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Wednesday August 13, 2014 at 11:31am
I am surprised at the number of people I see for whom the concept of retirement is a myth that does not withstand too much scrutiny. Most of the people I work with run their own business, by definition they tend to be self-actuated and motivated.

For some early retirement is a negative concept

This group of people see retirement as a negative step and far from being the holy grail of work they find themselves wondering what they will do with their time, how much they will have to reduce lifestyle to fund their reduced income. Some have already generated more wealth than they will spend in their lifetime but still many of the same niggling questions remain. Often they have built up a lifetime of specialist skills and do not really look forward to the day when they will never use them again. They often enjoy work, for some it defines who they are and so they don’t want to give up the challenges and access to like-minded people that work brings. On reflection they have to admit that hard work makes them happy and after a few months of enforced holidays they are going to have to find something to replace it.

Often for these people what they want is not retirement at all, it is financial independence and so the choice to not work, without actually having to stop work. For others they want to ensure they have organised their financial affairs in the best way to pass on to their family or avoid tax. I see more and more clients who like the idea of working less but are not really ready to stop. This is such a contrast with the traditional concept where you are working full-time one day and then find yourself in retirement the next day.

For others early retirement is confused with a desire to do more worthwhile work

Some of the people I work with talk about early retirement but what this really means to them is financial independence. When you question this concept it turns out they really want to do something more personally fulfilling with their lives. They don’t want to retire at all, they simply want to do something different. Often for these people the cost of financial independence is sticking at something they don’t like for years in order to gain the independence they think will allow them to do what they really want to do.

When making life changing decisions you want to approach the problem as analytically as possible and take the emotion out of the equation. For many individuals the solution is found through the financial planning process. As long as you get all of the financial inputs for the plan right it is very difficult to dispute the conclusions. The rigors of viewing life in pure financial terms is often literally life changing.

An interesting outcome of working together can be the reality that the years needed to achieve independence are not worth the wait, because life is simply too short. However annual expenditure is often the best definition of lifestyle. Once you know how much you spend you can then look at what you are prepared to give up and what income you need to cover a maybe revised lifestyle. Often simply being more tax efficient with savings and income can make a plan work. It may turn out the new life is achievable after all, or at least you will know what sacrifices you will need to make to get there.

So don’t equate early retirement with happiness. If you are longing for early retirement, seriously questioning your motives may not be such a bad idea.

Andy Parker
Chartered Accountant and Chartered Financial Planner, Solihull

Friday August 1, 2014 at 1:13pm
As the adage goes if you fail to plan then you plan to fail. Probably the most important plan you will ever make is your Personal Financial Plan. The reason is this will give you the steps you need to take in order to:
  • Understand what you need to do to live the life you want to live
  • Help to avoid running out of money
  • Provide you with real and lasting security for your family and dependents
  • Give you clarity about what your financial future looks like
  • Help you achieve peace of mind about money and not have to worry about it
  • Give you more time, more freedom, more choices and more life
One crucial question the plan will answer for you is “what’s my number?”

I have written several blogs about the concept of the number, which is a completely different way of thinking about the rest of your life (from Lee Eisenberg’s book, The Number). It’s the assets you need to maintain your lifestyle without ever running out of money. Once you have the answer to this illusive question you can then start to figure out how you can bring forward the date when you get there.

And for most people this is a really important deal, some people may not want to retire or change much in their lives but everyone wants to achieve financial independence, to have a choice about what they do with their time, to feel comfortable they are financially secure without losing their lifestyle.

Other answers your financial plan will throw up are how much you have at the present and how this will build or reduce over time. Armed with this knowledge we can tell you the age at which you will achieve independence assuming you continue doing what you have probably been doing for years without making any changes.

But a plan is no good unless it has some ways to bring forward your financial independence date and show you what you need do to increase your wealth and get you closer to that independence target. So we look at other scenarios. An obvious one is to look at your current tax rate on all of your earnings. Don’t forget it is not what you earn but what you keep that matters. So coming up with ways of paying less tax means you will keep more and so achieve financial independence sooner.

