Financial planning in a Covid-19 environment
By Donald Manning, Retirement & Savings Development Manager for FundsNetwork
This year has been a truly historic one with the Coronavirus pandemic creating an unprecedented environment for us all. From a financial perspective, the FTSE 100 index was down at one point by over 30%, interest rates cut to a new all-time low and we’re now in a recession.
Thankfully, we’ve seen a remarkable market recovery since the lows of March, and it seems clients heeded the advice to remain calm over this volatile period. Indeed, research conducted in May revealed that, since the start of the outbreak, 56% of investors had taken no action concerning their investments. In fact, 23% actually invested more money while only 2% had sold all their investments.
A crisis coinciding with tax year end
Of course, the initial phase of the pandemic occurred when year-end tax planning traditionally takes place. The market turmoil and the wider disruption to our daily lives caused many to overlook some valuable 2019/20 tax breaks. It’s a case of ‘use it or lose it’ for most allowances but not so with pensions given the ‘carry forward’ rules.
As you’ll know, most clients can tax-efficiently contribute up to £40,000 into a pension in this tax year. However, they may be able to contribute more by carrying forward any unused annual allowances from the three previous years. Certain conditions do apply – the client must have used this year’s allowance in full and have earnings of at least the amount they wish to invest. They must make use of any unused allowance from the earliest year first, and care must be taken if the tapered annual allowance applies. Carry forward is unavailable if the Money Purchase Annual Allowance has already been triggered.
As a reminder, FundsNetwork’s new Pension Summary report can help identify clients who may be able to utilise carry forward. It shows, for example, a client’s gross pension contributions for the current and previous three tax years.
Other valuable allowances to be considered
One concern when the pandemic hit was that older savers may make up for shortfalls in their income through flexibly accessing their pensions. In fact, a HMRC report highlighted that pension withdrawals were actually down in the second quarter, suggesting that clients showed common sense during this uncertain time. While pensions can be used to boost income, we shouldn’t forget that other allowances can provide more tax-efficient options:
- Capital Gains Tax allowance – clients can realise up to £12,300 of gains in 2020/21 without incurring a tax charge (if reinvested into an ISA, any resulting income will be tax free). Where additional gains fall within their basic rate tax band, they are taxed at 10%
- Dividend allowance – clients can receive the first £2,000 of dividend income at 0% tax, regardless of any other income they may have. Any additional gains that fall within their basic rate tax band, they are taxed as low as 7.5%
- Interest on cash savings - potential of up to £6,000 tax-free income in 20/21
- Starting rate for savings – clients can potentially receive up to £5,000 of interest without having to pay tax on it. The more income they earn from other sources, the less their starting rate for savings will be (they won’t be eligible at all if income exceeds £17,500)
- Personal savings allowance – clients can potentially receive up to £1,000 of interest without having to pay tax on it, subject to which tax bracket they’re in.
It’s also worth remembering that cash savings of up to £85,000 (£170,000 for joint accounts) held with a UK authorised bank, building society or credit union are protected by the Financial Services Compensation Scheme.
Of course, these allowances will naturally be considered when planning an income for your clients, but I think it’s useful to revisit how helpful they can be in these challenging times.
And don’t forget we have a wealth of resources available to support your business in our technical resource centre.
This is for investment professionals only and should not be relied upon by private investors. Please note that with pension products your client will not be able to withdraw their money until they reach age 55. Tax treatment depends on individual circumstances and all tax rules may change in the future. The value of investments and the income from them can go down as well as up so your client may get back less than they invest. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, FundsNetwork™, their logos and F symbol are trademarks of FIL Limited.