Monthly Archives

April 2019

Should you switch your final salary pension?

By | Financial Planning

Transferring a final salary pension is a big decision that cannot be undone once you have made it. You, therefore, need to be sure that it’s the right thing to do before you move forward.

What exactly is a final salary pension? What are the reasons to stay on your current pension scheme, or potentially move out of it?

Those are some of the questions we will be dealing with in this article. Please be aware that this content is for information purposes only, and should not be taken as financial advice. Speak with a financial adviser prior to making any decisions about transferring your pension.

Indeed, if your final salary/defined benefit pension is worth over £30,000 then you are required by law to seek independent financial advice if you are considering a transfer.

 

Overview of final salary pensions

A final salary pension (sometimes called a defined benefit pension) is a type of pension which you receive from your employer. They are sometimes called “gold plated” pensions because they are increasingly rare. Many people view the benefits as not only industry-leading but also difficult/impossible to replicate elsewhere through other pension schemes.

These pensions are different from the more common type of workplace pension, known as a defined contribution pension. Under this scheme, both you and your employer contribute to your pension pot over time. Under a defined benefit scheme, however, your employer promises to pay you a specified annual income when you retire – for life.

The precise amount you get varies under a defined benefit scheme, depending on factors such as your earnings during employment, your accrual rate and your total years of service. The income you receive is usually index-linked, meaning that as the cost of living rises each year so does the income you receive.

 

Why would I think about transferring?

If this all sounds like a brilliant deal which you would need a good reason to give up, you would generally be right. For most people, it would be fair to say that switching from your final salary pension to a different scheme will not offer the same level of benefits.

With that said, however, there are good reasons to consider switching to another scheme in certain situations. For instance, you cannot pass on your final salary pension to your descendants in the form of an inheritance, like you can with a defined contribution pension.

When someone transfers from a final salary/defined benefit pension, the scheme provider usually offers a “transfer value” – which refers to the sum of money you receive for leaving the pension scheme and putting it into a new pension.

Not all providers will allow you to transfer into a new scheme. These include taxpayer-backed defined benefit pensions (i.e. “unfunded”), such as NHS pensions. If you should, therefore, check that your provider will let you transfer out of the scheme, if you are considering it.

 

Advantages of a transfer

Here are some of the reasons people usually consider transferring out of their final salary pension into a defined contribution pension:

 

#1 Inheritance

As mentioned above, you cannot pass on your final salary/defined benefit pension to beneficiaries. If you die and leave a surviving spouse, then the scheme usually pays out some benefits to this person. However, once they die the pension does not usually pay out to children. A defined contribution pension pot, however, can usually be passed on as an inheritance.

 

#2 Employer stability

Since it is your employer who is promising to pass out your income when you retire, what happens to your pension if your employer goes bust?

Usually, the company pension scheme will be dealt with by the Pension Protection Fund. However, you are unlikely to receive your full benefits (e.g. annual inflationary increases).

 

#3 Your lump sum

If you want access to a lump sum at the beginning of your retirement, then some final salary schemes allow you to do this. However, they often provide a poor deal for converting some of your pension money into cash compared to a defined contribution scheme. In the latter case, you can usually take the full 25% tax-free lump sum you are entitled to.

 

Disadvantages of transferring

With some of the advantages of transferring your pension now specified, here are some of the reasons why people often choose to remain on their defined benefit/final salary scheme:

 

#1 Stability

With a defined contribution pension, your money is usually invested quite heavily in the stock market and so your income might fluctuate depending on how your investments perform. With a defined benefit pension, your employer is obliged to pay you a specified amount. So you know with greater certainty what your retirement income will be.

 

#2 Inflation protection

A defined benefit pension will usually raise your income in line with inflation. That means that as the price of food, fuel and other goods/services go up each year, your pension does not lose purchasing power over time. With a defined contribution pension, you will need to make your own income provisions to account for rising inflation.

 

#3 Future guarantees

You likely do not know how long you will live. That means you do not know how long your retirement income will need to stretch out for. With a defined benefit pension, your income is guaranteed for the rest of your life. With a defined contribution pension, you need to decide how your pension pot will be able to provide for your lifestyle over potentially 30+ years in retirement.

 

Summary

The topic of pension transfers is very complex and everyone’s personal circumstances are different. This means that a pension transfer might right for some people, but not for others.

A lot depends on what is important to you. If you most value being able to pass on your pension to your children, then a pension transfer might be high on your mind. If, however, the most important thing to you is income stability and certainty in retirement, then staying on your current defined benefit scheme might be the better option.

