PROTECTION – MAKE 2017 THE YEAR YOU GET THE RIGHT COVER
Life insurance may not be at the top of your shopping list, but arguably it’s one of the most important financial products anyone can take out, and one of the best ways of leaving loved ones provided for financially. Life and other protection insurance doesn’t just pay a lump sum on death or the diagnosis of a critical illness, they can help provide an income for families hit by an accident, sickness and unemployment, and help parents pass their wealth on to future generations by playing a major role in inheritance tax planning.
WHAT THE STATISTICS SHOW
Sadly, results from an industry survey1 show that this message is failing to get through to those who really need to hear it most. The findings show that 60% of all adults in the UK have no life cover; as many as 17% of UK adults who have financial dependants don’t have life insurance in place with the worst culprits being 35-44 year olds, despite this age group being most likely to have young children and big financial commitments.
When asked why they don’t have life insurance, people often say that policies don’t pay out in the event of a claim, but in reality 97.7% of claims are accepted as valid. UK insurers pay out a staggering £9.4m every day on protection policies including income protection, critical illness and life insurance. Another common misconception is that cover is expensive; many are surprised to learn that life insurance premiums have come down over the last few years, meaning that monthly life insurance premiums can cost as little as a takeaway. It’s a small price to pay when you consider that having no insurance could mean real financial hardship, especially for less well-off families. The younger and healthier you are, the lower your premiums are likely to be. As you get older you’ll be seen as a higher risk by insurers.
GET THE COVER YOU NEED
The great thing about life insurance is that it can be tailored to meet your needs throughout your life. People’s insurance needs change when they buy a property or have a family, take on more debt or change jobs. Cover can be combined with protection against accidents, critical illness and unemployment too. Why not make your New Year’s resolution to put in place the protection you need for you and your family?
NEWS IN BRIEF
Don’t forget to add Santa’s big gifts to your insurance.
Christmas is a time for giving, and many people are lucky enough to receive expensive gifts like new phones, tablets, laptops, jewellery and other precious items at this time of the year. Last year, the average spend on Christmas presents in the UK was estimated to be £489.041.
If you have a home insurance policy with personal possessions cover, your gifts may be covered, but remember that the cover will have an overall limit, as well as a limit for how much you can claim per item – which may be less than the value of the gift. So, it’s worth checking your policy.
If your gifts included phones or tablets or other portable items you should check that their value is covered away from home.
It’s important all year round to ensure your contents cover is adequate for your needs, if not you run the risk of being underinsured. This can cause serious problems if you need to make a claim, as your insurance company may not pay out the full cost to replace lost, stolen or damaged item.
BUY-TO-LET TAX RELIEF CHANGES – LANDLORDS SET TO PAY HIGHER BILLS
The National Landlords Association has calculated that the buy-to-let tax changes that will come into operation in April will affect one in five landlords, meaning that around 440,000 could, depending on their personal financial circumstances, find themselves paying tax at a higher rate as a result of the profits they make from their rental properties.
CHANGES FROM APRIL 2017
Currently, those with buy-to-let mortgages can deduct all finance costs (such as mortgage interest, interest on loans taken out to furnish the property, and fees) in arriving at their rental income. From April this will no longer apply. Instead they will receive a basic rate reduction from their income tax liability for their finance costs.
However, the new rules won’t be fully implemented until 2020 as the relief will be gradually tapered down. For example,
in tax year 2017-18 the deduction from property income will be restricted to 75% of finance costs, with the remainder being available as a basic-rate reduction. In addition, the 10% wear-and-tear allowance will go from April, and landlords will only be able to deduct costs they have actually incurred.
IMPACT ON THE BUY-TO-LET MARKET
According to the UK-wide Buy-to-Let Market Index2 produced by the Bank of Ireland, some landlords remain undeterred by the impending changes, with 46% of current landlords, with two or more properties reported as thinking of buying more over the next few years.
Over half of respondents (55%) admitted that they will consider raising rents, and more than a third (38%) are likely to switch mortgages in order to reduce the impact of the reduction in tax relief on their mortgage interest payments.
Many landlords will no doubt find themselves with a dilemma. Some will think
about putting their rent up at the earliest opportunity, while others may consider whether they want to remain landlords and could leave the market altogether.
In another hit on landlords, in the Autumn Statement the Chancellor announced a ban on letting agent fees charged to tenants, passing the entire fee burden on to landlords of the property being let. The ban will be introduced “as soon as possible” following consultation.
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage repayments.
ONE IN FIVE WORKERS WOULD BE HARD HIT BY LONG-TERM INCAPACITY
How would you cope if ill health meant that you had to stop work for six months or more? According to a survey1, 44% of respondents said they would have to live off their savings, but only 25% said they had enough put by to enable them to cover their monthly earnings for such a long period.
The survey also reported that many would rely on state pensions, their partner’s income or ask their parents for help. Women and the self-employed were identified as being most likely to be financially affected by long periods off work. With state benefits likely in most cases to be just over £100 a week, it could be hard for many workers to make ends meet.
INCOME PROTECTION POLICIES
Coping with a long-term illness or injury can be stressful enough without the added pressure of money worries. Fortunately, there are policies available that can help bridge the financial gap. Taking out an income protection plan offers peace of mind and security for your family, and provides funds when they are needed most.
These policies are designed to pay out if you’re not able to work and earn money due to illness or injury, and, in some cases, forced unemployment. They provide valuable protection for breadwinners, the self-employed, and employees who receive limited or no sick pay from their employers.
The maximum amount you can claim is usually your net monthly earnings after tax, minus any state benefits you may receive. This could be around 65% of your gross earnings and it’s usually tax free. Policies pay out following your chosen deferred period, typically between four and 52 weeks, and can continue until you return to work or the policy expires at the end of a fixed period.
There’s a wide range of policies and benefits available; talking to your adviser will help you make the right choice
HOW TO START AN INVESTMENT PORTFOLIO
Most of us would like to be comfortably-off financially. With interest rates low, being an enthusiastic saver isn’t on its own enough to secure this goal. If you put money in a savings account its value will be eroded by inflation.
Investing means introducing risk to your money. This is not necessarily a bad thing, as increased risk can help you grow your money. But, conversely, there is of course the possibility that you could lose some, or all, of your cash. Stock market performance is unpredictable. Investing is all about adopting a longer-term view, diversifying risk, and giving your money time to grow.
A FEW DECISIONS TO CONSIDER
Firstly, you need to be clear why you’re investing and what your goals are. Your adviser will want to know what your plans are so that they can develop the right strategy for you.
Next, you should decide how much you have to invest and how long you want to invest for. Will you invest a lump sum or make regular contributions? By regularly investing, you even-out the peaks and troughs in prices.
A portfolio that includes a range of assets such as shares, bonds, property, and cash, has been shown to perform better than one that is only invested in one type of asset. This process is known as asset allocation, and is almost always the starting point that any financial adviser will take when helping clients decide where to invest.
Working with your financial adviser, you will need to establish how much risk you’re comfortable with and the impact that has on the rate of return you can realistically expect to earn. You should bear in mind that the level of return can vary from year to year and that past performance is not a guide or a guarantee of future returns.
Investing money can seem like a major step, but with help and advice from a professional adviser, building up a portfolio of investments isn’t an unrealistic ambition.
MAKE SURE YOU USE YOUR TAX ALLOWANCES BEFORE APRIL
With the tax year-end fast approaching, there’s still time to make use of your 2016–17 tax allowances. Here are some ways in which savers, investors and workers could save themselves some tax.
TAX-EFFICIENT SAVINGS AND INVESTMENTS
With this year’s ISA allowance standing at a generous figure of £15,240 it’s worth thinking about topping up your savings if you can. There’s no tax to pay on interest earned in a cash ISA. With a stocks and shares ISA there’s no capital gains to pay and no tax to pay on dividend income. For Junior ISAs the tax-free allowance is £4,080.
For the tax year 2016–17 you can get tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever is lower. (However, if in this tax year you
start to take money from your defined contribution pension, then the annual allowance may reduce to £10,000 and to £4,000 from 2017–18).
CAPITAL GAINS TAX
Your 2016–17 exemption for capital gains is £11,100. As assets can be transferred tax-free between spouses, you could consider transferring investments to ensure that both annual tax exemptions are fully utilised if you’re planning to realise gains.
