COVID-19 and Financial Planning

Please see below some useful information on the COVID-19 and financial planning.

  1. Furloughed Employees
  2. Owner Managers/Director Clients and the Job Retention Scheme
  3. FCA Guidance on Pensions Advice: Covid-19
  4. Gifting wealth
  5. Funding ISAs

Please find below a summary of the latest thinking on pension contributions and revised patterns of income. Many of your clients and/or their family members/friends will be impacted by the recent government announcements and their pension provision is an important part of their employment package. Below is a brief summary of the key pension points and some additional clarification on individuals that have been furloughed.

Furloughed Employees

 

For employers that are furloughing their employees

  • They can claim up to £2,500 per month in salary for each furloughed employee.
  • There is a ceiling of 80% of the employees' salary as at February 2020.
  • The government grant will also include the employer's National Insurance Contributions AND minimum auto-enrolment contributions.
  • If the employer is paying more than the minimum or decides to pay their employees at their FULL income then no extra can be claimed.
  • The government has confirmed that the furlough scheme does not alter any existing contracts of employment.

Relevant UK Earnings

 

  • The grants that are paid by the government to the employer which then continues to pay their employees using PAYE. Income Tax and NICS are payable in the normal way. This means these earnings are still deemed to be UK relevant earnings.
  • The same principle will apply to self-employed earnings. It is thought the grants will be treated as self-employed "profits" with tax paid via self-assessment. This would mean that they would be deemed UK relevant earnings.

Furloughed Employees: Further guidance: Source: http://www.commissioninghr.co.uk/

  • Employees can start a new job when on "furlough" (meaning they might have up have 80% of old salary and 100% of a new one). Revised guidance confirms that their existing contract of employment needs to allow for this.
  • Clients on commission: An employer can reclaim 80% of compulsory (contractual) commission back from HMRC. This can only be referring back to past sales and commissions and not on any new sales.
  • Clients can be furloughed multiple times. Each furlough must be at least three weeks.
  • Employers must notify their employees of their furlough status in writing and keep this record for at least five years

Sources:

 

  • Technical Connection
  • ttps://www.thepensionsregulator.gov.uk/en/covid-19-coronavirus-what-you-need-to-consider

 

Owner Managers/Director Clients and the Job Retention Scheme

The position your clients who are owner managers and the Job Retention Scheme (JRS) announced by the government remains unclear. The note below gives a high-level summary of where we are currently and some thoughts as to how these clients should act in the light of the schemes' rules.

The issue is can owner managers access the JRS and if so how and on what terms?

  • It is clear that owner manager clients cannot qualify under the scheme designed for the self-employed. They are not in relation to their status in their company
  • The terms of the JRS refer to the employer paying a furloughed employee in relation to their salary.
  • In addition the furloughed employee cannot do any productive work for the company.
  • The Financial Times (02/04/2020) reported that owner managers/directors may able to furlough 80% of the PAYE element of their salary (https://www.ft.com/content/e8413fcc-d548-4a4c-835a-88039563be3e) via the JRS and continue with their statutory obligations on the basis that this was they were doing.
  • Treasury Guidance confirms that “Where furloughed directors need to carry out particular duties to fulfil the statutory obligations they owe to their company, they may do so provided they do no more than would reasonably be judged necessary for that purpose, for instance, they should not do work of a kind they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company.” (https://www.gov.uk/guidance/claim-for-wage-costs-through-the-coronavirus-job-retention-scheme)

What are an owner manager/directors statutory obligations?

 

Based on information from Companies House there are 7 duties of a company director:

1.To act within powers (i.e. to act in accordance with the company's constitution, and only exercise powers for the purposes for which they are conferred.)

2.To promote the success of the company for the benefit of its members (shareholders) as a whole. 

3.To exercise independent judgment.

4.To exercise reasonable care, skill and diligence.

5.To avoid conflicts of interest.

6.Not to accept benefits from third parties.

7.To declare interests in transactions or arrangements with the company.

https://companieshouse.blog.gov.uk/2019/02/21/7-duties-of-a-company-director/

It is the duty/obligation that seems to be causing employment lawyers and HR experts a headache:

Quoting from the Companies House website:

"The duty states a director must act in a way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members (shareholders) as a whole. When making decisions, directors must also consider the likely consequences for various stakeholders, including employees, suppliers, customers and communities. They should also consider the impact on the environment, the reputation of the company, company success in the longer term and all of the shareholders (including minority shareholders).

 

A duty to promote the success of the company may seem like an obvious task for a director. However, it brings with it a number of implications.

