Woodruff Financial Planning blog

OK, so it’s early days for the new Government, but we thought you might find it useful to have a run down of the likely proposed changes to your finances from the new regime.  Please bear in mind that much of this is speculation at this point!

Emergency budget
There will be a budget within 50 days.

Income tax
It seems that the Liberal Democrat pledge to increase the income tax threshold to £10,000 will stay.  This means no-one will pay tax below £10,000 earnings.  There is no indication yet as to when this would be introduced,

National Insurance
The Labour policy to raise National Insurance by 1% will be scrapped.

Married couples
There has been talk of a tax break for married couples and civil partners worth around £150 per year.

Inheritance tax
The Tory policy to increase the threshold to £1 million looks to be put on ice.

VAT
Neither party has ruled out an increase in VAT.  An increase to around 20% seems likely.

Capital Gains Tax
It seems likely that this will rise from the current rate of 18%, potentially nearer to 25-30%.  This would hit investors hard.  otherwise, there could be a proposal to create bands of capital gains tax, similar to income tax.  This would complicate the system.

Abolition of pensions higher rate relief
This was a Liberal Democrat policy, and looks quite likely to happen.  This would mean that higher rate income tax payers would lose the additional benefit of making pension contributions, and would be restricted to the same benefits that basic rate tax payers get.

Scrapping compulsory annuities at age 75
There seems to be a commitment to scrap the current requirement to take an annuity at age 75.  This should allow those with complex affairs to better manage their retirement incomes.

Other cuts
£6 billion of cuts to public services have already been announced, but this is small change compared to the budget deficit.  Therefore expect other cuts to public services.  One such change is a review into public sector pensions, so this should mean reductions in future benefits for public sector workers (while preserving accrued rights).

With the UK election due on the 6th of May, we thought it might be useful to look at the policies of the main 3 political parties.

Tax

Comments
It is obvious that after the election that taxes need to rise, or services need to be cut (or both), to combat the heavy borrowing taken by the State during the credit crunch.  We would expect more measures to be announced after the election.

Financial products

Comments
Employers won’t be happy about the proposed changes to company pensions, but we do think this is a good thing. Anything which encourages people to start saving towards their retirement will go some way to solving our demographic time bomb.

The commitment to increase pensions in line with average earnings is a welcome change, although this does not make up for the many years where state pensions fell behind average incomes.

We are generally not in favour of replacing the FSA (with the Bank of England or anyone else). This is not because of any particular view other than we are not convinced that this change would make any difference to consumers.  Actually, most of the same people would probably run the new regulator, and all this would achieve is more cost to us as a business, and therefore to our clients.

For more information see:

http://www.labour.org.uk/policies/home

http://www.libdems.org.uk/pocket_guide_to_policy.aspx

http://www.conservatives.com/Policy.aspx

Here is our summary of today’s budget.  This is not designed as a comprehensive list of the areas covered, but rather a commentary on the financial implications.

Stamp Duty
Stamp duty below £250,000 has been abolished for 1st time buyers from midnight tonight. 90% of first time buyers won’t pay stamp duty. This applies for this tax year and next tax year only.

But for properties over a £1million, stamp duty will rise to 5% (from 4%). Mind you, that’s a whopping £50,000 tax on such a property purchase!

Entrepreneurs relief
Good news if you own a business – entrepreneurs relief has been doubled to £2 million.  This means that you only pay 10% tax on the profits from the sale of your business, rather than 18%.

ISAs
As previously announced, maximum allowable tax-free ISA contributions are to be £10,200 from April (for everyone).  These limits will increase by inflation each year in future.

Income tax, national insurance, VAT, capital gains tax
No changes not already announced.  Obviously, the 50% tax on earnings over £150,000 has already been announced.

Tax relief on pensions
Confirmation of previously announced restrictions on tax relief on pensions, which affect top earners.  See here.

Public sector pensions
Reforms will be made to cut the pensions bill, which sounds ominous if you work for the state…

Freezing of inheritance tax thresholds
For a further 4 years, which effectively means a slight tax increase as assets (hopefully) increase in value.

Mortgages
HMRC is to open discussions with mortgage lenders on the formal introduction of an income verification service.  We are unsure how this would work in practice as this data is out of date by its nature for the self-employed by at least 9 months.

