Archive for June, 2015

Will You Get The Full State Pension?

Tuesday, June 30th, 2015

fullpensionIn the Jane Austen novel Emma, the main character, Emma Woodhouse wittily describes the difference between being rich and being poor in old age.

Emma was published in 1815, but in principle her comments still hold today. Those with enough money can find their later years some of the most fulfilling of their lives. Those who are short of money can find them difficult and depressing.

A Brief History of the State Pension

The original state pension was introduced in 1909. Unsurprisingly it has seen quite a few changes since then.

Starting in April 2016 the existing state pension will be changed to the new state pension. As the new state pension is a means-tested benefit the amount received, if any, depends on your National Insurance contributions. You are likely to need at least 10 years’ worth of payments to claim any state pension. You will need at least 35 years’ worth of payments to claim the maximum amount.

How Do I Calculate My Pension?

The easiest way to calculate your state pension is to get an estimate from the website. You can also apply for a National Insurance statement, which will show if there are gaps in your payment record. These may have been for perfectly legitimate reasons and be completely legal, but they may still impact your future pension.

If this is the case, you may be able to undo, or at least limit the damage, by making additional NI contributions.

You can also have NI contributions credited to you if you are in receipt of certain benefits. This could be particularly useful to people taking time out of work to raise children or to care for elderly relatives. Again, you can check if you are eligible for NI credits on the website.

Can I Rely on the State Pension?

There are two parts to this question.

The first part is how likely it is that there will continue to be a state pension.

The second part is whether or not it will be enough to live on.

There are no guaranteed answers to either part of the question. It should, however, be possible to make some reasonable guesses about the second part.

In short, you need to think seriously about the sort of lifestyle you want to have in retirement. Then you need to start costing out your plans. Of course, some aspects of your life may be substantially cheaper in retirement. For example you may have paid off your mortgage. You may also be able to stop buying a season ticket to travel to work or to give up your car.

You may, however, get a surprise at just how many expenses you will still have in retirement. For example, if you own your own home you will still need to maintain it. That’s even before you start thinking about actually having fun in your retirement.

Voluntary Pension Contributions Could Make All The Difference

Under the auto-enrolment scheme, all eligible workers are automatically enrolled into a workplace pension scheme.

As a part of this scheme, workers make pension contributions automatically out of their wages. These contributions benefit from tax relief.

Employers also make contributions. There are therefore obvious benefits to being a part of a workplace pension scheme.

There is, however, the obvious drawback that pensions contributions reduce the amount of money a person has available in the here and now. As the scheme is entirely voluntary, everyone needs to take their own decision based on their own personal circumstances.

It is, however, arguably impossible to overstate the importance of having adequate retirement savings in place. Does anyone really want to spend their later years in poverty?

Use Your ISA Allowance Or Lose It

Friday, June 26th, 2015

ISAAllowanceThe phrase “use it or lose it” is very relevant to ISAs.  As of April 6th 2015 you have 366 days to save up to £15,240 in your ISA.  Even though 2016 is a leap year, giving you an extra day to achieve this, it’s recommended to get off the starting blocks quickly.  Let’s cover the basics first.

What Is An ISA?

ISA stands for Individual Savings Account.  In very simple terms, you pay into an ISA out of your post-tax income.  You can either keep this money as cash or use it to buy investments.  You should know that there is a government-defined list of ISA-approved investments and you have to choose from these.  Having said that, the list is pretty extensive, so you have a good chance of finding something to suit you.  If you keep it as cash then the interest you earn is tax-free.  Generally speaking income earned from investments is also tax-free, but there are some exceptions to this.

How Does An ISA Work?

You pay into an ISA in the same way as you pay into any other bank account.  As previously mentioned the amount you can deposit in any one year is capped.  It’s important to understand that this cap relates to the amount deposited rather than the amount in the account at the end of the tax year.  In other words, if you withdraw money, you can’t just put it back later.  Otherwise ISAs work much the same way as a standard savings account or as an investment-funding account.  You can even use the same ISA for both purposes, dividing your money as you see fit.