Even in these cases, however, there are exceptions and it’s important to weigh up your options carefully with an experienced, independent financial adviser to make sure you are making the right decision for you based on the best available information.

4 Reasons to Remortgage, & 4 Reasons Not to

By | Financial Planning

Your mortgage is likely to be your biggest expense over the course of your life. So finding a better deal can be very worthwhile.

In fact, getting a new mortgage which has just a 1% lower interest rate compared to your current deal can often equate to thousands of saved pounds in the short term, and tens of thousands in the longer term.

So, your primary motivation for getting a new mortgage (i.e. “remortgaging”) is to put more money in your pocket, which would have otherwise gone towards interest payments. However, whether or not remortgaging is a good idea for you depends on your unique circumstances.

We cannot, unfortunately, cover all of the bases in the article about the ins and outs of remortgaging. However, we can provide some information about when remortgaging might be a good idea to consider:

 

Reasons to Remortgage

 

#1 Fears about rising interest rates

At the time of writing, the UK is currently deliberating Brexit options including further extensions following the missed deadline of 29th March 2019.

Property markets across the country have been jittery to say the least, and there is some talk in the press about the Bank of England raising interest rates later in 2019.

Of course, no one knows for certain what effect Brexit will have on the UK housing market. Interest rates could remain steady in an attempt to provide stability to the wider economy. However, if interest rates do rise then naturally that could have an impact on your mortgage payments.

If you are on a variable rate mortgage, for instance, then your mortgage lender might change the amount you are required to pay each month depending on the Bank of England’s base rate. One option might be to remortgage onto a fixed rate deal for the next 2-5 years, in order to ensure that your monthly mortgage payments remain stable as the UK economy navigates through the post-Brexit economic landscape.

However, please do not take this as a recommendation to ditch your current mortgage deal and apply for a new one. Fixed rate mortgages have their own advantages and disadvantages which may or may not make one suitable for your current financial goals and situation. The same applies to variable rate mortgages. Speak to a financial adviser if you are looking for specialist advice on how to plan your financial affairs.

#2 Rising home value

If your property has dramatically gone up in value since you first took out your mortgage, then your loan-to-value band might now be lower. This could mean that you are eligible to ask for a better deal, with a lower interest rate. It’s not a certainty, but it justifies a look!

#3 Overpayments

Have you suddenly found yourself in a position where you have a lot more disposable income – perhaps due to a big pay rise? In these situations, it can be a good idea to consider overpaying your mortgage in order to reduce the loan term and save money on interest payments.

However, some mortgage deals do not allow you to overpay – or if they do, the amount you can overpay is very small. For people in this scenario, remortgaging can be a good idea if your new deal allows you to overpay a decent sum. However, watch out for any charges or exit fees you might face otherwise you could lose out financially.

#4 Your deal is ending

Most mortgage deals last about 2-5 years. Naturally, when your deal is approaching its end then it’s usually a good idea to shop around for a good deal. You are not obliged to stay with your current mortgage lender.

Start looking around at least three months before your mortgage deal is due to expire. If you are on a fixed rate mortgage and allow yourself to drift over the expiry date, then usually you will be put automatically onto the lender’s variable rate. The monthly payments due under this arrangement are usually higher than your payments were under your fixed rate, so beware.

 

Reasons not to Remortgage

 

#1 Reduced property value

Sometimes, people take out a mortgage and unfortunately the value of their home goes down – meaning you owe a larger portion of the property value to the lender than you previously thought. In the worst cases, you can end up in negative equity – i.e. you owe more to the lender than the total value of the property. Here, you have little choice but to stay where you are until house prices rise again in your area.

 

#2 New circumstances

You should be aware that your mortgage options will likely be affected if you have recently become unemployed, or if you have moved from employed work to self-employment. Moreover, if you have experienced credit problems then this can also affect your mortgage applications.

Lenders are now legally required to see evidence of your income when you apply for a mortgage. If you no longer meet their conditions for a remortgage, then you will likely be required to stay on your current deal.

 

#3 Early repayment charges

Some deals will charge you a lot of money to move out of the deal before your incentive period has ended. Sometimes it can still make sense to move onto a better mortgage deal and take the hit from an early repayment charge, if you will still save money. However, quite often it makes sense to sit tight for a bit and wait until the charges are lower before you move.

 

#4 You have a good deal already

It could well be that you are already on a fantastic mortgage deal, and you’d be foolish to leap off it. However, don’t allow yourself to settle too much into your current deal. In all likelihood, a better offer will come your way eventually and it can pay off to keep your ear to the ground.

