An interest-only or endowment mortgage is one where you pay only the interest and not the mortgage balance itself. They’re big business: there are over 1.6m interest-only or part-interest mortgages in the marketplace, nearly 20% of all outstanding UK mortgages.
If you’ve got one, your biggest concern is: how are you going to pay it back? Don’t panic, just make sure you have a strategy in place.
Most people with an interest-only mortgage will have set up an investment or repayment vehicle – typically a PEP, ISA, endowment policy or personal pension plan – to give them a lump sum to pay off the borrowing at the end of the term.
But is that strategy still the right one? If you have a repayment vehicle, you have options:
1. Cash in and switch to repayment terms
It’s potentially advantageous to cash in now instead and pay off some of the balance, and switch over to a repayment mortgage that will see your loan completely cleared at the end of its term.
Doing this is probably your cheapest long-term option. You’ll have a smaller remaining balance, though you’ll also have higher monthly payments.
If you find the new premiums too high, ask if you can extend the term and push it out a little longer. But don’t go too far into the future – don’t extend debt past your retirement date.
An important note: if you’ve had a policy running for less than 10 years then check for any tax liability or surrender charges before you cash it in; if in doubt, seek professional advice.
2. Maintain your position
If your repayment vehicle is on track and you’re happy with it, then you might choose to maintain your current status quo on the understanding that your strategy will cover your final lump sum payment. But do keep an eye on it and keep it under regular review, this is a higher risk approach
3. Switch and maintain
If you can afford to switch the interest-only mortgage to a repayment one over the remaining term, plus keep your savings vehicle going, then that will give you a nice addition to any retirement funding or plans you have. Unfortunately, for many, switching AND continuing the investment vehicle is expensive and unaffordable.
4. Cash in and downsize
What you might have to do at the end of the term (or before) is to sell your property.
Downsizing might have always been part of your strategy, or it might be something forced upon you by your finances. Either way, if you cash in now and pay off some of your mortgage, when it’s time to downsize you’ll have lots of equity – potentially enough to buy a smaller property and have some money left over.
Warren Shute is a former Financial Professional of the Year and his bestselling book, The Money Plan, is now available on Amazon. Get more money tips at www.warrenshute.com
When you think of financial planning, what comes to mind? Boring discussions on pensions? Wealthy people hiding their money offshore to save tax?
Neither could be further from the truth. Financial planning is used by millions of people worldwide, people just like you.
A financial planner is not simply a financial adviser. True financial planning is the process of establishing what someone really wants from life, then working with them to create a financial blueprint that outlines agreed actions on how they can achieve their aims.
Financial planners take their clients through a structured, six-stage process, ensuring that people receive a similar experience wherever they go:
Defining the working relationship. What are the client’s expectations of the planner and vice versa, and how will the planner be remunerated? Clarity builds trust, and strong relationships need trust.
Information gathering. Once the planner knows what the client expects, they begin to piece together the information they need to form a plan. This includes the obvious, such as income, expenditure, assets and liabilities; but equally as important is personal information, such as future plans and dreams.
Number crunching. Figures are analysed and evaluated based on the client’s circumstances. The planner looks at income and tax implications, investments and capital gains, and estate planning, wills and inheritance tax. If needed, they pull in the expertise of specialist accountants, tax advisers or solicitors. This process concludes with one of two future outcomes: either the client will run out of money later in life, or there will be too much surplus capital. Both scenarios require careful financial planning.
Draft planning. A plan is drafted, discussed and finalised. This discussion is important, because the more the client engages in the decision-making process, the more they will want to carry out the actions that will move them towards their desired outcomes.
Recommendations are implemented. Recommendations may not be product-related, which means that financial planning is about the person and not about products.
Ongoing monitoring. This makes sure everything is on track, often including looping back to step one at some point to discuss again future hopes and aspirations before repeating the process.
Financial planning is not about answering questions about which pension or fund is better for you. It’s about asking deep and meaningful questions that, if acted upon, will move you towards a life which brings you more happiness and fulfilment.
Because after all, you don’t want more money; what you really want is what more money will bring you.
The £1 coin was introduced on 23 April 1983. If you’d invested one of them in the FTSE All Share, the main UK stock market index, by now you’d have seen a whopping 3,000 per cent return on your investment, an average of a little under 11 per cent each year.
But were better returns available? Perhaps an international fund would have done better? Analysis of the MSCI World Index shows roughly the same returns; around 2,800 per cent over the same period, an average of almost 10.5 per cent per year.
Ten-thousand pounds invested in the FTSE All Share in May 1983 would be worth over £322,000 today while the MSCI World Index equivalent would be worth a little over £292,000. Both very impressive.
But could those returns have been improved still further?
Diversification is generally considered the most important single thing you can do with your investment portfolio. It takes many forms; company size is one of them.
The relative size of the companies in which you invest has a considerable effect on your portfolio’s performance. How much of an effect? Historically, a substantial one – if you focus on the smaller listed businesses.
The UK small cap index on average returned over 12.8 per cent annually since 1983, and the global small cap index also did very well at over 12.1 per cent per year average return.
Although the journey was rockier than the main indices, the same £10,000 investment in the UK small cap index when the £1 coin launched would be worth over £604,000 today; and the global small cap over £495,000.
Diversity is King
These comparisons highlight why diversification matters. All four indices mentioned arrived at their destination via different paths. Despite their much lower performance, at times on the journey the main indices would have offered more favourable returns.
Consider this: for the FTSE All Share, the worst 12-month return was minus 34.3 per cent (to October 2008), and the best was plus 62.6 per cent (to September 1987) – huge swings.
What lessons can investors take from this? Markets rise and markets fall, ‘twas ever thus. Investors are rewarded for their length of time in the markets and the wise ones buckle up and sit tight.
We don’t know what the markets hold for us in the next 34 years or where the best place to hold £10,000 today is, so diversify your portfolio and accept the amount of investment risk you are comfortable with.
Universal Credit has made a lot of bad headlines, but like it or not, it’s here to stay. It will be phased in until 2023, replacing lots of other means tested benefits. Around 3m people are expected to be on it by the time the roll-out is complete.
The way your Universal Credit is calculated is complex. If you’re over 25 years old, the standard allowance per month is £317.82 for a single person (£251.77 if you’re younger), or £498.89 for a couple (£395,20 for under-25s).
On top of that, additional allowances specific to the circumstances of all household members dictate what you’ll ultimately receive, including whether you have children, have a disability or need help paying housing costs. The maximum allowance works out at just over £1,100 if you’re single, and just over £1,600 for a couple – there’s a London weighting added too if you live in the capital.
How much do you receive?
The amount you’ll receive is reduced depending on your income and savings.
If you’re employed, your Universal Credit is reduced by 63p for every £1 you earn over a fixed monthly income.
If you receive help with your housing costs, this reduction begins after you’ve earned £287 in a month; if you don’t receive help with housing costs, you can earn up to £503 before any deduction.
You can hold savings (cash, investments, stocks & shares, property) up to £6,000 without any deductions.
If you have between £6,000 and £16,000 in savings, for every £250 over the £6,000 limit you have, £4.35 is deducted from your payments. So if you had £7,000 in savings or investments, you’d have 4 x £4.35 = £17.40 deducted.
If you have more than £16,000 in savings, you will no longer receive any Universal Credit.
Financial Planning on Universal Credit
If your goal is to get off Universal Credit in the future – if it’s helping you through a difficult period – then use this time to come out of the other side in the best position possible; you might study or train to learn new skills for a future career, for example.
And with a few steps, you can use this period to take control of your finances, now and in the future.
Step 1: Set your goals
All good planning begins with your desired outcome: what do you want to achieve in life?
That’s a huge question of course! But it’s all too easy to just go through life without moving towards your goals. Life is finite. I spend around one-third of my book The Money Plan on setting outcomes and changing your mindset, it’s that important. Break down your ultimate goals into smaller steps, not just one big leap.
It’s incredibly hard to think positively when you’re going through tough times, but some simple actions that cost nothing can have a big impact, including:
Motion: get outside and move! Walk, run, whatever it takes. Get away from screens and get some fresh air
Breathing & meditation: there are some great apps such as Calm to Head Space, which can help you relax your mind and body
Ask yourself good questions: we’re constantly asking ourselves internal questions, so make them positive. What can you do today to make tomorrow better?
Food & drink: eat a balanced diet and drink a lot of water, science has shown that it makes a real difference
Step 2: Get financially organised
Set aside some time to assess four areas:
1. Know what’s coming in: are you claiming the maximum benefit you’re eligible for?
2. Know what’s going out: list all your expenditures in a document
3. What you own: it might not be anything, or you may have some savings
4. What you owe: list your debts, and are you paying the lowest interest possible on them?
After that, a few simple actions will go a long way to empower you.
For every expenditure on your list, ask yourself three questions: do I need this? Do I want this? Can I get the same thing for less? You’ve got to reduce your outgoings as much as possible, even if it means making sacrifices. Remember your outcome; sacrifices are temporary.
Automate all regular payments via Direct Debit or standing order, which takes emotion out of everyday financial decision-making. That includes pocket money if you have kids – systemise the payments, link them to your children’s age, and link it to household chores of some kind. That way you’re also teaching them life skills.
Set a sensible weekly budget to cover all your variable expenses, and add this to your list of Direct Debits, paid into a separate account. This is your WAM – walkabout money – and helps you to stick to your limits.
Potentially the hardest action is to make sure your monthly income is greater than your outgoings, preferably by 12.5%. That might sound crazy if you’re living hand-to-mouth. Look around your home and see if there are any items you can sell online, or can you get a part-time job that doesn’t reduce your UC payment? There’s no getting around the fact that what comes in must be greater than what’s going out.
Step 3: Put your financial foundations in place
Set yourself a goal to save £1,000, however long it takes. Once you get there, put it into premium bonds so it’s out of arm’s reach. That’s your emergency cash, your safety net should any unexpected costs suddenly arise.
Arrange a Lasting Power of Attorney. You can get exemptions on the cost of an LPA if you earn less than £12,000 annually, all you need to do is get the forms and complete them.
Get a will. This is essential if you have kids, and a good idea for everybody.Once you reach this stage, you should congratulate yourself and take a lot of pride. Don’t underestimate what you’ve done: those three steps represent enormous development and huge steps towards changing your life – and they can all be done during what may be a difficult period.
As things stand, around 11 million people are in danger of falling for the worst spring joke this year – and it won’t be remotely funny. Yes, by a bizarre coincidence, the energy price rise is due to kick in on the 1st April 2019.
British Gas has confirmed price hikes of 10.5%. With all of the Big 6 energy suppliers announcing price rises in the last few weeks. That’s a hit of around £117 for the average dual-fuel household. This raid on your finances is endorsed by the regulator. Ofgem lifted its price-cap this month and suppliers have made the most of the opportunity. You can’t blame them. They are, after all, commercial companies – but it surely shows that consumer protection, as it stands, is poor at best.
Thankfully – there is an alternative. Technology can now tell us what’s available across the board, and advise what’s best for our individual needs. It will flag a false promise or flawed deal and – once unleashed by a one-off nod of consent – it can now move our bills from one supplier to another, repeatedly.
After the initial sign up, Switchcraft involves zero hassle but promises to deliver savings – over and over indefinitely, they say they save most of their clients an average of £219 a year. No bureaucracy – just a handful of innovators harnessing technology to be a true consumer champion. So, don’t fall for the joke this April. Why settle for a state-backed price rise when technology could deliver you savings? Check out their website and get the last laugh on 1st April.
This week I’m answering a reader’s question, and it’s one that many of us ask ourselves as we get older: can I afford to retire, and if so what do I do next?
I was contacted by a gentleman, Arthur who wanted to understand his retirement options. Arthur was desperate to retire; frankly he’d had enough of the stresses of working – which is a shame as I like people to work in some form during retirement because work gives us a lot more than just an income; connection and relationships, mental stimulation, purpose to get up each morning. However, he’s been working for his company for over 30 years but is ready to stop.
First, let’s look at the key details:
Goal: To retire now
Financial situation: – No debts – Grown-up kids – Mortgage paid off – Wife already retired – Pensions funds totalling almost £500,000 – Savings from an inheritance of around £250,000
The first thing is to congratulate Arthur for arriving at retirement in such good financial shape. If you have debts, including a mortgage, then please try to do everything you can to pay them off before you retire. We’re living longer and longer, so we need to ensure we’ve got enough for our retirement and repaying our debt is a great step.
