The late 1980s TV series “Home to Roost” saw Henry Willows (John Thaw) have his life turned upside down after his 18-year-old son Matthew came to live with him. Today practical economics has made adult children living at home a reality in many families. The current generation of young adults face a number of challenges on the journey to (financial) independence.
While politicians wrangle about tuition fees, parents know that the real cost of an education goes way beyond that. Put quite simply, people need to live while they’re studying and that means paying for housing costs if living away from home, and still having money left over to pay for other living expenses.
These days getting that first job may mean starting off on a zero-hours contract, working part-time or temping. It may even mean accepting a period of voluntary work or an unpaid internship to get a foot in the door of a particularly competitive industry. None of these are necessarily ideal situations for independent living in general, nor for satisfying the affordability criteria for mortgages in particular.
There’s a lot that could be said about the property market. One key point is that deposits are massively important and it’s much easier to save for a deposit when living rent-free with parents than when paying rent elsewhere.
Anyone who’s watched period drama’s such as Downton Abbey will know that multi-generational homes are nothing new. Several generations of the Crawley family all live together (more or less) happily. Admittedly Downton Abbey was substantially bigger than many modern family homes and lifestyles and expectations back then were very different. Modern homes can work on a multi-generational basis, but this should ideally be a matter of choice. It should also be clear how financial responsibilities are shared between members.
If adult children are able and willing to pay their share of the household bills then there should be no adverse effect on the family finance. If, on the other hand, parents are effectively subsidising their adult children then their own personal wealth may suffer. Savings may be used up and plans for investing may have to be put on hold. In short the presence of adult children in the house may be a sign that it’s time to get some advice from a professional financial adviser to help them to move on.
The first step to nudging a young adult gently out of the nest is understanding why they’re in it in the first place. In some cases there may be non-financial reasons at play as well as financial ones. For example if parents are doing all the housework as well as providing financing then this may be a strong incentive for adult children to stay in the parental home.
For example if a young adult is struggling to find stable work then it may be helpful for them to get some career advice. This can look at the skills, abilities, and qualifications they have at the moment and see what their options are right now. This might also be an opportunity to see if there are any “easy wins” to help get young adults into work. For example first aid certificates, food hygiene certificates, and SIA licences are all relatively easy to obtain (at least compared to a degree) and can help kick-start a young adult into some form of employment.
Some parents may find it appropriate to gift their children cash to help them on their way, for example to provide a deposit for a starter home. This may be seen as their inheritance in advance and in some circumstances may be helpful from the perspective of reducing a parent’s tax liability. Such gifts however, should be looked at in terms of each individual’s situation to ensure that they are appropriate and will be used sensibly.
The private pensions market has undergone a period of rapid and intensive change in the past year. In the next two years state pensions will also be transformed and inevitably there will be those who benefit from the changes and those who don’t.
This blog is written to give you the best chance of benefiting from the new pensions landscape; normally the savers who are informed, pro active, and realistic about their circumstances and entitlements retire wealthier.
Last year the Chancellor of the Exchequer made annuities non compulsory on”defined contributions” pensions, meaning that when a saver wants to access their pension they can decide exactly how to spend it.
This gives some the flexibility to use a lump sum from their pension to pay off mortgages or other debt, contribute towards grandchildren’s education fees or buy a new property.
The FCA Review
The FCA’s review of the market has exposed some annuity providers discouraging potential customers from shopping around and charging penalties to existing customers who did.
The FCA has not published the names of the worst offenders yet and is waiting on further information provided by companies about their practices before it decides to take action.
What does this mean for you?
If you are considering buying an annuity you need to make sure you compare the fees and charges of each annuity scheme.
Not only have “defined contributions” pensions undergone significant changes in the last year, but plans for state pensions have also changed.
The statutory pension in 2016 will increase to a uniform rate for all claimants of £148.40 per week, however if you were reach the age of 65 on or after April 1st 2020 you will have to wait a further year in order to be able to claim as retirement age will rise to 66 that year.
In 2028, people will only be able to retire at the age of 67, and it is this increase in retirement ages that has helped the Chancellor to appear ‘generous’.
That said, these calculations are all based on the fact that overall we’re living longer, healthier lives than ever before so there’s every reason to be positive.
What to do next…
At the start of each year it is important to audit your pension affairs. You need to find out how many pension pots you have and work out what is in them, how well they are performing, and what the likely yield will be.
Will your pension be able to meet your financial needs?
Is your pension sufficient for the retirement you have planned?
If you are ten or twenty years away from retirement it is important to know whether there is a shortfall between what you can afford and what you can envisage.
If you find yourself unhappy with your current pension provision and would like some advice on how you can provide for the future, why not talk to a professional financial adviser.
