Retirement and Pension Options

Posted on 11/08/2017 by Amir

The summer budget of 2015 has given us more options as what to do with our pension pot than ever before. Here is a summary:

1. Lump sums:
You can now take as much as you like from pension in one go, but beware the taxman. The first 25% is tax free and many people take advantage of this benefit. You can also take several smaller lump sums over a period of time with 25% of these being tax free.

2. Taking an income
This used to mean selling your pension in return for a guaranteed income for life from an annuity and this is still an option. You can also get a guaranteed income whilst still keeping ownership of your pension using drawdowns. Or you can keep your money invested and take an income directly and flexibly from it using an income drawdown.

3. Waiting a bit
You do not have to take any money from your pension right now, of course. The way your pension is invested still matters and there several products available specifically designed for those looking to retire in just a few years.

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1970

Posted on 11/08/2017 by Amir

In the summer of 1970, I and some 30 young bright students were awarded 5-year scholarships to the study in the UK having achieved top marks at the Iraqi Baccalaureate examinations. Of course I had mixed emotions about such a bold move, for on the one hand there was trepidation to have to leave home and family at the tender age of 17, on the other hand there was a great sense of anticipation as what the future holds studying in a country that was until recently the greatest empire the world has seen.

On 28 October 1970 we landed at Heathrow airport. We stayed a couple of nights at a London hotel, and then every 5 or 6 of us were sent to different colleges to do A-level studies. I ended up at Dudley Technical College in the West Midlands.

My first impressions of the UK then were rather negative. It was the middle of autumn, it was cold, dark and dreary, while Baghdad tended to be rather nice in the autumn with mild temperatures and bright days. Then there was the food. Meat then –and there was so much of it- was almost always deep fried while vegetables were plain boiled. Food was  just bland and without imagination. However, it was in the evening that I had the most depressing feeling, for the town was dead barring a few pubs. The Baghdad that I have just left comes alive in the evening with streets buzzing with people shopping, eating, drinking and generally having a good time.

Matters came to a head around our first Christmas. We had high expectations that it would be great fun expecting it to be like our equivalent Eid which normally was a hive of people socialising and merry-making. It turned out for us to be so very boring, there was not much to do as it was (and still to a degree is), English family time with not much else happening. Our day was saved when my then kind landlord  invited me and all my friends to join his family for a lovely and our first UK  home-cooked dinner.

You can tell that it was a challenging time trying to adjust to a totally different life style, entirely on your own. But like most young men we soon discovered wine and women!

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Mitigating Inheritance Tax (IHT)

Posted on 10/08/2017 by Amir

With inheritance tax affecting thousands of families every year, you can’t assume your loved ones won’t be affected. For people who die with a certain level of wealth, a 40pc   inheritance tax charge is levied against part of their estate. And it’s no longer an issue that only affects the very rich.

According to figures released by the Office for National Statistics (ONS), £4.6bn was raised in inheritance tax revenue for the 2015/16 tax year. That means annual revenue has doubled compared to the £2.3 billion raised during the 2009/10 tax year – but more worryingly, its data reveals that the number of family estates on which inheritance tax must be paid has grown, from around 15,000 to 40,000 during that same period. In other words, while IHT was seen as affecting the very richest in society, it simply isn’t the case anymore.

To mitigate the impact of IHT, perhaps you should consider the following:

1. Write a will
Having a will means you avoid relying on the intestacy rules that come into play where there is no will. That is when the law effectively decides what happens to the estate, which can lead to financial anxiety for the surviving spouse along with a possible immediate charge to inheritance tax (IHT) on the first death.

2. Check that you actually have an IHT liability
Each individual has a tax-free allowance of £325,000, known as the nil-rate band. IHT only applies to the value of the estate above this at a rate of 40 per cent on death. However, transfers between husband and wife are exempt from IHT and if the nil-rate band is not used on the first death, this means that the value of the estate on the second death that will be exempt from IHT doubles to £650,000. N.B. The nil rate band thresholds are being  added to. By April 2020 it will be worth an additional £175,000 per person.

3. Take advantage of exemptions
You can give away up to £3,000 a year, which is known as your annual allowance, and this will be immediately exempt from IHT. There is also a small gift exemption, meaning you can give up to £250 to as many people as you like.

