Catriona: Hello, today Richard Verge, head of Goodman Jones private tax team is talking to David James, director of financial planning at Charles Stanley. We’ve been getting a lot of questions from people over the last few months and today’s session is going to be looking at some of the questions, put to us by employers who are keen to see what they can do to protect the business as well as their employees, as well as those questions that we’ve had from individuals and their families who similarly want to make sure they’re in the best place possible to face the future.
Richard: Hello David.
David: Hi Richard.
Employers’ questions about pension contributions
Richard: We’ve been talking through some of the questions which clients have been grappling with in recent weeks, particularly now that the lockdown is beginning to ease and people are looking ahead towards the next few months. One of the questions I’ve been asked a number of times are from employers concerned about their employees being able to continue to afford contributions into their auto-enrolled pensions. What options do they have at the moment?
David: I mean, the first thing to say is that auto-enrolment is still fully alive during the current pandemic or Coronavirus situation we’ve found ourselves in. So the auto-enrolment duties still apply to the employer and it’s their duty to continue to make those payments in line with the auto-enrolment guide or the actual current contribution rates. So they have to fulfill those. And it’s probably worth mentioning that under the job retention scheme that employers can claim up to 80% of the employee’s salary up to a maximum of two and a half thousand, but they’re also able to claim the 3% pension contribution that they pay on behalf of the employee.
David: So where possible you would expect that most employers would aim to maintain the auto-enrolment contribution levels as they did prior to the COVID pandemic, but on a reduced salary based upon the job retention scheme. So up to 80% of their salary. If employers decide to pay a little bit more and top that up by a little bit, then that is part of the overall salary position. So they need to maintain that auto-enrolment requirement during this period.
Richard: Okay, so if someone is actually looking to suspend say their pension contributions as their cash is tight, they want to reduce income. What can they do then?
David: It’s obviously very important that people try where possible to continue to maintain their pension contributions, because it’s a long term investment for them, for their retirement. But the rules are quite clear when it comes to auto-enrolment, that if a member decides to stop paying in because they can’t afford to at the moment; and I fully understand why that would be the case. They have to leave the scheme. So by leaving the scheme, then the employer will then stop making their contributions at the same time.
Richard: And what about then, can they pick that up again at a later time? Can they sort of dip in and out of the scheme as they need to?
David: Under the normal rules, they’d be invited back in, in 12 months’ time because that’s normally what the auto-enrolment rules would suggest that they do. However, you would expect that the employers would be a little bit more flexible during this period. And if someone looked to walk, back in six months’ time, I’m fairly sure that most employers would consider that and allow them to do so.
Richard: What about other benefits that are linked to salary? If peoples’ income has gone down during this period; are there any other things that they should be thinking about which may be affected by that change in, income level?
David: A couple of things to bear in mind here would be if they have some sort of group income protection arrangement whereby the company has taken out an insurance policy to cover people’s salaries, should they be off work after a deferred period of time. Most of those policies would still pay should a member of staff be taken ill or long term sick during the COVID situation. However, that would also then be linked to the current salary of the employee up to the maximum. Now the maximum you can claim under income protection is 75% of your salary. So if an employee was receiving, let’s say 80% of their salary under the job retention scheme, as long as that 80% of the salary didn’t mean they were getting more than 75, the statutory requirement underneath the income protection plan, that plan will be fully able to pay.
Protection for employers
Richard: You’ve mentioned about income protection, that sort of leads me into other areas. Are there any other ways that employers can sort of protect themselves or safeguard themselves from the impact of the pandemic at the moment?
David: I think the big question that I would have for businesses at the moment and probably more so looking at the directors, the key personnel is that
COVID has had a massive impact on businesses. And we would hope that in the next few months, please, God things may start to get back to normal, but a concern that I would have for businesses, if they suddenly lost a key person or a director due to an illness or death, then that would have a massive financial implication on the business at a time when their finances are probably stretched to the maximum. So I would be stressing to companies at the moment that they should review their existing directorship protection arrangements and all their business will, whichever you may wish to call it. And their key personal arrangements to ensure that they are fully protected, should something tragic happened to the business while they’re trying to get back onto their feet.
Safety of money for private individuals
Richard: That’s dealing with things from the employer side, I’m also getting a lot of questions coming indirectly from individuals and private clients. And a lot of them are worried. Well, there seems to be a divergence between those who are thinking well, yes, we’re in for a short recovery. Is it going to be a nice V-shaped recovery and others are saying, well, what about a second spike? What about the safety of money? Should people be looking to put their money into safe products?
