How to teach your children about money

July 8th, 2015

How To Teach Your Children About Money

Questions The Budget Needs To Answer

July 7th, 2015

questionsbudgetGeorge Osborne was last seen holding the famous red briefcase in March. On that occasion he was delivering a coalition budget.

The new “emergency budget” is a fully-fledged Conservative budget. Some people may be tempted to ask “Why do we need a new budget so quickly?”

That aside, there are actually a number of questions this budget has to answer.

What happens if spending cuts don’t work?

The Conservatives plan to combine spending cuts with a push for growth. Their ultimate aim is to move the UK out of the economic red and into the black.

Some people have, however, questioned whether the Conservatives’ plan to cut spending will actually have a beneficial impact. Some worry that they will cause suffering to the most vulnerable. Others simply believe that maintaining, if not increasing, government spending could stimulate growth.

What spending cuts will actually be made?

There are a couple of pointers about this already.

The Queen’s Speech made a reference to removing the right to housing benefit for 18-21 year olds.

David Cameron has also declared himself in favour of reducing the benefit cap from £26,000 p.a. to £23,000 p.a.

Although not technically a spending cut as such, there is likely to be a reduction in pension tax relief for the highest earners.

One cut which definitely won’t be made is a reduction to, or even freeze on, the state pension. The Conservatives have explicitly pledged to keep the “triple lock” system. This means that state pensions are guaranteed to rise in line with average earnings, inflation or 2.5%, whichever is the highest.

How do we manage our household debt?

The Conservatives are focussing on national debt. Debt can, however, affect individuals too.

The strategies for getting out of debt at a household level are, in principle, much the same as those for getting a country out of debt.

Basically you cut spending and/or boost your income (i.e. go for growth). Of course, the first point assumes that you can cut spending. In other words, that you are making non-essential purchases to begin with. The second point assumes that you have scope to increase your income. Those on benefits or pensions may be unable to do this.

How can we increase the UK’s productivity?

As previously mentioned, lowering debt of any kind means cutting spending and/or increasing income (aka growth).

For individuals increasing income may mean getting a promotion or better job. Unfortunately countries as a whole can’t do this.

Sometimes some funds can be raised by privatising national assets, e.g. national companies. Margaret Thatcher used this tactic in the 1980s.

Unfortunately an asset can only be sold once. The government has indicated that it is prepared to sell more of its stake in Royal Mail. It also plans to reduce its stake in the bailed-out banks.

Notwithstanding this, its projections for the coming years do include growth.

How can we reduce Britain’s current account deficit?

In terms of a country, the term “current account” is essentially used to mean the flow of money out of and into the UK.

At this point in time, there is more money flowing out of the UK than there is flowing in. This is known as a current account deficit.

There are various reasons why money flows out of the UK. People buy goods and services from overseas. Workers from overseas send money home to their families. Overseas investors withdraw their gains to their home country.

Of course, the same comments also apply in reverse. In other words, these are all reasons why money flows into the UK.

One of the challenges facing the Conservatives is the task of turning the current deficit into a surplus, or at least a balance.

Will The Next Budget Be Radical?

July 3rd, 2015

budgetOn 8th July 2015, George Osborne will deliver the first completely Conservative budget since Kenneth Clarke in 1996.

Given that George Osborne delivered his last budget on 18th March 2015, you could well we asking yourself “Why do we need another budget now?” The answer is essentially that the last budget was a combined Conservative Liberal Democrat budget.

This time around the Tories are working to their own agenda. The more cynical may also note that the Labour party lost its former shadow chancellor, Ed Balls, in the last election. This may make it more difficult for them to respond effectively to the Tory proposals.

The speed with which this budget is being announced has led to it being termed an “emergency budget”. Will it, however, be a radical budget?

Getting The UK Back Into The Black

The Conservatives have made a pledge to get the UK out of debt. To do this, they need to make spending cuts and encourage growth.

There have been various suggestions as to where spending cuts could be made. The Queen’s Speech included a reference to the removal of housing benefit for those aged 18 to 21.

David Cameron has also indicated support for a reduction in the benefits cap. This currently stands at £26,000 p.a., but could be reduced to £23,000 p.a.

Pensioners Are Likely To Be Protected

The Conservatives pledged to retain the triple-lock system.

This means that the state pension will rise in line with average earnings, inflation or 2.5%, whichever is the highest.

On the other hand, higher earners are likely to see a reduction in the pension tax relief available to them.

Housing Is A Key Area

The Conservatives believe that reducing pension tax relief for higher earners will counterbalance increasing the Inheritance Tax threshold.

They have pledged to raise this from £325,000 to £1 million. While this may seem like a large increase, it’s worth remembering that the current limit was introduced in 2009. Since then rising house prices have made Inheritance Tax a fact of life (or death) for a growing number of people.

This rise is an attempt to focus the effect of the tax on the highest earners. It will leave those on lower incomes with more money to spend, which may encourage growth.

To help people to get on the housing ladder in the first place, the Conservatives plan to introduce a “Help to Buy ISA”. This will only be available to first-time buyers.

In short, the government will add a 25% top-up to deposits made, up to a maximum of £3,000. In other words, if you save £12,000 yourself, you will get £3,000 from the government.

If you plan to buy as part of a couple, then both parties can have one each. This means that a couple could potentially have their deposits boosted by £6,000.

A Budget For Working People?

The personal allowance for Income Tax currently stands at £10,600. Under the coalition budget, it was due to rise to £11,000 in the financial year 2016/2017.

The Conservatives have pledged to raise it immediately to £12,500. Similarly they promised to raise the starting rate for the 40% tax bracket from £42,385 to £50,000. Obviously this means less money for the treasury, hence the need for spending cuts.

The Conservatives hope, however, that giving individuals more money in their pocket will help to boost the economy through growth.

So What Does This All Mean?

In simple terms, the effect of the budget will only be fully realized once it is implemented. In its general principles, it is arguably broadly similar to the coalition budget.

This is hardly surprising given that the Conservatives were by far the bigger party in the partnership. Whether the differences can be considered radical is largely a matter of opinion.

Will You Get The Full State Pension?

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

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

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?

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?

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?

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?

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.

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