Category

Financial Planning

Cupped hands holding a cut out of a family

Providing an income via life assurance

By | Financial Planning

Life assurance is a crucial area of financial planning, particularly where there is a need to provide protection for young and growing families or where others are financially dependent on the life assured. It is, however, all too often ignored by individuals when they assess their financial priorities. According to research undertaken by Canada Life last year, 63% of those questioned have never thought about, or do not have, an active life insurance policy in place.

Lump sum cover

The most common form of life assurance is a term assurance policy, whereby the death of the life assured triggers a lump sum payment to beneficiaries. Often the policy will be established as a decreasing term assurance policy, which is designed to cover a repayment mortgage. These policies are set up so that the amount of cover falls over time broadly in line with the outstanding mortgage balance.

Whilst holding life cover over an outstanding mortgage balance is obviously sound financial planning, a lump sum payment would do little to provide additional funds on an ongoing basis to cover day-to-day living costs and other expenditure for family members left behind. This is where a different type of life insurance – family income benefit – can be very useful.

 

Providing a regular income

The main feature of family income benefit is that the policy is structured to pay a monthly tax-free income to beneficiaries for the remainder of the policy term, rather than paying out a lump sum. It is designed to replace earnings or income that would have been generated, in the event that the policyholder dies, thus allowing surviving family members to maintain their standard of living. The policy is structured at the outset over a specific term, and in the event of a claim being made on the policy, the payments will be made for the remainder of the term. For example, if a policy was established for a 20 year term, and the policyholder died in the 9th year, the monthly benefit payments would continue to be paid for the 11 years remaining on the policy term.

Benefits paid by a family income benefit policy can either be paid on a level basis (i.e. the monthly premium and benefit payments are fixed at the same amount for the life of the policy) or indexed, where the level of benefits, and monthly premium, are inflation linked. This can protect the real value of the cover provided, and the cost of living increases we have seen over recent months are a timely reminder of the importance of protecting future payments against rising inflation. Many family income benefit policies also pay out on diagnosis of a terminal illness, and some policies allow the monthly payments to be commuted to a lump sum payment, if the surviving family feel this would be more helpful in their circumstances.

 

Cost-effective cover

Many people consider affordability as being one of the main barriers to holding adequate life insurance. Indeed, research carried out by Canada Life in 2019 confirmed that 27% of respondents felt the cost of the premiums was the main reason for not taking out cover. Family income benefit is often more cost effective than lump sum term assurance, as the total amount paid out by the policy depends on when the policyholder dies. If they die in the early years of the policy, the total payout will be more than if they die nearer the end of the term of the policy. Because the total amount paid decreases over time, it’s cheaper than an equivalent single lump sum life insurance policy which runs for the same period.

 

Specific situations where cover can assist

As we have established, the most common use of a family income benefit policy will be to provide families with cost-effective cover to enable the surviving family to maintain their standard of living in the event of death. Typically, policies would be put in place to provide a term of insurance until the youngest child leaves higher education.

In addition, however, there are many scenarios where family income benefit could be a very sensible solution for specific protection needs. One such situation is to cover divorce maintenance payments, which would potentially cease in the event of the death of a divorced parent. By taking out a family income benefit policy, the benefits could continue to provide the maintenance payments, thus enabling the ongoing standard of living the children enjoy to be maintained.

In a similar vein, family income benefit can be useful to cover education costs, in particular if a child is privately educated. By taking out a policy that covers the ongoing educational costs, this could mean a child being able to stay in private education or could potentially even provide ongoing funding through university.

Another scenario where family income benefit could be helpful is to cover the cost of care. Many individuals are full-time carers for loved ones, and in the event of death of the carer, this could leave the individual being cared for facing the need to pay the cost of finding alternative care. By taking out family income benefit, the monthly payments for providing ongoing care could be covered.

 

Seek our advice

Whilst many individuals hold adequate cover to pay off outstanding mortgages and other liabilities, the ongoing costs of living are often ignored. Family income benefit can be a cost-effective way to provide a regular income in the event of death and help maintain a family’s standard of living. If you would like more information on this type of policy, then speak to one of our advisers at FAS, who can take an independent look across the whole of the protection market, and provide advice on the most appropriate solution.

 

If you would like to discuss the above with one of our experienced financial planners, please get in touch here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.

Young woman leans over parents to reach calculator

The Bank of Mum and Dad – what to consider

By | Financial Planning

Buying your first home has never been easy, and the increase in house prices over recent years has made the task even harder for first time buyers. As a result, prospective house buyers are turning to parents, grandparents and other relatives for help. Indeed, it is a scenario we come across regularly; and, by and large, parents are keen to give their children a helping hand to provide a deposit to enable them to buy their first home, or trade up to a larger property.