We can take a positive approach to life and make positive lifestyle choices. Alternatively, we can be a Mr (or Mrs) Burns. Admittedly, the arch-villain of The Simpsons is an extreme. He is, however, a perfect example of someone who sees money as an end in itself.
It’s hard to imagine him singing “Money can’t buy me love”. Actually, it’s hard to imagine him singing at all. His problem isn’t that he has too much money. Bruce Wayne, Tony Stark and Professor X were all similarly loaded. It’s all about attitude. Some financially-successful movie characters can teach us a lot about how to manage money.
Uncle Scrooge McDuck is an expert at money management. His personal money is kept in gold coins in a vault. That vault is also his favourite place for swimming. Although he started out as a miser, Scrooge soon mellowed. He has stayed thrifty, but learned to be generous. Although he is never without a financial plan (or several), he stays “Uncle” Scrooge.
In other words, he always remembers to take care of his family. He generously gives unbiased advice to his three nephews. In fact, he frequently takes them with him on adventures.
His money opens up opportunities for himself and his young nephews. Although Scrooge is getting on in years, planning for care is not a concern for him. His thrift and investments have made sure that he will always have what he needs.
“No Addams has worked in the last 200 years!” Why should they when the family owns so many companies? Gomez’s business investments are highly varied. He owns a salt mine, a crocodile farm, and a tombstone factory to name but a few. It’s unclear whether is success is due to luck, skill or good advice.
Not worrying about money leaves Gomez with plenty of energy for his loved ones. He can literally afford to let his life revolve around his wife and children. Gomez probably has a longer investing horizon than mere mortals. His principals of quality and varied investments are, however, a good example to ordinary humans. Gomez never puts all his eggs in one basket – not even lizard eggs.
Although Bruce Wayne inherited a fortune, he built on his parents’ legacy. Like Gomez Addams, Bruce Wayne’s business interests are varied. Wayne Enterprises is known to be active in such diverse areas as food, finance and high technology. Indeed many of Batman’s gadgets (including the Batmobile) are manufactured by Wayne Enterprises.
Bruce Wayne has always stayed in tune with his family’s values. At the same time however, he’s keen to keep the business in line with modern trends. Clearly he understands that traditions and modern opportunities can be happily combined. As Batman, Bruce Wayne shows his darker, serious side. As himself, he can be more lighthearted and generous. He is happy to spend his money; enjoying quality nights out and entertaining at his mansion.
After all the work his does in both his guises, arguably he’s earned the right to a rest!
There are two basic parts to any loan. One part is the sum borrowed, sometimes known as the capital. The other part is the fee charged by the lender. In terms of mortgages, this fee is usually charged in the form of interest.
At this time there are three basic types of mortgage available:
Repayment – in which the monthly repayments are set at a level which ultimately repays both the capital and the interest.
Interest-only – in which the monthly repayments only pay the interest and the borrower must make other arrangements to pay off the capital at the end of the loan period.
Offset – in which the mortgage is roughly equivalent to a huge, fixed-term overdraft.
The endowment mis-selling scandal of the 1980s still has the power to generate strong emotions. In short buyers bought property on interest-only mortgages. They also purchased endowment policies to go along with them. The idea was that the endowment policy would not only pay off the mortgage capital but also make the home-buyer a profit. Unfortunately in many cases the endowments didn’t even pay off the mortgage capital. This meant that some home-buyers found themselves scrambling to find an alternative way to pay off the balance of their mortgage. The resulting scandal highlighted the fact that home buyers often did not understand the product they were being sold.
Notwithstanding this, interest-only mortgages remained a staple of the buy-to-let market. The key difference here being, of course, that the legal home owner does not live in the property. Interest-only mortgages increasingly became a means of building personal wealth by investing in property rather than for buying a home to live in.
Now interest-only mortgages are starting to make a comeback into the residential housing market. Leeds Building Society, for example, is currently offering an interest-only mortgage with a choice of 3 introductory deals. There are stringent conditions attached, such as a minimum 50% deposit. Interestingly this mortgage allows for 10% of the capital to be repaid each year without early repayment penalties being applied. This means that technically it could be used in a similar way to a repayment mortgage, but with more flexibility with regards to how much is paid each month. Meanwhile the Clydesdale Bank is offering interest-only residential mortgages to high-net worth customers with a minimum 25% deposit.
Like all financial products, interest-only mortgages need to be examined in the context of an individual’s financial situation. There are three key points to bear in mind when considering them.
Firstly the affordability criteria introduced in 2014 applies to interest-only mortgages in the residential market. You will therefore need to be able to provide evidence that you can afford the monthly repayments as well as having a feasible plan to repay the capital. When considering this point, think about what would happen if you couldn’t sell your house at the end of the mortgage period. Say there was a lull in the market or a temporary drop in house prices. How would you cope in that situation?
