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Capital gains tax comes under review

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The Chancellor has asked the Office of Tax Simplification to review capital gains tax.

Within a week of giving his Summer Statement, the Chancellor wrote to the Office of Tax Simplification (OTS) asking it to “undertake a review of capital gains tax (CGT) and aspects of the taxation of chargeable gains in relation to individuals and smaller businesses”. The request was unexpected and prompted some press speculation that Rishi Sunak was beginning his hunt for extra tax revenue after the unprecedented spending on Covid-19.

CGT is certainly an interesting place to start:

  • The latest data from HMRC show that there were fewer than 300,000 CGT payers in 2017/18.
  • Nearly two-thirds of the tax raised in that year came from 3% of CGT payers who made gains of £1 million or more.
  • Over half of the CGT payers either paid no income tax or paid it only at the basic rate, as the graph below shows.

CGT payers by highest income

The main reason why CGT payers are such a rare breed is the annual exemption. For 2020/21 this allows up to £12,300 of net gains to be realised before any tax becomes payable. Even then, the maximum tax rate is 20% (28% for residential property). In the last election, both the Labour Party and the Liberal Democrats called for gains to be taxed at full income tax rates and for the exemption to be cut to just £1,000 or abolished. The Conservative manifesto made no comment – CGT was not one of the taxes for which a rate freeze was promised.

Neither Mr Sunak nor the OTS has put any date on when the review might be published. However, the OTS has asked for all comments to be in by 12 October, so government proposals might emerge in the Autumn Budget, particularly if that Budget appears later in the year.

There is a precedent for changing CGT rates part way through a tax year – as then Chancellor George Osborne did in 2010. With this in mind, a wise precaution could be to review your portfolio and consider whether you wish to realise any gains in the next few months, while the current generous CGT regime is in place.

If you are interested in discussing your options with one of our experienced financial planners at FAS, please get in touch here.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. 

It pays to know the differences between independent and restricted financial advice

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Do you know which is better, independent or restricted financial advice? Spoiler alert: there’s only one right answer to this… Independent advice is far superior, and we’ll gladly explain why.

What is ‘independent’ financial advice?

As the name suggests, an Independent Financial Adviser (IFA) will offer you impartial, objective advice on financial products and services. This means they will carry out research across the whole of a particular market to find the right solution to suit you personally. They won’t be biased towards any particular financial company or product, and they won’t base their recommendations on fees paid by other companies to encourage them to sell their products. If you get your advice from an independent financial adviser or financial planner, you can feel confident they are working solely for the benefit of you, and no-one else.

Being independent is a highly-valued status in the advice industry. To call ourselves independent, financial advisers must be able to prove their status to the UK regulator of financial services, the Financial Conduct Authority. If you’re not sure whether an adviser is independent or restricted, ask them. A financial adviser who can only offer restricted advice must declare this to you before making a recommendation.

How does restricted advice compare?

It all comes down to the options that the financial adviser can give you. Being ‘restricted’ means an adviser can only recommend products from a limited selection or product range, not from the whole of the market. Here’s an example that highlights the difference from a client’s perspective.

You arrange to meet a financial adviser to set up a personal pension. An independent financial adviser will research every relevant pension available within the UK market to find the one that they believe is best suited to your needs. They will then make a recommendation and provide you with the reasons that justify their decision.

With a restricted financial adviser, however, the recommendation process is different. The adviser might tell you that they are only able to suggest a pension from one pension provider, or from a select panel of a handful of different pensions. Your options could be drastically reduced, because they won’t have access to the widest choice of products available.

Why is independent better?

Using a restricted financial adviser doesn’t necessarily mean you’ll be getting ‘bad’ advice. All financial advisers must have a similar minimum level of qualifications and meet the same standards.  It just means that the choices available to you may limited, and this might not be in your best interests.

And, sometimes, getting advice that isn’t independent can be a problem. Restricted advisers will often work for a much larger financial services company – in which case they are probably keen to sell you one of their products. Alternatively, they may call themselves restricted because they only focus on one type of financial product (pensions, for example). So, if the restricted adviser recommends a pension to you, you can never be entirely sure whether it is the right pension to suit your needs, or just that he gets paid to sell this particular pension to you.

Independent financial advisers, on the other hand, are so much more than just salespeople. We believe that financial planning is more important than just recommending where you should put your money. It’s our job to find out about your goals in life, look at your personal circumstances and help you decide on the best course of action. In fact, recommending products is just a small part of what we do. We tailor our advice to suit your needs, and we will never recommend a product that we don’t think is 100% right for you, and will always give you clear and comprehensive reasons behind every recommendation we make.

Are independent financial advisers getting harder to find?

You may be wondering why advisers choose to be restricted, since being independent is clearly better for clients? The simple answer is that it is more expensive to be independent than it is to be restricted.