 

The UK’s 10th largest lender

If the Bank of Mum and Dad was a business in its own right, it would be the UK’s 10th largest lender measured by total loans issued, according to research carried out by Legal & General in 2019. This research, undertaken in conjunction with the Centre for Economics and Business Research (CEBR) also showed that 23% of all housing transactions undertaken in that year involved parental or family assistance, with 65% of buyers questioned saying that they would not be able to proceed with the purchase without the financial assistance. Legal & General’s research also showed the average gift made for this purpose was £25,800 for buyers in London.

By providing a gift by way of deposit, parents can enable their children to increase the amount they can borrow on a mortgage, helping them to buy a home which would be impossible without the financial assistance. Alternatively, the gift could mean that the child borrows less on their mortgage, leading to lower monthly repayments and potentially access to lower mortgage interest rates.

 

Beware the pitfalls

Despite the good intentions that parents often have to help their children, they would be well advised to consider the pitfalls before gifting funds to their children to enable them to buy a home.

Any gift – be it by way of a deposit for a house or for another purpose – could have inheritance tax consequences. Each individual can make gifts of £3,000 per tax year and therefore a married couple could gift £6,000 of capital (plus £3,000 each from the previous tax year if not used) without any inheritance tax concerns. As shown by the research above, this is less than 50% of the average financial assistance provided by parents. Any amount gifted above the gift exemption is treated as a potentially exempt transfer (PET). No inheritance tax is due immediately; however, the person making the gift needs to live seven years from the date the gift is made for the gift to fully escape inheritance tax.

If a parent makes a gift to a child who is buying with an unmarried partner, the consequences of relationship breakdown could mean that the funds are unprotected if the property is subsequently sold. It is an important scenario to consider, and this can be avoided if the solicitor dealing with the purchase prepares a suitable Declaration of Trust, which stipulates that the amount of the gift is paid back to their child from the proceeds of sale.

 

Be careful with co-ownership

Some parents decide that rather than making a gift of a deposit, they would prefer to buy the property with their children. Whilst this allows parents to enjoy an equity participation in the property, the tax consequences need to be considered further. Firstly, assuming the parents already own a home, the purchase would be seen as being a second home, and therefore be liable to the additional rate of stamp duty (3% of the purchase price).

Secondly, the share of the property owned by the parents would not benefit from Principal Private Residence Relief, and if a gain is made on sale of the property in the future, the proceeds on the share owned by the parents would potentially be liable to Capital Gains Tax, at a rate of 18% or 28% (depending on their overall tax position).

Lastly, if a mortgage is being arranged for the purchase, the parent would be jointly responsible to meet the mortgage payments if the child was unable to make the repayments.

 

Looking after your interests

Whilst there are plenty of valid reasons for the Bank of Mum and Dad to remain open for business, parents need to carefully consider their own financial needs in later life before gifting funds to help offspring onto the housing ladder. The same research undertaken by Legal & General showed that 17% of parents passing money to their children via the Bank of Mum and Dad are materially worse off financially as a result.

Giving away capital when retirement is looming can diminish the amount of savings or investments, but also reduce the level of income that could be generated by the gifted capital. The gifted funds are also no longer available to cover any unexpected expenditure, and children will often not be in a financial position to return the favour if the parents require funds.

Parents would also be well advised to consider the effect of unequal gifts made to children. If one child receives a helping hand onto the property ladder, friction within the family could be caused, in particular if the parent is not in a financial position to equalise the gift to children at the same time. It may well be sensible to consider recording the gift in your Will, and making provision so that all are treated in an equitable fashion over time.

 

Engage with financial and legal advice

Many parents are happy to open the doors of the Bank of Mum and Dad, and do the best they can for their children. There are, however, a number of financial and legal considerations that need careful thought. A good solicitor should be able to provide the necessary advice to protect the gift in the event of relationship breakdown, and any changes that may be appropriate to your Will.

At FAS, we can provide assistance to parents who wish to use their funds to help their children. We can advise on which assets are gifted, and the potential financial impact of any actions taken on their financial security. Speak to one of our experienced advisers for assistance.

 

If you would like to discuss the above with one of our experienced financial planners, please get in touch here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.

Giant anthropomorphic British Pound Currency (fictional money character) symbolising income getting stronger

Make cash work harder

By | Financial Planning

The so-called “cost of living crisis” is never out of the news at the moment, with the hike in energy prices, petrol, and food costs causing concern for many. Headline UK Consumer Price inflation rates have now exceeded 6% per annum, and with expectations that annual inflation could reach double digits by the autumn, many are considering how to give their income a welcome boost.

 

Feeling the squeeze

One group in particular who are likely to feel the effect of the price hikes more than others are retired individuals, where income levels are not keeping up with the general rising prices. The reference point that sets the annual increase in State Pension is the rate of inflation at the September preceding the end of the tax year, and as a result, the State Pension has only increased by 3.1% this year, lagging behind the current rate of inflation by some margin.

Retired individuals who hold savings on cash deposit have had to live with low interest rates for more than a decade, so in some respects conditions at the moment represent the status quo. However, the big difference this year to previous years is the fact that the gap between savings rates and inflation has widened, and this trend is only likely to strengthen during the remainder of the year.

