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When loyalty costs

When loyalty costs

A super complaint launched by the Citizens Advice Bureau has found that loyalty costs UK consumers an additional £877 per annum; when compared to what new customers would pay for the same services. Their research found that five broad areas were affected by hiked renewal costs:

  • Mortgages;
  • Cash ISAs;
  • Insurances – income, sickness and protection insurances but particularly household insurance;
  • Broadband contracts;
  • Mobile phone contracts.

When loyalty costs mortgagees

A survey in late July by This is Money found that in some cases a building society was charging long-standing mortgage customers £4,020 more per year than new customers that signed up for the building society’s cheapest two-year fixed mortgage. Another building society brand was close behind charging an extra £3,156 to existing customers. Even the bank charging existing customers the least difference between charges for new customers had added an additional £1,788 in mortgage costs for loyal customers.

Many mortgage customers are getting caught-out by taking up good fixed-rate deals when they are new to a lender; only to find that standard variable rates – which are due at the end of the fixed-rate term, are much higher.

In fact; the gap between lenders best fixed-rate deals and standard variable rate has quadrupled in the past six years.

Typically banks and building societies offer fixed-rates from between two to five years. The same study found that the bigger the deposit in the first place 20%, 35% the greater the leap in cost from fixed-rates to variable rates.

We would recommend speaking to a mortgage specialist financial advisor about mortgage rates, especially if a mortgage has reached the end of its fixed-rate term.

Read our tips on how to prepare to meet an IFA.

However as regards mortgages, understanding any penalties eg early redemption fees, the mortgage terms and current property value are worth checking before booking a consultation with a mortgage specialist.

When loyalty costs cash ISA customers

Money Saving Expert found in June that banks offering loyalty reward Cash ISAs, were offering loyal customers dismal interest rates when compared to new customers. One bank was offering existing customers between 0.7% to 1.0% interest rates on a Cash ISA whereas, a competitor’s best buy instant Cash ISA was offering 1.3% interest rates to new customers.

Of course; the other benefit of ISAs is that investors do not pay tax on savings interest; or savers pay reduced tax on interest rates on investments including Capital Gains tax.

Cash ISAs are not the only Investment Savings Accounts that can be held. Investors can also save in Stocks and Shares ISAs which; provide investors with a way to invest individual company shares and money in a tax efficient way. Also; unit trusts, investment trusts, open-ended investment companies (Oeics), government bonds and corporate bonds. Can be included within these Stocks and Shares ISAs.

We would recommend speaking to an investment specialist IFA about savings and investments. Sharing financial goals with an IFA will help the investment specialist to tailor advice to help achieve a client’s financial objectives. Read our guide on how to prepare to meet an IFA here.

When loyalty costs insurances customers

Though the main findings of the super complaint launched by the Citizens Advice Bureau were against hiked home insurance prices, protection insurances also do not favour loyal customers. Many customers that purchase life insurance along with their mortgage may be paying more for their life insurance (level term life insurance) than they would if they had bought insurance from a different provider.

One such customer cancelled their existing policy, buying it again as a new customer from the same provider. In so doing they reduced their premiums to £9.00pm from £23.00pm; making an overall policy cost saving of more than £2,000.

If medical conditions have changed (for the better) after taking out protection insurances – income, sickness or medical insurances, some quite significant cost savings could be made. See our article on quitting smoking.

Again; we would advise that all life and protection insurances are reviewed regularly with an insurance specialist IFA. Preparing plan details including terms and premium costs will help the IFA to quickly see if the protection is right for the client and if any savings can be made.

Please call our team of Chichester-based IFAs on 01243 532 635 to arrange a consultation.

To discuss pensions, retirement and investment plans (including ISAs) with us please ask to speak to Richard Smith.

To discuss Life, serious illness, equity release (to provide for retirement income) and income protection insurances please ask to speak to Hamish Gairns.

To discuss mortgages and mortgage insurances please ask to speak to James Mayne.

Giving up smoking is good for your health and wallet

Giving up smoking, for at least 12 months, is good for your health and wallet because – the health dangers associated with tobacco mean that smokers pay much more for the cost of life insurance and other protection insurances than non-smokers.

Insurance underwriters take the health risks posed by tobacco so seriously that a 30year old smoker’s premiums will be a third higher than those of a 30year old non-smoker and; up to twice as high when comparing 50year old smokers to non-smokers of the same age.

Shown below are insurance firm Royal London life assurance premium costs for smokers and for non-smokers which were published on 11 March 2018.

