30s and 40s, it’s wise to seek professional advice about your goals for retirement, and what kind of investment/saving strategy is needed to get you there. A good financial adviser will be able to help you with ascertaining your best options, and keep you accountable to ensure financial risks are minimised and that everything stays on track.
Those at (or approaching) this stage of life would do well to also evaluate the different ISAs available to help you achieve your financial goals.
If you are looking to provide a financial “leg up” to your grandchildren, for instance, then you might consider using a Junior ISA to help them save during their formative years of education. For yourself, you might want to factor a Cash ISA or Stocks & Shares ISA into your retirement planning, since these allow you to generate interest/returns free from tax and without affecting your annual allowances. For more financial planning considerations in the last 10-20 years of your working life, read our guide:
5 pension issues to consider in your 50s
Talk to us
Whatever life stage you are at, a conversation with a professional financial adviser will help clarify your requirements and help you understand what you need to achieve your aims. This is particularly true during times of potential financial stress such as the current COVID-19 pandemic.
You can get in touch with your usual Punter Southall Aspire contact via the link below - we’d love to hear from you, and we’re happy to help.
Pensions and ISAs
How they can work together to help you in retirement
Pensions and ISAs: working together in retirement
Looking at ISAs provides an excellent example, since along with pensions they form one of the best ways to save for your long-term future.
They provide options that help you keep as much of the money as possible, rather than watch it get whittled away by high fees, inflation and the taxman.
Both are intended to offer tax-efficient ways to help you save towards your future. But we come across a lot of confusion about how each one works, and how they can be used together to facilitate a desired retirement lifestyle. Many people put their faith solely in one or the other, when the best approach for most individuals might, in fact, be to use both in various combinations.
“Both-and”, not “either-or”
People planning for retirement don’t have to choose between a pension or ISAs.
They can both be leveraged in powerful ways, working together to achieve your goals. Broadly speaking, a pension boosts your retirement savings through attractive tax breaks, whilst an ISA allows you to grow your money without it being subject to tax.
An important caveat to this, of course, would be the Lifetime ISA (LISA), where the government contributes £1 for every £4 you commit. In 2020-21, you are allowed to contribute up to £4,000 per tax year into a LISA, and the government “top-up” represents a 25% “return” on your money. This rate of “return” is certainly hard to beat through investments elsewhere on the market and it beats the 20% tax relief on pension contributions offered to Basic Rate taxpayers.
Whilst it is great to know that pensions and ISAs work together and that you have choice in front of you, determining the best route for your needs and goals isn’t always straightforward.
After all, both ISAs and pensions have their respective advantages and disadvantages, and your life choices/events (e.g. when you hope to retire) might affect which strategy is best for you.
To briefly summarise how ISAs and pensions work, for the former in 2020-21 you are allowed to contribute up to £20,000 per tax year into all of your ISAs.
Any interest gained, dividend income or capital gains made within your ISA(s) are then free from tax. With your pension, you are entitled to put up to £40,000 per year into your pension funds (or up to 100% of your salary; whichever is lower). The government then offers tax relief on your contributions equivalent to your income tax bracket.
A Higher Rate taxpayer, therefore, would receive 40% on their contributions, allowing them to make a £1 contribution at a personal cost of only 60p.
So far, both options might sound great for retirement purposes. Yet different rules govern each product which are important to understand in light of your own goals and situation.
For instance, savings in an ISA can be accessed before your retirement (except for LISA savings not used on a home purchase; stocks & shares ISAs usually involve locking your money in for a few years). A pension, however, cannot be accessed until you reach the age of 55. If you feel you need the money sooner, for whatever reason, then it will be impossible to get hold of it.
This latter point is arguably also an advantage to pensions.
After all, it removes the temptation to withdraw money for a home improvement or other large purchase, which could result in an erosion of your income in retirement. However, this restriction could pose an obstacle if you are hoping to retire early, before the age of 55.
The other significant advantage of an ISA is the tax-shielding benefit.
Any interest, income or capital gains made within your ISA(s) are tax-free, yet pension income is subject to tax once it exceeds your personal tax-free allowance (£12,500 in 2020-21).
Suppose, for instance, that you commit £20,000 into your Cash ISA each year over 20 years. By this point, you could hope to save £400,000 which is completely free from tax. If you then withdrew 5% each year to facilitate your retirement income (i.e. £20,000), then it would not face any income tax.
Any interest, income or capital gains made within your ISA(s) are tax-free, yet pension income is subject to tax once it exceeds your personal tax-free allowance (£12,500 in 2020-21).
At this stage, the ISA might appear the clear winner. Yet pensions still have a big advantage in the form of tax relief.
