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The popularity of Equity release is growing, but is it a good move?

Equity release is no longer the niche lending area it once was. More and more homeowners over 55 are choosing to release cash tied up in their homes and there are few signs of this trend subsiding.

Lending in 2018 increased by 27% compared to the previous year and is now nearly double what it was in 2016. It’s likely that the UK’s growing elderly population, where many don’t have the pension security of generations past, is partly behind this expansion. The growing variety of equity release products on the market could also be a factor. Newer products mean that homeowners are able to gradually release money from their property, rather than taking it as a lump sum.

Is it a risky option?

Equity release doesn’t exactly have a squeaky clean reputation. There have been past accusations of mis-selling and there are occasions where relatives find themselves receiving less inheritance than they might have expected.

Because of the way interest accumulates over the years, people can end up owing a large amount of money that is paid back from the value of the property when a person dies or goes into care.

Whether equity release is a suitable solution really depends on a person’s individual financial and personal circumstances.

As well as getting sound financial advice beforehand, it’s always best to be open with loved ones about releasing equity from your property. Two in three complaints to the Financial Ombudsman about equity release come from relatives of people who have died or gone into care. It can save a lot of upset later on to be open about releasing cash from a property when you do it, rather than further down the line.

The bottom line is that equity release can play a crucial role in supporting a full retirement, alongside pensions, savings and other assets, for the right homeowner. Since homes are most people’s largest asset, it makes sense to at least consider how this asset can be used to fund retirement. Downsizing in later life is another way of releasing money from your home.

Sources
https://www.mortgagestrategy.co.uk/feature-the-rise-and-rise-of-equity-release

What to know about ISAs in 2019/2020

The rules around ISAs (or individual savings accounts) change relatively often and different types of ISA rise and fall in popularity depending on where savers consider the most competitive place to put their hard earned money.

ISAs are a great way to save because of their tax efficiency. You don’t pay income tax or capital gains tax on the returns and you can withdraw the amount any time as a tax free lump sum. Because of their tax efficiency, there are set limits on how much you can save using ISA accounts.

The 2019-20 tax year is an interesting year for ISAs because the main annual allowance isn’t increasing. The yearly total you can invest in an ISA remains at £20,000. This means that the ISA limit remains unchanged since April 2017.

Remember that all ISAs don’t have the same allowance. For Help to Buy ISAs, you can only save a maximum of £200 a month, on top of an initial deposit of £1,200. Lifetime ISAs (LISAs) have a maximum yearly allowance of £4,000, on top of which you benefit from a government top-up of 25% of your contributions.

One ISA allowance that is rising (slightly!) is the Junior ISA, increasing from £4,260 to £4,368. This means that relatives can contribute slightly more to a child’s future, in a savings account that can only be accessed when they reach 18. Junior ISA accounts are rapidly gaining in popularity, with around 907,000 such accounts subscribed to in the tax year 2017/2018. Great news for the youngest generation!

Stocks and Shares ISAs are also gaining more popularity, with an increase of nearly 250,000 in the last tax year. On the whole, though, the number of Adult ISA accounts subscribed to in the last year fell from 11.1 million in 2016/17 to 10.8 million in 2017/18.

For investors with Stocks and Shares ISAs, Brexit uncertainty has understandably created cause for concern. In this scenario, your best course of action is to make sure that your investments are properly diversified around the globe. Speak to us if you are unsure about what you can do to reduce risk during any post-Brexit turbulence. We’ll be more than happy to help.

Sources
https://blog.moneyfarm.com/en/isas/annual-2019-isa-allowance

one in seven widows are missing out on valuable tax breaks

New data reveals that thousands of widows are missing out on valuable tax breaks on money inherited from their late husbands or wives.

In 2015, the government introduced a new rule that allows spouses to claim an extra ISA allowance. This allowance, known as an Additional Permitted Subscription allowance (APS allowance), is available to the surviving spouse or civil partner of a deceased ISA investor, where the investor died on or after 3 December 2014.

According to the Tax Incentivised Savings Association (an ISA trade body), around 150,000 married ISA savers die each year. However, just 21,000 eligible spouses used their APS allowance in the 2017-18 tax year, meaning they may be paying more tax than they need to pay.

Many bereaved spouses are unaware of the extra protections they can claim on, while others find the process difficult and confusing.

It is thought that many of those who lose out are widows whose husbands pass away without informing them of the exact nature of their financial affairs. In some cases, widows only discover large sums of money long after their husband’s death.