Applicant age Term of life assurance in years Monthly premium non-smoker Monthly premium smoker Non-smoker savings over 25 years
30 25 £14.00 £29.47 £4,641
40 25 £17.11 £41.06 £7,185
50 25 £23.90 £55.71 £9,543

Source Royal London 11 March 2018

The reason for the increased cost of protection insurance and life insurance premiums is that sadly, smokers are more likely to make a claim because they suffer either a critical illness or an early death, or both.

What is classed as smoking?

Insurers assess whether or not you are a smoker based on simple criteria…

…If you have smoked in the last 12 months you are a smoker.

This is an all-encompassing definition – smoking within the last 12 months includes:

The occasional cigar, vaping, e-cigarettes and other nicotine replacement products, and smoking 20-a-day.

Are there any exceptions to the smoker classification?

Yes, if the applicant has unusual circumstances, wants to insure their life for a large amount, or is elderly the policy and its cost will be tailored to the applicant.

We would advise for any protection insurances including life assurance, sickness and income protection insurances that applicants consult with a protection insurance specialist IFA.

The more information an applicant can provide about their medical history and, in many cases, their family’s medical history the better-able the protection insurance specialist is to advise the applicant. The applicant should also share their lifestyle and financial goals with the IFA, so that advice and planning can be tailored to meet the client’s needs.

See our tips on how to prepare to meet an IFA.

Medical information – how important is it?

When it comes to filling in information to apply for protection or life insurance it is critical that applicants include as much information as possible.

We would strongly advise against being tempted to leave any details out that may affect the cost of premiums. Insurance providers run random checks on around 20% of applicants where their medical history is accessed to see if it matches details on the application form.

As regards dishonesty about tobacco use, if a policy holder where to fall critically ill with an illness associated with smoking eg cancer, insurers would investigate medical records, and could either refuse to pay out, or reduce how much was paid out to policy holders.

Do premiums go down after giving up smoking?

Yes, insurance companies will check the cost of insurance premiums if the policy holder says that they have given up smoking. Insurance companies usually seek a report from the policy-holder’s GP. They may also require the policy-holder to have a chest X-ray. The value of the policy and the age of the policy-holder will also be considered.

Assessing the cost of protection insurance premiums and updating medical history is definitely worth doing. But we would advise you to do this with an Independent Financial Advisor who specialises in protection insurance.

Please call our team of Chichester-based IFAs on 01243 532 635 to arrange a consultation.

To discuss Life, serious illness, equity release (to provide for retirement income) and income protection insurances please ask to speak to Hamish Gairns.

To discuss pensions, retirement and investment plans (including ISA’s) with us please ask to speak to Richard Smith.

To discuss mortgages and insurances please ask to speak to James Mayne.

How degree subject and university choice add value

How degree subject and university choice add value

Over 1.7m UK students will start a degree at a UK university in September. Many have made subject and university choices based on what they are interested in and also what they excel at. Research from the Institute for Fiscal Studies has shown how degree subject and university choice can add value; but also, that gender and social background have an impact on earnings potential.

In general women that are degree educated can expect to earn on average £250,000 more over their lifetime than non-degree educated women. For men the impact is smaller adding £170,000 to the average expected increase of lifetime earnings when compared to non-degree educated men. However, male graduates earn on average 8% more than female graduates one year after graduating, and the upward trend continues; after five years they earn on average 14% more than female graduates. The factor that is influencing earnings is not so much gender as it is subject choice. Women on the whole choose subjects that pay less, for example: psychology, nursing, creative arts, sociology; whereas men choose better paid subjects such as: computing, architecture and engineering.

When well-paid subject choice and Russell Group university choice are combined eg University of Oxford and Economics, or Imperial College and Engineering; graduates earn on average 40% more than graduates with humanities degrees (eg philosophy) from non-Russell Group universities such as The Open University.

Over time the earnings potential gap widens; male students of management studies, law, or economics that studied at the London School of Economics can expect to earn over £300,000 per annum when in their 30s.

Both male and female graduates from households where the income is over £50,000 will earn 20% and 14% more respectively than male and female graduates from households with lower incomes, by the time they are in their early thirties.

Despite ‘Love Island’ being a quicker route to wealth than Oxford or Cambridge – as reported in the Financial Times on 26 July – a degree does add value to earnings potential.

We would advise parents and grandparents that are considering funding further education for offspring to consult an Independent Financial Advisor.

Having the right level of protection assurances such as life, critical illness and income protection policies is important when considering a further education funding plan. As house value is changing fast in the current economic climate; revisiting mortgage terms including life assurance policies with a specialist IFA is recommended.

Cash ISA investments may have been made when children were young, very often they attract an initial fixed interest rate and then after a pre-set term fall back on the providers’ variable rate, which can be quite low. All investments including Cash and Stocks and Shares ISAs should be reviewed to check that they are performing as expected or as planned for.