 

The quest for better rates

A simple option for those who are receiving a disappointing rate of interest on their savings is to look to move funds to an account paying a better rate. The Bank of England have increased base interest rates on three occasions since December last year, and in an attempt to tackle the persistent higher rates of inflation, are likely to increase rates further during the remainder of this year. Our current expectations is that the Bank of England will hike rates a further three times before the end of the year, although the continued uncertainty over the price hikes and growth could see the Bank take a more aggressive stance if necessary.

That being said, the pursuit of improved cash interest rates remains an exercise in frustration, despite the likelihood of cash interest rates offered by banks and building societies improving during the course of year. As much as cash savings rates improve, the prevailing rate of inflation is likely to have risen further, maintaining and even increasing the difference between the cost of living and savings rates.

 

Look to alternative options

So what can investors do to generate much needed income and also aim to add some growth into the mix to offset the rising prices?

By considering alternative assets to cash, such as fixed interest securities and equities, more attractive levels of income can be generated. Naturally, moving away from cash deposits introduces investment risk, which is not present when holding cash (although as we have shown above, cash is not risk-free, as inflation risk can be significant). Investment risk can be mitigated in a number of different ways. By holding a diversified portfolio, with allocations to different assets that look to balance out assets that have potential for greater returns, with those that offer more predictable returns. In addition, stock specific risk can be avoided by investing in pooled funds (such as Unit Trusts or Open Ended Investment Companies) that spread the investment across a wide range of different individual positions.

Let’s take a look at those alternative asset classes in more detail. Corporate bonds, government bonds, and other fixed interest securities are loans, where the investor lends capital to the issuing company or government. In exchange, the bond provides a regular income for a fixed period of time, with a set return of capital offered when the bond redeems. These investments tend to be more predictable than equities (company shares) but they do still carry risks. These risks include default risk, where the issuer of the bond is financially unable to repay the capital or interest. This risk can be minimised by careful selection of who to lend your money to.

Dividend income generated from equities (company shares) are regular distributions of capital to shareholders. The ability of a company to pay dividends relies on the company having sufficient capital to make the distribution, and are not fixed. Dividend yields came under significant pressure during the early stages of the pandemic, but more recently, dividend yields have improved. Unlike fixed interest securities, equities tend to be more volatile in terms of their capital value, which shows greater fluctuations over time. That being said, equities have greater potential to provide capital returns, and once again, with careful management, the risks can be managed through diversification into assets held in different sectors of the economy and geographic locations.

 

It’s all in the blend

By blending these assets classes, together with other assets that complement the overall strategy (such as infrastructure or property) cash savings could be better employed to generate more attractive levels of income and over the longer term, aim to provide some capital appreciation. Holding these assets in an individual savings account (ISA) can enable a tax-free income to be generated and this is often a sensible way of generating additional income, particularly for those who rely on fixed incomes, such as in retirement.

Moving away from cash and into investments such as fixed interest securities and equities can be a big step and this is where expert financial planning advice can add significant value. The advisers at FAS can provide impartial advice on the options open to you and construct a discretionary managed or advisory portfolio designed to meet your income needs.

If you are looking to make cash worker hard for you, then please get in touch with our experienced financial planners here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.

Houses in bubbles representing UK housing market bubble

The UK housing market

By | Financial Planning

It was just over two years ago since Prime Minister Johnson announced the first national lockdown to combat the spread of Covid-19. Global growth slumped and a deep recession ensued, as businesses and individuals relied on Government and Central Bank support for survival. Following a sharp slowdown in property transactions during the Spring of 2020, Chancellor Sunak announced a Stamp Duty holiday, removing Stamp Duty on properties up to £500,000. This helped reflate the flagging housing market, together with a trend amongst homeowners to look for properties with gardens and home offices.

Last year saw house prices continue to post significant growth following the rebound later in 2020. According to Nationwide, the average UK house price increased by 10.4% in 2021, the highest rate of growth recorded for 15 years. Considering the further lockdown seen in the first quarter of 2021 and continued uncertainty over new Coronavirus variants, these gains appear somewhat irrational. That being said, the extension of the Stamp Duty holiday, low borrowing costs and an imbalance between supply and demand appear to have combined to drive prices higher still.

 

How sustainable is house price growth?

Fast forward to 2022, and in the first two months of the year at least, the trend appears to be continuing, with Nationwide reporting house price growth of 0.8% in January and 1.7% in February. But is this really sustainable, or are we on the verge of a rapid slowdown in the housing market?  According to the Building Societies Association (BSA) Property Tracker March survey, it would appear buyers are becoming increasingly concerned.

The BSA Property Tracker survey, which is carried out quarterly by YouGov PLC, showed just 18% of those surveyed in March thought it is a good time to buy property in the UK. This is the lowest figure reported since the survey was introduced in June 2008. Perhaps unsurprisingly, fears over the increasing cost of living generally, the conflict in Ukraine, and the impact of sanctions on Russia on global energy and fuel prices were highlighted as key concerns.