Situations like this have led to many to call for greater transparency between spouses around their financial affairs. A culture of privacy around financial matters is rife among the ‘baby boomer’ generation, where the higher earner often manages the money and investments. This can leave the bereaved in a precarious position, especially if they don’t know what bank accounts, investments and companies their spouse may have managed.

If your partner has left funds held in an ISA to someone else, you’re still entitled to APS. For instance, if your partner left an ISA of £45,000 to their friends and family, you can use your APS allowance to put an extra £45,000 into an ISA of your own.

Think you might be able to claim? You can apply through your late partner’s ISA provider. You will need to fill in a form, similar to when you open an ISA.

Sources
https://www.telegraph.co.uk/personal-banking/savings/one-seven-widows-missing-valuable-tax-breaks/

New year, new you for your finances

With the new year comes new possibilities, and most of us like to put a resolution in place. While you might not stick to your January gym membership or finally get that novel written, committing yourself to a financial resolution is an excellent way to start 2019.

Improving a financial situation has proven to be a high priority for the British public as we turn the first page on a new calendar. In fact, the average adult will commit £4,600 on financial resolutions; this includes goals like paying off a debt or moving house. For those under the age of 25, 11% of people aim to clear their debts in the new year, and for the over 55s that figure increases to 15%.

Even with the best intentions, however, it can be tough to see resolutions bear fruit. Luckily, there are a few steps you can take to give yourself the best chance.

1. Look before you leap!

It can be tempting to jump into the new year with big plans for the future, but if you’re not looking at where you’re coming from, you may not be giving those plans the preparation they need to flourish. Review your spending for 2018, collect your bank statements, bills and receipts and look out for areas of excessive or unnecessary expenditure. Once you’ve identified any pitfalls, they’ll be much easier to avoid in the year ahead.

2. Find your feet

Once you’ve got a good grasp of how the past year has been for your finances, you’ll have an understanding of where you are currently. There may be actions you can take immediately to better your situation. For example, review any subscriptions or direct debits that you now deem unnecessary. Sell any unnecessary items to create an income without any serious lifestyle changes. Consolidate debts with balance transfer cards, to make payments more manageable and to potentially lower your interest rate. Simplifying and strengthening your financial situation at the start of the year will give you greater control over the coming months.

3. Set goals and be reasonable!

There’s no point in setting a goal that is unachievable, only to disappoint yourself when you inevitably fail to meet it. With a solid understanding of your recent financial habits and your current position, set yourself an achievable plan for the year ahead. Be specific and make it measurable! Rather than pledging to eradicate all of your debt, identify a portion that you’re confident you can clear, and set yourself benchmarks to help track your progress.

4. Draw up a budget

It’s all well and good having a plan but you’ve got to stick to it. A well constructed budget can be just the thing to keep you on the straight and narrow. Gather information about your income and outgoings and regulate your spending. For example, it can be very tempting to treat yourself when you receive some unexpected income but don’t ignore the opportunity to bump up your savings. Perhaps consider splitting that extra money between debt repayments and future savings, and if there’s any left over then go for that posh meal. The key is to keep up to date, and revise your savings goals and budget plans as you go so that you’re prepared for whatever the year may bring!

With the right preparation and planning, 2019 can be a great step forward for your finances – take on the challenge and have a happy new year!

Sources
https://www.equifax.co.uk/resources/money_management/new-year-new-start-to-your-finances.html

How can millennials get on the property ladder?

There’s been a lot of talk in the press recently about generational inequality, which has mostly been with good reason. Those currently in their twenties and thirties are earning far less than people the same age did 10 to 15 years ago.

The 2008 recession has put the millennial cohort far behind in terms of earnings and wages. Wages have never fully recovered since the recession and are still behind their pre-financial crisis peak. Many may be unable to ever afford to get on the property ladder, meaning they will have a lifetime of rent payments to fund.

Also, rising house prices have meant that the average deposit has risen from around £10,000 in the Eighties and Nineties to between £50,000-60,000 today, according to analysis by accounting firm PwC. Even when adjusted for inflation, the rise is dramatic.

Auto-enrolment in pension schemes has begun to address some of the long term issues around retirement funding but even still, these do not compare to the security offered by ‘gold-plated’ direct contribution schemes.