David: I think at the moment, we have to bear in mind that if people are invested, they probably would continue to stay invested in the markets because the markets have sort of rebounded somewhat in the last couple of weeks since the pandemic first hit the country and the world for that matter. So I’m not saying to any of my clients to disinvest during the current climate, because they would then crystallize any losses that they’ve already incurred. But I think the safety of cash at the moment is something for clients to bear in mind.
And the FSCS protection scheme allows bank accounts, the protection of 85,000 pounds per account per institution. And I think it’s always worth double-checking whether or not your bank is part of a wider organization. And you may think you’ve got money in more than one bank, but if they’re a part of the same group, you could only be able to protect one account up to the maximum 85,000 and 170,000 for a joint account.
There is some sort of slight caveats in the FSCS protection scheme that say that they will protect balances up to a million pound against a bank failing. And that has certain caveats to it such as the sale of a property, for example, where someone could suddenly have a large amount of cash in their bank account that they wouldn’t normally have because they’re waiting to buy another property or they’ve received benefits under death in service arrangement. That scheme extends that to a million pounds, but for a short period only.
David: While we’re talking about cash on deposit. I think another thing the client should bear in mind is that the national savings and investment, and, you know, I’m a fan of that institution. They offer protection on most of their accounts up to a million pounds, which is far in excess of the FSCS protection scheme. Obviously, you’d have to have the right amount of money and you couldn’t have 500,000 and claim for a million. You’d need a million pounds in there, in order to have that fully protected, but it is a very, very safe haven for cash in the short term.
Richard: Okay. So it sounds like national savings is perhaps a good idea if you’re worried.
David: Definitely. And I also think some of the contracts, they have are quite competitive in particular, the premium bonds. I think they’re a very good investment for clients that look to have money in a near-cash position. They do pay out, provide you have a maximum of 50,000, quite regularly. And as it’s deemed to be winnings, any returns on that premium bond are tax-free in the individual’s hands.
Richard: If we’re looking at things other than cash, obviously the markets are a bit difficult to pick at the moment. Clearly, some investments have done well because of the changes in the environment we’ve found ourselves in. Whereas many have done badly, given that overall, the markets are fairly low at the moment. Do you think this a good time to be investing in the markets?
David: Well, it definitely depends on people’s timescale and their risk appetite. So, you know, how risk-averse they may be because it has settled down in the markets. But I have to say in my view, going forward, I think we’re in for a bit of a rough ride. So in terms of investing large lump sums of money into the market at the moment, I don’t think you’d ever pick it at the right time because on a daily basis, we’re seeing markets fall by a percent or up by a percent.
So it’s quite volatile and volatility is the thing that makes markets concerned in the first place. So I think if someone was looking to take advantage of the market at the moment being in a lower position, I would probably suggest that they look to drip-feed money rather than placing it in one large lump sum. So typically for a client recently, we agreed that we drip feed a capital sum in over a period of 12 months, rather than going into the market in one go. And I think that’s probably a sensible thing to consider.
Inheritance Tax planning
Richard: The last topic I wanted to ask you about David, is the question of inheritance tax planning. This whole pandemic as brought to people’s minds the question of, should they start looking at their inheritance tax position? And if so, what could they do? I think my first question to you is when is a good time to sort of start thinking about inheritance tax planning.
David: My answer would be today. Because we all know how the inheritance tax works and the fact that we have a period of time more often when we can make a gift to people that peel away over a seven-year period.
But the other thing to look at here Richard is that some people have gone through difficult financial times and they’re probably still living in difficult financial times. So where families are considering making gifts to loved ones. Now is a pretty good time to do that because not only will they be reducing their inheritance tax, but they could be helping their family members out by helping them through this troubled time, by giving them some capital they weren’t expecting.
So I think now is the time to reconsider inheritance tax because we both know how much money the Exchequer raised last year from inheritance tax some five and a half billion pounds. And I don’t see that figure going down. I see that figure going up. So the longer you leave and the longer you delay with inheritance tax, more often than not, the situation will get worse and the opportunities to reduce that position diminished too. So people need to start considering their inheritance tax planning right away.
