Visit us on Facebook Visit us on LinkedIn Visit us on Twitter Visit us on YouTube Visit us on Instagram

Author Archives: admin

  1. Join me at the next Yes Group London event in London on 31st July

    Leave a Comment

    I will be appearing at the Yes Group London event on the 31st of July 2019 at the Holiday Inn in Bloomsbury.

    The event starts at 7pm and tickets cost £20 (or £25 on the night) and you don’t have to be a member of the Yes Group to come along, the event is open to everyone.

    Sign up to The Money Planner weekly update at www.warrenshute.com/joinme to receive my exclusive discount code and get 50% off the cost.

    For further details of the evening as well as booking your tickets please click on the link below.

    Further details & book your tickets now

  2. Summer Holiday Travel Money – ways to make your travel budget go further

    Leave a Comment

    Everyone loves going on holiday, but just how many Brits will spend more on holiday than they need to.

    Did you know that the average British family holidays twice a year, spending more than £6,000, which represents a quarter of the household disposable income AND holidays typically cost £855 per person each time though a quarter of holidaymakers splash out £1,000 or more? (According to the Nationwide’s 2018 spending report) So, we are not talking insignificant sums of hard-earned cash!

    Did you also know that UK holidaymakers spend almost £1 billion a year at airports just to “get rid” of foreign currency?  It’s also frightening how many people tell me they borrow money to go away.

    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. Here I want to share some of my ‘quick wins’ to help your summer holiday budget go further – and it’s not too late to prepare a budget and look at the best and cheapest option to afford your holiday.

    Raise extra cash before you leave

    Pull together a holiday budget.  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 things you can do that’ll help you find extra money that you can put towards your HOLIDAY MONEY:  Some ideas are to sell things on eBay, look at Airbnb, check your getting all the benefits you are entitled to; reduce spending, make the weeks running up to your holiday alcohol free (it will help your liver), downshift your supermarket shopping in the run up to the holiday.  Check out www.moneyadviceservice.org for other ideas.

    Cheaper air travel

    If you’re booking flights only, then don’t forget to compare.   www.Skyscanner.net lets you compare prices simply on any device as does www.kayak.co.uk and www.moneysupermarket.com.  It’s all about using the right tool and service to get the cheapest flights.  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.

    Better plastic

    When you’re using your plastic, it’s easy to be caught out by hidden fees and poor exchange rates.  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.

    Never 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.

    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.

    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.

    Sites like www.kayak.co.uk or www.carrentals.co.uk offer easy comparisons and great deals. The major rental firms also all publish rates on their websites.

    …and your insurance too

    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.

    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.

    Weigh and measure your luggage

    Whether you are travelling with hand baggage only or checking bags into the hold, be absolutely sure that they are below the size and weight restrictions imposed by the airline before you leave for the airport. Excess charges are swingeing.  Excess baggage fees can be brutal.

    Entertainment 

    The biggest mistake travellers make is thinking the more you spend, the better the experience. By veering off the more expensive tourist path, you can adhere to budget while gaining a deeper perspective of place.

    Limit attraction tickets and tours to a top-three list. 

    Take a sceptical approach to “tourist cards” bundling multiple attractions. Examine each component for value to decide if it’s a deal. Will you really visit all seven museums included? If not, it may be smarter to buy individual tickets.

    Free events at the resort

    Close to departure, search “destination name” and “free events,” and you will find gold. From walking tours to art gallery openings, most cities are overflowing with free to low-cost entertainment.

    Food & Drinks on holiday

    Try a new restaurant for breakfast, lunch and dinner, but these costs literally eat into your budget. Instead, stock up on snacks for your room and try to limit your dining out to once per day. Lunch will often be less costly than dinner, giving you the chance to try local cuisine without the mark up of dinner prices.   Check out local markets where vendors are cooking up fresh, regional specialties for cheap. Plan a picnic in a park sourced from local goods. Big savings come when you eat and drink from the region where you are traveling.  Order a margarita in Italy, for example. Expect to pay a premium. Instead, try a glass of house wine, usually selected by an expert at balancing taste and affordability. Pro tip: In wine regions, ask locals where they buy to connect directly with the producer.  Search “destination name” and “happy hour” and watch deals materialize.

    Getting around

    Skip expensive car rentals and taxis. Instead join locals on the bus or train for a real sense of daily life in the city. Also, for getting around, consider sharing a ride through BlaBla Car, which is usually less expensive than a bus or train ticket on the same route.

    Try out less obvious forms of accommodation

    Lodging Sure, part of the joy of traveling for you may be staying in a luxury hotel. Consider a balanced approach: splurging on a posh room for a few nights then sharing space with a local or renting a short-term apartment through Couchsurfing, Airbnb, or VRBO. Usually you get more space for less cost, plus gain valuable insight on your destination from a built-in local expert: your host.

    Research travel passes and plan routes

    Where possible, walk everywhere and anywhere you can! But when you need public transport, be sure to do some research before you buy. Transport passes can help you save a significant amount on tickets and by planning your route in advance you may be able to get away with a restricted pass for less money.  It’s also worth finding out if your destination offers sightseeing passes. These can include free or discounted admission to popular tourists’ spots and may even include free access to public transport.

    Apply for an EHIC card It’s essential!

    It’s not too late to apply for the European Health Insurance Card will enable you to access state-provided healthcare in European Economic Area countries for free or at a discounted rate.  It also entitles you to the same treatment as locals so if it’s free for them, it will be free for you. This is extremely useful in medical emergencies so make sure you keep it on you at all times.  It’s well worth applying for, and while it shouldn’t be used as an alternative to travel insurance, it can help cover your treatment until you return to the UK.  Apply now for your free EHIC card at the official website. The card is free so beware companies charging for this.

    More Quick Wins

    • Take freebies from the hotel room
    • Take something from the breakfast bar for lunch
    • Take your own refreshments onto the flight (no alcohol of course)
    • Drink in the room before you go out for the night
    • Weigh down hand luggage rather than the suitcase
    • Wear extra clothes on the flight and avoid baggage costs
    • Sleep on the plane to avoid paying for that extra night’s accommodation

    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!

  3. How to save for retirement when you’re starting late

    Leave a Comment

    We’ve now got auto-enrolment helping most of us save for a pension. But what if you’re in your 40s or older, and don’t have much of a pension pot built up yet?

    What’s your why?

    You’ve got to start with where you’re going. Step 1 of The Money Plan is: what’s your outcome? I know I keep coming back to The Money Plan, but that’s because it works!

    You need to ask yourself:

    • When do I want to retire?
    • How much do I want to retire on?
    • What other things are important to me on my journey to retirement?

    It’s so important to act intentionally, not by reaction or default.

    Get organised

    It’s so difficult to achieve things if you don’t know where you are and where you want to go. Even if you’re not naturally an organised person, you’ve got to step up and work out:

    1. What’s coming in?
    2. What’s going out?
    3. What do I owe?
    4. What do I own?

    You can get tips on getting properly organised here.

    You can see how to set your financial foundations to build your house of wealth here, starting with an emergency reserve of cash and incorporating different financial protections.