Do I Have to Pay into An ISA in One Go?

No, you can save over the course of the year if you want to.  Alternatively you can pay in a lump sum if that suits you better.

What’s The Difference Between ISAs And NISAs?

Last year ISAs were given a revamp.  In short the limits were increased and they were made more flexible.  For a while these new-format ISAs were referred to as NISAs.  Sometimes they still are, but the term ISA is also in common use.  There’s a limit to how long something can really be considered new.

How Do I Save into A NISA/ISA?

The short answer is however it suits you best.  If you have a regular income, you can set up a standing order to ensure that your ISA is topped up when you get paid.  If your income fluctuates you can deposit money throughout the year as you have it spare.  Alternatively you could save into a regular savings account throughout the year and transfer a lump sum at the end of the tax year.  That way you can take out and replace money without any penalties.

How can I make the most of my NISA/ISA?

Quite simply the more you put in, the more you can potentially get out.  In other words, if you possibly can, use your whole ISA allowance.

If you were unable to max out your ISA last year, now may be a good time to reflect on why that was.  If you simply didn’t have the money, then that’s fair enough.  Is there anything you could do to make your income go a little further this year?  Maybe now would be a good time to review the family finances and run a keen eye over your household budget.  If you did have the money but didn’t put it into an ISA, what specifically stopped you?  Did you just forget?  If so a standing order may be the answer.  Alternatively you could set a reminder on your phone or calendar to double-check if you should be making a deposit.

Increase Your Savings Vs Paying Your Mortgage Off Early

Tuesday, June 23rd, 2015

SavingsVSMortgagesIn the past six years, the Bank of England has presented home owners who have savings with a dilemma that it is difficult to resolve.

The slashing of the base interest rate to 0.5 percent has resulted in falling rates on mortgages, making borrowing to afford properties cheaper, but it has also seen the return on savings slump.

Therefore, a property owner with spare cash might be less concerned about paying extra on his already cheap home loan, but also might feel less than incentivised to pour cash into a savings account that offers a three percent APR.

This blog doesn’t pretend to have the answers to this particular conundrum and couldn’t give advice even if it did. Instead, in the next few paragraphs we will explore the various options of home owners and savers.

Paying off the mortgage faster.

By paying £10, £20, £50 or £100 extra off your mortgage every month you are speeding up the day that you finally are able to live mortgage free.

Being able to limit the amount of time you spend in hock to the bank will have the effect of cutting down on the overall interest payments you make.

It might seem like quite a sacrifice at the time, but the quicker the debt is repaid the less it will cost you in the long run.

If this is the case, then why doesn’t everyone pay off their mortgages early? Most of us are fixated on spending in the moment and enjoying money while we have it, instead of delaying gratification for the future.

If you are planning to pay off extra on your mortgage every year then you need to ensure it is a sustainable monthly commitment.

Don’t commit to overpaying more than you can afford, it might be easier to start off with a conservative sum that you know will be easy to stick to and gradually increase it as the months go by.

For some over payers the initial excitement and enthusiasm for excess payments wains as the months go by and ambitions slip. Therefore, in order for overpaying to be a serious, realistic strategy it must be maintained over the long term.

Adding to Savings

As mentioned above, the current financial climate is not one that suits savers. There are few incentives for prudent types who have spent years building up their nest egg.

The rates of return, whilst higher than the base rate set by the Bank of England are generally far lower than they were before 2008.

So why save at all?

There are still reasons to save, it is always important to have emergency funds tucked away, irrespective of interest rates.

Also your savings, if put in an ISA will enjoy protection from taxation and will accrue some interest every month.

The rate of interest is also unlikely to remain at a historic low either, meaning that in the next few years the returns on savings will inevitably improve.

The inevitable choice

As interest rates gradually increase, there will be an incentive both to save and to overpay on a mortgage.

Savings will be better rewarded with higher interest, but mortgage debt will be more expensive making it more important to repay it as quickly as possible.

Without a thorough audit of your circumstances and your financial strengths and weaknesses, it is difficult to know precisely which option to take, overpayment or saving.