Arthur mentioned that he’s saved as much as he can towards his retirement after receiving a pay rise or bonus. He’s also on a good salary – £60,000 per year – so he’s paying a top rate of tax and has been sensible in putting his money into a pension to get the 40% tax relief on his contributions.
Arthur is in a good position to give up work. So how should he go about funding his retirement?
There are two ways to go:
1. Purchase an annuity
An annuity is where you hand over your pension fund to an insurance company, who would then give you a monthly income for the rest of your life. The level of that income is based on your age and health, but also what I refer to as ‘bells and whistles’. They include your:
Desire for a level (fixed) income, or one which increases based on inflation
Guaranteed periods – if you were to pass away on day one, you can guarantee your annuity to continue paying out for a period of time, say five or 10 years
Spousal wishes – do you want an amount paying to your spouse in the event of your death?
You start with the highest level of annuity, and then each bell and whistle you add on reduces the amount you’ll receive each month. For example, if you choose that on death you want 100% of your annuity to continue to be paid to your spouse, you will receive a lower income than if they were to receive 50%, or nothing at all.
The benefit of an annuity is security. The income from an annuity is paid for the rest of your life, guaranteed. That security is very important to some people.
2. Drawdown on the funds
This involves taking a portion of your pension fund each year, and leaving the rest invested so it is still (hopefully) growing in value over time. If Arthur doesn’t draw down too aggressively, his pension fund should continue to grow.
There are two risks to this option:
Market risk – if the markets fall in value, his pension fund could fall in value
Drawing down too aggressively – taking too much capital out, leaving too little behind to cover him for the rest of his life
The benefit of the drawdown option is flexibility. Arthur can take different amounts from his pensions giving him a chunk of money that’s his to decide what to do with. And in the event of his death, he can leave his remaining funds to his children or spouse.
Both options would offer a tax-free payment of up to 25% of the fund value, and the income under both options is taxable at his highest marginal rate.
Which option is the right one?
There are pros and cons to both. Some people are not comfortable with the risk of not having an annuity, a secure and guaranteed flow of money; others want the flexibility to live life their way after they stop working.
There’s no right or wrong answer when it comes to how you should handle this decision: it’s a personal choice. While there have been plenty of headlines about the pension freedoms of drawing down since legislation changed in 2016, annuities are still highly relevant for a lot of people.
In Arthur’s case, he already has a nice sum of money (£250,000) in his savings that he can use for variable spending, like holidays, weddings, education for the grandkids and so on. Arthur and his wife are both quite naturally cautious, so for them and in their situation, an annuity was seen as the more suitable option.
Having decided that an annuity was the way forwards, Arthur had some questions to answer on how he wanted to structure it.
The first question is, how important it is that his wife receives an income in the event of his death? Does she have enough money in her own name to sustain her lifestyle, or is she reliant on his?
Because she’d retired earlier, she has some income herself, but not the same level of income as Arthur. We concluded that around 50% of his income should pass to his wife in the event of death, which will reduce his income but not by as much as if he chose to pass all of it on to her.
This was important and not difficult for them to answer.
Arthur opted for a guaranteed period of 10 years of payments even if he passed away, because this didn’t reduce his income by much – it was a relatively cheap option, and one he wanted to take.
Level income or inflation-linked?
This is a much tougher decision, and one that Arthur and his wife are still considering. Inflation is a risk to your capital, particularly as you get older: the cost of goods keeps rising, and your ability to earn extra money decreases.
That can make an annuity linked to inflation very attractive… but it’s also expensive. In Arthur’s case, the figures we had to consider were:
An annuity linked to inflation (rising by RPI) would pay 2.6% of his pension value annually
A fixed income annuity would pay 4.7% annually
That’s a big difference! On a £500,000 pension pot, Arthur’s annual income would be £13,000 for a linked annuity, compared to £23,500 in a level income arrangement.
Arthur’s in good health and actuarily, his life expectancy is 88 years old – meaning more than 20 years of annuity payments. RPI can vary considerably, so over two decades that’s a much bigger risk to the annuity provider; hence the cost of linking his income to it.
There is an option to split the annuity: take some of it level and some of it linked to inflation. In reality, our need for money generally decreases as we age; Arthur will be more active at 64 than he will be at 84, and will spend more.
Arthur could look at his basic living expenses, such as household bills, phones and so on, and buy an annuity linked to inflation to that amount, which should keep those covered each year; and then for his variable (spending) money, have a level annuity.
That gives him a guaranteed flow of money, as well as managing the effect of inflation. And don’t forget, on the side he still has his £250,000 savings, which gives him great flexibility.
Taking the right advice
As I’ve said, these decisions are incredibly personal to you and your circumstances. These days, we can Google many things we need to know; but this is one of those times when it’s really important to take the right advice.
Pay a professional, and get professional advice. Times of big financial decisions, such as inheritance, retirement and so on, are the right times to visit an expert, even if you don’t use one at other times.
For Arthur, with a little investment advice for his particular situation, he and his wife could actually be able to increase their income in retirement! Because he will be paying less tax on his investment returns and pensions, with a properly managed portfolio.
That might not be true for everyone, but it sure highlights the benefits of talking to someone.
Making the transition
My first question to Arthur was: what will you do instead if you retire? Arthur was working 12-hour days, and going from that to nothing is a big culture shock. After so long in work, we have set routines of getting up, going out and being challenged mentally. It’s important to transition, perhaps through doing some charity work or even going part-time to taper down the ‘shock’.
If retirement is right for you then great, go for it! But don’t underestimate the change that you’ll go through. Try to have a plan for retirement, to make sure you get the most of it.
If you have a question you’d like to ask, or a particular scenario you’d like some guidance with, please contact me via the site or on social media – your details will be kept anonymous, and the article could help you and other people in your situation
As a nation, we love property, I try to expand my clients views, but often decisions made decades before meeting me means that the largest asset some of my clients own is their home and often they are pension and cash poor, so how do you release the value of your home?
Always, always, always my preferred route is that around retirement time, before you get too old and grumpy to socialise and meet your new neighbours, it’s to downsize your home. This is by far the simplest and often the least expensive option.
Your main home, known as your Principle Private Residence in the tax world, can be sold without any capital gains tax and you can realise to cash some of the property value when you sell and buy a less expensive property for your retirement years.
This is actually a good retirement savings strategy!
However, often the upheaval of moving, we gather lots of ‘rubbish’ over the years, is too much or we don’t want to leave our fond family memories behind, or for some it’s the fear of the unknown; moving can be a scary/stressful process if you’ve never done it. That’s when I’ll consider with clients lifetime mortgages aka equity release, or for my American and Australian family ‘reverse’ mortgages.
I asked a good friend and colleague Marc Harris to help me with this piece, Marc is a lifetime mortgage specialist. If you’d like to speak with him, I highly recommend and trust him, he’s a really nice chap and has some glowing testimonials from those of you who have already used him, please just drop me an email at firstname.lastname@example.org and I’ll connect you both.
So, let me explain Lifetime Mortgages to you.
What is a Lifetime Mortgage?
A lifetime mortgage is a long-term loan secured against your property. You will retain the ownership of your property and you will only be required to make interest only payments if you wish. Alternatively, you can also choose to make no payments at all and simply allow the interest to roll up, which is the more common approach.
When you die or move into long-term care, your home is sold, and the money is used to repay the loan (and accrued interest). If you are a couple owning the property, this would be the second to die or go into long-term care.
Anything leftover is paid in accordance to your will (make sure you have one please!), which often would be to your beneficiaries. However, in the unlikely event that the value of your house has decreased significantly it would be possible that the value of your home no longer covers the value of the equity release loan. The Equity Release Council has a ‘no negative equity guarantee’, which all Equity Release Council members offer on their equity release products. This means that in this situation the remainder of the loan would be written off by the lender and not charged to your estate, ensuring that whatever the future holds, your beneficiaries would never have to meet the cost of your loan.
Most lifetime mortgages are portable from property to property, subject to property eligibility criteria, which means if you move home you could do so and just take the equity release loan with you.
If you come into a windfall, repay the loan. Lifetime mortgages can often be repaid early but may be subject to an early repayment charge, so you’re not committed to keeping it outstanding, but in reality, it’s unlikely you’re going to repay the mortgage unless your numbers come up!
Additional borrowing may be available in the future subject to lending conditions at that time. So for example if you took a little out to start with, you could go back for more assuming you remain within the lending criteria.
Are Lifetime Mortgages right for me?
I don’t know the answer to that, I don’t know you that well, however I recommend you get advice, don’t do it alone please. There are some things in life you can do without advice but with equity release you need to speak to a trusted equity release specialist.
Either know equity release inside out or know a specialist!
I also recommend you discuss it with your family members before you make that all important a final decision.
The retirement mortgage
The retirement mortgage is a new type of interest only lifetime mortgage, that means you can pay off your current lender and take your new mortgage into your retirement.
The market is constantly changing and that’s why as a Chartered Wealth Manager with 25 years’ experience, I wouldn’t do it myself, so neither should you.
Why do people arrange equity release?
As I mentioned earlier, if you don’t want to, or can’t downsize, equity release provides some much-needed cash to;
Supplement your pension income
Complete some home improvements
Adapt your home for old age
Take the holiday of a lifetime
Buy a second property/holiday home
Help your children with their income shortfall
Help your children or grandchildren onto the property ladder
Repay outstanding mortgage or other debts
An often overlooked inheritance tax planning benefit of equity release
A valuable main home can be our working life goal but can often cause problems with inheritance tax planning.
We now have in addition to the £325,000 nil rate band, a residential nil rate band which provides an additional £150,000 (rising to £175,000) if your home is left to your children/grandchildren (I appreciate it is direct decedent’s, but I want to stay on track here).
So if your estate as a married couple will exceed £1m (£325k plus £175k each), or £500,000 for a single person, and inheritance tax planning is an important consideration for you, equity release enables you to move some of the value of your home out of your estate as a gift now as a Potentially Exempt Transfer or Chargeable Lifetime Transfer, so as long as you live 7-years, the value of your home or to be precise the value of the gift, is removed from your estate when calculating the inheritance tax liability.
I would like to sum up by saying, if you need additional income in later life, consider moving home, this really should be your first consideration. If, after discussing with your family you feel a lifetime mortgage is the option you’d like to explore, get advice and remember Marc is here to help you, wherever in the country you are, just email me on email@example.com and I’ll put you in touch.
I was speaking with someone recently about their financial planning and they were really concerned about Brexit. The media’s aim is to get you to buy their paper or stay on their website, and worry makes us do just that. If they told you everything was fine, you wouldn’t pay too much attention. But articles portraying the concerns around Brexit get people to focus… and worry.
It can be hard to see through the headlines; there’s an editorial slant on all the news we read, see and hear. Let’s try to take the emotion out of the subject – regardless of whether you feel Brexit is a good or bad thing – and look at what’s happening in the bigger picture.
The economy continues to grow
Where we used to have two full government Budget statements each year, nowadays the Chancellor’s Spring Statement simply provides an update of what’s been going on in the economy. It was easily missed in the recent melee over Brexit.
The economy as a whole is growing. The independent Office for Budget Responsibility published figures alongside the Spring Statement predicting growth of 1.4% this year, and continued growth in coming years.
That’s good news: we’re not in a recession, and we might not be running on full steam, but things are growing. Manufacturing has had its longest period of expansion for more than 50 years. That’s great news.
Would we be doing better without the confusion over Brexit? It’s not black and white. One of the reasons for the growth in manufacturing and other sectors is that sterling has weakened.
When an economy goes well the currency strengthens, which makes goods more expensive for overseas buyers.
When the economy isn’t doing as well, the currency weakens which makes things cheaper. Tourists coming over are getting a lot more pounds for their local currency than they would have done a few years ago; and UK companies selling things overseas are boosted because the goods are less expensive and therefore more attractive to buyers.
The economy is doing a little better than some of the headlines might have you believe. The OBR factors in a lot of variables to its forecasts – which is why they change so often – so it has looked at several scenarios to arrive at its projected growth figures.
Inflation is under control
As an economy grows, if it becomes too fast then we see inflation pick up, and when that happens interest rates also rise. But the predictions of around 1.5% growth shouldn’t see that happen; the OBR said it’s unlikely we’ll see big rises in inflation. They feel we have a healthy level of growth.
