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July 12 2020 6.03pm

Financial Guidance Thread

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View Forest Hillbilly's Profile Forest Hillbilly Flag in a hidey-hole 11 Jun 20 7.04am Send a Private Message to Forest Hillbilly Add Forest Hillbilly as a friend

Interesting topic, and I feel like I'm learning a bit.

Two things come to mind, from my own experience.

1. An accountant friend of mine from years ago, said "a (good) financial advisor will always make you enough money to cover their fees, and then plenty more.

2, Using a financial advisor for investing in lots of different shares (spreading the risk), enabled me to double my money in around 5 years. This pi$$ed all over what the banks were offering in interest at the time.

However, the same Financial advisor told me an ironic story. He had a client who had invested in shares. Every time the share-price dropped, the client ordered his financial advisor to sell.
"This isn't what you should be doing. Hang in there and the prices will rise", said the Advisor.

His client willfully ignored advice, and kept buying high, and selling low. And lost a shed-loads of money.
If you are paying for advice,...don't ignore it.

 


,.,.,..,

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View BlueJay's Profile BlueJay Flag UK 11 Jun 20 3.37pm Send a Private Message to BlueJay Add BlueJay as a friend

Originally posted by Forest Hillbilly

Interesting topic, and I feel like I'm learning a bit.

Two things come to mind, from my own experience.

1. An accountant friend of mine from years ago, said "a (good) financial advisor will always make you enough money to cover their fees, and then plenty more.

2, Using a financial advisor for investing in lots of different shares (spreading the risk), enabled me to double my money in around 5 years. This pi$$ed all over what the banks were offering in interest at the time.

However, the same Financial advisor told me an ironic story. He had a client who had invested in shares. Every time the share-price dropped, the client ordered his financial advisor to sell.
"This isn't what you should be doing. Hang in there and the prices will rise", said the Advisor.

His client willfully ignored advice, and kept buying high, and selling low. And lost a shed-loads of money.
If you are paying for advice,...don't ignore it.

Human nature kicks in and rash financial decisions are made. It's foolish though, as you say, because even a casual glance at the stock market suggests that it's important to just sit tight and hang on in there. The old "time in the market, not timing the market" again. I saw a comment recently from someone losing it over the ups and downs of the current market and wondering what to do. A reply to them that summed it up said typically you have two options

- to lose money quickly
- to make money slowly

Constant rash decisions lead to the former!

 

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View Goal Machine's Profile Goal Machine Flag The Cronx 15 Jun 20 8.57am Send a Private Message to Goal Machine Add Goal Machine as a friend

Understanding & reducing your Capital Gains Tax (CGT) liability

CGT is a complex area. Thankfully, in the UK we have generous ISA’s and pension schemes, and most do not own a second property, so the majority of us do not experience CGT during our lifetime.

CGT is a tax on gains arising from the disposal of certain assets. Where the disposal is not a sale made on a fully commercial basis (i.e. ‘mates’ rates’), the disposal is deemed to be the market value of the asset.

All individuals are entitled to an annual CGT exempt amount of £12,300 for the 2020/21 tax year. Gains above this are taxed at the individual’s marginal rate. The taxable gain is added to the individuals other income that tax year and calculated accordingly.

Investments are taxed at 10% basic rate and 20% higher rate. Property is taxed at 18% basic rate and 28% higher rate.

The following are exempt from CGT on gains:

• Sale of Main Residence
• Investments sold within an ISA wrapper
• Investments sold within a pension wrapper
• NS&I, savings certificates and Premium Bonds
• Gilts (government bonds)
• Private motor vehicles
• Shares held by employees in share incentive schemes
• Investments sold within an Enterprise Investment Scheme (if held for at least 3 years)

A disposal by one spouse to the other does not give rise to a chargeable gain.

The most common time you are likely to receive a CGT charge would be on the:

• Sale of a second home/rental property/holiday home
• Sale of an investment which is not within a tax wrapper

How to calculate the gain:

1. Determine the sale price (or market value price)
2. Minus the acquisition cost
3. Minus costs incurred in arranging the purchase and sale (i.e. solicitors/stamp duty) and any enhancement costs (such as an extension to a property)
4. Set off any allowable capital losses, allocating them in a way that minimises the tax due, namely by setting them against gains taxable at the highest rate first.
5. Deduct the annual exempt amount in the way which minimises the tax due
6. Calculate the tax at the appropriate rate

This is not straightforward, so here is a short case study which might help:

Example:

Peter is single and earns a salary of £40,000, making him a 20% basic rate income tax-payer. In 2005, he bought a rental property for £150,000 and spent an additional £20,000 on an extension. At the time of purchase, he spent £10,000 on stamp duty, solicitor fees and estate agent fees.