Fuel duty rises
Next month’s planned 3p increase in fuel duty will be staged to soften the blow. It will go up by 1p in April, another 1p in October and a final 1p in January 2011.

Bank bonuses
An extra tax on bank bonuses has already been announced.  The 50% extra tax has raised £2 billion (twice as much as predicted).

Tax evasion
The Government will be harsher on those caught evading tax offshore. They expect to raise up to £500 million per year.  Those caught will be fined up to 200% of the tax evaded.

Housing benefit
To be cut back for expensive properties.

Basic bank accounts
Everyone will be guaranteed access to a bank account – surely a necessity of modern life?

We often come across financial services firms which call their advisers “Financial Planners”.  They might call themselves Financial Planners, but what most of them offer is financial product sales.  The purpose of this post is to give you an idea of what we do as Financial Planners, compared to other Independent Financial Advisers, who might work for a firm or a bank.

We do this because we feel that the role of a Financial Planner is actually distinct from that of the rest of the financial services profession.  By consequence, we believe that it is very difficult for you to determine the differences between the various services on offer – we would prefer for the role of a Financial Planner to be enshrined and protected, just like that of a Chartered Accountant or Solicitor.

Much of this information is cribbed from the Institute of Financial Planning website, which is aimed at promoting the Certified Financial Planner qualification and standards (to which we subscribe).

What is Financial Planning?
Financial Planning is the process of developing strategies to help you manage your financial affairs so you can build wealth, enjoy life and achieve financial security. Financial Planning is an effective way of ensuring you are fulfilling your life ambitions without having to worry about your finances.  Financial planning is about building towards financial independence, and is not focused on goals, income, assets, expenditure etc.  This process is not about product sales (although obviously, products would be used towards the end of the process to achieve the goals set).  Financial Planners tend to be fee-based because they charge for the creation and maintenance of a plan rather than selling a product.  This means you get what you pay for – advice rather than sales.

What is Financial Advice
Financial advice is what is supplied by the overwhelming majority of UK financial advisers.  This tends to be bespoke, targeted, transactional advice leading to a financial product sale.  As most financial advisers are commission based, they rely on selling you a product to get paid for their work.

1. What is their experience?
   Obviously, this is important; but as important is to ask their experience in dealing with situations similar to those faced by you.
2. What are their qualifications?
   This is more important than many financial advisers will lead you to believe.  Having advanced and specific qualifications shows a technical expertise, and a commitment to keeping up to date with the current trends.  After all, would you go to a doctor who only had a basic level of qualifications, and hadn’t kept up to date in 20 years?
3. What services do they offer?
   They should be able to easily define the services they offer to clients so you can decide if these are right for you.  You need to decide whether a comprehensive ongoing review is right for you, or you just want transactional advice on a one-off basis.
4. What is their advice process?
   How they go about delivering their service is also important – after all, you want to ensure that you will get a robust and consistent delivery of your service.  Our advice is to avoid advisers who cannot easily articulate their process.
5. How are they paid?
   This is important to your pocket, but also to know if you need to watch out for signs of bias.  You also need to know up-front the extent of your liabilities.  Our preference is for a fixed fee agreement, but many people prefer to operate on commission.
6. What is the typical cost of their services?
   This will help you to decide if the service is affordable and fits in with your expectations.  Ultimately, you want to avoid an open-ended commitment on your side.
7. Who else benefits from their recommendations?
   This is a question often missed.  You may have been referred to the adviser following a recommendation.  Does the introducer receive any payment from this arrangement?  We are aware of some local independent financial advisers who regularly pay out up to 50% of their income to professional introducers such as accountants.  While this is fine if the client agrees, we would be concerned that the client is not aware of the arrangement.  If you think about it, if the introducer receives payment (of such a large amount), your adviser will be forced to increase the fees or commission charged to you to achieve their profit margins.
8. Have they ever been disciplined by the Regulator?
   You would probably want to avoid advisers who have been sanctioned by their professional body, but you can actually check this out yourself by searching for the firm or adviser on the FSA Register.  All financial advisers must be on this register to be able to off you financial advice.  If they are not registered, then you are not covered (and the ‘adviser’ should be reported).