 

Higher costs squeeze affordability

We have warned clients that inflation was likely to increase since early in 2021, although our early estimate that inflation could peak in the Spring or Summer of this year now looks highly unlikely, largely due to the effect of the Russian invasion of Ukraine on global commodity prices. UK Consumer Price Inflation reached 6.2% in the 12 months to February 2022 and this is likely to go higher still as the year progresses.

Given the higher inflation numbers, the Bank of England has now raised Base interest rates at three successive meetings, from 0.10% to 0.25% on December 16th 2021, and agreeing two 0.25% increases in February and March, with the Base Rate now standing at the same level as it was before the pandemic. There are six further Monetary Policy Committee (MPC) meetings scheduled for 2022, and given the heightened inflationary expectations for the remainder of this year, we would not be surprised to see at least three more hikes in Base Rate before the end of the year.

The increase in Base Rates will, of course, feed into higher mortgage rates, both for those on variable rates and those with fixed rate deals that come to an end. Just over seven months ago, five year fixed rates could be obtained at just 0.99%, whereas the best deals in the market are almost double the rate at 1.82%.

 

Confidence on the wane

With higher costs of living impacting on household finances, it is little surprise that UK consumer confidence is starting to falter. The GFK Consumer Confidence barometer fell to -31 in March 2022, to stand just above the levels seen at the start of the pandemic, and when asked about their forecast for personal finances over the coming 12 months, respondents indicated that they were more negative now than at the height of the pandemic and also more pessimistic than they were during the Financial crisis in 2008.

 

Supply imbalance about to correct?

Much of the house price growth seen over the last decade has been a result of cheap borrowing costs, but also an imbalance between demand and supply, as housebuilding generally failed to keep up with demand for housing.

With prices potentially coming under pressure due to increased costs of living, could we see a increase of properties on the market as sellers hope to cash in before confidence weakens? It is too early to tell, although some investors with Buy to Let properties may decide to take advantage of current prices, particularly given that rental yields are likely to have fallen over time.

As a reminder to those who are considering selling second homes or investment properties, Capital Gains Tax on disposal needs to be paid to H M Revenue & Customs within 60 days of the property sale completing. This is less onerous than the 30 day payment window in place between 6th April 2020 and 26th October 2021, however sellers should be aware that tax due needs to be settled within the 60 day window to avoid penalties adding to the tax due.

 

Time to reassess property portfolios?

The UK housing market has defied gravity since the start of the pandemic, although it is becoming apparent that confidence could weaken significantly as 2022 progresses. Higher inflation and hikes in borrowing costs could see the imbalance between demand and supply ease and slow down the pace of growth. For anyone holding property investments, it may be time to reassess existing portfolios in light of the extraordinary gains seen over recent years.

 

If you are interested in discussing the above with one of our experienced financial planners, please get in touch here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.

Group of women laughing together

Different patterns, different needs…

By | Financial Planning

While it’s estimated that by 2025 around 60% of UK wealth will be held by women, the Covid-19 pandemic has exacerbated some basic inequalities for some. The challenge for women across the board is making the most of their financial resources – whether stretching a smaller amount to last longer or growing surplus wealth to best effect.

Financial planning for women guide

In our newly launched guide, we explore the specific needs across every stage of life so that you know your money is working for you…

View guide here»

If you are interested in discussing the above with one of our experienced financial planners, please get in touch here.

 

The value of your investment and any income from it 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.  The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Wooden blocks with hand picking up one reading Trust

What you need to know about the UK Trust Registration Service

By | Financial Planning

With the deadline for registration now just six months away, we look at the steps trustees need to take to ensure they remain compliant with the regulations.

Trustees have to perform a number of duties to fulfil their role effectively; however, some may not be aware of the Trust Registration Service (TPR) and the additional requirement for trustees to comply with the new registration process.

Set up in 2017, the HMRC Trust Register was introduced to improve transparency of the beneficial owners of trust assets. Under new Anti-Money Laundering Directives adopted at the time, trustees will need to provide details of the trust, as well as information relating to the settlor (the individual or individuals creating the trust), trustees, and potential beneficiaries of the trust assets. For each interested party to the trust, the service will ask for the name, date of birth, national insurance number, and address to be registered, and if the trust is being registered for the first time, details of the assets held in the trust will need to be provided. You should be able to find these details in the trust deed.

As it stands currently, only those trusts who have UK tax to pay need to register using the Trust Registration Service. These are known as Taxable Trusts, and these include trusts that are liable to income tax, capital gains tax, inheritance tax, or stamp duty land tax.

The introduction of the Trust Registration Service casts a wider net, with many trusts that do not incur a charge to UK tax now faced with having to register for the first time. October 2020 saw the expansion of the Anti-Money Laundering Directives and as a result, so-called “Express” Trusts – even if there is no tax to pay – are now caught under the Trust Registration regime.

