CASH ISAs for Investment Clients of Green Financial

Are you an investment client of Green Financial?
Are you considering a CASH ISA for the tax year 2012/13?

And possibly one that locks you in to the product for a number of years?

As a rule, for clients who have previously stated to me they have sufficient accessible cash, unless you have a need to accrue more cash for emergency purposes (and I’m assuming this isn’t the case if you have opted for a fixed term cash ISA where you lock the money away) I am not currently recommending cash ISAs

If you are simply rolling an existing ISA over, to obtain a better rate – or transferring an existing cash ISA to a better rate, that makes great financial sense.

And as above, if you are wishing to accrue more cash for a specific purpose, then sheltering the interest from tax makes sense.

But for most (not all) Green Financial planning clients we have already considered the amount of cash you have available.

Based on this, and on the premise that in the future, we are aiming to help you provide tax efficient income and capital for when you are no longer working, the current numbers don’t seem to stack up for cash ISAs

The current official rate of inflation on the Bank of England Website is 3.4%

On the day of writing this, the last day of the 2011/12 tax year, using my professional sourcing software I can recommend cash ISAs paying up to 3.5% for instant access.

MoneySavingExpert.com shows instant access rates at 3.1%

I can recommend products where you lock your money away for a year and it goes up to 3.6%

Lock your money away for 5 years and rates of around 4.5% are available

So if inflation remains the same (ie doesn’t go up) you’ll earn a real return of 0.1%, on the best instant access ISA. Using the maximum £5,340 that is just £5.34 a year. If you locked away for 5 years in year 1 you’d be earning £53.40 – I know every little helps but it hardly seems worth locking away £5,000+ to earn £50 to me?

And if inflation goes up – it will eat into that real return.

And many people feel the official rate of inflation is not realistic. Many people report things like petrol, heating costs, food bills etc going up far in excess of 3.4% which means in real terms you may be even lose money in terms of spending power over the term of the product

Anyway, just my thoughts as your professional financial adviser.

But to reiterate, this blog post is not intended to be personalised financial advice. If you have other reasons for investing in cash ISAs they may well override what I have typed here. If you wish to discuss your own personal situation as a client of Green Financial I’d be delighted to speak.

But as a general rule, for those clients that have a financial plan, whereby we have already taken into account your cash savings, and given the current rate of returns on ISAs compared to the rate of inflation (official and ‘real life’) and given the long term nature of a financial plan, I do not think cash ISAs make much sense today.

The Financial Year End, The Budget & A Tax Planning Ticklist

Financial folk speak of the end of the tax year and rush to finalise fiscal matters.

But what exactly is the tax year, what needs to be done and why?


Whether a layperson, interested observer, lapsed expert or those simply in need of a memory jog there follows a quick introduction to the tax year, a brief guide to the budget and a short tax planning ticklist.

THE FINANCIAL YEAR END

The UK tax year, or financial year, runs from 6th April until 5th April the following year. It is a twelve month period used for, amongst other things, measuring earnings and calculating income and the tax payable on them. Confusingly for the purposes of corporation tax and government financial statements the year starts April 1st (no fooling!) and finishes March 31. And those readers who run companies or know someone that does will know a company year can start and end whenever the owner wants and a company year can even be longer than 12 months! But that is for another blog post…

Back to the UK taxpayer fiscal year. Why April 6th? Surely running the tax year the same as the calendar year would make life easier? The sensible Swedes and the economical Germans do exactly that. But we Brits are not alone in our quirky dates. Across the pond Americans run from October to September and down under our Australian cousins have a tax year that starts in July and ends in June.

The April 5th year end for personal tax and benefits reflects the old ecclesiastical calendar, with New Year falling on March 25 (which was known as ‘Lady Day’), the difference being accounted for by the eleven days "missed out" when Great Britain converted from the Julian Calendar to the Gregorian Calendar in 1752. The British tax authorities and landlords were unwilling to lose 11 days of tax and rent revenue so under the ‘Times of Payment of Rents, Annuities, &c’ of the Calendar Act 1750, the 1752–3 tax year was extended by 11 days. From 1753 until 1799, the tax year in Great Britain began on April 5, which was the "old style" new year of March 25. A 12th skipped Julian leap day in 1800 changed its start to April 6. It was not changed when a 13th Julian leap day was skipped in 1900. So since 1800 the start of the personal tax year in the United Kingdom has been April 6th.