The 2016–17 Inheritance Tax threshold is £325,000 per person, doubling to £650,000 for a married couple. Above this nil rate band, tax is payable at 40%, though the main residence nil-rate band will be phased in from April 2017. With house prices remaining high, more estates are passing the threshold, so it makes sense to consider ways of mitigating IHT during your lifetime.
You can make gifts of up to £3,000 per annum (in total, not per recipient) plus any number of gifts up to £250 per other recipient during each financial year. Before the wedding day, each parent of a bride or groom can give up to £5,000; grandparents or other relatives can give up to £2,500 and any well-wisher can give £1,000. Further gifts can be made from your surplus income, although conditions apply.
Tax planning can be a complicated matter; everyone’s circumstances are unique and you should seek professional advice. Not all IHT planning is regulated by the Financial Conduct Authority.
TOP TIPS FOR SAVING FOR A DEPOSIT
With the average property in the UK now costing over £200,000, saving a big enough deposit to get a good mortgage deal for your first home can seem like an impossible dream. Here are some tips that can help boost your savings.
TAKE A LONG HARD LOOK AT WHAT YOU SPEND
In order to get a mortgage, you will need to show that your finances are in good order and that you can comfortably afford the repayments. Good budgeting skills are essential. Serious savers will tell you that cutting down on trips to the coffee shop and making yourself a packed lunch are all good ways of cutting your living expenses.
KEEP CREDIT CARDS AND LOANS UNDER CONTROL
Make sure you don’t miss payments and don’t become over-reliant on your card for day-to-day living expenses. Check out the various balance transfer deals available and where appropriate move your card balance to one with a lower interest charge. With interest rates low, you might be able to get a better rate on any loans you have. Consider switching your bank account too, as many banks offer valuable cash incentives to new customers.
TAKE ADVANTAGE OF THE GOVERNMENT SAVINGS SCHEMES ON OFFER
From April 2017 savers can take advantage of the government’s latest addition to the Individual Savings Account range, the Lifetime ISA (LISA), designed to permit individuals under the age of 40 save for a first home or for their retirement. The main attraction of a LISA is the generous bonus of 25% on offer for savers, meaning that for every £4 they save, the government will add £1.
To qualify to open a LISA, you will need to be aged between 18 and 40 in April 2017, and any savings you put in before your 50th birthday will receive the 25% bonus from the government at the end of the tax year. There is no maximum monthly contribution; savings can be as little or as much as you like up to the annual limit of £4,000. Savers need to be aware of the risks associated with a LISA, early withdrawal charges, restrictions and accessibility.
TALK TO MUM AND DAD
More and more first-time buyers are borrowing or receiving gifts of cash from their parents or grandparents. In many cases, the older generation are happy to pass on cash during their lifetime, so share your plans with them as early as possible.
MOVE BACK IN WITH MUM AND DAD
Lots of young people move back in with their parents to save on rent and help their savings grow faster.
EXPLORE WAYS OF EARNING EXTRA CASH
Sell stuff you don’t need. Be on the lookout for evening or weekend jobs that could boost your savings; from bar work to dog walking – every little helps.
GET GOOD ADVICE AS EARLY AS POSSIBLE
Talking to your mortgage adviser can help you get the right savings plan in place, and when the time comes, get the mortgage deal that’s right for you.
As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayment.
AUTUMN STATEMENT KEY POINTS
- Gross Domestic Product (GDP) growth forecast growth forecast for 2017 slashed; 2019-20 budget surplus ruled out
- Tax-free personal allowance to rise to £11,500 in April and increase to £12,500 by the end of the parliament
- The higher rate threshold will rise to £50,000 by the end of the parliament
- From April, employers and employees using salary sacrifice schemes will pay the same tax as anyone else, with the exception of pension arrangements, childcare, ultra-low emission cars and cycle to work schemes
- Insurance premium tax to rise from 10% to 12% from June
- From April a new savings bond will be available for 12 months through National Savings and Investments, with an interest rate of around 2.2% and a term of three years, the maximum deposit will be £3,000
- Ban on letting agent fees to tenants, burden falls to landlords of the property
- Triple lock applied to any increase in the State Pension will remain for this parliament
It is important to take professional advice before making any decision relating to your personal finances. Information within this newsletter is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation, are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.