4. Make gifts out of excess income
You can make ‘gifts out of income’ free from IHT. For the gifts to qualify, they must form part of normal expenditure, be made out of income and they cannot reduce your standard of living. This exemption is claimed by the executors of your estate, so it is important to keep good records both of gifts made and of your normal expenditure.

5. Identify assets that can be given away free of Capital Gains Tax
Should you hold assets that have fallen in value since purchase (property, quoted shares, etc.) then they could be gifted without attracting capital gains tax (CGT).

6. Take out life cover
One of the simplest ways of providing funds to pay the inheritance tax liability is to establish a whole-of-life insurance policy. This is designed to pay a sum equal to the tax liability into trust where the money is exempt from IHT and will be available for beneficiaries to pay the tax due.

7. Consider making gifts to charity
Gifts to Charity are exempt from IHT, but if you give 10 per cent of your net estate (the total estate value less the £325,000 nil-rate band) then the rate of IHT that applies to the remaining estate falls to 36 per cent. Many people will make gifts to charity in their will and so it is worth taking this allowance into consideration.

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John Carden

Posted on 09/08/2017 by Amir

In 1973, while studying for my engineering degree at Manchester University, I rented a studio flat in a house that belonged to a certain John Cardin. I stayed in that flat for 7 years during which time, John and I became good friends. I knew that John was a prominent solicitor and he represented famous 1970s clients such as Ken Dodd, George Best & Alex Higgins.

I always admired his beautiful Jaguar E-type V12 sports car. Then I realised that John was actually a racing driver. He raced against the likes of Jackie Stewart. However, his motor racing career ended following a high speed crash at Silverstone in a Lotus Elan. He then switched to horse racing as an owner, breeder and trainer. He rode in the Grand National five times between 1974 and 1982. I remember going to the bookies in 1977 –for the first and last time in my life- to place a bet on his horse, the man behind the counter laughed when I bet £1, for John’s horse was such an outsider at 500 to 1! So I thought I place another £1 bet on a name that I fancied ‘Red Rum’. This one actually won the race and I made £10 thanks to John!

John was also an accomplished musician, he played guitar, trumpet, and piano as well as bagpipes! John also prided himself on his fitness, running 10 marathons while in his forties and he set a National weightlifting record for his weight category.

John was a daredevil and lived life to the full. However, it was horse riding that was his love and undoing. He had a riding accident in 1993 that left him a ventilated tetraplegic. He had suffered a broken neck – similar to Superman actor Christopher Reeve’s injury, He became bed-bound and reliant on an iron lung to breathe. He, nonetheless continued to practise law using a ventilated wheelchair until his retirement in 2003. He passed away in 2010 aged 73.

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Wealth inequality and Brexit

Posted on 08/08/2017 by Amir

A booming City and rising house prices provided a double boost to Britons holding assets in 2016 as they pushed the nation’s wealth through the £10tn mark, according to a new survey. Lloyds Bank’s private banking arm said total household wealth in the UK increased by £892bn last year – with the property and financial markets each responsible for half the rise.

News of the 9% jump in the value of the assets from £9.6tn to £10.5tn during 2016 is likely to rekindle the debate about the UK’s wealth inequality. Previous surveys have shown that a tenth of adults own half the nation’s wealth, while 15% own nothing or have negative wealth.

The Bank of England has acknowledged that the richest 10% of Britons gained most from the money creation programme known as quantitative easing, since the increase in the supply of credit boosted demand for financial assets. Since the better off held a greater proportion of these assets, 40% of the gains of rising share and bond prices went to the richest 5% of households.

For more details: https://www.theguardian.com/business/2017/aug/08/total-uk-wealth-city-property-homes-inequality-saving

In a separate report released on Tuesday, the Social Market Foundation said more than 14 million working age adults were not saving at all, and more than 26 million adults did not hold adequate rainy day or pension savings.

More details: http://www.smf.co.uk/millions-not-save-money-missing-billions-pounds-keeping-money-cash/

So 2016 was another year when the rich got richer and those on low and middle incomes find themselves for ever struggling to make ends meet. This continues a trend that has been going on for many years now. It is a perilous one, stocking up social discontent. People can see that it was tax payer’s money that got the bankers off the hook during the credit crunch of 2008 and all that quantitative easing money (some £450bn) did nothing but help the rich get further.

