August 2018 – Impulse Plan

August 31, 2018September 6, 2018

Pension planning for the self-employed

Tips for the self-employed

Around 4,8 million people are self-employed in the UK. This is small in comparison to the 27 million people who are employed. If you are self-employed, you are one of the few people in the UK that have been greatly disadvantaged when it comes to pension planning, given the new pensions regulations. New pensions regulations require the all employers to offer auto-enrolled pension arrangements to all eligible employees. This is now compulsory. For self-employed people, no arrangements have been made within these new regulations.

Currently, close to 45% of self-employed people between the age of 35 and 55 have no private pension arrangement. Whilst you may be entitled to a State Pension, depending on your National Insurance Contribution record, this may not be adequate to cover the lifestyle you want in retirement. It is therefore really important that self-employed people take additional steps and extra caution in how they do their pension planning.

What kinds of pensions are available to self-employed people?

As we always say to our clients, it is never too late to start saving for retirement. What is most important is to start somewhere. There are three types of pensions that are available to invest in. These are private pension arrangements and each type allows for specific pros and cons.

(i) Ordinary personal pensions

These types of pensions are the most common among providers. As the name suggests, these pensions are personal arrangements in which you make monthly contributions, which are then invested by the pension provider to grow your investment. You do not need a financial adviser to open one, nor do you need to be employed to get access to these pensions. You just need to make sure that you keep up to date with your pension contributions. Normally with such pensions, the provider will have an already set mix of investments from which you can invest in. However, the allocations are managed by the pension provider

(ii) Self Invested Personal Pensions (SIPPs)

These are similar to ordinary personal pensions in that they are private and personal arrangements. However, these characteristically offer a wider range of investments than ordinary personal pensions. SIPPs also allow you to choose which investments you would like your pension contributions to be invested in. Essentially, you can build your own portfolio. However, this flexibility comes at a higher cost than that of ordinary personal pensions and it is normally reflected in administration and fund charges.

(iii) Stakeholder pensions

These are flexible pensions that allow you to contribute to your pension but with limits on the amount that you can be charged. Charges are limited to 1.5% per year for the first ten years of your membership with the pension and not more than 1% per year thereafter. In addition, the minimum contribution to such pensions cannot be more than £20, allowing you to contribute as little as £20 per month. Stakeholder pensions also have a feature known as lifestyling. This allows for the gradual shifting of your pension from higher risk investments to lower risk investments as you near your preferred retirement date. This is done to protect your pension as you get closer to needing it.

Within Impulse Plan, we encourage our clients to make use of our Personal Pension as it offers great flexibility in what you can invest your pension contributions in. With our Personal Pension, you are able to build your own portfolio and have the benefit of having a financial adviser guide you.

You get a little help from the government in building your personal pension pot

Depending on how much you earn per year, you are entitled to tax relief on your pension contributions, which essentially has the effect of increasing the value of your pension pot. This means that the government essentially tops up your pension pot as a reward for saving for retirement. Your rate of tax determines the level of tax relief.

Basic rate taxpayers

This tax band is for people who earn between £11,851 and £46,350 and these people pay tax at 20%. That is also the tax relief or “top-up’ they will get from the government on their pension contributions. Let’s look at an example below;

Susan’s Monthly goal	£100
Tax relief claimed by her pension provider	£20	20% * £100
Susan only has to contribute	£80	80% * £100
This means that if Susan continues to contribute this amount of £80 per month, she will have accumulated a pension valued at £1,200 when she only actually contributed £960. The difference (£240) is grossed up with the help of tax relief.

Higher rate taxpayers

This tax band is for people who earn between £46,351 and £150,000 and these people pay tax at 40%. That is also the tax relief or “top-up’ they will get from the government on their pension contributions. Let’s look at an example below;

John’s Monthly goal	£100
Tax relief claimed by his pension provider	£20	20% * £100
Tax relief John can claim on his self assessment	£20	20% * £100
John only has to contribute	£60	60% * £100 or (£100 – £20- £20)
This means that if John continues to contribute this amount of £60 per month, he would have accumulated a pension valued at £1,200 when he only actually contributed £720. The difference (£480) is grossed up with the help of tax relief.