He is now selling this property in the 2020/21 tax year and has agreed a price of £350,000. The associated legal and estate agent fees are £5,000.
In addition, he bought £10,000 of Benteke Ltd shares four years ago and is now selling these for £6,000, confirming a £4,000 loss.

Calculating the gain:

1. £350,000 (sale price)
2. Minus £150,000 (acquisition cost)
3. Minus £15,000 (fees) and £20,000 (extension)
Total Gain: £165,000
4. Minus £4,000 (losses from Benteke Ltd shares)
5. Minus £12,300 (annual exempt amount)
Taxable Gain: £148,700
6. The taxable gain will sit on top of his £40,000 income. As Peter earns £40,000, he has £10,000 of his basic rate tax band remaining. The first £10,000 is taxed at 18% (£1,800) as it uses up his remaining basic rate band. The remaining £138,700 all falls into his higher rate band of 28% (£38,836). The total tax due is £40,636.

Had this property been Peter’s main residence at any point in the past, he would be entitled to some additional tax relief. In this instance, the proportion of the gain which would be exempt is:

Total gain x (period of occupation/total period of ownership)

I will not expand any further on this.

Entrepreneurs Relief:

This applies to sole traders and can be claimed when an individual disposes part of/of a business.
To keep this simple and high level, all gains above the £12,300 annual exempt amount qualify for a reduced 10% CGT charge (Entrepreneurs Relief), up to a £10m limit. There is no basic or upper rate tax banding.

Solutions to reduce CGT

1. Split assets with a spouse before selling. In Peter’s case, if he were married, his wife would also have her £12,300 annual exempt amount. Additionally, if his wife were earning less, a larger amount of the gain would have fallen within her 18% basic rate band rather than 28% higher rate.

2. Spread sale of asset over more than one tax year. This will allow you to use the annual exempt amount more than once. This solution won’t work for a property sale but it would for investment sales.

3. Contribute to an ISA. All investments are exempt of CGT on sale. If you are maximising your £20,000 annual limit, use your spouses too.

4. Contribute to a pension. Contributions either reduce your salary if paid via your employer, or extend your basic rate tax band if made personally. This gives you more basic rate tax band to play with, thus reducing the tax.

5. Register losses. Providing you register losses with HMRC within 4 years of the event, you can bring these forward to reduce the gain.

6. Invest into an Enterprise Investment Scheme (EIS). These are heavily tax incentivised products designed to encourage investment into small start-up companies. CGT can be deferred by investing in one of these vehicles providing the investment is held for at least 3 years. Upon withdrawal in future, the investor will be entitled to their full annual exempt amount at the time of withdrawal which may also be at a time when they have less income – such as retirement. This investment could alternatively be dripped out over a number of tax years, within the annual exempt amount each time, to avoid the CGT charge completely.

The other benefits of an EIS are that contributions qualify for a 30% income tax reducer i.e. a £10,000 investment would reduce your income tax by £3,000, and if held for 2 years it sits outside of your estate for IHT purposes.

EIS invest in a portfolio of start-up companies, some will succeed, others will fail. This is a high-risk investment which is only suitable for the more adventurous investors.

As always, please ask on the thread or pm me if you have any questions or would like some assistance.

 

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View cryrst's Profile cryrst Flag Chatham 17 Jun 20 7.53pm Send a Private Message to cryrst Add cryrst as a friend

Hi GM
Just seen nationwide has increased its LTV rate.
Problems or sensible and will it affect you and your customers generally? It doesnt affect me as I'm not moving or buying but imo seems harsh and lacking in faith in the individual not the market.
I would have thought a system of deferring the extra 10% or increasing the term on that bit to reduce the payment amount with the option to pay a bit extra on that portion when you can. Might be too complicated but some now wont be able to buy.

 

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View Goal Machine's Profile Goal Machine Flag The Cronx 18 Jun 20 12.30pm Send a Private Message to Goal Machine Add Goal Machine as a friend

Originally posted by cryrst

Hi GM
Just seen nationwide has increased its LTV rate.
Problems or sensible and will it affect you and your customers generally? It doesnt affect me as I'm not moving or buying but imo seems harsh and lacking in faith in the individual not the market.
I would have thought a system of deferring the extra 10% or increasing the term on that bit to reduce the payment amount with the option to pay a bit extra on that portion when you can. Might be too complicated but some now wont be able to buy.

Hi Cryrst, hope you're well.