THE BUDGET

The next Budget will take place on Wednesday 21 March 2012. Readers who are up to speed with social media will be able to follow the official HM Treasury Twitter channel with the #Budget2012 hashtag.
Or me at @ianjamesgreen

Most of us recognise budget day as when the Chancellor appears on his doorstep with the famous red box. The Budget box or 'Gladstone box' was used to carry the Chancellors speech from Number 11 to the House for over 100 consecutive years. The wooden box was hand-crafted for Gladstone, lined in black satin and covered in scarlet leather. The word “budget” derives from the term “bougette” – a wallet in which either documents or money could be kept. And one more fascinating budget fact … Chancellors are allowed to refresh themselves with alcoholic drinks during their Budget speech - no other Member of Parliament can do this although we could be forgiven for thinking otherwise with some of the hullabaloo we witness!

The Budget is the single most important economic and financial statement made each year by the Chancellor of the Exchequer to Parliament and the nation. There is an act of parliament that requires the Government to produce a Budget Report for each financial year. There is a ‘Charter for Budget Responsibility’ which sets out what the Budget Report must cover.

The Office for Budget Responsibility (OBR) has to publish two economic and fiscal forecasts for each financial year, one of which is to be the official forecast on which the Chancellor sets out the Government’s fiscal policy in the Budget. The OBR’s duty is to examine and report on the sustainability of the public finances and it is required to do so objectively, transparently and impartially.

The Budget is actually the Chancellor’s response to the OBR’s forecasts.

Historically, the chancellor would often announce in the budget (end of March) a new measure, such as the removal of a benefit, or an increase in an allowance, and give a number of days to act, normally the start of the new tax year (first week of April). Buy now, while stocks last, in other words. Sadly, those days are gone with any new measures (that usually make us worse off!) implemented immediately. This is why the market for budget forecasters is now so big, as those of us that read the financial pages know too well. In the run up to the budget the press is full of ‘what might happen’

Rather than go over here what can be read elsewhere with a quick google, let’s look at just one personal financial matter, that has been mentioned as possibly going every single year I can remember since starting as a financial planner in 1995. Higher rate tax relief on pension contributions. Will this finally be the year it goes? Those against say it is the last thing that should happen. We need to be encouraging private pension provision, not the opposite. Those for say it is a fair tax, that only hits higher earners and will raise billions. Which camp are you in? Tune in to George on March 21 to find out…

What are my predictions? Clients of Green Financial will know that in all matters, whether financial, legal, political or investment I do NOT claim to own a functioning crystal ball! But climbing down off the fence, albeit briefly, I think a budget for growth is needed. I think there will be a few hard decisions for the chancellor and a few unpopular items, normally hidden away in the small print rather than announced in the House. But I also think the nation needs good news, so maybe a few pleasant surprises could be in store.


TAX PLANNING TICKLIST

In terms of personal financial planning, a few items to consider. Please remember, if you are in any doubt as to whether any of these tips apply to you or your family, either please ensure you know exactly what you are doing or preferably seek professional independent financial advice.

ISA – open and use your ISA allowance. You’ll pay no income tax or capital gains tax on any gains. You can choose cash or stocks and shares versions. This year’s allowance is £10,680 per person.

ISA – next year. The allowance rises to £11,280 on 6th April but you can apply now. For those that contribute monthly amounts you’ll need to change your direct debit amount from £890pm to £940 per month

Junior ISA – introduced in November 2011 the allowance is £3,600 per eligible child and the benefits are similar to adult ISAs

Capital gains – we all have a CGT allowance of £10,600 a year. Many of our clients sell shares to realise a gain and use the proceeds to fund the next year’s ISA.

Pension – Will this be the last hurrah for higher rate tax relief? (see above). Currently tax relief up to 50% is available. But pensions are a long term commitment with seemingly ever changing rules. Weigh up the pros and cons for your situation before committing too much.

