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Don’t Rely On Using The Sale Of Your Home To Fund Your Retirement

Blog 2014 (2)

As with any major reform to savings, pensions and investments, the recent government changes to annuities has been accompanied by a flurry of newspaper headlines, ranging from the alarming to the surreal.

Deciding how you will fund your retirement is one of the biggest financial decisions you will ever make and one that cannot be taken lightly, but often the information overload that happens courtesy of the media can leave savers feeling more uncertain than ever.

It is tempting in this situation to rely on a tried and trusted method of funding a retirement, the accumulation of equity in a property, but this might not be the safest and most effective way of paying for a retirement.

Using a property to pay for retirement is always gamble because savers have to make educated guesses on the robustness of the property market in the future when they eventually come to sell.

There might be scope for many people to profit if they act fast, sell up when property prices are high, and invest the equity.

The Bank of England’s Monetary Policy Committee may put up interest rates after the next general election and there is no guarantee that Help to Buy will continue in its present form, with some schemes encountering difficulties already.

So what other options might there be?

In the last year the pension market has undergone some radical changes and the options for savers and those who are due to benefit from their pensions have increased.

With the end of compulsory annuities on most pensions, savers have more flexibility to draw down a lump sum of their nest egg at retirement.

Paying off a mortgage or wiping out remaining debt in one go might be more cost effective solution for retirees than simply being tied to an annuity payment.

In September it was announced that pensions could become tax efficient savings funds, not just designed for paying an income later in life but also a way of passing on a pension pot to the next generation.

From April, depending on your age when you die, you may be able to leave your pension fund with no tax to pay on it (previously most inherited funds were taxed at an eye watering (previously it was taxed at an eye watering 55 percent).

It is not possible to leave an annuity policy in a will to a family member and as a result of the announced changes, annuities may become even less attractive as a means of managing ones pension income.

Some 12 million people in the UK in defined contribution pension schemes will be affected by the changes and they will be able to pass their pensions on without incurring penalties for inheritance tax if they are over the age of 75 when they decide to do so.

The government, with next year’s election in mind is looking to offer the electorate a reduction in the taxation burden on pensions and inheritance, and in this way they have given future retirees a lot more options.

If you are uncertain about how best to provide for you and your loved ones in the future, it might be an idea to seek some advice to give you an informed opinion on your possible choices.

To find out more about the options available, speak with a financial advisor.

 

 

 

 

 

Life Insurance – A Simple Way To Save An Inheritance

Simple Inheritance Blog ImageWould you rather leave your worldly goods to your loved ones (or your favourite charity) or the tax man?

Inheritance tax has long been the subject of heated debate, but the chances of it being repealed any time soon, is very remote.  So for most people, the choice of creating a financial plan to deal with it or leave your loved ones to foot the bill is pretty important.

Inheritance Tax Is A Growing Concern

Under current rules transfers of assets between spouses and civil partners are (usually) ignored for the purposes of any tax, including inheritance tax.  Each individual can leave an estate of up to £325K to any other individual or organization before Inheritance Tax becomes payable.

Inheritance Tax is levied at a flat rate of 40% (with a reduction of 4% where the deceased has left at least 10% of their assets to charity).

Any unused portion of this allowance can be transferred to the surviving spouse/civil partner as a percentage.  For example £162.5K would be transferred as an allowance of 50% extra.  This means that the surviving spouse/partner would be able to leave a tax-free estate consisting of their own personal allowance plus an extra 50%.

Looking at these figures and comparing them with house prices, it’s easy to see that many home owners could find their estate subject to inheritance tax.

Inheritance Tax Must Be Paid Before The Estate Is Released

Upon a person’s death, their executor must inform the Inland Revenue of the value of that person’s estate.  They will then receive a formal notification of how much tax is due.  In general, this must be paid within 6 months of the deceased’s death.  If it is not the Inland Revenue will charge interest on the outstanding balance.  Although the payment can be made out of the deceased’s estate, it must be made before the bulk of the estate is released.

There is an exception for funeral expenses, although the bank or building society must agree to allow the executor access to the account.  If they do not, these can be recouped from the estate and can be deducted from its value for tax purposes.  Added together this can all mean that families who have worked hard at money management to put their family finances in good order can find themselves under tremendous financial pressure at a time when they are likely to be feeling highly emotional.

Planning ahead with the help of a financial adviser can help to minimize the stress of dealing with a bereavement.

Life Insurance Can Be A Lifeline

Life insurance can be a very efficient way to ensure that there are funds readily available to cover Inheritance Tax and funeral expenses.   Rather than naming an individual as a beneficiary of the policy, the holder can request that the eventual payout be made into a trust, held on behalf of your preferred beneficiaries.

In this way, the funds will be kept separate from your estate and can be released immediately (and relatively simply).  This can also help to ensure that a surviving partner and/or children have sufficient funds to live comfortably while probate is being undertaken.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

New Parents Ignoring Life Insurance

BRITAIN-ROYALS-BABY-RELIGIONHaving a first baby is a steep learning curve.  One of the first things new parents may have to learn is how they can adapt to survive on minimal sleep.  It’s also expensive.  Cots, prams, car seats and other paraphernalia all need to be bought to keep the newborn safe and healthy.  Putting these together means that new parents can often find themselves spending money and missing out on important purchases.

A Savings Account Versus Life Insurance

Parents may open some form of savings account for their new arrival.  In itself this can be a sensible option.  For example Junior ISA’s provide a tax-efficient way of saving for when your tiny baby becomes a full-size, 18-year-old.  Few parents, however, give serious thought as to what would happen to their child if they were to die in the meantime.  While it’s fair to say that we are far more likely to live to a ripe old age than, say 50 years ago, sadly there is no guarantee.  Accidents happen and so do illnesses.   Younger people can and do die, and when they do, the consequences can be particularly severe. For new parents, who are caring for a child in the most physically demanding period of its life, the death of one or more parents can be catastrophic.  Savings accounts may be a useful way of planning for the future, but life insurance will take care of financial issues in the here-and-now.

Life Insurance Needs To Change With Your Lifestyle

Parents who have bought a house prior to having a baby are likely to have life insurance already.  It’s a condition of many mortgages.  For some mortgages however, the only requirement is to be able to repay the outstanding balance.  When a baby comes on the scene, the new parents have to think seriously about how to ensure their child’s welfare in the event of the unexpected death of one or both of them.  This means thinking well ahead until the end of the child’s full-time education.  It needs to cover everything from childcare fees in the early years to school trips in later childhood and university fees in early adulthood.

Peace Of Mind Can Cost Less Than Toys

New parents may find themselves buying baby items which are hardly or even used. The cost of these items could well cover the cost of life insurance for the first year of the baby’s life.  For healthy, younger adults an acceptable level of cover could be priced as low as a few pounds a week.  This is usually more than achievable for people who exercise good money management and keep a firm grip of the family finances.  Of course, life insurance only pays out in the event of a death and since both parents will hopefully live to see their baby reach adulthood, it can help a lot to have a financial plan in place to ensure that there are funds available to them when they reach school-leaving age.  Getting advice from a financial adviser can help put your child’s future life on a solid footing before they have even taken their first steps.

Why Do A Third Of UK Families Lack Life Insurance?

Blog Image 23 June 2014Life insurance can be the financial buffer which stops a painful bereavement becoming a financial catastrophe.  While there’s more to life than money, an effective financial plan recognises the fact that everyday actions have a financial value.  To put it another way, if we were left unable to carry out these activities, we’d have to pay someone else to do them for us.  Notwithstanding this, however, a third of families in the UK are without life insurance, which raises the question of why.

Lack Of Money

This is the single most obvious reason for people not having cover.  In one sense it’s completely understandable.  Most people are feeling the squeeze just now and for those who are struggling to make ends meet; it’s tempting to dismiss life insurance as a nice-to-have.  It’s all the more tempting for younger people who may think of it as something they can buy “in a few years”.  Unfortunately not even younger people are immune to death and when they die the effects can be particularly devastating.