If we leave the EU without a deal, there will of course be an impact, with potential supply chain disruption and some price rises. But a lot of businesses have long since been stockpiling sufficient supplies in the event of no deal so that they can carry on with their operations until trade agreements are signed.
Interest rates remain extremely low
It might not be good news for the savers out there, but continued lows in interest rates is a positive for anyone trying to clear their debts.
I’ve said time and time again, the priority now should be to pay your debt down. You get a much bigger bang for your buck with interest rates being so low.
Maximise inflows by doing things like selling items online, and minimise outflows by reviewing all your spending. Try to get excited and passionate about raising whatever you can to pay off debt – particularly unsecured debt like credit cards and loans.
Keeping on the debt theme, the amount of money the UK borrows is down three-quarters since 2010. We currently borrow £1 for every £18 we spend, whereas we were borrowing £1 for every £4 we were spending at the height of the financial crisis.
As a financial planner the model of borrowing to pay off debts is not one that I or any of my colleagues would recommend! But this is how the world works, and it’s good news that we’re borrowing a lot less each year than we were.
In the UK our national debt is around 85% of our GDP, the country’s national output, which is like our income. Globally, Japan’s debt stands at around 250% of its GDP; in the USA it’s approximately 105%; and in Canada, which is held up as one of the strongest developed economies, it’s still at 90%.
Forecasts are for our debt:GDP ratio to fall to around 78% in coming years, so things are moving in the right direction.
The bigger picture is important, but your own smaller picture is where you should focus
One of my mottos is that you should focus on the things you can control. We can’t as individuals control the country’s economy, but we can control our personal economy.
What’s always important is making sure your personal economy is as strong as you can make it, so that during harder times you can weather the storm with less impact. I appreciate that in some areas house prices are still struggling to get back to their previous levels, but asset prices have generally increased, including a long period of growth in the stock market.
By focusing on learning new skills, paying down debts and increasing cash inflows wherever possible during the ‘good’ times, you’ll be in a stronger position when things turn. You’ll also be building towards your retirement, even if right now that simply means chipping away at your borrowing.
Investors should stick to their strategy
People ask me whether they should hold off on investing because of the uncertainty and the news they read.
One of my favourite phrases when it comes to investing is that it’s the time in the market that matters, not timing the market.
What does that mean? Investing is for the long-term, and you should only have your money in the markets if you intend to leave it there for at least five years, and preferably seven or more. That’s time in the market.
If instead you try to ‘time the market’ by buying particular stocks or funds low and selling high, academic research has shown time and time and time again that while you may get lucky once in a while, your returns are less predictable over time.
Use a globally diversified portfolio, and a passive or index fund for your investment. The difference between that and active management – where people try to time the market on behalf of their clients – was perhaps best highlighted by Warren Buffett’s famous bet.
Buffett put out a 10-year challenge in 2007 to any individual in the world: use active fund management to beat my passive returns from the S&P 500, which is the US equivalent of the FTSE 100.
Only one person took the bet, which was for $500k, a hedge fund consultant named Ted Seides. In the first year, Seides did well and his investment returns had moved ahead. But it didn’t take long for the tables to turn.
A year before the challenge was due to end, Seideswas so far behind that he conceded he had lost the bet; there was no way his returns could catch up.
It’s a great reminder that ‘set and forget’ is your best strategy for investing. Choose an index portfolio that matches your risk appetite, put your money in it and leave it there to ride out the highs and lows that are inevitable. You can do this online easily, I have my own site Lexo.co.uk that lets you choose a portfolio according to your appetite for risk. Time in the market is your friend.
We work hard all year to be able to enjoy our holidays, so making every penny count helps you get the most from your trip.
Now, however, is the time to start planning your summer holiday money if you want to keep your costs down. Warren Shute shares his top 10 tips on making your money go further when you’re heading overseas:
1. Prepare a rough budget and think about ways to generate more income now
It very hard to stick to a budget on holiday, but with a few months to go, it is often useful to draw out a rough budget to make sure you have enough money – and if not, you have time to do something about it. Obvious I know, but I can’t tell you how many people wake up to the fact that they are going on holiday next week and don’t have enough spending money – which leads to more borrowing.
I think it’s really important to figure out how much will need on holiday. First, make a list of all the items you’ll need to take care of before you go: i.e. Travel money, Travel insurance, Accommodation, Sun cream and toiletries, Travel (flights or fuel costs), Holiday clothes and swimwear, Car hire (and car excess insurance). Remember to hunt around for the best bargains online.
Second, think about the day-to-day expenses on holiday like: Excursions, Holiday treats, Entertainment, Food and drink, Duty Free and Airport transfers. This will give you a rough guide of how much money you will need.
There are some things you can do though that’ll help you find some extra money that you can put towards your savings: Some ideas are to sell things on eBay, look at Airbnb, check your getting all the benefits you are entitled to; reduce spending, have a month of alcohol before you go away, downshift your supermarket shopping in the run up to the holiday. Check out www.moneyadviceservice.org for other ideas.
For a package holiday, if you can be flexible on where and exactly when you’re going, then the closer to your ideal departure date you wait, the cheaper the rates. There are plenty of bargains to be had in the scramble to fill up empty spaces in the month or two beforehand. If it’s just cheap hotel rooms that you are after I often use www.trivago.co.uk to compare rooms and www.booking.com is great if you want to delay payment to give you time to build up reserves.
3. Not all cards are equal
Having the right card in your pocket is by far the cheapest way to spend abroad. When you’re using your plastic, it’s easy to be caught out by hidden fees and poor exchange rates, so plan ahead and your cash will go on enjoying your trip – not on admin fees.
I’m a big fan of the Monzo card, which offers a debit card that you can charge up before you travel. Based on the Mastercard exchange rate, you’ll pay no fees to use it abroad in just about any currency, so it keeps your spending simple. You can also withdraw up to £200 cash for free in any 30-day period. www.monzo.com.
Via your smartphone, Monzo will also keep track of how much you’ve spent in sterling, and lets you know the exchange rate after you land. The Revolt card is another good example www.revoult.com.
Alternatively, although I am not a big fan if you’re not good with money, credit cards including Halifax Clarity, the Post Office and Saga offer fee-free transactions overseas, but you should only use a credit card if you’re financially organised and have a direct debit set up to clear your balance each month to avoid interest charges.
Other cards can add 3% in fees when used abroad, which might not sound like much but can quickly add up to a nasty surprise when you get home.
4. Don’t exchange cash at the airport…and always pay in currency of the Country you are in
If you prefer cash to cards, then get your currency before you reach the airport. Exchange rates are horrendous at the departure lounge, because you’ve no other choice by that stage.
Use an online comparison tool to search for the best exchange rates before you travel, keeping a close eye on the fees charged and not just the headline rate. It’s well worth spending a little time calculating the amount you’ll end up receiving from each provider once the fees are factored in. My favourite is: www.travelmoneymax.com.
Don’t forget – If they ask, “Pay in pounds or Euros?” The answer’s Euros. This question is becoming more common when paying or using ATMs in Europe. If you say “pounds” it means the foreign bank or shop is doing the conversion for you, and it’s usually at a worse rate than if you let your own bank do it by saying “Euros”. This is especially true if you’ve got one of the specialist overseas cards.
5. …and exchange whenever it suits you
Sterling exchange rates are fluctuating daily with the uncertainty surrounding Brexit, and nobody knows which way they’re going to go in the next week or month.
Don’t waste time fretting about picking the perfect time to exchange, do it whenever you’re ready – minimising the fees you pay will have a bigger impact on how much you get for your pounds than a slight shift in the currency rates.
6. A long delay can bring compensation
EU law dictates that a flight delay of two hours or more means you’re entitled to compensation on certain routes into or out of the UK, EU, Iceland, Norway and Switzerland. Amounts vary according to where you’re departing from or going to, and how long you’ve been held back.
To claim, you’ll need to contact the airline. It’s free and simple to do online on most carriers, so you don’t need a third party to claim for you. If the airline is unresponsive, you can elevate your claim to the Civil Aviation Authority or the official ADR providers www.aviationadr.com and www.cedr.com.
Avoid the numerous companies who charge for reclaiming, it really is a simple and easy process that you can do yourself. I would start with www.resolver.co.uk who are a free service. If your delayed flight was into or out of Europe, you could be entitled to up to €600 in compensation. … EU law EC 261 says you can file a claim for cash compensation if you arrive at your destination more than three hours later than planned.
7. Arrange your car hire at home…
It’s simple and fast to shop around online to get the best car hire deals. If you wait until you get to your destination, you run the risk of your costs going through the roof: double the price of an internet quote is not uncommon.
You’ll be offered accident excess insurance by pretty much very car hire firm, and because the excess for any claim you make (even for a paint scratch) is usually, well, excessive (£500+), it’s something you should take out.
But the rates you’ll be quoted are often around £10 per day or more. Instead, arrange an excess policy before you leave via a site like www.moneymaxim.co.uk, and you’ll save a pretty penny.
9. Travel insurance matters
Make sure you have insurance in place before you book your trip, or you won’t be covered in the event of cancellation. Travel insurance needn’t cost a lot, but it sure will if you don’t have it.
If you plan on travelling overseas more than once in the next 12 months, an annual travel policy is often cheaper than single-trip plans. Either way, use an online comparison tool to get the best rates. I would start with www.moneysavingexpert.com or www.comparethemarket.com.
10. Think about your next trip
Pre-funding your holiday means you won’t be paying it off for months after you get back. Set your holiday as a goal in your long-term vision, and without noticing you’ll have paid it off by the time you hit the beach.
Open a separate holiday account and make a regular, automatic monthly payment, like a direct debit. If your holiday’s going to cost you £800 in November, transfer £100 each month for 8 months before you go away.
Remember to focus on the date you need to make payment, which isn’t usually the day you go away! If payment is due a few weeks before that, budget accordingly.
How great would it be to get back from your holiday without paying for it for months afterwards? Make it a reality by automating your money.
Oh, and don’t forget the bigger picture when you’re on the beach….
With a little more head space when we go away, it can be a great time to see the bigger picture. Think about any changes you can make when you get back home to get more financially organised. Pick up a copy of The Money Plan for your beach reading and make your next trip even more special!
Warren Shute, who is one of UK’s leading financial planners and a regular provider of money saving tips to the national media, delivered a unique maths lesson to primary school children on Friday 15 March, in aid of the NSPCC’s Number Day.
NSPCC Number Day is a maths-inspired fundraising day for children in nursery right through to secondary school, with free downloadable activities suitable for all ages and abilities.
The financial planner, who normally works with wealthy individuals and businesses owners was lending his support to the children’s charity and hopefully inspiring the next generation of children at Parkfield primary school.
Pupils at the school got into the spirit of Number Day by dressing up in numbers inspired outfits and taking part in fun curriculum-based activities such as Wish upon a Star, Who wants to be a Mathionnaire and Number Hunt, whilst making a small donation to take part.
Funds raised from Number Day will help support vital NSPCC services such as Speak out Stay Safe which visits primary schools across London to teach children about the dangers of abuse and what they can do if they need help.
Gabriella Russo, NSPCC Schools Area Co-ordinator for West London, said: “In the last school year (2017/18) the NSPCC’s Schools Service reached over 43,000 primary school children in more than 140 primary schools across west London with its Speak out Stay safe workshops and assemblies.”
The head teacher at Parkfield Primary School said “We are delighted that Warren has taken time out of his busy schedule to support our fundraising efforts for NSPCC’s Number Day. Having a leading financial planner to come into school and talk to primary school aged children about finances in such a fun, interactive way was fantastic and very inspiring for the children.”
Warren Shute added “the children and staff at Parkfield primary school were amazing, I was so impressed how engaging the children were and what mature questions they asked, it was a great day for everyone”
Investment fads are nothing new. When selecting strategies for their portfolios, investors are often tempted to seek out the latest and greatest investment opportunities. Over the years, these approaches have sought to capitalise on developments such as the perceived relative strength of particular geographic regions, technological changes in the economy, or the popularity of different natural resources. But long-term investors should be aware that letting short term trends influence their investment approach may be counterproductive. As Nobel laureate Eugene Fama said, “There’s one robust new idea in finance that has investment implications maybe every 10 or 15 years, but there’s a marketing idea every week.”
WHAT’S HOT BECOMES WHAT’S NOT
Looking back at some investment fads over recent decades can illustrate how often trendy investment themes come and go.
