Category: Financial Planning

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when life means life

Some people object to insurance on the principle that it may not provide any tangible benefits: an insurance policy only pays out if the event occurs that it’s designed to protect against. If your house doesn’t suffer fire, flood, subsidence or other damage, your house insurance won’t pay out. And so on.

Of course, many such policies provide peace of mind and reassurance, which surely has some value. But it must be agreed that many types of insurance never pay out. Your house may never suffer damage. And even though term assurance is a type of life assurance, if you don’t die within the period specified, it won’t pay out either.

However, there is one type of insurance guaranteed to pay out: whole of life protection. This type of life assurance runs for your whole life; and as death is unavoidable, it will pay something sooner or later.

This provides you with the peace of mind that your family won’t suffer financial stress due to your death, whenever it occurs. But this type of policy also has other uses. You can combine it with term assurance to cover particular debts. It can also be used as part of estate planning by providing money that can help with Inheritance Tax bills. It can even have value for businesses: when used as so-called key person cover, it can protect a company from the financial consequences of losing a vital employee, partner or director.

Whole of life protection comes in various forms. In essence, though, there are two types of cover: maximum and balanced cover. With maximum cover, the initial premiums and the sum insured don’t change for the first 10 years. Thereafter, the premiums may go up depending on various factors – such as the performance of the life fund in which the premiums are invested.

Balanced cover plans aim to keep the original premium level for however long the policy runs for. However, premiums still might rise if the fund doesn’t perform as well as anticipated, or if charges go up.

How much does whole of life cover cost? The premium rate depends on a number of factors: your age, how much cover you want, your sex, whether you’re a smoker, and your state of health at outset. However, because whole of life cover is guaranteed to pay out eventually, it will tend to be more expensive than term cover which might not pay out anything.

You can bolt on some extras to increase your security. One of these is critical illness cover. While life assurance only pays out on your death, critical illness plans pay their sum assured following diagnosis of a specified serious illness; and the money can be used however you want. Waiver of premium might also be worth considering: this will pay your premiums for you for a set period if you’re unable to work due to illness or accident.

As always, it’s worth discussing your circumstances with a trained and qualified financial adviser to make sure you buy the plan that best suits your needs.

it’s not about how much you have , but what you do with it…..

The old cliché goes that ‘money can’t buy you happiness,’ but how true is that statement?

According to a recent survey by Ameriprise Financial, only 13 per cent of American millionaires classified themselves as wealthy. Even those who had over $5 million (£3.8 million) spread across their accounts, investments and funds said that they didn’t feel like they were rich. 

Elizabeth Dunn, psychology professor at the University of British Columbia, said that this could be due to ‘social comparison’, meaning that a person only feels rich if he is richer than the people he is comparing himself with. A 2005 case study in Germany compared people who were similar in terms of age, education and region of residence, finding that “individuals are happier the larger their income is in comparison with the income of the reference group.”

Another more recent study in America found that those with middle-incomes were less satisfied financially if they lived in a place with higher levels of income inequality. Interestingly, research in Canada found that neighbours of lottery winners were likely to run up debts and to go bankrupt.   

But what should you make of all this? 

Elizabeth Dunn commented that people tend to overrate the importance of earnings when it comes to feeling financially satisfied. “All of this talk about ‘income, income, income’ overlooks the fact that it matters a lot what you do with your money.” Spending money in certain ways, for example on memorable experiences rather than possessions, can make people feel better.    

Maggie Germano, a financial coach in the States, notes that “people who feel the best about their financial situation […] are people who are fully aware of what their financial situation is.” She explains how she has clients who get a surprise when they realise how much they are spending on online shopping and Uber rides. “I do think it is less about how much is actually coming in and more about how they’re consciously using the money,” she emphasises.

Another financial coach, Michelle Tascoe, mentioned how setting specific goals can help to give you financial peace of mind and cause you to have a more positive outlook on your finances. Rather than just saying, ‘I want to retire early,’  a more focused goal, such as, ‘I want to retire by the time I’m 55’ will help you plan more effectively.  

From the experiences outlined, it’s been shown that taking the time to work out what you want your money to achieve will give you a greater sense of clarity. You can measure your progress against a defined plan and improve your emotional and financial wellbeing for the future.