Being restricted makes it easier to run an advice business. A lot of smaller financial advice firms have chosen to become part of larger networks, which give them a panel of investments to sell to their clients. This makes it cheaper for them to run their business, because they can minimise their costs, outsource some of their functions and don’t have to spend so long carrying out painstaking investment research.

Being independent, on the other hand, means going it alone. This can mean paying more for professional insurance, training, and other regulatory burdens.

Don’t forget, most financial advice firms are themselves small businesses. Some have been hit hard by the coronavirus. In fact, the number of independent financial planners operating throughout the UK is shrinking. We’re not quite becoming an endangered species yet, but it’s sad sometimes to see that there are fewer of us out there flying the flag for independence. Because we believe people deserve the opportunity to get independent advice.

As for us, we have no plans to switch from offering independent financial advice to restricted. We believe that being independent means we can keep delivering better quality advice – and better quality outcomes – for our clients. We’re proud to say that all of our financial planners are highly qualified, have years of experience of financial planning – not just selling financial products – and are proud to call themselves independent.

So, if you’re ever in doubt over independent or restricted advice, remember this: a financial adviser who is independent will proudly tell you that fact, whereas an adviser who is restricted is legally required to disclose it. That should tell you everything you need to know about which is better.

If you are interested in discussing your financial plan or investment strategy with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.

Financial planning to help parents (and their kids) prepare for higher education

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While coronavirus has made academic life full of uncertainty, the one thing you can be sure of is that it’s likely to prove expensive. But don’t worry, we’ve done our homework and put together some practical tips to help you start saving for university fees.

Private school fees – let’s start with the maths

The number of parents who choose to put their children into private education has fallen significantly in recent years. According to the Independent Schools Council, private schools educate around 6.5% of the total population of schoolchildren. That works out at around 625,000 children being taught in around 2,600 schools.

And of course, private education doesn’t come cheap. Based on current prices, sending a child to a private secondary school between the ages of 11 and 18 could mean spending more than £105,000 in total. Sending them to a boarding school could cost four times that amount.

So, unless you have that amount lying around, you’ll need to start investing as soon as possible. For example, if you start saving around £461 per month as soon as the child is born, assuming that you achieve growth of 4.5%, then you should be able to have set aside around £75,000 by the time they start their first year at secondary school. But the later you leave it, the more you will have to save each month (and please don’t get us started on the cost of school uniforms).

What about university fees?

Last year, a record-breaking number of young people enrolled on degree courses to UK universities. And in 2017, the average university student graduated with a debt of £51,000 (according to the Institute for Fiscal Studies). So, if you have children looking forward to university life in the not-so-distant future, expect the ‘Bank of Mum and Dad’ to be called on frequently.

And, if you want to cover their debt completely, you’d need to start investing £457 a month when they turn 10 years old (assuming a return of 4.5% over an eight-year period). Start investing from their first birthday, however, and the monthly amount you need to invest falls to a much more palatable £180.

Investing for the long term

As with any investment, the best way to reach your long-term goal is to hold a portfolio of different investments spread across major asset classes (such as UK and international equities, fixed income investments (bonds), and other assets such as commercial property). Once you’ve built up a sizeable investment pot, you might want to convert some of your investments into cash, to make sure you’re always ready to pay the school fees (a good rule of thumb is to always have three years’ of school fees in cash deposit accounts).

Make use of tax wrappers

You should always try to make use of any available tax wrappers to help you with your school fees planning. Don’t forget that each parent can invest up to £20,000 a year in a Stocks & Shares ISA. This will give your investment the chance to grow tax-efficiently, and you don’t need to declare your ISA on your self-assessment.

Making use of the Junior ISA

If you can, it’s well worth making use of the Junior ISA to pay for university fees. You can open a Junior ISA on behalf of your children and currently you can invest up to £9,000 a year. As well as being tax-efficient, you can also invite grandparents and family friends to contribute. The money can only be withdrawn by the child when they turn 18.

That’s great, but my little angel is off to university this year!

If you have children about to head towards university, don’t despair. There are tuition fee loans and maintenance support designed to help manage the expense.

The maximum amount that universities can charge in tuition fees annually is £9,250. It’s worth knowing that tuition fee loans (plus any interest) are repayable over a 30-year term. Repayments only kick in once the student has graduated and is earning more than £25,000 per annum. The graduate will be expected to pay back 9% of the income they earn over this amount, so if they find a job with a salary of £28,000, they can expect to pay £270 a year (or £22.50 per month) towards their total tuition fee debt. And, if there’s any debt left over after 30 years, it is automatically written off.

We can help you start to plan ahead

If you’re thinking about how to start setting aside money to pay for your children’s education, get in touch. One of our qualified financial planners will be able to talk through the options available to you, assess your attitude towards investment risk, and come up with a plan to help you – and your kids – achieve the best possible outcome. There’s really no better time to start than right now.