This means that before you commit to either, it might be an idea to get some independent financial advice.


What Are The Alternatives To Annuities?

Friday, June 19th, 2015

FB - AnnuitiesIt seems that wherever one looks in the media at the moment a commentator, government minister or journalist is stepping forward to tell us how awful annuities are and posing the question: why are annuities so bad?

This, therefore is an important statement that should be absorbed before we continue; not all annuities are bad, some offer good value for money and many policy holders are happy with their choice of product.

Some savers with policies have been busy asking themselves ‘how much is my annuity worth’, and at least a few will have been pleasantly surprised by the answer. Others will be demanding to know ‘how do I sell my annuity?’

Ok. That’s that out of the way and the reason in this blog that there is a brief spell of objectivity is simple. If we are discussing the alternatives to annuities we should not start from the standpoint that they are all bad.

What do I need a policy to do?

For those of you who are asking: What is an annuity? It is a policy that used to be compulsory for most pensioners, sold by insurance companies, which guaranteed a fixed, monthly income for life in return for ones entire pension pot.

The role of any policy or plan that acts as an alternative to an annuity is simple, it has to last as long as you do.

An annuity will expire on the policy holder’s death, a factor that makes it attractive as it is a guaranteed income for life and will not run out before we head off to meet the great financial advisor in the sky.

Having the option of income drawdown presents savers with new options for finding more flexible retirement finance arrangements and one of the chief concerns for many is to limit the amount of tax liabilities on their lump sum.

On retirement, it was previously compulsory to buy a policy from an insurer unless one was lucky enough to have a final salary pension.

Now, as the restrictions have been removed savers have a number of choices when it comes to accessing their lump sum, a process which is referred to as ‘pension drawdown’.

Drawdown Options

Before April this year there were two main types of drawdown, capped and flexible. Capped drawdown meant that you could withdraw up to 150 percent of the amount per annum that you would have received each year if you had decided to purchase an annuity.

A flexible draw down enabled you to withdraw per year as much as you liked. There were more risks with the latter policy, but the risk was limited as your income from other sources needed to exceed £12,000 a year in order to be eligible for it.

Now the drawdown schemes have been simplified and replaced with flexi-access drawdown, which allows pensioners to take a quarter of their pot tax free in a lump sum withdrawal.

Subsequent withdrawals after the 25 percent tax free chunk are taxed at the standard income tax rates. If in a tax year you withdraw just £10,600 it will be tax free and the next £31,785 will be taxed at twenty percent.

If you’ve already been part of a capped or flexible drawdown plan, as of April 2016 these plans will convert to the new flexi-access scheme.

Getting advice

If, before now you’ve been wondering ‘what is an annuity’ or ‘how do I sell my annuity?’ it might be worth getting some professional advice on annuity policies, drawdown schemes or other alternatives.

Should I Fix My Mortgage Now?

Tuesday, June 16th, 2015

FB - FixMortgageDeflation is not all it is cracked up to be. Recently, as we cheered at the fall in fuel prices to historic lows, the fact that several industries were dependent on buoyant oil prices barely occurred to many of us.

However, the current plight of the oil city Aberdeen shows that there are significant problems attached to our current glut of cheap fuel.

Currently we have a glut of cheap borrowing too. Interest rates are at historic low, giving many of us low cost mortgages.

However, the actual amount of credit on offer is tightly regulated, following the housing boom and housing crash.

At the moment, there seems little evidence that an interest rate is in the offing in the short term and home owners are benefiting from the lowest mortgage rates, but even if this lasts, it might not be great for the economy in the long run.

How do I reduce my mortgage payments?

Classical economics suggests that supply and demand reach an equilibrium eventually and that equilibrium is always expressed through the medium of the price mechanism.

We have lived through a half decade of repressed demand in the economy for goods and services (in this case property) due to the long period of belt tightening that we have endured. Supply has remained relatively static, meaning that overall prices have declined or at least stagnated.

There are exceptions to this rule, London and the South East for example, where demand has outstripped supply.

