Income Protection vs. Key Person Insurance: Which Do I Need?

By | Pensions

At a glance, Income Protection and Key Person Insurance might look like the same thing. After all, they both intend to help protect a business if someone falls seriously ill or is injured; although the latter safeguards against death, as well.

In broad terms, Key Person Insurance is designed to protect a company’s financial interests. Income Protection, however, is intended to look after an individual and their family (i.e. following a serious injury or diagnosis of illness, which prohibits the person from working).

In this short guide, we have provided a summary of the key similarities and differences between Income Protection and Key Person Insurance. We’ll also be suggesting some scenarios where either might be appropriate to consider.

Key Person Insurance

If you are a Director or an important stakeholder in a particular business, then you will likely want to consider the benefits of Key Person Insurance. Essentially, it is a type of insurance which helps to ensure the business has access to much-needed funds if a key person, shareholder or decision-maker dies.

Some insurance policies will offer Critical Illness Cover (CIC), which could provide an emergency lump sum to the business if a key person can suddenly no longer work due to certain illnesses or injuries. If you are considering adding CIC to a Key Person Insurance policy, then it is important to check the details carefully with one of our Financial Planners. Certain illnesses and injuries might not be covered under different policies. You might need to balance the premiums of the policy with its conditions, as comprehensive policies are likely to be more costly.

Please speak to us about the tax implications of a Key Person Insurance policy. For instance, if you take out a policy for “business continuity purposes” then you should be able to treat the insurance premiums as a tax-deductible business expense. If, however, you are thinking about using Key Person Insurance to protect a loan, then the policy will likely not qualify as “tax-deductible”.

Key Person Insurance can be used to achieve a range of goals, including:

    Repay loans which might need settling.
    Providing funds to help close the business in a methodical, non-chaotic way.
    Open up a financial “safety net” to mitigate against a possible loss of profits.
    Supply funds for staff training and recruitment purposes.
    Provide much-needed funds for projects and developments.

Income Protection

As mentioned above, Income Protection exists primarily to protect an individual and their family, should they find themselves no longer able to work due to injury or illness. Should this, unfortunately, happen to you, and you have taken out such a policy, then if you meet its conditions you should be entitled to up to 80% of your pre-incapacity salary.

Sometimes a business will pay for an employee’s policy (e.g. a Company Director). In which case, this is usually called “Executive Income Protection” or EIP. Similar to Key Person Insurance, EIP can be treated as a tax-deductible business expense.

It’s worth noting, however, that if the policy’s conditions are met then the benefits are paid directly to the business, not to the individual. This means that when the company then distributes this post-incapacity, replacement remuneration to the employee, it will be subject to tax. So, it’s worth running this by us to ascertain the best way to distribute this in a tax-efficient manner.

In many cases, an individual will simply take out a policy themselves rather than a business taking it out on their behalf. Income Protection can be an attractive option for self-employed people, who typically do not otherwise have a means of attaining “sick pay” (since they have no employer to pay it).

Bear in mind that these self-funded policies are not tax-deductible, since you will likely be paying for the premiums using post-tax income. The good news, however, is that the benefits you receive from the Income Protection policy are usually exempt from tax.

Final Thoughts

Many businesses recognise the value of certain types of insurance to protect their assets and future growth prospects. Public Liability Insurance, for instance, is crucial for protecting your business against compensation claims levelled against you by customers. Employers’ Liability Insurance will help to cover you if such claims emanate from your staff.

However, as many as 3/5 small businesses in the UK admit to having no succession plan. Nearly 90% of the UK’s registered companies comprise businesses which employ fewer than 5 people, which are especially vulnerable if a key person was suddenly removed from the picture. This vulnerability, in turn, can hold businesses back due to investor reluctance or maintaining lines of credit.

If you are considering Key Person Insurance or Income Protection as a possible solution to your needs, then act swiftly. According to the ONS, a 35-year-old man has a 1/62 chance of dying within the next ten years. By the age 45, the chances change to 1/29 and by age 55, the chances are 1/12.