The younger generation are already aware that they will have to work far longer. Early retirement will likely be the premise of the rich, lucky or extremely frugal. Fortunately, millennials look set to be able to cope with the demands of a longer working life. The younger generation are fitter and healthier compared to previous generations with far fewer smokers and better diets.

Although a longer working life might be a path towards an eventual retirement, it does little to help young people get on the housing ladder. The fact of the matter is that many young people will need some kind of ‘leg up’ if they are to achieve the financial stability that many of the ‘baby-boomer’ generation managed.

The income gap between older and younger generations means that many young workers will have to rely on the wealth accumulated by their parents and grandparents if they are to sustain the same quality of life.

Family loans have become increasingly important for the financial wellbeing of young people. Many are giving younger generations so-called ‘early inheritances’ in the hope that such loans will enable them to get a foot on the property ladder. This is already so widespread that nearly eight out of 10 first-time buyers in London are receiving some sort of financial help from their parents.

Parents and grandparents are funding help through a variety of means. Almost three quarters of parents used their life savings to help out with the cash, while a third downsized or released equity from their homes. Another third accessed pensions cash; either cashing in lump sums through income drawdown or annual annuities. 7% remortgaged and 6% took out a loan themselves.

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Sources
Sunniva Kolostyak “Fireworks for millennials” in Pensions Age, November 2018
https://www.telegraph.co.uk/personal-banking/mortgages/baby-boomer-vs-gen-y-homebuying-in-1982-compared-to-2016/

Pension drawdown in an era of long life expectancies

Pension drawdown in an era of long life expectancies

Retirement planning means taking into account a whole host of factors. You have to navigate tough questions like, ‘What will the impact of inflation be?’ or ‘When will interest rates start to creep up?’

As well as these, there is another question that must be considered: ‘How long will you live?’

This question is unanswerable but figures suggest that some pensioners might be getting this figure very wrong when it comes to drawdown. Many are running the risk that their retirement pot kicks the bucket before they do.

Research by AJ Bell indicates that 50% of people aged 55-59 who’ve entered income drawdown say they have only enough savings to tide them over for 20 years. This might sound like a long time but when you consider that average life expectancy for this cohort of savers is 82 for men and 85 for women, many risk running out of money.

The reality is that none of us know how long we will live. When you factor in that there’s a fair chance that a few of AJ Bell’s respondents might live to 90 or even 100, it’s clear that many pensioners could be drawing from their savings at an unsustainable rate.

Withdrawal rates

AJ Bell also asked their respondents about their withdrawal rates. They discovered that 57% of people in the 55 to 59 age bracket are withdrawing more than 10% of their fund each year. This reduces to 43% of people in the 60 to 64 age bracket and 34% of people in the 65 to 69 age bracket.

While many use their early retirement to travel and embark on their larger plans, over-withdrawing early on could mean that they end up without the money to cover costs that arise in later life, such as care costs.

The average size of the fund in AJ Bell’s questionnaire was £118,000. Based on this, a 10% annual withdrawal of £11,800 would result in the income lasting just 12 years. However, if the withdrawal is reduced to 6% of starting value, the same fund might last for 29 years. These estimations don’t take into account the detrimental impact of inflation, which currently runs at 2.7%.

Working out a sustainable drawdown rate is difficult and depends on a whole range of factors. Your regulated financial adviser or planner should be able to give you your best chance of a good retirement outcome.

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Sources
https://www.retirement-planner.co.uk/232530/tom-selby-life-expectancy-guessing-game

3 pension changes you may have missed in the Budget

There was scarcely a mention of the ‘P’ word in October’s Budget speech (believe us, we were listening closely for it!). Instead, Hammond used the Budget speech as an opportunity to unveil his ‘rabbit in the hat’ changes to income tax thresholds, an increase in NHS mental health funding and a ban on future PFI contracts.

However, we had a good read of the accompanying ‘Red Book’ for any mention of pensions. At 106 pages, this was no mean feat. Fortunately, though, it was time well spent as we found some changes to pensions you may otherwise have missed:

The pension dashboard

HM Treasury confirmed that the Department for Work and Pensions (DWP) would look at designing a pension dashboard which would include your state pension. The pensions dashboard will be an online platform that will let you see all of your pension schemes in a single view. The average worker is nowadays expected to work eleven jobs during their career and keeping track of so many pension pots could prove confusing to say the least.

There was an extra £5 million of funding for the DWP to help make the pension dashboard a reality. Commentators see the dashboard as a welcome sign that the government is committed to helping savers keep track of their funds.