Suppose you put £200 a month into your workplace pension over 20 years, and the government gives you 20% tax relief on each contribution. Without the tax relief, you might hope to save about £81,000 (assuming a 5% annual return on your investments - but as always you should bear in mind that the value of investments can go down as well as up, and you may not get back what you put in). With the tax relief added on, however, you could instead save over £97,000. For Higher Rate taxpayers, of course, the 40% tax relief will add up to a lot more.
Pensions also have an edge when it comes to inheritance tax (IHT). Whilst ISA savings will be counted as part of your estate for IHT purposes, a pension is excluded. This allows you to pass your defined contribution pension down to your loved ones, tax-free (unless you die after the age of 75, at which point your beneficiaries might face a higher income tax bill).
So which is better for retirement - ISAs or pension?
For many people, finding a sensible combination of the two can be the best way forward. This helps you to offset some of the weaknesses of each one, whilst accessing the strengths. In the end, much depends on your own goals and circumstances. If your overriding aim is to retire in your 40s or 50s, then the balance might lean more towards your ISA savings. However, if you want to focus on minimising a future IHT bill to pass more wealth down to your family, then a pension might feature more prominently as a retirement saving tool.
To discuss which option would be best for you, get in touch with one of our advisers.
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Which ISA is right for me?
A guide to ISA types, and how they can facilitate your financial goals
Know your ISAs: a guide to the ISA types available to you
As part of our ISA special this year, we wanted to provide a helpful guide to those wanting to understand how they work, and where they can sit within a wider financial plan. In 2020, you have more flexibility and choice with Individual Savings Accounts than ever before, so it pays to know how each one works and how to leverage the benefits to achieve more tax-free savings if you’re in a position to make use of them.
Stocks and Shares ISA
Innovative Finance ISA
How is an ISA different from a regular savings account?
Both a regular savings account and an ISA can be opened at a local high street bank (although the latter can be used elsewhere). Whilst the former is a useful place to store easily-accessible cash, an ISA allows you to benefit from important tax advantages. Not only is any interest generated on your money tax-free, but any investment income/gains are also free from tax as well (e.g. capital gains and dividend income).
The important condition in 2020-21 is that you are only allowed to commit up to £20,000 per tax year into your ISA(s). In addition, there are various types of ISA intended to address specific purposes, which we will turn to now.
This type of ISA is most similar to a regular savings account, as it allows you to withdraw as much as you like, at any time. In 2020, there isn’t a noticeable difference between the two with regards to which one pays the higher interest rate. However, one important difference is that any interest earned within your Cash ISA does not count towards your tax-free personal savings allowance (which allows Basic Rate taxpayers to earn up to £1,000 interest each tax year without facing tax).
This can make Cash ISAs particularly attractive to higher earners who want to save on tax.
Consider for a minute that a Higher Rate taxpayer will likely pay £40 tax for every £100 interest earned over their personal savings allowance (£500). This can lead many people to still favour using a Cash ISA for easy-access cash, even in cases where the interest rates are lower than a regular savings account.
Launched on the 6th April 2017, the Lifetime ISA (or LISA) allows you to save up to £4,000 per tax year. For every £4 committed the government will also contribute £1, providing a maximum £1,000 “top-up” each financial year. Over ten years, for instance, this makes it possible to attain a £10,000 bonus from the government assuming you keep saving the full amount. This all occurs apart from the interest and growth which will likely also occur within your LISA, which are free from tax.
The primary condition of the LISA is that any savings must be put towards buying a first home, or towards retirement (i.e. the money is locked away until you reach age 65). The 25% bonus is granted to your LISA savings until you reach age 50, and provided the rules remain unchanged the maximum bonus available is £33,000.
Be careful to note that a 25% penalty is incurred if you use your LISA savings for anything other than a first home purchase or for retirement. This withdrawal charge is not applied in tragic situations; i.e. if you die or are diagnosed with a terminal illness (with less than 12 months to live). However, the LISA rules do allow you to contribute to both a LISA and other types of ISA, and you’re allowed to move it to another provider if you find a better deal.
There are some other important things to note.
Each person is entitled to their own LISA. So if you’re married or in a relationship, you can have one each and combine the benefits! You must have had the LISA open for a minimum of 12 months before you can use the savings towards a property purchase, and the property must be valued at under £450,000.
It’s also a good idea to consult professional financial advice if you’re considering using a LISA to facilitate your income in retirement. Quite often a pension will be regarded as a better option, since LISA savings are made from net (after-tax) income; whereas pension contributions come from pre-tax income and are often boosted by employer contributions. However, a pension cannot be withdrawn early whilst LISA savings can be in the case of critical illness. Also, you are only allowed to take up to 25% of your pension as a tax-free lump sum from the age of 55. Under LISA rules, you have to wait a bit longer (i.e. until age 60) but withdrawals from LISAs are completely tax-free.