The term “Express” Trusts does not relate to their speed, but instead relates to those created intentionally by a Deed, by an express, or inferred declaration of trust. These are trusts that do not have an immediate liability to any UK tax, such as those used in estate planning.

One common type of Express Trust that will be caught by the expanded Registration Service are Bare Trusts. These are perhaps the most common form of trust, which are often found written into wills, when assets are left in a simple form of trust for a beneficiary who is below the age of 18. Assets in this type of trust are held by the trustees until the beneficiary reaches the age at which they automatically become entitled to the assets held in the trust. There is usually no tax liability to report on Bare Trusts as the UK tax liability is incurred by the beneficiary and not the trustee, and in the past trustees have not had to be involved in reporting to HMRC.

This all changes with the introduction of new rules, and Bare Trusts are caught within the remit of the Trust Registration Service. Bare Trusts created by way of deed, such as a gift from a grandparent during their lifetime into a trust for the benefit of grandchildren, will need to be registered on the service by the deadline, whereas those created by a will need to be registered if the trust is still in existence two years after death of the settlor.

For these Express Trusts, the deadline for registration has been pushed back a number of times since the measures were first announced. The deadline has now been confirmed as 1st September 2022, and all Express Trusts in existence on 6th October 2020, or created after this date, will need to have registered by this date. Trusts created after 3rd June 2022 will have 90 days to register on the service.

A small number of Express Trusts can avoid the registration process, with these being limited to Charitable Trusts, UK registered pension schemes, and trusts where a disabled person is a beneficiary.

Following the first registration, the trustees will need to ensure that the Register is updated each tax year, and in addition trustees need to be aware of the need to inform HMRC each time there are changes to the beneficial ownership of a trust, for example whenever a trustee retires from their position or is appointed, or when beneficiaries change.

Trustees need to be aware of the requirements of the Trust Registration Service and if the trust needs to be registered, ensure that they comply with the registration process by the deadline. HMRC have provided an online registration service, or trustees may wish to ask their accountant to register the trust if they act as agent for the trustees. For more information on registering a trust visit Register a trust as a trustee – GOV.UK (www.gov.uk)

At FAS, we have long provided independent investment advice to trustees and guided them in respect of their duties. Whilst the responsibility rests with the trustees to register the trust correctly, we are on hand to give guidance to trustees if required.

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

 

The value of your investment and any income from it 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.  The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Mature woman at laptop calculating retirement income needs

Planning for income in retirement

By | Financial Planning

Transition from work

Money concerns are never welcome when entering retirement, particularly if the opportunity to earn your way out of them is no longer open to you. For many, the transition from work to retirement is often a gradual process. We frequently speak to clients who do not want the instant change from full time employment to retirement, and indeed, it is now quite common to see employees reduce the number of days they work prior to retirement.

The latest data from the Office for National Statistics shows that 14.0% of men and 8.0% of women still work beyond age 65. With the State pension age increasing this is perhaps not a surprise. However, it is unwise to assume that you can rely on continued earnings for a long period of time. Factors such as your health, your partner’s health, your enthusiasm and the type of work you’re engaged in, could mean you have to stop work at some point. If you think you will have to continue working indefinitely, then your (non-) retirement plans almost certainly need a serious review.

 

The role of pensions

Pensions, both state and private, are usually the main source of income in later life. For growing numbers of people,  private pension income will be via income drawdown, rather than the traditional pension annuity. The drawdown approach offers flexibility suited to gradual retirement, when individuals reduce the number of days they work and replace employment income with pension income, so that standards of living can be maintained. This flexible approach can also assist in wider planning, such as considering when to take tax free cash from personal and workplace pensions, and how best to use these funds to supplement the reducing income from employment.

It goes without saying that ongoing management of pension funds in drawdown is vital. The level of withdrawals needs regular review to ensure that the correct amount is being drawn. Taking too much from a fund can mean you outlive your pension, potentially forcing you to reduce the withdrawals in much later life, or even worse exhausting the fund. In addition, taking excessive income withdrawals could also lead to unnecessary income tax charges on pension income.

To help analyse the correct rate of withdrawal, it is important to consider life expectancy, which has continued to improve over time. Since 1981, life expectancy at age 65 has increased by six years for men (to age 85) and four years for women (to age 87). Drawing too much from the plan in the early days of retirement could seriously reduce the chances of the fund sustaining the level of income throughout your life.

Inflation is also an important consideration, and one that is very topical at present due to the elevated levels we are seeing around the world. For example, the buying power of the pound has dropped by about one third since the start of 2000, and static levels of income over time are likely to lead to a significant drop in standards of living as the years progress.

For some, pensions can be a powerful tool to pass wealth between generations, if retirement income can be obtained from other sources, such as investments. Taking lower withdrawals from a pension – or indeed no withdrawals at all – can allow pension funds to build up over time, which could then be passed on your children, grandchildren, or chosen benefactors who will ultimately benefit. This can be a particularly tax efficient way of passing assets between generations for those with substantial estates, as pension assets do not normally aggregate with the remainder of the estate when inheritance tax is calculated, thus potentially saving an inheritance tax charge of 40%.