In some sectors of the housing market (luxury six figure properties), spending power has remained largely consistent, meaning that there has been little overall decline.

Lowest interest rates

This decline of spending with the market place has led to a degree of deflation and for property owners this has brought about considerable advantages.

Those home owners on fixed rate mortgage products have been able to switch to variable rates, knowing that in all likelihood the rate won’t really vary all that much and if it does, the base rate set by the Bank of England is still 0.5 of a percent.

In the long term, this, of course, cannot last. The slashing of the cost of borrowing to almost non existent levels has brought about cheap mortgages for many of us, but for savers, it has been little short of disastrous.

Families used to accruing valuable interest off their savings have seen an important source of income and investment lost because of the decision to bring the base rate so low.

Savers will eventually demand to have their fortunes restored and when the Bank of England and the government comply, mortgages will become more expensive once again.

Mortgage Deals

Judging whether or not to take out a fixed rate mortgage now is beyond the scope (and the legal remit) of this blog, and ultimately it is a question that can only be answered by the borrower.

If you are risk averse and value security enough that you are willing to pay slightly more for a feeling that your financial future is more secure, then buying a fixed rate is eminently sensible.

However, if you have speculated that rates will stay low and there is no need to switch to a more expensive fixed rate, then you can stay on a variable deal. This might result in a scramble for a fixed rate policy when rate changes are announced, and at that time the cost of a fixed rate deal will inevitably be higher.


What’s My Pension Worth?

Friday, June 12th, 2015

FB - PensionsWorthIt’s hard to argue about the importance of saving for old age.  Those still of working age need to look at how they are going to finance their later years.

Those already retired need to think about getting the most out of their available finances.  The exact rules around pensions and savings can be changed in line with government policy at any given time.  Indeed the pension system has just been through an overhaul and with an election looming, politicians of all colours are setting out their plans for the future of pensions and the pensions of the future.  In reality, however, these plans only have any meaning to people who are focused on saving for retirement.  Let’s therefore look at some key questions on the topic.

What Is A Pension Pot?

Quite simply a pension pot is a common term used to describe savings which are specifically to finance retirement.  People contributing to a pension pot may get assistance from the government (in the form of tax relief) or from an employer (in the form of contributions).  Pension contributions are usually locked away until you reach retirement age.

How Do I Calculate My Pension?

There are plenty of online calculators to help with this.  It’s strongly recommended to keep track of how your pension is doing so that you know where you stand.  If you do decide you need to take action, sooner is usually better than later.

I Don’t Like What I’m Seeing, How Can I Build A Healthier Pension Pot?

You have three options.  You can save more money, you can manage your savings more effectively or you can do both.  It can help to look at this question in the light of your overall financial situation.  For example if you are carrying high-interest debt, such as credit-card debt, then it may well be in your best interests to focus any spare cash you have on paying this down.

Once you have cleared your debt, you can then divert the funds to building your pension.  If you do have spare cash and are in employment, then it may be useful to look at making extra contributions to your workplace pension.  This can be particularly helpful if your employer will top up any contributions you make.  If you’re unsure about locking cash away until you retire, then it may be worth looking at ISAs as an alternative.  Although contributions to ISAs are made out of post-tax income, generally speaking the income they generate is tax-free and the money in them remains accessible if you need it.

What Do I Need To Know About Getting More From My Pension Pot?

For many years getting more from your pension pot generally meant getting the best deal on an annuity.  Now there are vastly more options for those with pension pots.  With this in mind, it can be very helpful to get some professional advice before taking any significant decisions on how best to use your pension pot.

It is also advisable to keep up to date with any changes which may affect pensions.  For example at the current time, the Conservatives have a proposal to allow holders of annuities to sell them on.  If enacted this could have massive implications for existing pensioners.

It’s also worth remembering that, generally speaking, pensioners have access to the same savings and investment products as those of working age.  For example they get exactly the same ISA allowance as working adults. There are even some savings products tailored specifically to their needs (e.g. pensioner bonds). These can all help pensioners to make the most of their finances.