I turned on the news this morning to see a happy couple in front of the TV cameras having won a huge jackpot on the Euromillions.  This turned my thoughts back to a previous post on Sudden Wealth, which would probably describe the situation of the lucky winners today.

A psychologist was commenting on the effects of such a life-changing event, and in particular focused on issues of how the couple’s life would be different in many ways.  Obviously, most of their financial windfall will be positive, but he was cautionary about how the money would need to be managed, both from a financial planning perspective, and from an emotional standpoint too.

We think that people need to think about their financial goals at all points of their lives, but at times of sudden wealth financial strain can be quite severe.

For many people, this will not be as drastic as a huge lotto win.  But there are many other situations which can bring about a life-changing influx of money.  With this money comes the need to manage your finances.

Think about the following situations:

Sale of a business
You would hope to sell your business for a suitable sum, which after tax would help provide you with enough money to achieve your financial lifestyle needs.  No doubt you would need financial advice on when to actually sell (i.e. when you have enough to retire), but also how to manage the capital to generate a suitable income.

Inheritance
You may come into a significant sum of money which would need management both for capital and/or income.  It can be tempting to spend the windfall, when some sound financial planning will set you on a secure financial future. See our inheritance tax section on our website.

Divorce
This comes with issues for both sides.  Both parties will need to plan how their finances have changed, perhaps making up lost pension benefits or buying a new home.  Of course, if you receive pension benefits from your former spouse as part of the divorce you will need help to manage these new assets. See our leaflet on pensions and divorce.

Critical illness
If you have managed to claim on a critical illness policy then your life will have changed dramatically.  You will probably have a serious and debilitating condition, and would likely have to give up work.  The policy may have been set up to simply pay off the mortgage, but you might have also provided further benefits to help give you an income and/or make alterations to your home.  In any case, you would probably want to have some ongoing advice to ensure that this resource is best used.

Ultimate high earners
In this category might be sports stars or entertainers, who get paid significant sums for their talents; alternatively, directors or city workers might also receive bonuses as part of their package.  For some, they might want to seek a financial planner to help them organise their finances into a sound footing to avert the times ahead when the high income might dry up.

Thinking about those lucky Euromillions winners, I would say 3 things:

1. You should probably avoid the lotto – It could be you, but statistically, it probably won’t;
2. If I won the lottery, I definitely wouldn’t appear on TV spraying champagne everywhere;
3. I also wouldn’t be saying that my life would not change. With a sudden windfall, everything changes, and this needs careful management both from a financial and an emotional perspective.

Click here to download out leaflet on sudden wealth.  You may also be interested in our core services, which aim to help you plan your finances and manage your money.

If you are reading this blog you are no doubt interested in financial planning and what it can do for your future financial prosperity.

Have you ever wanted to prepare your own comprehensive financial plan, to work towards your future financial independence without having to pay for it?

Well now you can!  We have just launched Your Financial Plan - this is a free resource designed to give you all the tools you could need to be able to prepare your own comprehensive financial plan.

Take a look, and if you like what you see, sign up to receive the free materials.  You can unsubscribe at any time.

We have just published our latest financial planning newsletter.

Click here to view the newsletter.

According to a recent ICM poll, conducted for Aviva (see here), less than half of consumers would be willing to pay any sort of fees for financial advice.  We think that this kind of survey is misleading since in our experience people will pay for advice if they can be shown value for what they are receiving.

This goes to the heart of the commission versus fees debate.  Most UK financial advisers get paid by commission, although some may tell you that their advice is ‘free’. If they do, don’t believe them because getting paid by commission does not mean free.  Commission is paid for through the charges of the product.

We charge you for our time, advice, research and expertise just like any other professional service. We believe that commission creates an inherent conflict of interest between your and our interests, as this payment method is intended to encourage use of certain product providers over others. After all, if your garage was paid only if they sold you a new part on your car, rather than for the service, do you think they would sell you a new part each time? Of course they would because that is how they would get paid; and they would certainly be more likely to recommend the most profitable part for them rather than you.

We work on a fixed fee basis, so that you can be sure of the cost to you, regardless of how long the work takes.

Click here to see how we charge for our advice.