10 October 2018

Protecting Your Lifestyle - Insurance Options

We're all aware of the role that insurance can play in protecting our "stuff" - cars, house contents, pets, and so on. But insurance also provides wider opportunities to protect our lifestyle and those we leave behind when we die.

Term Assurance is fairly straightforward - and often inexpensive. It could, for example, provide a lump sum to pay off a mortgage if you were to die. That's essential protection where a family could be left behind. It is also possible to receive the payment in instalments - perhaps to cover ongoing family expenses for a while.

Whole of Life Cover might be relevant if you want to be sure to pass on a lump sum to someone on your death. That could provide your family with the means of paying an Inheritance Tax bill, for example.

Income Protection Insurance could be valuable if you don't have a big employer to carry on paying you while you are off sick. Many small business owners would struggle to survive financially if they were off work for any length of time. Income Protection Insurance could replace a proportion of your income.

Critical Illness Cover - If you have concerns about particular illnesses then this insurance pays out on the diagnosis of a range of ailments. It is not intended to exactly match any additional costs you may incur, but provides some compensation in a difficult time.

Private Medical Insurance will help pay for private health care, enabling you to receive treatment at a more convenient time and place than the NHS might have provided. Alternatively, if you have adequate invested assets, you might choose to "self-insure" and pay for the treatment directly.

Business Owners have particular requirements. It may be about mitigating the effect of losing a key person in the business if they die, or it may be about having a lump sum available to buy the shares of one of the owners if they die. That is likely to need a shareholder agreement alongside term assurance.

Overall the most important things are to know what event you are insuring against, and what you want to happen if it does.

25 September 2018

Financial Planning with Trusts

I have written about Trusts a number of times over the years (click on "Trusts" in the Labels index - on the right of the main blog page to see). Mostly I have started with the reason you might want a trust. Here's another way of looking at it, though - a list of different types of trust and where they might be useful.

Expertise is needed, though, not only to help select the appropriate trust, but also to advise on how the money put into trust should be invested. Note that Inheritance Tax-efficient trusts generally require 7 years to be outside your estate.

Absolute trust
A simple (but inflexible) solution where you do not require access to the capital held in trust and know who you want to leave the money to.

Discretionary trust
Keep control and have flexibility over how wealth is distributed. Effective for Inheritance Tax in most cases.

"Best start in life" trust
A discretionary trust that enables you to pass on wealth in an IHT-efficient way, and can provide for tax-efficient payments for the benefit of children.

Reversionary ("lifestyle") trust 
Has an option to take back a fixed proportion of the value each year. What remains is outside your estate after 7 years.

Excess income trust
Build a nest egg for beneficiaries, free of IHT.

Discounted gift trust
Receive regular fixed payments for life with the balance passed to beneficiaries.

Loan trust
Since it's a loan you still have access to the capital. But any investment growth is outside your estate for IHT purposes.

6 September 2018

Should I ... Sell Everything if I'm Nervous?

Nervous babyFrom time to time a client will tell me they are nervous about the future. The trigger might be something political or financial like the Euro Crisis, Brexit, or Trump, or it may simply result from reading the Daily Mail(!).

History tells us that it is not generally worth making changes to long term investments - including pensions - in response to short term events. But if you are getting close to needing access to an investment, perhaps retirement is looming, then it may be a good thing to take action anyway.

So if you are really concerned about protecting your assets what can you do?

Depending on what investments you hold it may be possible to reduce the expected volatility (risk) of your portfolio by switching into more stable funds (more fixed interest ("bonds"), perhaps?).

Or your investment product may offer a fund which is "smoothed" and which has the effect of dampening down the worst ups and downs in the short term.

Some products allow you to add a guarantee to an investment (usually only at the beginning, though). That often takes the form of insurance to prevent the value falling below - say - 90% of its highest ever value. But like any insurance, it costs you - typically in the form of higher annual product charges.

Ultimately you could sell everything to cash, perhaps keeping it within the investment wrapper, although deciding when to get back into the market is always the challenge. More often than not this strategy results in your being worse off than if you had simply left things where they were.

4 July 2018

Withdrawing Money from your Pension

Since April 2015 it has been possible to withdraw money from certain types of pension once you are over 55. That sounds good at first, but there are some big pitfalls to be aware of.

Firstly, what is possible? Well, it depends on the type of pension and the provider. But in the best (most flexible) case you can choose to withdraw some or all of the value of a pension as a lump sum. Up to 25% (generally) of the value will be tax-free, with the rest being taxable as income.

But, withdrawing from a pension means it is no longer available to provide an income in retirement. So you would need to be comfortable that you have adequate alternative income.

And tax is a bigger issue than you might think. The pension provider will treat it as a payment under PAYE, and it will generally be taxed in the month of withdrawal as though you will be withdrawing that amount every month! That results in a tax over-payment, and although the situation will eventually be sorted out the immediate effect can be that you receive a lot less than you expect.

There are other issues to think about, too. The Lifetime Allowance may need considering for larger pensions; future contributions to other pensions may be limited; you may be losing guarantees which would only apply at retirement age; and the amount withdrawn becomes part of your estate for Inheritance Tax purposes (whereas it probably wasn't while within the pension).