Yes, quite a change. I'm sure Nationwide will not be the only lender to do this. It's certainly going to hit the younger generation hard and there is likely to be an increased reliance on the bank of mum and dad to get on the property ladder.

I can understand why they've done it. There are concerns over negative equity if property values fall and also even worse is the increased risk that people can't repay the loan and could end up homeless. Ultimately they need to protect themselves and the customer.

Thankfully it's not effected any of my clients yet as they are either home owners or happy to rent with no desire to buy.

I don't know how long these changes will be in place for, but I guess for parents looking to help their children get onto the property ladder in future, this represents an opportunity to start a savings or investment plan - perhaps via a Stocks & Shares/Junior ISA

 

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View Goal Machine's Profile Goal Machine Flag The Cronx 22 Jun 20 9.12am Send a Private Message to Goal Machine Add Goal Machine as a friend

Building a successful savings plan

It’s easy to save money, right? Wrong! If you’re one of those whose money runs out a few days before pay day and you’re surviving on beans on toast, you’re not alone. This article is designed to encourage better behaviours to help you reach your financial freedom.

Here some key stats from April 2020:

• 1 in 10 (10%) Brits have no savings at all
• A third of Brits have less than £600 in savings
• The average amount invested is now just £813, down from £1,050 just two years ago
• The average Brit has £6,756.81 put away for a rainy day.
• 40.93% of Brits don’t have enough savings to live for a month without income.
• While 22-29 year olds are the least likely to save, with 53% having no savings at all

Why aren’t Brits saving?

• 40% reported lacklustre earnings as the reason for not saving
• While nearly two thirds of Brits didn’t have a financial plan in place
• 91% of Brits did report they planned to add the same if not more to their savings in 2018 than they did in 2017

Here are some suggestions to help combat these.

Step 1 – Work out your income and expenditure

Quite simply, if you don’t know how much money you need each month to cover your livings costs and bills, how do you know how much you can afford to save each month? Going through this exercise works as a real motivator. You’ll often be surprised at how much surplus income you actually have.

If you budget, say £2,400 per year on holidays, be disciplined and pay £200 per month into a separate ‘holiday account’. This will avoid the need to pay large lump sums, or even loans, and won’t feel like such big hit when holidays come around. The same goes for hefty annual subscriptions you may have.

If you are genuinely struggling to cover your living expenses, try to adjust and see where you can cut costs. Packed lunches and avoiding your morning Starbucks are two easy wins.

Lastly, pay yourself at the start of the month, not the end.

Step 2 – Build an ‘emergency fund’

It is recommended that individuals build an emergency fund equal to at least 3 months salary. This should be held in an instantly accessible cash account and only used to pay for unexpected costs such as replacing a kitchen appliance or a new boiler, or even worse, replacing your income if you find yourself out of work.

Stage 3 – Building your investment pots

By following the first two steps, your investment pot should be able to grow uninterrupted and benefit from long term compounding – this is the ‘snowball’ effect.

It’s vital that you identify an end goal for your investment pot, such as what is the savings pot for and when are you looking to achieve it? It’s important as the length of the investment will impact how much risk you can afford to take. The general principal is that the longer the time horizon, the more risk you can absorb, as a long-term investment has time to recover from short term volatility, whereas a short one doesn’t. History has so far proved that stock market investing over the long term outperforms all the other main asset classes. Separate your pots for each of your goals and treat each pot differently.

An example of a ‘short-term pot’ might be saving to pay for a wedding or a mortgage deposit. If this is less than 5 years away, a ‘cautious’ investment approach would be sensible.

A typical ‘long-term pot’ would be your pension savings. For someone with 15+ years to retirement, although it may seem daunting, an ‘adventurous’ investment approach should be strongly considered to maximise the growth. Over time, a pension pot would eventually become a short-term pot and the investments can be adjusted accordingly then.

The majority of people in the UK build their long-term savings in cash as it is deemed ‘safe’. This is one of the mostly costly financial mistakes you can make. If interest rates are at 0.5% and inflation is at 2.5%, the spending power of cash reduces by 2% per year. Imagine this over 20 years. In the year 2000, 30p would buy me Mars bar, today it would buy me a Freddo! Don’t make this mistake.

Remember that investments can go up and down in value, so you could get back less than you put in.

If you need help with a budgeting questionnaire or help choosing the right investment, please don’t hesitate to make contact.

 

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View Badger11's Profile Badger11 Flag Beckenham 22 Jun 20 9.22am Send a Private Message to Badger11 Add Badger11 as a friend

When I retired I got serious about budgeting along the lines that you say. I can now accurately predict how much money I will spend per annum, bar emergencies. My budget also includes a monthly figure for play time e.g. going down the pub or a holiday.