If you are interested in discussing your financial plan or investment strategy with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.

China is constantly in the headlines – but is it a sound investment?

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Some of the recent headlines coming out of China have been troubling, to say the least. But if you’re looking for growth, there are plenty of good reasons to invest in the world’s second-largest economy. Here we outline some of the arguments for and against investing in China.

One of the hottest – and most hotly debated – investment topics of this year has been China. The world’s second-largest economy rarely seems to be out of the headlines, and most of them are disturbing. Back in June, the new security law imposed on Hong Kong, removing the region’s autonomy, was considered to have been China’s boldest – and most worrying – political manoeuvre in years. And just last month, Foreign Secretary Dominic Raab accused China of human rights abuses against its Uighur population, suggesting that sanctions from the UK government could follow.

Donald Trump’s favourite enemy

That’s not to mention the ongoing trade war between China and the US, and seemingly endless headlines expressing concern over state-controlled businesses such as Huawei and even TikTok (if you haven’t heard of TikTok, we suggest you ask your children or grandkids).

So perhaps the bigger question is, what is it about investing in China that makes it worth the risk? And would investors be better off avoiding the region altogether?

There are plenty of reasons why investing in China is a good idea

In pure investment terms, investing in Chinese markets can be a valuable way to diversify your investment portfolio. It has been one of the few regions to have performed well during the pandemic this year, and the returns from Chinese stock markets are not closely correlated to British or American stock markets. That’s a definite plus point during volatile times.

And there are longer-term reasons to be keen on China. As well as being the world’s largest exporter, China has a huge domestic market, and is home to some of the world’s largest companies that you may, or may not have heard of – like Alibaba, TenCent, PetroChina and Xiaomi. However, it is worth noting that Chinese companies don’t have a tradition of paying dividends, unlike companies in the UK. Investors look to China for growth, rather than income.

China drives the global economy

In many respects, China’s economy, which emerged from lockdown just as the rest of the world was entering, has a head-start on the rest of the world, and this is an advantage China intends to keep. And, for all the bad press China has been receiving recently, its exports seem to be relatively unaffected. China is tightly weaved into the fabric of the global economy, which has begun whirring again, so China is pushing its inventory stock out and increasing exports dramatically.

But China’s politics are leaving it with fewer friends

However, political risks around China appear to have increased dramatically – there has even been some talk of a new ‘cold war’ between the US and China. But President Trump’s bluster might quieten down if the US economy doesn’t recover enough to improve his election chances in November. And, with governments all over the world desperate to avoid a lengthy and damaging economic downturn, they may have no choice but to deal with Chinese businesses for the foreseeable future. Even so, the threat of wider-reaching sanctions, or stealth sanctions in the form of red tape and regulation changes, remain a threat.

What does the investment community think of China?

When it comes to China, two so-called inevitabilities are often taken for granted. First, that China’s economy will one day inevitably overtake the US economy to become the world’s largest. And second, that China’s investment universe will inevitably one day become fully integrated into the financial systems we enjoy here in the west. But both of those outcomes will only happen if China maintains good relationships with the rest of the world. Even with China’s impressive recent strengthening of its domestic economy, the stellar growth seen over the last two decades cannot continue if it becomes decoupled from its major trading partners. It won’t matter how valuable Chinese companies are if trade wars and sanctions make China an international pariah. And, while there has been huge demand for Chinese domestic assets from overseas investors recently, that demand could be dented if those assets come with big political risks, or could even result in capital invested in China being frozen as part of escalating sanctions.

For now, investors continue to back Chinese stocks, despite the rising geopolitical tensions. But at what point will the political uncertainties overtake the investment case? Recent events have shown that investors are justified in questioning the ethics of owning Chinese stocks. China’s economy is the second-largest in the world, but is easily the most controversial. It is perfectly reasonable for investors to now consider investing in China on a par with investing in other countries with poor human rights records, or non-ethical investment sectors such as tobacco, military-grade weapons or oil companies.

Summary

Whatever your views on China and its politics, it is an investment market that is hard to ignore. The sheer size of China’s economy, its continued growth and ever-increasing global importance, are all very good reasons for investors to consider increasing their exposure to China when building a balanced investment portfolio. But whether you think China deserves a place in your investment portfolio has now become a highly personal and political decision.

If you are interested in discussing your financial plan or investment strategy with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.

Getting the lowdown on BPR and trusts

By | Tax Planning | No Comments

We take a closer look at Business Property Relief, a little-known but incredibly useful planning tool when it comes to reducing inheritance tax, as well as explaining how it can be used alongside trusts for small business owners.

Did you know HMRC collected a staggering £5.2 billion in inheritance tax last year? In fact, every year, thousands of bereaved families find themselves facing an unexpected tax bill on their inheritance.