 

Board decisions can only be justified by the best interests of the company, not on the basis of what works best for anyone else, such as particular executives, shareholders or other business entities. But directors should be broad minded in the way that they evaluate those interests – paying regard to other stakeholders rather than adopting a narrow financial perspective"

The big question is whether the duty to "promote the success of the company" means that there is an obligation on  your client to do all they can to keep their business working despite being furloughed. Does this mean doing work for a client which then brings in revenue and seems to therefore cut across the requirement NOT to do any "productive work". Definitely one for the lawyers as s172(1) of the Companies Act confirms that a duty of a director  "to promote the success of the company".  A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole" (http://www.legislation.gov.uk/ukpga/2006/46/section/172).

 

Why are dividends not covered by the scheme?

  • The simple answer is that the JRS only covers salary which is not a great outcome  for those clients who have deliberately planned a low or very low level of salary. The problem is compounded by the requirement that it needs to be salary as at the 28th February 2020 so it is impossible to change the pattern of remuneration retrospectively.
  • There is an additional legal complication. The client is a shareholder. The obligation of the director is "to promote the success of the company for the benefit of its members (shareholders) as a whole."
  • Also it is worth bearing in mind that the self-employed can receive the grant and (subject to various conditions) continue working.

 

A HR source confirmed that the latest thinking for clients who are owner managers/directors "is to furlough for 3 weeks, take off furlough for 1 week and perform all your work in that week then furlough again for another 3.  There seems nothing wrong in being able to do this and I think is the consensus at the moment." (http://www.commissioninghr.co.uk/)

Of course, each client must take its own legal and HR advice but I hope you found this note to be helpful in providing some background to this particular area.

 

FCA Guidance on Pensions Advice: Covid-19

The FCA published on the 7th April a document outlining their approach  to pensions advice in a number of areas that may directly or indirectly impact your firm's advice to pension clients. The FCA in this document are not only addressing the advice sector but also very much in focus are the pension providers.

The document can be accessed from the FCA website: https://www.fca.org.uk/firms/pensions-and-retirement-income-our-guidance-firms

Key points

Deferral of the following until 01/02/2021

  • Final suite of Retirement Outcome Review Remedies
  • Investment Pathways
  • Cash investments
  • Actual charge disclosure rules

The second part of the FCA document provides further guidance on DB transfers. The FCA specifically address a number of  potential "misconceptions" clients may have  and confirm that:

 

Addressing customer misconceptions 

 

Firms should not assume that changes in circumstances due to the coronavirus make a transfer more likely to be suitable for individual clients. Firms should also address any misconceptions clients may have as a result of the crisis. For example, clients may think:

  • ‘Cash equivalent transfers (CETVs) are at an all-time high’. Firms should not assume that increases in CETVs automatically improve client outcomes if a transfer proceeds. They should consider the client’s circumstances and attitude to transfer risk if DB schemes offer larger CETVs.
  • ‘Death benefits will be better in a DC scheme’. Firms must adequately consider how death benefits are provided by the DB scheme and the proposed DC arrangement throughout retirement. They should also consider alternative options, such as term life insurance, and any tax implications, especially if a client has a life expectancy of under 2 years.
  • ‘My employer is going under, so my pension scheme will too’. Firms are generally not experts in employer covenant assessments. So where clients have concerns about the sponsoring employer continuing in business, they must provide a fair assessment of the benefits of the Pension Protection Fund."

 

 

Gifting Wealth

 

  • This could be a good time for advisers/clients to consider passing wealth on.
  • The best time to trigger CGT is perhaps when the asset value of a portfolio is at its lowest for some time which means that the amount that has been gifted for IHT purposes will also be lower.

 

Funding ISAs

A couple of BDs last week had IFAs asking for material on the advantages of funding an ISA at the beginning of the tax year as opposed to the end. I sent over some H-L material last week but I have also found this quote from Interactive Investor

Rebecca O'Keeffe, Head of Investment, interactive investor:

"Most investors are aware of the long-term advantages of investing in a Stocks and Shares ISA, but many may not be aware that it can make a significant difference to your wealth if you invest early in the tax year rather than late."

"Although there only appears to be one day in it, if you start the clock on the 6th April and one set of investors chooses the early-bird route and invests £20,000 at the start of each tax year, they will end up with a portfolio worth £264,136 after 10 years assuming a 5% return after charges – which is £12,578 more than those investors who choose to invest the same £20,000 at the end of each tax year and effectively only have 9 years' worth of growth, where their portfolio would have grown to £251,558.

"Over 20 years the impact is even more stark, with the difference between early-bird and last-minute investors resulting in a portfolio worth over £33,000 more by investing early - £694,385 compared to £661,319 if you generated a 5% return after charges."

Source: https://www.ii.co.uk/blog/early-bird-isa-investors-catch-extra-ps33000-ii508067

COVID-19 Coronavirus financial update.