    Pay down debt or save for retirement?

    The reason we pay down debt before investing in our future is because it builds security, and it helps your cash flow to give you more money in the long run.

    Even if you have an interest-free arrangement(s), clearing your debt first gives you such a feeling of security, and psychological ‘wins’ to celebrate.

    Once you’re debt-free and have your financial foundations in place, you can decide how to allocate the money you have leftover each month after paying your bills and paying your WAM to yourself.

    Is 40/40/20 right for you?

    In The Money Plan, I recommend allocating it 40/40/20: that means 40% goes to your retirement savings, 40% on overpaying your mortgage, and 20% back to yourself. That last part is important, because if you’ve been living financially lean in order to get financially secure, this is the time to reward yourself for your efforts.

    Whether it’s training, holidays, that item you’ve always wanted… enjoy the rewards, with the only rule being not to take out debt!

    If you’re catching up on pension savings, you need to ask yourself if that will give you enough for your retirement plan. Will that 40% be enough?

    It comes down to your tactical approach. I’m of the opinion that if you have a mortgage and you’re a basic rate taxpayer, it’s better to clear your mortgage first. That will give you security and comfort.

    If you’re a higher rate taxpayer, earning more than £50,000 a year, there’s a good argument to say that you should pension more of your income because it’s more tax-efficient.

    If you’re in your mid-50s or older with no real pension pot, you may have to face up to the fact that you won’t retire at 65 and will have to defer. It’s just not practical to save up hundreds of thousands in the next 10 years in your pension.

    In this situation, you may decide to split your surplus money 50/50 between your mortgage and pension, and postpone taking the 20% for yourself. It all depends on your circumstances.

    While that may not be appealing, it’s important to remember that working gives us more than just money. If you don’t like the job you have, I understand you’ll be keen to get out. But working gives us mental stimulation and keeps us active, so you don’t need to be in such a rush to retire, particularly if you like your work or would like to retrain.

    It’s very common in the US to keep working in your retirement years, mainly because of the cost of things like healthcare, but it’s not yet as common in the UK.

    Where to save your pension payments

    For virtually everyone, the best place to invest your 40% or 50% is your workplace pension, on top of your regular contributions.

    What you’re looking for is a “fair” charging scheme: a 0% or 1% fee on your money going in, and running costs of no more than 1.5%. Some schemes charge 5% going in and the costs can run to 2.5%, but at those levels you’re losing money for your retirement.

    If you don’t have a workplace pension, use an online platform such as Lexo.co.uk to set one up. It’s a platform I set up to provide simple and inexpensive ways to invest. You’re charged 0% going in, and fees run at around 0.6% to 0.7%.

    How aggressive should I be with my investments if I’m playing catch up?

    The closer we get to stopping working, the more cautious we should generally be. And it’s always important to be aware of your tolerance for loss – remember that during a big pull back in the markets, your money will fall around 50% in value if it’s all in the markets, so consider how you will feel about that.

    As a general rule of thumb, I use a formula of 100 minus your age to determine how much of your money should be in the stock market rather than low-risk investments: if you’re in your 20s, 100-20 is 80, so you should have around 80% of your money in the markets.

    If you’re playing catch up, you might want to stretch that rule; if you’re in your 40s you may be tempted to put more than 60% of your pension into the markets. But remember, you have to be honest with yourself: the markets will fall at some point, by around 50%, so ask yourself how you would feel then. It’s an easier question to answer intellectually and theoretically than it is emotionally and in reality.

    If you are going to be more aggressive, then make sure you’re in it for the long-term. You should only be investing in the stock markets if you don’t need the money for at least five years, and preferably seven or more.

    So if you’re 45 now with little pension, you might say to yourself, ‘I have 20 years left to invest this money before I want to retire, so I’m going to be more aggressive than the rule of 60% allocation to the markets at my age, because I’m not going to use that money until I’m 65.’

    If you’re naturally cautious, it’s not advisable because a drop will make you lose sleep at night. But if you have a long-term mentality, it’s a valid strategy if you’re playing catch up.

  4. Tax Freedom Day – 6 ways you can you bring your own personal Tax Freedom Day closer

    Leave a Comment

    Tax Freedom Day was devised by the Adam Smith Institute as a benchmark for when the average person has paid all their tax for the year, and starts earning money for themselves instead of the government.

    In the UK, Tax Freedom Day currently falls at the end of May – around 40% of the way through the year, and over a month later than in the US! That means that on average, our first 148 or so working days are simply covering the tax we’ll pay over the course of the year.

    It covers an estimate of your income tax, national insurance, a proportion of corporation tax receipts, VAT, insurance premium tax… basically all the taxes you can think of.

    Of course, some are higher earners and have a personal Tax Freedom Day later in the year; and non-earners will have theirs earlier.

    Collectively in the UK, we generate over £700bn in taxes for the treasury each year. That’s the revenue that keeps our country’s services running.

    But can you – morally, legally and ethically – bring your personal Tax Freedom Day forward earlier in the year? Here are some things to check that might just do that for you.

    1. Income Tax

    The first place to start is on the money you earn: income tax.

    Income tax rates are:

    • On our first £12,500 annual income, we pay no tax
    • The next £37,500 we earn, we pay 20% income tax
    • The next £100,000 we earn is taxed at 40%
    • Anything over £150,000 of income is taxed at 45%

    In addition, we pay National Insurance contributions:

    • On our first £8,632 income, we pay no NIC
    • Between £8,632 and £50,000 of income, we pay 12% NIC
    • Over £50,000 income, we pay 2% NIC

    For example, someone on just under £50,000 per year is effectively paying 32% tax on a sizable portion of their earnings. (Rates are lower for the self-employed.)

    It’s important to be aware of the tax you should be paying. You’ll receive a tax code each year: if yours isn’t a standard code, then contact HMRC and challenge them as to why. Mistakes can be made, so check your code on your payslip.

    2. Pension contributions

    Pension contributions receive tax relief: you get your income tax back on them.

    • If you’re a basic rate taxpayer (under £50,000 annual income), this gets automatically added to your contributions.
    • If you’re a higher rate taxpayer, you have to claim back the extra amount through a tax return.

    If you earn more than £50,000 annually, and you’re making personal pension contributions – i.e. not those made by your employer – you need to ensure you’re claiming the higher rate tax relief from HMRC. It is NOT given to you automatically.

    This is one of the most common ways higher earners could bring forward their Tax Freedom Day; so many are not aware or do not claim it. If you get a bonus at the end of the year and it takes you over £50,000 in income, then it’s very easy to miss this.

    One more thing: if your employer offers you salary sacrifice (sometimes called salary exchange), then you should take it. This sees you give up some of your salary, which is instead paid into your pension.

    Why should you do it? Because it’s more tax-efficient – you’re saving on NI contributions. (A caveat might come if you are looking to take out a mortgage soon.) The numbers may seem small, but over the long-term, which a pension is, they really add up thanks to our old friend compound growth.

    3. Charitable Contributions

    Typically, you’ll get basic rate tax relief added on to any charitable contributions you make through the Gift Aid system.