Richard: On that very point about inheritance tax, not going away. Obviously, there are concerns being expressed about where the government’s going to get the money to pay for all the assistance they’ve been giving to businesses and individuals during the coronavirus crisis. On the inheritance tax side of things, there’s been a lot of talks even before this about whether business, property relief and AIM-listed stock were going to be an issue. And whether that relief was going to be withdrawn. Do you have any thoughts on that?
David: I hope that doesn’t change because I think AIM gives a lot of people the opportunity to invest in it in a diversified market. It also gives businesses the opportunity to start up and grow because they’re attracting investors, but it is a more high-risk area than our financial planning because these are startups. So more often than not, there is a greater level of risk attached to these companies. So you are investing for the long term and you have the incentive to do so because they become taxing center after two years.
So I think our government has been pretty strong over the years in trying to encourage new business and new companies, startups. I would expect that to continue. I wouldn’t see any reduction in that if anything, they probably want to see more of that to help the economy get back to normal.
Richard: So I’m getting from you that you still think AIM-listed products are possibly a good part of your overall IHT planning strategy?
David: I definitely think so, but for the right people, because some of these areas of investments are much higher risks than the normal sort of run of the mill investments that you and I would know, like an ordinary equity share or something along with that, but even though you’re buying shares in a company, you are taking a lot more risk than you would normally, given this status of the AIM market. But if you speak to clients who’ve invested in AIM over the years. I’m pretty sure most of them are very happy with the returns because there have been some absolute standout returns from those over the last few years.
Richard: One other minor point that we did discuss previously was about writing policies into a trust. Is that something that you’d like to just mention?
David: Yes, I think on two fronts, really, I think it’s very important that if people take out life insurance policies to protect their families, they should really consider making sure that those policy proceeds are paid into a trust. And the main reason is that once again, we’re in very difficult financial times and money is tight. If somebody had a payment from a life insurance contract that was caught up in probate, there could be waiting a lot longer than normal to receive those funds at a time when they really need them.
So just by simply writing that policy into trust for their beneficiaries means that they can usually get that money paid to them within about four weeks. So it’s very good financial planning. And I think I’ve moved that over towards pensions as well because under pension’s rules, it’s very important that nomination of beneficiaries is kept up to date so that if somebody passed away during the current situation, their nomination of beneficiaries needs to be accurate so that the pension provider or the trustees can get that pension passed across to the beneficiaries as soon as possible.
Once again, because money may be tight and people might want to get their hands on that money so they can deal with their affairs, promptly and probate can probably take up to a six month period before anything happens there. So the benefit of writing life insurance interest and nomination of beneficiaries being up to date, I think it’s a really important area for clients to do. And more often than not they can do that without an advisor because they can either check their existing arrangement to see what it says, speak to their existing advisor, and if they have life coverage and there’s no trust involved, their insurance company can send them a trust form. And with their advisor, they could probably quite easily put that together. So there is a belt and braces so to speak.
Richard: I think you anticipated what I was going to say next there David.
Richard: Not at all, because if my clients are anything like I am you know, these policies have been started some time ago and I was going to ask you, what’s the best way of checking one, whether life policies are written in trust and two whether pension arrangements have been correctly nominated who the potential beneficiaries are.
David: Yes. I mean the financial adviser, if they recommended their life insurance in the first place probably would have ensured that the client wrote the policy and trust. But if they haven’t by just contacting the adviser, they can get the necessary forms and that can be dealt with. And also with the nomination beneficiaries at Charles Stanley, it’s something we are very keen on ensuring, and this is something we would conduct our annual review just to make sure that the client’s circumstances haven’t changed since their last meeting. And if there have been changes, those changes are actioned after that meeting. So the client fully understands what would happen to their life insurance or their pensions in the event of their untimely death.
Richard: Okay. Well, thanks very much, David, for your insight, hopefully, that’s been of help to some of our listeners and I look forward to having another conversation with you very soon.
David: Face to face, hopefully, Richard.
Richard: Face to face, that would be good.
David: Face to face would be lovely.
Richard: With a pint of beer.
David James leads Fitzrovia Financial Planning, a joint venture between Goodman Jones and Charles Stanley which came about because of the very close working relationship we have with their independent and impartial advisers.
He can be contacted at firstname.lastname@example.org
Richard Verge leads a team of tax advisers specialising in advising people on a personal level whether that be in connection with their individual tax affairs or the tax affairs of their families or businesses. As such he gives advice and guidance on personal tax and succession planning as well as overseeing the tax return process.
Email Richard on email@example.com