Sterling & Law Group Plc - Surrey

Using pensions to tackle to ‘60% tax’ bracket.

For most individuals, their first £12,570 of taxable income falls within the ‘personal allowance’. This is the 0% tax band.

For individuals earning over £100,000, they lose their personal allowance at a rate of £1 for every £2 of earnings over £100,000.

For those who make personal pension contributions, their basic rate tax band is extended by the size of their gross pension contribution.

Scenario 1: John has a salary of £125,140 and makes no pension contributions. He pays the following income tax:

- Personal Allowance: £0
- First £37,700: 20% x £7,540 (basic rate)
- Remaining £87,440 x 40% = £34,976 (higher rate)
- Total tax paid: £42,516

Scenario 2: John makes a £20,112 net pension contribution, which is grossed up instantly to £25,140.

- First £12,570 x 0% = £0 (Personal Allowance)
- Next £62,840*: 20% x £12,568 (basic rate)
- Remaining £49,730 x 40% = £19,892 (higher rate)
- Total tax paid: £32,460

*basic rate tax band extended by size of gross pension contribution (£25,140).

Following self-assessment, John receives an income tax refund cheque from HMRC of (£42,516 - £32,460) £10,056.

In this example, it has cost John (£20,112 - £10,056) £10,056 to make a £25,140 pension contribution.

Furthermore, all investment growth in the pension will be tax free.

Why pay the taxman when you can pay your future self instead?

https://www.vouchedfor.co.uk/financial-advisor-ifa/oxted/036412-andy-norrington

Financial Planning isn’t just about building wealth.

It’s about creating a bespoke plan to help you understand your financial position to give you the confidence to spend and enjoy your hard-earned savings.

Often, all it needs is some restructuring into the most tax friendly vehicles and taking appropriate investment risk within parts of your portfolio.

What are your financial goals?

https://www.vouchedfor.co.uk/financial-advisor-ifa/oxted/036412-andy-norrington

Control the controllables.

1. Knowing your income/outgoings is the starting point for a financial plan.

2. Calculate your surplus monthly income and save it.

3. Use the correct tax wrapper. ISA’s and Pensions receive beneficial tax treatment.

4. Select the appropriate level of risk. The longer the investment time horizon, the more risk you can absorb.

5. Behaviour like an investor. Be patient when the going gets tough and focus on the long-term goal, not the short-term volatility. Markets are dips are normal.

We cannot control global stock markets. We can control our actions.

Those who control the controllables will end up winners.

https://www.vouchedfor.co.uk/financial-advisor-ifa/oxted/036412-andy-norrington

Compound growth.

'The average rate of growth experienced by an investment over a multi-year period’. Think of it as the ‘snowball effect’ – i.e. the growth on growth.

This is perhaps best understood by looking at some examples:

1. £10,000 lump sum in the bank (assumed 1.5% annual interest):
Value after 5 years: £10,772
Value after 10 years: £11,605
Value after 20 years: £13,346

2. £10,000 lump sum into a Stocks & Shares ISA (assumed 7% annual investment returns):
Value after 5 years: £14,025
Value after 10 years: £19,671
Value after 20 years: £38,696

3. (£10,000 (+20% tax relief)) £12,500 lump sum into a Pension (assumed 7% annual investment returns):
Value after 5 years: £17,531
Value after 10 years: £24,589
Value after 20 years: £48,371

The figures after 20 years in example 3 compared to example 1 are life changing for many. It just requires patience and discipline to reap the long-term rewards.

https://www.vouchedfor.co.uk/financial-advisor-ifa/oxted/036412-andy-norrington

**Investment returns are not guaranteed and can go down as well as up**

Why I love pensions.

John is 40 years old and earns a salary of £95,000 pa, making him a 40% higher rate taxpayer.

He pays a £32,000 lump sum into his pension which receives instant 20% basic rate tax relief, grossing it up to £40,000.

As a higher rate taxpayer, he claims a further 20% via self-assessment. Ten weeks later he receives a cheque from HMRC for £8,000. Therefore, his £40,000 contribution has only cost him (£32,000 - £8,000) £24,000.

Within his pension, he invests in a globally diversified equity-based fund which achieves average returns of 7% pa. All growth is tax free.

By age 65, due to the effects of compounded growth, the investment is worth £229,000.

Could you be putting your spare cash to better use?

**Investment returns are not guaranteed and can go down as well as up**

https://www.vouchedfor.co.uk/financial-advisor-ifa/oxted/036412-andy-norrington

Time to act. Tax year end.

Mr & Mrs Smith have a spare £100,000 in a bank savings account which has accrued for meany years. They are 65 and retired several years ago.