Additional rate taxpayers

This tax band is for people who earn over £150,000 and these people pay tax at 45%. That is also the tax relief or “top-up’ they will get from the government on their pension contributions. Let’s look at an example below;

Janet’s Monthly goal	£100
Tax relief claimed by her pension provider	£20	20% * £100
Tax relief Janet can claim on her self assessment	£25	25% * £100
Janet only has to contribute	£55	55% * £100 or (£100 – £20- £25)
This means that if Janet continues to contribute this amount of £55 per month, she would have accumulated a pension valued at £1,200 when he only actually contributed £660. The difference (£540) is grossed up with the help of tax relief.

Are there any limits to how much I can contribute to my pension?

There are limits to how much you can contribute with the benefit of the tax-relief option. You can contribute up to the lower of £40,000 and your annual earnings with tax relief per year.

You can contribute more if you would like to, but these will not be eligible for tax relief, but there is still a way to get this relief if you have not always been contributing up to the annual allowance of the three previous tax years. In reality, how this would work is that you would first have to use up your current year’s allowances and then first use the unused allowance from the earliest year, which in our case would be the 2015/2016 tax year.

If you haven’t contributed as much as the annual allowance in each of the previous three years, you can carry forward these allowances to the current tax year and be able to contribute more than the annual allowance and get tax relief on it. A tax year runs from the 6th of April each year to the 5th of April the following year.

Let’s say last year you contributed only £10,000 to your pension. That means that you have £30,000 of your allowance that you can carry forward to this year and you can contribute up to £70,000 this year and get your tax relief. You are pretty much getting an opportunity to catch up if you have not been making full use of your allowances in the previous three years! The allowances for the previous three tax years are as follows;

Tax year	Annual Allowance
2015/2016: this is split into two periods; 1.Pre-alignment tax year: 6 April 2015 to 8 July 2015 2. Post-alignment tax year: 9 July 2015 to 5 April 2016	£80,000 £0
2016/2017	£40,000
2017/2018	£40,000
2018/2019	£40,000

For the year 2015/2016, you can carry over up to £40,000 of your unused allowance from the pre-alignment tax year (6 April 2015 to 8 July 2015) to the post alignment tax year. That means that if you had contributed £10,000 in the pre-alignment tax year, you have £70,000 unused allowance that you can carry forward to the post-alignment tax year (between 9 July 2015 and 5 April 2016). What this means is that you have £70,000 to use in the post alignment year. Say, between 9 July 2015 and 5 April 2016 you contribute only £20,000 to your pension, you would have £50,000 left from the post alignment year to carry forward to the 2016/2017 tax year.

August 31, 2018August 31, 2018

Income Protection for the self-employed

How to be prepared for a rainy day

Being self-employed has its benefits in that you have flexibility over your work hours and your level of income. However, this flexibility comes with some complexities. What happens if you are ill and cannot work at your business? What happens if you become incapacitated or disabled and cannot carry out your normal business?

These questions are more daunting for self-employed people than people who are formally employed. This is because with employed people, there is the possibility of getting sick pay from their employers or even a disability claim whilst they are unable to work. This option is not available to people who are self-employed. Self-employed people have to make alternative arrangements to ensure a source of income in the event of falling ill or becoming incapacitated.

The good news is that there are plenty of insurance products that are tailored for self-employed people to cover this uncertainty. Whilst income protection products are available for both employed and self-employed people, the reality is that the way products are tailored for self-employed people is more sophisticated. But, first things first, let us take a look at what income protection in general is.

What is income protection?

Income protection is an insurance policy that pays out when you are unable to work due to illness or injury, in return for monthly premiums. This will provide you with a source of income in the period you are not able to work. The extent of the income you get will depend on the level of cover that exists within your income protection plan. You will get a percentage of your current income.

For self-employed people, you can get products that cover between 50% and 70% of your share of annual pre-tax profits from your business. This is normally done on the previous year’s pre-tax profits, but this varies between insurance providers. This income can be provided on either a short term or long term basis. On a short term basis, the income is provided for a period not exceeding 12 months, whereas on a long term basis, the income is paid for more than 12 months, the exact period will be defined within your policy terms and conditions.

What conditions are covered by the policy?

Normally income protection policies cover a wide range of conditions should you fall ill. This includes conditions such as stress, back conditions, heart disease and cancer. The exact list of conditions covered varies between providers, but this is key before you sign up for income protection. Normally, the more conditions are covered by the policy, the more expensive your monthly premiums will be. It is also important to note that you will not be able to get cover for pre-existing medical conditions. The main issues with pre-existing conditions that providers have is with regard to mental illness (depression, anxiety) and skeletal issues (back/neck/spine) if you have suffered from these in the past 5 years. The provider will normally exclude these conditions from your cover.