What else was 2016 famous for? Of course Brexit. The referendum itself was an ill-thought idea by David Cameron believing that he would easily win it to silence the right wing of his Conservative party. But it backfired badly despite the fact that the Brexiteers told blatant lies such as our EU contributions of £350m would go into the NHS and playing on immigration fears that now we know are in the main unfounded.

I believe that a very big reason for the Brexit vote was the underlying social discontent. People are working harder than ever, yet in real terms they are poorer than ever. They see that the system is awash with money that is more than ever accumulated by the few, while they are Just About Managing (the JAM families?). They wanted to vent their anger on a system that is failing them, hence a large number of them voted to exit the EU. It was an anti-establishment vote.

In my own personal opinion, Brexit is a grave mistake, but I fully understand why the vote went that way. It should really be a wakeup call to start remedying the economy so that it works for everyone.

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Babylonian Princess

Posted on 08/08/2017 by Amir

Iraq is an amazing country. It is the cradle of civilisation. First, it was the Sumerians, who almost 6000 years ago, settled in the south of country and gave us writing, created the first cities and laid the foundations of science, religion, astronomy, culture and much more. Then after, successive civilisations prospered in that country: Assyrians, Babylonians, Greeks, Romans, Persians and Arabs. All building upon the achievements of the proceeding one culminating in the most cultured city in the world at its time: Baghdad of the 1001 nights, the capital of the great Abbasid Empire. However in 1256 that great city fell to the Mongols who proceeded to destroy its great monuments, burning and pillaging and killing hundreds of thousands of its inhabitants. From then on, Iraq suffered nothing but a series of invasions led by blood-thirsty tyrants. No other country in the world has suffered such a catastrophic decline. By the 19th century, it was just a forgotten, sparsely populated barren land.

I tried very hard to find what life was like in 19th century Iraq. The sources are extremely limited. I was looking for an ‘indigenous’ source as opposed as to one written by the ruling elite or European travellers. My quest finally led me to a book entitled ‘Memoirs of a Babylonian Princess’  published in 1845 in London and written by Maria Theresa Asmar. She was an Iraqi christian who lived in Mosul and Baghdad and recorded her life (and the people of the time) in Iraq and then her travels before finally settling down in Europe.

I found the book riveting reading and culturally valuable as it threw light on 19th century Iraq. While it was full of fine personal details, I only wanted to draw a general picture of what the country was like then:

  1. The rulers (the pashas) were ruthless people who had no interest in advancing the country and their only methods of raising money was by enslaving the masses and fleecing the few rich people, even to the extent of torturing and killing them.
  2. The country was literally in total darkness, while Europe was lighting up to gas and electricity, Iraq was devoid not only of universities, but there were hardly any schools. The vast majority of the nation was illiterate.
  3. There was no concept of citizenship and no sense of  belonging to the country, each community, each tribe, lived by itself, totally independent of other communities, only making contacts with others as and when needs arose.
  4. Religion was totally dominant and people were very superstitious.
  5. Hardly any economy existed, people were very poor, basically subsisting on whatever the land provided them with.
  6. The tribes were a law onto themselves and their favourite money-making exercise was raiding other tribes and holding travelling caravans to ransom.
  7. Simply put: it was a miserable place to live in.

But if one was to reflect, one can see that so much of Iraq’s present day troubles has its roots in that dark period and so much of what was wrong then is still unfortunately prevalent today.

Maria Theresa ended up losing her family and abandoning Iraq to live in Europe. Sadly a familiar story.

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What are the changes to buy-to-let tax relief?

Posted on 04/08/2017 by Amir

At the moment, landlords can claim tax relief on their mortgage interest payments. In other words, they can offset the cost of the mortgage interest from the rental income when they calculate their profits. But this situation won’t last for much longer. In his 2015 Summer Budget, George Osborne announced that landlords would no longer be able to deduct all their mortgage interest when they work out their profits.  Instead, mortgage interest tax relief will gradually be cut back to 20% between 2017 and 2020.

