USING OUR EXPERIENCE AND EXPERTISE

Our purpose is to help our clients to achieve their objectives and enjoy financial security. We can call on many years of experience and expertise and seek to deal with all matters in a speedy and efficient

manner with the greatest degree of professionalism possible. Here are some recent client comments:

“Wanted someone with a track record of stability and we knew the owner. Absolutely met our expectations.”

– Mr & Mrs R R of West Sussex

“Many thanks for all your patience, guidance and expertise in arranging this for us.Your help is very much appreciated.”

– Mr & Mrs PL of Surrey

“I wanted to improve on the high interest rate I was paying. Sovereign Finance gave me sound advice on how to achieve this and I am thrilled with the outcome and results.

– Mrs AG of East Sussex

“I am impressed.Many thanks for the good work.”

– Mrs KC of West Sussex

SOME TIPS FOR THOSE OF US GROWING OLDER (OR WITH FRIENDS OR RELATIVES GROWING OLDER!)

• If income is tight, consider the possibility of renting out a room or two. You can earn up to £7,500 a year from this free of any tax.

• As we reach a point where some help is needed with our affairs, we should consider taking out a Lasting Power of Attorney to ensure there is someone who will be able to assist when needed.

• Make sure you are not paying more tax than you need to. The new taxation of savings income and of dividends may work out in your favour.

GETTING OLDER – WHAT ABOUT THE LIFETIME MORTGAGE?

The Lifetime Mortgage is not a completely new arrangement but over the last few years their flexibility and interest rates have improved. Borrowing is based on age and percentage of value of the property. There are no income requirements to be met. The youngest age allowed is 55 and in the case of a married couple or partners, the youngest of the two must be 55 or older. It must be your main residence. The level of borrowing starts at about 21% of property value at age 55 and goes up to about 46% at age 80. So on a property worth £200,000, that would be £42,000 borrowing at age 55 and £92,000 borrowing at age 80.

You can have the option of paying the interest so that the borrowing does not increase or allowing the interest to be added to the amount borrowed. In either case the mortgage and any interest owing is paid off on the eventual sale of the property. The Lifetime Mortgage can also be moved to a new property (subject to property value).

WHAT IS THE VALUE OF A PARENT?

Research has been done on the financial value of a parent based on what it would cost currently to replace the activities they do in raising a family.

 Taking into account cooking, cleaning, transport, childcare, etc., it works out as an average of £631 per week for the parent at home and £448 for the parent who is working. Over half of the parents contacted in the survey had no financial protection in place. The cost of taking out simple life assurance is not huge. A woman or man aged 30 can insure themselves for £200,000 for under £10 per month each, or under £15 per month for a joint policy (non-smokers and without major medical complications).

We can speedily provide you with quotes.

MORTGAGE PRISONER? THE CHAINS GROW LOOSER!

Mortgage lenders are becoming more flexible in dealing with borrowers who are locked into their present mortgage arrangement for one reason or another.

 

 There are those who were self-employed and found that the self-certification of income enabled them to raise the level of the mortgage they needed. Others will have taken out a mortgage in the past where they paid only interest, and now are approaching the end of the agreed mortgage term and their strategy to repay the mortgage may not now be workable. Still others have reached an age where they can get only a very short-term mortgage or even no mortgage at all.

Problem: Age

Solution: Try your present lender to see if they can provide some flexibility or contact us as there are a number of small lenders who will take a more enlightened view about maximum mortgage ages.

Problem: Providing adequate income

Solution: Again, first try your present lender to see how they may be able to help. Then try us to see what can be achieved on the income that you can prove. There is a wide variation in the way different lenders calculate the maximum lending they will permit. And if you and your spouse are both aged over 55, it is worth seeing if a Lifetime Mortgage would provide a solution. A Lifetime Mortgage is based on your age and property value and can run indefinitely. There are no maximum age restrictions and there are no income requirements. (But do remember that a Lifetime Mortgage is only going to work where the mortgage is relatively low in comparison to the property value.) Give us a ring and we can let you know what can be done.

Problem: An interest-only mortgage reaching the end of the mortgage term

Solution: The first thing to do is to work out what you want to do. It may be that you can deal with the problem by simply selling your property and downsizing. It is also possible to speak with your present lender and get them to extend the term of the mortgage if that is going to enable you to repay it in the reasonably near future – say, up to 5 years. There are also still lenders who will do interest-only mortgages and it may be worth talking with us about those options. And there is also the Lifetime Mortgage option mentioned above where the mortgage owed is relatively small when measured against the property value.