In the early 1990s, attention turned to the rising “Asian Tigers” of Hong Kong, Singapore, South Korea, and Taiwan.
A decade later, much was written about the emergence of the “BRIC” countries of Brazil, Russia, India, and China and their new place in global markets. Similarly, funds targeting hot industries or trends have come into and fallen out of vogue.
In the 1950s, the “Nifty Fifty” were all the rage.
In the 1960s, “go‑go” stocks and funds piqued investor interest.
Later in the 20th century, growing belief in the emergence of a “new economy” led to the creation of funds poised to make the most of the rising importance of information technology and telecommunication services.
During the 2000s, 130/30 funds, which used leverage to sell short certain stocks while going long others, became increasingly popular.
In the wake of the 2008 financial crisis, “Black Swan” funds, “tail-risk-hedging” strategies, and “liquid alternatives” abounded.
As investors reached for yield in a low interest rate environment in the following years, other funds sprang up that claimed to offer increased income generation, and new strategies like unconstrained bond funds proliferated.
More recently, strategies focused on peer-to-peer lending, cryptocurrencies, and even cannabis cultivation and private space exploration have become more fashionable. In this environment, so-called “FAANG” stocks and concentrated exchange-traded funds with catchy ticker symbols have also garnered attention among investors.
THE FUND GRAVEYARD
Unsurprisingly, however, numerous funds across the investment landscape were launched over the years only to subsequently close and fade from investor memory. While economic, demographic, technological, and environmental trends shape the world we live in, public markets aggregate a vast amount of dispersed information and drive it into security prices. Any individual trying to outguess the market by constantly trading in and out of what’s hot is competing against the extraordinary collective wisdom of millions of buyers and sellers around the world.
With the benefit of hindsight, it is easy to point out the fortune one could have amassed by making the right call on a specific industry, region, or individual security over a specific period. While these anecdotes can be entertaining, there is a wealth of compelling evidence that highlights the futility of attempting to identify mispricing in advance and profit from it.
It is important to remember that many investing fads, and indeed, most mutual funds, do not stand the test of time. A large proportion of funds fail to survive over the longer term. Of the 1,622 fixed income mutual funds available to investors in the world’s biggest market, the US, at the beginning of 2004, only 55% still existed at the end of 2018. Similarly, among equity funds, only 51% of the 2,786 funds available at the beginning of 2004 endured.
WHAT AM I REALLY GETTING?
When confronted with choices about whether to add additional types of assets or strategies to a portfolio, it may be helpful to ask the following questions:
1. What is this strategy claiming to provide that is not already in my portfolio?
2. If it is not in my portfolio, can I reasonably expect that including it or focusing on it will increase expected returns, reduce expected volatility, or help me achieve my investment goal?
3. Am I comfortable with the range of potential outcomes?
If investors are left with doubts after asking any of these questions, it may be wise to use caution before proceeding. Within equities, for example, a market portfolio offers the benefit of exposure to thousands of companies doing business around the world and broad diversification across industries, sectors, and countries. While there can be good reasons to deviate from a market portfolio, investors should understand the potential benefits and risks of doing so.
In addition, there is no shortage of things investors can do to help contribute to a better investment experience. Working closely with a financial adviser can help individual investors create a plan that fits their needs and risk tolerance. Pursuing a globally diversified approach; managing expenses, turnover, and taxes; and staying disciplined through market volatility can help improve investors’ chances of achieving their long-term financial goals.
Fashionable investment approaches will come and go, but investors should remember that a long-term, disciplined investment approach based on robust research and implementation may be the most reliable path to success in the global capital markets.
A handy checklist of suggested planning considerations for individuals for the end of tax year.
There’s less than a month to go until the end of the 2018/19 tax year. However, there’s still time to consider some last-minute tax planning to maximise the use of an individual’s allowances, reliefs and exemptions for the current tax year. Some of these will be lost if not used before the tax year end.
As well as last-minute tax planning for 2018/19, now is also a good time to put in place strategies to minimise tax throughout 2019/20. The majority of planning strategies have greatest effect if implemented before a tax year begins.
This year end tax planning checklist covers the main planning opportunities available to UK resident individuals and will hopefully help to inspire action to reduce tax for 2018/19 and 2019/20.
However, while tax planning is an important part of financial planning, it is not the only part. It is essential that any tax planning strategy that is being considered also makes commercial sense.
In this summary all references to spouses include civil partners and all references to married couples include registered civil partners.
Suggested planning points for consideration
Reduce taxable income below £150,000 to avoid 45% tax. Pension contributions are one of the few ways to reduce taxable income.
For married couples / civil partners ensure each has sufficient income to use their personal allowance: £11,850 in 2018/19; and £12,500 in 2019/20.
The personal allowance is gradually withdrawn for individuals with income above £100,000. If income is above £100,000, then pension contributions before 6 April 2019 can reduce income to £100,000 to restore all or part of a personal allowance which would otherwise be lost.
Reinvest in tax free investments, such as ISAs, to replace taxable income and gains with tax free income and gains, or investment bonds that can deliver valuable tax deferment.Investments delivering tax free, or potentially tax free, and/or tax deferred, income, can be beneficial for an individual in contrast to an income producing investment which might otherwise result in an erosion of personal allowances. Note that once an investment bond gain is triggered, for example, by encashment, it is included in an individual’s income without top slicing when assessing entitlement to the personal allowance.
Redistribute investment capital between spouses / civil partners to potentially reduce the rate of tax suffered on income and gains. No capital gains tax (CGT) or income tax liability will arise on transfers between married couples or civil partners living together or where the asset to be transferred is an investment bond.
Any transfer must be done on a ‘no-strings-attached’ basis to ensure that the correct tax treatment applies. This means investments must be fully transferred with no entitlement retained by the transferor.
Capital Gains Tax
Maximise use of this year’s annual exemption (currently £11,700). Any amount unused cannot be carried forward – “use it or lose it”.
To defer the payment of tax for a year, make a disposal after 5 April 2019.
To use two annual exemptions in quick succession, make a disposal before 6 April 2019, and one after 5 April 2019.
Try to ensure each spouse / civil partner uses their annual exemption. Assets can be transferred tax efficiently between spouses / civil partners to facilitate this.
Any such transfer must be outright and unconditional. In transactions which involve the transfer of an asset showing a loss to a spouse / civil partner who owns other assets showing a gain, care should be taken not to fall foul of anti-avoidance rules that apply (money or assets must not return to the original owner of the asset showing the loss).
Everybody has an annual exemption of £3,000 to use each tax year. Any unused annual exemption can be carried forward for one year only. So, use any available annual exemption carried forward from last year before 6 April 2019.
The annual £250 per donee exemption cannot be carried forward. A person can make as many outright gifts of up to £250 per individual per tax year as they wish free of inheritance tax (IHT), provided that the recipient does not also receive any part of the donor’s £3,000 annual exemption.
Savings & Investments
Savings income and dividends
For married couples / civil partners ensure each has sufficient savings income to use their £500 or £1,000 personal savings allowances, and sufficient dividends to use their £2,000 dividend allowances.
Those able to control the amount of dividend income they receive, such as shareholding directors of private companies, could consider paying themselves up to £2,000 in dividends in tax year 2018/19 and £2,000 in 2019/20.
The 0% starting rate band for savings income of £5,000 is available on top of the dividend allowance and personal savings allowance. It reduces £1 for £1 by all non-savings income over the personal allowance, so people are not able to take advantage of this starting rate band where earnings and/or pension income exceeds £16,850 in 2018/19. However, if a person does qualify, ensure they have the right type of investment income (eg interest) to pay 0% tax.
Where interest is due just after 5 April 2019, closing an account just before the tax year end can bring that interest forward to the 2018/19 tax year, which, for example, may help in making better use of any surplus personal savings allowance or nil rate starting (savings) band for the current tax year.
ISAs and JISAs
Annual subscriptions (£20,000 and £4,260 respectively) should be maximised before 6 April 2019 as any unused subscription amount cannot be carried forward.
EISs and VCTs
For subscriptions to be relieved in tax year 2018/19 they must be made before 6 April 2019.
EISs – Up to £1 million can be invested; £2 million where any amount above £1 million is invested in knowledge-intensive companies. Maximum income tax relief is 30%. Unlimited CGT deferral relief – provided some of the EIS investment potentially qualifies for income tax relief. To carry back an EIS subscription for tax relief in 2017/18 it must be paid before 6 April 2019.
VCTs – Up to £200,000 can be invested. Maximum income tax relief is 30%. No ability to defer CGT, but dividends and capital gains generated on amounts invested within the annual subscription limit are tax free.
It is essential that would-be investors are aware of the likely greater investment risk and lower liquidity that will have to be accepted in return for the attractive tax reliefs offered by EISs and VCTs.
Investment bonds can deliver valuable tax deferment. To minimise taxation on encashment, consider deferring the encashment until later tax years, if other taxable income is likely to be lower, or nil, or the investor is a basic rate taxpayer. In the meantime, if cash is required, the investor can use the 5% tax-deferred annual withdrawal facility. (Alternatively consider assigning, transferring, the bond, outright, to an adult basic rate or non-taxpaying relative before encashment.)
Or, it may be worth triggering a chargeable event gain before the end of this tax year, so that the liability to tax falls in 2018/19, if the taxpayer anticipates that their top tax rate in 2019/20 will be greater than this year’s.
The carry forward rules allow unused annual allowances to be carried forward for a maximum of three tax years. This means that 5 April is the last opportunity to use any unused allowance of up to £40,000 from 2015/16.
For high earners, now is the final time to check, if they are subject to the tapered annual allowance, whether there is anything they can do about it. If the client has sufficient carry forward and their threshold income is only just above £110,000, making additional pension contributions could reinstate their whole annual allowance. This means more pension savings and the possibility of avoiding a tax charge.
Making extra pension contributions not only increases pension provision but for those who may be subject to a reduced personal allowance a personal pension contribution could claw back some of this allowance giving an effective tax saving of around 60%, more with salary sacrifice.
In addition to helping high earners gain back their personal allowance, pension contributions can also help families get back their child benefit, which is progressively cut back if one parent or partner in the household has income of more than £50,000. Benefit is totally lost when income reaches £60,000.
The changes to the death benefit rules on pensions from 6 April 2015 should have prompted a review of the pension scheme and/or the expressions of wish regarding the recipients of pension death benefits. If this has not been done, now is the time. In theory a person’s pension plan could provide income for future generations, as beneficiaries will be able to pass the remaining fund to their children and so on down the line.
Individuals should consider making a net pension contribution of up to £2,880 (£3,600 gross) each year for members of their family, including children and grandchildren, who do not have relevant UK earnings. The £720 basic rate tax relief added by the Government each year is a significant benefit and the earlier that pension contributions are started the more they benefit from compounded tax free returns.
Several years ago, I worked with a group of people to create a model called the House of Wealth: a graphical representation of your financial planning. The foundations of the house include all the basics everyone should consider having in place to safeguard their (and their families’) future, we never know what’s around the corner.
There are eight elements to the foundations in total: three are essential (an emergency cash reserve, a will and a lasting power of attorney), and five are optional. They’re very important for some people, but unnecessary for others.
It’s worth checking those five to see if you could benefit from the protections they offer.
1. Life insurance
We’re insuring a risk with life cover: if you were to pass away, what would happen to your family unit or those you leave behind? If you’re a single person with no debts, you probably don’t need life assurance. But if you’re in a relationship and you’ll leave someone behind who would be financially disadvantaged by a loss of income, you should consider it.
There are two broad types of policy you should consider:
Mortgage payment protection insurance
This is a term assurance policy which will cover the balance of your mortgage. As your balance reduces over time, the policy value reduces accordingly (it’s also known as decreasing term assurance). This is generally the cheapest way to have your mortgage paid off in the event of death.
You can also arrange what is called a level term assurance, if you have an interest-only mortgage. Premiums are generally higher because you’ll still owe a substantial amount at the end of an interest-only mortgage term.
Family Income Benefit to replace the loss of income
Repaying the mortgage on death is one thing, but there are still bills to pay, so replacing this loss of income can also be important.
If your dependent receives a lump sum on your death, they’ll probably need to seek financial advice to invest it to ensure it lasts over time, we think this carries an additional level of risk and uncertainty and that’s why we generally prefer to use a family income benefit plan.