Planning to fund further education for family members may coincide with retirement and Inheritance Tax planning.

We would recommend speaking to a retirement planning financial expert, and having prepared a budget plan of outgoings and income for the consultation (see our tips on How to prepare to meet an IFA). It is a good idea to consider goals and ambitions for the life-stage that is being entered, this will help the IFA to give specific advice so that desired outcomes can be achieved.

Please call our team of Chichester-based IFAs on 01243 532 635 to arrange a consultation.

To discuss pensions, retirement and investment plans (including ISA’s) with us please ask to speak to Richard Smith.

To discuss Life, serious illness, equity release (to provide for retirement income) and income protection insurances please ask to speak to Hamish Gairns.

To discuss mortgages and insurances please ask to speak to James Mayne.

As Carillion liquidates we review workplace and private pensions

As Carillion liquidates we review workplace and private pensions

In the news recently leading construction company Carillion went into liquidation. As with British Home Stores and with Tata Steel the workplace pension fund is short; in Carillion’s case by an estimated £580m. This workplace pension deficit has placed an additional burden on the Pension Protection Fund (PPF). It is expected that the PPF will take over the pension scheme if Carillion goes into administration. Though current Carillion retirees will not see any changes to their pension terms, existing employees that are soon to retire may see their funds cut by as much as 20%; and top-earners may have some of their pensions capped.

Why some workplace pensions are in trouble

Though workplace pensions are not new, the Roman army had them from around 30 BC, struggling funds are a relatively recent phenomena. There are two main drivers of this change.

Defined Benefits (DB) pensions guarantee pensions linked to an individual’s pay. Years ago, this meant that firms could slow down pay increases for staff, but make up lower wages with increased pension funds for retirement. Funding pensions, however is a challenge. There is a growing retired population and a shrinking tax contributing working population. Effectively the pensions candle is burning at both ends.

In 1960 the average life expectancy of a British male was 75 years, and for females it was 80 years. Now the average life expectancy of a British male is 83 years, and for females it is 85 years. But also, the amount of tax available to go towards later-life living costs: healthcare and the NHS, public transport, infrastructure and state pensions is in decline.

And though the Chancellor has taken steps to buoy the Pension Protection Fund it is clear that some workplace pensions, particularly Defined Benefit ones are becoming too costly to sustain.

The appeal of private pensions

Private pensions (also known as Defined Contribution schemes) where; an individual saves from their earnings into a pension fund, can run alongside workplace pensions and state pensions, or be the main pension scheme for the saver. Contributors must be aged 18 years’ old and also be a UK resident. Tax relief is available on private pension contributions, which makes this a particularly attractive savings ‘vehicle’.

In addition to the above, contributions are invested in funds which benefit from a tax-efficient status. When choosing to draw benefits from the plan, up to 25% of the fund can be taken which is also tax-free.

Personal Pensions are extremely flexible in comparison to DB schemes. Finally, when taking benefits from the private pension fund, there are no restrictions on the amount of money that can be withdraw at any one time.

Though HMRC proposes to increase the minimum retirement age for pension schemes from 55 to 57 by 2028, the state pension retirement age will increase to 67, meaning that private pensions can fund an earlier retirement.

It is clear, with the sad demise of the likes of Tata Steel, BHS and Carillion, that both Defined Benefit and Defined Contribution pension funds can be complicated. As ever we would advise you to speak to a local Independent Financial Advisor about pensions, retirement planning or any other financial concern that you have. Please call our team of Chichester based IFAs on 01243 532 635 to arrange a consultation.

To discuss pensions, retirement and investment plans with us please ask to speak to Richard Smith.

To discuss Life, serious illness, equity release (to provide for retirement income) and income protection insurances please ask to speak to Hamish Gairns.

To discuss mortgages & insurances please ask to speak to James Mayne.

Brains v brawn; is a university education worth the investment?

Brains v brawn; is a university education worth the investment?

As this year’s undergraduates prepare for university and parents and grandparents unlock savings to fund degrees, we ask: Is university education worth the investment?

Firstly – let’s take a look at university education costs:

  • From September 2017 universities in England and Wales may charge up to £9,250 (~$11,940) per annum for tuition fees. Standard degree courses last for three years bringing teaching fees in at a total investment of £27,750.
  • The introduction of two-year fast track degree courses has not reduced this three-year course tuition price as they cost £28,000 in total.
  • Average living costs are estimated at £12,000 per annum, though London prices are considerably higher. But, taking average living costs the total living costs for a three-year degree are £36,000.
  • The student loan interest rate was recently increased from 4.6% to 6.1% meaning that new under-graduates would pay an additional £5,800 in interest on tuition fees alone.
  • Assuming a standard three-year degree course with interest on tuition fees at 6.1% plus average living costs for three years that brings the sum of the total investment to £69,550.

