Winter 2013
The truth about...
Premium Bonds Full story on page 7
Plus: Child trust funds The cost of education Changes to NEST Crowdfunding
What’s inside
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8
12
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Will you be one of the ‘never retirees’?
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personal
Crowdfunding
6
personal
Premium bonds
7
personal
Changes to long-term care costs
8
personal
AIM shares to be permitted in ISA
10
personal
Child trust funds
11
personal
The cost of education
12
personal
Changes to NEST from 2017
14
business
Subscriptions & Enquiries If you have any feedback, comments, and questions; to discuss your financial planning requirements or for further information, please get in touch.
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Address
Editorial & Design
Curo Advisers Ltd The Coach House, 1a Machen Street, Penarth, CF64 2UB
Press Ahead
tel: +44 (0) 2920 256 001 email: enquiries@curoadvisers.com
tel: +44 (0) 191 516 6235 email: enquiries@pressahead.info www.pressahead.info
welcome A warm welcome to the first edition of Curo Advisers’ newsletter and a very happy and prosperous new year to all our clients! We look forward throughout 2014 and beyond to keeping you up to speed with informative articles on all aspects of finance and investment. This edition follows the appointment last autumn of Mark Carney as the new Governor of the Bank of England and it will be an interesting time to see how he will have an impact on our economy. His actions will impact on interest rates, annuity rates and stock markets, so it is important to keep at least a watching brief on what is going on...and we, at Curo Advisers will do that on your behalf. One thing that Mr Carney has hinted at is that interest rates are not going to be rising soon. In fact, as you are probably aware, they have been at a record low mark since 2008. Good news for homeowners but if you rely on investment income, you should review your arrangements as soon as possible to make sure your savings are working as hard for you as possible. We will provide an insight into key financial issues, strategies and trends to help you in today’s highly complex global economy. From the cost of education as a parent or grandparent, to alternative pension investments, we trust that this newsletter will provide you with all of the necessary information to help you make the best possible decisions for your future. And we will try to do so in plain English, not city jargon! We hope you enjoy reading this newsletter.
Ian Crocker, Curo Advisors Ltd.
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Will you be one of the ‘never retirees’?
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Recent figures from the Office of National Statistics (ONS) showed that nearly one million people over the age of 65, the equivalent of one in 10, are still working. Not many would choose to do this voluntarily and the reason most are doing so is because their income in retirement is too low.
Despite preserving their pensions, there is no prospect of their retirement income increasing dramatically and they may never fully retire.
If you are not inclined towards pensions at the moment, there is a wide range of other investments that could be suitable - although not with the same tax incentives as pensions.
The combination of the increasing Government restriction on what you can save into pension plans and low annuity rates means that a ‘traditional’ retirement is becoming rarer these days.
These include:
But if you are in danger of becoming a ‘never retiree’ in future because of a lack of potential retirement income, now is the time to do something about it. The state pension is £110.15 a week - could you live on that? Starting a pension plan early can remove financial concerns but we appreciate that you might be put off doing so because you cannot legitimately get hold of the money until age 55 at the earliest and even then, some of the cash has to be taken as an annuity. To offset that, members do get generous tax breaks and a pension of some description should be owned by anyone in gainful employment. The Government agree, which is why any employee earning a reasonable amount is going to be automatically enrolled in the Government schemes by 2017 if they aren’t already in a pension scheme.
• ISAs • Collective investments • Investment trusts • Investment bonds You may already have a range of investments - as well as having employment income or earnings from a business but all of this needs to be factored into your future to make sure that you enjoy a good lifestyle now and after retirement. After all, you don’t want to become a ‘never retiree’.
“The hardest thing in the world to understand is the income tax.” Albert Einstein
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Crowd funding Crowdfunding involves a large group of people contributing money to support a business, individual or campaign. The funds raised are often used as start-up capital, or may help a business expand or even avoid going bust.