Often people don’t look at their expenditure but controlling this will again bring forward that Independence Day and what better incentive than to know that doing so will enable you to actually achieve financial independence sooner.

A financial plan will also show you how well you and your family are protected in the event of some unforeseen event and what options are available to you to improve things for them. It will help you with your estate planning, exiting a business or even decisions about changing jobs, taking on investment risk or simply being more sensible and planning what you do with your money.

I’m happy to outline in more detail the process we go through to develop your personal financial plan, just give me a call or send me an email.

Andy Parker
Chartered Accountant and Chartered Financial Planner

Thursday July 24, 2014 at 5:12pm
I’ve always been a fan of Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS).Once you realise they offer 30% tax relief, tax free dividends and tax free growth who wouldn’t be? Unfortunately, HMRC has just woken up to the low risk nature of some of the underlying investments. It’s not too late however if you want to take advantage of these benefits.

How EIS investment works

Let’s say you invest £10,000 into EIS, you will receive tax relief of £3,000, thus making the net investment cost to you £7,000. Assume the investment grows by a very modest 5% over 3 years thus returning you £10,500. Divide this by the net investment amount and you will see you have received a 50% return on your money (£3,500/£7,000).

A low risk investment

Well that is exactly how clients' lower risk EIS and VCT investments work, and therein lies the problem. You see HMRC, as an agent of the government, give such generous tax breaks because they want to encourage investment in high risk, difficult to fund ventures. So there is an anomaly with an EIS or VCT investment being intrinsically low risk. Lower risk investment has been achieved in the past by investing primarily in renewable energy, the bulk of which is solar power. This is a relatively simple business model based around companies that take agricultural land or roofs of large commercial units and install solar panels. These are connected into the national grid and during the daylight hours they generate electricity creating a return for investors. For as long as we consume electricity these investments will make money.

HMRC stop solar investments in tax advantaged investments

Because the business model is so lucrative the government has woken up to the fact that such investments are probably not suitable for tax advantaged treatment as investors will probably invest in them anyway. However, there is still a strong demand for low risk and tax relief on investment and the industry has not been slow to find the next best thing to meet this demand. The latest investments include anaerobic digesters which produce saleable fertiliser from food waste. However my favourite are small scale hydroelectric plants.

Unfortunately this is a finite resource. Small scale hydroelectric schemes involve taking water from a mountain river and diverting it down a steep hill through a progressively narrowing pipe. The ensuing jet of water is used to drive an electric turbine thus generating electricity sold to the national grid. The advantage is the technology is well known and is simple and relatively low cost to implement. It is also eligible for EIS and VCT. The down side is there is limited supply of upland streams which can be diverted for such use. Many Scottish land owners have already signed up to such schemes and so demand is outstripping supply.

So there are still such investments available but like solar we expect the supply to be finite. If you are interested in the lower risk tax advantaged investments act sooner, rather than later. I’m always happy to discuss the best current opportunities for tax efficient investments, just give me a call.

Andy Parker
Chartered Accountant and Chartered Financial Planner

Tuesday July 15, 2014 at 2:43pm
Against the press doom and gloom of forwarder payments there has been some good news from the courts last week on the Glasgow Rangers Employee Benefit Trust case. Following an HMRC appeal of an earlier Tribunal verdict, the Upper Tribunal have now ruled in favour of Glasgow Rangers.

It’s been described as a comprehensive defeat for HMRC and although HMRC may appeal again it is difficult to see on what grounds. As we have said all along the case law on employer trusts has been in the tax payers favour, originally with the Dextra case, then Sempra Metals and now with Glasgow Rangers.

The court has effectively reaffirmed that employer contributions to these trusts do not give rise to PAYE/NIC and that properly constituted loans should be respected as such and treated accordingly. The interpretation of the legislation is they do not represent income for the employee.

So, this is good news for anyone currently running an Employee Benefit Trust. It seems unlikely HMRC will be able to take another EBT case and argue that PAYE applies. Of course that won’t stop them continuing with litigation on EBTs in relation to the Corporation tax deduction.

Where now for follower notices and accelerated payment notices?