Obtaining a degree in England can cost more than obtaining one from a state funded university in America, but lower cost tuition fees are applicable to in-state American students only. Otherwise tuition fees at American state and private universities are higher, in general, than those of universities in England and Wales.
Europe is an option for EU and for EEA members where over 30,000 international degree courses are offered. The average annual tuition fee for a BSc degree in Europe is: €4,500 (~£4,160) and for an MA it is: €5,100 (~£4,715) or around half what English and Welsh universities charge. In Germany and also in the Netherlands courses are taught in English and the cost of living is lower than it is in England or Wales.
But to return to our initial question:

Brains v brawn; is the outcome worth the investment?
Put simply – yes – graduates do earn more than non-degree qualified people.
However…
How much more graduates earn (in comparison to their peers) and
How soon they start to earn more than their peers does not have such a simple answer.

In addition to the Teaching Excellence Framework (TEF) – launched by government to assess the quality of teaching delivered by UK universities; the Department for Education (DfE) measures ‘education outcomes’ by analysing the income tax returns for graduates five years after they have graduated. The government hopes to add weight to TEF benchmarking by using DfE analysis of graduate earnings. Currently the majority of universities charge maximum tuition fees regardless of the subject studied or of the prestige of the academic institution.

The Economist has appended further ‘study data’ including: subject studied, which university the graduate studied at, the location of the university, school exam results, family income, age and whether or not graduates attended private school to predict ‘expected earnings’ and match that with actual earnings.

Here are the main take-outs of the Economist findings:

  • Graduates that studied a maths related subject (economics, engineering, medicine, veterinary science and maths) earned more;
  • Universities that selected under-graduates that had performed particularly well at school and also used selection criteria produced better-paid graduates.

By way of example dentistry and medicine graduates earn £47,000 per annum five years’ after graduating whereas creative arts graduates earn £20,000 per annum. The most selective universities produce graduates that on average were earning £40,000 per annum five years after graduating compared with non-selective universities whose graduates were earning £20,000 per annum on average – this regardless of subject studied.

Based on the Economist’s university impact on earnings analysis there is good news for universities local to Chichester-based MarchwoodIFA; Portsmouth, Bournemouth, Brighton, Southampton Solent and Chichester universities were all ranked in the top 15 for boosting graduate earnings, with Portsmouth university taking first place.

And how does a university education play out over time?
The main factor influencing later-life income is a degree qualification. The UK still favours services industries – finance, media, management consultancy and tech; where intelligence impacts the quality of service. Over a quarter of degree qualified 65-69 year olds are in employment, compared with 14% of the same age group that did not qualify beyond secondary school. In fact degree qualified 65-69 year olds are more likely to be in employment that unqualified 16-24 year olds.

The gap between rich and poor disposable income in retired households, grew by one third between 1984 and 2014; the same pattern of a growing rich and poor gap is true of working age households. This would indicate that investing now in a university education for a young person may well be a worthwhile long-term ‘future earnings’ investment.

As always, we would advise you to seek financial advice from your IFA.

To arrange a consultation with Marchwood IFA please call 01243 532 635. We have specialists that are able to discuss specific options with you.

To discuss retirement and investment plans with us please ask to speak to Richard Smith.

To discuss insurances and equity release please ask to speak to Hamish Gairns.

To discuss mortgages & insurances please ask to speak to James Mayne.

 

*British pound conversions to USD and to EURO as at 25 Aug 2017 published exchange rates.

Drawdown pensions; why they appeal

Drawdown pensions – why they appeal

Recently the Financial Conduct Authority (FCA) has expressed concern at the growing number of retirees that are drawing down on their pension funds rather than buying annuities with them.

Drawdowns – (capped or flexible) are where a pension pot is left invested but an amount is taken as income.

Annuities – where the pension pot is used to buy a regular income from an insurance company.

Changes to the way in which pensions can be spent and invested were triggered by the launch of pension freedoms in 2015. Though designed to give retirees and over 55’s more choice, many are choosing drawdowns without seeking professional advice from a finance expert – 5% prior to 2015 but now that figure is at 30%. Without professional advice seniors may pay too much tax, miss out on benefits, or on other investment growth.

Most seniors that drawdown entire pension pots have:

  • Relatively small savings at £30,000 (or lower) and;
  • Have other sources of income.

Drawdown monies are most often used to:

  • Clear loans, for example mortgages (whole or in-part);
  • Make purchases such as home repairs, cars or holidays;
  • Invest in property, stocks and shares, bonds or other investments;
  • Save into another fund.