    But you can claim the higher rate back yourself as well if you’re a higher rate taxpayer, through a tax return, in exactly the same way you can with pensions contributions.

    4. Marriage Allowance

    This benefits couples where one partner is a low earner or has no income. If one person in a marriage doesn’t earn more than the £12,500 personal allowance – i.e. pays no income tax – they can transfer 10% of their personal allowance to their spouse.

    A non-earner can transfer £1,250 of their allowance to their husband or wife, which will save £250 per year in tax.

    It’s straightforward to claim, but it’s not automatic. It’s hugely underutilised, with HMRC stating that less than 1 in 10 of eligible couples are making use of this allowance.

    5. Work Allowances

    If you’re doing mileage at work, you can claim 45p per mile up to 10,000 miles, so if you’re not receiving that then you should claim the difference.

    You may be eligible for up to £208 of tax relief If you have to (not choose to) work from home. You can usually claim this back online and check what you can claim for – it must be business-related, but cannot also cover things you use personally such as broadband.

    The best thing to do if you think you have allowances you can claim and don’t want to do all the research yourself is to find a good accountant and pay them for an hour of their time. You should save more than they cost!

    6. Inheritance tax (IHT)

    Everyone has a £325,000 tax-free allowance to leave behind. If we leave our estate to our spouse, they add their own allowance and can leave £650,000 without IHT.

    A few years ago, the main residence nil-rate band (AKA the Principal Private Residence Allowance) was brought in as an additional allowance. If you have a main residence (your home) which passes to your “direct descendants” – basically, your spouse, children or grandchildren – no IHT is due on the first £150,000 of value, rising to £175,000 next tax year.

    Those figures were set because when you add up the £325,000 estate allowance and the £175,000 from your home, as a couple that means you can leave up to £1m without incurring inheritance tax.

    A final note here: if your will includes a discretionary trust, then you should get it checked over by a professional, because some of those wills were written in a way that you won’t qualify for the PPRA.

  5. The Brexit effect on the markets may surprise you

    Leave a Comment

    It’s three years since Britain voted to leave the EU. And what’s happened since for investors highlights that you need to be careful about who you listen to, and what you take away from them.

    People like to give predictions about the future, but none of us know what will actually happen. That includes politicians, think tanks, bankers and economists.

    After the referendum result, a lot of people predicted that the stock market and the property market would crash. And when those people are on TV and in the national press, they have strong credibility. They seem trustworthy.

    But a lot of predictions are built on opinions. And that means they’re not always right.

    The performance of the markets since the vote

     

    The chart above starts from the day of the referendum, 23 June 2016. The five lines represent:

    • A: An investment portfolio with 100% stock market exposure
    • B: The MSCI Capital Index, which measures combined global stock market performance
    • C: A typical portfolio, with 60% invested in the stock market and 40% in low-risk bonds
    • D: The FTSE 100, an index of the UK’s largest 100 companies
    • E: The Halifax Property index, measuring average national house prices

    The chart shows that:

    • The FTSE 100 has gone up in value over 32% since the referendum
    • The super-aggressive 100% stock market portfolio has risen over 48%
    • The world index tracker is up over 40%
    • The property market index is up more than 11%

    Those figures are probably quite startling for anyone who hasn’t been tracking the markets closely over the last three years, compared to the media reports we’ve been seeing and reading.

    But good news doesn’t sell.

    What can we take from this data?

    I’m certainly not saying it’s all been good news on the market, as you can see from the volatility of the aggressive portfolio: in Q1 of 2018, the fund fell 10% after rising consistently before that.

    And it’s during those downturns that psychologically, we want reassurances. If the most prominent reference you have is the news, and if you’re using the news to educate you, you’re going to invest according to the headlines.

    Instead, you must go back to your investment strategy and philosophy, make an agreement with yourself: ‘I’m going to invest in these funds, for this period of time, with this much money. And when something catastrophic happens – when, not if, because the markets will pull back at some point – I’m going to sit tight.’

    You set the date until which you will follow that strategy, which typically is around seven years before retirement or before you’re going to need the money, and you hold tight. You don’t need to fret about the headlines and the markets every day, just check in every so often – annually is usually enough.

    Following a strategy that matches your goals, your risk tolerance and your risk capacity is how you should invest. It’s what differentiates a true investor from a speculator or gambler.

    Follow the evidence

    When investing, use an evidence-based strategy – you shouldn’t base your decisions on marketing any more than you should on the news. Neil Woodford’s fund is a good recent example, which was widely promoted as a ‘Best Buy fund’ by some advisors. That kind of terminology makes me cringe.

    An investment or fund is NOT a product to be sold like bananas or shoes. It’s not about getting rich quick.

    It’s about setting a strategy which is right for YOU, and following it.

    You’ve got to cut through the noise and start with Step 1 of The Money Plan: what’s your outcome? What do you want to achieve?

    After that, what does the evidence tell us? The academic research that’s been done is clear: buy the index, diversify as much as you can, invest in markets all across the world, and don’t try and think you can predict the market and what’s going to jump up next.

    And once you buy, hold for as long as you can. Warren Buffet said the best period of time to hold your investment is forever! As someone who made his billions through investing, not through selling funds, I’ll take his opinion over those promoting their Best Buys.

  6. How much should you be saving in your pension?

    Leave a Comment

    Running out of money in retirement is a scary thought, as we age we feel more fragile and venerable, a secure income during our retirement years gives us peace of mind, but comes at a price.  The security provided by the defined benefit pensions offered by many larger employers has gone and the responsibility to secure our retirement income has been left to us to sort out.

    Since the start of Workplace Pensions in 2012-18 most employed individuals have been auto-enrolled into their employer’s pension. Employees will now be saving around 8% into their pensions. To put this into perspective, that is the first 40minutes of their eight-hour working day, although it may be more than before, it’s not enough and targeting the first working hour or 12.5% is what we should be aiming for.

    How much do you need saved in your personal pension?

    About 400 times your desired monthly income, that’s a big amount!  If you want a £500pm pension, then as a guide, that’s about a £200,000 pension fund.

    The earlier you start saving, the less you need to save each month and the higher chances you have to make the target.  Regularly indexing or increasing your contributions makes a positive difference to the end result and is especially helpful if you can’t afford too much now, sacrificing some bonuses and overtime helps too.

    You may be thinking you can’t afford it, there’s no money in the pot as it is. Try and look for spending creep in your budgets, the incidentals you spend which you could stop, or cut back on.  Maybe taking coffee in from home rather than the local coffee shop?  Or bring in a pack lunch and using the savings to add to your pension.

    Many people have found using the Bank Account System and WAM, from The Money Plan, to free up disposable income a way of finding a little extra to put into pensions.

    Remember it’s your money, you’re just setting it aside in a pension, so you can spend it at a later date.

    Many workplace pensions will provide access to life-styling funds, which automatically give you a higher risk investment when you have more years to retirement and gradually reduce this risk as retirement approaches, this takes the thinking out of the process and makes it automatic for you.

