10 October 2018

Protecting Your Lifestyle - Insurance Options

We're all aware of the role that insurance can play in protecting our "stuff" - cars, house contents, pets, and so on. But insurance also provides wider opportunities to protect our lifestyle and those we leave behind when we die.

Term Assurance is fairly straightforward - and often inexpensive. It could, for example, provide a lump sum to pay off a mortgage if you were to die. That's essential protection where a family could be left behind. It is also possible to receive the payment in instalments - perhaps to cover ongoing family expenses for a while.

Whole of Life Cover might be relevant if you want to be sure to pass on a lump sum to someone on your death. That could provide your family with the means of paying an Inheritance Tax bill, for example.

Income Protection Insurance could be valuable if you don't have a big employer to carry on paying you while you are off sick. Many small business owners would struggle to survive financially if they were off work for any length of time. Income Protection Insurance could replace a proportion of your income.

Critical Illness Cover - If you have concerns about particular illnesses then this insurance pays out on the diagnosis of a range of ailments. It is not intended to exactly match any additional costs you may incur, but provides some compensation in a difficult time.

Private Medical Insurance will help pay for private health care, enabling you to receive treatment at a more convenient time and place than the NHS might have provided. Alternatively, if you have adequate invested assets, you might choose to "self-insure" and pay for the treatment directly.

Business Owners have particular requirements. It may be about mitigating the effect of losing a key person in the business if they die, or it may be about having a lump sum available to buy the shares of one of the owners if they die. That is likely to need a shareholder agreement alongside term assurance.

Overall the most important things are to know what event you are insuring against, and what you want to happen if it does.

25 September 2018

Financial Planning with Trusts

I have written about Trusts a number of times over the years (click on "Trusts" in the Labels index - on the right of the main blog page to see). Mostly I have started with the reason you might want a trust. Here's another way of looking at it, though - a list of different types of trust and where they might be useful.

Expertise is needed, though, not only to help select the appropriate trust, but also to advise on how the money put into trust should be invested. Note that Inheritance Tax-efficient trusts generally require 7 years to be outside your estate.

Absolute trust
A simple (but inflexible) solution where you do not require access to the capital held in trust and know who you want to leave the money to.

Discretionary trust
Keep control and have flexibility over how wealth is distributed. Effective for Inheritance Tax in most cases.

"Best start in life" trust
A discretionary trust that enables you to pass on wealth in an IHT-efficient way, and can provide for tax-efficient payments for the benefit of children.

Reversionary ("lifestyle") trust 
Has an option to take back a fixed proportion of the value each year. What remains is outside your estate after 7 years.

Excess income trust
Build a nest egg for beneficiaries, free of IHT.

Discounted gift trust
Receive regular fixed payments for life with the balance passed to beneficiaries.

Loan trust
Since it's a loan you still have access to the capital. But any investment growth is outside your estate for IHT purposes.

6 September 2018

Should I ... Sell Everything if I'm Nervous?

Nervous babyFrom time to time a client will tell me they are nervous about the future. The trigger might be something political or financial like the Euro Crisis, Brexit, or Trump, or it may simply result from reading the Daily Mail(!).

History tells us that it is not generally worth making changes to long term investments - including pensions - in response to short term events. But if you are getting close to needing access to an investment, perhaps retirement is looming, then it may be a good thing to take action anyway.

So if you are really concerned about protecting your assets what can you do?

Depending on what investments you hold it may be possible to reduce the expected volatility (risk) of your portfolio by switching into more stable funds (more fixed interest ("bonds"), perhaps?).

Or your investment product may offer a fund which is "smoothed" and which has the effect of dampening down the worst ups and downs in the short term.

Some products allow you to add a guarantee to an investment (usually only at the beginning, though). That often takes the form of insurance to prevent the value falling below - say - 90% of its highest ever value. But like any insurance, it costs you - typically in the form of higher annual product charges.

Ultimately you could sell everything to cash, perhaps keeping it within the investment wrapper, although deciding when to get back into the market is always the challenge. More often than not this strategy results in your being worse off than if you had simply left things where they were.

4 July 2018

Withdrawing Money from your Pension

Since April 2015 it has been possible to withdraw money from certain types of pension once you are over 55. That sounds good at first, but there are some big pitfalls to be aware of.

Firstly, what is possible? Well, it depends on the type of pension and the provider. But in the best (most flexible) case you can choose to withdraw some or all of the value of a pension as a lump sum. Up to 25% (generally) of the value will be tax-free, with the rest being taxable as income.

But, withdrawing from a pension means it is no longer available to provide an income in retirement. So you would need to be comfortable that you have adequate alternative income.

And tax is a bigger issue than you might think. The pension provider will treat it as a payment under PAYE, and it will generally be taxed in the month of withdrawal as though you will be withdrawing that amount every month! That results in a tax over-payment, and although the situation will eventually be sorted out the immediate effect can be that you receive a lot less than you expect.

There are other issues to think about, too. The Lifetime Allowance may need considering for larger pensions; future contributions to other pensions may be limited; you may be losing guarantees which would only apply at retirement age; and the amount withdrawn becomes part of your estate for Inheritance Tax purposes (whereas it probably wasn't while within the pension).

All in all, while it's possible, it's worth taking advice before falling down that hole!

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