Sources
https://www.theatlantic.com/family/archive/2019/07/who-feels-rich/594439/

https://www.nber.org/papers/w24667

What has survived from the original Pension Schemes Bill?

 You may have read various headlines about the Pensions Bill which was first announced in the Queen’s Speech in October. Its progress was subsequently halted with the calling of the General Election but it has now been confirmed by the Queen and is on its way to becoming law. 

Given all the to-ing and fro-ing, you could be forgiven for being unclear as to what it actually includes. It has, in fact, remained largely unchanged and has met with widespread cross-party support.  

The main initiatives include:

  • The introduction of the framework for pensions dashboards
  • Legislation to establish collective defined contribution (CDC) schemes
  • Greater powers for The Pensions Regulator 

The government said the purpose of the bill was to “support pension saving in the 21st century, putting the protection of people’s pensions at its heart.”

Pensions dashboards 

The long-awaited pensions dashboards are designed to allow savers to view all their lifetime savings in one place through a digital interface. Data will be retrieved directly from pension providers and updated in real time. The Pensions Bill has introduced new rules that will provide a framework so that providers will be compelled to provide accurate information. State pension data should also be visible.       

Experts warn, however, that primary legislation will take most of 2020 to reach the statute book and it could be several years before much of the older data from company and private pensions is accessible. Research has shown that 65.8% of respondents would like to use a dashboard to see how much their pension is worth and what type of income that would translate to in retirement. 54% of those surveyed, though, said they would be unlikely to use the system if it only contained partial information.

It’s clear that dashboards have the potential to revolutionise retirement planning but the industry wants to ensure early users are not put off by incomplete versions.The Bill is really only the beginning.          

Collective Defined Contribution schemes 

The Bill also announced its commitment to the creation of a ‘framework for the establishment, operation and regulation of Collective Defined Contribution (CDC) schemes.’ Currently, employers can offer either a Defined Benefit (DB) scheme or a Defined Contribution (DC) scheme but both have their disadvantages. DB schemes can present significant risks to the employer while DC schemes may give a less predictable income for scheme members. As a result, the Government has decided to offer this new type of scheme, the CDC, also known as a Collective Money Purchase scheme.

As the name suggests, both the employer and the employee would contribute to a collective fund from which the retirement funds would be drawn. The scheme does not produce individual pension pots and the funding risk would be shared collectively by the individual investors.       

Unlike DB schemes, CDC schemes do not guarantee a certain amount in retirement. Instead, they have a target amount they will pay out, based on a long-term mixed risk investment plan. 

Greater powers for The Pensions Regulator  

The other key part of the proposed Bill is that The Pensions Regulator (TPR) will be given stronger powers to obtain the correct information about a pension scheme and its sponsoring employer in a timely manner. This will ensure it can gain redress for members when something goes wrong. Any company boss found to have committed ‘wilful or grossly reckless behaviour’ in relation to a pension scheme will be guilty of a criminal offence, which will carry a prison sentence of up to seven years.

Sources
https://www.pensionsage.com/pa/Pension-Schemes-Bill-reintroduced-in-Queens-Speech.php

https://www.pensionsage.com/pa/Over-half-of-savers-unlikely-to-use-incomplete-dashboard.php

https://www.ftadviser.com/pensions/2020/01/08/govt-s-revolutionary-pensions-bill-re-enters-parliament/

https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-8674

Ensuring harmony after death

With an estimated 60 per cent of people dying without having made a will, it’s troubling to think that their life savings and property may not be passed on according to their wishes.

One way of guaranteeing that those closest to you are taken care of is simply by making a will.

A will ensures that your assets are shared in the way that you would like. If you’re an unmarried couple, you can make sure your partner is provided for and if divorced, you can decide whether to leave anything to your former partner.

You are never too young to make a will. An online YouGov poll undertaken by children’s charity Barnardos found that of those people who have made a will, a surprisingly savvy 61 per cent did so before the age of 41.

More than one in five (22 per cent) cited having a child as a key driver whilst almost a quarter (23 per cent) stated financial planning as the reason for writing a will.

Although it is possible to write a will yourself there are various legal formalities you need to follow to make sure that your will is valid. Importantly, employing the services of a Solicitor can ensure the process is smooth and that you don’t pay more inheritance tax than necessary.