    But once you have done all this, there’s no magic answer and it may mean you need to defer retirement, or at least accessing your pensions from 65 to 70, or perhaps 75!  It can make a massive difference to your income. Deferring 5 years could give an extra 20% boost to your pension, or 45% after 10 years and that’s without paying in any more, just leaving it invested.

    But don’t despair, working through retirement has social and physical health benefits as well as financial!

  7. Does it help to try Help to Buy?

    Leave a Comment

    Help to Buy has been in the headlines recently. A National Audit Office report said that people were borrowing money from the government scheme when they didn’t need to, which has pushed up house prices and made it more difficult for some people to get on the housing ladder.

    Let’s look beyond the headlines at the scheme and its implications.

    What is Help to Buy?

    In 2013 the housing market was relatively stagnant, with only around 9% price growth nationally over the preceding five years. That’s a concern to the government because the housing market is a barometer of the wider economy.

    At the same time, wages had largely been frozen since the financial crisis, and people were finding it increasingly difficult to afford property.

    The government wanted to stimulate the property market, which is where Help to Buy came in.

    The scheme provides a loan to people looking to buy a new-build home with a value of up to £600,000. It doesn’t matter if you’re a first-time buyer or not; it only matters that the home is a new build.

    The amount the buyer borrows is fixed at 20% of the purchase price if the home is outside London, or 40% of the value if it’s in the capital.

    A couple of rules are involved:

    • The buyer must have 5% deposit of their own money
    • They must take out a mortgage for the remaining 75% (or 55% in London) with an approved lender on the scheme (but just about all major mortgage providers are approved)

    As an example, if you wanted to use Help to Buy to purchase a £200,000 home:

    • You’d need £10,000 of your own money as a deposit
    • You’d borrow £40,000 from the government’s Help to Buy administrator, Homes England
    • You’d get a mortgage for the remaining £150,000.

    The terms of Help to Buy mean that you effectively only own 80% of the home (60% in London), with Homes England owning the other 20% (40% in London).

    And that matters: when you sell, you must pay back 20% or 40% of the value at the time of sale. House prices generally go up, so this is how the scheme funds itself.

    In the example above, if you sold the house five years later for £220,000, you would have to pay back £44,000 to Homes England. If it shot up in value to £250,000, you would pay back £50,000.

    Overall, Help to Buy is a way to bolster the money you have for a deposit on a home purchase. It’s hard to save a deposit while you rent, so this was seen as a way for the government to help would-be buyers onto the housing ladder.

    Why has it been in the news?

    The NAO report said that Help to Buy has not necessarily achieved its objectives, claiming that the majority of people who have used the scheme could have afforded a home anyway.

    It did add a caveat that perhaps the scheme helped them buy the home they wanted, i.e. a larger or ‘nicer’ one than they could have afforded on their own.

    One of the chief concerns is that Help to Buy has helped inflate prices of new builds, boosting the profits of the companies building them, because they know people can afford a little more. Most infamously, Persimmon chief executive Jeff Fairburn was paid a £75m bonus in 2018, with the housebuilder being one of the major beneficiaries of Help to Buy.

    A second concern is that wealthy people, including existing homeowners, have taken advantage of the ‘free money’, by selling the home after five years, paying no interest on the Help to Buy Loan and cashing in on whatever the value of the home had risen by.

    And thirdly, if the price of your home has been inflated when you buy it, that could cause you issues when it comes to selling. The house will sell for its market value, which may not have risen as much as you would expect, because it is no longer eligible for Help to Buy. And you must still pay back the 20%, whatever the value achieved, the effect being that more of the profits potentially end up with the housebuilders, not the buyers & sellers.

    The financial realities of Help to Buy

    For the first five years, you don’t pay anything towards your Help to Buy loan – you simply pay your mortgage lender as normal. So essentially, it’s free money for five years. Sounds pretty good doesn’t it?!

    But after five years, you start paying interest on the loan, currently 1.75% per year. If your loan is modest, that would seem manageable for most people – though bear in mind that a lot of people now are earning little more than they did five years ago because of austerity and wage growth stagnation. So that will suddenly be an extra payment coming out of your monthly money.

    And the interest paid increases every year by RPI plus 1% – the higher of the two inflation rates that the government uses.

    Don’t get me wrong, that still makes it fairly cheap money. But the bit that I really don’t like is that you can’t pay your borrowing down easily.

    To make an overpayment to Homes England, you have to pay a minimum of 10% of the property value – not the amount of the loan! I’m a big proponent of overpaying a mortgage when you’re in a position to do so, so this doesn’t sit well with me because that’s incredible difficult to do for almost everyone.

    With all that said, it’s important to understand that everyone’s circumstances are individual. For some, Help to Buy is absolutely a golden opportunity to get on the housing ladder, and if the alternative is to stay in rented accommodation forever then it’s a useful scheme for you.

    But if you stay in the home for a very long period of time and the value goes up significantly, then that apparently ‘free’ or cheap money suddenly becomes very expensive when it comes to selling. Bear that in mind if you’re using the scheme.

    What are the alternatives?

    If Help to Buy isn’t for you, there is a savings scheme that can offer genuinely free money!

    The Lifetime ISA is a great way to save for property, if you meet the eligibility criteria. You can put away up to £4,000 per year, get a 25% bonus on your money from the government, and if you’re a couple you can have one each.

    The maximum value of the property you can use a LISA for is much lower than with Help to Buy: £450,000, whether inside or outside London… but you are the sole homeowner and you can overpay your mortgage according to your agreed terms with your lender, which will not require you to save 10% of your home’s value.

    Your main home is more than just a roof over your head; it’s also a great investment, because when you sell it, if the price has gone up you make tax-free money on the rise in value. Whether it’s Help to Buy or a LISA, make use of the schemes in place that can help you onto the ladder.

  8. Getting financially organised in 2019: Q2 check in

    Leave a Comment

    Unbelievably, we’re nearly halfway through the year! Time flies, and that means it’s time to check in on where you’re up to on your financial organisation for 2019.

    So where should you be if you started The Money Plan early this year? There are three key areas to look at as we approach six months in:

    1. Your what and your why

    Everyone should have completed Step 1: Setting your outcome. What do you want? Whenever you’re thinking about where you’re going in life, always bring it back to your goals.

    Every morning in front of me in the mirror while I clean my teeth I’ve got my compelling vision looking back at me. I’ve written down and pinned up my one, three, five and ten-year goals; the things I’m working towards. We’re human beings and we go off track, we have a lot to do. I find that by having my goals in front of me every morning, I’m always focused on achieving them.

    Don’t forget to consider too: what’s your why? For many people, getting financially organised is driven by planning for retirement, paying off debts or helping kids with university or buying property. Your ‘why’ gives your goals a substance. Having a goal of saving £1m is great, but think about why saving it is important to you.

    By this stage of the year you should also be well into your financial organisation, and that’s Step 2 of The Money Plan.

    2. Systems for success

    The thing that more people tell me has made the biggest difference for them than any other is the Bank Accounts System. It works for everyone, from multi-millionaires on down, because it automates as much of your finances as possible. If you haven’t put it in place yet, then consider doing it – you can find a detailed explanation here.

