Tag Archives: pension contributions

Emerging Market Allocation Hits Dangerous Level, says survey (Article by Adam Lewis in fundweb on 15.02.2012)

15 Feb

Asset allocators have almost doubled the size of their overweight position to emerging markets, reaching a level which has historically coincided with short-term underperformance, according to the Bank of America Merrill Lynch (BofA ML) fund manager survey for February.

As risk appetite returned to more normal levels in February, global managers upped their weightings to emerging markets from a net 20% overweight in January to a net 44% overweight, according to the survey. This represents the second biggest jump in the region in the past 12 years, following an improvement in sentiment towards the prospects for the global economy in the coming year.

In February, a net 11% of global managers predicted the global economy will strengthen in the coming 12 months, up from the net 27% who predicted a worsening economy in December.

Gary Baker, the head of European equities strategy at BofA ML global research, says historically such a large shift in sentiment towards emerging markets can be seen as a contrarian trade, with the argument the sector has got too far ahead of itself.

With cash balances falling and allocations to equities rising, Baker describes February’s survey as managers taking off the ’risk off’ trade, although not yet to a level that can be described as ’risk on’.

 “The strongest indication of risk appetite is investors’ definitive move into cyclicals from defensive stocks and the closing of underweight positions in banks, especially in Europe,” he says.

In the European survey, banks saw a 38 percentage point swing in their weighting in February, which is the third biggest shift since the survey started. Meanwhile the autos sector hit its biggest overweight, with a net 20% of investors overweight, up from 18% last month.

The large bellwether defensives meanwhile fell out of favour, says Baker, with healthcare fell by 30 percentage points to a net 18% underweight, its third largest ever one month fall.

Globally, technology remains the most favoured sector, hitting a level, like emerging markets, which Baker describes as dangerous

Lib Dems Push for Pension Tax Relief Cut (Article by Rachel Dalton in IFAonline on 13.02.2012)

13 Feb
Deputy prime minister Nick Clegg and Treasury secretary Danny Alexander will meet with David Cameron and George Osborne today to demand more tax on high earners’ pensions.

The Liberal Democrats will push the Prime Minister and his Chancellor to speed up the increase of the lower income tax threshold to £10,000, the Telegraph reports.

It is understood that Clegg and Alexander (pictured) will reveal to the Conservatives their plans to fund the tax break for lower earners with progressive taxes on the wealthy.

Reducing tax relief on pensions will be one of the proposals put forward by the Liberals, sources have claimed.

Alexander is likely to propose that higher rate tax-payers will only receive basic rate tax relief on their pension contributions, although Osborne is known to be opposed to the idea.

However, a compromise could be that only those earning more than £100,000, rather than those earning more than £45,000, will be stripped of higher rate tax relief on their pensions.

A deal like this would save the taxpayer £3.7bn per year.

Another main source of funding for the tax break on the lowest earners is the General Anti-Abuse Rule (GAAR) proposed in a report prepared for the Treasury in December.

Clegg has hinted the GAAR could be included in this year’s budget.

Tax Planning and Investments

10 Feb

There are three ways to maximise potential returns and achieve clients’ goals. This is through competitive pricing, tax planning and investment returns. So, we need to control costs and attract rebates (wherever possible), pay the minimum amount of tax possible and finally, the performance of the investment portfolio.

Investors can make their Tax Allowances and Reliefs stretch further with some lateral thinking.

The end of the tax year on the 5th April is the cut off for the current tax year for Pension Contributions (£50,000), ISA Allowances (£10,680), VCT (£200,000) & EIS (£500,000). By combining Reliefs you can maximise the tax benefits generated.

 

Personal Planning

1.  For example, for a 40% tax payer – making annual pension contributions of £40,000 will create immediate tax relief of £10,000 plus relief through your self assessment of a further £10,000 (total of £20,000). If this £20,000 was invested in VCT, then the £20,000 investment would attract further income tax relief of £6,000 (but the investment must be held for 5 complete years).

In this example, tax savings total £26,000 leading to the initial £40,000 investment creating £60,000 of investments. This is only effective if you have a tax bill of at least £26,000.

2.  For example, for a 20% tax payer – making annual pension contributions of £30,000 will create immediate tax relief of £6,000. If this £6,000 was invested in VCT, then the £6,000 investment would attract further income tax relief of £1,800 (but again the investment must be held for 5 complete years).

In this example tax savings total £7,800 leading to the initial £30,000 investment creating £36,000 of investments. This is only effective if you have a tax bill of at least £7,800.

Company Director Planning

An alternative way to look at the same information is, the above strategy could be used in combination with taking higher dividend payments from a limited company. If the dividend distribution leads to 32.5% on the share distribution to be paid by rolling the payment (or possibly part payment) into such investments could mitigate the additional tax payable.

3. For example, lets assume that you draw dividends up to the threshold for higher rate tax, take a further dividend payment of £50,000 creating an additional rate of tax of 32.5%. The 10% income tax credit is already included  so a further taxable amount of £12,500 will be due. By investing this in, say, the VCT will create a tax rebate of £15,000. So mitigating the additional tax and £2,500 of existing income tax payable.

 

Additional Information

Planning is all about making the best of the money available. Careful consideration must be taken with respects to the investment product chosen.

Pension investing – asset classes can be mixed so that the underlying portfolio can be designed to reflect your chosen risk profile. On the initial investments there is Basic Rate Tax Relief at Source and any further taxation is reclaimed through your Self Assessment. When you crystallise your benefits and draw an income, either directly from the fund or via the purchase of annuity, the income generated is treated as earned income for tax purposes i.e. all the income is assessed to determine the tax payable.

Whereas Venture Capital Trusts (VCTs) are listed companies who invest in small, higher risk UK companies and must be held for a minimum of 5 years. If they are encashed earlier the tax relief will be clawed-back on a pro-rata basis. These investments attract income tax relief of 30% on the capital invested, any dividends payable are free of tax and the maximum investment is £200,000 per person per tax year.