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What’s a Rio Mortgage?

Sadly, this type of mortgage won’t help you jet off and buy a pad in Rio de Janeiro. It can, however, be a useful option to provide you with more flexibility in later years.      

A RIO mortgage stands for ‘retirement interest-only’. It’s valid for people over 60 who are keen to release some equity from their home. With this type of mortgage, the borrower only makes  monthly interest payments until they die or go into long term care, at which point the lender will get their loan repaid by the house being sold.

It allows the homeowner to remortgage their existing loan under similar terms to their current agreement. So if you’re on a pension income, the fact that you’d only have to repay the interest can make it an attractive proposition. If there’s any value left in the house once the property is sold and the mortgage repaid, that would become part of your estate.

RIO mortgages are relatively new on the market. They came about in March 2018 when the FCA relaxed their rules and separated them from equity release, by re-classifying them as standard mortgages rather than lifetime mortgages. 

The FCA wanted to make ‘affordable borrowing’ more widely available to an older population as long as they had a steady income.Take up of the new mortgage was initially slow but it has been growing in popularity. It’s simpler than equity release, offers an attractive alternative to downsizing and also means the interest isn’t racking up.

Despite being called RIO or interest-only, some lenders are also offering an option where the borrower can repay part of the capital as well, which means they can leave more of an inheritance to their loved ones. Other providers are offering set repayment dates.

When are RIO mortgages suitable? 

A RIO mortgage can be worth considering if you are reaching the end of a standard interest-only mortgage in retirement and are concerned about how to repay the loan due to a shortfall in your savings. Rather than having to consider a house sale or expensive loan repayments, it offers flexibility and stability.            

This type of mortgage also provides an effective way of managing intergenerational wealth as it can enable you to help younger members of the family buy their first home. In addition, it can act as a means of reducing any inheritance tax burden.   

Points to consider

On the plus side, the monthly repayments on a RIO mortgage are likely to be cheaper than with   alternative repayment mortgages. It also provides a way you can stay in your own home without the worry of repaying the capital sum during your retirement. 

However, you will have to pass an affordability check to show you can afford the interest-only repayments. Bear in mind that it may be difficult to subsequently change mortgage provider or move house. You would also not be protected from short-term dips in the housing market.

It’s important to make a will and let your beneficiaries know about the mortgage so they will be aware of the reduction in the proceeds of your estate on death.

Sources
https://www.ftadviser.com/mortgages/2020/01/06/does-your-client-need-a-retirement-interest-only-mortgage/?page=2

What are the proposed changes to IHT for siblings

At the moment, only those who are married or who are registered civil partners are exempt from paying inheritance tax (IHT) on money or property left to them by their spouse. This was expanded to include heterosexual civil partnerships at the end of 2019.

But the law does not cover siblings who are cohabiting.They are liable to pay the standard IHT rate of 40% of anything over the £325,000 threshold.

The injustice this poses for some households was highlighted by the recent case of Catherine and Virigina Utley. They have lived together for over 30 years in the house in Clapham which they both bought. Despite being co-owners, when one of them dies the surviving sister will be forced to sell the property to be able to pay the IHT, estimated at about £140,000. 

Shocked by the unfairness of this situation, Lord Lexden has brought a new Bill to the House of Lords. Under the new proposals, siblings would be exempt from paying IHT on property left to each other, provided they had lived together for at least seven years and that the surviving sibling was over 30. As well as brothers and sisters, the law would also apply to half brothers and sisters and be valid in England, Wales, Scotland and Northern Ireland.

While this would be good news for cohabiting siblings, some people feel the proposed changes do not go far enough. The new law still wouldn’t provide any protection for those who are cohabiting but who are not married or in a civil partnership. Cohabiting couples do not have any rights to their home on the death of their partner. In this respect, the UK is way behind other countries.  

A change to the law for cohabiting siblings in terms of IHT will raise questions as to where the line is drawn. Other platonic couples, such as parents and children, or friends who own a property together, may also want to be considered. The rules will have to be sufficiently tightly defined so as not to be open to abuse.

Sources
https://www.moneyobserver.com/news/siblings-live-together-may-soon-be-exempt-inheritance-tax

https://www.express.co.uk/finance/personalfinance/1232666/inheritance-tax-uk-threshold-changes-latest-news

The link between human behaviour and investing

Financial planning… Isn’t that based on cold, hard facts and scientific reasoning? Surely feelings  and emotions don’t have much to do with investing?        

We think they do. And here’s why.

A little thing called human behaviour gets involved, you see. Only it’s not so little. 

Human beings are highly complex systems, motivated by many different factors and emotions. This makes us volatile, unpredictable and irrational. We also hold values and beliefs that drive our behaviour; some logical and valid, others not quite so much. 

But despite being so important, human behaviour is often one of the most frequently overlooked aspects of financial decision making.

Factors that influence us

Our financial behaviours are influenced in many ways, from sensational media headlines about the next downturn or star fund to family members telling us they know best. You know the type of thing: ”It worked for me, so you should do the same.” 