Secondly deposits matter to interest-only mortgages in the same way as they do for other kinds of mortgages. It is therefore important to have savings in place to be able to make a respectable down payment.
Thirdly, and possibly most importantly of all, it is absolutely vital to have a plan in place to pay back the capital. It is also crucial to “stress test this”. This includes making contingency plans for unexpected life events. For example what will happen if you are unable to work for a time, perhaps because of illness? It also includes thinking about unexpected financial situations. For example, if your plan is to pay off the capital with income from investing, what will happen if your investments under-perform?
Getting some advice from a financial adviser can help to resolve these issues and give you the best chance of finding the right mortgage for you.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
In the next few months with a general election on the horizon, millions of voters and savers will be eagerly waiting for news of what provision there will be for them in their retirement.
The state pension, which is currently capped at a maximum of £113.10 per week, has been amended, adapted, altered and changed by successive governments over the last half century or so. The result can be that state pensions confusing, contradictory and often unfair.
New government rules that will eventually come into effect from 2016 onwards have been drawn up in order to make state pensions simpler and fairer.
In this article we will explore the new changes and how they will affect your financial future.
State Pensions are related to National Insurance contributions, a pension is simply the result of your money, plus some extra from the government which is hopefully invested wisely.
Currently, people who take a break from contributions such as new mothers on maternity leave are penalised and people who switch from full time employment to self employment may find they have less in their State Pension pot.
The new State Pension that will be introduced in 2016 will be worth no less than £148.40 per week (this is based on current rates of inflation and might be higher in 2016). The final figure will be set in August this year.
Since 2010 if a married man or woman had lower National Insurance contributions, they were able to increase the size of their state pension based on the contributions of their wife or husband.
Now in 2015 couples in civil partnerships will also be able to benefit in the same way, the amount will be capped at the level of the basic state pension, which is £67.80 per week.
Married couples and civil partners who benefit from this do not have to live with their partner or even wait until their partner has drawn their pension, as long as they are eligible to draw their own.
The increases in life expectancy across Britain have had a dramatic effect on the overall cost of state pensions.
The number of years in which people are likely to be claiming has increased dramatically since State Pensions were introduced. In addition to this, the population itself is ageing, presenting the government with a major dilemma.
The answer is to gradually increase the State Pension age, and after 2020 retirement ages for men and women retiring after January 1st that year will increase to 66, rising to 67 by 2028.
If you were unsure what your State Pension age will be there is a Pension Calculator accessible to everybody, or speak to a financial adviser.
Review all your pensions
The three months before the end of the tax year in April are some of the most important in the financial calendar, particularly for savers.
If you have a number of pension pots, including your state pension, if might be a good idea in the coming weeks to review them.
Carrying out an audit of the overall value of your pensions is relatively straight forward and is especially important given the forthcoming changes to pension entitlement.
The most important task relating to state pensions is to contact the Future Pensions Centre to find out exactly what you are entitled to and when you will receive it.
The world of private pensions was changed forever last April with the ending of compulsory annuities on the vast majority of pensions, those insurance policies that savers were obliged to purchase with their pension pots.
If you are planning for retirement and need some advice about what to do with your pension in the post annuity world, why not talk to a professional financial adviser.
All too often it can feel like the latter, and while teachers take a well-earned break from the classroom, your role as a parent is to find fun and stimulating activities for your children to do.
Countless websites and blogs will suggest (as if you hadn’t already thought of it) to take a day out to a safari park or hit the cinema.
This is a quick guide to a few alternative projects you can do that won’t break the bank and are just that bit different.
Involving children in anything creative tends to be a great antidote to boredom, but being able to taste the finished product is even better.
Baking needn’t be the complex, like it is on the Great British Bake Off; instead there are for cakes, biscuits and bread.
Sewing has become an increasingly popular hobby for children in the last few years.
The recession and the growing ‘make do and mend’ culture in Britain has made thrifty solutions and natural creativity a really enjoyable activity for children.
Even if you don’t have any needle craft skills yourself, finding patterns, material, needle and thread and even a cheap sewing machine is quite easy and can mean hours of concentration and enjoyment for your kids.
One way of involving your children away from the television and outside during the half term holiday is to involve them in a garden or allotment project.
Creating a vegetable patch, raised flower beds, planting fruit trees or bushes, or planting a small herb garden – these are all perfect activities for the early spring in the gardening calendar.
By the summer time you will be able to see the rewards of your efforts and your children will be able to enjoy seeing the garden blossom.
And then there is everything else…
Of course, the above list of holistic activities might not work and your children might well roll their eyes at the sound of baking or sewing. There really is no accounting for taste sometimes.
In which case it is important not to ignore the standard solutions of day trips to local attractions such as the cinema, leisure centre’s or the ice rink.