    If you started The Money Plan in January, then you should already be reaping the benefits of its organisation on your finances.

    If you’ve got kids, you should also be looking at the Pocket Money Strategy, helping to teach your kids to be in control of their money rather than vice versa. It doesn’t matter if you’re not great with money, you can still impart valuable lessons to your kids from a relatively early age that they’ll remember for life.

    You should also be working on your snowball, the 12.5% of your income you’re paying yourself to put towards paying off debts or your future planning. That might involve selling some items to generate more income… or you may be tempted by other schemes! See below as to why you need to be careful.

    3. Protecting yourself

    Once we’ve got our organisation sorted out, it’s time for step 3: protection, and building our house of wealth.

    If you started in January, hopefully you’ve saved up your £1,000 emergency reserve of cash, but if you haven’t then just refocus – don’t beat yourself up about it. Think about how you can get there by the end of the year.

    The other two essential foundations, a will and lasting powers of attorney, are something that everyone should have in place. They’re simple to arrange, they cost little, and they matter a lot.

    If you’ve got those three foundations in place, the Bank Account System set up and you’re working towards your goals, then you’re head and shoulders above most people – you should give yourself a very big pat on the back. You’re being smart about your money.

    And if you haven’t started yet…

    If you didn’t get underway with your financial organisation yet – or if you bought the book, read it and forgot about it without implementing anything – then don’t beat yourself up. Life gets busy, things get in the way. That’s OK.

    But if you want to make a change to your finances, then NOW is the right time to do it! You’ve got to step up and make some decisions. If you’re unhappy with how things are panning out, then you need to do something differently.

    The best time to start was yesterday; the second best time is today.

  9. When you can save money and help the planet

    Leave a Comment

    I am all about saving money and making the money I have work harder for us, so that I can spend more time doing the things I enjoy and that are important to us, I’m sure you’ll agree that is what we all want.

    So when I found Bulb an electricity supplier, I felt the connection, not only were they among the best priced provider in the market, saving me £’s each month, they use 100% renewable energy which was important to me.  I have used them for about six-months and I am very happy.

    You can get a price on your energy supply from Bulb by clicking here and if it’s right for you and you sign up by midnight on Tuesday 18 June, they will pay you a £75 welcome payment onto your bill, if you sign up after this date it reduces to £50.

    Bulb says that an average home could save up to £356 a year, while getting green energy and Bulb’s #1 rated service.

    Click here to get a clean energy price from Bulb, and see if they work out for you

  10. Lessons learned from Woodford woes

    Leave a Comment

    Neil Woodford has been in the news a lot this week as his flagship equity income fund has suspended trading as investors rush to the exit. Read the article below to find out who he is, what happened and what lessons to learn from this if you are an investor.

    Who is Neil Woodford?

    Woodford is a fund manager, managing and investing money for both individuals and big institutions, including county councils and pensions.

    He made his name at Invesco Perpetual, where he ran a £30bn+ fund very well for 25 years and gained a reputation as one of the UK’s leading fund managers. He’s become a household name in the investment market, with companies such as Hargreaves Lansdown heavily promoting his funds.

    He left Invesco to set up his own fund, Woodford Investment Management, in 2014, and quickly built it to manage over £10bn at its peak. The current value it manages is now much lower, after its stellar first-year performance was not sustained.

    What happened?

    Typically, only a small proportion of a fund is held in cash: to beat the returns available through investing benchmarks like the FTSE All Share Index, you need to be heavily invested in the stock market and not hold money in low-risk cash.

    One of Woodford’s institutional investors, believed to be Kent County Council, attempted to withdraw £263m from his fund. This followed a series of withdrawals from the fund in recent months, including over £500m during May alone.

    Not having sufficient funds available in cash, Woodford needed to sell shares in order to cover the withdrawals – and that takes time. Woodford’s fund has a large proportion of illiquid holdings, which cannot be turned back into cash quickly.

    The high levels of withdrawals also spook his other investors.

    To stop a ‘fire sale’ of investors withdrawing their capital, which is like a run on a bank as we saw with Northern Rock after the financial crash in 2007, Woodford has suspended trading in the fund. That means investors cannot sell (or buy) their units, initially for a 28-day period, while he liquidates enough assets to stabilise.

    Woodford isn’t the first fund manager to be in this situation, and he won’t be the last. But there are things that investors can take from the situation.

    Investment lessons to take away

    1. All funds and portfolios go through ups and downs, this is part of investing.

    Some comments have been made along the lines of ‘I didn’t expect my investment to fall 20%’. And that’s disappointing, because it shows people are fundamentally misunderstanding investing.

    If you invest 100% of your money in the stock market, then you should expect the value to fall by up to 50% at certain periods of time. We’ve seen this during the dotcom bubble, during the financial crash… these periods WILL repeat themselves. We don’t know when, but they will.

    If you expect it, you won’t be disappointed. Only invest money you can afford to tie up for a long period of time, and leave it to ride out the inevitable ups and downs.

    1. Diversification is your friend. It spreads your risk.

    Woodford’s approach is to invest his fund in a very concentrated group of shares and companies. That gives you a chance of higher returns, but also increases your risk of a loss.

    The portfolio includes only 105 different holdings in the fund, which is incredibly concentrated – and well over half of the fund (64%) is in just 20 of those holdings.

    When your fund is concentrated like this, you only need one or two of its shares to do particularly well to see very strong returns. By the same token, you only need one or two to do very badly and your fund will pull back.

    Woodford has had a tough time of it, with initial strong gains followed by retraction over recent years. It’s very difficult for fund managers to ‘beat the market’ – outperform the index funds that are available. Instead, you should focus on global diversification.

    1. Allocate your money carefully.

    If you’re an active investor, diversification of funds is just as important.

    I’m a proponent of index or passive investing, using an index tracker rather than using an active fund manager who is trying to beat the market. If you invest passively, you accept the market return and take the emotion out of the decisions of the fund manager.

    But if you are an active investor instead, then don’t put all your money with one fund: allocate it across several and make sure it’s diversified globally, not only in the UK but across the US, emerging markets and Europe. At any given time, certain sectors won’t perform well, so make sure you’re allocating your risk. Never put all your eggs in one basket.

    Warren Shute is a multi-award-winning financial planner and author of the bestselling personal finance book The Money Plan. He shares his thoughts at warrenshute.com

  11. The psychology of money

    Leave a Comment

    There’s been a lot of bad headlines again recently – Jamie Oliver’s restaurants and British Steel are shedding jobs, Mothercare and other retailers are in trouble… if you’re directly involved (or know someone who is), then this is a very tough time financially.

    I don’t pretend to have a silver bullet, but I do know that it’s very easy to get overwhelmed in these kinds of situation. The most important thing you can do? Get clarity.

    Come back to the steps of The Money Plan to do that.

    Step 1: What’s your outcome?

    The worst thing you can do, although it might also be the most natural, is to dwell on the here and now and the bad situation you’re in.

    You’ve got to say, ‘this situation doesn’t define me’. What’s happened to you isn’t who you are.

