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Bay Tree News & Events

The information contained within the articles below was accurate at the time of being published. However, references to taxation, legislation, regulation or any other issues or concerns may no longer apply.


Posted by Jen Usher

It is no wonder that there are no new National Savings Index-linked Certificates...

The Budget confirmed that National Savings & Investments (NS&I) money-raising target for 2013/14 is nil – in other words, all NS&I has to do is match inflows and outflows. At first sight this might look surprising, given that in the current financial year the Government needs to raise nearly £163 billion in cash. The simple truth, however, is that at present NS&I represents an expensive way for the Government to borrow.

This was underlined last month, when the Treasury sold £1.6 billion worth of index-linked stock at its lowest ever yield. The price paid by institutional investors for 0.125% Index-Linked Treasury Gilt 2024 meant that they were accepting a real (inflation-adjusted) return of -1.26% a year if they held the stock to maturity. Negative real returns have been with us for some time, as a result of the Bank of England’s quantitative easing and the pension funds’ desire to match their inflation-linked liabilities. Even so, the fact that big investors are locking in a loss of over 1.25% each year for 11 years gives pause for thought.

The last public issues of index-linked savings certificates, withdrawn in September 2011, offered a real return of 0.5% a year over five years. If you have existing certificates reaching maturity, NS&I will now only offer RPI + 0.15% for reinvestment over three and five years. The new certificates would also be subject to revised terms, which include early encashment penalties. Unattractive as that sounds, index-linked stock for similar periods will give a return of about RPI – 2.5%.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The spring Budget of 20 March was not it seemed, even if much of it appeared to be familiar from earlier announcements…

Posted by Jen Usher

As in many other areas of the Budget, Mr Osborne had stolen some of his own thunder by turning last December’s Autumn Statement into a mini Budget. We already knew that the personal allowance for 2013/14 would be £9,440, £235 higher than previously revealed, and that the starting rate for higher rate tax would fall by £1,025 to £41,450. We had also been promised a 1% increase in that threshold for the following two years.

The surprise in the Budget was that the personal allowance will jump to £10,000 next tax year (2014/15), a year earlier than had been generally expected. If you are a basic rate taxpayer you will gain £112 a year as a result, whereas if you are a higher rate taxpayer with income of up to about £119,000 you will be £195 a year better off. Top rate (now 45%) taxpayers will be £29 worse off because they receive no personal allowance and suffer from a £145 shrinkage in the width of the basic rate band. One point the Chancellor did not make was that the freeze in personal age allowances and the qualifying date of birth (born before 6 April 1948) would continue in 2014/15.

The generous increase in the personal allowance – it will have more than doubled since 2005/06 – was not mirrored elsewhere. The capital gains tax (CGT) annual exemption was confirmed at £10,900 for 2013/14 and will rise by just £100 in each of the following two tax years. The Chancellor also said for the first time that the freeze on the inheritance tax (IHT) nil rate band would be extended until 2017/18, in part to fund the bringing forward of the social care reforms to 2016.

The main rate of corporation tax will fall to 20% from 2015, a move that will result in the unification of corporation tax for all companies, as the small profits rate (formerly small companies rate) is currently 20% and not changing. From April 2014 all businesses will benefit from a new Employment Allowance. This is set at an annual £2,000 for each employer and offsets the employer’s national insurance contribution (NIC) liability. In practice the smallest employers will be the major beneficiaries – the allowance covers just £14,500 of earnings liable to NIC.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.



Is this you?

Posted by Jen Usher

A survey has highlighted the UK’s reluctance to save for retirement.

One of the major clearing banks recently undertook a retirement planning survey across 15 countries in which it operates. Among its findings for the UK were:

  • One third of people were not making any preparation for retirement, while a virtually identical proportion thought they were not doing enough.
  • The average expected time spent in retirement was 19 years, which was 12 years longer than the average time retirement savings were expected to last.
  • In terms of retirement income, the average amount thought appropriate was 73% of pre-retirement income.
  • Just 38% of people are regular savers, leaving the UK only above Egypt in terms of thrift.
  • The UK came top in one unfortunate category: prioritising saving for a holiday over saving for retirement. Given the choice of only one savings goal for the year, 58% of the UK respondents chose a holiday, while 32% opted for retirement.