Mortgages

If you are struggling to pay your mortgage as a result of your finances being impacted by coronavirus, you can apply for a three-month payment holiday.

Interest accrued during the period will be added to the outstanding balance of your loan and can be repaid over the rest of the mortgage term.

To apply for the payment holiday, you need to contact your lender, either by telephone or online. You do not need to prove that you are in financial difficulties.

If you bought your property through the help to buy scheme, you can also apply for a three-month payment holiday on interest on the equity loan.

Renters

If you are renting and you're worried you cannot pay your rent, there is help for you too.

Legislation  has been put in place to stop you from being evicted for at least three months.

To take advantage of the scheme, contact your landlord as soon as possible and explain what your situation is.

As with mortgages, you will have to make up the payments you have missed, and landlords have been instructed to work with their tenants to create a repayment plan.

Buy-to-let landlords are also able to apply for the three-month mortgage payment holiday, as long as they pass on the benefit to their tenants.

In addition, the Government has increased the local housing allowance for people who are unemployed, on low incomes or claiming certain benefits to cover at least the bottom 30% of market rents in your local area.

Wages

If you are not able to work due to the impact coronavirus has had on the business that employs you, the Government has agreed to step in and pay 80% of your salary up to a maximum of £2,500 a month, as long as you are kept on the payroll.

You do not have to make a claim for the money. Instead, companies will apply directly to the Government for grants, and then pass on the cash to their employees.

While the scheme is not expected to start paying out until the end of April, payments can be backdated to 1 March.

It will initially run for three months, but the Government has said it will extend it if necessary.

Self-employed and freelancers

The Chancellor Rishi Sunak has announced new measures to help you if you're self employed

The self-employed and freelancers can now apply for a grant worth 80% of their average monthly profits.

The money - up to a maximum of £2,500 a month - will not be paid until the start of June at the earliest but will be backdated to March.

For now, you can claim universal credit a benefit for people who are unable to work or who earn low incomes. People who are self-employed can claim it at a rate that is equivalent to statutory sick pay, which is currently £94.25 a week.

The minimum income floor that is used to work out entitlement to the benefit has been suspended.

The Government has also said it will delay the next set of self-assessment tax payments until January 2021 to give you more time to pay your bill.

You also have longer in which to pay VAT bills, with money due from now until the end of June deferred until April 2021.

Utility bills

If you are struggling to pay your gas, electricity or other utility bills, contact your supplier, as they have been instructed to support customers who are in financial difficulties through reducing, pausing or reassessing payments.

They have also been told to help customers who have pre-payment meters but cannot add credit to them.

Support available includes using a discretionary fund to increase customer’s credit or sending you a pre-loaded top-up card so that your supply is not interrupted.

Debt repayments

Many lenders are offering payment holidays on unsecured debt, as well as waiving late payment charges for people whose finances have been hit by coronavirus.

As with the mortgage payment holiday, if you are struggling to keep up, contact your lender as soon as possible.

Unlike the mortgage payment holiday, however, this is not a formal scheme announced by the Government, so individual lenders can make their own decision on whether or not to grant you a pause in repayments. 

You may also have to provide proof that your finances have suffered.

Increased benefits

In a bid to help those on low incomes, the Government has increased certain benefits.

The universal credit allowance is being increased by £20 a week for all new and existing claimants. 

The rise, which is in response to the pandemic and comes on top of already planned annual increases, will start  on April 6 and last for 12 months.

Those who are still eligible for the working tax credit will also see the allowance increased by £20 a week.

Small business Coronavirus Help.

Hi Everyone

Here is the link to the government website for help to small business.

https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses

Few points to mention

  • There should be a major announcement in the next 48 hrs for help with self-employed income.
  • In regards to staff, normal contracts apply so if you are considering making people redundant check staff contracts e.g do they need to be paid for a full month/ redundancy pay.
  • In relation to the point above look at the employee retention scheme that runs from the 1st April avoiding those issues.
  • For those limited companies corporation tax bills are due 9 months and 1 day after the end of their business year. These can be negotiated with HMRC into some kind of payment plan
  • Make sure you apply for the rates relief with your local council
  • Commercial mortgages can also be requested for a 3 month repayment holiday however from personal experience the process seems more complicated as they have asked for my business accounts like a ‘normal’ commercial loan process. Residential mortgages are a case of contacting your lender directly usually through an online form.
  • Self-employed and other people in the Self Assessment System will not have to pay their July payment on account but this will be due 31 January 2021 - this is automatic
  • VAT payments this quarter may be deferred over the remainder of the year but VAT returns still need to be prepared and submitted on time - this is automatic
  • Under the Coronavirus Job Retention Scheme, all UK employers will be able to access support to continue paying part of their employees’ salary for those employees that would otherwise have been laid off during this crisis - the application process is being devised - my reading is that you need to pay the employee and then claim back the 80% that has been widely publicised so people considering stopping wages should think carefully - rules around sole director companies are unclear.  My understanding is that the grant will be based on February's PAYE submissions.