Your children are, of course, your toughest audience and, though you love them dearly, they are often difficult to please.
Talk of “the housing market” often focuses on buying property and in particular the challenges facing first time buyers. There are, however, a number of people for whom renting is an appropriate lifestyle choice. The most obvious example of this is younger people, who are still forming relationships and establishing themselves professionally. Renters, of course, need landlords, which opens up opportunities for investing in rental property. There are various ways to go about this, so those interested in this area might be well served by getting some financial advice from a qualified financial adviser before deciding which option is right for them. Those who are seriously considering buying a property to let out should think about all the implications before they start.
Financing a buy to let property
Unless you can afford to buy a rental property outright, you will need to look for a specific buy-to-let mortgage. While these are officially exempt from the affordability criteria which have been applied since April 2014, potential investors need to be aware that their application is still likely to be looked at very carefully. Buyers also need to understand that the deals on offer in the buy-to-let mortgage market can be very different from those available to people buying a home to live in. Interest rates and fees, for example, can be substantially higher and lenders may insist on bigger deposits. There may also be a preference for younger borrowers, i.e. people who will have paid off their mortgage by the time they retire or at least very shortly afterwards.
A buy to let mortgage can last longer than a tenancy agreement
One of the reasons lenders look carefully at buy-to-let mortgage applications is that mortgage repayments have to be made every month, regardless of whether or not there are tenants in the property at the time. Potential buy-to-let investors will therefore need to have funds set aside to cope with vacant periods (or problems with tenants not paying or paying late). These funds have to be viewed separately from general savings.
Be clear about the difference between rental income and rising house prices
Renting out a property will bring you an income, but you will only be able to turn rising house prices into hard cash if you sell it. It is, however, risky to assume that you can pay off a mortgage by selling the property towards the end of the term. If the market value of your investment property falls, for any reason, then you will be left to deal with the shortfall. This is a particular risk for those with interest-only mortgages, which are currently far more common in the buy-to-let market than in the residential one. Potential property investors should also be aware that profit on the sale of buy-to-let properties is liable to be subject to Capital Gains Tax.
Remember to budget for running costs
Potential landlords will need to decide whether or not they are going to work through an agency or be “hands on”. Agencies charge fees but can save time and hassle. In either case, buy-to-let properties need much the same care and maintenance as any other home and one way or another these costs will come back to the owner of the property.
Be realistic about your market
It may be an old cliché but location matters a lot in the property market. There are therefore two key questions to ask when looking for buy to let properties. These are “What is the going rate for rentals and sales in the area?” and “Who are my potential tenants?” Student towns have obvious appeal to buy-to-let investors, as do places where there are lots of young adults, particularly young professionals. There are, however, other markets, for example in some areas family homes could be a very good investment. As you can see, there’s actually quite a lot to becoming a buy-to-let property investor. The golden rule, however, is always to ensure that you can realistically expect a rental income which is at least high enough to cover all the costs involved.
Given that a mortgage is usually a long-term commitment, sometimes a significant one, paying it off can be a major financial (and personal) milestone. For some people it may even be worth considering taking steps to repay a mortgage early.
The practicalities of overpaying a mortgage
There are essentially two parts to a mortgage. The first part is the capital – the money borrowers need when they are buying a home. The second part is the interest charged on the loan. Both the capital and the interest need to be repaid but this can be done in different ways.
With repayment mortgages, repayments are intended to pay off both the interest and the capital borrowed. In principle making overpayments reduces the amount of capital borrowed and this should reduce the amount of interest payable. How this works in practice will depend on the lender.
With interest-only mortgages, the repayments are only to cover the interest. Borrowers would need to check with their lender if there was a possibility of making overpayments to reduce the sum owed. If not then the borrower needs to make provision to repay the capital at the end of the mortgage term.
With offset mortgages, the mortgage works like a massive overdraft. As long as borrowers have reduced the outstanding balance to zero by the end of the term, they are largely free to manage their overdraft as they see fit. There is no repayment schedule as such but borrowers can manage their family finance to reduce the balance to zero as quickly as possible if they wish.
There can be a cost to repaying early
Put quite simply, the interest charged on a mortgage is the lender’s gain. Making overpayments to reduce the amount of interest payable on a mortgage means that a lender makes less gain on it. Because of this, some lenders may charge fees to repay a mortgage early. On the other hand, it also reduces a lender’s risk and therefore some lenders may be sympathetic towards the idea. With this in mind, it can be wise to check the small print on your mortgage or to contact your lender directly to see what their policy is.
Is repaying early the right decision?
Before making any significant overpayments to a mortgage, it can be a very good idea to get some professional financial advice from a qualified financial adviser who can look at your overall financial situation and your personal and financial goals and help you to take the right decisions for your own, specific, circumstances.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE