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Jonathan Gibson

Understanding the difference between needs and wants

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What is the difference between a need and a want?  At a recent conference run by Distribution Technology, a senior member of the Financial Conduct Authority, Head of Life Insurance and Advice Supervision, Debbie Gupta, said, “Advisers consider what a client wants, but few consider what the client really needs”. 

Put simply, needs are something that you must have for survival.  Wants, on the other hand, are good to have, but arguably not necessary for your survival. 

Humans are fascinating and we often tend to confuse needs and wants.  For example, you or a colleague has had a tough day at work.  They might say, “I really need a holiday!”  Is that right?  Is it the case that the only way you are going to survive is by taking a holiday?  Well, it’s possible that is the case, but the chances are they meant to say, “I really want a holiday!” 

Financial Planning looks at both needs and wants and considers the availability of both.  By looking at a person’s assets and liabilities and income and expenditure throughout their lifetime, the Financial Planner can help the client to understand what their needs are (food, clothing, the cost of having a roof over their head etc.) and whether or not they will have enough financial resources to pay for the things that they want (holidays, a new house in the country or money to gift to their children or grandchildren). 

The challenge, though, is identifying what is truly a need and what is more likely to be a want.  It gets even more complicated because many people would argue that a financial life which solely pays for your needs is not necessarily going to result in a fulfilled life.  At Wells Gibson we believe real wealth is a fulfilled life and one characterised by contentment.   

This leads us to an essential financial planning question, “Are you prepared to risk not having enough later in life to pay for your needs, to satisfy your wants in the shorter time frame?” 

It usually comes down to degrees of risk.  If there is a modest risk of running out of money later on in life but having a fulfilled life now, many might be prepared to take that risk.  This is particularly true for many people who have been a member of a defined benefits pension scheme, one that provides a “guaranteed” income for life in retirement.  Such pension schemes often offer a capital sum now (referred to as a, cash equivalent transfer value) if the scheme member is prepared to give up their guaranteed income.  This money is then transferred into a personal pension plan from which the plan owners can, under current rules, extract as much or as little as they wish (typically, as long as they are over age 55). 

So, would you be prepared to give up a guaranteed income for a capital sum?  “Which would you prefer, a lump sum of £1 million today or £1,000 per week for the rest of your life?”   

How would you answer this question?  It might well depend upon several factors, for instance, how old you are; your current state of health; how you feel about any investment risk associated with having that £1million; how you might feel about spending all that money and not having enough later in life. 

It might also depend upon whether the guaranteed pension income you are giving up was going to be enough, on its own or in conjunction with other income, to pay for your identified needs.  It will also depend upon your needs and your wants and whether one overrides the other. 

Ultimately, Financial Planning isn’t just about the numbers.  It’s more about life.  Your life. 

Taking small steps towards a more sustainable world

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It does feel as if the world is at an inflection point: step up to the challenges of global warming and other non-sustainable pressures on the Earth’s resources today or let our children and grandchildren reap the havoc of the melting ice caps; sea water level rises; deforestation and a decline in biodiversity; desertification and the potential social and migratory upheaval that will accompany it.    

Our consciences have been awoken by the likes of David Attenborough in his Planet Earth II series and his appearance at Glastonbury in 2019, and also by Greta Thunberg who has challenged both the political leaders around the world and the older generations to take responsibility, for the sake of future generations. 

The internal challenge that many people feel is whether or not, on their own, they can really make any sort of meaningful difference, or if anything they do is simply a drop in the ocean.  After all, looking at the data on CO2 emissions1,  we observe that China, USA and India account for nearly half of all emissions, whilst the UK represents 1% of emissions out of the EU’s 10% contribution.  The answer is ‘yes’, we can make a difference!   

In our heart-of-hearts, many of us know that we are conflicted in our attempts to manage our carbon footprint.  We may diligently recycle paper, glass and plastics on a regular basis, wheeling out the green or brown bin when required, yet will jump into our petrol or diesel cars and head off to the airport for a family holiday in the US.   

Even Greta Thunberg found herself embroiled in controversy when it was revealed that although she had taken a moral stand to sail, rather than fly, from Europe to the US to attend the UN climate change conference in a zero-carbon yacht, the yacht’s owners had to fly two crew to the US to bring the boat back!  

On a personal level, there are all sorts of things that we can do to improve the sustainability of our lifestyles including how we invest our money.  Today US$1 out of every US$4 under professional management in the US (around $12 trillion) incorporates some form of sustainable/socially responsible investing strategy2.   

For many, being able to make a difference, whilst not jeopardising the returns and risk control of a sensibly structured investment portfolio, may be something worth considering.  This can be achieved by using lowcost, systematic funds, where they are available, that overweight companies with more favourable sustainability metrics and underweight those that are not doing such a good job.   

This is a relatively new world, where data and metrics are evolving, new products are being brought to market and in which there is no perfect solution.  When it comes to investing all choices require trade-offs.   

At Wells Gibson, we believe that investors can take a first, yet meaningful, step towards a more sustainable world.  It’s a journey that we think is best navigated by sticking as closely to our guiding principles as possible and moving at a prudent pace.  Patience is required and a well-thought out long-term strategy, implemented using sustainability-focused funds only when they are robust enough to earn a place in a portfolio.    

One step in the right direction at a time…  

The True Cost of the High-Income Child Benefit Tax Charge

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With the tax return deadline looming, some parents may not realise they need to repay some or all of their child benefit. This is more specifically those parents who received a pay rise between April 2018 and April 2019 – taking their earnings above £50,000. Parents not normally required to submit tax returns are being urged to check if they need to repay some or all of their child benefit in the final week of January.

New HMRC figures obtained by NFU Mutual show that the government collected £1.65bn from the High-Income Child Benefit Tax Charge (HICBC) between its introduction in January 2013 and the 2016/17 tax year.

A further £3.51bn has been saved from parents opting out of receiving child benefit, with 279,000 families giving the taxman £345m in 2016/17.

Many families with incomes over £60,000 are opting out of receiving child benefit altogether, with more than half a million cancelling by August 2018. If at least one earner in a household has an income of more than £50,000, that household must repay some of its child benefit.

For every £100 of income over £50,000, 1% of the child benefit must be repaid, so those with an income of £60,000 and more are required to repay it all through the tax charge.

Individuals who need to pay the charge who are employed, and normally pay their tax through Pay-As-You-Earn (PAYE), will need to submit a self-assessment tax return before the 31st January deadline.

Latest figures suggest this tax charge will affect 1.4 million families in 2019/20 but paying more money into your pension has the potential to save you thousands in tax.

Failure to get this right can be costly.

HMRC has already issued nearly £15million in fines for failing to notify them, although they have paid £1.8m back to families following a review. This comes to 97,475 penalty assessments to 37,406 people.

The HMRC paid out £12.17bn in child benefit before the High-Income Child Benefit Charge was introduced in 2012/13.

The bill dropped to £11.4bn for 2013/14 after it was introduced and has not climbed higher than £11.68bn since. In 2018/19 the government paid out £11.55bn.

However, an advantage of child benefit that should not be ignored is that – until the child is 12 – it qualifies the stay-at-home parent for National Insurance credits which count towards the State Pension entitlement.

One way to save your family money and reduce the risk of this charge is to pay more into your pension pot. For example, if the top earner in a family with three children earned £60,000, they could save £4,500 a year in tax by paying £8,000 into their pension. The £2,000 tax relief on top of the £8,000 would take their taxable earnings down to £50,000. Not only would they save £2,500 from the child benefit charge, but they would also take their income below the 40% tax charge. For a family with three children, this would result in an extra £10,000 in their pension pot at the cost of just £3,500, with a total of £4,500 saved in tax.

Are you a ‘Pension-Preneur’?

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It’s no secret that the nature of retirement is changing.  What used to be considered by many as a quiet, relaxing time in life, is increasingly becoming a period of greater activity – perhaps it’s a new retirementality.

 

New research from Charter Savings Bank reveals that, instead of taking it easy, millions of those approaching retirement are planning to reinvent themselves and start their own business.

 

The study surveyed 2,005 adults living in the UK between 11 and 15 October 2019.  These 3.5 million so-called ‘pension-preneurs’ across the UK have already started their own business or are planning to do so.  At the same time, some want to invest in another business during their retirement.

 

The nationwide study reveals that 14% of over-50s have entrepreneurial plans for the years ahead.  Of these, 2.2 million people have already set up their own business or have invested in another.  While a further 1.6 million are planning to do so.

 

Pension-preneurs collectively invest about £22 billion in their enterprises, equating to £6,300 per person over 50 years old.  15% are planning to invest more than £20,000 in their new enterprise.

 

The majority of the over 50s plan to use their own personal savings to fund their new business in retirement, but 11% plan to use a lump sum from their pension.

 

Other options for financing include loans from family and friends (8%) and business loans (7%) for their new venture.

 

It appears there are millions of people heading towards retirement who don’t want to just stop working and put their feet up.

 

The most popular plan is for retirees is to volunteer with an organisation or start a charity (33%), while a fifth (22%) plan to start a new job part-time.  Setting up as a freelancer or consultant during retirement is another popular option (12%).

 

Paul Whitlock, Group Managing Director, Charter Savings Bank said,

 

“The fact that so many people over the age of 50 want to create a new business or invest in one is inspiring and shows such an entrepreneurial spirit.”

 

“However, starting a business takes funds and the fact that so many people plan to use their own personal savings to do so highlights how important saving is.”

 

“Whether spending one’s retirement travelling the world or starting a business, saving as much as possible from as early as possible is vital.”

 

Professional services (13%); education (12%); hospitality & leisure (12%); and wholesale & retail (9%) are the most popular industries for pension-preneurs planning to start their own business.

 

Over a third (37%) bravely plan to start their new venture in a completely different industry, while almost half continues in the same industry they’ve worked in during their working life.

 

Are you planning to be a ‘Pension-preneur’?

 

Photo by Joel Filipe on Unsplash

Budget date confirmed and here’s what it could contain

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It has been confirmed; the Budget will take place on Wednesday 11th March 2020.  The Chancellor of the Exchequer, Sajid Javid, has launched the beginning of the Budget process, announcing that it will take place only a few weeks before the end of the tax year. 

During a visit to the new £350 million Trafford Park tramline project in Manchester, the Chancellor set out plans to use the Government’s first Budget to deliver change.  He plans to use the Budget as a platform for unleashing Britain’s potential, delivering world-class public services and levelling up the whole country.  

The Chancellor of the Exchequer, Sajid Javid, said, “People across the country have told us that they want change.  We’ve listened and will now deliver.  With this Budget we will unleash Britain’s potential – uniting our great country, opening a new chapter for our economy and ushering in a decade of renewal.” 

Javid is expected to set out plans in the March Budget to open a new chapter for the UK’s economy and prepare it for the decade ahead.  He aims to deliver on the Government’s promises on tax, to help tackle the cost of living for hard-working people. 

Furthermore, he would like to make good on the commitment to level up and spread opportunity, including by investing billions of pounds across the country. 

At the Budget, the Chancellor will update the Charter of Fiscal Responsibility with new rules, taking advantage of low-interest rates to invest appropriately and responsibly, while keeping debt under control. 

Although at Wells Gibson, we don’t like to speculate, we pay little attention to economic forecasts and, we can’t know exactly what the Budget will contain, until it’s announced in the House of Commons, there are a few areas where proposals seem very likely. 

New legislation will be introduced in April 2020 to stop the abuse of National Insurance and tax contributions relating to off-payroll labour in the private sector.  Therefore, if you are a contractor, you need to consider whether you fall inside or outside the IR35 rules by April 2020. 

On property, there is likely to be significant changes to Capital Gains Tax, especially for Lettings Relief and Principal Private Residence relief.  On 6th April 2020, Lettings Relief will be adjusted to only apply on the case where the owner is in shared occupation with a tenant. 

In respect of primary residences, PPR relief could be reduced from 18 months to 9 months if you buy a new home before you sell your old house.  This change will mean that individuals set on moving will need to stay in their home until it is sold or ensure that a sale of their old property takes place within nine months of them moving out to avoid a potential CGT charge. 

The March Budget could also introduce some changes to Inheritance Tax.  Last summer, the Office of Tax Simplification published its second report making proposals to reform the Inheritance Tax system.  This report covered the main areas of complexity for the tax, along with some of the technical issues caused by the current system.  They proposed several significant changes to the Inheritance Tax system, supported by a common perception that IHT rules are overly complicated and ideal for reform. 

Pensions could come into the firing line for the Chancellor in his Budget statement.  As things stand, tax relief on pension contributions tends to benefit higher earners disproportionately.  There are also widespread concerns about limits on pension contributions, with doctors and senior NHS staff, in particular, facing punitive charges, some taking early retirement or refusing to work additional shifts as a result. 

It’s likely the Budget will prioritise the environment and build on recent announcements to boost spending on public services and tackle the cost of living.  These spending announcements include investing in new hospitals, training thousands of new police officers, funding vocational education and the biggest ever cash increase to the National Living Wage. 

We look forward to seeing what the Budget will deliver, and whether it can indeed start a new chapter for the UK economy, seizing the opportunities that (as Boris would say) come from getting Brexit done.