Things you may already know:

  • a statutory sick pay relief package for SMEs - this will not be claimed via the PAYE process and the refund process is still unknown
  • a 12-month business rates holiday for all retail, hospitality and leisure businesses in England - this will be automatic
  • small business grant funding of £10,000 for all business in receipt of small business rate relief or rural rate relief - as it stands this would not be available to people who run businesses at home or those who do not pay business rates.  This will be automatic
  • grant funding of £25,000 for retail, hospitality and leisure businesses with property with a rateable value between £15,000 and £51,000 - the process will be via the local authority
  • the Coronavirus Business Interruption Loan Scheme to support long-term viable businesses who may need to respond to cash-flow pressures by seeking additional finance - this is accessed via the British Bank website
  • the HMRC Time To Pay Scheme - If you are concerned about being able to pay your tax due to COVID-19, call HMRC’s dedicated helpline on 0800 0159 559
  • Mortgage holidays for 3 months - I'm already hearing positive comments about banks providing this relief and if you are in difficulty you should contact your bank
  • IR35 for contractors has been placed on hold until April 2021
  • Companies House filings can be delayed due to Coronavirus

Pension seminars

Martin Lewis of Money Saving Expert fame has described 2020 as a ‘savings horribillis’ and it is hard to argue! A major high street bank has cut its main savings rate by 0.5% with cash savings rates at record lows. Most people’s average savings earnings are now around 0.4%!

Often people are unwilling to invest cash savings yet are happy to invest in pension. This is despite many of the underlying assets and risks can be similar. There seems to be an acceptance that pension ‘has’ to be invested but savings don’t?

There still remains a great deal of confusion with investors in regard to pensions and what options are available with their pension, on retirement, in regard to income and lump sum. The danger of pension freedoms is that many people are considering cashing in pensions, paying large amounts of tax and then putting that money in a bank when savings rates are at record lows!

For this reason Approachable Finance will be running some free, no obligation Retirement Seminars at our offices at 6.30pm on Tuesday 31st March and Thursday 23rd April. This is a perfect opportunity for anyone to come along in a group environment and get some information on retirement and savings planning. We look forward to seeing you and if it is of interest please RSVP as places are limited.

Seven pension myths busted

 

  1. It’s not worth having a workplace pension

Not true! Most people receive more back than they contributed. They also receive contributions from their employers and in most cases tax relief.

  1. My property is my pension

Not everyone wants to sell their home when they retire to live somewhere smaller. Bills still need to be paid.

  1. I’m too old to start a pension

If it’s a workplace pension, you’ll miss out on “free money” in the form of a contribution from your employer. Secondly, saving into a pension is probably the most tax efficient way to save

  1. I’m too young to start a pension

Starting early makes a huge difference thanks to the magic of compound interest.

  1. I can’t afford it

With auto enrolment, if you opt out you’ll be re-enrolled again every three years when hopefully your financial situation will have improved.

  1. My pension will be lost if I die before retirement

What happens to your pension when you die depends on the type of scheme you have. Many schemes allow the full value to be transferred to a love one / dependent.

  1. The State Pension will be enough for my retirement

The full amount of new State Pension is currently £168.60 a week – that’s just over £8,750 a year. For most people, this won’t be enough.

Flexible Access to Pension

A common enquiry over the last few years is a request for us to ‘sign a form’ to cash in or transfer a pension in its entirety into a bank account.

Often, we are contacted by people who simply do not understand that there are often better ways of taking pension. Whether it be using ‘guarantees’ associated with their pension that they were not aware or exploring options such as buying an annuity or flexible drawdown.

Whilst it may appear like the easy option of cashing in your pension, you have to consider that a full encashment will often mean a large ‘emergency tax’ bill of at least 20% of the fund value (after tax free cash).  Often the cashed in pension will sit in a bank account earning little or no interest. Not to mention the ‘opportunity cost’ of reducing the figure that gains interest by 20% paid out in tax.

If your pension is in a ‘pot’ which is invested on the stock market, it usually means it can be switched into a ‘Flexible Access’ or ‘Drawdown Pension’.  This means that the pension becomes flexible, meaning it can provide an income, or lump sum, or both. It is also accessible for the term of the pension and doesn’t tie money up like an annuity.

It is always recommended that at the point of retirement, it is worth speaking to a good independent financial advisor about your options.