A quick reminder of inheritance tax facts

Inheritance tax is paid on the value of your estate when you die. Your estate could include your home, any other properties, savings and investments, and also any life insurance policies held in your name. Your estate will be completely free from inheritance tax if you leave it all to your spouse or civil partner. However, there may be an inheritance tax bill if you choose to leave some of your estate to family or friends.

If your estate is valued at less than £325,000 (known as the nil-rate band), there’s no inheritance tax to pay. However, your beneficiaries will be expected to pay inheritance tax at a rate of 40% on everything over that threshold. It’s important to remember that the inheritance tax due on your estate is paid by your beneficiaries (the people you choose to leave your estate to). They must pay the inheritance tax bill within six months of death being recorded.

Homeowners can also claim the ‘residence nil-rate band’, an additional allowance introduced in 2015. Provided the family home is left to direct descendants (children or grandchildren) a further £175,000 of inheritance tax relief can be claimed on the value of the estate. For married couples, any unused available reliefs can be transferred to the surviving spouse, meaning that it’s possible for a married couple to pass on an estate valued at £1 million, provided the family home is left to their kids or grandkids.

Could Inheritance Tax changes be on the cards?

There’s increased speculation that inheritance tax reliefs could be changing. The government’s response to the coronavirus – including furloughs for workers, business loans and grants and even ‘eat out to help out’ meal deals have cost the Treasury billions and blown a hole in the public finances.

As a result, there are concerns that Chancellor Rishi Sunak could be looking to claw back some of his ‘giveaways’ by closing some tax reliefs – with inheritance tax firmly in his sights. So, now might be a good time to think about ways to invest your money while making it exempt from inheritance tax – starting with Business Property Relief.

Understanding Business Property Relief

First introduced back in 1976, Business Property Relief (BPR) was brought in to make it easier for family business owners to pass on the ownership of the business to their descendants without leaving them with a large inheritance tax bill. But since then, BPR has expanded, and is viewed as a tax relief that encourages investment into trading UK businesses. Shares in a BPR-qualifying company can be passed on to beneficiaries free of inheritance tax. However, BPR only applies to trading businesses that meet HMRC’s qualifying criteria.

It’s worth knowing that you don’t have to be a business owner to be able to invest in BPR-qualifying companies, and there are a number of good investment management companies that give investors the opportunity to invest in portfolios of companies that qualify for BPR. As long as the investment has been held for at least two years, and is included as part of the estate, it can be passed on to the beneficiaries free of inheritance tax.

The key benefits of using BPR for estate planning is that it is flexible. Other ways of planning for inheritance tax – such as making lifetime gifts or placing money in a trust – means that you lose control over the assets. But if you’re considering investing in a portfolio of BPR-qualifying companies, it’s important to understand the risks involved. Your capital is at risk, and you may get back less than you put in. Shares in unlisted companies can also be more volatile and harder to sell.

Trusts explained

Setting up a trust can also help you to pass down more of your assets to your beneficiaries. Trusts are particularly useful where large sums of money are involved, where family relationships are a little complicated or where you don’t want children or grandchildren to receive the money until they reach a certain age.

There are many different types of trusts to choose from, but discretionary trusts are the most popular. Discretionary trusts are usually set up to provide money for a group of beneficiaries – for example, children or grandchildren, but a trustee is appointed to be responsible for managing the assets.

Any assets placed into a discretionary trust will be deemed outside of the estate for inheritance tax purposes, provided the person who set up the trust lives for a further seven years. However, inheritance tax may be payable (1) when the trust is created, (2) every ten years (known as ‘periodic’ charges) or (3) when trust assets are paid out to beneficiaries.

Combining BPR with a trust

If you’re a small business owner and you are planning on leaving your business to your spouse, you might want to consider combining Business Property Relief with a discretionary trust. This is a good way to ensure your estate will remain free from inheritance tax for your children and grandchildren, as well as for your spouse.

It is possible to arrange for shares in the business that qualify for BPR to be placed into a discretionary trust. A trust is a legal entity in its own right, which means that the trust ‘owns’ the business, rather than the surviving spouse. If the spouse chooses to sell the business, it won’t trigger a tax bill as the trust will own the proceeds of the sale, rather than the spouse.

Ready to have a conversation?

It’s not always easy to talk about what happens when you pass away. But you should have those conversations while you can, instead of leaving things till it’s too late. Estate planning can be complicated, and tax rules and tax reliefs are also subject to change. It’s important to sit down with one of our qualified financial planners who can explain the different options available to you, and work out a plan that will give you and your family peace of mind.

If you are interested in discussing your financial plan or investment strategy with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.

Ensuring Those Left Behind Have Enough Money

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Life insurance puts money in the hands of those who need it when a person dies. There are many reasons why this money might be needed. It’s not just for parents with young families. A need could arise at any age and the nature of that need could change as you get older. As such, regular reviews of your financial protection needs are essential.