RETIREMENT MENU

Cash please

Those who are 55 and older can now draw out all (!) of their pension fund as cash. So you can ask to have it all as cash (!)   BUT…

Tax! The downside is that with each pension only 25% of the fund can be taken tax-free.

Any amount that you take over and above this tax-free 25% will be taxed as if you had earned it in the Tax Year in which you draw it out. That amount is added to your other income and is taxed accordingly.
Example:
A person aged 55 is earning £20,000 per annum and paying about £1,800 in tax on those earnings. He has a pension fund worth £40,000 and he wants to take it all out. He would get the first £10,000 tax free. The remaining £30,000 would be added to his £20,000 other earnings and he would be taxed

as if he had earned £50,000. This would result in him paying £9,200 in tax instead of £1,800. So he would lose £7,400 of his £30,000 pension to the taxman. A person already earning enough to put him in the higher rate tax bracket (40% tax where the total income exceeds £43,000) could lose 40% of the money he takes out over and above the tax-free amount. In our example of a £40,000 pension fund, he would still get the £10,000 tax-free but lose £12,000 of the remaining £30,000 in tax). Therefore it is important to take tax into account when working out when to take money out of the pension.

(Note: this article refers to personal pensions only; the rules are different for a Final Salary Scheme where the benefit is based on the salary and years of service and some other special types of  pensions.)

Income Options

(Note: all these options assume that you take out the tax-free cash.)

Option 1: Leave the balance invested with the option to take out further funds in the future – either when your need is greater or when your tax position is more advantageous. This is called a Flexi-

Drawdown arrangement as it provides the flexibility for you to draw out whatever sums you want at any time you want them. But remember that once you have drawn out the tax-free element, any other monies you take out will be taxed. Such an arrangement also involves investing your pension fund so you would need to consider both the risk that comes with such investments as well as the provider’s charges for running the pension.

Option 2: Use the balance left over to set up a guaranteed income for life (an “annuity”). The amount of income received would depend on your age – the older you are, the more you would get. The amount of income you would get also depends on your state of health – the worse off you are health-wise, the greater the income you are likely to receive. You can set it up on just your life or so that it covers both you and your spouse/partner. The idea of guaranteed income is attractive but the current annuity rates are quite low so the amount of money you can obtain may be a bit disappointing.

Option 3: Take a short-term guaranteed income (a “temporary annuity”). This pays out a guaranteed level of income for a fixed number of years and then pays out a guaranteed sum on maturity – which can then be used again in Option 1 and 2 above or to repeat this Option 3 for a further term of years.

News

It is still early days but there is a surprising resilience in the property and financial markets

following the BREXIT vote. Residential property prices have remained reasonably stable

and mortgage rates remain at the lowest levels on record.

Pensions and taking the benefits from them, however, remain a complicated area. To help understand

the options here follows: A New Retirement Menu for Personal Pensions. We know that the subject

of pensions is confusing to most people, so do feel free to contact us with your questions. Do note

that the “Retirement Menu”  relates to Personal Pensions only. The regulations for Final

Salary Pensions where the benefit is linked to years of service and salary are different.


Menu to follow ......

TIME TO REVIEW YOUR FINANCES

It is all too easy to let the annual pension report and mortgage statements and investment data just accumulate in a drawer. By reviewing these at least  once a year, you can stay on top of your finances and ensure they are doing as good as possible. If you need any help with this, contact us.


Sovereign Finance 01342 313302 or mail@sovereignfinance.org

CHEAP PROTECTION

One of the cheapest financial planning and protection tools is still term life assurance. The amount that is insured will be paid out on death at any time during the agreed term of years. It really is a must for young families where husband and wife can be covered by a single policy and get substantial cover for less than £10.00 per month.


We would be happy to provide quotes by return of e-mail. Contact us on 01342 313302 or info@sovereignfinance.org

STRIVING TO MEET EXPECTATIONS

By survey what our clients value, and why they continue to come back to us, is our independent and unbiased advice on financial matters and mortgages, utilising our extensive knowledge and know-how gained over the last 35 plus years.