The FCA found that an undercurrent of ‘pensions investment distrust’ lead many retirees to drawdown and move money out of their pension pot. Over 70% of seniors accessing retirement funds are aged under 65 years’ of age.

The FCA have said:
“Drawdown is complex and [retirees] may need more support and protection.”

As the shape of our economy and ageing population changes it is hardly surprising that retirees wish to invest differently. We would advise however that anyone looking to change their pension investments should speak to an independent financial advisor, but also one that specialises in pensions.

We cannot advise generically on the best investment for you we would ask that you please book a pensions/investments consultation either with Hamish Gairns or, with Richard Smith.

But we do have some lifestyle and health tips especially for over 55’s.

  1. Identifying and fulfilling a sense of purpose has been found to lead to a longer life. Patrick Hill and Nicholas Turiano conducted the longer life research at Oxford University. The good news is that finding a sense of purpose can happen later in life to the same effect.
  2. Creating a retirement plan that gives prominence to what people want to do, and how they want to live in later life helps to shape conversations around finance and inheritance planning. We would suggest that finances that compliment a retirement plan are discussed with a retirement specialist IFA.
  3. As the UK population is an ageing one, putting health at the centre of a retirement plan is a good idea. It might be that joining classes and groups takes the grind out of physical and mental exercise. And activities that are completed in groups enable participants to extend their social circles. Learning a language, or to dance is proven to keep minds and bodies active.

Here’s to enjoying many later years.

Contact MarchwoodIFA for pension, investment, mortgage, equity release, and living inheritance planning advice: 01243 532 635.

ISA allowance for this tax year FY16 runs out soon

ISA allowance for this tax year FY16 runs out soon

The end of the current tax year, 5th April 2017, is approaching fast; the opportunity for savers to invest up to £15,240 in an ISA (Investment Savings Account) will end at the same time. Savers can invest their annual savings allowance of £15,240 in Cash or in Stocks and Shares ISAs. From 6th April 2017 the individual annual allowance for Cash or Stocks and Shares ISA investments increases to £20,000.

ISAs explained

  • Anyone in the UK aged 16 or older;
  • Can save or invest up to £15,240 per tax year;
  • Without paying tax on interest earned on their savings, or paying reduced tax rates on investments including dividend payments;
  • Once money or individual company shares are invested in an ISA they remain tax free, or tax-efficient.

Cash ISAs explained

  • Cash ISAs are savings accounts that are tax free, there are two types of Cash ISAs – i) fixed ISAs where the money attracts a higher interest rate on savings but cannot be withdrawn, and ii) easy access ISAs where money can be withdrawn without attracting interest savings penalties;
  • Interest on savings for top paying easy access ISAs have consistently out performed easy access savings accounts over the last five years.

However the return on a Cash ISA investment is affected by rates of inflation (RPI) and also the interest rate on savings – Savings Rate. Since the recessions of 1999 and of 2008 the Bank of England has kept interest rates low to control inflation and to encourage economic growth, which means that both RPI and the Savings Rates have been impacted. Cash ISAs are not as attractive now, as they were in 1999 – see below.

Cash ISAs 1999-2017

April 1999, the landscape for cash ISAs is very attractive:

  • Average ISA Savings Rate 6.32%
  • Inflation (RPI) 1.60%
  • Tax Free Real Returns 4.65%

April 2017 the landscape is very different:

  • Average ISA Savings Rate 0.46%
  • Inflation (RPI) 2.50%
  • Tax Free Real Returns -1.99%

 Stocks and Shares ISAs explained

  • Investors can transfer current tax year Cash ISAs into Stocks and Shares ISAs, provided the whole amount is transferred.
  • Investors are also able to transfer any previous tax years Cash ISAs into Stocks and Shares ISAs without affecting the current tax year’s ISA allowance.
  • Stocks and shares ISAs provide investors with a way to invest individual company shares and money in a tax efficient The savings in the ISA can be invested in unit trusts, open-ended investment companies (Oeics), investment trusts, government bonds and corporate bonds where there is growth potential meaning that the value of the investments can go up. (Though past performance of stocks and shares investments is not a guide to future performance). Where investors pay higher or additional rate tax the advantages for tax-efficiency of Stocks and Shares ISAs is significant.
  • Spouses can inherit their deceased spouses ISA allowance regardless of their own tax and personal savings allowances.

Using your ISA allowance – up until 5 April 2017

  • If you haven’t yet taken advantage of a Cash or a Stocks and Shares ISA in this tax year, you still can up to the allowance of £15,240 and
  • For this tax year ‘without tax’ means that if your savings earn £100 in interest you will keep all of the £100.

Contact an expert

We know that personal savings allowances, inheritance tax, and other investments are subject to change come 6 April 2017.