The concept is relatively new to the UK and the market is small, especially compared to the US. However, there is increasing interest in it as a new way for businesses and individuals to raise funds and for people to invest money. Crowdfunding is fast becoming a great alternative to a traditional bank loan or Government grant, particularly in the case where the amount of funding needed to kick-start a project or get a new venture off the ground is relatively small.
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Curo Advisers’ associate, Funding Empire, launched its crowdlending platform in October 2013. The company believes most crowdfunding should be targeted at sophisticated investors who know how to value a start-up business and aim to provide businesses and wouldbe investors with everything they need to know, removing barriers and highlighting what a convenient and straightforward financing option it can be. Visit www.fundingempire.com or call 02920 351444 for further information on crowdfunding.
Jargon Buster Capital Capital refers to financial resources such as cash, or other assets (such as your house or car) which can be liquidated and turned into cash.
personal
Premium Bonds Millions of people hold premium bonds in the UK. The combination of a Government guarantee that your money will be safe and a chance to win a million has proved irresistible.
The added bonus is that any prizes you may receive are completely tax-free. So even if you don’t strike lucky, by investing a reasonable amount in premium bonds you could get a regular taxfree income of sorts.
Those rates are fair when compared to other interest rates currently available and you do have the chance of winning big. But of course, your chances whave reduced along with the interest rate.
But now that potential income, which wasn’t a huge amount to begin with, has been cut back. National Savings & Investments (NS&I) has announced that the underlying tax-exempt interest rate on premium bonds will be cut by 0.2% to 1.3% as of August 2013.
The odds against you winning a prize will rise from 24,000:1 to 26,000:1 for each £1 of bonds you hold. So if you hold the maximum £30,000 investment, by rights you should win at least one prize a month. But don’t complain if it doesn’t happen!
For the maximum £30,000 investment, that would be £390. This is the equivalent of 1.63% gross for a basic rate taxpayer and 2.17% gross for a higher rate taxpayer.
This change in interest rates is being achieved by varying the pattern of prize payments as follows:
Value of prize
Number of prizes in July 2013
Number of prizes in August 2013 (Estimate)
£1,000,000
1
1
£100,000
5
3
£50,000
9
6
£25,000
20
11
£10,000
49
30
£5,000
97
58
£1,000
1,142
789
£500
3,426
2,367
£100
33,552
11,891
£50
33,552
11,891
£25
1,831,461
1,724,014
Total
1,903,314
1,751,061
The cut in rates follows on from the announcement of reductions by NS&I for their Income Bond, Direct Saver and Direct ISA. We emphasise that in practice, the 1.3% rate on premium bonds is not what the typical bondholder would receive in prizes – that all depends on how lucky you are. If you would like a more predictable way of generating income, or a higher rate, we can help you find out what is available. Below is an example of how one of our clients is benefiting from premium bonds: Mrs Perkins, aged 66, contacted Curo Advisers after receiving a lump sum of £12,000 from her late husband’s life insurance and was recommended premium bonds, issued by National Savings & Investments, as a suitable home for her money. She purchased £10,000 of premium bonds and after several weeks, started to see the benefits, including a £1000 cheque, without risking one penny of her investment. Mrs Perkins said: “I’ve been really pleased with my premium bond investment so far as not only is it reassuring to know my money is safe but it’s exciting to think that each month I may get an email alerting me to another win. My substantial cheque was a really pleasant surprise.”
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Changes to long-term care costs
personal
In February 2013, the Government announced a series of measures aimed at improving access to long-term care in England.