A family income benefit plan pays out a regular payment each month for the term of the policy, like a tax-free salary. It can go up in line with inflation, the premiums are cheaper, and is generally a more secure way to protect against loss of income for those you leave behind, in the event of death.
As with all life assurance, lump sum or income, it’s generally better to arrange individual policies rather than a joint one with your partner. This allows for the policies to be tailored to each person’s needs, which can be very different. In addition, the benefit pay-out can be left in a trust, which can help speed up a payment in the event of a claim and keeps the benefits out of the estate for inheritance tax purposes.
Who’s it for? Anyone who would leave behind a partner or dependants should consider it.
2. Disability insurance
This covers you if you’re unable to work due to an accident or long-term illness. This type of policy will pay a proportion of your income – typically between 50% and 75% – tax-free in such a scenario.
Policies are usually deferred before they begin paying out. It’s often good practice to set that deferral according to however much you have saved in an emergency reserve; if you have 12 months of expenditure set aside, then deferring the policy for a year means you’ll pay lower premiums that if you have it set to pay out after a month.
The policy pays out until you either return to work or until the end of the term, which generally is your retirement age.
Who’s it for? Everyone should consider it. Even if you have no dependants, you still need money coming in if you can’t work due to an accident or long-term illness. Some larger employers, particularly for executive roles, will include this type of cover as part of their terms of employment.
3. Critical illness cover
Critical illness policies offer a tax-free payment and become payable on diagnosis of a specific list of conditions, including the likes of brain injury, organ failure and surgical treatments such as a heart bypass.
They can be set up as monthly payments like a family income benefit plan, but generally are taken as a lump sum, typically to clear a mortgage. You can set the amount of the lump sum, with higher sums attracting higher premiums.
Who’s it for? This should only really be considered once you’ve paid off all unsecured debt.
4. Private medical insurance
We’re lucky enough to have the NHS, and that’s an organisation that many people are so fond of that they’d never consider private medical insurance, regardless of their personal wealth.
But if you need to get back to work as quickly as possible after your circumstances change, private medical insurance will generally reduce the waiting time to be seen by a specialist and receive non-emergency treatment. It may also provide you a private room after an emergency procedure.
There can be an excess on these policies, much like car or home insurance. Around £250 is a typical excess, which will roughly cover your first consultation with a specialist. The higher your excess, the lower your premiums.
Who’s it for? Particularly valuable for the self-employed, but relevant for anyone. Again, some larger employers will offer it as part of their standard employment terms as a benefit in kind.
5. Household insurances
This is the likes of buildings and content insurance on your home, car insurance and travel insurance.
While most people have these already, what’s important is to regularly check the amount you’re insured for, especially on home contents policies. So many people are under-insured, which doesn’t come to light until you make a claim. Make sure all your jewellery and technology is covered, and itemise things on the policy if you’re not sure, especially for taking them away from your home.
Documents (and photos of receipts for expensive items) should ideally be kept either in a fireproof box or safe, or online in cloud-based storage.
Who’s it for? Everyone with a roof over their heads, car outside or holiday booked!
Insurance isn’t fun – but it’s vitally important to get right for your circumstances. Once a year, it’s worth reviewing you’ve got everything in place you need… and then you can forget about it for the next 12 months!
Preparation and planning is key to good money management. Knowing what’s coming up means you can prepare and adjust before things happen, rather than rushing to get things arranged at the last minute.
On 6 April the new tax year begins, so ahead of the inevitable flurry of advice in late March, here’s a look at the income-related changes that are on the way so that you can plan ahead.
Income tax rates themselves aren’t changing, but the bands are moving upwards. The personal allowance – what we can all earn before paying any income tax – is going up from £11,850 to £12,500.
Income is currently taxed at 20% for the first £34,500 you earn above the personal allowance. This basic rate tax band is increasing to £37,500 for 2019/20.
Combined with the increased personal allowance, this means you can earn up to £50,000 annually before reaching the higher rate tax bracket. Anyone earning more than this figure will therefore benefit from an extra £3,000 being taxed at 20% rather than 40%.
The higher rate (40%) tax band will cover earnings from £50,001 – £150,000, and income above this level will be charged at the additional rate tax band (45%), as it is currently.
The key to these changes is to do something with this extra money! Most people live to their means, spending what comes in, and of course the effect of inflation on goods is an ongoing concern. But this is in effect ‘extra money’ that we’re receiving, so even if you only get a little more, it should be put to good use.
That includes saving £1,000 minimum as an emergency reserve to cover you should something unexpected happen; paying down unsecured debts; investing it; or overpaying your mortgage.
Scotland sets its own rates of income tax. The personal allowance will also be £12,500 from 6 April, but other rates differ from the rest of the UK as follows:
Income of £12,500-£14,549 will be taxed at 19% (known as the Starter Rate).
Income of £14,549-£24,944 will be taxed at 20% (Scottish Basic Rate).
Income of £24,944-£43,430 will be taxed at 21% (Intermediate Rate).
Income of £43,430-£150,000 will be taxed at 41% (Higher Rate).
Income above £150,000 will be taxed at 46% (Top Rate).
Thanks to auto-enrolment, employees are now all offered a workplace pension. Although contributions vary according to each company’s policy, currently your employer must contribute at least 2%, while you must add 3%.
These minimum contributions are rising in April: employers must pay 3% and employees 5%.
This shouldn’t be something that worries you, because it’s securing your future. The 5% includes tax relief, so in reality it’s 1.6% more coming out of your take-home pay.
I always encourage people to try to save 12.5% of their income towards retirement planning or overpaying their mortgage, which represents the first hour of an eight-hour working day. The new rules mean you’ll be at 8% as a minimum, pushing you towards this figure.
One final word here: if you’re self-employed then don’t leave yourself short on this target – make sure you’re planning for your future too. Pensions provider Penfold will soon launch a scheme specifically for the self-employed and those in the so-called gig economy, so there’s no excuse for leaving yourself out of pension planning, but in the meantime start saving into a stakeholder pension.
Capital Gains Tax
Capital gains allowance will rise to £12,000, from £11,700. This is applicable to any investment or asset sale gains, including rental properties.
We all have a £325,000 inheritance allowance that we can pass on tax-free on our death to an individual or trust, which remains unchanged in the next tax year.
In addition, if you own a home and pass this onto your direct descendants – essentially, your children or grandchildren – the tax-free allowance is changing, rising from £125,000 to £150,000.
What out here, that if you leave this portion of your estate to a trust, you may not get the residential nil rate band, this would cost your estate up to £120,000 in extra inheritance tax from April!
In April 2020 the residential nil rate band will rise again to £175,000, meaning that a couple will be able to pass on up to £1m tax-free to their children/grandchildren when their main residence is included as part of the inheritance.
Cash and stocks & shares ISA limits remain capped at £20,000 this year.
The Lifetime ISA annual allowance, a fantastic vehicle for saving towards a first home, also remains unchanged at £4,000.
The Junior ISA allowance will rise in line with CPI inflation to £4,368, up from £4,260.
Anybody from a new-born baby until they are in their 70s can have a pension – you can even set one up in your baby’s name and pay into it from the day of their birth!
The beneficiary can’t access their pension until retirement age, so your children can’t use it to buy a car or a house or to pay for university. So why would you consider starting one for your child?
The answer is compound interest, which Albert Einstein described as the eighth wonder of the world, and with very good reason. Compound interest means receiving interest on your original capital plus the interest it earns; think of it as ‘interest on your interest’.
It makes your money grow exponentially, and over the long-term the benefits are huge. How huge? The impact can be mind-blowing, as we can see by using an example where you start a pension for your child maybe by saving some of your Child Benefit payment?
If you saved £50 per month (£40 from you and £10 tax relief from the government) into a pension for your child from birth until they turn 25, you’ll end up putting £15,000 into the pot.
Assuming growth of 7% per year – global stock markets have averaged around 9% over time, so this is a reasonable assumption – when your child reaches retirement at around 67 years old, that £15,000 will be worth an incredible £1million. That’s with no more contributions after their 25th birthday. What a legacy to leave them! They may not remember what you spent the Child Benefit on, but they will remember the £1million fund.
On the flipside: if you were to wait until turning 40 before starting a pension, over the same 25-year period as above you’d need to save nearly 20 times more, £922 per month (£740 before tax relief), to reach the same £1m at retirement. That’s £276,000 saved in total compared to the £15,000 needed if starting from birth.
That’s the magic of compound interest. It’s why one of my favourite money sayings is that the best time to start saving for your future was yesterday, and the second-best time is today.
Most stakeholder (personal) pension plans will allow contributions for babies and children. There are plenty of places you can set one up online, and the advantage of a stakeholder pension is that fees are low.
The amount you can contribute annually into a pension varies and is generally linked to your earnings, however for children, or those with no income, it’s £3,600pa gross. Gross means it includes the tax relief HMRC will add to the pension payments, even if you don’t pay tax like children. So you can pay, on behalf of a child, £2,880 and HMRC will add 25% or £720 so £3600pa can be saved. These are the maximums children can put away, you can fund much less to make it affordable.
You can’t access a pension until you retire, so other wrappers such as a Junior ISAs, ISA or general investment account should be used if you’d like to save to help your children with the cost of a wedding, education, property and so on.
The money in a pension is effectively ‘locked away’ until retirement age (currently 55 years old but rising in the future to be 10 years before the state retirement age) which should be seen as a positive thing, because it protects it for the time when it’s needed most: when we’re no longer working but still require income to do the things we want to do.
Now, then, them
Before you rush off to start a pension for your kids, you must take care of your own finances first. Like the safety instructions on a plane – secure your own oxygen mask first before you help others – the same is very much true of finances: you must secure your own future before you plan for your children’s.
I use a saying: now, then, them. Sort out your finances now; then sort out your own future and retirement plans; and only after that should you worry about ‘them’.
If you don’t, you’re potentially going to be a financial burden on your children and that’s not what you or they want. By getting yourself organised, you can marvel as Albert did at the wonder of compound interest.
As parents and grandparents, we give kids pocket money and other treats all the time. Imagine if this was the legacy we gave them instead? You might not be around when they start drawing their money, but they’ll sure remember you for it!
Even if you can only afford to put away £10 per month, something is better than nothing. Quarter of a million pounds is still more than double the average pension pot saved by those now aged 55-65, according to recent research.
When I wrote my recent state pension guide, I was surprised to find that it helped me boost my own state pension, let me explain how.
Because I am a self employed business owner, I engage my accountant to file my tax return, I could do it myself, but I feel I have better uses of my time and I believe, that because they file 1000’s each year, they will have a better understanding of the allowances I can claim, and cannot.
When I completed my state pension guide, which explains how the basic state pension works, how you qualify and how you can check your entitlement, I thought it would be wise, to ‘walk my talk’, as I do with everything I share, and go through the process myself.
So, I logged into the government gateway, which I must say I found fairly easy to follow and I had no hiccups. When I get to the stage where I looked at my contribution history, I was shocked to find that from about 1998/99 to 2003/04 I had insufficient contribution history – basically this means I did not pay, or qualify (these are different) for national insurance benefits.
I knew this would not be right, I feel the pain when I pay my taxes each year and if you earn enough to pay income tax, you earn enough to qualify for national insurance credits, so I contacted my accountant who acted for me at the time for some evidence, you see you only ‘need’ to retain documentation for six-years, so being an efficient person, I’d discarded this information, you can’t be expected to keep everything forever, or should we? Thankfully my accountant had it archived.
Well after the January tax return rush had passed, they kindly send me copies of my tax return’s, which I will now, follow my guide’s process and send these off to HMRC to, hopefully, be credited with my national insurance credits, I am duly owed, for these years.
The message I want to share with you from this is that if a Certified Financial Planner, a professional in the business can have gaps like this, when I do this everyday, could you? Check out your own national insurance contribution history, before it may be too late, you can obtain a free copy of my guide by clicking here www.warrenshute.com/state-pension-guide
Now is a great time to ensure you fill in any gaps in your national insurance history, to ensure you obtain the full state pension. At present anyone who receives state pension after April 2016 have until April 2023 to fill in any gaps between 2006/7 and 20015/16, and doing this before 5th April 2019 (when rates get set to £15 a week) will be able to benefit from especially favourable rates.
For example, buying one week of national insurance contributions for 2010/11 currently costs £12.05 or £626.60 for the year. After 5 April 2019 this will cost £780, an extra £153.40. Buying the extra year can increase your state pension by more than £244 for the rest of your life, meaning a yield of almost 40%.