How to save £1000’s: Our money renovation guide

By | Money Tips

Did you know that setting aside just one morning could result in thousands of pounds more in your pocket over the next 12 months?

With Brexit dominating the news at the moment and living costs potentially set to rise, it certainly wouldn’t hurt to look at ways to reduce your expenses and build up a savings buffer.

As a financial planning business, we wanted to share some of our thoughts in this article on:

● How you can start setting a spending plan.
● Ways you can reduce some of your outgoings.
● Suggestions for clearing costs incurred by debts.
● Ideas on how this money could be put to better use, both short and long-term.

Before we get started, please note that this article is for information purposes only. It does not constitute financial advice and should not be taken as such.

For financial planning and advice about your own personal goals and situation, please get in touch to speak with us.

 

Setting a spending plan

An important first step to improve your savings and spending efficiency is to take stock of what you earn, how much you spend and what you spend it on.

The best way to do this would be to record your spending in a notebook or smartphone app, to determine your average monthly spending. Most of us are not that organised, however, so you might need to look at your bank statement for the past thirty days and go from there.

You will not know how drastically you need to rein in your spending until this picture is clear in your mind. Here are some obvious expenses to look at:

● Mortgage payments & household bills (e.g. gas, electricity).
● Mobile phone bills and broadband.
● Food bills.
● School fees & childcare costs.
● Car & transport costs.
● Subscriptions
● Debts & finance payments

It can be helpful to divide your expenses into different categories in a similar way to the above, as this can really help make your estimates more accurate.

 

Suggestions for reducing costs

There are literally hundreds of ways you could potentially reduce your outgoings. Here are just a few suggestions for you to consider:

● Check your Council Tax band. Many people are in the wrong one without knowing it. Since this tax goes up about 4.5% each year, it’s worth making sure you are not paying more than you should be.
● Check your broadband. Some people pay over £600 a year by just staying with their current provider, rather than taking advantage of promotional deals which can bring your bill down to as little as £12 a month.
● Take a hard look at childcare. The equivalent of one parent’s wage can be entirely devoted towards childcare costs, so it’s always a good idea to look at whether potential savings can be made here. For instance, are there any free summer holiday activities you can take advantage of? Does your employer offer any help with childcare costs which you are not using?
● Direct debits. This is another huge area where people’s money disappears without their noticing. Whether it’s a £40-per-month unused gym membership, or unused subscriptions to online services such as Audible and Spotify, you could save over £1,000 over the course of a year just by making some sensible cutting decisions here!

 

Debt-cutting ideas

Clearing a high-interest debt quickly can be one of the best ways to save money over the longer term. Leaving credit cards unpaid and building up interest, for instance, can easily amount to hundreds of pounds per year.

However, cutting your outgoings isn’t just about addressing the obvious debts such as credit cards and personal loans. It’s also worth taking a look at your mortgage, which is likely the biggest debt you will have as a homeowner.

Remortgaging your home, for instance, can sometimes open the door to a lower interest rate and reduced monthly mortgage payments. This frees up some extra cash in the short term, and also potentially save you tens of thousands more in the form of reduced interest down the line.

 

Putting money to better use

Hopefully, by this point, you will have already identified some areas where you could save hundreds or even thousands of pounds per year through careful financial restructuring.

What, then, should you do with the extra cash now sitting in your account as a result? It completely depends on your unique circumstances and goals, but here are some ideas that everyone should consider:

● Think about building up an emergency fund. Ideally, this should amount to between 3-6 months of your living costs. Not only will this help keep you afloat in the event of an expensive, unexpected expense which could otherwise plunge you into financial trouble (e.g. covering the costs of a sudden broken boiler).
● Take a look at your pension. Would it be worth contributing more of that extra cash towards your long-term future? Many people are just putting as little as 3-5% of their salary towards their workplace pension scheme, which is unlikely to cover your lifestyle in later life on its own (even when combined with the state pension). Putting even just £50 a month more towards your pension could result in thousands more to support you in later life, when you retire.
● Consider investing. It’s easy to spend extra money on things which cost you money – such as a new car, or a motorbike. There’s nothing wrong with treating yourself from time to time, but what if you spent some of that instead on things which could actually make you money (i.e. an asset)? For instance, perhaps you have a goal to save up for a deposit on a property within the next 10 years. One option would be to build up some saving towards this goal within a Cash ISA account, but another option might be to invest your money in a diverse set of investments in order to try and get a better investment return at the end of the 10-year period.

