Summer 2011
Covering your income Income protection is an insurance policy that provides you with an income if you are unable to work as a result of accident or illness. Most policies will then pay a regular monthly amount until you have made a full recovery, until retirement age, for a fixed term - or death if earlier. Income protection can be useful as a supplement to state benefits, as these generally prove insufficient to maintain the lifestyle you are able to enjoy on your current earnings. It is traditionally used to cover your salary and the maximum amount you can insure for will enable you to broadly match the after-tax earnings you would otherwise lose.
Welcome to the latest edition of our newsletter, our update on developments in the
Costs vary depending on your circumstances, your medical history, the time for which you defer payments but also on the provider. The more you are covered for, the higher the
world of financial services.
premium. However, cheaper is not necessarily better and therefore, as with all forms of insurance and protection, it is imperative you read the small print on your income protection policy to ensure you know what is covered.
If you have any questions about the issues raised in this
Finally, it is also essential that you are open about any previous medical conditions, regardless of whether or not you think they are significant. Non-disclosure remains one of the most common reasons for claims being declined by providers and will probably only
issue, please do not hesitate to contact us.
arise right at the moment you most need the money. Financial advice is therefore highly recommended to help ensure you find the plan most suitable for you.
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Getting on the ladder Despite house prices falling recently, they are still very high in terms of affordability. So, does it make sense to sit on the fence in the hope that they will fall further or do you get on and get in to somewhere you can afford now? For those who have held off buying in the hope of a tumble, it has proved a long wait. Coupled with this, the credit crunch means getting a mortgage for those needing higher income multiples or high loans-to-value is harder than it was. However, what these limitations do ensure is that those who might once have overstretched themselves are now prevented from doing so which will perhaps help to make prices more affordable for everyone as the market settles down.
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No more compulsory purchase Britons could soon enjoy greater financial flexibility during retirement thanks to draft legislation released by the UK Treasury ahead of the 2011 Finance Bill. Until the June 2010 Budget, pensioners were forced to buy an annuity by age 75 with the money they had saved which still remained in their personal pension scheme. That age has now been raised to 77 whilst the Coalition finalises this draft legislation, removing compulsion and allowing pensioners to decide for themselves how long to leave their pension fund invested and at what age (if ever) they wish to make that annuity purchase. The legislation does include restrictions, notably the amount of money that can be withdrawn from a still-invested personal pension at any one time. This will be limited to 100% of the equivalent single-person annuity that could have been bought with the funds, a restriction which is intended to prevent individuals from withdrawing and spending all their money and then calling on the state to support them. However, individuals can withdraw more than this amount if they can prove that they receive pension income of at least £20,000 per year. In this case, they will be able to take out as much as they like. The increase in flexibility will end a rigid system in which individuals were being forced to buy an annuity to a deadline even if annuity rates were particularly poor. An increase in life expectancy and an environment in which older people work for longer have made the original age-75 cut-off appear progressively more unrealistic and draconian. Treasury figures show that 450,000 individuals bought an annuity in 2009, while 200,000 people are in income drawdown arrangements. According to Treasury figures based on data from the Financial Services Authority (FSA), approximately 50,000 people who are currently in drawdown arrangements could benefit from the flexibility and an additional 12,000 people could now start using it. The National Association of Pension Funds (NAPF) has welcomed the prospect of additional flexibility, but also believes the new rules are most likely to benefit only those with large pension funds and multiple income streams. Many people are still likely to choose to purchase an annuity, which will provide a fixed income over their remaining lifetime. Moreover, NAPF warned that most people are simply not saving enough into their pension schemes, and urged the government to do more to encourage and support strong occupational pension schemes and “creative, flexible” ways for individuals to save for their retirement.
Don't put off your will It is understandable that so many of us put off the task of making a Will. It makes us think about our mortality and consider things which we hope will never happen. However, without one, you might be surprised to find out how easy it is for your assets to be distributed in an undesirable way. The exact rules of distribution depend where in the British Isles you live as some details differ between Scotland, Ireland and England & Wales. However, if you are not married, for example, the law is united in saying your partner may get nothing. Without a marriage certificate, your children and parents will benefit instead. Even if you are married, there are many good reasons for making a Will. First and foremost, it allows you to take postive decisions over who gets what - including friends, friends' children, charities and local societies who are entitled to nothing without your say. You can also decide if ex-partners - or perhaps more importantly, ex-partner's children - should be helped out. And, if your estate is greater than £325,000 (£650,000 for married couples), a Will can help you plan to reduce your Inheritance Tax liabilities. In thinking like this, making a Will can actually become a positive, rather than negative experience. Considering such things in advance can help your peace of mind and ensure that all your family and friends will be looked after in exactly the way you want them to be. The Financial Services Authority does not regulate Will Writing and some forms of Inheritance Tax Planning.