 

Investment management

If you hold investments – including those underlying your pension arrangements – they need to be managed. What you require from your investments could alter over time and investment horizons naturally tend to shorten as you get older. For example, you may wish to increase the emphasis on security of income rather than income growth. Regular reviews of asset allocations can be very helpful in identifying areas of risk and ensuring that the portfolio continues to meet your needs and objectives.

Investments can also be a useful source of retirement income, which can be used as part of an overall strategy when combined with pension income to generate a tax efficient income stream. Collective investments and direct investments can generate attractive levels of natural interest and dividends, which are tax exempt if held in an ISA wrapper.

 

Pulling it all together

To maintain a coherent approach to planning, it is important to engage with advisers who take a holistic approach to planning. Considering each aspect as part of the whole, rather than individual components, can often lead to better outcomes. A global strategy can ensure that investment risk is monitored across all aspects and income levels can be altered from flexible sources to hit precise income targets in a tax efficient manner. At FAS, holistic financial planning is at the heart of our process.

 

If you are interested in discussing your retirement income 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. 

Older lady in a wheelchair outside with a female carer

Are long-term care annuities value for money?

By | Financial Planning

The rising cost of care has been hitting the headlines lately, which has placed the spotlight on long-term care annuities designed to pay out for the rest of a person’s life. But these annuities may not be the best solution for everyone.

The costs of long-term care are increasing. According to LaingBuisson, an independent provider of healthcare statistics, the average cost of residential care home fees for someone in the UK increased to £672 a week (almost £35,000 a year) in the 2019-2020 tax year, an increase of 3.0% on the average fees in the previous tax year. Over the same period, the costs associated with nursing homes – where residents receive round-the-clock care – reached an average of £937 per week, almost £49,000 a year, an uptick of 5%.

Despite recent announcements from the government that National Insurance and Dividend Tax will be increasing to help to pay for the cost of social care, most people will have to pay for their own care as they get older. And with around one-fifth of the UK population – or 12.3 million people – aged 65 or older (figures published in 2019), it’s not surprising that more people are considering taking out some sort of insurance policy to help pay the future costs of care. These products are also known as ‘long-term care annuity’ or ‘immediate needs annuity’. With both, you use a lump sum to buy an insurance policy that pays out a regular lifetime income. This income is then yours to help fund your care fees for as long as you live. While a long-term care annuity might seem like an appealing option, giving you some much-needed peace of mind, they have several limitations that everyone should be aware of before they take one out.

 

What types of long-term care annuities are available?

Broadly speaking, there are two options when it comes to the types of long-term care annuities currently available, depending on whether you need care funding now, or expect to need to fund care in the future. The first is an ‘immediate needs’ annuity, and the second is a ‘deferred annuity’. We explore both of these in a bit more depth below.

 

An immediate needs annuity

This is an insurance policy designed to pay a regular income towards the cost of your care fees over the course of your lifetime. An immediate needs annuity is usually considered appropriate if the individual has health issues or is already receiving care at home or in a care home.

The annuity is bought upfront, with a single payment. The amount you must pay to buy the annuity will be calculated based on factors such as your age, your health, and the expected costs of current and future care. If you’re in poor health, you can expect to pay a lower price for the annuity, given the length of time you will need to pay for care will most likely be shorter than for someone in good health.

 

Disadvantages of an immediate needs annuity

There are several drawbacks that mean immediate needs annuities may not offer the best value to someone in need of long-term care. For starters, the initial cost of the annuity can be staggering, and can eat up much of an individual’s capital assets. Whilst the average stay in care is 26 months, sadly many survive for a much shorter period of time in care, and in these cases, the return on the annuity purchased can prove to be very poor value. Usually, if an individual dies shortly after taking out an immediate needs annuity, there is no return of capital to the estate, leaving beneficiaries in the will significantly worse off.

Second, taking out an immediate needs annuity can take longer than the name would have you believe. As annuities are insurance policies, they have to be underwritten, which means the annuity provider will first collect information about your health from your GP, family and current care provider. Third, if your annuity doesn’t allow for care fee increases, it may not even cover all of your future care costs. If this happens, you will have to make up the shortfall through other means.

 

A deferred annuity

A deferred annuity is similar to an immediate needs annuity, although having bought the annuity, you won’t begin to receive the income payments immediately. Instead, you choose when you want to be paid income, usually between one and five years in the future. The longer the deferred period, the lower the cost of the plan overall.

 

The disadvantages of a deferred annuity

As you would expect, while cheaper than an immediate needs annuity, a deferred annuity still requires an upfront payment. Should you need to pay for care fees sooner than anticipated, you’ll be expected to pay these fees until the deferred annuity income starts. The worst-case scenario would be that care costs increased to levels that saw you run out of money before the deferred annuity kicks in.