For expert, friendly and considered advice about current investments, please contact Hamish Gairns or Richard Smith at Marchwood IFA.

hamish@marchwoodifa.co.uk or richard@marchwoodifa.co.uk

Autumn Statement

Chancellor Hammond in his Autumn Statement of 2016 mapped out the next decade as best he could. In contrast to former Chancellor George Osborne, where a keen eye was kept on national debt, Gross Domestic Product (GDP) and austerity measures post the great recession of 2008; Philip Hammond set out a period of extended borrowing, with a stop on welfare cuts and increased investment in businesses, transport and infrastructure.

 

All very well and good if you are an economist; but from a domestic perspective, a closer look at living costs, housing, technology, economic growth, business, transport and income will help to understand how the Autumn Statement will effect UK residents.

 

Living costs

The freeze on fuel tax is extended for the seventh year bringing an average annual car driver saving of £130 and an annual average van driver saving of £350.

There will be a further increase to Insurance Premiums Tax (IPT) from 10% to 12% effective from June 2017. This will effect: cars, homes and private medical cover insurances.

The average household is expected to pay an additional £51 in insurance annually. Measures have been announced to cut whiplash claims which; is expected to reduce car insurance premiums by £41 on average per annum.

Insurance industry experts have complained that this IPT increase follows two previous IPT increases, all of which have fallen in an 18month period. They expect that the rise in tax will increase premiums for 50m UK residents and have dubbed it “the stealth tax”.

 

Housing

As homeownership is in decline in the UK and private rent is increasing in price, the Chancellor has pledged additional funding to make housing more affordable for first time buyers, and also where there is significant housing demand.

Charging tenants fees for rented accommodation, (typically charges were made against tenants for reference and finance checks,) have been banned.

A fund of £2.3bn has been given over to Housing Infrastructure investment, a frequent blocker to planning permission being granted. The fund is to be allocated to open up sites for 100,000 new homes in high demand areas such as London and the southeast.

The construction of 40,000 affordable homes has received funding of £1.4bn. Funding for a right-to-buy regional pilot scheme will enable 3,000 housing association residents to buy their properties at a discounted rate.

 

Income, work and transport

As anticipated tax breaks are being given to the working population while some tax breaks are being refined to fund those that are working and Just About Managing (Jams).

Workers will be exempt from paying tax until they reach annual earnings of £12,500 or over.

Salary sacrifice; where employees are permitted to trade their salary for perks will be curbed but, ultra low emission cars, childcare and cycle to work schemes will be excluded from plans to scrap employee tax breaks.

Working families will be eligible for 30 hours a week of free childcare for all three and four year olds from September.

The National Living Wage is being increased from £7.20 to £7.50 per hour effective from April 2017.

Universal Credit the single monthly payment for people that are unemployed or on low incomes will be increased by £700m for an estimated three million families. Individuals will be paid £0.65, as opposed to £0.63, for every additional £1.00 earned by them through work over their work allowance threshold.

English local transport networks receive £1.1bn in funding, £220m for ‘pinch points’ on national roads, £450m to trial digital signaling on railways and £390m for development of low emission vehicles.

East West Rail receive £110m of funding and a commitment to deliver the new Oxford to Cambridge Expressway.

A new savings bond, with an interest rate of about 2.2% will be launched through National Savings and Investments. The bond will be available to those aged 16 and over, where a minimum investment of £100 and a maximum investment of £3,000 has been set. Savers must invest for three years. The new product will be available for 12 months from spring 2017.

New limits are to be placed on the reinvestment of pension pot savings. The new tax-free allowance falls from £10,000 to £4,000 in April, affecting all of those who would wish to take money from their defined contribution pension pot.

 

Technology

In an effort to boost productivity Hammond pledged £23bn to a new national productivity investment fund. Monies will be allocated towards technology and scientific innovation.

As part of Chancellor Hammond’s vision for the “UK to be a world leader in 5G” £1bn in funding goes towards 5G and digital infrastructure.

New fibre infrastructure will receive 100% business rates tax relief for the first five years.

 

Economic and business growth

Recognising the difficulties that start-up businesses face in funding Hammond pledged £400m for venture capital funds to unlock £1bn of finance for start-ups.

Noting the migration of workers to cities, more budgetary control and funding is being given to elected mayors and city-based Local Enterprise Partnerships (LEPs).

Taking £1.8bn from Local Growth Fund for English regions: £556m is given over to LEPs in the North of England, £542m to the Midlands and East of England, and £683m to LEPs in the South West, South East and London.

London will receive £3.15bn as its share of national affordable housing funding to deliver more than 90,000 homes, as well as full control over its adult education budget.