Before 6th of April, they can both:
- Pay £20,000 into an ISA
- Pay £2,880 net / £3,600 (gross of 20% tax relief into a pension)

After 5th of April, they can both:
- Pay £20,000 into an ISA
- Pay £2,880 net / £3,600 (gross of 20% tax relief into a pension)

This means over the next three weeks they can pay in £91,520, which becomes £94,400 due to tax relief.

Once in the ISA and pension, they can choose to invest money if they wish to, and all growth will be tax free.

If you don’t use your allowances, you lose them.

https://www.vouchedfor.co.uk/financial-advisor-ifa/oxted/036412-andy-norrington

Junior Stocks & Shares ISA’s

• Parents can contribute £9,000 per child, per tax year.
• All investment growth is tax-free.
• Future withdrawals are also tax free.
• On child’s 18th birthday, Junior ISA becomes an adult ISA.

Noah is a newborn baby. His parents contribute £9,000 now and £9,000 again on the 6th April (the new tax year).

The investment achieves average returns of 7% per annum.

By age 18 the Junior ISA has grown to £63,225. University sorted, if not, perhaps a future house deposit?

Compounded investment growth and tax wrappers are your friends. Take advantage.

**Investment returns are not guaranteed and can go down as well as up**

https://www.vouchedfor.co.uk/financial-advisor-ifa/oxted/036412-andy-norrington

Using Pensions to tackle the ‘60% tax band’.

Individuals in the UK are taxed on their ‘adjusted net income’.

All individuals have a ‘Personal Allowance’. This is a 0% tax band on the first £12,570 of taxable income. However, for high earners, the Personal Allowance is reduced at rate of £1 for every £2 of earnings over £100,000.

This means that for earnings between £100,000 - £125,140, individuals not only pay higher rate tax (40%), but also their first £12,570 is taxed at 20% rather than 0%, making it an effective 60% tax bracket.

Let’s look at an example: John has a salary (relevant UK earnings) of £130,000, his tax bands are as follows:

- Personal Allowance: nil
- Basic rate: £37,700 x 20% = £7,540
- Higher rate: (up to £125,140) £87,440 x 40% = £34,976
- Additional rate: £4,860 x 45% = £2,187
- Total Income Tax = £44,703

Adjusted net income can be reduced by the size of a gross pension contribution. Furthermore, higher rate tax relief is awarded by extending the basic rate tax band by the size of the gross pension contribution.

John makes a £24,000 lump sum net pension contribution which receives instant 20% tax relief, grossing up to £30,000. This reduces his relevant UK earnings from £130,000 to £100,000. The income tax position is now as follows:

- Personal Allowance: £12,570 x 0%
- Basic rate (£37,700 + £30,000) x 20% = £13,540
- Higher rate: £19,730 x 40% = £7,892
- Total Income Tax; £21,432

Therefore a £24,000 net pension contribution receives £6,000 instant tax relief, plus John has reduced his income tax by (£44,703 - £21,432) £23,271.

A £24,000 net pension contribution has made a total tax saving of (£6,000 + £23,271) £29,271.

John has also made a significant pension contribution to help him retire early.

https://www.vouchedfor.co.uk/financial-advisor-ifa/oxted/036412-andy-norrington

Why I love pensions.

John is 40 years old and earns a salary £95,000 pa, making him a 40% higher rate taxpayer.

He pays a £32,000 lump sum into his pension which receives instant 20% basic rate tax relief, grossing it up to £40,000.

As a higher rate taxpayer, he can claim a further 20% via self-assessment. 10 weeks later he receives a cheque from HMRC for £8,000. Therefore, his £40,000 contribution has cost him (£32,000 - £8,000) £24,000.

Within his pension, he invests in a globally diversified equity-based fund which achieves average returns of 7% pa. All growth is tax free.

By age 65, the investment has benefitted from compounded growth over 25 years and is worth £229,000.

From this, he can take 25% (£57,250) tax free.

The rest is taxable at John’s marginal rate upon withdrawal. As John has now retired, he has no other income, so the first £12,570 (the ‘Personal Allowance’) is taxed at 0% and income up to £50,270 is taxed at 20% basic rate.

**Investment returns are not guaranteed and can go down as well as up**

https://www.vouchedfor.co.uk/financial-advisor-ifa/oxted/036412-andy-norrington

Markets have rallied since the end of October, rewarding investors who have stuck through a turbulent year.

Yet despite the S&P 500 returning 23.41% year to date, you won’t find this reported in any mainstream media. The same chart shows 95.30% growth over 5 years.

As those in the industry know, what you see in the graph is normal. Markets are volatile in the short-term, but the trend is always upwards over time.

This is a fantastic advert as to why ‘time in’ not ‘timing’ the market is key to successful long-term investing.

https://www.vouchedfor.co.uk/financial-advisor-ifa/oxted/036412-andy-norrington