It’s also worth noting that the income from your annuity will be taxed at your marginal rate and may also affect your entitlement to means-tested benefits. This applies to immediate needs annuities too.

 

Are long-term care annuities value for money?

The answer to this question really depends on the particular circumstances of the person who is in need of care. We would suggest that the number of people who would benefit from a long-term care annuity is actually rather small, and that it’s a specialist product for those with urgent care needs, and where leaving behind an estate is not a key factor. For the vast majority of people looking to make long-term care plans, other options might offer better value and suit their longer term objectives.

For example, instead of using capital to buy an annuity to pay for care, we often suggest an alternative where funds remain invested and capital is drawn down when required. This is a more flexible approach, and gives your money the chance to keep growing while it’s not needed. The added benefit of this is that upon death, the remaining capital is still available to form part of a person’s estate, and therefore left to beneficiaries.

 

If you are interested in discussing long-term care arrangements 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. 

Yellow note pad with 'Intestacy' on the front

Intestacy rules – why making a will is so important

By | Financial Planning

We often see situations where individuals haven’t made a will and are unaware of the potential consequences of leaving the laws of intestacy to determine the destination of their estate. As October is Free Wills Month, we thought this an ideal opportunity to remind our readers of the importance of making a will.

Free Wills Month is an initiative where a number of leading charities offer members of the public over the age of 55 the opportunity to prepare or change a simple will free of charge, by using a participating Solicitor.

Just under half of the UK population have not made a will, which is a frightening statistic given the potential issues that can arise by relying on the laws of intestacy, which are a standard set of legal rules that apply if an individual dies without having made a valid will. Who benefits from an intestacy depends on a strict order based on family connection, rather than which family member is most in need. It is important to note that these rules differ for estates covered by Scottish Law.

 

Intestacy rules

For those who are married, or in a civil partnership, the surviving spouse or civil partner will receive the full value of the estate, unless there are surviving children. In this instance, the surviving spouse or civil partner will receive the first £270,000 of assets, with the remainder of the estate being divided in half. The surviving spouse or civil partner receives an absolute interest in one half of the remainder, with the other half divided equally between surviving children.

The situation is even more complicated for those who are unmarried. For anyone dying intestate with children (either biological or adopted), the children will inherit the estate at the age of 18, with the estate divided between children equally. For anyone dying without being married or in a civil partnership, and without children, assets first pass to any surviving parents, and then to siblings (if parents are deceased) and then to grandparents (if alive) and then to wider blood relatives, such as aunts and uncles. An individual who dies without any surviving family will see their estate being left to the Crown.

 

Potential complications

As you can see, the intestacy rules are complicated enough, without considering how they haven’t kept up with the way modern families are living. A particular issue we come across regularly is couples that have lived together for many years but have not married, and wrongly assume that this affords each other protection under the law. It is crucial to remember there is no such thing as a common-law partner under UK law, and in this situation an unmarried partner of an individual dying intestate would not be left anything under the intestacy rules. This can leave surviving partners in financial difficulty at a time of great distress, and lead to outcomes that differ wildly from expectations. For example, this could mean the unmarried partner being forced to move out of the family home, or funds being left to an estranged spouse.

A will can also deal with important aspects such as guardianship of children, or how funds are left for minor beneficiaries so that they benefit from any inheritance at the right time. The legal age of majority is 18, however, many would consider 21 or 25 as being more appropriate dates for beneficiaries to receive funds when they are potentially more financially aware and in a position to use the funds wisely for further education costs or a house deposit.

Intestacy also leads to further complications in dealing with the estate. Where a will has been left, this usually clearly sets out the wishes of the deceased, including such matters as funeral arrangements, or how possessions are to be distributed. This is a great help to executors and family members in dealing with arrangements at what is a difficult time. Dying without a will leaves no named executor, and family members or other individuals will need to decide amongst themselves who will be appointed as administrator of the estate.

 

Ensure your will is up to date

At FAS, holistic financial planning is at the heart of what we do. Whilst we do not write wills, we regularly remind our clients of the need to both prepare a will, or ensure an existing will is up to date and reflects an individual’s wishes as part of a wider review of their financial planning objectives. Not having a valid will, or holding a will that is out of date, could potentially undermine financial planning strategies, or potentially lead to higher levels of tax being paid.

In conjunction with reviewing existing wills, or preparing a new will, it is also very important to ensure that an ‘expression of wish’ for any existing pension arrangements is similarly up to date.

On the death of anyone holding a personal pension arrangement, it is a common misconception that the residual pension also passes in accordance with their will. This is not the case, and the pension trustees can choose who will benefit from the pension arrangement. They will, however, consider an ‘expression of wish’ left by the deceased pension holder, which sets out how the pension holder would like the benefits to pass in the event of their death, when deciding who receives benefits from a pension.

 

Make a will this month

Make this month the time to make a will. As part of our holistic planning service, we constantly remind our clients of this important step, ensuring assets accumulated during a lifetime are left in accordance with your wishes. Leaving matters to the laws of intestacy may not achieve the desired outcome and could cause financial distress at an already difficult time.