If your income would stop upon your death, and you have people who depend on you financially, you should have life insurance cover. If you live with a spouse or partner and their earnings would also stop at death, they too should have insurance cover. However, if you do not have financial dependents, you may not have a need for life assurance.

Quantifying the need for life insurance

The life insurance needed to cover a loan is relatively simple to assess. You need enough insurance for the amount of the loan, and the cover should last for the time that the loan is outstanding. If you pay off some of the loan, you should be able to reduce the amount of cover earmarked for this purpose. However, if you take advantage of loan or mortgage repayment holidays as a result of Covid-19, you’ll need to review the cover you have in place as it may no longer be sufficient, unless you subsequently make overpayments. Most people also need insurance cover to replace their income if they were to die. The same principles apply but the calculations are a little more complicated.

Example – calculating needs
David and his wife Penny have a son of five who is about to start school. They have decided to send him to a fee-paying school and expect him to be there until he is 18. David and Penny are now considering life insurance to ensure that the fees could continue to be paid for the next 13 years. The first thing to do is therefore to quantify the total cost of school fees over the next 13 years, taking inflation into account.

The approach to insuring other needs is roughly the same. For example, you could calculate how much your family would need to cover the general household and other expenses, and how long they would need the funds for.

You can arrange for life cover to pay out a series of annual amounts over a set period, which is a simple approach to replacing an annual income, but most life cover pays out a lump sum. If you want a lump sum to provide £1,000 a year for 10 years, you would need life cover of about £10,000 because even if you invested a lump sum it wouldn’t have long to grow before you needed to spend it. If you needed the income for 20 years, however, you might only need about £18,500 because you could invest some of this for the longer term and benefit from growth and income.

It is sometimes hard to work out how much life cover you would require for your family, because of the difficulties of assessing your family’s needs after one or both parents have died. Your usual pattern of expenditure provides a good starting point for these estimates. Then you would have to consider the other costs that might be involved, like childcare. It can be especially difficult to assess the potential financial impact of the death of a parent who spends most of their time looking after children and the household. A good starting point is to estimate the costs of buying in these services.

Over time, your circumstances will change. Children grow up and mortgages and other loans are repaid. Your income may rise or fall, stop and restart. The same goes for your expenditure. You may take on more debt. It’s therefore a good idea to review the amount of cover you have on a regular basis, to ensure that it is still appropriate for your needs and that you are not under or over-insured.

The Right Life Insurance Policies for You

Term assurance is the right sort of life cover for most types of family protection needs. It can provide insurance at the lowest cost for the period that it is required.

It is rare that you would need other types of life insurance for family protection, because they generally involve much higher costs than term assurance for comparable levels of cover. Whole of life assurance provides cover for the whole of your life, as the name implies, and its main use is in inheritance tax planning and provision for funeral expenses. Whole of life policies can have substantial investment values that you can cash in, unlike term assurance policies.

Term assurance is the simplest form of life insurance, working in a similar way to your home insurance. The policy will pay out if you die during the term, but if you survive to the end of the term, the contract simply ends and there is no pay-out.

The cost of term assurance varies considerably according to factors such as your age and state of health. The cost of 10-year term assurance for a 30-year-old is about a tenth of the same cover for a 60-year-old. A person’s state of health is also important; poor health could mean increased premiums or even the possibility that the individual cannot be insured. Although term assurance is a simple product, there are variations that suit different needs.

Types of term assurance

Policy type Description
Level term These polices pay out a fixed sum if you die during the term of the policy.
Renewable or convertible term Some policies are renewable, so that you can extend them for an additional period of cover at the end of the term regardless of your state of health at the time, while others are convertible to a whole of life policy regardless of your health. These policies cost more than level term.
Increasing term Some policies have an element of inflation proofing. You either have the option to increase the cover from time to time by a set percentage or, in some cases, the amount of cover increases automatically by a set percentage, or perhaps the rate of inflation. These policies also cost more than level term assurance.
Decreasing term This is like level term, but the amount of cover reduces each year. Decreasing term is typically used to cover a liability that you expect to decrease year on year, such as paying school fees until a child reaches the age of 18. The cost of this cover is less than level term assurance because the overall amount of insurance provided over its lifetime is lower.
Mortgage Protection This is a type of decreasing term assurance, but the cover reduces in line with the outstanding capital on a repayment mortgage where you pay off some of the capital every month. The higher your mortgage interest rate, the more slowly the outstanding mortgage capital falls each year. It is important to ensure that the interest rate specified in the policy matches the mortgage it is intended to cover, or that the rate is higher than the interest rate you expect at any time during your mortgage.
Family Income Benefit These policies pay an annual sum if you die during the term of the policy and the payments continue until the end of the term. Family income benefit can provide a higher initial cover for a lower cost because it is effectively a form of decreasing term assurance.