At FAS, we offer financial planning and advice on a wide range of business and income protection solutions. If you are interested in exploring your options, please do give us a call.

A Short Pension Guide for Your Grandchildren

By | Pensions

Did you know that in 2019-20 you can put up to £2,880 per year into a pension for your grandchild (i.e. £240 per month), regardless of their age?

Conveniently, this £2,880 also falls into the £3,000 annual limit on gifts, which are exempt from Inheritance Tax. Moreover, any money which is placed into your grandchild’s pension receives tax relief, effectively acting as a Government “top-up” to your contributions. This tax relief amounts to 20% on the contributions. So, if you put the full £2,880 per year into your grandchild’s pension, they would also receive £720 in the form of tax relief. To be clear, a grandchild can only receive one annual net payment of £2,880 into a pension so two grandparents cannot contribute £2,880 each.

All of these benefits can lead many grandparents to seriously consider making contributions to a grandchild’s pension as they feel it allows them to leave a more meaningful Inheritance to their beneficiaries via Inheritance Tax reduction.

Pensions for Grandchildren: Pros & Cons

As you know, today’s UK State Pension is unlikely to cover most people’s outgoings in retirement. With both the UK’s overall population and life spans projected to increase over the coming decades, the pressure on future Government’s pension budgets is likely to be stretched even further.

In light of this, the main advantage of setting up a pension for your grandchild is so you can potentially make a significant difference to their financial future by:

    Reducing their future reliance on the State Pension.
    Reducing the pressure of them having to make their own pension contributions.

The other attractive benefit to starting a pension for your grandchild (particularly if they are very young) is that the funds you invest in have more time to grow.

For instance, let’s give some thought to how much a single lump-sum contribution of £2,880 into your grandchild’s pension could potentially grow over 30 years, 40 years and 50 years (assuming a 5% annual rate of return). Whilst there are many variables to consider, broadly speaking values could be in the region of:

After 30 years: £12,447.19
After 40 years: £20,275.17
After 50 years: £33,026.11

However, the main disadvantage to consider before setting up a pension for your grandchild relates to accessibility. Under the existing pension rules in 2019-20, you cannot access money in your pension pot(s) until you are at least 55 years old.

So, if your loved one wants to use the money for a house deposit, to cover wedding costs or to help fund their way through University, then they will most likely be unable to do so. Bear in mind that the age you can access your non-State Pension(s) is also set to rise to 57 by 2028 and is it possible that this could rise even further in the distant future.

Some clients prefer to gift money to their grandchild’s Junior ISA or other investment, whilst committing other funds towards their pension. This way, the grandchild can benefit from having investments building for their future retirement, whilst allowing easy access to other funds they may need for a house deposit, wedding or another important life event.

Choosing a Pension for Your Grandchild

Certain types of pension are prohibited when setting up a pension for a grandchild. For instance, you cannot set up a workplace pension on their behalf. However, you should be able to arrange a Personal Pension Plan.

As there are different types of Personal Pension to choose from, it’s a good idea to speak to us first. You could choose to open a SIPP for your grandchild (Self-Invested Personal Pension), which can offer a fairly wide range of investment choices, but bear in mind that these pensions can often carry higher charges when it comes to investment management fees so its best if we are involved to help you find the most competitively charged contract. We can help you choose the right SIPP from the wide range available including “Child SIPPs” or “Junior SIPPs” targeted specifically at grandparents who are interested in setting up a pension for their grandchild.

Are you set to get the best State Pension deal?

By | Pensions

The State Pension is the money you get from the Government to provide you with an income in retirement. This might sound straightforward enough but the system is actually quite complex.

The system can be a bit of a minefield but it’s important to understand it as your State Pension entitlement could have a big impact on your future retirement lifestyle.

In this article, we will briefly cover how the State Pension works, how to calculate the level of State Pension you are likely to receive in retirement and ways in which you could get a better deal from the Government.