The Finance Bill 2014 contains provisions whereby a taxpayer would receive a penalty if they litigate and lose a case after receiving a follower notice. HMRC would issue the notice if they opine that the legal issues of the case have already been determined by other litigation. In such cases HMRC could require accelerated payment of tax in dispute by issuing an accelerated payment notice.

In spite of unprecedented adverse comment and intense lobbying by the tax and legal professions MP’s have allowed HMRC to have their way. Just like Turkeys don’t vote for Christmas, MP’s don’t vote against tax avoidance legislation. As I have said in my blogs we cannot rely on MP’s to uphold fairness and constitutional rights, they want to get elected. We can however rely on the courts as the last bastion of the constitutional rights of the individual. They simply have a different agenda compared to MP’s.

The Glasgow Rangers decision does raise an interesting question for HMRC, do they consider issuing accelerated payment notices on EBT cases where they have failed to collect PAYE/NIC? This would be very much at odds with this latest decision of the courts. HMRC did promise guidance notes at the end of May on these notices but so far this has not materialised. We have been informed council are advising on the possibility of issuing judicial challenges on these notices once they are issued.

What HMRC have said on the matter

Lin Homer, head of HMRC has said when questioned on this matter by the Treasury select committee that at this stage they will only seek accelerated payment in cases where there has already been a tribunal decision in their favour. Although further clarification is required it does suggest there will be no rush to issue these notices. We have to wait and see but I suspect the sheer volume of objections and their validity has had some effect on HMRC.

HMRC could issue accelerated payment notices to any DOTAS tax strategy but all this would do is create considerable legal challenge thus bringing the legal process to a standstill. By selecting DOTAS schemes where there has been successful legal challenge gives HMRC more chance of success. We have to be careful with our definitions; a tribunal challenge has to have taken place in a higher court to have legal precedence. A First Tier, formerly Special Commissioners hearing would not give that legal precedent. If that were the case it considerably reduces the risk of failure for HMRC.

Interestingly on the above definition (with the exception of Stamp Duty Land Tax planning) the guidance from our strategic tax planning partners is that the risk of follower notices and advance payment notices being issued in relation to the type of tax planning they have promoted over the past 10 years is reduced. Certainly clients using some form of trust structure or employed through the contractor structures would fall into this category. All of the structure providers are progressing cases towards, or are already in, the litigation process.

It does appear likely that HMRC will not issue advance payment notices if litigation is in process. There is no definitive statutory support for this contention; however the advice is that it would be a “legal nightmare” for HMRC to consider such action.

So we have to wait and see how the new rules may play out in practice. There is some hope that the new regime will actually speed up the litigation process which we may already see in evidence by the appointment of 38 new recruits to sit in the first tier tribunals.

Andy Parker
Chartered Accountant and Chartered Financial Planner

Thursday July 10, 2014 at 1:46pm
Yes, accountancy suddenly got very interesting. We are experiencing the biggest change in the industry in my lifetime. And this change brings substantial benefits to clients, enhancing their understanding of what is happening in their business.

The old accounting business model

With the advent of online accounting software the role of the accountant has changed. The traditional accounting business model was to receive the accounting records sometime after the year end. Take a month or so to prepare the accounts and then spend the entire accounting budget trying to sort out the mistakes, miss-postings and other errors prior to presenting the client with the financial results some 15 months or more after the financial year started.

The whole process was driven by the need for compliance with the tax and other regulatory authorities with little added value in terms of useful up-to-date financial information for the business manager. Accountants did prepare monthly management accounts but the process was time consuming and hence expensive for many companies.

The new world of online accounting

Online accounting has changed that by utilising new technologies and the time and hence cost savings they bring. We are Xero Accounting Software partners and so I only speak from the experience of using our chosen software, however I expect their competitors to offer similar features. Here’s how that software has revolutionised accounting:

Cloud based rather than server based: hosting the software in the cloud rather than on a server means anyone with a secure log-in can access all of the information from any location. As accountants we set up clients to see only what they want and use. For example, you can now check bank balances, profit and loss, monies owed and owing from a mobile phone or tablet.