Patient capital funding

The government announced a pensions investment package which should make it easier for direct contribution pension schemes to invest in patient capital. Patient capital refers to investments that forgo immediate returns in anticipation of more substantial returns further down the line.

The government may review the 0.75% charge cap and there is widespread speculation that it will be increased to allow more investment in high growth companies.

Cold calling ban

The government has promised to ban pensions cold calling as part of a drive against pension scammers. Almost two years since the government’s initial proposals to combat pension scams were announced, pensions cold calling will finally be made illegal.

Research by Prudential indicates that one in 10 over 55s fear they have been targetted by pensions scammers since the introduction of pension freedoms in 2015. Cold calls, with offers to unlock or transfer funds, are a frequently used tactic to defraud people of their retirement savings.

As much as these measures go a long way to making people’s pensions more secure, the government will be powerless to enforce cold calls made from abroad and not on behalf of a UK company. It is unclear how and if the government will work with international regulators to mitigate the dangers of such calls.

Sources
https://www.moneyobserver.com/news/budget-2018-three-pensions-changes-you-may-have-missed

the top 4 places to buy a home abroad in 2018

It’s not difficult to see why Briton’s find buying a property abroad so attractive. High house prices, a temperamental climate and long working hours in the UK can make buying a property abroad seem like a highly desirable option.

Whether for a holiday property or somewhere to live long term, here are our top places to buy a home abroad in 2018.

Spain
Although buyers have fallen over the last few years, Spain remains Britain’s favourite place to buy property abroad. Spain has a well-established expat community and a warmer, drier climate than the UK (although central Spain is surprisingly cold in the winter), making it an attractive destination.

Affordability is a big driver for Britons going to Spain. In 2008, Spain’s property market crashed and the market only began to recover in 2014. Even though the pound is down on its pre Brexit referendum highs, Spain is still remarkably cheap.

What’s more, prices in Spain are on the rise. Spanish bank BBVA forecasts house prices to rise by 5% in 2018.

Buying in Spain is relatively simple. There is no requirement to be a Spanish resident to buy property – the only requirement is a Spanish NIE tax identification number.

One thing to be cautious of is that, in recent years, many homes have been built across the country without proper planning permission. Using a reputable property agency familiar with the area gives you your best chance of avoiding these.

Portugal
Our next country, lying on the Western edge of the Iberian peninsula, is a similarly ‘hot’ option for foreign buyers. Since 11%, on average, was wiped off the value of Portuguese property between 2011 and 2012, prices have recovered well.

From the Algarve and the Costa Da Prata to Porto and Lisbon, the country has a wide range of attractive options for foreign buyers. Lisbon and the Algarve are substantially more expensive than the rest of the country – bear this in mind when looking for options in Portugal.

France
Although more expensive than Spain and Portugal, France is an incredible place to buy a property. If you look in the right place, the country is still temptingly affordable. And, as the largest country in Western Europe, France has no shortage of variety.

Sunny Mediterranean beaches, chic cities, rolling hills, thick forest, dramatic mountains… you name it, France has got it. The Dordogne, the Charente and the Haute-Vienne in the south-west remain the most popular places for Brits.

However, north France is incredibly accessible. If you live in the south of England, it’s just a short ferry across the Channel. This means you can experience that alluring Gallic lifestyle, without straying too far from your life in the UK.

Croatia
Spain, Portugal and France are old favourites for Brits looking for a home abroad. Now it’s time for something a little less predictable.

This former Yugoslavian country is on the rise as a popular place for Brits to buy abroad. Its Dalmatian coast is among the most stunning in the world and the country is home to many quaint towns, as well as its lively capital Zagreb and beautiful Dubrovnik. The Dalmatian coast is a well-established centre for yachting.

The best time to look for properties is at the end of the main tourist season in the Autumn, when prices are lower than they are at peak times.

However, there are some restrictions for foreigners buying property in Croatia. If you hold only Swiss or Italian citizenship you are prohibited from buying a house in the country unless you intend to live there permanently. In addition, foreign buyers are required to seek approval from the Croatian Ministry of Foreign Affairs to attain the necessary documentation to buy a house.

Sources
https://www.telegraph.co.uk/money/transferwise/buying-property-in-spain-guide/
https://transferwise.com/au/blog/buy-property-in-portugal
https://www.aplaceinthesun.com/articles/2018/08/top-10-best-places-to-buy-a-home-abroad-in-2018

Buying Property in Croatia

what might be in the autumn budget?

