Time to get wrapped up? How to shelter income and capital gains
For long-term investors, Individual Savings Accounts (ISAs) are a very tax-efficient wrapper that can hold cash savings as well as investments in stocks and shares. Savvy investors are also able to shelter income and capital gains.
The limit on how much can be saved in an ISA each year has doubled since 2009; you can add up to £15,240 to an ISA in the 2016/17 tax year. Cash that you withdraw from a flexible ISA can be replaced during the same tax year without counting towards your annual ISA allowance, which is known as ‘ISA flexibility’. What sets ISAs apart from other savings and investment accounts is that any interest on cash savings, gains from investments or income from dividends are tax-efficient, and you don’t have to declare ISAs on your tax return.
Facing new challenges at every turn to meet long-term objectives
We are now living in a more uncertain world. As correlations between asset classes rise, the right strategy is crucial to preserve capital when markets are falling.
In addition, the result of the European Union (EU) referendum came as a shock to financial markets, and there is likely to be fallout from this historic event for some time. Many investors are now facing new challenges at every turn. So what can you do to manage your investments in current markets?
How the lifetime allowance reduction could impact on your retirement savings
The Government has introduced comprehensive reforms to the pension rules over the previous few years. One important change, which may have been overlooked by some savers, is the reduction of the lifetime allowance that applies to pension savings. The lifetime allowance is the total amount you can hold within all your pensions without incurring an additional tax charge when you extract money from the pot.
The Government has indicated that this allowance will increase each year in line with inflation (CPI) but only from 6 April 2018. It was reduced from £1.25m down to £1m from 6 April 2016. If you have more than £1m in your pension pot or are likely to do so at retirement, you can apply to protect it against reductions to the lifetime allowance.
Do you have a financial plan in place to help protect your home?
Taking out a mortgage is the biggest financial commitment many of us will ever make, and having a financial plan in place will help protect your home in the event that you can’t work due to illness or ill health, or even your premature death.
No life cover
So it’s concerning to see that half (50%) of the UK’s mortgage holders have no life cover in place, meaning that 8.2 million people are leaving themselves and their families financially exposed if the unforeseen were to happen.
Start thinking about preparing for any big events as soon as you can
None of us know exactly what life’s got in store for us, but we know that there are a handful of major events that we’re quite likely to encounter at some stage. These include some of the great milestones of life, such as buying a property, getting married, starting a family, buying a holiday home or planning for retirement.
It’s essential to start thinking about preparing for any big events as soon as you can. Often this means saving for major expenses that may not yet be in sight but which we know are awaiting us just over the horizon.
Understanding why your lifestyle makes it more relevant and real
From the old adage of saving for a rainy day to planning for a comfortable retirement, before you can actually define your investing goals you need to ask yourself what you want to achieve.
While deciding on the best fund, tax regime, pension or investment is a necessary part of the financial planning process, it’s crucial to understand what these mean to you – and your lifestyle makes it more relevant and real.
Importance of not losing sight of your long-term savings goals
The UK is entering uncharted territory after the EU referendum, but with relatively few unretired people beyond the age of 55 having started their retirement planning it is important not to lose sight of your long-term savings goals. Changing social, political and demographic factors mean that the outlook for retirement finances in the UK is constantly evolving.
Worryingly, barely one in three (36%) unretired over-55s had started their retirement planning during Q2 2016 – the lowest percentage since Aviva’s Real Retirement Report began tracking this data two years ago, the latest report reveals.
As a result of the UK voting for Brexit (apart from the political turmoil), sterling has dropped significantly against the US dollar and the Japanese yen – the new safe haven currency it seems. We have a new Prime Minister and cabinet and a clear statement from the new Chancellor of the Exchequer that there will be no ‘Emergency Budget’. The normal Autumn Statement and Spring Budget process will be followed.
Restoring fiscal stability
As to what the Autumn Statement and Spring Budget will deliver, we can’t yet know.
New research outlines typical financial situations
A small number of pensioners are relying on loved ones to help them financially during retirement, and those approaching retirement seem to be in an even worse situation. Yet equally worrying is that people are also far more likely to take financial advice about retirement from friends than from a professional, with more than a million pensioners financially reliant on friends and family, AND the next generation even more stretched, according to the latest research from LV=.
The annual State of Retirement report shows that one in ten pensioners are reliant to some degree on friends and family for financial assistance. While this suggests the vast majority are able to remain financially independent in retirement, worryingly those due to retire within the next ten years are almost three times as likely to be in this situation (27%).
Britons not planning financially for long-term sickness
Only one in five UK people have income protection cover in the event of becoming too ill or disabled to work according to research published by insurer Zurich. This is despite the fact that as many as 42% have experienced income loss in their working lives due to serious illness. The findings indicate that people still have an ‘it won’t happen to me’ attitude despite having suffered the consequences first-hand.
Only 19% of respondents claim to have a good knowledge of income protection products, suggesting that more needs to be done to raise awareness of the product’s benefit, including swift access to rehabilitation as well as financial support. This lack of understanding also seems to extend to price, with many overestimating how much cover costs. Over a quarter of respondents said they would be willing to spend 5% of their income on it, though such cover can be bought for significantly less.
Hastings O'Loughlin is a business name of Hastings O'Loughlin Financial Services Ltd. Company No. 4502991. Registered Office at Hastings House, Birds Royd Lane, Brighouse, HD6 1LQ. Authorised and Regulated by the Financial Conduct Authority.