    Ask yourself how you want to spend the rest of your life. You may have to take a short-term job just to bring some money in, but at the same time, start planning for the future. Set your vision of where you want to be, and then you can determine what you need to do now to move towards that.

    Sometimes when you’re in the thick of the forest, you can’t see the wood for the trees. You’ve got to step back a bit to assess what you really want.

    I’ll share my personal outcome: I want to help one million people become financially organised and free. It’s not a commercial thing for me, it’s just how I feel and what I want to be able to look back on when I’m in my 90s in a rocking chair!

    For many, the long-term goals are about retirement, helping their kids or buying property. It doesn’t matter what your drivers are, just that you know them. You’ve got to know your ‘why’ or you’ll never really change your situation.

    Step 2: Get organised

    Being financially organised doesn’t have anything to do with how much income you get or how educated you are. Once you’re organised financially, you can broadly forget about it and enjoy life.

    The Bank Accounts System is probably the single thing that has the biggest effect for the people I work with. The purpose of it is to automate your spending and take routine thought out of your banking. You can find more details on the system here.

    The other thing you must do is save an emergency reserve.

    There’s a reason why people who follow me hear me talk so much about the importance of emergency cash. Your emergency reserve is a fund that will weather you through some storms. To begin with, it’s £1,000, which isn’t going to last very long if you lose your income but we start there because some people have never saved that much money in their life.

    If financial objectives are too challenging to achieve, then you’ll get demotivated and that’s the opposite of what we want. The £1,000 goal is something that everyone can achieve, I’ve coached many people in different situations and they’ve all done it. Do whatever you can (legally and morally!) to get there, from selling things around the house to taking a second job for a while if you have to.

    I prefer to save this money in Premium Bonds (NS&I). It’s NOT an investment, it’s not about the returns – I like Premium Bonds because it keeps the money safe and out of arm’s reach, so you won’t be tempted to spend it if you have a particularly bad or good day.

    Step 3: Financial protection

    There are eight financial foundations to your House of Wealth, three essential and five optional. We’ve already discussed the first of those, emergency cash, which by this stage you should be looking to build up from £1,000 to between three and six months of your expenditure.

    The other two essentials are to make a will and lasting powers of attorney.

    Even if you have no assets, please make a basic will and revise it when you do. It will put you in the right mindset for future wealth and avoid any issues for those you leave behind.

    Lasting powers of attorney are essential for everyone aged 18 or over. They are NOT just for the elderly. You can find out why here.

    The five optional elements are to do with protecting yourself: life assurance, disability insurance, critical illness cover, private medical insurance and general insurances. These all transfer a risk away from you to someone else; you don’t have to have them, but they can give you peace of mind.

    Step 4: Pay down your debt

    When you pay off your unsecured debt, you’re more confident and vibrant, and you’re freeing up money you were previously using for your repayments.

    The Snowball System is the best way to approach it psychologically. You should be paying yourself 12.5% of your income every month, and if you have unsecured debt you should be aiming to get rid of it as quickly as possible.

    Step 5: Investing

    When you’re financially secure, it’s time to invest. Take your snowball, which is a minimum of 12.5% of your income, and split it 40/40/20 – that’s 40% on overpaying your mortgage, 40% on your future, your retirement, and 20% for yourself.

    Up until step 5 you should have kept everything very lean and tight, and there’s only so long you can do that for. There was a purpose behind it, which was to eliminate your debts, and once that’s done it’s important that you enjoy yourself. You might spend that 20% on training courses, holidays, weekends away… the most successful diets are the ones that people stay on the longest, not the ones that are the strictest, and the same principle is true here too.

    You’re looking after your now by overpaying your mortgage and your future by investing. Accumulating wealth takes time, and you’ve got to enjoy the process.

    The investor mindset

    The other group of people typically monitoring the headlines closely are investors, who might be asking whether the financial climate is changing.

    You shouldn’t set your financial situation up for seasons. The economy has seasons, but you need an evergreen mentality when it comes to your investing. That way, you expect pullbacks or retracements, they don’t define your strategy. The right way is to set your ship and weather the storm.

    You can’t change your approach every time something occurs. You’ve got to set your course and stick to it.

  12. How much value does a financial planner really add?

    Leave a Comment

    Vanguard’s Adviser Alpha survey is an annual report produced by one of the world’s largest and most respected fund management companies. Their latest survey used real-world data to try and quantify the benefits of using a financial adviser or planner – the returns on top of your returns, if you will. It makes for interesting reading.

    The report discusses seven key areas where a planner can add value to your portfolio. Where they could, Vanguard quantified this value in ‘basis points’ by comparing the performance of real portfolios of people working with a financial adviser with those who did not. One basis point is worth 0.01% extra to your portfolio.

    1. Asset Allocation

    Definition: putting the individual components of your investment portfolio together in an appropriate way based on your risk tolerance profile.

    Essentially, this involves making sure that your investments are highly diversified across industries and countries, and that you have the correct proportion of fixed interest elements in your portfolio compared to market exposure.

    Value added: Vanguard couldn’t quantify this point, but highlighted it as one of the largest benefits a planner can provide. They stated that individual investors will not typically be able to allocate in the same way as a planner.

    2. Rebalancing

    Definition: keeping your portfolio’s asset allocation correctly proportioned.

    A portfolio includes both stock market and fixed interest (bonds) components. Let’s say that the ratio is 50/50 when you first invest; the stock market portion will typically grow faster than the bond portion, so if you leave it then the ratio will change over time, perhaps to as much as 70/30.

    This increases your risk, as more of your money is now in the markets than you had planned, and if the markets retract you will lose more value in your portfolio than you anticipated.

    Rebalancing is the process of keeping the ratios at the right level, by selling the gains if you’re ahead, or buying more stocks if you’re behind. It typically happens when the imbalance is 20%, i.e. has moved to 60/40.

    Value added: 43 basis points (0.43%)

    3. Cost-efficient Implementation

    Definition: planners have access to what are called ‘institutional grade funds’, which are not usually available to individual investors and carry lower fees.

    Institutional grade funds are cheaper to operate, meaning you see greater returns. In effect, you’re accessing bulk buying power: planners are allocating millions of pounds (or more) across many different investors, and therefore get access to institutional funds. Fees add up when investing, and this added value each year makes a difference.

    Value added: 66-92 basis points (0.66-0.92%)

    4. Behavioural Coaching

    Definition: the psychology around finance. How do you behave when it comes to your money?

    This has the biggest value of all elements discussed in the survey. A planner focuses on helping you achieve your goals, not just in the short-term but over time and consistently.

    That’s why most planners advise meeting annually, so they can keep you on track and help you avoid making bad decisions based on news headlines or other factors. Sometimes the decisions planners make are designed to protect you from yourself!

    Value added: 150 basis points (1.5%)

    5. Tax Planning & Allowances

    Definition: making sure you utilise what’s available to you.

    If you’re doing something day in day out, you’re generally going to be better at it than someone who doesn’t. I don’t do my own tax returns, because others are better at them than I am and know things that I don’t.

    Planners understand tax allowances and benefits implicitly and should be able to help you make savings thanks to that knowledge.