 

Example

Mark has twin children, aged five. He wants to ensure that if he died, the family would be protected until the twins reach 21. He feels they would need £30,000 a year for this and takes out a family income benefit policy to cover the liability. If he were to die in year one, the policy would pay £30,000 a year for 16 years – a total of £480,000. If he were to die two years before the end of the term, it would pay £60,000 in total.

Life cover from your employer or pension scheme If you are employed, you may well have life cover from your employer and you might want to take this cover into account when deciding how much insurance you need. However, you need to bear in mind that you will probably lose this cover if you leave your employer. At which point, you’d need to consider taking out additional cover.

Relevant life policies Employers can take out these policies on the lives of employees. They are not part of their pensions, but they have many of the same tax advantages.

Joint life policies There may be situations where you would want to take out a policy on more than one life. The policy could then pay out after both the insured people have died – this is sometimes used for inheritance tax planning. Alternatively, the policy might be arranged so that it pays out when the first of the insured people dies. This could be suitable for financially interdependent people, but would mean that the second person would no longer be covered by the policy after the first of the couple dies.

Ensuring the right people get the money

Generally, the best way to ensure that the proceeds of a life policy are paid to the people you intend to benefit is to arrange for the policy to be in a trust. Some types of trust give the trustees discretion or flexibility about how they distribute the benefits, but it is a good idea to get advice about this. If you die, the policy proceeds will be paid to the trustees and then the beneficiaries, not into your estate. This arrangement could save them IHT and should speed up the payment to the beneficiaries.

There are other ways to set up life policies. The person you want to benefit could take out the policy themselves – the so-called life of another basis. In some circumstances this can be a wise arrangement, especially if the potential beneficiary wants to be certain that the premiums on the policy are being paid. But mostly it is preferable to arrange for a policy to be in trust.

Covid-19 and life insurance

Many life insurance providers are reassuring those with existing policies that they will pay out in the event of a claim resulting from a coronavirus-related death. However, because each insurer has different terms and conditions, you should check your policy to ensure that pandemics are not excluded.

Applications for life insurance from new clients are being accepted, but if an applicant is currently experiencing Covid-19 symptoms, the insurer is likely to postpone processing their application until they have fully recovered. Telling an insurer that you are in a good state of health when you are not will invalidate your policy, meaning that it will not pay out in the event of a claim.

Please do give us a call if you wish to speak to one of our Financial Planners about your life insurance requirements. We have good relations with reputable providers and can possibly make preliminary enquiries with underwriting teams about certain conditions to gain an understanding of how an application may be considered.

This article is for general information and is not intended to be advice to any specific person.

Making Sure That You Have Enough Money if You Fall Seriously Ill

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The purpose of health insurance is to provide some money if you fall seriously ill or have an accident, potentially affecting you for many years. In this case, you would probably stop earning, although your financial needs might well be greater than ever. The state benefits you would receive would be relatively low and would be most unlikely to provide sufficient income to meet your needs, especially if you have substantial rent or mortgage payments to make. You might also need capital, for example to make adaptations to your home or to pay off debt. A rainy day fund can help in the short term here, but it’s not a complete solution. The precise level of fund required can vary from person to person, but, as a minimum, three to six months’ expenditure could be used as a guide.

Virtually everyone who is working therefore needs some kind of health insurance to provide financial protection if their earnings are affected by serious illness or disability. Even if you have no financial dependents, there is a very strong chance that you will need health insurance if you are responsible for paying your own bills.

Income Protection Insurance

Income protection insurance – sometimes called permanent health insurance – pays a weekly or monthly income if you cannot work because of illness or disability. You may think that you do not need to worry about this kind of cover, but the fact is that in the UK there are nearly 14 million people with a limiting long-term illness, impairment or disability. The prevalence of disability rises with age. Around 8% of children are disabled, compared to 19% of working age adults and 45% of adults over state pension age.

You can generally be insured to receive a monthly benefit of up to about half to two-thirds of your pre-tax income. If you have no income, you may still be able to take out a policy, but the maximum payout will be limited, generally to an income of about £20,000 a year.

Some employers provide income protection insurance, but a very large number do not. Employers are only legally obliged to pay employees, in the form of statutory sick pay, for the first 28 weeks of their being unable to work because of an illness or injury; even then not everyone will qualify, and the employer does not have to pay the full salary. It is worth specifically checking the position with your employer. If your employer provides cover, the benefits generally continue to be subject to income tax and national insurance contributions, at least initially, but you won’t usually have to pay tax on the premiums. If you take out the cover yourself, the benefits are tax free.

Income protection insurance pays after a waiting period on each claim and can usually continue to pay you up to retirement age, unless you recover and return to work sooner. The cover normally lasts until you are aged 60 or 65, but you can arrange the insurance for much shorter periods – say five or ten years – and this cover is much cheaper because it is substantially less valuable. The chances of having a serious illness or disability increase substantially as you grow older.