Looking to build up a tax-efficient set of savings for your child? If so, one option is to set up a Junior ISA on your child’s behalf (see our piece on Planning Your Life Journey), which allows you to commit up to £9,000 per tax year, tax-free. The Junior ISA comes in two forms - a Cash ISA (much like an ordinary Cash ISA) and the Stocks & Shares Junior ISA, which allows your child’s savings to be invested.
The account can be built up until your child reaches age 18, and the interest rate on the Cash ISA can be respectable with some providers offering up to 3.6%.
The rules were also updated in 2015 to allow people with a child trust fund to convert it into a Junior ISA (NB. the rates on the former tend to be lower).
It’s important to bear in mind that your child’s money will be locked away in their Junior ISA until they reach age 18.
So, be careful to have sufficient emergency savings outside of this account if you want to contribute to one. Also, please note that any unused allowance for the tax year (i.e. £9,000) is lost if you do not use it, so make sure to fully take advantage of it before the 5th April.
Any unused allowance for the tax year (i.e. £9,000) is lost if you do not use it, so make sure to fully take advantage of it before the 5th April.
Stocks & Shares ISA
An ISA doesn’t simply need to be about finding a tax-efficient place to store easy-accessible cash. You can also use it as an investment wrapper via a Stocks & Shares ISA. Here, you can invest in different funds, bonds and shares, and your ISA will be managed by an online platform or broker. Any capital gains or investment returns you make within your ISA(s) will be tax-free (although as always you should note that investments can go down as well as up)..
It’s a good idea to seek professional advice about finding the best deal if you are interested in investing through an ISA. Remember, the brokers/platforms which facilitate them charge fees for opening and keeping a Stocks & Shares ISA, and some will even charge you if you want to take money out, move capital across to another company or alter your investment set.
Innovative Finance ISA
Some higher earners might be interested in generating a return by lending money to other people or to businesses. Here, an Innovative Finance ISA could be an attractive option, since it allows you to engage in crowdfunding, peer-to-peer (P2P) lending and business lending whilst reaping returns and interest tax-free.
Bear in mind, however, that whilst your Innovative Finance ISA money might be protected from tax, it isn’t protected from risk. This type of investing, moreover, is widely regarded as higher risk due to the possibility that borrowers might default, or make late repayments. By seeking expert advice, however, you can help to mitigate these risks by diversifying your investments across a range of loans, thus shielding your portfolio in case one of your borrowers fail.
These are now closed to new applicants in 2020, but there are some important need-to-knows for people who already have a Help-to-Buy ISA. These ISAs used to allow you to commit £1,200 within your first month of opening it (£200 a month thereafter), and the government would provide a 25% “top-up” to your savings when you eventually used them towards a property purchase.
For those looking for a similar scheme, the Lifetime ISA outlined above will likely be of interest to you (since Help-to-Buy ISAs stopped selling to new customers on the 30th November 2019). If you currently own one, however, please note that you can only continue saving up to £200/mth into it until November 2029. Also, be careful not to forget that the 25% Help-to-Buy ISA bonus only applies to the deposit at completion (i.e. the mortgage deposit).
For the initial exchange deposit during the earlier stages of buying a property, you will need to rely on your own savings.
The property you purchase using Help-to-Buy must be valued at under £250,000 (or £450,000 if buying in London), and your solicitor must attain the bonus for you.
Also, be careful to note that if you have paid into a Help-to-Buy ISA during the present tax year, you will not be prohibited from also putting money into a Cash ISA. If you want to withdraw your money from your Help-To-Buy ISA then you can do so, but be aware that the 25% bonus will be withdrawn.
Finally, if you want to transfer your Help-to-Buy ISA to another provider to try and find a better rate, there are still some brands which allow this (even if these ISAs are no longer available on the wider market).
Contact us for guidance on which ISA might be right for you and your circumstances.
'You ain't seen nothing yet!'
An interview with Tom Becket, CEO, Punter Southall Wealth - plus questions on the financial impact of COVID-19 answered
"You ain't seen nothing yet!"
Punter Southall CEO Jonathan Punter interviews Thomas Becket, Chief Investment Officer of Punter Southall Wealth. Tom shares his compelling perspective on what motivates his team, outlines his investment principles, and explores the lessons to be learnt from history. Ranging from the impact of COVID-19 to what the next decade holds for markets, we feel it’s thought-provoking - and a good way to spend 20 minutes of what might be enforced spare time.
Your questions answered
Tom answers some commonly asked questions about the impact of coronavirus on financial markets and the wider economy.
Read the Q&A