Corporation tax will be reduced from 20% to 17%.

 

Summary

In summary, though the UK will borrow £122bn more than predicted before the EU referendum over the next five years, growth forecasts and unemployment remain forecast as low but steady. Domestically there have been changes to pensions, income and wages, also insurance premiums which; effect the cost of living.

 

For expert financial and inheritance tax planning advice in fast-changing times, speak to a MarchwoodIFA expert.

Protecting pension pots

Protecting pension pots; private, State and workplace pensions explained.

We last updated you about specific changes to pension schemes in November 2015 which were as a result of the Chancellor’s autumn budget. Since that update significant changes to company (or workplace), state and private pension schemes have been in the news. This means that if you or your spouse, or partner have a pension we would recommend that you review it with your IFA. And if neither of you have pensions we would recommend that you speak to an IFA about pension options.

Private pensions explained

A private pension is a savings plan, where an individual contributes money or investments from their earnings. The pension scheme may invest a proportion of pension savers money in stocks and shares. Upon retirement (which can be as young as 55) the private pension fund pays income to the pension saver. Private pensions run separately to State pensions, a pensioner can receive both. All working people that pay tax and make National Insurance Contributions (NCIS) pay into a State pension.

To invest in a private pension the saver must be:

  • Over 18 years of age;
  • Resident in the UK;
  • Eligible for tax relief on your pension payments;
  • Tax relief on private pension contributions can be worth up to 100% of annual earnings or £40,000 (whichever is the least). If contributions go above 100% of earnings then the pension holder would be required to pay tax relief back to HM Revenue and Customs (HMRC);
  • In addition Lifetime Allowance (LTA – the total amount you can hold within your pension without paying an extra amount of tax) has fallen from £1,800,000 in tax year 2010-11 to £1,000,000 in tax year 2016-17;
  • For those pension savers that have over £1,000,000 within their pension, and therefore exceed the new LTA limit, the pension fund could be taxed at a higher rate, above the rate of normal income tax the saver would usually pay, up to as much as 55%. Pension savers that are concerned about their Lifetime Allowance, or Annual Allowance pension contributions should contact their IFA to talk through their options;
  • Savers that have a private pension and pay basic rate tax should also contact their IFA for a pension review as the retirement age for State pensions has changed, and the recent sad demise of BHS and British Steel has placed a company (or workplace) contribution deficit burden on the Pension Protection Fund (PPF).

According to the Economist private pensions have done well for today’s pensioners, this is largely because for most of the 20th century stockmarket returns were high. For a retiree in the top income quintile (around 1.5% of the UK population), a private pension now pays out 2.5 times as much as one from the State, up from less than 1.5 times more than the State in the early 1980s. Pensioners in the top income quintile tend to be well educated and work in the services industries. They have seen their earnings from salaries and self-employment rise in real terms by 60% in the past 30 years. The strong performance of private pensions has topped up these earnings.

State pensions explained

State pensions affect anyone working in the UK that pays tax and makes National Insurance Contributions (NICS). Currently there are 12 million pensioners in the UK variously they draw State, company (or workplace) and, perhaps, private pensions. The basic state pension is £116 a week, compared with the median full-time salary of working people which is £530 a week. This makes Britain near the bottom of a 34-country ranking calculated by the Organisation for Economic Co-operation and Development (OECD). When compared to what those of a working age could earn State pensions have been in sharp decline from 1980 to 2009.
However since April 2016 the government’s flagship proposal is a ‘flat rate’ pension, fixed initially at £155.65 a week. The new flat rate State pension will replace a confusing mix of a basic pension at £119.30 per week and an earnings-related supplement and means-tested benefits. Means-tested benefits will ensure that those without any other income get at least £155 a week. But, the means tests apply to couples, not individuals; meaning that married people without the right NICS record (35 years of contributions each) may get less than the flat rate. Simple it is not…
We would again urge couples, in particular, to contact their IFA to discuss pension savings options.

Company and workplace pensions explained

Company pensions, which are now known as workplace or occupational pensions, are retirement plans that are arranged by employers for their employees. A percentage of pay is put into the workplace pension scheme on every payday. Many businesses also add additional funds into the pension plan for the employee. Again there is the potential for tax relief from HMRC on these contributions.

A new ‘automatic enrolment law means that every employer must automatically enrol employees into a workplace pension scheme if they:

  • Are aged between 22 and the State pension age (now 66);
  • Earn more than £10,000 per annum;
  • Work in the UK;
  • As an employee you have the right to either ‘Opt in’ or ‘Opt out’ of this scheme.
  • Tax relief that is taken at source is either taken out of pay before deducting income tax or the pension provider claims tax relief on behalf of the employee at 20% and adds it to the employee’s pension.

