Not Getting Enough from your Savings?
Published August 4th 2013
With the recent comments by Mark Carney, the Governor of the Bank of England, that interest rates will not be reviewed until unemployment reaches 7%, this provides some clear guidance allowing us to plan for the future. The anticipated timescale for any increase in interest rate is currently about 3 years.
This makes it clear to savers that interest or return on their capital will remain low and that in the current climate, with inflation (CPI) measured at 2.9% for June 2013, the ‘real value’ or purchasing power of capital is likely to erode.
These factors lead many investors to question the level of risk they have been prepared to take in order to achieve better returns from their capital and to start asking themselves what they are actually seeking with regards to income and capital returns? Do they want preserve their capital for future generations or would they prefer a guaranteed a level of income to meet their immediate or future needs?
There are solutions that offer a secured level of income for the rest of your life. The type of client that might consider one of these plans:
- May worry that their money in the bank may run out and would prefer a guaranteed income for life, without giving up access to the capital.
- May worry about the investment markets and would like to ensure that income doesn’t go down, whilst still participating in the markets for the potential of growth.
- Do not need an income now, but would like to ensure that the investment used to fund their income receives guaranteed increases, perhaps concerned about the impact of inflation at least until it is needed.
- Wants to ensure that anything left in a plan would pass to their family on death.
What compounds the attraction of this type of plan is that the income is tax efficient. Unfortunately, because of the advantageous tax on the income this plan can’t be written in trust.
I have noticed that many investors who are at, or nearing, retirement are also turning their attention to inheritance tax (IHT) concerns particularly with regards funds held in cash accounts or a ISAs, which are not protected from IHT in the event of their death.
In the event of their death, any transfers to children over the £325,000 inheritance tax threshold are taxable at 40%. If married, any unused amounts may be used to potentially increase the allowance up to £650,000.
To plan for death, the first and most important step is to make a will. Without a will, you are said to die intestate. If this happens your property and money is distributed in accordance with the rules of the Succession Act 1965. Basically, this means that you are not in control of how your assets are distributed.
Any money in the bank generally cannot be obtained by family members until Probate is complete. Probate can take anywhere between 6-9 months and several years. So although a will ensures it is distributed as you desire, you family may have limited resources whilst this happens.
Any assets held in a bank account or cash will not be written in trust, which means there is the potential that they will be subject to inheritance tax. What many people do not realise is that the children must find the funds to pay the 40% inheritance tax liability before the assets are made available to them.
The ‘estate’ includes the value of your share of your property. If the family home is held as joint tenants then it passes to the surviving partner. If married, there is no IHT liability between married couples. If not married there may be an IHT liability.
Alternative investments, such as an Investment Bond, can be written in trust and can provide some protection from inheritance tax, in the event of death.
However, when using a trust to avoid IHT you generally have to give up some control or benefits of the asset.
These trusts allow the most flexibility with regards to who receives the benefit and allow for any change in circumstance in the future. E.g. adding new grandchildren.
Any assets held in a discretionary trust can be distributed to the right people at the right time. As long as any ‘gift’ into the trust and any gifts in the last 7 years are not more than the Nil Rate Band (£325,000) there is no immediate IHT to pay. If you are over the limit, at 20% charge will be payable as the gift is treated as a Chargeable Lifetime Transfer (CLT). The could also be potential additional charges at year 10.
There are 3 basic types of discretionary trust
- Gift Trust – you will gift the asset and if you survive for 7 years there is no IHT liability. You can be a trustee but not a beneficiary.
- Loan Trust – you lend the capital to the trust. The loan is repaid on death, or earlier for you to spend, which means that there is no liability. Any growth occurs outside of your estate, within the trust for the beneficiaries.
- Discounted Gift Trust – based on your health, age and the level of income you will receive, HMRC will discount an amount of your investment which will automatically reduce the value of your gift for IHT purposes from the start of your investment. The remainder of your investment after discount, will be outside if your estate for inheritance tax purposes should you survive a further 7 years. Again, any growth occurs outside of the estate and any income is set at outset.
If any of this article has triggered any questions that you may have about your circumstances, please contact me (01622 664440) and I would be please to explore the possibilities for you own planning.