Here are a few recent client comments:

“Thank you so much for being super quick and efficient and guiding us through this. I have already recommended your services to 2 of my friends and am sure we will have some more work coming your way in the near future.”  – Mr RW and Ms NF of Kent

“Many thanks for all your patience, guidance and expertise in arranging this for us, your help is much appreciated.”  – Mr & Mrs PL of Redhill, Surrey

“Usual thanks and best wishes for excellent service.” – Mr IB of Leeds

“As ever your advice is clear and constructive; we will certainly come back to you as and when we decide to take the next step.”   – Mr & Mrs AM of Uckfield, East Sussex

 

COMPULSORY WORKPLACE PENSION

If you have a business with even just one person on PAYE (other than yourself  if you are the director), you need to find out what you are expected to do as regards having a Workplace Pension. This has been going on since October 2012 starting with the companies with the most employees. Over the next year or so it will catch up businesses even with just an employee or two. There are pretty steep penalties for not meeting your obligations in this regard. If you have been sent your “Staging Date” (the date at which you are required to have the Workplace Pension set up and operating in your business), you should not ignore it. If you are not sure, you can check on your Staging Date by going on-line to www.thepensionsregulator.gov.uk/employers.

PENSION OPTIONS

There are many more choices on taking your pension benefits than ever before. It is a good idea to get professional advice to help you make the decisions that best suit your plans. As the rules have changed as regards how pension benefits are treated on death, this too is something important to know about. We would be happy to assist.

FINANCIAL BASICS

It is worth keeping a check on your Financial Basics:

• M ost important! – ensuring more money comes in than goes out

• Building up some cash reserves in case of an emergency (putting this cash into an ISA

   is a good plan for most)

• Life assurances kept at an adequate level (basic life assurance is inexpensive for most and

   we are happy to provide quotes)

• Build up some long range savings or investments, e.g. pension, property, stocks and

   shares (there are many options; feel free to discuss the options with us)

• Keep your credit in good shape by always making payments on time (setting up a Direct

   Debit helps ensure you do not forget)

• As you move into your 60s, look into taking out a Lasting Power of Attorney

• Make a Will

MORTGAGE MARKET

Those looking to buy in the near future may benefit from the bit of a slump that has occurred following the new rules affecting Buy-to-Let properties. There was a surge in the first three months with the deadline in the higher Stamp Duty charges for Buy-to-Lets that came into force on the 6th of April. However, there is now the beginning of a slump so it is worth doing some tough negotiating.

BEST MORTGAGE RATES EVER

In the UK we still have available some of the best mortgage rates ever. If you are on your lender’s standard variable rate and are in a position to remortgage, do give us a ring and we can let you know what is possible.

STUCK WITH AN INTEREST-ONLY MORTGAGE

There are still many people who have an interest-only mortgage which is coming to the end of its term. For whatever reason, the original strategy for repaying it is often no longer an option, and for many moving down market is not desirable. Many lenders are now willing to consider extending
a term even if it goes into the 70s and 80s – particularly if part of the new arrangement will include some repayment of capital. A recent example we know of involved a man aged over 80 being given an extension of 10 years for the mortgage on the basis that half of it would be on a repayment basis. It is worth talking to your lender. If you are paying the lender’s Standard Variable Rate (4.5% or more), you should also ask for a better interest rate, e.g. a two year fixed rate. We had one client recently who we advised to do this. With just a telephone call she was able to reduce her mortgage by 2.5% for two years – saving her £400.00 per month. If talking to your existing lender does not work, then you can look at one of the new Lifetime Mortgage options if you have enough value in the property.

75 IS THE NEW 65 IN THE MORTGAGE MARKET

The mortgage market for older people is improving remarkably. At the insistence of the Financial

Conduct Authority (FCA), lenders have been encouraged to extend their maximum ages for standard

mortgages. Whereas age 65 some years ago remained a cut-off point, now it is quite common to

find mortgages available to age 70 and 75 and even 80 and 85 in some cases. After 70, however, it

is still likely to be only pension income, or other similar guaranteed income, that will be taken into

account when they look at affordability and how much they will lend.

A MORTGAGE WITH NO PROOF OF INCOME REQUIRED AND ON AN INTEREST-ONLY BASIS! TOO GOOD TO BE TRUE?

Who would have thought that it would be the older people now who would enjoy the ability to take out a mortgage without proof of income and on an interest-only basis for an unlimited term of years! This is the latest refinement of the Lifetime Mortgage. The limit of borrowing in these cases is based

on age and property value.