Why Do I Need Life Insurance?

Tuesday, June 9th, 2015

FB - Life InsuranceNo matter what anyone tells you, you don’t need life insurance.  Like the old saying goes “you can’t take it with you”.  Once you’re dead, money stops being a concern.  Of course, your having life cover could make a world of difference to your loved ones.  In the short term, it could help prevent their grief being compounded by financial anxiety.  Over the longer term, it could allow them to enjoy a better quality of life than they would have managed without it.  Let’s look at some basic questions about life insurance.

Why Take Out Life Insurance?

There are basically two reasons for taking out life insurance.  One is because you have to and the other is because you want to.  An example of the former is being required to take out life insurance as a condition of a loan, such as a mortgage.  An example of the latter is family protection.  In other words, making sure that the people who love and depend on you can manage financially in the event of your death.  When looking at this issue, there is one very important question you need to be able to answer.

How Much Is My Life Worth?

You are unique and irreplaceable.  There is, however, a fair chance that a lot of what you do every day is far from unique.  This is just as well because there is also a fair chance that somebody else will need to do it if you die leaving family or other dependants behind.  It’s entirely possible that at least some of these people will need to be paid for their services.  Therefore even if you are purely a home-maker rather than a breadwinner, your life does have a financial value.  If you also bring in an income then it is highly advisable to look at the impact of losing this.

I Have Savings And Have Made A Will So I’m Already Protecting My Family.  Do I Still Need Insurance?

Well done for making a will.  It would, however, still be a good idea to look at life insurance.  First of all, it will give you an opportunity to check whether your savings would be enough to protect your family in the event of your death.  Secondly life insurance payouts can be excluded from probate.  In very simple terms this means that your intended beneficiaries can receive the insurance funds in a relatively short time-scale – possibly long before the process of probate is completed.  This can go a long way towards easing the financial impact of your death.

My Financial Plan Doesn’t Leave Enough Money For Life-Insurance Premiums.

There are two ways to look at this issue.  One way is to review your financial plan thoroughly to see if there are any changes you can make so that you can afford the premiums.  The other is to see what you can do to get lower insurance premiums, which you can afford.

In very simple terms, premiums are priced based on the statistical likelihood of you dying within the term of the policy.  While there’s nothing you can do about your age, you can control your lifestyle.  For example, if you’re a smoker, giving up will both free up cash and make you more attractive to life insurance companies.

It’s also worth looking at what different types of cover are available.  This may help you to get the cover you actually need at a price you can afford.  For example, if your main goal is to pay off a mortgage, then it may be more affordable to take out a policy which decreases in value over its term, rather than one which provides the same level of cover from beginning to end.

Will I Benefit From The Pension Reforms If I’m Already Retired?

Friday, June 5th, 2015

FB - PensionsOne issue in the world of personal finance has dominated the headlines for months; the changes to Britain’s pensions industry that will have profound implications for savers and retirees for decades to come.

Much of the focus of the reportage has been on the effects of the changes on savers waiting to retire, but there are equally far reaching changes afoot for those who have already finished their careers and are enjoying their retirement.

In this article, we will explore what already retired pensioners need to know about their rights and entitlements under the new pension laws that come into effect this year.

What is an annuity?

There are currently five million pensioners living off annuities, insurance products bought with a pension lump sum that guarantee an income for life.

Because many annuities were virtually compulsory on pension policies until 2014, there has been less incentive in the market to provide competitive products that provide value for policy holders.

Why are annuities so bad?

This means that while some annuities have performed well and are offering pensioners a decent income in retirement, others pay out poorly every month.

Impoverished pensioners have been left feeling frustrated, with large sums invested but weak returns limiting their ability to enjoy the rewards of a life of work.

New rules now allow pensioners who hold annuities to sell disappointing policies, enabling them to regain control over their investments.

What can policy holders do?

Selling your annuity for cash will be possible from the financial year 2016-17.

The chief purchasers are likely to be the pension companies themselves, many of whom have already encouraged Pensions Minister Steve Webb to help develop the market.

