You will all be aware of the measures announced by the Government and passed through Parliament yesterday. As you would hope we have considered the impact on the financial planning for our clients.
We are due to send our first client “perspective” newsletter at the end of September, but the Government’s actions meant we felt we should get in touch sooner, with the full newsletter to follow.
Triple not lock
This was a bold promise made when it was relatively easy for the Government to predict the likely cost over time to the exchequer, and plan to fund the cost accordingly. We were, and still may be in the long-term, in a world of low inflation and wage growth.
But projections can never quite account for the vagaries of the world and an 8+% increase in one year would never have been in the “model”. It is therefore unsurprising to see this temporary hold, as annoying as it might be to those in receipt of their state pension. We welcome that this is a suspension rather than a scrapping, which would have substantially reduced the value the state pension has to clients’ income over the course of their retirement.
Dividend tax rises and investment portfolios
The increase of 1.25% to the rate of tax on dividends will reduce the total return on portfolios that don’t sit within tax privileged ISA and pension wrappers, but only by a very small amount.
For example, in a balanced 5/10 portfolio, the total average return expectation (capital growth plus income) averaged over time might be 5% p.a. The part of this return represented by dividend income might only be 1%, with the remaining 4% delivered by capital growth and other income. It is only the tax on that 1% that is increasing by 1.25%. If you had £100,000 invested in this way of your £5,000 anticipated gross return, you’d only pay an additional £12.50 in tax due to this measure.
Dividend yields around the world have been falling for quite some time. Our return objectives are always set with total return in mind. Furthermore, when planning for income in retirement we look at total return expectations when setting what we think it sensible for you to draw.
National Insurance rises
This measure raises the vast majority of the tax being used to support the Government’s plans. It is a real tax rise that will affect all working people and employers with the stated aim of providing funding towards reform of the health and social care system. Time will tell if the tax rise, given the purpose, is justified and what the political fallout might be.
Whilst many may see these measures as unwelcome, they are unsurprising. It reinforces the need for continued use of all the tax privileged savings allowances available, and structuring returns from your wealth where possible, to use all of the income and capital gains allowances you have. This is a key focus of our ongoing planning process.
It is unlikely these measures would cause us to suggest substantial changes to the plans we manage, but should you wish to discuss the impact at a personal level then please do not hesitate to get in touch.