One interesting point the survey threw up was that, for those on average incomes, there was a strong relationship between financial planning and greater saving. People who had carried out some type of financial planning had at least four times the retirement savings of those who had failed to plan. Where professional advice is used, savings were two and a half times more than those of people who have not taken expert advice. 

Of ever-dwindling interest

Posted by Jen Usher

Instant access rates are shrinking further.

What do you think is the current top market interest rate for £10,000 in a new instant access account?

If you have not looked at the savings league tables recently, it may surprise you to learn that the answer is now just 2%. And that is gross, so if you are a 40% taxpayer, the net return is just 1.2%, little more than a third the current rate of retail prices index (RPI) inflation.

Rates have fallen for new accounts and for many existing variable rate accounts (notably the Post Office) because the banks and building societies can access up to £80 billion worth of cheap money under the Funding for Lending Scheme (FLS). The FLS was launched by the Treasury and Bank of England last summer in an effort to stimulate lending to households and businesses. So far, the main impact has been on deposit rates for investors and the mortgage market, where rates for new loans have been falling.

The drop in instant access deposit rates has rippled through to fixed term accounts, with only the longest terms from a handful of lenders now offering a rate above 3%. This year’s cash ISA season looks set to be much less competitive than previous years, with building societies rather than banks giving the best terms at the time of writing. 

We all need some rainy day money on deposit – three to six months’ cover for outgoings is a good start – but if you have more, now is a sensible time to consider ways in which you could make that excess cash work harder, if only to counter that stubbornly over-target inflation rate.

Past performance is not a reliable indicator of future performance. The value of investments and income from them can go down as well as up and you may not get back the original amount invested.

ISA time: and add still more in the future...?

Posted by Jen Usher

There may be an increase in ISA limits on the way.

Last month, the Office of Tax Simplification (OTS) published its final report on simplifying the tax system for pensioners. The OTS made some useful suggestions, such as saying that the Department for Work and Pensions should issue a consolidated statement of taxable benefits each year, similar to a P60. It also proposed that HMRC produces a composite notice of coding for people (probably the majority) who have pensions paid from a variety of sources. Whether either cash-strapped arm of government would make the necessary system changes is a moot point – so much so, that the OTS stressed that its proposals should be considered as a whole, and not cherry-picked.

The OTS comment has more weight when one of its policy changes is considered: the abolition of the 10% savings rate band. This would affect not just pensioners, but anyone with a low level of earned income and a high level of interest income (which could mean wealthy, non-working spouses). In practice, ‘the levels of confusion and the low level of take up’ mean that the 10% band is widely ignored. You have to claim the tax refund resulting from the 10% rate with a self-assessment return or HMRC form R40 (which cannot be completed online).

The OTS recommends that, with the 10% band scrapped, the ‘money saved [about £50 million a year] could be used to make a pragmatic above-inflation increase in the ISA limit.’ It will be interesting to see whether the Chancellor takes up the OTS’s suggestions when he presents the Budget on 20 March 2013. The politics are particularly tempting for Mr Osborne, given that the 10% savings rate band is a hangover from Gordon Brown’s era as Chancellor. In his last Budget, in 2007, Mr Brown announced that the 10% band (which he’d introduced in 1999) would no longer apply to all income from 2008/09. That left his successor, Alistair Darling, with a backbench rebellion to deal with the following year.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Services Authority does not regulate tax advice.

Personal allowances: the winners and losers

Posted by Jen Usher

Personal allowances will be based upon a person’s date of birth rather than their age as of the 2013/14 tax year, with allowances for older people frozen at their 2012/13 levels.