Here is a sample of the maximum borrowing possible:

AGE      LOAN TO VALUE        MORTGAGE EXAMPLE (VALUE OF £200,000)

55                  21.0%                                £42,000

60                  26.0%                                £52,000

65                  31.0%                                £62,000

70                  36.0%                                £72,000

75                  41.0%                                £82,000

80                  46.0%                                £92,000

Note: Borrowing is based on age and percentage of value of the property with the youngest age being 55 and the property must be the person’s main residence. Where there is a couple, the calculations are done on the age of the youngest. This borrowing is for a first mortgage only and second mortgages are not permitted. It can be for a remortgage or a purchase.

The new developments for Lifetime Mortgages includes the option to make repayments of interest
up to 10% of the original amount borrowed without penalty. For some there are also now fixed early
redemption penalties, and no penalties at all after 10 years. Some Lifetime Mortgages also allow a
person to start with, or switch to, making no payments and letting the interest build up – to be repaid
on the eventual sale of the property.

THE NEW STATE PENSION

From the 6th of April 2016 the new State Pension came into effect. In order to make it as fair as possible, those who have been building up State Pension benefits before that date will have a

“Foundation Amount” calculated. This basically represents the value of the State Pension benefits

built up under the old rules. To that will be added the benefit built up from the 6th of April 2016 up to their normal State Retirement Age.

As would be expected, there are some winners and some losers in this change-over. The best thing to

do is to request a State Pension Forecast – www.gov.uk/state-pension-statement. Their telephone number is 0345 3000168. This will confirm what your State Retirement Age is and also whether you have any “holes” in your National Insurance payment record which you may be able to fill.

UTILISING THE VALUE IN YOUR HOUSE – EQUITY RELEASE!

For those aged 55 and over it is possible to access some of the value in your property. There are no income requirements and the older you are, the more you can take out. The funds taken can be used for any purpose. There are three general approaches to Equity Release:

1) making interest-only payments indefinitely (Interest Only);

2) borrowing without having to make any repayments at all until the property is sold (Lifetime Mortgage);

3) trading ownership of the property for a lump sum and the right to life-long tenancy of the property (Home Reversion Plan).

LIFE ASSURANCE AND PUTTING THINGS IN ORDER

Unfortunately we do not live forever. To avoid leaving behind a confusion that family or friends have to sort out, there are some basic actions that should be taken:

1. Write to any company that you have a pension with and notify them of who you want the money to go to on your death. This is in addition to having a will. By letting the pension company have written notification, that money can be made available to the beneficiary(s) immediately. It does not have to wait for Grant of Probate, i.e. when your whole estate is valued up and your will reviewed. Such a notification would keep the pension funds from being included in your estate and possibly being subject to Inheritance Tax when you die.

2. Make sure you have an up-to-date will. These are not expensive.

3. In the event of illness or something else happening that affects your mental capacity – either for a short time or a long time – it is a good idea to look into doing a Lasting Power of Attorney. This is a written document that appoints someone to make decisions about your affairs in case you are not capable of doing so. There are two parts to this – one to deal with health issues and the other to deal with property and finance. In setting up a Lasting Power of Attorney you can do one or both parts. This is not inexpensive, but what it might save you in the long run might well be far more than the cost of getting one of these done.


4. Review your life assurance needs. If you have people who depend on you financially – whether a spouse, or children or business associates – having adequate life assurance is a good idea. Basic life assurance is generally inexpensive. We can provide quotes very quickly. Just give us a ring.

SAVINGS AND INVESTMENT TIPS

1. Don’t forget about National Savings products. Premium Bonds and their Direct Saver and Direct ISA accounts are competitive and also not subject to the usual £75,000 maximum protection (per banking group).

2. Investment bonds allow for taking withdrawals each year of 5% of the original investment, and these are not treated as income and do not have to be declared in tax returns.

Note: this is possible for up to 20 years and then the overall return from the investment bond is subject to possible capital gains tax.

HELP WITH FINDING LOST PENSIONS

Commonly people have accumulated various pension entitlements over the years and many have lost track of them. The Government provides a Pension Tracing Service which will help you locate any of your past pension benefits. For details of how to use this Tracing Service (which is free), google Pension Tracing Service or ring them on 0800 1223104.