Your situation, your objectives and the current market could be very different, so it’s important to draw your own conclusions.          

Beware of the biases

You may think your decisions are based on sound, rational judgement, and sometimes they may be, but equally, the framework in which you are making the decision could be distorted. And that’s not helpful.

This is where you need to be aware of bias. It’s all part of what makes us who we are, but it’s not always useful when making decisions.   

We suffer from two common biases that can cloud our judgment and impede us from achieving our financial goals:

  • Cognitive bias
  • Emotional bias

Cognitive bias generally involves decision making based on established concepts that may or may not be accurate. Emotional bias typically occurs spontaneously and is based on the personal feelings of an individual at the time a decision is made.

These types of bias can be particularly significant in relation to risk. For example, being either overconfident or excessively cautious could each have a damaging effect on your financial well-being.

If you’re an optimist, you may tend to take too much risk, managing your money in a way that may have severe consequences in the future. On the other hand, if you’re risk averse, you may be holding yourself back from achieving true financial independence.

If you’re what’s known as ‘loss averse’, you may fear losing money to such an extent that you avoid making a loss more than trying to make a profit. So your financial decisions may be driven by the desire not to lose £2,000 rather than to make £3,000. Such a bias can be reinforced so that the more losses you experience, the more loss averse you become.        

Another common issue is inertia. This may cause you to put off making a decision altogether. Maybe the whole process just feels too difficult. Maybe you don’t have the time. Maybe you fear making the wrong decision. Whatever the reason, inertia is the enemy of financial well-being, because it gets in the way of action. 

An objective eye 

Whether your financial decision-making is being impeded by an incorrect bias, be that cognitive or emotional, or an unwillingness to move forward at all, working with an independent financial planner can help. Our role is to help you make clear, objective decisions, free from clouded judgment. Those decisions could help you secure better financial outcomes, whether that be retiring on your own terms or passing money to the next generation. 

So the next time you think of financial planning as ‘boring’ or ‘disappointing’, think of the ‘human behaviour’ element. We think you’ll find it a great deal more enjoyable and emotionally rewarding if approached in this way. 

Sources
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/list-top-10-types-cognitive-bias/

Understanding Active vs Passive investment strategies

The debate about whether a passive or an active investment strategy produces a better return for investors is one that has rumbled amongst financial planners for as long as passive strategies have been in existence. For you as a client, the method favoured by your adviser can have a major impact on your investment experience, so understanding the two different approaches is important.

An active strategy is one in which the investor – possibly a fund manager or other investment professional – will make investment choices on a regular basis, buying or selling holdings when they think it is necessary, often when they believe they can make a peak profit. An active strategy is highly involved and requires constant management.

A passive strategy meanwhile is one which requires hardly any trading whatsoever. Instead, money is invested into funds linked to indexes, such as the FTSE 100, by way of just one of many possible examples. Relying on the market to make your gain, passive investing is typically seen as a longer term strategy and, although it may sound easier than active from a management point of view, there is still a lot to do in terms of selecting the right funds and creating a well-balanced portfolio of asset classes that meet client’s needs.

On the active side, proponents claim that such a strategy is the only way to generate better-than-average returns; the only way to ‘beat the market’. After all, passive strategies, though divested across indexes and asset classes, are by their very design market-linked. If the index your passive strategy invests in goes up, so will your investments, with the negative being true if the index falls. Your investment may never outperform the market but it will also never lose more than the market as a whole.

Passive proponents, meanwhile, point out that active investment strategies typically cost more in fees, with these fees potentially impacting on the ability of the strategy to produce a better return. Those who favour passive investments also point out the increased volatility of active strategies, stemming from the higher frequency of investment movements and the timing of those movements, which also produce the potential for market-beating gains.

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.

What is a Self-Invested Personal pension?

Self-Invested Personal Pensions (SIPPs) are designed to give you greater control over your retirement savings. With a SIPP you can choose from a wide range of high quality investments, manage them for yourself and consolidate your existing pensions in one place.

A SIPP is different to other pension saving forms and can give you more control over your pension through a provider with a wide range of funds and the flexibility to manage your own investments.

SIPPs are not suitable for everyone. If you don’t want to invest across different asset classes or don’t think you will make use of the investment choices that SIPPs give you then a SIPP might not be right for you. Self-directed investors should regularly review their SIPP portfolio, or seek professional advice from an independent financial adviser, to ensure that the underlying investments remain in line with their pension objectives. Prevailing tax rates and the availability of tax reliefs are dependent on your individual circumstances and are subject to change.

While SIPPs are definitely suited to investors keen to look after their own money, you don’t have to be confident with or interested in investing. You can still benefit from financial planning and investment management services, so you can usually have as much or as little involvement as you like with your SIPP.

Self-Invested Personal Pensions are described by providers as right for people who want the freedom to choose and manage their own retirement investments. SIPPs are often thought of as pensions specifically for people with a lot of money or investing experience and whilst this might have been true in the past, competition between SIPP providers means costs have generally decreased and some SIPPs are now promoted by providers to be amongst the best value pensions around. You should investigate costs carefully before choosing, however, and always seek independent financial advice if you are unsure.