They were responding to individuals’ concerns about the accumulated cost of the care and that some people’s homes went to offset the bill. The Government is currently consulting about the detail of the proposals. Broadly, the proposed changes will mean that everyone will know how much they have to pay for their care and that the most support goes to those who need it most. The following points will be of particular interest: • Local authorities will have to carry out a ‘needs assessment’ if they believe a person has care and support needs. From 2016, it will be the first stage of the process which establishes if you are eligible for the new rules • There will be a cap on the amount that anyone will be charged in total and that will be £72,000 for people of state pension age and over. You may not even have to pay that if you are of limited means
• Food, accommodation costs and certain personal expenses are not covered by the cap – you have to pay these anyway. People receiving residential care will remain responsible for these, which are set at a standard amount of around £12,000 each year • All of the total cost the local authority calculates as being required to meet a person’s eligible needs will count towards the cap. In practice, the costs could be paid by yourself, the local authority or a combination of the two – but it doesn’t matter of the purposes of the £72,000 limit • You may decide that you want to stay in a more luxurious home that the local authority chooses for you and that you are happy to pay the extra cost involved. If you do so, that extra payment will not count towards the cap • People of working age who develop care needs before retirement age will also benefit from a cap, but it will be lower than £72,000. (Different caps apply to different age groups.) • If you only have total assets of less than £17,000 you will not be expected to contribute towards your care costs at all, just the daily living costs
• If you have more than £17,000 – but less than £118,000 – you will have to contribute most of your income and make a set contribution from their assets towards your care costs • If you only have total assets of more than £118,000 (including your home) you will have to pay all the costs (until you get to the £72,000 limit). If you do not have a home or your partner is living there, a reduced upper limit of £27,000 will apply. • The relevant limits will be adjusted annually in line with average earnings, to reflect inflation. People of modest resources should welcome the news that the £72,000 lifetime cap on residential care costs is to be based on the total cost of an individual’s eligible needs, including the local authority’s contribution as well as their own. The fact that costs will be limited means that there will be greater opportunity to plan and the Government expects a range of pension and insurance products to help people meet the cost of care to have emerged by 2016. But if you have concerns about the costs of long-term care before that time, we can help.
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AIM shares to be allowed in ISA The Treasury recently announced that new ISA rules are being issued, which will allow you to invest directly into shares that are listed on the Alternative Investment Market (AIM). But is this going to boost your investments and help you make money? Or will it be just for the speculators?
AIM is a stockmarket for smaller growing companies. A wide range of international businesses join AIM, seeking capital to help expand their businesses. They include early stage businesses, those backed by venture capitalists and more established companies. But you have to choose carefully as some would be very high-risk investments. The change is part of the Government’s commitment to help smaller companies succeed by promoting investment to deliver sustainable economic growth. Over one thousand companies listed on the AIM will now be eligible for ISA investment.
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So you are going to be able to invest up to £11,520 in AIM shares and any gains arising from the growth in your investment would be tax-free. If you are in need of a regular income from your ISA or do not want to take too much risk with your investments, AIM shares are probably not for you. But if you are looking to improve the returns from your ISA or improve the prospects for capital growth, we can offer up to date recommendations.
Jargon Buster Credit Credit can be used to purchase things that you currently don’t have the money to buy. Essentially, it’s an agreement between you and the bank that you will pay them back later for an item you are buying now. Credit cards make it very easy to do this.
Commodity A fixed good that can be sold on. Common commodities sold include gold, oil, minerals, and grain.
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Child trust funds
Parents and grandparents are often keen to contribute to a loved one’s savings and investments, as a way of rolling wealth down the generations and stopping the taxman from getting his hands on it. Many are saving or investing to help pay university fees or simply give children and grandchildren a good start in life.
The Government recently announced Child Trust Funds (CTFs) can be transferred into Junior ISAs from April 2015. These accounts, which were available to all children born between September 2002 and January allow £3,720 tax year to be added tax free and locked away until the holder’s 18th birthday. For children older or younger, CTFs have now been replaced by Junior ISAs.
CTFs are a now defunct tax free savings product and pay worse rates than Junior ISAs, but over six million children are still locked into these accounts. The silver lining is you can at least transfer them to up to 3% interest. Anyone who still holds a CTF is able to keep paying in and switch to a new top rate at any time, just like normal savings, and here at Curo Advisers, we can help you find the best place to invest.