Direct bank feeds: The bank transactions feed directly into the software. This has several advantages, the obvious one being the transactions do not have to be manually keyed in thus saving time and reducing errors. However, another benefit is that the software allows us to set up rules so that similar transactions are automated, once again speeding up the accounts preparation process.

Third party add-ons: Just like Apps on your mobile phone there are well respected add-ons for Xero, indeed because it is the market leader there are a lot of very good add-ons that we use for clients. For example, Receipt Bank converts all receipts into electronic transactions that are posted directly into Xero. Simply take a photo of your taxi receipt on your mobile phone using their App and it automatically gets saved and recorded in Xero.

Other add in’s include Workflow Max which allows the build-up of work in progress, Spotlight allows us as Accountants to produce monthly key performance indicators and show financial data in a more easily understood and comprehensible visual format. Simply Cashflow allows us to monitor cash flow within a client’s business with direct feeds from the bank and Xero which again drives down costs and makes the production of valuable information much faster.

We have now reached the stage where most new clients use Xero accounts thereby giving them meaningful monthly management information. In this way we help clients run profitable and successful businesses helped by us as their trusted advisors.

Andy Parker
Chartered Accountant, Solihull

Thursday June 26, 2014 at 10:00am
There is one common bug bear with pensions; they are simply not tax efficient on death. The good news is with the new pension rules and careful planning this is no longer the case.

As the rules currently stand the treatment of your pension fund is different depending upon whether you have taken tax free cash. Let’s say you have a fund worth £500,000. If you die without having taken tax free cash your spouse or next of kin would receive a cheque for the full £500,000 tax free. However, if you had taken 25% tax free cash of £125,000 the remaining fund of £375,000 would be subject to a 55% tax charge on death, ultimately meaning your family are worse off.

How to minimise tax on pension on death

Firstly, the current 55% tax charge is under review and the feeling is that the government will bring this charge into line with the highest rate of income tax, i.e. 45%. Even so this is still a big hit.

Let’s say you want to withdraw £30,000 per year from your pension and the fund grows at 6% per year. The £30,000 withdrawn is replaced by the 6% growth in investments; hence the fund value remains at £500,000.

So instead of taking the full £30,000 as tax free cash what you may consider is taking 25% of the £30,000 being £7,500 as tax free cash and taking the remaining £22,500 as income. In this way the growth adds to the fund from which no tax free cash has been taken. The net effect is to take all of your pension income but still retain a £500,000 fund that will incur no tax charge on death.

What happens at age 75?

If you have not taken your tax free cash by age 75 you lose the tax free death benefits on any part of your pension fund that has not had tax free cash paid out. Hence the advice is there is little point in not taking your tax free cash once you reach age 75. However, all is still not lost as our advice would then be to combine a total withdrawal of pension fund, under the proposed new rules, with a tax advantaged investment that would shelter both income tax charged on pension withdrawal and be tax efficient for Inheritance Tax.

As you might have realised this is quite a complex area of pension and retirement planning so do take advice before acting on any of the ideas I’ve shared here. I’m always willing to discuss the options with you, just give me a call.

Andy Parker
Chartered Financial Planner, Solihull

Thursday June 19, 2014 at 1:29pm
It is not uncommon to come across successful companies with large bank balances. If the owners do not have any immediate use for the money they will avoid paying income tax of between 25% and 32% on dividend and simply leave the money in the company. Sounds a good plan but our advice is always to hold sufficient money in the company to support working capital and do something with the rest. This blog gives you three compelling reasons not to hold more cash than you need in your limited company.

High cash balances make you a target for litigation

Any asset held within the business is subject to business risk and can be lost on liquidation or an unforeseen business event that costs the company money. Another way to look at this is by holding surplus funds in the company you negate part of the benefit of limited liability. The point is surplus cash is not really a business asset and so should be protected by withdrawal. HMRC also think so as explained below.

Surplus cash is not a business asset for entrepreneur’s relief purposes

The implication of this is that should you sell your business and expect to obtain Entrepreneurs Relief on the sale of shares the surplus cash element will not qualify. If surplus cash is £500,000 the tax effect is an additional tax on sale of 28% - 10% being 18%. On our £500,000 example above this will cost the individual an additional £90,000 in tax.