But before you do this, please check my guide to ensure topping up will definitely boost your state pension.
Money, like a relationship, is a very emotional thing. Put the two together and you’ve either got sweet sailing or stormy waters ahead.
Discussing your thoughts and rules around money is important as a couple. You need to develop together in a financial sense as well as an emotional one. Based on over 20 years of working with couples and their finances, here are some tips on navigating the journey together.
When is the right time to discuss money in a relationship? Nobody can tell you when you’re ready – everyone is different and we all grow up with different values.
I think the right stage is usually the point at which you start doing more committed things together, which generally involve larger sums of money. For many couples that will start with going on holiday, which can be the perfect opportunity to start discussing how you each manage your money, whether you use credit cards to pay and how you handle those.
For others the conversation might become more serious when buying a home together, where there will naturally be a more formal conversation around finances.
Whenever the right time is, don’t allow money to come in the way of your relationship – it’s just the oil that makes things run more smoothly.
We all have different visions of where our life is going and how we’ll finance getting there. Even our interpretations of the same thing can be very different, for example what retirement looks like. You’ve got to consider what you each think the future will bring.
What are your values and belief around money? If you have kids, will one of you be taking time off work to stay at home? Is your vision that you’ll dedicate your lives to your careers or other passions, or are you looking to retire as soon as possible so you can travel the world?
The biggest arguments tend to come when your values aren’t aligned. If one of you enjoys spending and the other sees money as building your future freedom, then when the spender comes back from a shopping spree the other will see that as impacting their freedom. And vice versa too of course: the spender feels their own enjoyment of money is being challenged.
The key is communication: talk openly, honestly and without judgement and try and see things from the other person’s point of view.
The Bank Accounts System
This is a great system for couples which automates and takes routine thought out of daily money decisions.
If you manage your money jointly, the way it works is to have your income paid into a joint Bills Account, regardless of who earns what. From that account each month you’ll have direct debits or regular payments going out to meet all your fixed payments, things like utilities, rent or mortgage, life insurance and so on. You should also have a payment into a savings account.
In addition, set up another weekly payment, which is to each of you – this is your WAM or Walk About Money, your daily spending money. It funds all your variable spending, from coffee to haircuts and dinners out. Agree how much each of you will get as your WAM, it very well may be different.
If you each have your own WAM account, it avoids conflict; you don’t want your partner saying, ‘Wow, you wasted a lot of money on that’. It’s not for someone else to decide what’s important to you, so having this system in place ensures things work smoothly.
However, if you wish to manage your finances separately, the system works the same, with a little additional step. Your income is first paid into an account in your sole name, and from this account you pay the amount agreed, into your Joint Bills account.
I have clients successfully manage their money both ways, it’s not for someone else to tell you what’s right or wrong, it’s what works for relationship.
Should a person with no debt take on the debt of their partner? Everyone has their own views on this, but try flipping it on its head: if that same person was left a large inheritance or won the lottery, would the partner expect it to be shared?
If we’re willing to share our life and money together, then debt should probably be treated the same way as money received – as long as you are both in it for the long-term. If you’re not committed to the relationship then it’s probably not a good idea to combine finances; you need to be all-in.
If you struggle with your financial management then take on good money habits from your partner and grow together as a couple, securing your future and keeping out of debt once it’s gone.
Buying a home
When you’re ready to take the step of buying a place together, start saving individually. If you’re planning to purchase at least 12 months into the future and are aged between 18 and 40, the best place to save is in a Lifetime ISA (LISA). This allows each of you to save upto £4,000 in a tax year, and you’ll receive a 25% government bonus on your contributions at the end of each month.
You can only open a LISA as an individual and not as a couple, so by starting one each you’ll both get the bonuses towards your home purchase. This is also useful should the worst happen and you decide you don’t want to move in together any more: the money is only in your name.
As you look towards your future together, consider ‘equalising your estate’ – having a similar value of assets and income in each partner’s name.
If one of you has a particularly large pension, then it can be worth building up the other to a similar level. If, in retirement, you have one person with so much income that they’re paying higher or additional rate tax, and the other with the state pension as their only income, the latter is not even covering their personal allowance when it comes to tax. Equalising the combined retirement income is more tax-efficient as a couple.
The sticking point can be that, in general, the person with the larger retirement pot is a higher earner now and is paying more tax today. It’s another example of why communication is all-important in your joint decision-making.
Breaking up: see the bigger picture
Money can get messy when a relationship breaks down. Ideally, you want to both think about the bigger picture and trying to find a scenario where there’s a win-win for both parties.
Fast-forward 10 years, past the phase where the break-up hurts the most: does this money and its stress really matter in the bigger picture?
Try to focus on the future and realise that a deal, even if it’s not the perfect one for you, will free you from the worries of the settlement and allow you to return your focus to your future.
Around 10% of the year has already flown by – but that means there’s still 90% of it left to make your mark on 2019 and take control of your finances.
If you resolved to do just that, but January wasn’t your month for whatever reason, then it’s time to be resilient, set a strategy, focus on your outcome and take consistent steps towards it.
In my book The Money Plan I set out a five-step process to getting financially organised. The first step is to set your compelling vision: what do you want the rest of your life to look like?
For many people, that big picture vision includes paying down debt or considering how and when they’d like to retire. Whatever your vision, you can’t just wish it to happen. You have to work hard, nothing comes without effort.
Once you’ve got your compelling vision, break it down into the steps you need to take to get there. One of those steps is to look at your income and expenditure, what’s coming in and what’s going out. The first number must be, or become, bigger than the second.
Go through every expenditure outcome and ask yourself those three all-important questions: Do I need this? Do I want this? Can I get it cheaper?
You might have to go without things for a period of time, for example by sacrificing your satellite subscription or forgoing your next phone upgrade. It’s all about sacrificing today so that you can have a fruitful future, and move towards your goals.
If you can’t earn more money in your current role, you might look for a second job, sell things online or even change your job altogether for more money. Those things won’t happen overnight, so plan out the steps needed.
A simple first step might be to put your CV together and scour job sites. You won’t get a job the same day, but you’re taking the actions to make it happen.
When it comes to selling, your first step might be going through your house and making a inventory of things to sell. Your next might then involve opening an eBay account and starting to list them.
Those tasks might not be massive things on their own, but each building goes up brick by brick. Small achievements, consistently done, is what takes us to greatness. Put a structure in place where you’re always taking steps towards your goals.
Remember to review
Looking back on what you’ve done is so important; you need to cherish what you’ve accomplished. If you’ve had a great start to 2019 and you’re already taking control of your financial life, then stop for a moment and congratulate yourself!
Equally, consider any tasks you’d planned that you haven’t been able to do. It might have been the weather, or your children being sick and off school: sometimes life gets in the way. By reviewing and thinking about the tasks you haven’t been able to get done yet, you can schedule them in in the future. That way, you’re not just letting things go.
The other thing that reviewing does is make you grateful. If you’re always pushing forward, trying to achieve more and more, you can forget where you’ve come from.
Every morning I write down three things that I’m grateful for. Some days they’re as simple as having a roof over my head and being warm. It’s important to bring things back to basics sometimes, because it makes you humble and realise what you’ve achieved.
Remember, if you resolved to take control of your finances this year but haven’t started yet, don’t beat yourself up; there’s plenty of time.
If you have started, then give yourself a pat on the back, review and enjoy a sense of achievement. Great years, great months and great days are made up of great decisions. It’s the decisions we consistently make to drive us forwards that get us where we’re looking to go in life, financially or otherwise.
How are you getting on with your new year’s resolutions, we’re a few weeks in now and for many of you, your resolutions include financial goal-setting.
It’s also the time of year when we are hit with all sorts of predictions on what stocks or investment strategies are going to work best in the coming year, so I thought I would add mine to your list.
You may be paying extra attention right now, given that the stock market was so rocky in 2018 and we are heading for the uncertain Brexit.
I know volatility can make you nervous, seeing your pension or ISA fall for no reason can be concerning, however, please, take a deep breath and ignore all the stock and other investing tips you hear and read. The best investment advice for the coming year, and for your life for that matter, has nothing to do with what may–or may not–happen in the economy and the markets. Nobody can say for sure exactly how things will play out, we should know that by watching our politicians on TV.
My best investment advice for 2019 is advice that will build financial security not just for a year, but for life:
Invest in the Right Perspective
If you are investing for retirement, and you have 10, 20, 30 or more years until you retire, what happens in 2019 isn’t too important. Sticking to your long-term plan is what matters. In fact, when you are younger and you’re saving monthly into your pension, it’s actually good for shares to lose value, honestly.
It means your contributions in your workplace pension or ISAs will buy more shares because they are cheaper and over time remember, you have decades, those shares should rise in value, especially if you invest via a global index tracker fund,
If you are approaching your retirement years, you obviously want to be comfortable with your portfolio’s mix of shares, bonds, and cash. Review your strategy to make sure it is one that feels right to you. Your workplace pension plan may offer online tools to help you sort through your portfolio allocation, but again, perspective is important, your retirement may last two or three decades and if you intend not to buy an annuity, it means you will remain invested and your portfolio has plenty of time to grow in the coming years.
Commit to living within your means
If you are looking for a financial goal, this is the big one as far as I am concerned, it’s not what you earn that counts, it’s what you do with what you earn and it’s essential you avoid credit card debt. I hate budgets, I think they are like calorie restrictive diets, that’s why I developed the Wednesday WAM – your weekly allowance to cover your everyday spending items.
If you have unsecured debt like credit cards and overdrafts ensure you tackling these using my snowball debt repayment system you can learn about at warrenshute.com.
We have been through a 10 year stock market run, a bull market, where the economy is good and business is strong, let’s call the season ‘summer’, and well all know what follows summer, and when the economy slows down, when things get a little rocky, you want to have your financial house in order and now’s the best time to focus on clearing your debts before winter comes.
If you have credit card debt, ensure you’re switching the balances to get the best interest rate you can, before you see rates rising. Use my Bank Account System which I share in my book The Money Plan and on my site, to organise your spending and get yourself financially in control.
Take Care of Yourself
Investing in your physical and emotional well-being is the smartest move you will ever make. Emotional stress and mental health is finally becoming mainstream news, January and February are difficult months for some people, the weather is cold and dark, we realise how much we’ve over spent at Christmas as our statements arrive and life is difficult. Reach out and get some help, talk to someone and take care of yourself first. Taking care of yourself is the most selfless priority you can have. It is what gives you the strength and the energy to be there for everyone in your life.
When you take the time to take care of yourself you are investing in being a happier, healthier you today, and decades from now.
With all the financial planning we can do, we often lose sight of the fact that arriving at retirement in the best shape possible will have a huge impact on the quality of our retirement. It just might also allow you to work a bit longer–if that is part of your retirement plan–and potentially reduce your chances of early care costs later on.
A healthier you starting in 2019 is going to pay dividends for years.
Warren Shute is a multi-award winning Certified Financial Planner and author of The Money Plan, an Amazon best selling personal finance book
We don’t receive financial education at school, so teaching children about money starts at home. That can seem scary if you’re not good with money yourself, but with a simple pocket money system you can easily show your children strategies which help them learn and grow their own money management skills.
By helping your children understand about finances from an early age, the hope is that they’ll carry that knowledge through into adult life.
Setting the right amount
Every family has its own circumstances, so it’s not for me or anyone else to tell someone how much pocket money to pay. But one thing I do suggest is: link it to your children’s age. That way it grows as they grow, at their pace. My wife and I pay £2 pocket money per month for each year of our children’s age. Our daughter is 11, so she gets £22 per month, and our son is 13 and get £26 per month.
The amount you pay isn’t important, but linking it to their age gives you and them a system which makes things simple.
I also strongly recommend paying pocket money via direct debit or bank transfer – that way you’re never ‘in debt’ to your children when you don’t have spare cash, which isn’t the example we’re trying to set!
The value of money
It’s important that children learn the value of money and how far it goes. The easiest way to start is with you buying their needs, and them buying their wants.
Needs would include things like school trips, uniform, holidays and so on, while ‘wants’ covers everything else. When my daughter asks for the third time in a week if she can get some glue to make slime, or my son asks about a new Xbox game, those fall into their wants!
I was reminded of how well this system works when I was out shopping with my daughter. She loves crafts and came back to the trolley armed with all kinds of coloured paper, Post-it notes stickers and pens. She looks at me with her puppy dog eyes and says, ‘Can I please have them?’
