A side effect of more home-working seems to be that the days pass more quickly and another week seems to have zipped by in a heartbeat.
Speaking of time passing quickly, we are now into our seventh year in business (it still feels strange writing that). The years really have flown and it’s great to see how far we’ve come, thanks to our great team and the support of our lovely clients. Thanks to all of you who have supported us along the way, whether you be canny veterans that have stuck with us over many years, or fresher faces still making yourselves at home around here.
One of the great things about this profession is that we get to work with a wide variety of people and personalities from all walks of life. Finance may have a reputation for being a tad dull at times (though we try our best to make it otherwise), but from our perspective, this job is anything but. Even after all these years I still look forward to going to work most days and you can’t ask for much more than that.
In many ways however Wetherall’s is only just getting started, with big plans for the future and numerous projects bubbling away in the background. In the meantime we’ve been compiling some key stats and figures from our sixth year in business, which I’ll share with you in a dedicated bulletin shortly, using a handy infographic so you can take in the highlights at a glance. We continue to be committed to transparency and openness and see this as a good opportunity to give you an insight into some of the inner workings of our business and how we are performing. After all, it’s no small thing to be entrusted with people’s life savings and we want you to know we remain financially strong and stable regardless of the current state of affairs.
In the meantime, I’ve written two pieces below for your reading pleasure/ displeasure. One is about NS&I swinging the axe on the rates on their savings products. The other is about the future of tax relief on pension contributions which appears safe for now.
NS&I Swings The Axe On Savings Rates
Please forgive the creepy Patrick Bateman picture, but when part of the title of this blog contained the words ‘pension tax relief’, I felt I needed to do something to keep your attention. If you’re still here reading this then it clearly worked, plus hey, American Psycho is a great film, just ask Paul Allen.
National Savings and Investments (NS&I) recently announced that they are changing their rates from 24th of November to keep them in line with their competitors. By ‘changing’ they appear to have meant ‘dropping to the floor’, whilst I’m not sure what competitors they are referring to, as even the banks wouldn’t be this brazen.
To summarise this in their own words:
NS&I must strike a balance between the interests of savers, taxpayers and the broader financial service sector.
Changes will ensure NS&I interest rates are aligned appropriately against those of competitors.
Interest rate reductions will apply to variable rate and some fixed term savings products, effective from 24th November 2020 – with changes to the Premium Bonds prize-fund rate effective for the December 2020 prize draw.
So what does this really mean? Well, you can view the full details here, but to give some examples, the interest rate on their Direct Saver has fallen from 1%, to 0.15%. Income bonds have been slashed from 1.16%, to 0.01% (no, that’s not a typo), whilst their Direct ISA has been reduced from 0.9% to 0.1%.
At least Premium Bonds have fared a little better, with the tax free prize fund rate having been cut from 1.4% to 1%. However, this does mean your odds of winning anything at all have fallen to 34,500 to 1, with most prizes amounting to £25. I did try to run the numbers on your chance of winning the £1m prize, but my calculator broke...
So why is this relevant? Well, firstly lots of our clients have premium bonds. Your return on premium bonds is effectively when you ‘win’, though in reality over time they function more like a bank account, paying an approximate rate of interest via said winnings. So, from 24th of November onwards, the chance of winning just got lower.
Meanwhile, for those with large sums of capital held in savings well in excess of the FSCS protection limit (currently £85,000 per person), we often recommend using NS&I’s Direct Saver. This is because it’s government backed and you can deposit as much as £2m. So rather than carving your savings up into £85,000 blocks and splitting them between various different accounts to keep your money protected, you can safely hold your cash all in one place, albeit at a slightly lower rate than with some banks. Not quite so good for your returns, but significantly better for your sanity than six different bank accounts…
So overall, changes are coming and not for the better. NS&I still remains a safe place for your money, especially for sums in excess of £85,000. However, now more than ever, leaving large sums of capital on deposit means a guaranteed loss over time in real terms, as inflation reduces the real value of savings.
If you’d like to talk about your surplus cash or your NS&I holdings, feel free to get in touch, otherwise we can discuss this at your next financial review.
Pension Tax Relief Safe For Now
It is widely expected that tax increases are on the horizon, as the government will need to start recouping some of extraordinary costs of the Covid financial support measures. Could higher rate tax relief on pension contributions be on the chopping block?
Tax relief on pension contributions has been the subject of thorny debate for a number of years now. There is a view by some that the system is inherently unfair, as currently basic rate tax payers receive basic rate tax relief at 20%, whilst higher rate tax payers receive higher rate relief at 40%. Some argue that this means higher earners are given an unfair advantage (though it could be argued the other way, as higher rate tax payers are paying significantly more income tax in the first place on their earnings beyond £50,000).
MPs sitting on the on the Committee of Public Accounts (‘PAC’) have been applying pressure to the government to reform pension tax relief for some time now, pushing for HMRC to carry out a rather ominous sounding ‘evaluation’. In their words they are ‘concerned’ that HMRC ‘does not understand the impact of any of the largest tax reliefs, including reliefs on pensions that were forecast to cost £38bn in 2018-2019’.
Reassuringly for higher rate tax payers, the Treasury has responded to say:
‘The government will continue to engage with stakeholders to understand the regime’s impacts and gather evidence through consultations such as those listed above, but does not think it is the right time now for a formal evaluation’.
However, the government did state that in the next three months, it should establish and publish the criteria it will use to determine which pension tax reliefs to evaluate in the future.
So what conclusions can we draw from this? Well firstly, whilst a little vague (would you expect anything less in politics?!), the government have publicly stood their ground on the issue and clearly – for now at least – higher rate relief appears safe. However, we should also keep in mind, that despite often being painted as the party that feathers the nests of the rich, the conservatives have actually pursued a pretty centrist policy when it has come to taxes over the past ten years.
Significant increases to the personal allowance lifted many people with lower earnings out of basic rate tax (perhaps more credit to Clegg than Cameron on that one though). A raising of the higher rate band in real terms helped middle earners keep more money in their pockets, whilst a few years back business owners everywhere found themselves on the receiving end of a (widely underreported) 7.5% tax increase on their dividends, which make up the majority of the earnings of small business owners. The latter is particularly interesting, as it was a direct raid on what is seen as one of their core voter bases.
Also, if you’re in power and want to increase taxes, it’s best to do it as early in your term as possible, in the hope that disgruntled voters have forgotten about it – or at least accepted it – by the time the next general election comes into view.
Whether you’re a higher rate or basic rate tax payer, paying into a pension remains one of the most effective ways of saving for retirement. For higher rate tax payers and business owners making pension contributions, for now at least, it looks like a case of ‘make hay while the sun shines’. We’ll be continuing to watch this space and will keep you informed of changes, but if you’d like to review your own pension contributions, please feel free to get in touch.
And with that, I think that about wraps it up for another week. Wishing you and yours a pleasant weekend, we look forward to catching up in due course.