    Value added: 23 basis points (0.23%)

    6. Spending Strategy

    Definition: we invest so that we have an income available in the future. A proper strategy covers how much you can safely withdraw without diminishing your capital, where to take your income from, what to do if the market falls, and much more.

    Managing an income derived from assets and investments to make sure the money doesn’t run out is not second nature to most people. If you take too much money out, your future income is reduced and can drop below the levels you need. A planner will also help you withdraw in the most tax-efficient way.

    Value added: 48 basis points (0.48%)

    7. Total Return vs Income Return

    Definition: ensuring investments are focused on the overall returns, not only on the returns offered by share dividends.

    It’s easy for individuals to think they should concentrate their investments on shares that pay dividends, thinking of it as a source of income. But research shows that overall returns are greater when focused on a growth portfolio, not on this kind of income portfolio where the underlying share prices may not be growing at anywhere near the same rate, and the long-term returns are therefore lower.

    Value added: unquantified

    Overall summary

    The total value added by using a financial planner instead of going it alone, at the lower end of Vanguard’s research, is 3% annually.

    That might not sound like a lot, but in the financial world it’s huge. Getting 3% additional return each year on your investments over a 20-year period gives you over 80% more in your portfolio! Would you rather have a £100,000 portfolio or one worth £180,000?

    The power of compound growth magnifies that seemingly small 3% over time. Using a planner isn’t for everyone, but if you need a sounding board or comprehensive professional advice, then the numbers stack up in their favour.

    Who should use a planner?

    If you’ve got challenges, sizeable assets or complex financial affairs, seeing a planner is a good idea. That’s also true if you’re looking at estate planning and helping out your children or others in your will (or before).

    If you’re just looking at putting some money into an ISA or similar, then a CFP is probably not appropriate.

    There isn’t a minimum amount of assets you need, because a planner goes way beyond simply how to invest your money. Along with topics such as different portfolios and pensions, they’ll discuss things like banking strategies, estate planning, life assurance, tax allowances… even pocket money for your kids!

    A good Certified Financial Planner will ask disturbing questions, ones that take you out of your comfort zone. One of my first questions is always, ‘How do you want to spend the rest of your life?’ It’s about setting the right goals, then putting the strategies in place to achieve them.

  13. How to save for your children

    Leave a Comment

    With the cost of education and housing rising, it’s become more commonplace for parents and grandparents to save for their children and grandchildren. By planning ahead, they can maximise the impact those savings will have.

    What’s your outcome?

    Whether you’re saving for yourself or your children, the first thing to think about is why you’re doing it. This focuses your mind on your goal, and gives you a timeline for your investment.

    The first big-ticket items that most parents say they want to help their children financially with are either a car or going to university. Other popular reasons to save for your kids include travel, a wedding or to help them onto the housing ladder.

    Where to save?

    You’ll need an account or wrapper for the money you’re saving. You could use:

    • A straightforward bank account, in your name or your child’s
    • An ISA in your name (your child is eligible at age 16)
    • A Junior ISA in your child’s name
    • A general investment account to put money into the stock market, in either of your names
    • A pension in your child’s name (they’re eligible from birth!)

    Each wrapper has advantages and disadvantages, and when you’d like your child to access the money is an important factor.

    If they’ll need it within the next five years, you should stay out of the stock market and use a savings account.

    If they don’t need to access it for at least five years, and preferably seven or more, then the returns offered by the stock market should be taken via an ISA or investment account. Over the long-term, you should be looking at around 5%+ annual returns at the lower end of expectations.

    A Junior ISA is a popular option because it’s easy to open one. But it comes with a potential downside: at age 18, the money automatically reverts into your child’s name and becomes their property – so your plan to save for university fees may turn into a car or holiday instead!

    If you’re taking a long-term view towards their retirement, which can be a great option for grandparents looking to leave a legacy, then you should use a pension fund. You can save up to £240 a month in a children’s pension – but they can’t access the money until they reach retirement age. That’s currently 55 years old but is certain to rise by the time a child born today gets there.

    The big advantage of using a pension is the vast amount of time the savings have to enjoy compound interest. That means a modest amount can become substantial: saving £50 every month from birth until age 25 will turn into £1m by retirement age if the pension averages 9% annual returns.

    Although that’s a best-case scenario, it highlights the benefit of the pension option and the power of compound growth over time.

    How much risk should you take?

    As an investor, the returns you get are linked to the amount of risk you’re prepared to tolerate. You can decide how much exposure to the stock market you want in your investment, and the longer the investment, the more exposure you can risk.

    For a pension in your baby’s name, the money will be in the markets for over 50 years, so you can go for up to 100% exposure to the market in the early years. Peaks and troughs are inevitable, but with so much time on your side you should try to maximise potential returns.

    As your child gets older, this level of exposure should be adjusted. By the time we reach retirement, we don’t typically want a lot of our investment in the markets because we need more certainty on our money.

    Whichever vehicle you use, as a parent or grandparent start with the outcome you want and use that to determine how you can best help your loved ones.

  14. An LPA could save your family £1000s

    Leave a Comment

    A lasting power of attorney is like a ‘living will’, a legal document allowing you to nominate individuals (attorneys) to make decisions for you if you are incapacitated.

    Without an LPA in place, if you are no longer able to make decisions because of an accident or a condition like dementia, your loved ones will need to spend a lot of time and money before they can act on your behalf – it can cost well over £5,000.

    Don’t be caught out by the popular misconception: LPAs are not just for when we’re older and need social care. Anyone can have a car accident, hit their head, or lose their faculties.

    There are two types of LPA:

    1. Health and welfare: your attorneys can act on your behalf regarding your health and social services care. That might involve talking to the NHS about your treatment, where you might be treated, and where you might go once you’re discharged.
    2. Property & Affairs: your attorneys can make financial decisions on your behalf. A good example is a pension; if you haven’t started claiming your pension and you lose your capacity, your attorneys can do it for you.

    What if I have an EPA?

    The LPA’s predecessor is called an Enduring Power of Attorney, which stopped being offered on 1 October 2007. The LPA is more comprehensive and you might want to consider arranging one if you have an EPA, but it’s not essential.

    How do I arrange an LPA?

    Visit www.gov.uk/power-of-attorney, you can arrange one online or from printed forms. Bear in mind that if you fill out the form yourself and your application is rejected because of an error, your application fee will not be refunded – you’ll need to pay again. The Office of the Public Guardian helpline is very good, use it if you need to.

    How much does it cost?

    Arranging an LPA yourself costs £82, but if you earn £12,000 per year or less then it’s £42. Remember there are two types of LPA, so you’ll need to double that cost. If you’re on certain means-tested benefits you can get a waiver on the fees.

    If you appoint someone to draft one for you – the questions you’ll have to answer for the LPA are reasonably complex – Warrenshute.com offers a LPA service where we will draft one for you click here for more details.

     

  15. Important pension changes this month which will affect you

    Leave a Comment

    Do you remember that you were automatically enrolled in your employers’ workplace pension scheme some time ago?  Well, the payments which are made into this scheme are increasing this month, so you’ll see a change in your payslip, but it’s not all bad news.