During the Covid-19 outbreak, insurers have experienced a rise in queries regarding income protection insurance. Generally people who are simply self-isolating are unlikely to be covered. However, a small number of providers will consider claims for self-isolation where it is medically advised. Those with severe coronavirus symptoms that continue beyond the waiting period will start to receive their monthly payout if those symptoms mean they meet their insurer’s definition of incapacity (e.g. they are unable to work at their own occupation). Some providers are restricting cover for respiratory conditions for new customers.

Income protection can appear relatively expensive but can be very valuable if you fall seriously ill. If you are considering taking out a policy these are some of the things you should consider.

Consideration Possible issues
Exclusions Check the conditions and exclusions on income protection insurance policies as terms vary between different insurance companies. Almost all illnesses are generally included in the cover, but most have exclusions, for example if the illness is caused by drugs or alcohol abuse.

There is an important difference between cover for being unable to work at your own occupation and cover for being unable to work at ANY occupation. It is much better to have the first type of cover, though it is likely to be more expensive. Otherwise, if you cannot work at your own occupation, under the wider definition the insurer could insist on your undertaking other work.

Insurers will generally only pay a proportion of recent earnings as benefits, which can be hard for people who are self-employed or have fluctuating earnings.

Inflation protection It is normally advisable for income protection insurance to be inflation protected in two main ways. You should be able to increase the level of cover periodically regardless of your state of health, or the cover should increase automatically in line with inflation or a fixed percentage. It is also important to ensure benefit payments keep pace with inflation. If benefit payments never increase after you fall ill and cannot work, their real value will be gradually eroded over the years.
Underwriting Insurers are careful when people first apply for income protection insurance. If you have, or have had in the last few years, a health issue, the insurance company may exclude your particular problem, increase the premium or possibly decide not to insure you. Insurers also pay attention to your occupation. You will get the best terms if you work in an office, mostly indoors and do little or no manual work. The cover is much more expensive for people who work with machinery or in relatively hazardous places like factories and farms.
Claiming If you have to make a claim, the insurance company will continue to pay you the benefit until you are well enough to return to work. If your illness recurs, they should start paying the benefit again. Unsurprisingly, they will want to check from time to time that claimants are genuinely incapacitated.

Example David works as an IT manager. He earns a good salary and he lives a comfortable lifestyle. In the event of being unable to work due to illness, he would receive full pay for up to four weeks, but would then only receive statutory sick pay and, later, state benefits if he is eligible for them. He would not be able to continue to meet his commitments and may have to sell his flat should the illness continue into the long term. David might consider income protection to provide an ongoing income after his employer stops paying him. This could continue until his selected retirement age or, if he wanted to keep premiums down, for a limited term of, say, five years.

Critical Illness Insurance

Critical illness insurance pays a lump sum if you are diagnosed as suffering from a specified illness. Over 30 conditions may be covered, including serious cancers, heart attack and stroke. Some providers may cover significantly more – even up to 100 different conditions.

The advantage of critical illness insurance is the benefit is paid very early, shortly after diagnosis of the illness, without any significant delay – unlike the usual longer waiting periods of income protection. It is also in the form of a lump sum that can allow you to make rapid adjustments to your lifestyle and pay off loans. The main drawback is that this type of health insurance only covers a limited set of conditions. These are common disabilities, but critical illness insurance generally does not cover some important conditions, such as musculoskeletal pain and most mental illnesses.

People often take out critical illness insurance to cover a mortgage or other loan. Because you are significantly more likely to have a critical illness than die whilst you are of working age, it is more expensive than life insurance. But this reflects the likelihood of needing to claim on the policy.

Critical illness is an important and valuable addition to income protection, but it should not normally be regarded as a replacement for it.

Whereas an income protection policy will pay out to those suffering from severe Covid-19 symptoms beyond the waiting period where the insurer’s definition for incapacity is met, Covid-19 itself is not covered by critical illness policies. However, if the coronavirus leads to one of the conditions listed on your policy, for example a heart attack or a stroke, and you survive the waiting period, the policy would pay out.

Again if you would like to discuss your income protection requirements in more detail, please do give us a call.

This article is for general information and is not intended to be advice to any specific person.

Helping You to Afford the Cost of Private Medical Treatment if You Need it

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Private medical insurance (PMI) pays for private health treatment. Depending on your budget, you choose what you want covered – just in-patient or day-patient treatment, or out-patient consultations and medical tests. PMI pays for the treatment of acute conditions only. It does not cover chronic conditions (except, generally, at onset) and pre-existing conditions may also be excluded. As part of the response to the Covid-19 outbreak, providers are continuing to delay non-urgent treatments to free up beds for the NHS. Treatments will be delivered and funded by the provider once the beds are no longer required.