When I told her, ‘Yes, of course, but you have to pay for them out of your money’, suddenly almost everything went back and she was left with some pens and paper that cost less than a pound!
That’s not to say that you shouldn’t treat your children whenever you want to, that’s your prerogative as a parent: this system simply restricts their spending so they can truly learn the value of money themselves and see how far it really goes.
Earning and learning
Children have to learn that money doesn’t come for free. So how can you encourage them to understand that money is earned?
By linking pocket money to the completion of chores like tidying up or taking out the bins, you can easily instil the importance of hard work and its impact on what we earn. It only took one lower payment after tasks were skipped for our children to learn that lesson!
Doing this teaches your children that it’s their money, they’ve earned it and are entitled to it. They feel good, it’s different to when we’re given things. Sometimes it’s dark, cold or raining when the bins go out, but afterwards my children stand with pride: they’ve earned their money and they get to spend it on what they want.
Most children are ready for their own bank account aged around 13. This takes the pocket money system to the next level, especially when used with a pre-paid card such as Osper which acts like a debit card and gives more independence and freedom to adolescents.
With their own account, it’s time to start learning more about incomings and outgoings. Make sure all their personal ‘bills’ like a mobile phone or online subscription come out of their account. This way money comes in and it goes out, so they learn about managing incomings and outgoings.
When they’re doing this in the safety of the family circle, and their spending habits each month are fairly modest, it’s the perfect environment to take the first steps towards good personal finance skills. Learning how to manage our money is just like learning to walk: we need a guiding hand to hold and encourage us along the way.
The 31 January deadline for submitting online self-assessment tax returns is suddenly looming large. If you’re not one of the 10,000 or so people who submitted their returns on Christmas Day or Boxing Day – no, me neither – and you still haven’t done it yet, then it’s time to get moving on your return.
Do you need to submit a return?
Self-assessment is not just for the self-employed. If you have any income which is not taxed at source, such as rental income or capital gains, you’ll need to complete a tax return. The financial year covered by the upcoming deadline is 6 April 2017 to 5 April 2018.
And the deadline might still be relevant even if you had no income: if you’ve completed a tax return in the past, then unless you have specifically been told by HMRC that you don’t have to submit another one, you must file a tax return even if you do not need to pay any tax.
If you miss the 31 January submission deadline, even with no tax to pay, you will be liable for financial penalties.
If you’re unsure, then call HMRC on 0300 200 3310.
How to submit?
The easiest and quickest way is online, and HMRC have a straightforward system for submitting your return – and helpful notes available.
There’s a useful video on the HMRCgovuk YouTube channel which gives a great overview on completing your return.
What information will you need?
HMRC are looking for information on your taxable income, so dig out any relevant paperwork you have – your P60, dividend vouchers, Interest statements and so on. ISAs are exempt because they are tax-free savings vehicles, but capital gains are treated differently.
Even if you haven’t made a taxable capital gain, if you’ve sold an asset which is more than four times your capital gains allowance (£45,200), you still need to declare it on your tax return, even if tax is not due.
Your pension may also be relevant: if you’ve put more than your annual allowance into your pension (for most people that’s £40,000pa, but it may be less if you have total income from all sources of more more than £110,000), then you may be liable for an income tax charge.
The key thing is to take action! Self-assessment returns are broken up into many parts, so it’s a big job to complete. Don’t put your head in the sand and ignore this until deadline day. Call the helpline, watch the YouTube video and avoid this next section being relevant to you.
Penalties are split into two areas.
Late (or no) submission penalties
If you miss the 31st January deadline by even one day, you’ll pay a £100 penalty. If you still haven’t submitted after three months, you’ll be charged an additional £10 per day, up to a maximum of £900.
After those six months, if you still haven’t completed your self-assessment return, another penalty of £300 will be added. And if after a year you STILL haven’t submitted, you’ll be hit with another £300 penalty.
That’s £1,600-worth of penalties in total, just because you didn’t take action and get your return done.
If you have tax to pay, then the penalties rack up quickly for late payments. You’re given 30 days to pay before a 5% penalty of the tax due is applied, on 1 March. Another 5% penalty on your total balance due comes into force on 1 August (six months later). A further 5% penalty is due if you still haven’t paid the tax by 1 February, a year later.
And if that’s not bad enough, you’ll also be charged interest, currently 3.25% on your tax owing.
Add up all the penalties above and if you only owe £100 in tax but don’t submit for a year, you’ll end up paying over £1,700!
That should be more than enough motivation to set aside time and submit your return as soon as you can.
It’s that time of year when credit card statements loom large – and for many, that means worries about their finances. Recent research showed that people take on average until May to pay off their Christmas.
But by definition, if you’re ready and willing to do something about your debt this year, then you’re not average – the majority of people do not change how they manage their finances.
I use an acronym, PSAR, to represent the steps you need to get on top of your money management in 2019. It stands for Psychology, which is where it all begins; Strategy, so you have a plan to follow to get debt-free; Action, doing something about it; and Review, because this is about changing your habits not just once, but consistently.
If you start anything feeling like you’re unlikely to succeed, then you’re setting yourself up for failure. If you play sport and you begin a game thinking you can’t win it, then your shoulders go down and you will end up losing.
The same is true of our debts. If you think ‘It’s too hard, I can’t do it’, then you’re not going to get back into the black.
Start by looking at your physiology, because that’s the quickest way to change your psychology. If you exercise or play with your kids, you feel good because you’re moving your body: motion creates emotion.
So when you’re thinking about your debts, straighten your stance and hold your head up high. Move your body – walk, run or exercise. You need to believe, without any doubt, that you can pay your debt off. Visualise being debt-free and how you will feel.
On my website, warrenshute.com there’s an audio exercise to help you focus your mind on making better financial decisions. Call it brain training, meditation, whatever you want to call it – but listen to it daily and you’ll see results.
I’m a big fan of the Snowball System. Write down all your credit card balances and list them in order from smallest to largest. Find out what the interest rate on all of them is, and get the lowest interest rate possible on all of them (I’m not a big believer in consolidating all your debts, because of the psychology mentioned above;).
The aim of the Snowball System is to take all your surplus money – your snowball – and pay off the smallest balance first; not the one with the highest interest rate, the one with the lowest balance. Once that’s gone, move onto the next, then the next, always applying your snowball to the lowest balance.
Why? Because when you’re paying off your debts, you need some wins along the way to keep you motivated and engaged. That comes back to psychology!
Then, you need to look at three things: your assets, income and expenditure.
Do you have any assets or savings you can use to repay your debts down? Don’t deplete any savings completely, you should always keep £1,000 in an emergency reserve fund, but otherwise you should be using any assets to pay down your debt.
Next is your income. Can you earn more money? If you can’t, or you don’t want to take a second job, it’s time to get creative. Lots of us got Christmas presents we perhaps don’t want or need, so consider selling those items and any others in your home that you don’t use. Go through your home and get excited about making an inventory of things you can sell online.
Think how you can maximise your income opportunities and consider options such as renting spare rooms out using sites like Airbnb, dog or house sitting or selling your skills online using consukltancy sites.
Finally, make sure you get paid, where you can, with any spending you do online using sites like topcashback.co.uk and quidco.com and get voucher discounts on sites like joinhoney.com, vouchercodes and vouchercloud.
The third step is your expenditure. This is where you need the Bank Accounts System which automates your money as much as possible, taking emotion out of everyday financial decisions.
Set up two bank accounts, one for bills and another for personal spending (more can be used for other longer term expenses).
Arrange ALL your regular payments to come out of your bills account – which is also where you have your salary paid. Go through each payment and ask yourself three things: do I need this, do I want this, can I get it cheaper elsewhere? You might be surprised at how much you can save, from TV packages to utilities to using a refillable water bottle.
Put some Wednesday WAM into your life: WAM is your weekly WalkAbout Money, and it pays for all your variable spending and fun: drinks, coffee, haircuts and so on. Work out how much you want (or have) to spend in a month after your outgoings, divide it by four, and you’ll get your weekly WAM.
Set up a weekly payment for this amount from your bills account to your spending account. Set it for a Wednesday, so you don’t have too long to wait after the weekend.
Your WAM is your weekly allowance; it’s finite. DON’T dip into your bills account for more, it’s not too long to wait for next Wednesday!
This system gives you boundaries that stop you overstretching: if you can’t afford something, save a little of your WAM each week until you can. Don’t’ use your credit cards! The Bank Accounts System works for everyone from those on low income through to very high net worth individuals, and it will work for you too.
If you can’t start acting on your strategy right now, then put a note in your diary or calendar to sit down and review your finances. Don’t reschedule it, no matter what: nobody is more important than you. Taking action is the key to any success, those who do, are the envy of the many who purely watch.
Reviews need to be planned: again, put a note in your calendar and schedule time to review. It won’t happen unless you make it happen. Reviews help you keep on track, and they’re an important part of the process.
You won’t get fit by going to the gym once, and you won’t get financially fit by looking at your finances once either, it’s a process.
Is getting out of debt easy? No, of course it isn’t, but it’s straight forward. You CAN do it, by following these steps. Imagine how you’ll feel when you get debt-free, and use that feeling to drive your actions.
Warren Shute is a multi-award winner Certified Financial Planner and author of the bestselling personal finance book The Money Plan, available on Amazon priced £11.99.
Amazon was the first trillion dollar company in the world ever! Not many people know who founded the company, or anything about the man behind Amazon, the company that influences the lives of so many of us.
Here is one of my favourite interviews with Jeff Bezos, where he opens and speaks freely about so many aspects of his life and success.
I love people from all walks of life that have achieved brilliant things, whether this is health, relationships or financial success, I hope you enjoy this interview with Jeff.
I am looking for just 3 people/couples to coach personally over a period of 3 to 6 months to take them from where they are and put them on the path to financial success.
There is no charge or cost to you, I am not looking to earn money from the coaching, however there is a few conditions you need to meet;
You struggle financially.
You agree to commit to change your current habits and implement The Money Plan.
You commit to a weekly catch up (either over the phone or in person).
You disclose fully your financial position and agree for this to be used for marketing purposes. Don’t worry, your private information will remain private.
If this applies to you and you can commit to a weekly catch up, 2019 could be the year it all changes for you – get in touch here. Alternatively, if you know someone who could really benefit from this, send them a link to this page, or like it on social media in the links below.
Since the launch of the Help to Buy ISA, 169,980 property completions have been supported by the scheme – up 23,227 since the previous quarter.
225,618 bonuses have been paid through the scheme with an average bonus value of £836. The total value of the bonuses paid in this period was £189 million. These were used to finance properties worth £29.4 billion in total – up £4.1 billion since the previous quarter.
The highest proportion of property completions with the support of the scheme is in the North West and Yorkshire and The Humber, with a lower proportion in the North East and Northern Ireland.
The mean value of a property purchased through the scheme is £172,787 compared to an average first-time buyer house price of £193,006 and a national average house price of £228,384.
The median age of a first-time buyer in the scheme is 27 compared to a national first-time buyer median age of 30.
What is the Help to Buy ISA?
The Government introduced the Help to Buy ISA in the 2015 Budget. It’s available to UK residents over the age of 16 for a temporary period of four years, which started in December 2015 and ends in November 2019.
Savers can open accounts with an initial deposit of up to £1,200 and are then able to save up to £200 a month. They can receive a tax-free Government bonus equal to 25% of the amount saved (including interest) when funds are paid on completion of the purchase of a first home costing up to £250,000 (£450,000 in London).
The Government contribution is capped at an overall maximum of £3,000 (ie. on £12,000 of savings) and subject to a £400 de minimis amount, meaning that savers must save a minimum amount of £1,600 to receive any bonus.
Savers, can’t have another active cash ISA in the same tax year. If they have opened a cash ISA the same tax year, they can still open a Help to Buy ISA but will have to transfer £1,200 from their cash ISA to their Help to Buy ISA, and the balance of their cash ISA to another account. They can still save into a stocks and shares or portfolio ISA.
Help to Buy ISA account holders can continue saving into their account until 30 November 2029 when accounts will close to additional contributions. The Help to Buy ISA Government bonus must be claimed by 1 December 2030.
First-time buyers (and others saving for the long term) can also save through the Lifetime ISA, which enables those between the ages of 18 and 40 to save up to £4,000 in each tax year with the added benefit of the government providing a 25% bonus on the contributions paid in a tax year at the end of that tax year.