Junior pension – parents and grandparents can contribute to a pension for a child, placing up to £3,600 away at a cost of only £2,880, a tax break of £800. But will the child thank you for a present they can only open when age 55?!

National Savings – the rates have dropped massively and the number of accounts on sale has also fallen. But there are still tax shelters available including the ever popular premium bonds

Inheritance Tax – There are a number of gifts one can make to reduce the liability including giving away up to £3,000 from capital.

Personal allowances – Ensure you make full use of these, especially if one of a couple is a lower rate tax payer than the other.

As at the start of this part of the article, PLEASE seek professional advice if in any doubt whatsoever over the suitability of these tips for your own situation.

There is a FREE download on end of year tax planning here:

http://www.iangreen.com/downloads/tax2012.pdf


and a FREE wealth & tax tips guide with FIFTY tips here:

http://www.iangreen.com/GFA-Tax&WealthTips2011.pdf


Both of the above are also available as photos to view at www.facebook.com/GreenFinancial

Save into a Barclays cash ISA? Time for a rethink?

Here is a screenshot of some posts on my facebook page (www.facebook.com/greenfinancial - do have a look and hit 'like')
I was at a train station in March, as 'ISA season' got underway and saw an advert for Barclays so-called 'Golden ISA'. I had recently reviewed a previous issue of this for a financial planning client and had noted the way the client had originally been attracted by high rates then seen it drop away. So I light heartedly took the mickey out of the advert imagery with that in mind.

Then not 2 months later, I noticed that http://www.thisismoney.co.uk/ tweeted (@thisismoney - well worth a follow) that Barclays had quietly dropped the rate, from 3.25% to 2.2% immediately taking them out of the best buy tables. So my prediction came true: just like the two previous tax years, Barclays heavily advertised a high headline rate, along with 'promises' then dropped the rate when no one was looking (except @thisismoney and me, @ianjamesgreen !).

And imagine my surprise when today @thisismoney revealed Barclays have now also dropped their 'rate promise' which promised to track Bank of England rates on the way up.

As an independent, fee based, financial planner, I report to the FSA on 'TCF' - Treating Customers Fairly. I wish the FSA would ask Barclays if they think their advertising and marketing methods are 'Treating Customers Fairly'

Junior ISAs - due Nov 2011

A new tax-free savings account for children, known as the JUNIOR ISA, will be available from 1 November, the government has confirmed.

The Individual Savings Account (Isa) will have an annual contribution limit of up to £3,000 in cash and shares.

The government said last autumn that it was considering the investment scheme, and has now published draft regulations for consultation.

Junior Isas will replace Child Trust Funds, which have been phased out.

However, I believe the government have missed an opportunity to simplify things here, as children who are eligible for an old child trust fund will not be eligible for a Junior ISA. This means children who have a CTF (and the parents may not even have chosen it, as if they didn't submit the voucher in time, the government just select a provider) will be limited to £1,200 a year instead of the £3,000 limit of a junior ISA. And even without the difference in limits, this is just another piece of admin needed before opening an account.
See my previous blog post for details of which children are eligible for CTFs
http://greenfinancial.blogspot.com/2011/02/time-flies-saving-for-children.html
but generally speaking, it is children who were born in 2011 or later or before 1 September 2002.



Savings or Investment

As mentioned above, investments in Child Trust Funds (CTFs) have a £1,200 annual limit, but the new Junior Isas will have a £3,000 limit. This will be available whether through regular monthly savings, a lump sum, or a combination of both.

But, unlike CTFs, there will be no government contributions into each child's savings pot.

Junior Isas will be offered by many of the providers that currently offer Isas to adults.

"Junior Isas are a great example of a simple, clear and jargon-free financial product that allows families to save and invest for their child's future," said Mark Hoban, financial secretary to the Treasury.

Fidelity International has calculated that if a parent invested the full allowance of £3,000 each year they could accumulate savings of £107,923 by the time their child reached 18, based on growth of 5% a year.

So you can see why it seems unfair that if your child was born in the time that CTFs were in existence, the total pot possible to accumulate will be much reduced.