All in all, while it's possible, it's worth taking advice before falling down that hole!

9 April 2018

Tax on Savings and Investments - April 2018 Update

Various changes have taken place recently, some of which may require action from the saver / investor.

From April 2016 interest on savings was paid gross (that means Income Tax was not deducted). You are still responsible for paying any tax due, though.

To help with that, a Personal Savings Allowance was introduced. Within that you don't have to pay tax, but if any interest is received above it you do. It is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers (2017-18 and 2018-19). Most people don't earn that much interest these days, but if you do you need to tell the tax man.

Also in April 2016 a tax-free Dividend Allowance of £5,000 was introduced to replace the "tax credit" system that previously applied. If you received more than that in dividends during 2017-18 you should complete a self-assessment tax return.

The Dividend Allowance falls to £2,000 from April 2018.

From April 2017 "collective investments" (generally meaning investment funds) joined the  "gross" party and now pay dividends and interest gross. Information from the investment provider (after April 2018) will enable you to see if tax is due.

Capital Gains Tax applies to the growth of certain (non-property) investments when you sell. There have been no significant changes recently - a slightly increased allowance continues to be available, while the rate itself is a manageable 10% for gains within the basic rate band, or 20% above that.

All of the above can be bypassed if your savings or investments are held within an ISA. You don't need to declare interest or capital gains on a tax return, even if you are completing one for other reasons.

The Inheritance Tax nil rate band continues to be £325,000 although the Residence Nil Rate Band rises to £125,000 from April 2018.

1 March 2018

Funding Long-term Care - Myths

Sorting out funding for care in later life is normally a once-in-a-lifetime requirement (although I guess you may have more dependant relations and friends than me!). So knowledge about the subject is not particularly widespread, resulting in some myths...

1. Care Funding is Free
False! It's easy to confuse healthcare services (free via the NHS) and social care services (which are means-tested by the local authority - unless you qualify for NHS Continuing Healthcare funding). But in England, if you have more than £23,250 in assets (including your property if no-one else lives there) you will have to pay the full cost for social care fees.

2. If you run out of money paying for social care the State will pick up the cost
False! The local authority will often only pay a lower amount than the actual cost, so a top-up is needed. And if you run out of money then you may have to move somewhere cheaper that fits within the local authority's budget.

3. Either I have the money or I don't - a financial adviser won't help
False! Only registered financial advisers can advise on all the different ways of paying for care, including Immediate Care Annuities.

4. Attendance Allowance can't be paid when in a residential care home
False! AA is a non-means-tested benefit, paid tax-free towards the cost of living with a disability.

5. My local authority will tell me whether I am entitled to payments or not
Not necessarily accurately! It is a complex system with "fault lines" between health and social care, and differences in interpretation between local authorities.

6. Care in my own home will be more expensive than in a residential care home
False! Domiciliary care is not necessarily more expensive since the accommodation costs don't need to be paid for. You are also more in control of what level of care you have.

7. It is good financial planning to give away my assets before I need care
Beware! While it is true that social care costs are means-tested, local authorities are able to look at your financial history and if it appears that you deliberately deprived yourself of assets then those gifts can be treated as "notional capital" which still belongs to you.

8. I will have to sell my home to pay for care
Not necessarily. The rules are complicated but it is certainly not a foregone conclusion.

7 February 2018

Eight reasons to avoid equity income funds for income

Many investors (and financial advisers) rely on equity income funds to provide income. They are funds which invest in companies paying dividends, and those dividends are paid out as income, preserving - the theory goes - the capital value. But the approach is not without its problems and it is not one that I generally take with my clients. Because ...
  • Dividend payments are not regular. Some pay quarterly, some half-yearly, etc.. That leads to an uneven income for investors - good if that is a significant part of your income.
  • Dividend amounts are not regular either. It's like an employer paying different amounts every month if it is your main income.
  • Income cannot readily be changed. When circumstances change and additional income is needed, a dividend strategy cannot deliver. 
  • Whenever a fund manager has to restrict the companies they can hold in their fund - such as to those that pay dividends - they are likely to restrict their performance. The data bears that out with Citywire reporting lower returns for UK equity income funds over three years than for the UK All Companies sector (admittedly using average performance in each sector).
  • Dividend-paying companies are mostly UK-based. While the rest of the world is catching up to some extent, having to bias your portfolio to one investment sector is a risky approach.
  • Taking income from dividends doesn't guarantee that the capital value will not fall, any more than it does with a growth-oriented fund.
  • Companies sometimes have to skew their financial situation in order to pay dividends. Companies with pension deficits are sooner or later going to have to prioritise that rather than paying dividends. And that is particularly difficult if you have a history of paying rising dividends. Think Carillion for a recent example.
  • The tax situation could go either way depending on investor circumstances. There is a small dividend allowance, but for many investors, using their Capital Gains Tax exemption is going to be more effective. If funds are held in in ISA then tax doesn't apply anyway.
So what is the alternative? A strategy to sell from a broadly-based portfolio to provide “income”  in the form of regular withdrawals is generally preferable in my view. Either by selling across all funds or by defining a single low-volatility fund to make regular sales from, and then topping that up from the growth part of the portfolio on an annual basis, for example

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