However, it will not be possible to simply return an unwanted policy to the company you bought it from for a refund.

How do I sell my annuity?

The trade in second hand annuities could result in a new derivatives market where bundles of policies are packaged together and sold, which means that insurers will be keen to buy ‘good’ annuities and avoid ‘bad’ ones.

An annuity policy must stop paying out when the original holder dies, therefore insurers will be wary not to buy back policies from holders in poor health.

This will have implications for policy holders, who will possibly be required to pass a medical examination in order to get the best price for their policy.

How much is my annuity worth?

At the moment, selling your annuity attracts such massive tax penalties that there is no point in doing so.

The minimum tax levied on an annuity sale is 55 percent, with some policies attracting rates of up to seventy percent.

The lump sum that you receive will be taxed at standard income tax rates, so if you have no other income and your lump sum falls within the basic income tax band (say £30,000), you will be taxed at 20 percent. This means a tax bill of £6,000.

This is of course, far better than a tax penalty of over 55 percent, but by no means ideal.

The Chancellor has suggested that for many pensioners with good policies, the best strategy is to hang on to them. The new market for annuities does not exist yet and will take at least a year to evolve, which gives annuity policy holders time to get advice.

How To Profit From Deflation

Tuesday, June 2nd, 2015

FB - DeflationIt seems like a world away now, but the 1970s and 1980s both saw periods of double digit inflation, where prices rose at one point in 1975 to nearly 25 percent.

How any economy could function like this seems a mystery, until the obvious answer presents itself – Britain’s economy didn’t function under this burden, strikes, chaos and by 1982 over three million unemployed.

Ah, the good old days.

It rather puts our recent difficulties into perspective, whilst we have had a tough time as a nation since 2008, prices have remained stable in some areas and fallen dramatically in others.

We are in a period of deflation and whilst this might be bad news for manufacturers or property developers who hope for high prices for their goods and services, it is certainly good news for consumers.

It is good news for everyone willing to take advantage of the opportunities that deflation offers. This article is a quick examination of some of the ways you can benefit from our deflationary economy.


It is suggested by independent financial advisors that a review of ones mortgage deal every three years is advisable.

If you are approaching a point whereby it is time to consider the mortgage once again, it might be worth remortgaging with a different provider.

If you are currently wondering ‘how do I reduce my mortgage payments?’ now might be a good time to explore your options.

Whether you choose to take out a fixed rate deal or a variable rate or some other kind of mortgage deal with your new provider, the current market is, to some extent, geared towards the buyer.

Obviously we no longer live in the carefree days pre 2008 when questions like ‘and how will sir be repaying that home loan’, seemed petty and banal.

The irresponsible lending of the boom years is long gone and good riddance, now there are stringent and forensic surveys of a borrower’s ability to pay, but if those criteria are satisfied, interest rates on mortgages are lower than they have been for decades.

Where do I invest for growth?

The declining cost of fuel has had a remarkably positive effect on a whole range of companies (except the oil companies, of course).

Road hauliers, food manufacturers, construction businesses and the car industry have all seen their balance sheets improve over the last few months.

This means that their dividends have also improved and therefore investing in shares where overheads decline in cost can be seen generally as a good idea (though it goes without saying that the value of investments can go down as well as up and you might not get back what you put in).

Big Spends

In a period of time when the cost of borrowing, property and fuel are low, it is almost a given that other consumer goods and commodities will see their prices reduce.

You can normally get a good gauge for the price competitiveness of the economy as a whole by looking at the bargains on websites like eBay, Amazon and Groupon for example.

This isn’t a licence to go mad and by the jacuzzi you’ve always wanted (though you can if you want), but our sage suggestion is that you use the opportunity to find bargains that will add to your overall financial well being.

Investing in your home, buying an essential but costly item for your business or investing in a second property all might seem beyond your means normally.

However, in the current period of deflation it might be worth exploring whether these items are significantly more affordable.

If you are thinking of taking advantage of the opportunities deflation offers, then it might be an idea to get some impartial financial advice.

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Monday, June 1st, 2015


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