Health cash plans pay for everyday health costs, typically 75%–100% of costs for dentistry, optical and consultation costs, plus a small sum for each day spent in hospital, subject to an annual limit. Other dental options include capitation (maintenance) plans, which are agreed with your dentist and cover likely costs over the next year, and dental insurance. Plans may require an initial waiting period to stop people taking out cover for known treatment then cancelling the policy.

We can assist you in obtaining medical insurance by researching the marketplace for the most suitable cover. So, if you wish to discuss this area of protection in more detail, please do get in touch.

Helping You to Get the Protection You Need

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Financial resilience is the ability to recover quickly from an unexpected financial shock. Many of us insure our homes and cars without really thinking about it, but far fewer insure their lives and incomes. And yet, if you were to pass away, how would those you leave behind be able to manage financially? If you were unable to work due to illness, how would you find the money to pay your household bills? Savings can and do help in the short-term. But what happens when they run out? What happens if an illness goes on for three, six, or even 12 months? What then? Covid-19 has focused many people’s minds on the need for an adequate rainy day fund and financial protection. While nothing can ease the emotional distress the virus has and is continuing to cause, it is possible to lessen its financial impact on those affected and their loved ones. Life and health insurance protection underpins most good financial planning.

Insurers are constantly looking at new ways to meet people’s needs, such as through life insurance that includes critical illness and/or income protection insurance, which may be cheaper than taking out separate policies. It is important to look at your options – what do you need most now? How much cover do you need? Can you defer some cover until a future date? What can you do to protect yourself and your loved ones financially in light of the Covid-19 pandemic?

Our role is to do four things:

  • Know enough about you to make the right recommendations. We take the time to understand your financial situation, your needs, preferences and views. Whether for example, you would feel comfortable accepting that premiums may rise, or if you want a guaranteed solution.
  • Help you to identify your priorities. If you were insured against absolutely everything, like most people you may find premiums unaffordable. We don’t expect you to be an expert on life insurance, but we need to know your attitude to risk. Working out how things might change in the future and prioritising matters could be a sensible thing to do.
  • Recommend solutions to meet your needs. The right policy is important, but a will or writing policies in trust could be too.
  • Review. Your financial protection needs change over time. Regular reviews are essential to ensure your plans continue to meet your needs.

If you would like us to assist in finding the most suitable protection for you, we will be happy to help!

Lessons From Five Years Of Pension Flexibility

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It’s been five years since pension holders were given the freedom to draw directly from certain pension savings. What have we learned that can help those about to embark on their own retirement journey?

The pension reforms in April 2015 gave defined contribution pension holders “complete freedom to draw down as much or as little of their pension pot as they want, anytime they want,” according to the Chancellor of the time. After five years of experience in the UK – and many more in places like the US and Australia that have had similar rules for longer – we can draw some conclusions about the changes, and derive some lessons for the future.

Despite the sceptics’ almost immediate warnings that pension pots would be frittered away on Lamborghinis or world cruises, leaving the State to pick up the pieces, it has not worked out that way. After an initial rush to fully encash pension pots, the average amount withdrawn per person quickly declined. By the final quarter of 2019, nearly four times as many people were receiving flexible payments as in the second quarter of 2015, but the average payment had fallen by almost two thirds.

Source: Official Statistics – Flexible payments from pensions (www.gov.uk)

The relatively stable pattern of average withdrawals over the last three years suggests that the gloomy forecast of spendthrift pensioners was wrong. However, there has been a continued decline in the purchase of annuities to provide retirement income. The latest data from the Financial Conduct Authority (2018/19) shows just 11% of pension plans being used to buy an annuity.

 

Drawdown pros and cons

If you are at the stage when you are beginning to consider your retirement, there are some lessons to learn from half a decade’s experience of pension drawdown:

  • A full withdrawal can make sense for small pension pots, even though 75% of the amount received is subject to income tax under PAYE. As the pot size increases, income tax and the operation of PAYE becomes much more of an issue. Full withdrawals account for nearly 90% of payments from plans valued below £10,000, but for only about 1% of pots of more than £250,000.
  • Flexi-access drawdown is by far the most popular means of drawing from pension plans valued at £100,000 or more. However, it is probably still too early to say whether those who choose this option without taking professional advice are making a sustainable level of withdrawals.
  • Flexibility in law may not mean flexibility in reality for your pension plan. Many providers of large group schemes, and insurers with pre-2015 pension policies, decided not to offer all the options that legislation permits. In some instances, the only flexibility is the ability to withdraw in full. If you find yourself with such a plan, you may wish to seek advice about transferring to a more flexible arrangement.

Whatever decisions you make about managing your retirement income, it’s a complex area. To make sure you understand your options clearly, it is imperative that you seek expert advice and a member of our Financial Planning team will be happy to assist you!

The value of your investments and the income from them can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Occupational pension schemes are regulated by The Pensions Regulator.