Surplus cash is not a business asset for business property relief (BPR) purposes

This means that if you own a trading company and so expect your company shares to qualify for BPR then the value of the shares does not suffer 40% Inheritance Tax if you die whilst still holding them. However, surplus cash does not qualify, hence the Inheritance Tax charge on the £500,000 surplus cash would be £200,000 paid unnecessarily.

The solution

If you are worried about litigation you should extract the money from the company tax efficiently. My earlier blogs on EIS, VCT and pension explain this in more detail.

However, if you are quite happy to keep the money in the company the simple solution is to invest the surplus money in a low risk investment that does qualify for Entrepreneurs Relief and Business Property Relief. Such investments will typically provide a return above the cash return and remove the problems discussed above.

Andy Parker
Chartered Accountant and Chartered Financial Planner

Thursday June 12, 2014 at 10:00am
Pensions are a tool for retirement, right? Well yes, they certainly are that but I think they are so much more than that. With the proposed changes announced in the 2014 budget allowing pension savers to access all of their pension savings from age 55 I see real opportunities to use a pension as a savings plan.

Let’s say you are just 50 and are looking for a tax efficient way to save money to repay your mortgage. Let’s assume that, like most of our clients, you are a higher rate tax payer and so avoiding tax is of significant concern. Some people may be putting away up to the ISA allowance, now £15,000 per annum, as a tax efficient way of saving to repay their mortgage.

Personally I do not like this method because the ISA has to grow faster than the interest payable on the mortgage to make sense. And the mortgage interest must be paid out of taxed income. In such circumstances simply taking out a repayment mortgage or making lump sum repayments is a more certain way of repayment.

Up until now a pension was not a valid repayment vehicle because of the limitation on what can be withdrawn from the fund from age 55. The changes announced by George Osborne in March 2014 mean that this is all proposed to change with no restriction on the amount you can withdraw from pensions from age 55.

Let’s take two examples – in both cases the individual is a 40% tax payer, each individual invests £15,000 per year for 10 years, one into an ISA, the other into a pension. We assume the same rate of return per annum on both types of investment. It is worth noting that investor 1 would need to earn £25,000 per annum gross to achieve a payment into ISA of £15,000 per annum after tax.

                     Investor 1  Investor 2
Investment vehicle ISA Pension
Contribution per annum £15,000 £15,000
Tax relief nil £10,000
Investment period 10 years 10 years
Return per annum 5% 5%
Fund value at 60 £198,101 £330,170

I think the rate of return on the pension investment speaks for itself.

If investor 1 draws down the funds from the ISA there is no additional tax to be paid – good news then? Well, yes but there’s better news for investor 2 because although they will have to pay some tax when they draw on the funds in their pension in this example the pension investment is still a significantly better option. If you draw down the funds from your pension you are able to take a tax free lump sum of 25% of the fund value and pay tax at your marginal tax rate on the remainder. In our example, if investor 2 were to withdraw all the funds in the same year assuming they have no other income and full advantage is taken of personal allowances on a pension fund of £330,170 the net proceeds after tax free cash and income tax would be as follows:

               Investor 1 Investor 2
Investment vehicle ISA Pension
Tax free cash £82,543
Remainder of fund after tax £143,695
Total income available to repay mortgage £198,101 £226,238

If you reinvested the net funds in VCT (Venture Capital Trusts) or EIS (Enterprise Investment Scheme) the benefits would be significantly greater as discussed in an earlier blog (Pensions suddenly become very interesting).

Of course, these examples should not in any way be considered financial advice and are used only for illustration. Appropriate professional advice should be taken before anyone makes a decision on this kind of investment. I am happy to run similar figures on a more personal basis for anyone who needs convincing that pensions are probably the best investment you’ll ever make.

Andy Parker
Chartered Accountant and Chartered Financial Planner

Thursday June 5, 2014 at 10:00am
“You have earned it, you have saved it, this government is on your side”, so said George Osborne in his March 2014 Budget. And this time he wasn’t just talking to a small minority of people as 13 million members of defined contribution pension schemes will be affected. That is anyone with a non final salary pension.