    Up until this month, the contributions into your workplace pension was at least 2% from your employer and you paid 3%.  On April 6th 2019 these rates increased, so this month will be the first pay packet monthly paid, employees will see showing the increased contribution amounts of 3% from your employer and 5% of your pay.

    I know this is another deduction from your pay but remember it’s your money that’s being saved for your retirement, and you’ll be glad you did.  When you take the take break you receive into account, you’ll only pay 4%, the other 1% is tax relief from HMRC.  This means you double your money to 8% with your employer’s payment and the tax relief.  Trust me on this, it’s a fantastic deal, one I urge you to keep going.

    As an additional sweetener, the amount of money you can earn tax-free, known as your personal allowance, also increases this month by £650 to £12,500, so you can now earn £1041 each month before you begin to pay income tax.

    Pension planning
  16. What to do with £25,000

    Leave a Comment

    With interest rates still low, if you’re a saver then what should you do with your hard-earned money?

    Suppose you’ve got a lump sum of £25,000 saved, and you’re a homeowner. Assuming you’ve got an emergency reserve of cash put aside and no unsecured debts, there are a few different options for you to make the most of your money.

    Pay down your mortgage

    It may not be immediately apparent when interest rates are so low, but by paying down your mortgage, you get a guaranteed return.

    Even if you’re paying as little as 1.5% interest on your mortgage, by the time you add on the fees and tax you may pay if you invested the money instead that figure could go up to around 3%. You may well be better off paying down and getting the guaranteed long-term return.

    With that said, it’s not usually seen as the exciting choice!

    Invest in the markets

    The average world stock market returns in recent years are around 9% annually. Even after a 1% fee on a tracker fund, if you hold your money in a stocks and shares ISA then you might think it’s obvious what you should do with your money.

    But since 2008 we’ve been in a strong bull (or rising) market. While an imminent crash isn’t predicted, the markets do go in cycles.

    You should only put your money into the markets if you’re happy to leave it there for at least five years, and preferably seven or more, to ride out the inevitable peaks and troughs.

    Split it

    If the £25,000 represents your only savings, you might want to consider splitting it. If so, I like to use a 40/40/20 rule of thumb: 40% goes towards mortgage overpayments; 40% is invested in the markets; and 20% is for you, for the here and now.

    Think of the last 20% as investing in yourself. You could learn new skills or training to earn more money in the future, or you could take a fantastic holiday and much needed break. As long as you don’t take out debt to cover any extra costs, it’s important to enjoy the here and now as well as plan ahead.

    If you’re not a homeowner or have already paid off your mortgage, then you could choose to simply invest 80% of your lump sum instead.

    How to invest?

    There are various wrappers available – ways to hold shares – when you’re investing. Which one is right for you?

    • If you don’t need or want to access your money until you reach retirement age (currently 55 years old), then you should normally use a pension to invest.
    • If you want your money sooner, consider an ISA, which is very tax-efficient but has a £20,000 annual cap that you can put in.
    • If you’re saving for a home, look into a LISA, a Lifetime ISA, which can give you a 25% bonus on your money.

    If you have more money to invest than your annual ISA limit, you should use a general investment account. This is a wrapper which has no limit on how much you can put in, but any gains you make over the capital gains tax allowance (£12,000 in the current financial year) are taxed when you realise them, usually at 10% or 20% depending on your income tax band.

    A financial planner can advise you on moving money from your general investment account to an ISA each year, to make sure you’re maximising your tax-free savings.

    Risk vs reward

    Investments can offer different returns depending on your tolerance to risk. The more market exposure you have, the greater the potential returns – but the greater the volatility too.

    When stock markets crash, they usually go down by around 50% before recovering. If you put your money into a stocks and shares ISA with 100% market exposure and the value of it fell by half, how would you feel?

    By controlling your exposure to the markets, you control the risk you’re taking. Different funds offer different market exposure levels, so consider your tolerance for risk carefully.

    Investing is about having the right strategy and the right psychology. Time is an investor’s friend, so when you’ve decide on your risk tolerance you should let things take their course and enjoy the ride!

  17. Interest-only mortgage mess? Don’t Panic!

    Leave a Comment

    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

  18. Financial planning is for everyone, not just the wealthy

    Leave a Comment

    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:

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. Recommendations are implemented. Recommendations may not be product-related, which means that financial planning is about the person and not about products.
    6. 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.

  19. A Pound for Your Thoughts

    Leave a Comment

    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?

    Size Matters

    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.

  20. Taking control of your finances on Universal Credit

    Leave a Comment

    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.

    Income

    • 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.

    Savings

    • 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.

  21. Avoid being an April fool: Consider your energy suppliers

    Leave a Comment

    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.

    Click here to visit Switchcraft and see how much you can save.

    Alternatively if you don’t fancy automating your energy switching, consider using an Ofgem accredited price comparison site, you can find a list by clicking here.

    https://www.ofgem.gov.uk/consumers/household-gas-and-electricity-guide/how-switch-energy-supplier-and-shop-better-deal

    I use energy helpline: https://www.energyhelpline.com/fri/.

  22. Readers Question: Can I Retire?

    Leave a Comment

    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:

    • Age: 64
    • 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’s options

    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:

    1. Market risk – if the markets fall in value, his pension fund could fall in value
    2. 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.

    Next steps

    Having decided that an annuity was the way forwards, Arthur had some questions to answer on how he wanted to structure it.

    Spousal income

    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.

    Guarantee

    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

     

  23. Equity Release – is it right for you?

    Leave a Comment

    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 warren@warrenshute.com 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.

    Summary

    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 warren@warrenshute.com and I’ll put you in touch.

  24. Spring statement and the economic outlook

    Leave a Comment

    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.
    • Use the free resources on the site to help you. Now is the time to reduce your debt.

    UK debt is falling

    • 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.

     

  25. Holiday money blues? Not with these tips

    Leave a Comment

    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.

    2. Time your booking to maximise your saving

    If you’re booking flights only, then the earlier the better when it comes to the cost.  www.Skyscanner.net lets you compare prices simply on any device as does www.kayak.co.uk and www.moneysupermarket.com.  It’s all about using the right tool and service to get the cheapest flights.

    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.

    Sites like www.kayak.co.uk or www.carrentals.co.uk offer easy comparisons and great deals. The major rental firms also all publish rates on their websites.

    8. …and your insurance too

    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!

  26. UK’s leading financial planner set to tutor primary school pupils

    Leave a Comment

    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”

  27. Déjà vu All Over Again

    Leave a Comment

    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.

    CONCLUSION

    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.

  28. Year end tax planning checklist for individuals

    Leave a Comment

    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


    Income Tax

    • 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).


    Inheritance tax

    • 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

    • 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.

    Pensions

    • 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.

     

  29. Your ‘House of Wealth’ needs solid financial foundations

    Leave a Comment

    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!

  30. New tax year: changes are coming

    Leave a Comment

    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

    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

    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).

    Workplace pensions

    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.

    Inheritance Tax

    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.

    ISAs

    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.