What is the State Pension?

State Pension rules changed in April 2016 which made them more difficult to understand. Before this happened, people received a “basic” State Pension when they reached retirement age and in some cases, certain individuals received an “additional” State Pension.

So, if you reached retirement age before April 2016 then in the 2019-20 financial year, the basic State Pension making its way to your account should be £129.20.

If, however, you are set to retire after April 2016, your State Pension will operate under the new rules and you should receive a “single-tier” State Pension when you reach retirement age (sometimes referred to as “new State Pension”).

In 2019-20, the amount you receive under the full, new State Pension is £168.60 (about £8,767.20 per year). We highlight the word “full” because you may not actually receive this amount as it is dependent on your personal circumstances.

If, for example, you have not built up 35 years of qualifying National Insurance contributions (NICs) then you are unlikely to receive the maximum £168.60 available. On the other hand, if you have accumulated an “Additional State Pension” then you may well receive more than this.

It is worth mentioning briefly that it has not been possible to build up any additional state pension (sometimes called the “Second State Pension” or “State Earnings-Related Pension Scheme”) after April 2016. However, you may have prior to this date, as you approach your retirement age after 2016.

You might be wondering what your “retirement age” is (i.e. the point where you can start claiming your State Pension). In 2019-20 it is between 65 and 66 for everybody which is set to increase in future years. So, for instance, in 2028 it will be 67 and by 2039 it will have risen further to 68.

How much will I get?

As mentioned above, how much money you get from the Government in retirement depends on a range of factors, including:

-Whether you reached retirement age before April 2016. Certain groups of people get more, or less, than others under the old system compared to the new one.
-How many years of NICs you have built up (remember, you need at last 35 to get the full, new State Pension).
-Your pension credit status. This an extra, means-tested source of income for retired people who are struggling financially. You must meet certain criteria to be able to claim this benefit, which we will come to below.
-Any Additional State Pension you may have accumulated.

The other important thing to remember is that to get any kind of State Pension, you must have at least 10 years of qualifying NICs.

How to get a better State Pension deal

Clearly, if you are still working and will be for a good few more years, then one important way to get the best pension deal is to make sure you build up at least 10 years of NICs throughout your employment.

Better still, try to meet the 35 qualifying years to ensure you become entitled to the full, new State Pension when you reach your state retirement age. In general, those in full time employment earning over £166 a week should be making NICs automatically via their employer, under the Pay-As-You-Earn system (PAYE).

Looking forward, it may well be that you will fall short of the 35 years’ worth of NICs through your future employment. Should this be the case, it is possible to “top up” some of your previous years where you did not make a qualifying year (e.g. because you lived abroad), by making voluntary NICs. Another option could be to consider deferring your whole State Pension, which can sometimes result in you receiving a higher income from the Government when you do eventually claim it.

You can check for gaps in your NI record on the government’s website.

For expectant parents, you may be wondering what could happen to your NICs if one or both of you intend to take time off work to look after your child.

This situation can become quite complicated but generally speaking, if you are over the age of 16 and your child is less than 12 years of age, you should receive “Class 3 National Insurance credits” if you are receiving Child Benefit. These credits allow you to fill gaps in your NI record, even if you are not working.

Another option couples may wish to consider is making voluntary NICs on behalf of a spouse or partner so they can build up their own full new State Pension record.

Final thoughts

We hope this has helped with the basic aspects of the State Pension which may affect you but there is a lot more to consider when factoring your State Pension into your overall retirement plan so please do get in touch if you wish to explore this further.

Scams & Unregulated Investments: Update & Warning

By | Pensions

You have spent years building your wealth to support your family and lifestyle. It would be a great shame to lose it to scammers, unscrupulous businesses and high-risk investments.

Yet every year that is exactly what happens. Since 2014 at least £42 million has disappeared from people’s pension pots due to fraud. Worryingly, the Financial Conduct Authority (FCA) says this is likely to be a fraction of the scale of the problem.