Reaching your goals Investors can be divided into two broad groups: income seekers and growth seekers. Whichever you are, it is important to establish your investment goals from the outset. This helps to determine your tolerance for risk, thereby ensuring that you select the most appropriate investments for your portfolio. Risk tolerance is actually one of the most important factors. Traditionally, there is a direct relationship between the amount of risk you take and the amount of potential return you can expect. For example, a 30-year-old, with no financial obligations other than rent and savings in a deposit account, might decide to invest in a pension for later in life. With this long-term investment horizon – 35 years or so – it might be appropriate to take on more risk, as any short-term ups and downs can be absorbed in favour of the potential for higher long-term gains.
Considering a remortgage Most mortgage providers offer introductory discounts to attract borrowers that help to minimise the amount you pay each month when you first buy a house. However, once this introductory discount with a lender ends, you will revert to their standard variable rate (SVR) of interest – a rate set according to Bank of England base rates and company profitability. This can be quite high compared with any previous deal so, when it happens, you might want to consider remortgaging.
However, a 30-year-old receiving an inheritance payment, with which they plan to buy a house in five years, needs to be more cautious. Over this relatively short period, they would be more vulnerable to the ups and downs of the market cycle, and would therefore be best served by a relatively cautious approach that will not put their
Whilst house prices have fluctuated over the past couple of years, they are now higher on average than they were five years ago. If you've had your house a while, therefore, you might find deals which were previously not available to you, simply because the amount of equity you have has increased. Of course, moving your mortgage will incur a fee and you should balance these costs against the savings that you might make by moving but some lenders might help with these costs, or your existing lender might offer a rollover deal which could minimise these fees. Having said that, such deals are now less common than they were a few years ago, when lenders were less discriminating about the amount and quality of business they took on. It is worth remembering that, if you took out a very competitive mortgage, you might also find yourself trapped by early repayment charges, even after your discount has ended. However, rather than just take whatever is on offer, it is always worth checking the alternatives. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
precious capital at risk. It is important to bear this relationship in mind when making investment decisions. Perhaps consider a range of less volatile investments such as cash, UK bonds and maybe UK equities, to build a core, to which riskier options can then be added. These riskier options can then be adjusted as market conditions change.
Getting into buy-to-let Buy-to-let mortgages are no longer as available as they once were, making research all the more important to make sure you find an appropriate deal. Recent developments mean you now need a large deposit generally at least 25% - and lenders have significantly tightened the criteria on which they will lend. For example, they will ask for your salary details, existing debt levels and about any other properties you own and will also look for an ability to cover the mortgage should you find yourself without a tenant. However, for those with the means, it is still possible to enter this market - and depending on where you are, if you take a long term view, there are some very attractively priced properties to be had.
What will your pension provide? Enjoying the spoils of a comfortable retirement after years of working requires planning. Whether you end up living in the lap of luxury, or have to count the pennies, can be determined by the decisions you make for your pensions saving. Many factors can have an impact on the pension you receive – the age at which you start saving, the amount you save, your investment choices and market fluctuations. Specific investment decisions are sometimes out of your hands as, once you choose your pension plan, the trustees or fund managers might take over. However, the time you start setting money aside and the amount you save is entirely in your hands. Market fluctuations are also notionally out of your hands – but you can plan for their effects, particularly over the final five or ten years, by consolidating your gains in the run up to retirement. Drip feeding your money from riskier investments into more secure areas - such as cash or bonds - can help guard against downturns in equity markets which could otherwise lose you money at the last minute. When you actually reach retirement, your pension savings will normally be used to buy a lifetime annuity which provides you with a guaranteed income for the rest of your life. However, the rate at which you buy this annuity is also dependent on market conditions, which fluctuate with interest rates and inflation. Hence, the income you can buy this year with your fund may be higher or lower than that available last year – or next year. In a time of low interest rates, however, you might avoid having to cash in everything on a very low annuity quote by using deferred or phased retirement plans. Finally, some very lucky employees could be in 'defined benefit' (or final salary) schemes, which promise to provide a fixed amount based directly on your salary and years of service - irrespective of stock market movements, interest rates or inflation. Generally, this could be up to two-thirds of your final salary at the company, or an average over a specified period. However, the stock market slump of 2000-03 reinforced the problems associated with these schemes and many have since been closed. For those still available, the level of contributions are generally increasing. At the end of th day, you will get back from your pension plan what you put in. It is therefore most important to start early and to save as much as you sensibly can.
Issued by Wells Financial which is authorised and regulated by the Financial Services Authority. The contents of this newsletter do not constitute advice and should not be taken as a recommendation to purchase or invest in any of the products mentioned. Before taking any decisions, we suggest you seek advice from a professional financial adviser.