DB Wood Team
20th May, 2022
Some Top Planning Tips that People Don’t Talk About
Part of the magic of Financial Planning is the interaction between tax benefits and investment returns. The investment part is crucial over the longer term, but the tax part can provide additional benefits which can add up to 45% additional return on parts of your portfolio in certain circumstances. This is why it is always important to have a plan and to review what you are doing with your income and your investments each year to ensure you are operating with maximum efficiency. To that end it is worth mentioning that the majority of our clients in retirement, including those with incomes in excess of £100,000 per annum, generally pay less than 10% income tax. This of course does not happen by chance; it is through the accumulation of assets in the different tax wrappers we have at our disposal and their unique benefits.
So whilst investment markets continue to reposition in response to global events and higher inflation, this week we thought we would bring you some useful planning pointers which often disappear under the radar.
If you are employed…
- Nearly everyone who is employed pays into an employer’s pension plan, though many who are earning above £50k per annum, aren’t always getting the maximum tax benefit.
- Employer pension schemes can be set-up two ways – “salary sacrifice” or “relief-at-source”.
- If your scheme is “salary sacrifice” you are covered and receive the maximum amount of tax relief available.
- If, however, you are earning over £50k and have a relief-at-source workplace pension scheme, then you are able to claim back an additional 20% (or 25% for additional rate taxpayers) through your tax return.
- This could translate into thousands of pounds of tax saving each year.
For those earning over 100k and paying a lot of income tax…
- Pension schemes are a great option here, as most people don’t know that you pay 60% income tax between £100,000 and £125,140.
- This is because your tax-exempt Personal Allowance goes down by £1 for every £2 that your income is above £100,000, meaning your allowance is zero if your income is £125,140 or above.
- As an example, if you had earned £110k and made a £10k additional pension contribution, you would save £6k in tax. So that £10k pension contribution would only cost you £4k, equivalent to a 250% initial investment return.
Whilst for most people pension planning should be number one here, others may prefer a shorter investment time horizon, where you don’t need to wait until your mid-50s to access the benefits. In this respect there are also investment vehicles that provide 30% tax relief on what you invest, provided you invest it for 5 years and meet certain other criteria. If you are open to expose some of your portfolio to a little bit of higher risk, then the tax relief and investment returns can handsomely reward you. In the right circumstances it is certainly worthy of consideration as part of a broader investment piece.
If you are approaching state pension age:
- Our first piece of advice here is ‘it is always worth getting a State Pension Forecast’.
- The rules related to how benefits are calculated have changed recently, and you now need 35 years of National Insurance credits to qualify (as opposed to 30 years as was) for the full state pension.
- If you can are short of the required years, then you do have the option of purchasing them directly from the Department of Work & Pensions (DWP) for a remarkably competitive rate.
- £824 currently buys you an extra £275 per annum of index-linked guaranteed income for life, so provided you live for three years past your State Pension age, then you are in the green!
- Importantly, from April 2023, it will only be possible to buy back the previous 6 years of contributions.
- As usual the Government haven’t made the rules simple; there are lots of exceptions here and there. So while in the majority of cases buying those added years will be a fantastic return on your investment, there are occasions where it won’t be.
For more information head over to this fantastic guide provided by moneysavingexpert.com, or as ever, you are welcome to get in touch with a member of our team for further assistance. Voluntary national insurance contributions (moneysavingexpert.com)
For those retired or otherwise…
- In situations where either you or your spouse is a basic rate taxpayer, and the other is a non taxpayer, then it is possible to pass £1260 of the non taxpayers personal allowance to the other, essentially saving an extra £252 in annual net income.
- This can be backdated to 2018 so this could give you an immediate uplift – just as soon as you let the revenue know.
- Moreover, for those below the age of 75, you can still add £2,880 into a pension each year even if you aren’t working, and the government will add an extra £720 to the amount.
- Most people tend to forget about pension savings when they are retired, though this is simply a prudent way to move your assets around and grab a bit of free growth.
- If you did this between 65 and 75 you could amass £7,200 of tax relief return, not to mention the compound investment growth you would likely get on top.
For those with mortgage’s…
- As interest rates have been hiked in recent months, mortgage rates have followed suit.
- Though the increases haven’t been even across the board, with 2-year fixed rates seeing the biggest increases.
- In fact, two year fixed rates are now around the same level as 5-years, so unless you have specific circumstances that mean shorter-term is better (again, always worth speaking to us), it could be beneficial to lock your rate in for longer and remove the hassle of worrying about where things could be in 2 years’ time.
So, there’s a snippet of what’s flavoursome at present. Whilst we are repositioning our portfolios in response to global events and preparing for the forward opportunity, we are also hoping to be able to add value to your financial plans as well through great tax planning.
I’m sure most of our regular readers will be making the most of these opportunities anyway, though have a think about family and friends who might benefit and always feel free to get in touch or put them in touch with our wider team. Have a great weekend everyone!