People born between 6 April 1938 and 5 April 1948 will receive a higher allowance, with those born before 6 April 1938 receiving slightly more. So people reaching the age of 65 or 75 during 2013/14 will not see any increase to their personal allowance.

So who are the winners and losers? The clear winners are younger basic rate taxpayers who will see their personal allowance increase by £1,335 – a tax benefit of £267. But for higher rate taxpayers the benefit is just £62. People who qualify for the higher personal allowance will not see any difference because the allowance is frozen, although the income level at which the additional element is withdrawn has gone up by £700 to £26,100.

The most aggrieved will be those turning 65 during 2013/14. Instead of receiving the higher allowance of £10,500, they will continue to receive just the normal personal allowance of £9,440. The same is true for anyone reaching 75 next year but they will only lose the modest increase from £10,500 to £10,660.

State pension reform

Posted by Jen Usher

The much-delayed White Paper on the future of state pensions has been published.

When the Government issued a Green Paper on state pension reform last April, the expectation was that a White Paper would follow in the summer…then autumn…then before Christmas. It eventually arrived, suitably snow covered, in January – along with a complete Pensions Bill following close behind.

While many of the finer points are yet to be settled, the framework for the new state pension regime is now clear.

  • The current two-tier state pension system, comprising of the basic state pension (BSP) and earnings-related state second pension (S2P) will be replaced by a single-tier, flat-rate pension. The White Paper assumes ‘for illustrative purposes’ that this would be £144 a week in today’s earnings terms, against a current BSP of £107.45 a week.

  • You will need National Insurance (NI) contributions or credits covering 35 years to obtain the full £144 a week – five more than are needed for the current BSP. If your NI record is less a minimum period (likely to be ten years), you will receive no state pension. At present you earn BSP for each year, regardless of how few.

  • The single-tier pension will be earned on an individual basis, so you will not be able to rely on the NI record of your spouse or civil partner to boost your flat-rate state pension. However, transitional provisions will apply to soften the blow.

  • The new pension will rise in line with earnings once in payment. The ‘triple lock’ guarantee which applies to the BSP (the greater of price inflation, earnings growth and 2.5%) is not guaranteed to continue beyond 2015.

  • The state pension age (SPA) for men and women will rise to 67, with a two-year phase-in starting in April 2026. The Pensions Bill also imposes a requirement for five-yearly reviews of SPA, with the first due by May 2017. Any change decided at review will not take effect for at least ten years.

  • You will not receive any savings credit if you reach SPA once the new flat rate pension is in place. Guarantee credit will still be available, but if you receive the full flat rate pension, you will not be eligible.

  • At the point when the new regime is introduced, the existing state benefits you have accrued will be converted to a ‘foundation pension’. The calculation of this is designed to ensure that what you have earned to date is not lost, but how contracted out benefits are dealt with remains unclear. If your foundation pension exceeds the new flat rate pension, then the excess will be CPI-inflation proofed before and after retirement.

  • The ending of S2P will mean that if you are currently contracted out through a final salary scheme, your (and your employer’s) NI contributions will increase.  Ironically it will be the Government, as public sector employer, that will be most affected.

  • The new regime will begin in April 2017, at the earliest.

All these changes will not mean the Government spends any more on pensions. The White Paper’s analysis shows that, in the long run, the Government will save money, even before taking account of the extra income from the ending of NI contracting out rebates. The corollary is that, just as the present state pension system will not provide a decent standard of living in retirement, neither will the single-tier system. But it will be simpler…

ISA time: add more now…

Posted by Jen Usher

As the tax year-end approaches, it is time to top up your ISA.

With February upon us, it won’t be long before the ISA supplements start appearing in the weekend papers. The end-of-tax-year rush to invest in an ISA is at once both sensible and illogical. It’s sensible because of the benefits an ISA offers:

  • Dividends and income from fixed-interest securities are free of personal UK tax within a stocks and shares ISA, although dividend tax credits can’t be reclaimed.