PENSION FREEDOM – UNLIMITED ACCESS TO YOUR PENSION FUND!

If you are aged 55 or older, you can access all your private pension benefits at any time. This opens the door for many to access lump sums that were not available before. Ever since the new Pension Freedoms came into force last year, many people have chosen to draw significant amounts from their private pensions or even take it all. However, some have not taken into account the tax ramifications and paid unnecessarily high levels of tax. Others have failed to look ahead to see what the effects of taking their pension benefits now would be when they are older.

Our priority is to help our clients achieve their objectives and enjoy financial security. Sometimes it is not possible to achieve both of these aims, but we can help work out what can be done so you can make an informed choice. Do contact us if you want to look over your plans. For those in a position to maximise pension contributions do remember it is possible to carry forward unused pension allowances for up to three years.

MORTGAGE PROBLEMS?

There are a number of property owners who find themselves unable to obtain a new mortgage – whether to move property or even to just obtain a better mortgage interest rate. Changes in the recent past have tightened lending criteria on income requirements and age restrictions. This has meant that in many cases borrowers have been left stuck with their lender’s standard variable rate when new fixed rates are 1% to 2% better. Just a 1% reduction on a £150,000 mortgage would save £1500 in interest each year (assuming a 20 year repayment mortgage).

Here are a few examples of this ‘mortgage prisoner’ problem along with possible solutions:

Problem

Some older people cannot get a new mortgage with a longer term, or extend the

term of their existing mortgage, because of the current attitude of most lenders to

maximum mortgage ages.

Solution

Try your present lender to see if they can help, or contact us. There are more

and more niche lenders who will take a more enlightened view about maximum

mortgage ages – where the deal makes sense otherwise.

Problem

Some people were able to take a mortgage out in the past where it was possible

to self-certify the level of their income. In virtually all cases now income must be

proven and the self-employed will be assessed on the net income as shown by

the Tax Office.

Solution

Some lenders are more generous in their income calculations than others and some

lenders require only one year’s completed accounts for the self-employed. For those

over 55 with relatively small mortgage needs, Lifetime Mortgages (Equity Release)

can often get over the problem of age or affordability. We can research what is

possible for you.

Problem

Some people took out interest-only mortgages. Usually they had a plan of how

to repay them, but sometimes that original plan is no longer possible.

Solution

For some simply down-sizing will be a solution. For others who want to stay where

they are, however, there may be other options. There are still some interest-only

mortgage options available if one is looking to extend the time he can continue to

stay in the property. It is also possible for those aged 55 and older to use a Lifetime

Mortgage solution. Contact us and we can work out what options are available for you.

CAPITAL GAINS TAX

The Capital Gains Tax Allowance level remains at £11,100 in 2016/17 but there has been a change

in the charging structure for capital gains. Above the £11,100 allowance level, capital gains tax will

be charged at 10% for basic rate taxpayers and 20% for higher rate tax payers — except for second

properties where the tax will remain at the 18% and 28% rates respectively. This is meant

to encourage people to invest in stocks and shares rather than property.

STAMP DUTY ON PROPERTY PURCHASE

(Note: There is a 3% increase on all bands for Buy-To-Let/Second Property)

                   

                             Residential             Second Property/Buy to Let

£0 to £125,000                  0%                                 3% (0% up to £40,000)

£125,001 to £250,000       2%                                 5%

£250,001 to £925,000       5%                                 8%

£925,001 to £1,500,000   10%                              13%

£1,500,001 plus               15%                              18%

Note: The Chancellor did also announce some changes to Stamp Duty on purchases of commercial property.

Contact us if you need details.

TAX NOTES for 2016/17

Personal Allowance      £11,000 (reduced for those with incomes over £100,000)

20% Rate Tax Band     £32,000 (adding in the personal allowance of £11,000 means

                                            that your income would need to be in excess of £43,000

                                            before the 40% rate starts to be charged)
Dividend Income Nil

Rate Band                   £5,000

Personal Savings

Allowance                   £1,000 (basic rate taxpayer), £500 (higher rate taxpayer)

ISA Allowance             £15,240 (same as last year)

Lifetime Pension

Allowance                   £1 million

Inheritance Tax Nil

Rate Band                   £325,000 (same as last year)

Annual Pension

Allowance                   £40,000 (reduced for those with income in excess of £150,000)

Rent-A-Room

Allowance                   £7,000 per annum - tax free (up from £4,250 last year)

State Pension              New Single Tier State Pension comes into effect

THE BUDGET AND THE NEW TAX YEAR

The March Budget did not bring in any additional immediate changes to personal finances. Once

again the Chancellor has made promises for the future, but we will focus on what the tax position

is as from 6 April 2016. We will introduce the new LISA (Lifetime Individual Savings Accounts)

closer to her arrival time in 2017!