Safeguarding your hard-earned family wealth is one of our top priorities at FAS. In this guide, we are going to shed light on some of the latest scams so that you are armed with more knowledge to protect yourself.

The two main areas we will cover are pension scams and unregulated investments.

Pension Scams: What to Watch For

The UK government finally made cold calling about pensions illegal in January 2019 – after years of consultation. This is a welcome move.

This new law was brought in due to pensioners receiving fraudulent calls. People who were tricked by these calls lost, on average, about £91,000 in 2018 and some were even left penniless in retirement.

Despite the ban, however, there are still companies making unsolicited calls to people in the UK about their pension. Sometimes these businesses are based off-shore, far away from the reach of prosecution under British law. So you still need to be careful.

Please note that pension scams do not merely come in the form of unsolicited phone calls about your pension. They can also involve unexpected texts, emails or social media messages.

Be especially wary if you are in your 40s, 50s or 60s as these are prime targets for scammers.

As a general guide:

    Be immediately suspicious of any company that contacts you out of the blue about your pension(s). End the call if you do not recognise them.
    If a caller claims that they can help you access your pension before the age of 55, then it is almost certainly a scam. End the call and do not give out any personal information.
    Should a caller try to pressure you into acting quickly (due to a time-sensitive “offer”) then do not proceed any further with the conversation. Authorised Financial Planners are not allowed to pressure you into important financial decisions, so a stranger on the phone is certainly not allowed to either!
    If you are promised a deal which sounds too good to be true, then it almost certainly is. The main scam to watch out for here are promises of high investment returns with little-to-no investment risk. Almost always, investments with the potential for higher returns also carry a higher level of risk.
    Be wary of anyone offering a free pension review. This might be an attempt by a fraudulent person to access your financial information.

If the company you are speaking to is not FCA-authorised, then you should certainly not entertain a conversation with the caller. Either check the FCA register for the company name if you are at all uncertain about who you are dealing with or contact us.

Remember, a company is only allowed to contact you about your pension if they are FCA regulated and they have an existing relationship with you.

Unregulated Investments: Be on the Lookout

The tactics and issues surrounding pension scams are very similar to the dangers posed by people who try to sell you unregulated investments.

If someone contacts you unexpectedly about a “great investment” opportunity, and you have never spoken to them about it before, then you need to be very careful.

Generally speaking, we would urge you to end the conversation as soon as possible. Make sure you do not give away any personal information over the phone and try to record the name of the business that the caller claims to represent.

Remember, a company must be regulated by the FCA to provide the vast majority of financial services in the UK. If the business is not regulated, then you know not to deal with them further.

However, there is a chance that a caller might indeed represent an FCA-registered firm, but they are trying to sell you an “unregulated product”.

These financial products are high-risk and are not covered by the FCA’s rules or the Financial Services Compensation Scheme. That means you are unlikely to get any money back if you invest in the product and things go awry.

Once again, resist any claims which sound too good to be true (i.e. high returns and low / no investment risk) as well as any pressure to make quick decisions.

Be especially wary if the investment “opportunity” concerns bamboo, hotels, cryptocurrency or storage as these are unregulated products. For a full list of unregulated products, please see the FCA website here.

The Value of a Financial Planner

If there’s one valuable service that a good Financial Planner can provide, it is to give you a reliable “sounding board” and “firewall” against potential scams like the above.

Should someone contact you out of the blue about your pension or an investment opportunity, then you can ask us about it. We will be able to quickly detect whether or not it was a scam and advise you accordingly.

The value of a long-term, trusting relationship with a Financial Planner cannot be understated. It is certainly more reliable than someone you do not know, contacting you unexpectedly, offering grandiose promises and pressuring you to act against your best instincts!

If you are concerned about a recent call, email or message you received then please get in touch.

5 Tips To Ensure Your Pension Lasts As Long As You Do

By | Pensions

There is probably no bigger financial worry for pensioners – and soon to be pensioners – than the thought of running out of money in retirement.