Begin by taking some time to think about what you want to include in your will, look at how much money and what property and possessions you have. Crucially, think about whom you want to benefit from your will and who is best placed to look after your children if under the age of 18.

Also consider who you would like to sort out your estate and carry out your wishes after your death. You can appoint an executor at any time by naming them in your will.

In England, Wales and Northern Ireland, two witnesses are required to be present when a will is signed and they must have no beneficial interest as this could make it invalid.

Remember once you’ve made your will it’s important to keep it in a safe place and tell your executor, close friend or relative where it is. You should also consider reviewing it every five years and after any major change in your life – such as separation, marriage, divorce, having a child or moving house.

Can I afford to retire?

Retirement has often been described as “the longest holiday of your life.” But attractive as that sounds, can you afford to pay for the holiday?

Research by one leading insurance company shows that 69% of people over the age of 50 are concerned about their income in retirement.

Many people underestimate how much income they will need when they retire. If you’ve been used to having two cars, going on foreign holidays and eating out then it is unlikely that you’ll want to give those up simply because you’ve stopped work. In fact, many people find that their need for income actually increases when they retire. After all, if you’re behind a desk all day, the only money you’ll spend will probably be on a sandwich at lunchtime. Contrast this with how much you spend on a day off.

As worries about income in retirement increase, so do people opting to keep working after their normal retirement date.

Many people who have their own business argue that “my business is my pension.” Again, that works well in theory – but it assumes that you can sell the business for the price you want at exactly the time you want. With technology changing ever more quickly and more and more businesses losing market share to the internet, relying on your business to fund your retirement can be a high risk strategy.

More than any other aspect of financial planning, your retirement demands careful consideration. From checking on your likely state pension to tracking down any previous pensions you might have to making sure you’re contributing sufficient to your current pension – retirement planning needs to be done thoroughly and reviewed regularly.

How the gender gap even affects children’s pensions

We’re familiar with the gender gap in pensions for adults but there is evidence that this actually starts much earlier on. According to data from HMRC, parents and grandparents are more likely to save into a boy’s pension than a girl’s.

A Freedom of Information request by Hargreaves Lansdown revealed that 13,000 girls aged 15 or under had money paid into a pension for them in 2016/17 compared with 20,000 boys. The disparity means the pension gap can actually start from birth onwards.

This only exacerbates the situation as women are likely to have less in their pension due to the gender pay gap. Nest found men are twice as likely to be in the highest income bracket and women are three times as likely to be earning less than £10,000 per year, which is the auto enrolment threshold for a single job.

Women are also more likely to take career breaks or work part-time to bring up a family. Added to which, they are more likely to live longer and spend longer in retirement so, in reality, will need more in their pension pot than men.

Research in 2017/18 by the union Prospect found that the pensions gender gap equated to 39.9 per cent or a £7,000 gap in retirement income between women and men.

Hargreaves Lansdown has calculated that paying £100 per month into a child’s pension until the child reaches 18 can increase their savings by as much as £130,000 by retirement. Yet the cost is only £21,600 plus tax relief of £5,400. Forward planning pays off!

Someone without any earnings can pay up to £2,880 each year into a pension and receive 20 per cent tax relief (up to £720) so it’s possible for parents and grandparents to make a significant difference to a young person’s financial future by starting a plan early. An added advantage is that once the money is in a pension, it can grow without attracting capital gains tax.

It’s unclear why the anomaly between paying into boys’ and girls’ pensions has existed in the past. Some feel it may be because gifting has traditionally come from the baby boomer’s generation where men were more likely to have had the greater share of pension in retirement.

Whatever the reason historically, the current message is to use children’s pensions to give the younger generation a helping hand but to do it equally.

Sources
https://www.ftadviser.com/pensions/2019/10/04/gender-pension-gap-seen-among-kids/

https://citywire.co.uk/new-model-adviser/news/gender-pensions-gap-begins-at-birth/a1277113

Financial lessons for parents of students

If you’ve got a son or daughter at college or university, you could have some stark financial lessons ahead. Getting the grades may have dominated the household up to now but budgeting for their life as a student can require just as much focus.      

Tuition fees and student loans are usually top of the agenda. Most universities charge £9,250 for tuition fees but the financial help available to students for their living costs will differ. Maintenance loans are calculated according to where the student is going to study, where they plan to live and how much their parents earn.