The Treasury also published a press release, which highlights that over 458,000 completions have taken place using ‘one or more of the Help to Buy schemes’, and that the average house price purchased through the ‘schemes’ is £201,881. These figures are different to the above, as they incorporate statistics from other Help to Buy schemes, such as the Mortgage Guarantee scheme and the Equity Loan scheme, as well as the above Help to buy ISA scheme statistics.
I’m sure you may have 100 things on your “to do” list, but this will take you 5 mins and you’ll thank me 100 times over.
I came across Monzo, a fairly new bank, last year and I wrote about them in my book The Money Plan when discussing the “Bank Account System”. They are a brilliant new bank, and are particularly good in two areas;
When is comes to staying on top of your spending, the Monza app (for both Android and Apple) and its notifications are great. Nicky I both use them for our weekly WAM (Walk About Money).
Overseas spending. They do not make any charge for spending in foreign currencies (€ and $ at least!) and the rate is better than I can get when I get cash from the exchange!
When I pay I get an instant notification telling me my local spend amount and the £ equivalent – perfect for the ‘guess the bill’ game after the family meal, and it’s fun financial education for the children (or your partner if they need it!)
You can see on my Facebook page in August how much I saved when Nicky accidentally paid in € and I asked the hotel to reverse the payment and retake it in £. The refund was instantaneous and we saved a lot!! I screen printed the payments.
So why am I mentioning this now?
Because throughout DECEMBER ONLY they are giving away £10 to every new account opened, when you use the special referral code below:
If you haven’t gotten around to adapting your bank accounts to my system I suggest in my book, now would be the perfect time to do so. Consider Monzo for your weekly Wednesday WAM and then keep your current bank account as your Bills Account.
It is a fact that most of the working population receive little or no financial education from their employers – and I believe business owners and their HR functions can shine by stepping in to fill this gap in 2019.
Debt is crippling. It clogs us up. It hinders us. It weighs us down. It enslaves us and it makes us unable to manoeuvre, often leading to mental health issues. Employers have a moral responsibility to look after the financial wellbeing of their employees and to ensure they are at least financially literate. In my view, if people are better at managing their own money, they will also be better at managing company resources and will endure less stress in the workplace, which certainly impacts their ability to perform.
This is clearly good citizenship, but it is good business sense too. Financial education is as an employee benefit that assists with retention. Help with pension planning will aid the transition to retirement among older employees and improve succession planning by providing further options for younger staff.
If businesses care for their employees, I believe people will be able to give them more in return. Basic courses in budgeting and debt reduction, in addition to retirement planning, can be a great start.
Of course, financial education should not be a substitute for paying people a decent wage and it’s important not to examine it in isolation from your pay policy. But with the rollout of auto-enrolment pensions in particular, all employers have a responsibility to offer access to schemes. With this should come guidance on the schemes and on the need for employees to augment their state pensions.
What is being done?
Supplementing pension provision with workplace savings schemes is a logical further development to consider. And the process of providing guidance on pensions and savings feeds through to other aspects of financial education. Assessing how much income is needed in retirement requires budgeting skills and an understanding of taxation. In effect, pension guidance is a stepping stone to wider financial education.
Although some employers do not have the resources and skills to provide financial education, there are freely available services to help provide support. The Money Advice Service provides simple and easy-to-use online financial tool, for example.
Teaching employees about money has to be good for business – and for that reason, HR should get more involved in 2019. If your employees can better manage the money they make, those extra savings will provide a bump to their bottom line. You’ll be giving them useful life skills they can apply beyond your company. And hopefully, they will put plans in place that will reduce their money-induced stress. By giving your employees tools precious few others have today, they can teach their spouses, children and friends sound financial skills – which means you are helping society and the country by educating people in a necessary but under-taught set of life skills.
If you are reading this and think that your employer/company and its staff would benefit from a presentation on becoming financially organised then please get in touch, or visit my corporate presentations page for further details.
This article was written for People Management publication and can be found here. Warren Shute is a financial expert and author of The Money Plan.
When we speak about the future direction of the stock market, we are always guessing, we really don’t know with any confidence or certainty what will happen to the markets in 2019/20, we may have a feeling, based on the news articles we read, but if we read a different set of articles we’d have a different outlook about the market direction.
This was evident in 2007/08 when nobody that I am aware of predicted the market top, but there were many who came forward after the event explaining their methods, hindsight is a wonderful thing and it sells well!
At present we may be concerned with Brexit and Trumps trade tariff with China, but if a deal is agreed and Trump relaxes the tariffs, it will be a different storey.
Markets are generally rational and fairly priced, but on occasions, they do crazy things. Are they going to correct next year, I don’t know and nobody does with any certainty, but rather than worrying about something you cannot control, like the short-term direction of the market, focus instead on what you can control, like your asset-allocation.
You should ensure your asset mix between equities and high-quality short-medium term bonds is right, the lower your risk tolerance and the closer to when you need access to your capital, the higher your allocation to these types of bonds should be.
For retirement funds, as a general rule of thumb, you can use 100 minus your age for your equity allocation, so a 20-year-old who has a long time until the retirement funds will be needed, say 40-45 years, would have 80% in equities (100 minus 20) may work. Whereas a 70-year-old would have 30% in equities, still maintaining an exposure to provide some growth. Having such a high allocation to these bond funds should reduce the overall volatility of the portfolio.
Secondly, look at your funds and consider moving from active managed funds to index tracker funds. This is likely to do three things for your portfolio, firstly and most importantly, it should reduce your costs, so you keep more of your gains, secondly it removes the fund managers emotion from your investment performance, fund managers are also human and are affected by market turbulence and finally, you may find that a global index fund holds more shares across more countries so provides you with more diversification.
What would happen? How would markets react?
2000 and 2007 were very much market extremes and these significant retracements were for different reasons and I am not convinced that we are in a position like this today.
What would be the main contributing factors to this? Trade war between the US and China, rising interest rates, etc.
Stock markets are forward pricing machines and they like to know what will happen in the future, although stock market valuations are not wildly high, we have global challenges, like Brexit, Trumps trade tariffs with China and global populism all of these cause market uncertainty this is likely to reflect in the volatility we are experiencing and market retracements.
How long would it take to recover?
Since 1986 the FTSE 100 has had 8 negative years out of 31 years, it’s the negative years that are more concerning for us as we see out investments fall. Markets generally fall quicker, but less often, than they grow, this causes fear.
The FTSE 100 has averaged just over 9% over since 1986, but some years were negative, the worst being over 32% fall (Nov 2007 to Oct 2008).
How long they take to recover will depend on how far the retracement is and what the global central banks do. If we look at previous events about three years. That’s why financial planners suggest only investing in the stock market if you have at least five years, preferably seven years until you need access to your capital. If you have less than five years, you should consider deposit accounts and National Savings & Investment products.
How can the world prepare for the next financial crash?
Asset allocation, asset allocation, asset allocation. Get this right, globally diversify and only use short-medium term high quality bonds and focus on what you can control.
It’s predicted that the pound could slide further against the euro because of Brexit. But if you look back over the past decade of exchange rates between the two currencies, the reality is a little different than some headlines would have you believe.
At time of writing, one pound will get you around 1.12 euro. Go back to 2013, and the exchange rate was at a similar level.
Think back to 2013, did you do anything different because of the apparent ‘drop’ to this rate? Yes, it has an impact on trade and business, and yes there are bigger macroeconomic things to consider – but ultimately, the fact that the exchange rate has dropped from above 1.40 euro in 2015 does not have a considerable impact on a large proportion of the UK population.
It’s also worth remembering that the FTSE 100 represents the UK’s largest 100 listed companies, which derive a large proportion of their income from outside this country. If there is a slump on the pound, their profits will rise when they repatriate income from abroad.
Many of us will gift to charitable causes regularly throughout the year, using Gift Aid or Payroll Giving, but fewer of use appreciate how this works, we purely give from the goodness of our hearts to help others less fortunate.
Gift Aid works similar to how personal pension tax relief would work. When you make a donation to a charity though Gift Aid, basic rate income tax relief is added to the payment by HMRC and the total amount, known as the gross payment, is paid across to the charity. If you are a higher rate i.e. 40%, or an additional rate i.e. 45%, income tax payer, you can enter the total gross payments you make in a tax year onto your self-assessment tax return and claim further tax relief, few people appreciate this additional tax claim.
Some 52% of those who donate money to charity said they used Gift Aid on their donation, according to the UK Giving 2017 report, by the Charities Aid Foundation. You need to ensure you complete a Gift Aid declaration form for each charity you wish to donate to.
This is how the numbers work;
Gifting £100 to a charity via Gift Aid would mean they would claim 25% of the contribution and a total of £125 would (eventually) end up in the charity bank account. The £100 has effectively been ‘grossed-up’ by the 20% income tax you have paid (100/20%) = £125.
If however you pay income tax at 40%, you can enter the £125 gross payment on your self-assessment and effectively claim a reduction in your end of year tax payment of a further 20% or in this example £125 x 20% = £25.
So for every £100 you give as a higher rate tax payer, you reduce your income tax bill by £25.
It goes further if you are an additional rate income tax payer (i.e. you have total income over £150,000pa), you clam 25% (45%-20%) of your gross contributions, or £31.25 for every £100 you pay to a charity.
This additional tax refund makes the effective net cost to you far less, as shown in the table below;
Total Charity Receives
Net cost to you
Basic or 20%
Higher or 40%
Additional or 45%
Do I have to pay tax to use Gift Aid?
It’s important to know you need to pay tax to use Gift Aid, and it’s the donor’s responsibility to notify the charity if they become a non-tax payer. You cannot claim more tax in Gift Aid than you pay.
How do you claim tax relief?
Complete the charitable giving section on your annual self-assessment tax return or ask HMRC to amend your tax code which is used to calculate how much tax-free income you’re entitled to. You can reach HMRC on 0300 200 3300.
How long can you claim back for?
If you forget to – or were unaware you could – claim tax relief you have four years to submit a claim for tax ‘overpayment relief’ to HMRC. That’s four years after the end of the tax year your claim relates to.
For example, currently it’s the 2018/2019 tax year and it ends 5 April 2019, so you could claim as far back as the 2014/2015 tax year which ended 5 April 2015.
An alternative to Gift Aid is Payroll giving, or I have also seen this referred to as Give As You Earn. If you donate to a charity through a payroll giving scheme at work, donations are taken out of your gross pay – that’s your pay before tax (and national insurance) is deducted. So there’s no tax relief to claim and it’s far easier.
Gifting to a charity in our will
If the art of living is giving, what about our final bequest?
Many of us don’t appreciate the benefits of leaving a charitable legacy through our will.
All gifts to a charity are exempt from inheritance tax, so if you left your whole estate, or at least the excess of your estate which is over the tax-free allowances – your estate would pay no inheritance tax.
Each estate has a tax-free ‘nil rate band’ of £325,000 per person and possibly a tax-free ‘residential nil rate band’ which is currently £125,000 per person (if your main residence is left to your direct descendants ) up to these amounts, you would pay no inheritance tax and for estates valued over this amount, you would likely pay inheritance tax at 40% on the excess. It’s important to note that both of these tax-free allowances can be inherited from your spouse, if they predecease you.
However, for most, this is a step too far and this may upset the surviving family! So, leaving 10% or more of your taxable estate to a charity would have the effect of reducing your inheritance tax rate from 40% to 36%.
Therefore in this example, a married couple, with a will and an estate of £1m, could deduct two lots of £325,000 and two lots of £125,000 (assuming they meet the criteria) to give a taxable portion of their estate of £100,000.
Ordinarily, this would be taxed at 40% or £40,000 inheritance tax, however leaving 10%, or £10,000 to a charity, reduces the inheritance tax rate from 40% to 36%, and would make the remaining £90,000 estate taxable at 36% or £32,400 inheritance tax.
Here are the numbers;
Estate value:£1,000,000 Nil rate band (times two): £650,000 Residential nil rate band (times two): £250,000 Net taxable estate: £100,000
No charity payment – 40%: £40,000
With a £10,000 (10%) charity payment – 36%: £32,400
Of course there is the finer detail to any financial planning, but the concept of leaving a legacy in your will to a charity is very tax efficient and helps others, from beyond the grave and will reduce the amount of inheritance tax your executors will need to pay.
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