Sources

www.bestinvest.co.uk

Planning around the retirement threshold

By now, if you are somewhere in the retirement experience – either approaching it, passing through it or leaving it behind – you will already have experienced firsthand your own childhood and maybe that of your children, grandchildren and great-grandchildren. Now you are heading to experience later life, which for most of us will stretch forward for more time than we might have expected all those years ago.

We have reached the point where being ‘over the hill’ should mean something quite different to what we might have thought when we were younger, about older people. Time has not caught up with us, but we have now captured it – it will be ours to do with what we will. If we are ‘over the hill’ then it is more a case of picking up speed and looking for what we can open up in front of us, further down the line.

What’s your concept of a later life plan? Is it a path along which you plan to travel, a bit like Dorothy setting off down the Yellow Brick Road, in the Wizard of Oz? Or should we view our future and plan from the perspective of Willie Wonka’s Great Glass Elevator, quite unlimited in its potential to travel up, down, sideways, forwards or backwards. For most of us, later life can be a period of opportunity.

Making sure we’re prepared for all of the above is about more than financial planning. Quality of life concerns, desire and purpose come before finance, which is there to support the manner of living to which we would want to become accustomed. There is little doubt that we will need to cut our cloth accordingly, but not everything in later life comes with a price tag attached. Maybe your planning needs to err on the side of non-materialistic things, affordable opportunities: doing rather than owning!

The later life planning process is as important as the outcomes. The emerging plan will always be open to revision. Tinkering with your plan, bucket-list, short-term calendar and one-page plan will become part of the adventure. Satisfying needs in your plan will not be enough: go for the wants and desires, and hopefully these won’t all be about spending money!

If you are ready for planning around retirement and holistic later life planning, here are five priority components which should inform your thinking and your plans:

1 – Health and Wellbeing – thinking about how to sensibly exercise, keep fit and not over-abuse your physical body. With later life comes physical decline and it’s best to slow this down. Bits of you will sag or fail you eventually, but an active lifestyle is a major part of a quality life.

2 – Social Life – most of us need a social life and in retirement this becomes more important, replacing a work orientated lifestyle. See what’s available, plan to renew relationships, join in things and investigate local opportunities.

3 – Breaks, Holidays and Adventures – plan to punctuate your later life with these, which often bridge the longer quieter periods, and become highlights. This is where the ongoing bucket-list approach to planning is so useful. Cross them off and find more!

4 – Work – being gainfully occupied late in life might be a nice earner and could be a focus for your planning if you have long hankered to do something different as work or in a business. Otherwise, and in addition, consider getting involved in the world of voluntarism.

5 – Learning Activities – these can be any part of the other components, where you learn within each. You could pursue formal learning or plan to learn as you go along, from your enriched later life and the opportunities and experiences you have planned for.

Sources
www.communitylearningdevelopment.com (Website draft article: 2015/05/27)

Love yourself,love your finances

We’ll be the first to admit that your personal finances aren’t the easiest thing to fall in love with. It can be easy to bury your head in the sand when it comes to both your regular expenditure and investments.

There are several reasons for this. First of all, money can be a source of stress. We’re sure you’re well aware of how crunching big numbers in your head can keep you awake into the small hours of the morning. Or how not knowing whether you can afford something you really want can fill your life with uncertainty.

Secondly, some aspects of finance can seem rather boring. To the untrained eye, the daily performance of the FTSE, foreign currency exchange and bond markets can look intimidating. We actually find them incredibly exciting, but we understand that this isn’t for everyone.

We think the best way to fall in love with your finances is to get a bit creative. It helps to really understand the relationship you already have with money so you know what you’re dealing with. As with a partner, you have to really get to know them before you fall in love. Here are some questions you can ask yourself to ‘break the ice’ with your finances:

What’s the most fun, frivolous thing you’ve ever bought?

Answering this should help you get a handle on whether you’re someone who likes to splash out from time to time, or if you prefer to sacrifice a bit of enjoyment for personal security. If you have made any such purchases, do you consider them to have been worth it, or do you find yourself regretting that you hadn’t spent the money a little more practically? The answer to this could provide some guidance if you have the opportunity to make similar purchases in the future.

Do you take pride in knowing your net worth?

If you take pride in your net worth, it suggests that a large part of your happiness hinges on the money you have accumulated over your life. You’re likely to be someone for whom a high salary forms a large part of what they enjoy about their career, rather than someone who’d be content working in a job with lower pay.

What’s your dream retirement scenario?

Looking at what you want in retirement will let you know how much you need to prioritise saving for retirement. If you plan on living adventurously you’ll need to save considerably more than if you think you’ll be happy having a quiet retirement. Trips of a lifetime don’t come cheap, so the sooner you start saving and investing, the more you’ll be able to do.

Like all long-term relationships, your relationship with your finances won’t always be easy. Good relationships take work, but the rewards are more

Sources
https://money.usnews.com/money/blogs/my-money/2015/02/13/to-fall-in-love-with-your-finances-do-this

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