Archive for March, 2012
When a tax break dies – follow up
Interesting to note how quickly the industry moves these days when it comes to shutting products down. That’s L&G, Skandia and Transact all removing what were effectively high net worth individual tax dodges.
Whats more interesting however is Skandia’s assertion that they were already planning on pulling MIPs with RDR (banning commission) on the way next year. That does imply, to me, that in the age of commission/adviser fee transparency that at least one provider thought that MIPs wouldn’t survive even as a high net worth tax break.
Does that imply that their real benefit was in generating generous regular premium commission for financial advisers, rather than serving as a top up tax break for those already maxed out on their pension allowances? Makes you think, doesn’t it.
When a tax break dies
The Budget is a funny moment for anyone in the financial services industry. There’s all the parliamentary banter and pantomime or the BBC versus Sky News teams having their “cup final” moment, and sounding a bit too much like David Mitchell on football for my liking.
If you work in financial services you ignore all the artificial sound and fury, and spend hours looking at all the detail. You are looking for opportunities for new products, or more likely to see what headaches you are going to have in a few hours as you start to think about reconfiguring your IT system, customer service process or marketing plans.
One technical nicety that emerged (it was too boring for Osborne to mention in the House) is what the trade press are calling the death of MIPs. Maximum Investment Plans have had a checkered history, covering high charges, mis-selling, and various tax planning strategies depending on the tax free alternatives.
They operated as qualifying endowment plans which is the technical jargon for an investment issued by a life company (this one for example). The organisation accepts regular payments from the customer and the tax is paid by the provider (the cost of which is passed on to the client).
The advantage is that, provided they keep the plan for long enough (usually at least 7 and a half years) they have no tax to pay on any gains, even if they are a higher or basic rate taxpayer. So it can often be better for the tax to be paid by the provider rather than the individual. Of course it all depends on individual circumstances as to whether they were better off.
A condition of the tax break is that the provider also has to package the product with some life cover. So the industry came up with the idea of creating a suite of such products with the minimum amount of life cover. In a blaze of marketing brilliance (yes an example of the lowest form of wit) the industry turned minimum on its head; if there was less for life cover there was the maximum for investment. Hence Maximum Investment Plan.
However as we know tax treatment can change in the future and MIPs began to fade as a mainstream product in the era of TESSAs, PEPs, ISAs and pensions.
But since 2008 MIP started to get mentioned in hushed tones throughout the industry, indeed I was tapped up by a couple of consultants asking if Scottish Friendly would be able to build a MIP for their clients. There were two main reasons behind this: rising tax rates and squeeze on pensions for people with big incomes. It was almost comical how the industry hoped to quietly reinvent this tax break for rich individuals whilst hoping the government wouldn’t notice.
It was interesting to watch the ABI new business statistics which showed a pulse in the once moribund MIP business line, start to blip, blip, blip back into life.
But today the government effectively made MIPs as a rich man’s tax break redundant, and I for one welcome it. In my view high net worth individuals don’t need any more tax breaks to encourage them to invest. Tax breaks should be small, simple and focussed on getting those that don’t normally invest to get into a regular habit. Once that habit takes hold, tax breaks become much less relevant and their job is done.
So farewell MIPs, it’s been nice having you around but your time as a tax loophole for the rich is happily at an end.
Baby boomers hit in the budget
It’s not often I’ll say this but I have to say I admire George Osborne’s guts in taking on the baby boomers. Freezing their tax allowance and effectively ending the age related allowance is a very “brave and courageous“ decision.
Of course the baby boomer and grey vote are already gearing up for a fight and #grannytax was almost immediately trending on twitter.
“When ah were a lad”, they used to say you couldn’t take on the miners and expect to survive through to the next election. These days I reckon the miners are pensioners – remember poor Gordon and his 25p increase – it will be interesting to see if Nick, Dave, George and Danny can hold their nerve.
Hold on boys it’s going to be a very, very rough ride.
Popular questions and answers about Investing in an ISA
When it comes to saving and investing money, anyone interested in avoiding the taxman will have heard of the Individual Savings Account. Introduced in 1999, the ISA is a popular, useful way of generating returns within a tax-free wrapper. Many people think taking out and managing an ISA is complicated, but taking the time to familiarise yourself with the details can make the process a lot easier!
Read our list of important basic points for getting the most out of your ISA…
Q: What is an ISA?
A: Anyone who has savings or investments and wants to protect their money from the taxman may wish to consider an ISA. The money you place within your ISA is protected by a ‘tax-free wrapper’, which under current law exempts the account from income and capital gains tax (tax is deducted on UK share dividends). Remember, tax treatment depends on individual circumstances and tax law may change in the future.
You must remember that with any stock market related investments, your investments may fall as well as rise and you could get back less than you have paid in.
Q: How does an ISA work?
There are two different types of ISA: a ‘Cash’ ISA and a ‘Stocks and Shares’ ISA. The Cash category ISA acts like a normal savings account, except the interest you generate isn’t taxed and the money you put into a Cash ISA is secured.