Timeframe

Money invested in Junior Isas will be "locked in" until the child is 18, and the Isa will then, by default, become an adult one.

The Treasury has estimated that six million children will be eligible for Junior Isas at launch, with 800,000 more eligible each year after that.

Consultation on the government's regulations will continue until May, with the launch date of the product due in November 2011

7 Financial Year End Tips – Checklist 2011

The weekends are passing fast in the run up to the end of the tax year. Before we know it, it will be 23rd March when the budget will be announced so why not get a head start on the financial planning needed before the end of the tax year and check the list below.

1. National Savings
The interest rates may not be market leading but as National Savings and Investments is 100% backed and guaranteed by the UK Treasury it is arguably the safest place for your money. Disappointingly they currently have no tax free savings certificates on offer – But you can save up to £30,000 tax free into Premium Bonds with a chance every month to win £1 million or one of hundreds of thousands of other tax-free cash prizes. And you can get your original money back at any time.

2. Capital Gains Tax
Got Gains? - Have you incurred capital gains this year? Each individual, even children, have a Capital Gains Tax (CGT) allowance of up to £10,100. You could crystallise gains (for example from gains in the value of shares you hold) without paying a penny of tax.

3. Use your ISA allowance
You can shelter up to £10,200 this tax year. Funds saved in an ISA (cash or stocks & shares) means you pay no further income tax and no tax on any gains.
For more reasons why to use your ISA allowance see the article on:
http://greenfinancial.blogspot.com/2011/03/fye-tips-55-reasons-isa.html

4. Use your pension allowance
Depending on your situation you could contribute anywhere from up to £3,600 to £255,000 before April.
Everyone, even non-earners or non taxpayers can pay in up to £2,880. If you pay this amount the tax man automatically adds £720! Making a total of £3,600 invested.
So real cost to you is £2,880 for £3,600 in your pension
Parents and Grandparents can even do this for their children or grandchildren.
See previous blog posts for more end of tax year pension tips


5. Inheritance Tax
There are numerous ways to mitigate or reduce your liability but a simple end of year allowance that is often missed is the ability to give away £3,000 from your capital each year without any inheritance tax implications. This saves £1,200 per person in potential future inheritance tax liability.
Remember you can also give away smaller gifts of up to £250 per donee

6. Venture Capital Trusts
Often only for the brave of heart or very risk orientated Venture Capital Trusts (VCTs) offer adventurous investors the chance to invest in some of the smaller companies in the UK. In return for taking on more risk a generous tax rebate of up to 30% could be available. Definitely one for professional advice though, not generally a ‘DIY’ product.

7. Will Review (or finances in general)
Have your circumstances changed this year. Births, Deaths & Marriages and all sorts of other happenings can be the catalyst for reviewing and changing your Will, or even triggering a review of your finances in general. Financial Spring Clean anyone?

And finally, want to keep one step ahead?
Why not plan for next year’s ISA contribution now? The annual allowance will rise to £10,680, with half of that available to invest in cash if you wish.

FYE Tips - 5.5 Reasons - ISA

5 and a half reasons to use your ISA allowance before April 5th 2011

This is not intended to be a political statement. As with all my blog posts professionally I remain neutral. Of course I have a personal political point of view but that has no place here.

But have you, like me, noticed that the Government is getting better at taking our money off us?

With taxes rising and inflation eating into the purchasing power of our salaries and savings there has never been a better time to take advantage of one the easiest and arguably most generous tax break of all – investing in an ISA (Individual Savings Account)

Still not convinced? Here are 5 reasons to use your ISA before April 5th this year:

1. Avoid Higher Taxes
More and more of us are being caught in the higher taxation net. No matter what individual tax seems to go down, the overall tax burden is continuing to rise. The so-called ‘tax freedom day’ when we stop contributing to Govt coffers and start to keep our own money (see http://greenfinancial.blogspot.com/2010_12_01_archive.html) is getting later and later in the year – This year it is May 30th.

The Government’s stated desire to take increasing numbers out of the tax system altogether by raising the personal allowance (They are aiming for the first £10,000 everyone earns to be tax free) has come at a price. It is being paid for by those who would have been at the top end of the basic rate tax band but have now tipped into the ranks of the “higher paid” (even if bringing up a family on £40,000 or so doesn’t exactly feel like the high life!).