Can You Afford To Take The Risk?

You have to insure your car and you have to insure your house, but you are not required to insure yourself or your spouse despite the possible consequences!

Life Assurance does not need to be expensive and we can generally provide a quote within an hour or less.

EXPERIENCE AND EXPERTISE COUNT!

We do seek to use our experience and expertise to maximise the help we can give our clients. Here are what a few clients have to say about their experience with us:

“My expectations were met and exceeded. The prospect of sorting out an annuity was very daunting but Sovereign Finance came to my rescue. The world of annuities and pensions were explained to me in an uncomplicated way, which made my decisions a lot easier. I genuinely don’t think anything could have been done better.”

– Mr GD of East Grinstead

“I am writing to thank you for your expert guidance. Despite the government simplifying pensions it is still a very complex area and your experience proved invaluable in progressing this matter.”

 – Mr & Mrs PB of Horley

“Such courtesy is not often found in many companies nowadays.”

 – Mr BB of Crawley.

LOOKING AHEAD – LASTING POWERS OF ATTORNEY

More and more people reaching retirement age are making long term financial arrangements, such as pension drawdowns or equity release, which will require on going attention and decisions. The fact is, whether we like it or not, that the older we get, the more likely it is that we will suffer a physical or mental disability. While people generally understand the need to have a will because they know that death is an eventual certainty, the same is not true with the problems that can come with gradually growing older. As Sovereign Finance has been around quite a while, we do have many older clients. As a company, we have decided that we should recommend to all those reaching retirement age that they consider taking out a Lasting Power of Attorney (LPA). This is a legal document that lets someone appoint one or more people (who will be called “attorneys”) to help them make decisions, or make decisions on their behalf, should they become incapable of making the decision themselves. There are two types of LPA; one for managing health and welfare issues, and one for managing property and financial affairs. It is possible for a person to arrange an LPA for themselves for a cost of only about £110 or so. But where one’s affairs are complex, we would recommend that a solicitor be used. That will be considerably more expensive, but in the long term it may prove to be money well invested.

PENSIONS AND HIGH EARNERS

From the 6th of April the Government is bringing out measures aimed at restricting the level of pension contributions very high earners (incomes of £150,000 and above) will be allowed to make and get tax relief. If you are in this category, do contact us for further information.

LIFETIME PENSION ALLOWANCE BEING REDUCED

For many of us the reduction from next April of the Lifetime Pension Allowance from £1,250,000 to £1,000,000 may not be of concern. However, there will be those who are not really big earners who may need to look at how this might affect them. For example, a person who has been in a salary-based pension scheme and has built up a pension entitlement of £50,000 per annum or more, may need to take some actions regarding this. If you think you may be affected, do contact your pension provider or ourselves for assistance.

 

CHECKOUT SOME OF THE INVESTMENT GUARANTEES AVAILABLE

Whether you are investing in a pension or other investments, the challenge for many older people is how to achieve a reasonable income without having to take high risks. There are some guaranteed options worth considering. Do contact us if you would like to find out more.

PENSION “FREEDOMS” – AND DANGERS!

As predicted 2015 was a Year of the Pension with many people taking the opportunity to access the money they had in their pensions.

The Government hastened to get out warnings about consequences of doing this unwisely. Not the least of these was that the person could run out of money in retirement! An important warning in this regard was issued by Department for Works and Pensions. They issued a factsheet confirming that if people “spend, transfer or give away any money taken from a pension pot” they could be considered to have “deliberately deprived themselves of that money” to secure or increase benefits. This could mean a person later on being ineligible for State benefits that he might otherwise have had. For further information on this, visit the Department for Works and Pensions website and search on “Pension flexibilities and DWP benefits.”

TAX MATTERS – AFTER APRIL 2016!

1. The Personal Tax Allowance (what you can earn before you pay any tax) goes up from £10,600 to £11,000.

2. The Basic Rate Tax Band goes up from £31,785 to £32,000. This means that from the 6th of April, with the first £11,000 earned being subject to no tax, you will not start paying £40,000 tax on earnings until they exceed £43,000. This is marginally better than the previous year.

