This article was published in the May issue of Master Investor Magazine

Master Investor

All articles in this section are provided courtesy of Master Investor Magazine and are not necessarily the views of Alan Steel Asset Management.

… Now my advice for those who die
Declare the pennies on your eyes
'Cause I'm the taxman, yeah I'm the taxman
And you're working for no one but me

- The Beatles

Why is it that according to research from Aegon, the average private pension pot for those heading into retirement these days is a measly £50,000, despite the fact that, for most of us, we've lived through the most bountiful sixty-odd years in history? When the average pension income in central London is just shy of £38,000 per annum, why is the national average only £18,400 – and a paltry £12,800 in the Midlands? Over a twenty-year retirement, that makes the total income difference between best and worst a whopping £630,000!

Why do so many folks die without bothering with a Will or any other simple planning, leaving behind heartache, delays, taxes and heavy legal bills for their families? Why do so many 'investors' leave so much money languishing in deposits? Why is it that even those who see the sense of having equity portfolios ignore annual allowances that give extra tax-free income opportunities? Too many whys. We should replace them with "Why nots?" As in why not change old bad habits? Why not aim for excellence? Why not set goals and feel good about achieving them? When's a good time to start? Why not now?

"True happiness is becoming something.
This can be done by being
committed to lofty goals. We cannot
become something without commitment."
- Marvin J. Ashton

When I was just a youngster back in the early 1950s, my memory of this time of year was rather clouded…by dust, lots of it. Yes, this was traditionally the time that mums and grannies took their carpets out into backyards or gardens and gave them a good old-fashioned beating. Remember, this was years before household innovations such as fitted carpets.

If we were lucky, us youngsters escaped this outdoor mayhem but were usually roped-in to scrub-up brasses and polish the family silver. The whole affair was known as "Spring Cleaning". It was an annual event.

When you think of it, it all made sense and copied what nature did. For spring is the time when the days get longer and warmer (only longer in Scotland though). And in our modern world of fitted carpets and artificial oak flooring it's a perfect time nowadays to replace the carpet-beating ritual with taking our finances seriously at least once a year and giving them a good going over. For unless we do, how can we be sure about the quality of our financial lives in retirement? Or even worse, what mess will our families inherit when we die?

DAYS IS A MEASLY £50,000.”

What have the Romans done for us?

Despite spring moving around from year to year between March and April, "financial experts" tell us the best time to have a go at reassessing our financial plans, if we have any, is right after the new "fiscal year" or "tax year", which begins every year on 6th April. This year it was a Friday.

Now who thought that one up? The sixth of April? Not an obvious starting date for anything, is it? Surely, logically, the first of January makes far more sense. And that's the conclusion in loads of countries including the US and Canada. So how come we're different? If you think Pensions legislation is complicated, wait until you hear this.

In the UK the New Year used to start on 25th March because of some weird religious accounting system in medieval times which divided the year into quarters. And for some reason lost in the mists of time, the quarter ending on 25th March was when rents were due, and debts were settled. Over time, that day became the start of the new financial year.

Moving to 6th April started in the sixteenth century with Europe dumping the Julian calendar because somebody noticed (goodness knows how) that the calendar was out by ten days compared to the solar year. Pope Gregory introduced his own calendar which fixed the discrepancy by dumping a few odd days. The UK was unimpressed and ignored it just to spite Europe. But 170 years later we were 11 days out of alignment with the rest of Europe. (Nothing changes there then, eh?) We were brought into line by an Act of Parliament in 1751, which dropped eleven days out of September the following year (no doubt in the process upsetting a few thousand Virgos who missed out on their birthday pressies or parties).

Determined not to lose out on tax collections, the government extended the tax year to 4th April. Then fifty years later added another day for reasons best known to themselves. Just to complicate things further, while our tax year runs from 6th to 5th April, their financial

year runs from April Fool's Day to 31st March, as does the Corporation Tax year for businesses. And elsewhere in the world most, countries opt for tax years that run from 1st January.

This may help to explain why so many of us find money and taxes so complicated, and why only one in twenty-five of us reach retirement with genuine financial independence bestowed through ample pension funds and tax effective investments. It is also partly why the vast majority of us leave our families in the lurch financially when we die, thanks to being so disorganised and under-prepared. So why not decide to make this April the time to start putting all that right?

Goals or dreams?

Like losing weight, you can go it alone relying on guidance from online helplines, or if you're like my wife, you'll simply buy slimming magazines every year, admire the pictures, but fall back into the same old habits. It was Einstein who said, "Insanity is doing the same thing over and over again and expecting different results."

But for different and lasting results nothing beats having a coach to map out targets specifically for your circumstances and then keep you on track over time, one way or another. Some of the best advice I received regarding goals was from a coach in the US who said the challenge was to have BHAGs – Big Hairy-Assed Goals. So, let's see what goals you can come up with. First we need to start with some basic questions to establish where you are now and where you want to be. That way, we can establish inefficiencies, shortfalls, and what needs to be done.