Will I still pay tax on the income I receive from the income protection policy?

The good news is that if you took out the policy yourself, that is, if you pay the premiums for it by yourself, the income you receive from the policy will be tax-free.

What happens if I recover and can work again?

Should you recover, your claim for that period will end. This does not mean that your policy lapses. It just means that you will have to rely on the income you are currently making within your business. You can make multiple claims on the same policy should you fall ill or become injured again

What government benefits are available if I fall ill and cannot work?

There are benefits that are available through the Employment and Support Allowance (ESA). This will provide you financial support in this case, as well as, personalised help to allow you to work if you are able to such as setting goals and improving your current set of skills. This is available for self-employed people as well as employed people.

In order to receive this, you need to meet the following conditions;

· Be under State Pension Age

· You should not be receiving Statutory Sick Pay or Statutory Maternity Pay and you have not gone back to work

· You should not be receiving Jobseeker’s Allowance

There are various rules and limitations that determine exactly how much you will get paid as your allowance. You would need to consult your financial adviser to do a benefits calculation for you.

August 23, 2018August 23, 2018

Millenials Spending & Savings Habits

It's all avocado toast and trips abroad?

Millennials have faced a series of criticisms over how they choose to live their lives and how that has affected their spending habits. Millennials have been constantly compared to previous generations and just how well we have done, as compared to other generations, in achieving the traditional life goals such as buying your first home, getting married, having children, purchasing your first car etc.

Being a millenial myself, I can sort of see where that comes from and have had “the money talk” with my parents several times. Many say we need to relook at our spending habits and consequently our savings habits. I have had quite the eventful week reading through articles and statistics produced on our spending habits and my conclusion was perhaps we need to do a double take on our finances.

Are millenials really that different?

The research, at first glance, shows that we are not that far off from our parents who are Generation X. We spend more or less the same on medical care and pharmacies and gasoline. However, we spend about 2% more on electronics, hobbies and clothing than our parents do and about 6% more on restaurants. We also spend less on traditional household expenses like furniture, building and groceries than our parents do (almost 3% less on furniture and building and 4% less on groceries). But does this warrant the stereotype that millenials are irresponsible spenders with little to no care for savings? I do not think that we are that different, we just have different priorities?

Why are we different?

Several articles point to how we as millenials have shifted away from the importance of ownership of property and products and that we rather are focused on experiences, without the burden of ownership. For example, instead of buying a car and going through the hassle of financing and maintaining the car, we choose to make use of Uber or Lyft because it is just so much easier for us to use. There has been a lot of emphasis on us valuing multisensory experiences and seeking instant gratification regardless of the cost or giving in to the pressure to achieve traditional life milestones such as saving towards buying a home. In addition, the amount of technology we have access to has given us the opportunity to experience without ownership.

Technology has also offered us experiences that were previously considered life goals and unattainable for young people traditionally at much cheaper prices. For example, flights have become incredibly cheaper, more so for resort destinations around the world. In our age, it has become normal for someone to choose to spend months on end travelling because of the access to cheaper flights. This, coupled with our shift from traditional life milestones to experiences, has led us to be spending more on travel, high-end products bought online and less on more home making kinds of expenses such as furniture and groceries. According to Bank of Merryl Lynch, millennials spend more on restaurants, electronic devices, hobbies and clothing than any other generation before us. It also happens that we spend the least amount of money on groceries, furniture and buildings (we spend very little on home making it seems) than any of the generations before us. Perhaps that explains why we have been called the “experience” generation for how we focus more on experiences in our restaurant visits, our nights out and our electronic gadgets rather than on home making or buying groceries to cook at home.

How does the average millenial spend their money?

According to data collected by Strutt & Parker, the average spend of a millenial looks like the pie chart above. the average millennial has a budget of approximately £6,354 per annum. With that amount, we apparently spend close to 47% of that amount weekly nights out for the year. Coming in on a close second is a reflection of our love for restaurants and the increase in the number of foodies that have come with our generation. We spend approximately 21% of our annual budget on takeaways (I think we can blame UberEats and others for this right, definitely not our fault?). In our defence, technology has just made it 10000 times easier to get a meal than it was for previous generations, especially with the ability to make an order for food online and get it delivered for free of charge is just so much easier than going to buy groceries and then cooking to get a meal out of the groceries.