Most of my numbers are fixed costs such as council tax however I realised I was paying over the odds for TV / broadband and Utility bills. I have reduced these considerably.

Nobody likes looking at bills but it is a worthwhile exercise it tells you where you are spending money. For instance I was paying £70 per month for a TV package from Virgin when I did some analysis I realised that nearly all the channels I watch regularly are on Freeview so I cancelled the contract, a huge save of £800 pa.

Thanks GM a useful post.


 


One more point

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View Goal Machine's Profile Goal Machine Flag The Cronx 29 Jun 20 8.44am Send a Private Message to Goal Machine Add Goal Machine as a friend

How much do I need to save for retirement?

Where do I start with this? Research from Fidelity suggests that ‘savers should be putting away at least 13% of their pre-retirement annual income before tax, each year, from the age of 25’.

25-years olds are typically saving for their first deposit, wedding or have kids. How can they possibly afford 13 percent per month?

The introduction of Auto Enrolment, which is the requirement for employers to automatically enrol new starters into the workplace pension scheme, has helped but the minimum contribution requirement is 3% from the employer plus 5% from the employee. This is still 5% short of Fidelity’s 13% suggestion.

Now factor in the ageing population in the UK with the plans to increase the State Pension age beyond 67. This clearly raises questions about the sustainability of the State Pension. Will Millennial's even have a State Pension in 40 years’ time?

If any of this is worrying you, then good. This is designed to shock as too many are sleeping walking into financial worry.

My issue with Fidelity’s statement is that it is far too simplistic. Someone with a desired retirement age of 55 will need to save considerably more than someone who wants to retire at 70. One person’s dream retirement could be to travel the world and take up new hobbies, which will require more income than their best mate who just wants to watch telly and walk the dog. Retirement planning is complex and unique as there so many variables to consider.

Here are a few steps to hopefully put you on track.

Step 1:

In today's terms, try to estimate how much income you need to fund your lifestyle. Things to consider include deducting expenses which will be gone by retirement such as kids becoming financially independent, mortgage cleared, and costs associated with work i.e. travel and clothing. You also need to factor in possible additional costs such as increased holidays or that new golf membership.

Step 2:
Increase the figure from step 1 to account for future inflation up until your desired retirement age. Inflation averages at roughly 2.5% over the long term. If you don’t know the calculation, this can be found on the internet. As an example, if I need £20,000 income today, in 10 years
time I’ll need £25,601.

Step 3:
This is where it becomes tricky. Try to guess how many years you will live. The average 65-year-old male will live to 85 whereas the average female will live to 87. Consider the history of longevity in your family and how your current health may impact this. Multiply this by the figure in step 2 and factor in even more future inflation. Suddenly the numbers become very daunting.

To put this into context, if you are cautiously minded and are attracted to the simplicity of a guaranteed income for life in retirement (known as a lifetime annuity), a £10,000 per annum inflation linked income with no death benefits or guarantees would cost a healthy 65-year old approximately £375,000.

Try this pension shortfall calculator to see where you currently are: [Link]

Ultimately, the only person who can help you, is you.

Here are my tips:

Start saving early. The effects of compounding (the snowball effect) will be far greater for someone starting in their 20’s compared with someone in their 40’s.

Maximise your employer contribution. Most settle for the default minimum contribution upon joining the workplace pension. Speak to your HR department as many employers will increase their contribution if you do. If your company will offer you free money, you might as well take it, right?

Review your pension investment. The default choice will be a run of the mill ‘lifestyle’ approach which gradually de-risks as you get to within 10 years of your selected retirement age. Many employer sponsored arrangements have up to 200 other funds to choose from. Is there a better option to make your investment work harder for you?

Keep track of previous pensions. There is over £10 billion of lost pensions in the UK as people move job and forget about their old pension. It often make sense to transfer your old pension into your current one for ease of administration, but check charges before doing this. Here is the link to the governments Pension Tracing Service: [Link]

Use the correct tax wrapper. A pension will benefit from full tax relief on a contribution and growth will also be tax free. I recently met a client who had been saving towards retirement via a stocks and shares ISA. 20 years of contributions had been missing out on 20% tax relief and investment growth.

Love your pension. You may not feel it now, but one day you will be grateful for the small sacrifices. Get in the habit of checking your pension value at least once a month.

A financial planner will have access to cashflow forecasting software which will help you to project into the future and identify any shortfall.

As always, comments and questions are welcome. Feel free to PM me if you'd like any assistance with your own arrangements.

 

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