Tax breaks for widows to help you through the rough times

By | Money Tips

Spousal bereavement is an unimaginably difficult time. Not only are you having to process your grief, but there is the whirlwind of sorting through the estate and finances.

In this midst of the complexities, many people end up needlessly paying tax on assets and money inherited from their lost loved one – particularly when it comes to ISA savings.

Most people need all the emotional, relational and financial support they can get during their bereavement. So make sure you don’t miss out on these important tax breaks below.

 

Keep your tax-free wrapper

In 2015, the UK government introduced the Additional Permitted Subscription allowance (APS). This means that if your spouse or civil partner dies, then you can claim extra ISA allowances.

Normally, in 2018-19 you can put up to £20,000 per year into an ISA (or set of ISAs) without the amount being liable to tax. Under the APS scheme, however, you can inherit your deceased spouse’s/civil partner’s ISA savings without the amount being taxed.

The APS scheme is not widely known, unfortunately, so it is estimated that as many as 15% of widows are missing out on these benefits. With the average APS claim currently standing at around £55,000, clearly more needs to be done to inform grieving people about this important source of financial provision and support.

Here are some important things to know about the APS scheme:

● You can apply for the additional ISA allowance if your spouse or civil partner died on or after 3 December 2014.
● You must have been living together at the time of the death. You must not have been separated or estranged from your spouse or civil partner.
● Subscriptions cannot be made to or from a Junior ISA.
● Non-UK residents can make subscriptions.
● You can make the subscription to a wide range of different ISA types including stocks and shares, innovative and cash ISAs.

 

How APS subscriptions are processed

As the surviving spouse or civil partner, you will need to speak to the deceased’s ISA manager to begin the APS process. This means providing them with sufficient evidence that they are satisfied you are their client’s surviving spouse/civil partner.

Important information you should consider submitting to the ISA manager therefore include:

● Your name and physical address.
● National insurance numbers.
● Dates of birth, marriage/civil partnership and the date of the death.

You will likely need to submit this information and other important details to the ISA manager via a formal application form.

In some cases, someone else might make an APS subscription on your behalf – for instance, if they hold Legal Power of Attorney (LPA). In this instance, the ISA manager will need to see a copy of the LPA and check the relevant provisions.

 

Valuing the deceased’s ISA(s)

It isn’t always clear how much your spouse/civil partner has in their ISA(s), and it’s important to establish this early on.

For instance, stocks and shares ISAs need to be properly valued so the ISA manager knows how much to put into your account. This can get complicated, as it involves referring to obscure laws and regulations such as section 272 Taxation of Chargeable Gains Act 1992.

Essentially, the ISA manager should carry out this valuation legwork for you. It’s a good idea to get the advice of a professional financial adviser particularly at this stage, who can look over the ISA manager’s valuation and ensure you are getting a fair deal.

Things can become even more complicated, unfortunately, depending on the date your loved one died and the number of ISAs they held.

If they died before 6 April 2018 and held numerous ISAs, then the ISA manager needs to take into account a single additional permitted subscription limit. This will need to account for the total value of all of the deceased’s ISAs at the time of their death.

If your spouse or civil partner died after the 6 April 2018, however, then the rules are slightly different. Here, the single additional permitted subscription limit is instead determined by the total values of each ISA at the time it ceased to be a “continuing account”.

Confused yet? Don’t worry if you are. This is a big reason why many bereaved people miss out on important tax benefits during this difficult time. Yet with the help of a professional financial adviser, you can make sure your interests are protected and get the help you need to navigate this complex tax landscape without it feeling overwhelming.

 

Time limits

One important detail to bear in mind is the time restrictions on APS. If the APS is made as stock, for instance, then your subscription must be completed within 180 days of your spouse’s / civil partner’s assets distribution date.

If, however, the APS is being made in cash then you have three years from the date of death to complete the subscription. Or, you have up to 180 days following completion of the administration of your spouse’s / civil partner’s estate. Whichever happens first.

Bear in mind that if you do not act within the relevant timeframes, then you might need to gradually funnel your spouse’s / civil partner’s ISA savings into your own in order to minimise the tax involved.

For instance, if they had £60,000 in ISA savings and you contribute nothing to your own ISA(s) during a given tax year, then in 2018-19 you could put £20,000 of your spouse’s / civil partner’s ISA savings into your own ISA(s) without attracting tax. You would need to do this each financial year, however, over three years in order to move this money without facing tax.