At FAS, we frequently encounter this fear when speaking to both new and existing clients. The good news is there are many practical, positive steps you can take now to ensure your future retirement is comfortable and secure.

Official statistics are showing that not only is the UK population growing but people are also living longer. This situation is likely to put additional strain on the State Pension when faced with the prospect that retirement could well be one of the longest phases in a British adult’s life.

It is therefore crucial that you plan as early as possible for your retirement to ensure you achieve the lifestyle you want when you eventually stop working.

Consider for a moment that the current basic UK State Pension would give you a weekly income of £125.95. Even with no mortgage borrowing and with greatly reduced monthly outgoings, this is barely enough for most to live on. You therefore need to look beyond the State Pension in order to achieve a comfortable retirement.

Many studies suggest that millions of people are ‘sleepwalking into pensioner poverty’ due to inadequate pension savings. Around I in 6 pensioners are living in poor conditions and complacency now is likely to cause this to rise in the not-too-distant future.

So, how can you ensure that you have a stable, secure income in retirement?

Here are 5 tips to get you started:

Take stock of your assets

Of course, this is the natural place to begin when starting to think about your retirement plan. Your assets include not just short-term savings but also property, investments, business assets, your State Pension, existing personal pensions and pension savings.

Make a detailed list of your assets and calculate their estimated value. If you are not sure of your assets’ value – such as your Final Salary Pension – you may well benefit from going through all of this with one of our Financial Planners.

Check your tax reliefs

It is quite possible that a number of your assets are not being used in the most tax-efficient way. In which case, you are needlessly giving money away to the taxman.

For instance, if you are a Higher Rate taxpayer then contributing towards a pension could actually reduce your taxable income. Remember, pension contributions receive tax relief at your marginal rate, so every 60p you put into a pension pot is currently boosted up to £1 by the Government.

Moreover, you might want to consider any workplace Salary Sacrifice schemes on offer in order to save even further on Tax. For instance, your employer could pay for car parking near your workplace in exchange for a reduction in your salary. Whilst this wouldn’t necessarily reduce your take home pay, you would pay less Income Tax and National Insurance contributions.

Work out your expenses in retirement

It is very easy to underestimate how much you will need in retirement. You may have well paid off the mortgage, the kids may have left home and there will be no more work commuting costs. However, research suggests that UK pensioners should aim for an income of at least £23,000 per year in order to have a comfortable retirement. As a minimum, you are likely to need around £18,000 to cover the essentials, such as household bills.

Of course, your State Pension should cover some of this but certainly not all of it. So, you need to take the time to carefully consider what you would like to do in retirement and realistically what your outgoings are likely to be when you give up work. Ask yourself questions such as, will you want a new car every 5 years? Will you want regular holidays? You’ll need to factor in those luxuries as well.

Take stock of your goals

Once you have gathered all of this information, it will need to consider your future in line with your financial goals. Now ask yourself, when do you want to retire? What kind of lifestyle do you want in retirement, and where do you see yourself living?

If you plan to retire early then bear in mind that you will not start receiving the State Pension until you meet the required age set by the Government. For many people, this will be aged 68. However, your pension age might be slightly earlier, so make sure your financial plan allows for this if you’re set on early retirement.

Get to know your pension options

There are a number of ways to use your pension money in retirement. Our Financial Planners help clients decide which of the available options is right for them. Here is some food for thought:

  • You do not necessarily have to start drawing your pension once you reach your retirement age – you could continue to work and keep the money invested so that it continues to grow.
  • It is not a sensible idea to withdraw all the money from your pensions as the majority will be taxed. However, you can withdraw up to 25% tax free.
  • For some people, keeping most of their pension money invested whilst drawing an income, works well. Income levels can depend on investment performance.
  • You could use your pension money to buy a financial product which gives you a guaranteed retirement income, for the rest of your life. Whilst this may appear an attractive option, it is not as flexible as the alternatives so we would always recommend speaking to our of our Financial Planners who can help you to make the right decision.