In normal years, the Autumn Budget (formerly the Autumn Statement) is announced in November. However, with less than 6 months left on the countdown to Brexit, this year is far from a normal year.

At the end of September, Chancellor Philip Hammond revealed that the Autumn Budget would be released on 29 October which is also, unusually, a Monday – traditionally budgets are announced on a Wednesday. Since the Wednesday would’ve been Halloween, perhaps the Chancellor moved the budget forward by two days to avoid a potential Budget horror show.

Hammond’s Twitter feed indicates that we can expect the Chancellor to balance the books. Aside from this there has been little concrete information about what the Budget might contain. However, Hammond has given us a few hints:

The end of the freeze on fuel duty
It’s likely that the eight year freeze on fuel duty will come to an end this year. Last month, Hammond said that the freeze on fuel duty has meant the Government has “foregone” £46 billion in revenue and, if the freeze continues, will miss out on £38 billion more.

NHS spending
One of the Chancellor’s main concerns will be finding the money to fulfil Theresa May’s pledge to pump an extra £20 billion into the NHS by 2023. The prime minister herself admitted that this would require tax hikes, but was unclear as to which taxes would be raised.

Digital tax
At the recent Tory conference, Hammond said that Britain will impose a new “digital service tax”, even if other countries fail to follow suit. However, what this tax might look like is currently unclear.

He called for a reform of the international tax system for an era where digital companies account for much of global business, with Britain leading the way. Business leaders have mentioned that such a tax could compromise the UK’s reputation as a good place for digital companies to do business.

Of course, what will have the largest bearing on the eventual success of any changes to the budget is any Brexit deal. A good Brexit deal will boost growth and balance public finances without the need for major tax hikes.

We eagerly await the Chancellor’s Budget at the end of the month.

Sources
https://www.independent.co.uk/news/uk/politics/philip-hammond-tax-cut-self-employed-scrap-conservatives-national-insurance-contributions-nic-class-a8526236.html
https://www.telegraph.co.uk/politics/2018/09/11/chancellor-hints-fuel-duty-rise-fund-nhs-campaigners-warn-struggling/

are children’s pensions as good as they seem?

Pensions for children? Surely that’s taking planning ahead to a whole new level?

Nonetheless, if you can afford it, putting money aside in to a pension for your children or grandchildren can be a sensible option.

Under the current rules, you can put £2,880 a year into a junior self-invested personal pension (SIPP) or stakeholder pension, on their behalf. Even though the child won’t be a taxpayer, 20% is added to the amount in tax relief, up to £3,600 per annum. If you think about it, that can result in quite a significant amount over the years, taking compound growth into consideration.

The idea of contributing to a pension may tie in well with your sense of responsibility towards the next generation. You may feel sorry for the youngsters of today with their university fees to pay back and a seemingly impossible property ladder to climb.

However, on the downside a children’s pension can be quite frustrating for the recipient. The money is tied up until their mid fifties. This means that although the amount is steadily growing with no temptation to dip into it, it may not be much consolation for a twenty-five year old desperately trying to find the deposit for a house. Instead of making their financial future easier, you may have, in fact, impeded it.

There are other alternatives which will also give you the benefit of compound growth and help you to maximise tax relief, such as using our own ISA allowances and then gifting the money later. These may have more direct impact if the money is to help pay for a wedding, repay a student loan or enable them to buy a house or start a business.

Pension contributions are often referred to as ‘free money’ because of the the tax relief. In addition, 25% of the lump sum when the recipient comes to take their pension is tax free but it is equally important to remember that 75% of any withdrawals will be taxable. Another consideration is that children’s pensions have the lowest rate of tax relief but once in employment, your children may be higher rate taxpayers so would have benefited from higher rate relief.

One thing is for sure and that is that the rules around pensions and withdrawal rates are frequently changing. Given the extended timeframe involved, it’s likely that the regulations around accessing a pension pot will have altered considerably by the time a child of today reaches pension age. Their fund will have had time to grow handsomely, though. As with most things, it all comes down to a question of personal preference for you and your family.

Sources
https://www.ftadviser.com/pensions/2018/05/09/danger-of-children-s-pensions-laid-bare/
https://www.bestinvest.co.uk/news/are-pensions-for-children-bonkers-or-brilliant
https://www.moneywise.co.uk/pensions/managing-your-pension/start-pension-your-child