Woodruff Financial Planning blog

You may not have heard of qualifying savings plans, as these have become unpopular over the last few years.  These used to be popular with direct sales forces selling expensive with profits plans.  However, they are still available and have come back into focus following the recent changes to tax rates.

What are Qualifying savings plans (QSPs)?
These are savings plans which commit you to a minimum of 10 years savings.  If you save for 7.5 years, or 10 years if the initial term is longer, you will be able to withdraw your savings from the plan without any further tax, even if you are a higher rate tax payer.  The plans also come bundled with life cover.

QSPs have advantages over other products in that you can save a lot of tax when you come to cash in your plan, even if you are still paying higher rate tax.  If you had a general investment account, you would be liable to capital gains tax on the cashing in of the plan.  This is currently 28% for higher rate tax payers, and 18% for basic rate tax payers.  The QSP would avoid this tax quite legitimately, although it would still pay tax on the savings income while invested, normally at around 16-18%, as opposed to up to 40% or 50% with other savings plans. We would assume that you maximise your ISAs, since they are largely tax free, but once you have done that, you could consider QSPs.  QSPs have an advantage over pensions in that you are not constrained over what you do with the capital, and when you withdraw the money, although taking the money early would remove the tax-free status.  You can write the plans into segments so that you can choose to cash some of the plan in early, albeit attracting tax at that point; this gives you the ability to access cash when you need it, and retains the tax-free status of the remaining savings.

Who should consider a qualifying savings plan?
We would assume that you would maximise your annual ISA allowances (£10,200), but after that…

Savings for high earners
If you pay higher rate income tax, you could consider paying into a QSP, mainly to get your money free of tax at the end of the policy.  Thus, you would save paying capital gains tax of 28% (or 18% as a basic rate tax payer) on the cashing in of your plan.  The plan could be used to fund your retirement, weddings, university or private education costs.

Those reaching their pensions cap
It is becoming more common to reach the limit for pensions contributions.  In the recent budget, the Chancellor announced that they are considering bringing in a limit to contributions of £45,000.  For those contributing over this limit, a QSP could be useful.

Regular bonuses
QSPs can receive annual contributions.  If you receive a regular bonus, the QSP may be a useful tool for you (so long as the bonuses can be realistically predicted).  You can use the plan to shelter your bonuses from tax.

Converting capital
If you receive a lump sum, say from an inheritance, a QSP can be used to convert the capital (which would be taxable at up to 28%) over a number of years into a lower tax QSP.

Life cover
The QSP comes with life cover bundled into the plan.  This can be used as a form of inheritance tax planning, as the cover is usually available with limited medical underwriting, and therefore can work well for older people with pre-existing conditions.  The life cover can be split from the savings element, and gifted into a trust.

Obviously, this is a complicated area, so we recommend that you seek independent advice before taking out such a plan.  Please contact us if you need any advice in this area.

You will have probably seen the recent reports that inflation has shot up significantly in the last few months, and now rests at 3.5% as measured by the Consumer Prices Index (CPI), the inflation measure preferred by the Government.  Interestingly, the Bank of England predicts that this will drop back again later this year, before rising again.  See here for details.

This is largely due to the increase in VAT at the start of the year.  This measure strips out mortgage costs, and the Retail Prices Index (RPI), which includes these costs, was at 3.7% in January. 

This should be of concern to you if you have bank savings, or are on a fixed income (perhaps a pensioner).

I saw a couple this week, who had recently signed up to a fixed rate bond account with a major high street bank.  They had invested £10,000 each.  One client pays higher rate income tax (at 40% of interest received), while the other pays basic rate income tax (at 20% of interest received).  The rate they have been guaranteed is 2.8% per year over 2 years, but this interest is taxable.  Therefore, after tax, the basic rate tax payer will make 2.24% per year, and the higher rate tax payer will make 1.68%.  While these are not fantastic rates, they are typical of the bank market at present.  The clients consoled themselves that at least they are guaranteeing their capital.

The money won’t actually go down – the deposits will be guaranteed to come back to them as they cannot go down in value, the bank is well capitalised and the deposits would be covered by the compensation scheme.  But when you think about the effects of inflation, they do not look so great.  With inflation currently at 3.5%, they will actually be losing money in real terms.  The basic rate tax payer will be effectively losing 1.26% per year in real terms, and the higher rate tax payer will lose 1.82% per year.

Now, everyone should have some money on deposit to use as a rainy day fund, but these investments were not taken for this reason.  The fact is that they are tied in for 2 years, so they are now locked into this account (or face losing the interest).

