FYI Professional news update
News items you might have missed:
New tax rules threaten Buy2Let investors
In a major report on the effects of the new tax rules on Buy-To-Let mortgages, the Financial Times quoted accountants views that even with a 30% deposit and a 6% rental yield, a property could be loss-making for a higher rate taxpayer. For a 40% taxpayer, the net cost of interest payments will rise by 45% (equivalent to a rise from £55 to £80) by 2020. Experts pointed out that for higher rate taxpayers, reducing the level of debt would now be highly advantageous, and that people who did not have the cash available to do this might well sell part of their BTL portfolio.
Parents get it wrong for kids ISAs
Most parents saving for their children get it wrong, said the Telegraph. Figures show that two-thirds of what parents put into Junior ISAs last year went into cash accounts. Yet if the money won’t be paid out for many years (age 18 is the earliest it can be paid out) then you would normally expect much higher returns from shares than cash – an average of 5% a year on top of inflation as against a mere 0.8% from cash deposits. Experts said a UK equity income fund was a sound choice.
Can you take 4% for life?
A key question for people in retirement is how much income they can take from their investments without the risk of the money running out. The Telegraph cited the ‘4% rule’ named after a US financial planner, which has academic support. It says you can safely take a starting income of 4% and increase the income in line with inflation. But the rule was developed in an era when interest rates were much higher than they are today, and recent experience suggests that to be safe from the risk of ruin you also need a ‘cash buffer’ on which to draw for the next few years’ income, so that you do not need to cash in when markets are down.
Is final salary in the firing line?
The Telegraph asked whether final salary pensions – the variety giving employees the best deal – are in the Chancellor’s sights. A review of pension tax relief will result in announcements by the Chancellor in his Autumn Statement. He is widely expected to announce a reduction in the top rates of tax relief on pension contributions. But the Telegraph also speculates that the Chancellor will announce other measures to reduce the amount of tax relief given to final salary schemes, which are the largest element in the £50 billion cost of pension tax reliefs.
Better than pension top-ups
Most commentators have said the government’s offer of Class 3a National Insurance contributions to top up the new flat-rate state pension is a good deal, said FT columnist Merryn Somerset-Webb. She disagreed, pointing out that a 65-year old would have to live for 21 years to get their money back from a Class 3a contribution if they paid basic rate tax. She said if you wanted a bigger income, it was better to defer taking your state pension – in this case, the pay-back period for a basic rate taxpayer is just four years.
Return of the granny flat
The Mail says figures show the granny flat is more popular than ever, with the number of properties with ‘annexes’ up by a third in the past two years. If an annexe has a bathroom and kitchen, it used to be classed as a separate dwelling for council tax, but there is now a 50% discount if it is occupied by elderly people. While some annexes are used by children who can’t afford to buy, most are used by older people for whom having family on hand means they can avoid the high and rising costs of care.
The fatal flaw with index trackers
Index tracking or ‘passive’ funds are now more popular than actively managed funds, says Sunday Times columnist Ian Cowie. But they suffer a fatal flaw. Since 2000, a UK index tracker has turned £10,000 into £16,300, but an average equity income fund has more than doubled it to £24,500. The equity income fund avoided investing heavily in banks, oil and mining companies, all of which have delivered poor returns over that period and all of which accounted for a substantial fraction of the UK stock market index.
How to be a good banker
The BBC’s Robert Peston told his audience at the Cheltenham Literary Festival to downsize in order to free up homes for the younger generation, says the Times. Among the alternatives it suggests for those who don’t want to go that far but are happy to be the Bank of Mum and Dad are taking cash from their pension fund to provide children with a deposit, guaranteeing a child’s mortgage or entering a joint mortgage with them.
Watch out for the 14-year rule
Most people know that if you give away money and live for seven years, the gift no longer counts as part of your estate for inheritance tax. But the Telegraph alerts readers that if you make a gift to a trust and die within seven years, all the gifts you made up to seven years before setting up the trust are included in your taxable estate. So if you died almost seven years after making a gift to a trust, all gifts you had made in the previous 14 years would be included in your estate.