As an example, the maximum maintenance loan is £11,672 if the student is an undergraduate,  studying in London and not living at home, but this would only apply if the gross household income was below £25,000 (after pension contributions). If the household income is greater than £67,000, the maximum a student can borrow for their living costs is £5,812. You would be expected to provide a parental contribution of £6,000 to make up the shortfall.              

A recent survey revealed that parents of students could be found to be contributing an average of £360 a month. Half of them said they had not anticipated that they would have to give as much financial help. Luxury items such as new cars and exotic holidays were sacrificed while six per cent of respondents said they had taken a second job.

Despite this, students faced an average monthly shortfall of £267, according to the 2019  National Student Money Survey. Although some had taken part time jobs, 49 per cent relied on  overdrafts and 14 per cent on credit cards.

Not surprisingly, the main expense is accommodation.This has soared in recent years due to the increasing amount of university accommodation being provided by commercial operators, which costs significantly more than traditional halls of residence. Students can find themselves paying up to £9,000 a year on rent in London and £6,366 elsewhere.

Students also get tied into lengthy commercial tenancies of up to 46 weeks. Some landlords may even charge for 51 weeks. To make things even more difficult, the rent may be due before the maintenance loan arrives.         

Despite the high costs, demand is high so students may be expected to start a tenancy in June for the forthcoming academic year. That can mean deposits of three months’ rent need to be paid in advance before the Easter term.

Parents are often called in to meet these costs and act as a rental guarantor. One advantage is that large providers like the Unite Group will allow you to pay by credit card so you can stack up lots of loyalty points. 

It’s an exciting new chapter of life and with a bit of careful ongoing planning and budgeting, you can make sure you minimise any surprises.

You have a financial plan, but do you have a financial plan b?

“The best laid schemes o’ mice an’ men, gang aft agley”. So said Robert Burns in his poem ‘To a Mouse’, lyrically summing up the idea that no matter how well we prepare, there are always factors beyond our control that can cause our ‘best laid’ plans to unravel.

Whilst the same can be said for financial planning, there are a great deal of factors that are under our control, one of which is preparing for the eventuality that our plan ‘A’ might not come to pass. Making a plan ‘B’ is not admitting defeat, but pragmatically working on the assumption that nothing about preparing for the future is guaranteed.

When it comes to retirement planning, too many people give themselves a single plan without having an alternative they can turn to. This is most common amongst those who have made plans themselves without consulting an independent adviser. One of the most frequent mistakes made is planning for too short a retirement. It’s always better to be optimistic about how long your pension will need to last. That way, if you overestimate, your money won’t run out and can become part of your legacy.

An increasing number of retirees are planning to continue working in some capacity after they retire, either taking on a part time job or extending their previous career through taking on a consultancy role. Financial advisers, however, are increasingly recommending that any income from working in retirement should be factored in as additional income rather than something you rely on to ensure you have enough money each month. That way you have the freedom to reduce your hours or stop working altogether whenever you want.

Plan ‘B’ is not always about the worst case scenario, however. It could be that your main plan assumes a certain amount of savings in your pension, whilst your backup plan is more optimistic but less likely. If you find that you do reach retirement age with more money available than you expected, plan ‘B’ could be your way of ensuring you make the most of life after work. If you planned to move abroad, look at more expensive destinations that might offer you even greater benefits than your initial choice.

If you’re nearing retirement and would like help putting together your plans, please get in touch.

Sources
http://money.usnews.com/investing/articles/2016-08-03/whats-your-plan-b-for-retirement

Own a second property? Here’s some changes you need to be aware of

There have been several changes relating to Capital Gains Tax (CGT) over the past few years. The coming years are set to bring more. Here’s our summary of some of the more important changes coming that might be coming into effect from April 2020. 

If you are thinking about selling a residential property in the next year or two, you need to know about proposed changes to the capital gains tax rules for disposals from April 6th 2020. 

If you only own one property and have always lived there, you should not be affected. However, if you own more than one property or you moved out of your only property for a period of time, you might face a capital gains tax bill. 

The two main changes you should be aware of are: 

Final period exemption 

The last period of ownership counting towards private residence relief will be reduced from 18 months to just nine. Currently, the final period exemption allows individuals a period of grace to sell their home after they have moved out. However, the government feels that individuals with multiple residences have been taking advantage, hence the reduction.   