The point is that you should not just look at the headline rate of your investments and savings.  You should also think about tax, charges and the effects of inflation.  Obviously, we can help with this (particularly with our Portfolio Management service).

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.

5 ways To measure risk in investment portfolios: http://viigo.im/2fQH

This is an interesting article which explains some of the technical measures which we can use to assess risk in your investment portfolios.  If you are just looking at past performance you could find yourself taking excess risk with you money, or worse, paying for fund management from a closest tracker fund.

Standard Life holds with profits bonus rates. If you hold such funds your chances of growth are restricted: http://viigo.im/2fQD

We think that these type of funds are outdated since they are difficult to understand for consumers, and are also difficult to value.

I attended a meeting of trustees in London this week, to conduct a general review of their investments, and also to meet the professional legal trustee who is advising the trustees.  What struck me from that meeting was the need for trustees to seek professional legal and financial advice.

This particular trust is relatively complicated in that it seeks to provide income for some beneficiaries, and when they die, others get the capital.  As you can imagine, this could lead to some conflict over how to treat the assets and investments of the trust, as different decisions could favour one class of beneficiary over the other.

Legal advice
The presence of a qualified solicitor and STEP practitioner was invaluable to the trustees.  They were able to use his expertise to understand their obligations, their investment powers, and to talk through different options for the future treatment of the trust. I can only imagine that without such assistance the trustees could experience potential problems at a later stage.

Financial advice
We are helping the trustees to fulfill their obligations to produce an income for some beneficiaries now, and also to grow the capital for others later.  As you can imagine, this is a delicate balancing act, and needs some meticulous planning.  Essentially, we are following our usual investment process by managing risks and hopefully maximising returns and income over time, but we are paying particular regard to the needs of the various parties.  What is important in these circumstances is to undertake regular reviews.

Click here to read our simple guide for trustees on their obligations under the Trustee Act.

According to the Halifax, UK house prices rose by 2.7% per annum in real terms over the last 50 years but did fall in value over some periods. http://viigo.im/28KK.

What this goes to show is that property investing can be a good long-term strategy towards building up assets.  However, be aware that there are many pitfalls to owning (and renting) property.  Do not fall into the trap of believing that property never goes down in value (it does).

If you are thinking of getting into buy to let investing, why not read our factsheet on the risks of buy to let.  This might help you to clarify whether buy to let is right for you.  Of course, all investments should be made as part of a diversified portfolio.

Get your free investment or pension portfolio review: http://bit.ly/4NEFvG.

We are offering a trial to allow you to investigate the basic performance of your pension or investment portfolio. Contact us to give us the details of your investment funds, and we will produce a basic analysis of your portfolio to give you an idea of how it is doing.

One of the unique pitfalls of financial planning is suddenly coming into money.  This might affect you if you fall into the following categories:

• Sale of a business
• Inheritance
• Divorce
• Critical illness
• Windfalls (e.g. lottery win)
• Ultimate high earners

It may surprise you to think of it, but sudden wealth can be negative as well as positive.  Some commentators have described this as ‘affluenza’ as the responsibility of the extra wealth can lead people to suffer from stress as a result of managing the assets.

Click here to download our factsheet on sudden wealth.

Unsurprisingly, we can help.  We have a service which directly resolves all the issues people face when they come into money – the Portfolio Management Service.

If you are reading this, then you probably have a sizable amount invested in investments or pensions.  Most people do some research when they set up their investments (and this applies to most advisers too!).  However, many (most) investments are rarely reviewed.

If you think about it, if you have many thousands of pounds invested you really should be keeping a strategic eye on this money (after all your financial security depends on it).  If you bought a car for £20,000 wouldn’t you get it serviced each year? The alternative is to expect something to go wrong in the future, probably when you most need that money.  Well, your investments or pensions could/should end up being much more valuable than you car, but when was the last time you reviewed them?

What should you look to review with your investments?

• You should be able to know the rough value of your holdings at any point
• You should understand the level of risk you are prepared to take, and the likely positive and negative outcomes this may generate;
• Where your money is invested, and what this means for you;
• When to make strategic changes to your portfolio;
• Know when to switch out of funds;
• Know what the investment and income outlook is for your investment.

We don’t think you need to look at things daily, but you should look at things at least annually.  Failure to do so could mean that you end up taking more risk than you meant to, and could end up leaving you with a nasty shock at a later date.

If you have an adviser, ask yourself how often they sit down with you and explain all of the above to you.  If the answer is that they do not, then perhaps you should think about changing your adviser!

How do we help clients with this?
We offer our Portfolio Management Service, which aims to help clients manage risks with their money, and to maximise returns on their investments.