A Stocks and Shares ISA is an investment product. The company managing your ISA will invest your money in the stock market – any returns generated on the growth of your money are protected from income and capital gains tax (remember tax is paid on UK share dividends). The Stocks and Shares ISA is an investment product. As with any stock market investment, your investments can fall as well as rise – there’s no guarantee you’ll get any return on your money and you could get back less than you have paid in.
Tax treatment depends on individual circumstances and tax law may change in the future.
Q: How much can I invest?
The current subscription limit for an ISA, annually, is £10,680. You can hold both Cash and Stocks and Shares ISAs simultaneously and you may split this amount over both accounts – although there is a cash limit, which stands at £5,340. If you wish, you may invest the entire amount in the Stocks and Shares ISA, but be aware that . The subscription limit doesn’t rollover – so if you have money you wish to save or invest, make sure you do so before the end of the tax year. Please remember, tax treatment depends on individual circumstances and tax law may change in the future.
Q: What kind of access to my money will I have with an ISA?
A: It’s a misconception that an ISA restricts access to your money for a pre-determined length of time. You should check the regulations for individual products but most ISAs will allow instant access to the money inside without losing tax benefits. If you do intend to access your money, it’s important to remember your subscription limit won’t change. You won’t be able to re-invest if you’ve maxed out your subscription limit. If you have invested or saved £1000 in your ISAs, you may generate returns and interest tax free – but you’ll only be able to contribute another £9,680 in that tax year. Tax treatment depends on individual circumstances and tax law may change in the future. Stock market investments may fall as well as rise and you could get back less than you have paid in.
Finding the right ISA product is important since you want your money to be working hard for you! Take the time to look through the products offered by different companies and consider your own savings and investment goals before you take the plunge.
Scottish Friendly has provided no advice in relation to these plans. If you are in any doubt as to whether a plan is suitable for you, you should contact a financial advisor for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk Advisers may charge for providing such advice and should confirm any cost beforehand.
How to save or invest money tax-free
Saving and investing money is a way to encourage good financial practice and could provide peace of mind for any financial burdens – both expected and unexpected – that you may encounter in the future. Putting something aside regularly can help you prepare you for those big costs: towards your children’s education, medical expenses or even that post-retirement round-the-world trip you’ve been planning!
When you’re trying to save or invest, you’ve got enough to worry about without the taxman taking a chunk of your money. While tax is an important part of our financial system there are ways in which you can save and invest money and benefit from significant tax incentives.
Many savings and investment plans allow you to generate interest and returns exempt from tax – but it can be difficult selecting the right product for you. Take time to familiarise yourself, not only with the different plans on the market, but how each one will function over the short and long term.
Tax free means, under current law, free of income and capital gains tax except for tax on dividends from UK shares. Be aware that tax treatment depends on individual circumstances and tax law may change in the future. You must remember that with any stockmarket related investments, your investments may fall as well as rise and you could get back less than you have paid in.
Tax Free Savings and Investment Plans
You’ll find a variety of tax-free savings and investment plans on offer: each carries its own benefits and drawbacks. Most will require you to invest money regularly over a predetermined period of time (usually over ten years) – and in return, attempt to generate potential long-term growth and provide a tax-free lump sum at the end of that period.
Individual Savings Accounts (ISAs)
Individual Savings Accounts are a popular way of allowing your money to grow within a tax-free wrapper. Depending on your requirements and needs, you may take out a ‘cash’ or Stocks and Shares ISA or hold both simultaneously subject to the annual subscription limit. For the 2011/12-tax year the limit stands at £10,680 and up to £5,340 can be invested in a cash ISA.
Family Savings Plans
Saving and investing money doesn’t just have to be for you – you can get your whole family involved in preparing for the future with products designed specifically for families and plans that allow you to make investments for children. The tax-protection these plans offer often comes in addition to the allowances of any other tax-free plans (such as the ISA) you or other members of the family hold.
Get the Most from Your Savings or Investment Plan
Keep certain factors in mind before you choose a savings or investment plan…
- Subscription Limits: make sure you understand how much the savings or investment plan you’ve chosen allows you to put aside at any given time. Most savings or investment plans involve monthly contributions so it’s worth planning ahead. The ISA involves an annual subscription limit, which stands, at present, at £10,680 per tax year. You may share this amount over both a cash (up to £5,340 can be invested in a cash ISA) and stocks and shares ISA.
- Long-term investment: think about what your savings and investment goals are. Most savings or investment plans should be considered long-term strategies, which deliver their full potential over a pre-arranged period of time.
- Access: find out what kind of access you’ll be allowed to your money. While ISAs may allow a certain level of access, most tax-free savings and investment plans require you leave your money until the end of the plan or risk losing the tax benefits.
On a final note, it can be a good idea to use any kind of savings or investment plan to develop a regular savings habit. If you’re putting money aside regularly, you may find that the process quickly becomes a habit and can be a great way to get the most out of your tax-free savings and investment allowance. It’s never too early to begin investing for the future!
No advice has been provided by Scottish Friendly. If you are in any doubt as to whether a plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk. Advisers may charge for providing such advice and should confirm any cost beforehand.