Lettings relief

Lettings relief is set to be removed, unless you live in the property with the tenant. For UK property, HMRC must be notified and tax paid 30 days after completion rather than the January following the end of the tax year in which the disposal took place. Failure to pay on time will result in HMRC imposing interest and potential penalties. 

With no transitional measures in place, this means that higher-rate taxpayers previously expecting to benefit from the maximum potential relief of £40,000 could be lumped with £11,200 extra tax overnight. 

Here’s an example of how the new taxes could influence a sale:

Steve, a higher rate taxpayer, bought a flat in April 2009 for £100,000. He lived there for 6 years until April 2015 before moving out to live with his partner. He let the flat until 2020 when he sold it for £300,000. The sale was completed on 4th June 2020. 

If the contracts were to be exchanged before the April 2020 changes, a CGT of £6,618 would be due. However, after the deadline a CGT of £21,636 would be due, payable seven months earlier – this is due to there being a lower period of private residence relief and a lack of lettings relief. 

The next steps

The two above changes are set to be enacted as part of the 2020 Finance Act and at the moment are not definite. The consultation to these steps closed on 5th September 2019. Assuming that draft provisions reach the Finance Bill 2019-20, we will have to see if any changes are made to either after it is debated in Parliament. 

Sources

https://www.accountancyage.com/2019/09/16/prr-how-will-your-clients-be-affected/https://www.bdo.co.uk/en-gb/insights/tax/private-client/further-tax-changes-for-non-residents-holding-uk-propertyhttps://www.killik.com/the-edit/how-capital-gains-tax-on-property-will-change-from-april-2020/

Marshmallows and financial planning

The Stanford marshmallow experiment is one of the most famous pieces of social science research out there. It has arguably influenced the way that many people live their lives, in addition to providing plenty of fun and interest for those with young children who are in the ‘I’ll try this at home’ camp.

So what is the marshmallow test? 

A marshmallow is placed in front of a child, they are told that they can have a second one if they can go 15 minutes without eating the first one – then they are left alone with the marshmallow.

As you can imagine, many children ate the marshmallow as soon as the door closed, others fidgeted and wiggled as they tried to restrain themselves, eventually giving in. A handful of children managed to wait the entire time. 

Following the experiment, the children were monitored as they grew up and it was found that those who waited for the second marshmallow performed better in exams, had a lower likelihood of obesity, lower levels of substance abuse and their parents reported that they had more impressive social skills. 

In other words, it could be said that the ability to delay gratification is a trait that leads to valuable rewards in the future. 

So how does this relate to financial planning?

The results from the experiment can easily be applied to the way you save and invest money. Simply put, if you save rather than spend now, you’ll gain greater rewards in the future. 

How do you delay gratification?

Cutting out frivolous and impulsive purchases are a good start. Think to yourself: ‘do I really need this?’ Do you have to buy a coffee from the coffee shop near work? Do you have to eat out twice a week? Small acts of restraint can lead to a big pay off in the future. 

When it comes to building a financial plan, it’s important to identify the levels of savings required for achieving goals in the future. Are you aiming for an early retirement or buying a holiday home? Setting out these goals early and developing a plan will help you to streamline your saving strategies so that you remain on track. Just remember, one marshmallow now or many marshmallows later.   

Whatever you want to purchase: a boat, a house or a car, delayed gratification is an extremely valuable skill to learn when it comes to achieving your financial milestones. The more you see your savings grow, the more motivated you will be to keep going. It’s good to see your hard work pay off and over the span of a few years, you could see dramatic increases in your wealth and financial security.

Sources
https://www.huffpost.com/entry/40-years-of-stanford-rese_b_7707444 guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAJdHRHqhlsVcLeV6Yi_w61XPEFBayOqdTK89gxGCEdCpDt8CZVAn9Nrzg_branVU7Z0eWhyD4CjX0ii8uQzgVRE2OrG17sknh-B4t_HwD35qNwzcMVc6QLH9ijLjmwCnjIQmyUvHDPtR5bme9Zu4p977cA_h2r1GWY6VIKl6hnAx&guccounter=2
https://www.theatlantic.com/family/archive/2018/06/marshmallow-test/561779/
https://www.businessinsider.com/delayed-gratification-helped-me-save-money-2019-3?r=US&IR=T