 

If you are interested in discussing the above 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. 

Woman speaking with her financial adviser

The four questions to ask your financial adviser

By | Financial Planning

Since the COVID-19 pandemic, we have noticed an increase in the number of people coming to us for financial advice. We see this as evidence of the real need for people to seek out professional advice to help with their financial concerns and aspirations. So, we wanted to share some of the questions that should be asked when anyone chooses to meet with a financial adviser.

 

1. What are your professional qualifications?

It always makes good sense to find out what professional qualifications a financial adviser has attained. When it comes to finding the right person, it is important to start with a feeling of trust. You want to feel reassured that they are professionally competent and that they have the necessary specialist knowledge, experience, and technical expertise to be able to advise you properly. Of course, a professionally qualified adviser will be pleased you asked the question and will be more than happy to disclose their credentials as they will have worked very hard to pass their exams!

One of the challenges with the UK financial services sector is that there are a number of different bodies that assist in the attainment of industry professional qualifications entitling someone to be called a ‘Financial Adviser’. These include the Chartered Insurance Institute, the Personal Finance Society, the Institute of Financial Planning, the CFA Society of the UK, and the Chartered Institute for Securities and Investment. All Independent Financial Advisers in the UK are regulated by the Financial Conduct Authority (FCA) and can be found on the FCA register.

At FAS, we are part of a relatively small group of independent financial advice firms in the UK to have been awarded the ‘Chartered Status’ from the Chartered Insurance Institute. This is considered the ‘gold standard’, in terms of commitment to professional excellence and integrity. The Chartered Insurance Institute only awards Chartered Status to firms with the highest level of advanced qualification, an overall commitment to continued professional development, and adherence to an industry-standard Code of Ethics.

 

2. What services do you provide?

People decide to talk to a professional financial adviser for any number of different reasons. Perhaps they have experienced a sudden change in their personal circumstances or decided that the time is right to start planning for their future.

At FAS, we call ourselves financial planners because we believe in offering our clients a comprehensive service that takes everything into account. While some financial advisers can be relied upon to recommend a particular product or service, we believe financial planning should be holistic and more about the actual advice than simply selling financial products.

Our team will talk to you and take whatever time is needed to help determine both your shorter and longer-term financial aims and objectives. This means that as well as covering more immediate issues, such as tax-efficient investments and savings, mortgages and protection and family arrangements, we will also cover a wider variety of topics such as your retirement goals, inheritance tax and estate planning, and any potential later life care needs. For example, tax planning is one of our specialist areas, and because this is such a potentially complex area, it is important that a client receives comprehensive professional advice tailored to their personal situation, rather than receiving generic advice.

Our aim is to work with you to build a well-considered, robust financial plan that can give you peace of mind and allow you to work towards the future you want for yourself and your family. We would always say that a financial plan is better than just selling a product, but this is an important discussion to have with any financial adviser you are considering using.

 

3. How do you get paid for providing financial advice?

This is an important question to ask anyone who provides financial advice, and it is an answer that most advisers will already have prepared in advance. We believe that the best financial advice pays for itself in the long run and that the best available advice is independent in nature.

As the name suggests, an independent financial adviser 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. The alternative is a ‘restricted’ financial adviser, who can only recommend products from a limited selection or product range, not from the entire marketplace. Restricted advisers are usually incentivised to recommend products or services from within the available product range.

We have noticed an increasing number of clients who have come to us because they have been disappointed by the performance of managed portfolio products recommended to them by restricted advisers. This is because in most instances the adviser can only recommend the managed portfolio service from the investment company they work for. However, if you receive an investment recommendation from an independent financial adviser or planner, they are able to research and choose the associated product from the whole of the market, not just one provider.

 

4. What experience do you have advising people in my situation?

One of the most common questions we hear from new potential clients is whether we have experience advising clients in a similar situation to their own. More often than not, the response is a resounding ‘yes’. We have been providing independent financial advice since 1991 so for 30 years we have been able to provide our clients an exceptional level of personal service, tantamount to what you should expect to receive from any professional practice.

We often receive enquiries from potential clients who have had a less than welcoming experience from larger financial advice firms, which has left them feeling neglected while ‘bigger’ clients are prioritised. No one wants to be made to feel like a ‘little fish in a huge pond’, which is why we have continued to expand the business to make sure that both new and existing clients remain well looked after and receive the attention they deserve.

 

Summary

People often make the decision to talk to a financial adviser because they have a specific issue in mind, usually one that demands immediate attention. But looking beyond that, you should look to forge a relationship with a financial professional who understands you, your personal needs, and your lifestyle goals – someone who will be able to use their knowledge and experience to turn this into a well-defined financial plan.

Above all, it is worth thinking about the relationship you have with your financial adviser. It should be capable of lasting for many years, you should feel comfortable with that person and expect to continue to benefit from their advice well into the future.

 

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.