“We live for the coffee”

We have become an incredibly busy generation and one that seems to be addicted to coffee to keep up with the fast and ever changing world of technology. We need coffee so much that we spend close to 10% of our annual budget on coffee. I personally had not realised just how quickly that a medium latte from Costa Coffee a day could set me back that much in my budget. It turns out that that £2.45 a cup actually adds up to quite a lot at the end of the year.

We are the night lifers

It has been claimed that we spend more during the night than we do during the day. The reason for this? Our nights out clubbing and at high-end restaurants. We would not hesitate spending on experiences, bottles of alcohol and club entry fees. According to Strurr and Parker, each millenial on average spends £115 on one night’s clubbing. Whether this is true for everyone is debatable, but these are the results of their millenial survey. It is worrying though that this forms 47% of our annual budgets.

My takeaway

I do not think that the stereotype that we are heavy
spenders and bad savers holds much water. I just think that we are different in
terms of our priorities as compared to Generation X, but at the end of the day,
in money terms we are actually not that different. We still strive for
traditional goals such as having a home and buying groceries every month, but
that is not as much a priority for us as it was for our parents. We could
benefit though from some cost cutting measures, less nights out and less spent
on takeaways. Perhaps that would put us on par with previous generations?

August 17, 2018August 17, 2018

Understanding pensions tax relief

understanding pensions tax relief

Saving for retirement can be a daunting task. We all know we must do it, probably your employer has already started doing it on your behalf, but is it enough? What is enough, actually? These are all very valid questions and there is a plethora of “rules of thumb” available and a very large industry of advisers that constantly advise you that you should be making plans towards your retirement. It is unfortunate that majority of advisers use complicated jargon (I think sometimes they have no choice really, I have been there) in an effort to educate their clients. Hopefully, the next few paragraphs will give you an idea of how tax relief for pensions work and how you can take advantage of these to save for retirement.

let the government help you save for retirement

Yes, really they can, and have been all these years. Let’s use an example to demonstrate this;

Susan has a goal to contribute £100 to her pension this month. Claire earns below the basic rate tax band of £46,350 per year. Susan only has to contribute £80 towards her pension of her £100 goal. Why? Because the government has provided tax relief of 20% that essentially grosses up her £80 by £20 to £100. Her £100 is what is known as a gross contribution and the £80 is known as her net contribution. In reality how this works is that the tax relief is reclaimed by your pension provider.

Susan’s Monthly goal: Basic rate taxpayer	£100
Tax relief claimed by her pension provider	£20	20% * £100
Susan only has to contribute	£80	80% * £100
This means that if Susan continues to contribute this amount of £80 per month, she will have accumulated a pension valued at £1,200 when she only actually contributed £960. The difference(£240) is grossed up with the help of tax relief.

Let’s look at John who earns between £46,351 and £150,000 per annum. He is a higher rate taxpayer. In addition to the 20% gross up, he also gets additional tax relief of 20%, giving him a total of 40% tax relief! This means that if he wishes to contribute £100 towards his retirement this month, he only has to contribute £60 and the government will automatically gross up his contribution by 40% (£40) to £100. In reality how this works is that your pension provider will reclaim the tax relief up to 20%, and you will be entitled to claim an additional tax relief of 20% in your self-assessment return, giving you the full 40% relief.

John’s Monthly goal: Higher rate taxpayer	£100
Tax relief claimed by his pension provider	£20	20% * £100
Tax relief John can claim on his self assessment	£20	20% * £100
John only has to contribute	£60	60% * £100 or (£100 – £20- £20)
This means that if John continues to contribute this amount of £60 per month, he would have accumulated a pension valued at £1,200 when he only actually contributed £720. The difference(£480) is grossed up with the help of tax relief.

Now, here is Janet who earns above £150,000 per annum. For tax purposes she is considered an additional rate tax payer. For additional rate tax payers, they get additional tax relief of 25%, in addition to the already available standard 20% that Susan gets, giving her total tax relief of 45%. This is claimed in the exact same way as John above. If she wants to also contribute £100 this months, she only actually has to contribute £55. Here’s how that works out;

Janet’s Monthly goal	£100
Tax relief claimed by her pension provider	£20	20% * £100
Tax relief John can claim on his self assessment	£25	25% * £100
John only has to contribute	£55	55% * £100 or (£100 – £20- £25)
This means that if John continues to contribute this amount of £55 per month,she would have accumulated a pension valued at £1,200 when he only actually contributed £660. The difference(£540) is grossed up with the help of tax relief.

Month: August 2018