Younger children are the most demanding in practical terms.  They effectively need 24/7 supervision, which can place a tremendous strain on a surviving partner.  While children require less direct supervision as they age, they have other, less tangible needs.  The most obvious of these is for a good education.  These needs can be much more challenging to satisfy with only the income of the surviving partner.

Lack Of Confidence

Some people feel deterred from sorting out their financial affairs because they think it will be too complicated.  These people are likely to get particular benefit from seeking help from a professional financial adviser.  Money can’t buy happiness but lack of money can lead to a lot of misery.  This means that most people will benefit hugely from having a financial plan to ensure that they can meet their financial goals over the years.  This is more than just exercising good money management on the family finances.

It’s about understanding what’s important in your life, which will vary depending on the life stage you have reached.  One constant however is the need to protect what really matters to you, be it your health, your children or your home.  While single people who are renting a home and have no dependents may be able to afford to ignore life insurance, for most people with children it’s a must.

Lack Of Clarity

All life insurance products ultimately belong to one of two types.  There are life policies, which are open-ended and term-assurance products which are for a fixed period.  Notwithstanding this, providers try to differentiate their products in the eyes of the public by customizing them to specific markets.  They may also offer special deals. All of this can easily confuse customers and put them off taking out life insurance at all.

Fortunately, a provider will be happy to explain exactly what their offerings do and do not provide to help you make an informed decision.

Source: 35% of British families have no financial safety net in place at all to cope with a sudden loss of income according to Legal & General research.

The Best Life Insurers

life_insurers_blogBy definition insurance is something you hope you’ll never need.  If you do need it, however, then the value of a good policy, backed by a good insurer, becomes obvious.  This is particularly true of life insurance where claims are made as a result of a bereavement.  There are three key points to look for when trying to identify the best life insurers.

Financial Position

Small can be beautiful as long as it’s backed by strength.  Put quite simply in the event of making a claim, you want to be sure that having taken your premiums, your insurer will actually pay and pay reasonably promptly.  This is important for any claim and all the more so if you would like some or all of your benefit to be paid as longer-term income rather than as a lump sum.

It’s also worth understanding a company’s pedigree.  Has it been spun off from or absorbed by a larger company?  How long has it been in business overall and how happy are its shareholders/investors.  In short, you should expect an insurance company to demonstrate the sort of good money management you apply to the family finances.  If this sounds complicated, then an experienced financial adviser will be familiar with companies as well as products and will be able to point you in the right direction.

Flexibility And Diversity

Although all life insurance essentially boils down to a choice of an open-ended life policy or a term-assurance policy, there are a variety of other options available to tailor them to suit.  These include guaranteed rates (keeping your premiums the same over the whole term/lifetime of policy).  The ability to vary terms can also be useful.  It allows you to adapt your policy to your changing needs without having to start again from scratch.  Likewise the ability to vary the sum insured can be helpful, for example it can be reduced in stages as a mortgage is paid off.  This can reduce the level of payments and allow funds to be diverted to other areas of a financial plan.

Customer Services

Two little words which can make a world of difference.  Customer service isn’t just about being polite and helpful when you’re making a claim (although they certainly helps).  There are some more concrete points to check.  First of all, how quickly do they make a decision and offer a price?  For people with very specialist requirements there may be a need for an insurer to take some time out to check if cover can be provided and if so how much it will cost.

For most people however, companies should be prepared to give a prompt answer along with a price.  Once a decision has been made, do they offer cover during the underwriting process?  This is a fairly standard option, but it is not universal so it pays to check as the process can be quite lengthy.  Do they offer annual statements?  These can be a very convenient reminder to double-check that your cover is still appropriate for your needs.  Do they have a telephone number?  If so how helpful are their agents?  If not, what contact options do they have and how efficiently do they work?