He was referring to the proposed change in 2015 to allow individuals to withdraw as much as they like, without limit from their pension. You will still need to be over 55 to do this and you will still be able to take 25% of your fund tax free. The rest will be taxed at whatever your tax rate is at the time you withdraw the funds.

There are concerns about people not being sensible and withdrawing all of their funds and becoming reliant on the state. However, George Osborne thinks not. If you consider the average pension fund in the UK is worth £36,800 then under the new system that person would receive £8,750 tax free cash and £26,250 as a one off taxable payment.

Under the old system the tax free cash would be the same £8,750 but the £26,250 would purchase an annuity. A 65 year old male basic rate tax payer buying an annuity with 50% spouse annuity would receive £24.23 per week after tax. This would buy about 7 pints of beer so you can see that the lump sum would probably be more attractive.

We have been saying for years how good pensions are as a vehicle for saving, there is tax relief on the contributions paid in, tax free growth and tax free income from investments. The problem has always been the fact that 75% of the fund is locked up after retirement. The other problem is if an annuity is purchased the bulk of the fund can be lost before the pension is fully paid.

Now under the new rules the member can have full access to their funds in their lifetime and also on death. We think the change is definitely one for the better and is something anyone approaching retirement, or the 55 age limit should start thinking about now. We’ll be explaining our views on these changes and why pensions are probably the best investment you’ll ever make at our next seminar on 18th June 2014.

This is a topic I will be revisiting in future blog posts and covering in our monthly newsletter.

Andy Parker
Chartered Accountant and Chartered Financial Planner

Tuesday May 20, 2014 at 10:00am
The credit crunch of 2008 highlighted the unpredictable nature of markets. It is the very unsettling nature of such times that really bring home the importance of a coherent, rational and easily understood investment approach. It is through accepting higher risk that investors find the potential to earn higher rewards over time.

It is not possible for anyone to control how capital markets behave but we each individually control how we personally participate in those markets. A sensible start as an investor is to seek advice on assembling a portfolio that meets your long term goals and aligns with your personal capacity to take on risk. Assembling a portfolio with proper diversification and the right mix of assets, along with staying disciplined are crucial if you hope to have a good investment experience.

This last point about staying disciplined is often easier said than done. There are many well documented psychological biases which adversely affect our decision making and which we are all susceptible to. We are human and so tend to behave irrationally from time to time. Here are some of my favourites; you will probably recognise some of them;

Endowment effect: this is the tendency to consider something more valuable simply because you already own it compared to if you didn’t own it.

False consensus: this is the tendency to think that others are just like us. In investing terms we all have our own capacity for risk and required return.

Information cascades: this is the tendency to ignore our own objective information and instead emulate others. For example, an inexperienced investor may buy shares because everyone else is thus driving up the price. They then sell those shares when the price falls through fear which is reinforced by seemingly everyone else selling at the same time. This is known as herd instinct and largely explains why investors buy equities when prices are high and sell when prices are low. Which of course is the exact opposite of what they intended to do in the first place.

Myopic loss aversion: this is the tendency to focus on avoiding short term losses, even at the expense of long term gains.

The Dunning Kruger Effect: psychologists have tested numerous groups where people unskilled in a particular area will make poor decisions and reach erroneous conclusions. Their lack of skill denies them the insight into recognising their mistakes. This gives them illusory superiority leading them to believe their skills in that area are actually above average when in fact they are incompetent.

The reverse effect can be seen in people with real talent whereby they tend to underestimate just how good they are. They tend to think that other people find those tasks as easy as they do when in reality they are way ahead.

It is useful being aware that we all suffer from psychological biases to varying degrees. When it comes to investing the rule is to stay focused to your investment principles and don’t allow random emotional behaviour distract you from those principles and your long term goals set out in your financial plan.

Andy Parker
Chartered Financial Planner Solihull

Parker Chartered Accountants and Financial Advisors is the trading name for PLW Advisors Ltd (Registered No. 10396831), and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here