Protecting your pension pot and the Pension Protection Fund

  • Following the Maxwell scandal of the early 1990s, when the Mirror Group newspaper publisher was found to have plundered more than £400m from the company pension scheme, the British government attempted to protect workplace pensioners’ interests by introducing the Pension Protection Fund (PPF);
  • The (PPF) offers insurance for employees that are part of defined benefit schemes only when and if companies fail, by charging a levy on all participating companies that offer this type of pension scheme.
    The PPF is backed by the Pensions Regulator, a Body that is meant to ensure that companies are fulfilling their obligations to pension scheme savers;
  • If, as is the case with BHS and British Steel, a company does fail and there is a significant workplace pension scheme deficit; there is no explicit guarantee of taxpayer backing were the PPF have failed to ensure adequate contributions to the workplace pension fund;
  • In the short term, the burden of corporate failure would fall on other companies funded by a higher levy rather than on the taxpayer;
  • Despite British companies contributing £500 billion to pension schemes since 2000, the collective deficit has tripled and is now at £800 billion.
  • For those employees that are members of Defined Contribution Schemes (such as the new Auto-enrolment pensions) then the pension being used is normally supplied by the Pension provider and will then be covered by the Financial Services Compensation Scheme (FSCS).

Many factors are contributing to rising inequality between older pensioners and new retirees: market turmoil, lower equity returns, the gender pay gap, low-wages (since 2008) and the extended State retirement age for women. “Nearly half of working-age Britons doubt they will save enough money for a comfortable retirement [according to the Economist] and three-quarters believe they will be worse off than their parents.”

With so many moving parts the time is right to speak to a trusted IFA about your pension options.

Contact Marchwood IFA today to arrange a consultation.

Inheritance Tax (IHT) bills are rising. What can you do about yours?

What is the average IHT bill?

Latest HMRC data shows that the average IHT bill rose by £5,000 in 2013, when just under 18,000 estates (the largest number since 2008) paid over £3.05 billion. That’s an average individual bill of £170,000. The increase was due to a combination of rising house prices (which have increased by 21% since 2009 according to the Nationwide) and a tax-free allowance or ‘nil-rate band’ of £325,000 that has been frozen since 2009. Not surprisingly, more than half of the estates that had to pay IHT in 2013 were from those who had property in London and the South East

What is Inheritance Tax exactly and how is the tax-free allowance changing?

Inheritance Tax (IHT) is a tax on the estate (money, investments, property or possessions) that you leave behind when you die. It also applies to some gifts you may make while you are still alive. A certain amount can be passed to your inheritors without being taxed; this is known as the ‘nil-rate band’ which is £325,000 (£650,000 for couples) for 2015-2016. It will stay that way until at least 2020-2021. George Osborne announced in July 2015’s Summer Budget that he intends to scrap IHT when parents or grandparents pass on a home that is worth up to £1m (£500,000 for single people). This will be phased in gradually between 2017 and 2020. This means that the rise in IHT bills could start to slow in the coming years, although not until 2017 at the earliest.

We talk about the effects that this new ‘main residence nil-rate band’ will have as part of our blog about the writer PD James.

So what can you do in the meantime?

Money given away before you die is subject to IHT if you die within seven years of giving the gift. So one tip is to give substantial gifts at a time when you are confident of surviving more than seven years. Early planning of how to pass on your assets is important. This is an area where you do need specialist advice.

However, even if you do die within seven years of making a gift, there are several other exemptions worth taking into account to help reduce your estate’s IHT bill, including:

  1. You can give £3,000 away each tax year inheritance tax-free
  2. You can give a further £5,000 to a child – £2,500 to a grandchild or great-grandchild – if they are getting married.
  3. Gifts to charities and political parties are inheritance tax-free.
  4. You can give £250 each year, inheritance tax-free, to everyone you know, as long as the recipient hasn’t already benefitted from one of the other gifts mentioned above.
  5. You can also give away as much as you like from your income without it potentially being liable for inheritance tax. You do have to prove you have enough income left to maintain your normal lifestyle.

Inheritance Tax Calculator

This calculator (a link to the ‘This Is Money’ website) is handy way of working out your approximate inheritance tax (IHT) liability until the rule change in 2017. But it doesn’t show you how to use financial planning to mitigate the ultimate tax bill your estate will have to pay. You need an independent financial advisor for that. Link to Calculator

Next steps

If you feel that inheritance tax (IHT) planning is something that you or your family need, you should make sure that you consult an expert in the field. If you would like to find out more about the financial decisions you should take now to reduce a possible IHT bill, please contact Marchwood IFA. We can liaise with a solicitor to help you draw up a will that protects your family’s future.

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