For those fortunate or hard working enough to earn over £100,000 the personal allowance is progressively taken away until at about £113,000 there is no personal allowance at all. So if you earn over £150,000 half of your earnings go straight to the government. All earners are about to pay another 1% a year on National Insurance (surely now just income tax by any another name!). I could go on

2. Save More Tax Free
The ISA tax break is actually getting better.
Having been increased to £10,200 last year, the annual allowance is due to rise by the rate of inflation in April to £10,680. That means that a couple can put aside more than £21,000 a year between them completely free of further income tax and with no capital gains tax to pay - ever. Mixing both cash based and shares based ISAs means that for most people the ISA allowance, coupled with the £50,000 a year that they can put in their pension each year, means they don’t need to worry so much about tax on any of their short, medium and long-term savings.

3. Use It or Lose It
If you choose not to take advantage of it by 5 April you can’t roll it over into the next tax year. Many people have built up really sizeable pots over time – At Green Financial with have many clients with six figure plus ISAs
We have many more clients with far more modest amounts gradually accruing via the discipline of regular monthly savings. But if you miss the opportunity there is no going back.

4. Flexibility
Sure, Pensions are great, they have their place in long term saving and the upfront benefit of tax relief on contributions is especially attractive to higher rate taxpayers (and even more so to those paying the top rate of 50% income tax). But there is a price to pay for the tax relief uplift and it is that your money is locked away until at least the age of 55 … and even then there are restrictions on what you can do with your money … and you pay tax on the income you earn from your pension pot. With an ISA there’s no upfront benefit but there is also no additional tax to pay ever again … and there’s no restriction on when and how much money you can take out of an ISA. For some this freedom is the difference between starting to save and not. ISAs are flexible in other ways too. You can shelter most forms of savings and investments in an ISA. With some limitations, you can mix and match cash and stocks and shares and funds (including property funds) within the ISA tax wrapper. If you don’t know where you want to put your money and are still deciding whether to go the ‘DIY’ route or to seek fee based professional independent financial advice then a ‘cash park’ type ISA could be a good stopping off point while you make up your mind.

5. Avoid CGT
Some people say that ISAs are not really all they are cracked up to be, especially for basic rate taxpayers. It is true that most people never exceed the £10,000 or so of CGT (capital gains tax) we are all allowed to incur each tax year before we are liable for tax. But you only need to accumulate a £100,000 pot for a 10% annual return to tip you into tax-paying territory. Steady saving and a tail-wind from the market could easily get you there but if you have not bothered with the ISA tax wrapper in years past you cannot rewind the clock later on. When CGT was just 18% that might not have seemed such a problem but at 28% it is much more of a consideration and who knows where it might go in future.

5.5 And finally … One of the best things about the use it or lose it ISA allowance is the way that around this time of year (often referred to as ‘ISA season’) it forces us to be disciplined about saving over time. The astute investor can, over time, benefit from the phenomenon known as ‘pound cost averaging’ – see http://greenfinancial.blogspot.com/2011/02/pound-cost-averaging.html)

Whether month by month or viewed as year by year, what this means is that we are obliged to invest in the market in all phases of the investment cycle and so we benefit from buying when markets are depressed and when, left to our own devices, we might shy away from committing ourselves.


So there we have it, five and a half reasons to use your ISA allowance before April 5th 2011.


The required small print: Please don’t take this article as personal or specific financial advice. It is intended to be guidance only. The value of any tax break will depend on your personal circumstances. Tax and the associated laws are subject to almost constant change. This is correct as at the time of writing. E&OE. If you are in any doubt as to whether this information is of benefit to you please seek independent financial advice, ideally fee based. Please remember if you invest in stocks and shares the value of your investment can go up as well as down. Other elements such as currency exchange fluctuations could affect the value of your investment. If you have property based investments you may not be able to sell when you wish to realise your funds. Past performance is no guarantee of future returns. If you invest in cash based investments inflation may erode the purchasing power of your savings.