  • Interest earned on deposits is UK tax-free in a cash ISA. A flat 20% tax applies within a stocks and shares ISA.

  • Gains made within ISAs are free of capital gains tax (CGT).

  • ISA income and gains do not have to be reported on your tax return.

The illogic stems from the timing: why wait until the end of the tax year before taking advantage of the ISA’s tax benefits if you could have invested last April and enjoyed them since then? The answer is probably that there’s nothing like a deadline to concentrate minds, and, as a result, the marketing departments of financial services companies make the most of them.

In recent years, cash ISAs have attracted the bulk of ISA subscriptions, despite the base rate having been 0.5% since March 2009. The most successful cash ISA providers have relied upon temporary bonuses to attract investors – last year’s ISA season saw rates of around 3%, of which up to 2.5% was accounted for by a one-year bonus (now just about to end). So far in 2013, rates have been lower, with the big banks either staying their hand or deciding they don’t need the cash. Most returns on offer are now below the prevailing inflation rate.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

Income drawdown revisited

Posted by Jen Usher

The Autumn Statement increase in drawdown limits is not the panacea some press comment has suggested.

Last year the personal finance pages of the national press regularly carried stories about how income drawdown reviews had left investors facing large cuts in their future income. The drops – some by as much as 50% – were the result of five factors.

  1. The April 2011 reduction in the limit from 120% to 100% of the notional annuity used to set the ceiling.
  2. A change in the mortality assumptions for the notional annuity, reflecting improved longevity.
  3. The decline in long term gilt yields, which are a key part of the annuity basis.
  4. Disappointing investment performance over the five years since the ceiling was last set.
  5. Too high a level of withdrawals – choosing the maximum was (and always will be) the highest risk option.

The Autumn Statement addressed only the first of these by announcing a reversion to the 120% ceiling, although from when the change takes effect remains unclear. It is no complete cure, as the example shows.


A cut, nonetheless

Jim started his income drawdown with a fund of £200,000 in January 2008 at the age of 60. The maximum drawdown rate for him then was 7.8%, based on an underlying gilt yield of 4.75%. Five years later, at his first review, the gilt yield had fallen to 2.25% and, despite being five years older, his maximum drawdown rate had fallen to 5.5%. Even if the Autumn Statement reversal had taken effect, Jim would still have a maximum rate of 6.6%.

If Jim had been taking withdrawals at say, £1,200 a month (7.2% of his initial £200,000), then to maintain his income now his fund would need to have grown – after £60,000 of withdrawals – to about £262,000. The Autumn Statement change would still require a fund of just over £218,000 – a tall order given the performance of most investment markets since 2008.



Not a bad year for equity markets…

Posted by Jen Usher

Never mind the Eurozone crisis, UK double dip recession or the fiscal cliff – equity markets generally did well in 2012.


2012 Change

FTSE 100

+  5.8

FTSE All-Share

+  8.2

Dow Jones Industrial

+  7.3

Standard & Poor’s 500


Nikkei 225


Euro Stoxx 50


Hang Seng


FTSE All-Emerging All-Cap ($)



The apparently modest performance of the UK in 2012 stems from several factors.

  • It was not a good year for the commodity-based multinationals, which form an increasingly significant part of the UK stock market. The oil and gas sector fell by 11.2% over 2012, while the basic materials sector registered a rise of just 1.9%.

  • The more UK-centric businesses did much better; witness the performance of the FTSE 250, which measures the 250 companies below the top 100 – about 15% of the UK stock market. The FTSE 250 gained 22.5% in 2012, which explains why the broader FTSE All-Share Index out-performed the more widely quoted FTSE 100.

  • On top of the index capital return, there was a useful flow of dividends. The market ended the year with an average dividend yield of around 3.6%. The UK remains one of the highest yielding of the major global stock markets.

  • The value of sterling rose against most currencies over the year. For example, it was up 4.6% against the dollar, 3% against the Euro and 17.5% against the Yen. Adjust for this and the UK stock market’s relative performance looks much better.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.