Limited companies are not affected by the changes to mortgage interest tax relief. Many landlords are therefore setting up a company to minimise the impact of the new tax regime. However, it’s important to remember that HMRC will treat any transfer of ownership of a property as a sale, so there could be a capital gains tax bill to pay. The mortgage options might also be limited because lenders offer a restricted choice of home loans to companies.

The tax attack on landlords does not stop at mortgage interest. The chancellor also imposed tighter restrictions on the wear and tear allowance. From April 2016, landlords will no longer be able automatically to deduct 10% of their rental profits as notional wear and tear. They will be able to claim tax relief only on costs they have actually incurred, such as if they have bought a new sofa or bed for the property or paying for agents fees, etc.

Since September 2015, landlords in England must also fit smoke and carbon monoxide alarms or face a penalty of up to £5,000.

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Vathek

Posted on 04/08/2017 by Amir

One of my favourite authors is Bill Bryson. While I was reading his book ‘At Home’ describing how wealthy men in 18th century England were building themselves great mansion houses, I came across a certain William Beckford, who at the age of 21 inherited a vast fortune and many years later proceeded to rebuild the family home Fonthill Splendens to make it simply the biggest house in the country since Blenheim Palace. Needless to say it was a folly, everything was built on a gigantic scale. My interest in Beckford however was that soon after he came into his inheritance, he was involved in a  scandal which compelled him to escape to Paris. There he wrote in French a Gothic novel called Vathek, an Arabian tale. That intrigued me and I got myself a copy of Vathek.

The story turned out to be based around Vathek the 9th Abbasid caliph of Baghdad! The novel describes Vathek’s journey to damnation among the subterranean treasures of Iblis (Satan). Very strange story indeed and very curious how Beckford made the connection with Vathek. But I guess in 18th century Europe there was a great fascination with the Orient. The novel might have been admired at the time, but I can say it is hard reading now.

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Life Cover

Posted on 04/08/2017 by Amir

Anyone looking to protect their family and wealth should look closely at how they can put in place life assurance to ensure money is paid to beneficiaries on their death. Life assurance costs are normally fairly modest and arranging a life policy is relatively easy. There are two areas of life assurance planning which are particularly linked to family protection: providing some income and paying off debts and perhaps inheritance tax (IHT).

Many families nowadays have high debts, many of the same families afford the cost of debt through one wage earner. If that wage earner dies and their income ceases, the loans/debts can become devastating to the family that remain. Putting in place life assurance to provide income and paying off debts is a sound position, creating a lump sum may well be critical to keep a decent level of income available for the family

It is worth bearing in mind that it is possible that inheritance tax (IHT) can be alleviated through the use of trusts. However, life assurance can be used as an alternative to pay the expected IHT bill.

Separate to life cover, one may also consider critical illness cover as a valuable part of wealth protection.

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Pension facts

Posted on 03/08/2017 by Amir

Investing for a pension is an essential part of modern-day financial life. If one wants a comfortable retirement, one needs to start saving early. Pension planning is therefore essential. Here are a few simple facts to help with your planning:

1. You do not have to make regular monthly contributions to your pension. Most plans will allow you to vary the terms, perhaps increasing or decreasing the contributions, making lump sum payments or even stopping contributions for a while. So you have control and you make your contributions in-line with your income and circumstances there and then.

2. You do not lose your pension when you change job. You just keep any pension pot you have built up so far. If the new employer offers a pension and contribute towards it, then it makes sense to join since it effectively is free money.

3. It is possible to start a pension on behalf of a child or non-earner. You contribute up to £3600.00 per annum on behalf of child and still receive tax relief on the contribution.

4. You do not have to take your pension when you retire. Since April 2015, there is great flexibility in how you handle your pension pot once you reach the age of 55. You may withdraw all or part of pot, you may decide to defer withdrawals, or perhaps you make no withdrawals and keep investing, etc.

5. You can keep paying into your pension even after you retire and still receive tax relief on your contributions.

6. Pensions are usually free from inheritance tax. If you die before the age of 75, your beneficiaries will withdraw what they like from your pension and usually pay no tax.

7. Finally it is worth noting that pension is the most efficient form of savings, because the government will either directly contribute to the fund or you can claim the relief through your tax return. This amount to 20%-40% depending upon your circumstance.

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