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The cost of education
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Getting an education costs students and parents quite a lot. Private primary and secondary education has always been relatively expensive compared to higher education. So for parents and grandparents who grew up in an era of free higher education and generous grants, the current costs and well-being of your offspring are quite daunting. The cost of a private education, for example, is likely to be not less than: For non boarders:
£14,000 per year
For boarders:
£27,000 per year
(Source: Independent Schools Council census 2012/13)
The cost of each year of higher education is likely to be: Course cost (typically) £10,133 for each academic year (in England) Living costs (average)
£12,056 for living costs (outside London)
But even the cost of sending each child to state school has soared to £22,500 – payable out of net income, of course. (Source: Aviva) This works out at £1,614 per child, per school year. So, if you have three kids that’s just under £5,000 a year. Many students will apply for a student loan, dividing parents’ opinions across the UK. According to Credit Action, a charity which promotes financial awareness, an undergraduate from England is likely to accumulate student loans worth £43,500 by the end of their course. (Figures relate to those studying in their home country and living away from their family home, but not in London.) Given these sobering facts, if you are a parent – or perhaps a grandparent – you may not like the idea of students ending their education with a millstone round their neck and want to help avoid, or at least reduce, the need for students to end their studies heavily in debt.
(Source: National Union of Students estimate for 2012/13)
Courses will usually last three or four years, with some being extended a further year in order to secure a Masters qualification.
By investing early, the burden can be reduced or eliminated. Below is an overview of some of the various options available; some are taken out in the parents name and some in the name of children.
Product
Maximum investment
Junior ISA
Up to £3,720 each year
Tax-free income and gains
ISA
Up to £11,520 each year
Tax-free income and gains
Children’s Bonds
Up to £3,000 per child per issue
Tax-free
Premium bonds
Up to £30,000 per child
Tax-free
Unit trusts and OEICS
None
Income tax and capital gains tax, but allowances and exemptions are available
Investment bond
None
Income tax and capital gains tax, but allowances and exemptions are available
Income tax and capital gains tax, but allowances and exemptions are available - also potential inheritance tax savings
Investments in trust None
Tax profile
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Changes to NEST from 2017
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business
The National Employment Savings Trust (NEST) is the Government’s pension scheme, in which all eligible employees without pensionable employment will be enrolled by 2017. The duties were introduced from October 2012 and will affect all UK employers over the next few years.
8. This increases from October 2017 to September 2018 to 5%, of which you pay 2%
The basics of automatic enrolment:
9. Finally, it increases on October 2018 to 8% of your salary, of which you pay 3%
1. Eligible jobholders are those aged between 22 years and the state pension age (which is gradually increasing up to age 66 for all) 2. All employers have to automatically enrol workers earning above £9,440 a year into a qualifying pension scheme and pay contributions on their behalf 3. If employers do not have their own scheme, employees will be automatically enrolled in NEST
10. Should you wish, you can pay more than the minimum contribution and your employee can also make additional contributions at their desire 11. The overall maximum that can be paid into a NEST account (but not a private arrangement) each year is £4,500.
4. This process started in October 2012 with the largest employers and will be gradually phased in for all employers by 2017
The information regarding taxation is based on our understanding of current legislation, which may be altered and depends on the individual financial circumstances of the investor.
5. If eligible, an employee’s qualifying earnings are between £5,668 and £41,450 (the limits are reviewed every year)
If you no longer wish to receive this newsletter, please simply reply to the e-mail with “unsubscribe” in the subject line.
6. If an employee earns £15,668 a year, their qualifying earnings would be £10,000 and contributions based on this amount (the limits are reviewed every year) 7. From October 2012 to September 2017, the compulsory minimum contribution is 2% of qualifying earnings – of which you pay 1% and your employee pays 1%
“Why is there so much month left at the end of the money?” John Barrymore
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Get in touch: The Coach House, 1a Machen Street, Penarth, CF64 2UB tel: +44 (0) 2920 256 001 email: enquiries@curoadvisers.com