First up, do you really want to be financially independent? And by that I mean arrive at a time when you are in control of whether to work or not. When ideally would that be? And if that was now, measured in today's money, what spendable income would you want? Would you want that to keep up with inflation? And if you were to snuff it today, what financial state would your partner or family be in? Happy with that, or not? What are you going to do about it?

Perspectives and actions

Let's look at some perspective. Let's assume you want to be financially independent in 15 years' time and that in today's money that would equate to £3,000 a month after tax. Also, let's assume you want that income inflation-proofed and you also want your partner's income to be protected on your death. Assuming that future inflation is 2% per annum, by simple rule of thumb you'd need to build a fund of £2 million or thereabouts in only 15 years. Ouch!

The earlier you become aware of the enormity of such a target, the better. Now you may begin to understand why Einstein also said, "Compound interest is the 8th wonder of the world. He who understands it, earns it. He who doesn't, pays it."


So, your financial "Spring Cleaning" should just start with goals on what you'd specifically want to achieve in real terms (BHAGs) in capital and income for your later years, and what legacy you'd prefer to leave to your family on your death. And now for the hard bit: laying bare your existing situation to the eyes of another.

Any well-designed financial plan starts with the goals, then assesses where you are today. And it should start with protection issues, the potential "what ifs". What if you died tomorrow? What if you became ill tomorrow? Do you have cover for these possibilities? Is it

enough? Will any payments go directly without tax and delay to who needs them most? Are your pension plans in trust? Are you sure? Do you have a Will? If so, when was it last reviewed? Have your circumstances changed? If you don't have a Will, go and get one. If you don't know why, go speak to families that have experienced such a nightmare.

Facing-up to difficult questions

Now let's go through your savings plans in detail. Pensions first. Many of us have been in different jobs or careers, and with pensions legislation being such a dog's dinner, what with over a couple of hundred law changes in the last 20 years, plus so-called "Pensions Simplification" twelve years ago, and bewildering "Freedoms" introduced more recently, there's every chance you've gone off-piste.

Add to that lot the increasing number of different types of plan you may be stuck with, with their ever-increasing small-print restrictions, and the overcharged and underperforming investments inside, the chances are high that a review can improve your eventual fund size significantly. No matter how complex you think they are, pensions should be the starting point of retirement planning thanks to their still-benign tax status.

Yet another restriction on tax relievable contributions has come along to introduce "tapering rules" which further complicates what is known as "carry forward" rules. There used to be a retrospective chance to catch up on previous years when you didn't make full contributions to your pension plans and pick up tax relief. That's much harder now, especially the more you earn above £150,000, but that now includes dividend income and benefits in kind. The more you earn the less you can contribute and offset against taxes.

Sadly, the whole pensions area is so utterly complex you need a Philadelphia lawyer or preferably an experienced and qualified IFA to guide you through the jungle. But it's well worth it. Few, if any, investment areas are as tax effective, even against Inheritance Tax (IHT). And if you haven't had the treatment of the death benefits checked recently, do so without delay.

Next up list your deposits, collectives (investment trusts, OIECS, investment bonds) and review the performances net of costs. Update your portfolio values. Have you taken advantage of annual tax exemptions? Have you taken advantage of all the opportunities to

roll over tax free gains into ISAs which in turn avoid high rate income tax on dividends, as well as giving you freedom from any Capital Gains Tax (CGT)? If not, why not?

Aiming for tax freedoms

Have you thought of shares in the AIM index which don't count when calculating an IHT tax charge? (HMRC in 2016 raised over £5 billion in Inheritance Tax for the first time.) Have you thought of investing in VCTs or EIS investments which, while higher risk, give valuable upfront tax reliefs, and freedom from CGT and Income tax ad infinitum?

Let me remind you that there's no better feeling, when you're my age, than a tax rebate and repeating tax-free cheques from my VCTs. I must admit that my only regret in investment over the years is that I didn't stick more away into VCTs. As I said to a financial journalist pal recently, "Don't complain that your VCTs haven't given you any capital gains, they produce tax free income for life, your partner's life and the tax-free income can pass down the generations."

Finally, are you making full use of all the tax allowances available to you and your partner? Tax planning doesn't just stop at different income tax rates. It should apply to building real wealth over the years by proactive use of all tax planning opportunities, and regular Spring Cleaning of your investments too. And it makes sense to review your attitude to risk. As you age, asset protection usually takes precedence over out and out growth. Especially after a nine-year equity bull market that few saw coming. Now go get that coach!

Alan Steel
This article is the personal view of Alan Steel. Please check the appropriateness to your individual position with your advisor before taking or refraining from any action.