3. We understand that the annual ISA allowance will remain the same at £15,240. The new Help to Buy ISA will become available from the 6th of April. This is for First Time Buyers only. For full details search “Help To Buy ISA” at www.gov.uk.

4. From 6 April 2016 the Rent-A-Room relief rises from £4,250 per annum to £7,500. That is a very attractive tax-free source of income for those with spare rooms they can let.

5. If you have saved in a deposit account which is not an ISA, you will be familiar with the fact that the Bank or Building Society would automatically deduct 20% of the interest as tax (unless you were a non-taxpayer and filled out the appropriate form). This will change from next April. Deductions will no longer be made. And, in fact, there is a new Personal Savings Tax Allowance which will mean that for a basic rate taxpayer, the first £1000 he earns in savings interest will be tax-free. For higher-rate taxpayers this allowance reduces to £500 per annum.

AND EVEN MORE PRESSURE ON BUY-TO-LETS!

As a further blow to landlords, the Government has announced it will be phasing out higher rate tax relief on mortgage interest paid on residential investment properties.

A landlord is entitled to claim tax relief on the interest he pays on any mortgage he has on a Buy-To-Let property. Currently that tax relief will be at the Landlord’s highest marginal rate of tax. So if he is a 40% taxpayer, he can claim 40% tax relief on the mortgage interest he pays. From April 2017 over a four year period the Government is changing this so eventually any tax relief will be limited to the 20% level. Not only is this a disadvantage for those landlords paying higher rate tax, it is also starting to affect how lenders will do their affordability calculations. These calculations are based on the expected rental income from the investment property. The lenders are concerned that the change the Government has announced might make it more difficult for some landlords to meet their mortgage payments. Therefore some lenders are tweaking their affordability calculations with the result that they may lend somewhat less than before for a given level of rental income.

 

THE AUTUMN STATEMENT!

There were not a great many new announcements in the Chancellor’s December Statement.

Many of the changes that will take place in 2016 had already been announced earlier.
Perhaps the biggest surprise was the Government’s strategy to limit the number of properties being taken up by Landlords by announcing an increase in Stamp Duty on second properties and investment properties by 3% (!) from the 6th of April. In our view this will just fuel a four month property boom as landlords buy before the deadline!

To illustrate the effect of this extra 3% tax, we can look at the Stamp Duty on Buy-to-Lets before and after the 5th of April 2016. Our understanding of the application of the Stamp Duty from 6 April looks like this:

Buy-To-Let                        Buy-To-Let                         Buy-To Let

Purchase Price                   Stamp Duty Now                 Stamp Duty  from 6 April

£125,000                            nil                                        3% = £3,750

£200,000                            £1,500                                 5% = £7,500

£275,000                            £3,750                                 8% = £12,000  (average family home)

£510,000                            £15,500                               8% = £30,800

Note: This increase in Stamp Duty will not apply to purchases of caravans, mobile homes or houseboats.

PENSION AND PROPERTY IN 2016

With the start of 2016 Sovereign enters its 35th year of trading. It looks like the focus of the New

Year will be on pension changes and the property market with an immediate rush on “Buy Nows”,

both on investment properties and on maximising pension contributions – all before the 6th of April!

2015 survived an election here and slumps in the Chinese economy there with little growth in our

own economy but also virtually no inflation. The new “pension freedoms” saw many dipping into

their pension funds for a whole variety of reasons – some sensible and others rather exotic, as

people realised that it was their money and they could have it when they want it (once they reached

age 55) – subject to tax. Workplace pensions in 2015 were reaching the smaller companies with a bit

of scrambling around to get things in place. 2016 will see the real tsunami of the Workplace Pension

as micro-companies approach their Staging Dates (dates by which they have to have the required

company pension in place).

THE KEY TO MANAGING YOUR FINANCES

One of the fundamental principles for us all – whether a Government, a business, a family, or an individual – is that we need to have more money coming in than is going out. It is vital to have controls in place to know how much income has come in and also to know what is being spent. The author Charles Dickens’ communicated this very clearly when he had one of his characters explain that happiness is having at least one more penny coming in as income than is being spent, and that misery starts as soon as that extra penny appears on the other side of the ledger.