23 December 2011

Pay Less Inheritance Tax!

The majority of us give to charities during our lifetime. But only around 7% include charities in our wills.

From April 2012 there is an added incentive to do that, particularly if you will have an Inheritance Tax (IHT) bill to pay. That's because if you give at least 10% of your estate* to charity, the IHT tax rate will be reduced from 40% down to 36%.

Practically speaking, your will can be worded to refer to a percentage (10% or more) to ensure that it meets the threshold. You could reserve a suitable sum of money with a whole of life assurance policy, or another investment (possibly written in trust) or simply leave the money to be found from your assets.

* 10% of the "net" estate after deducting nil rate band, etc.

15 December 2011

How to Recover from a Poor Investment Experience

Many people have not had a good experience with their investments in recent years. Here's one reason.

The investment industry tends to focus on "relative performance" - if your investment fund has done better than average then they are happy, even if that means a 10% fall in value.

Now, if you consider yourself to be an investor, that's fine; you are aware of the underlying reasons for investment performance, and are willing to ride out the difficult times for the prospect of bigger returns over the longer period. But for many real investors who simply want to see a growth in their savings above what they might get in the bank, that is just not satisfactory. Good relative performance doesn't pay the bills!


But there's no doubt that the higher the level of certainty in an investment, the higher the cost, one way or another. So here's some possible antidotes to poor performance, including what the cost is:

"Absolute Return" funds
Rather than relative performance these are funds which aim for an absolute return using various strategies - although that's not guaranteed.
Cost: long term performance is unlikely to be as good as more traditional funds.

Structured Products
Products which offer a pre-determined return but with conditions (e.g. performance of the FTSE 100).
Cost: There's still a chance the condition won't be met (although some are positioned to make this very unlikely), you generally need to hold the product for 5 or 6 years, and you are reliant on the credit-worthiness of the underlying provider of the return - normally a bank.

"With Profits" Funds
The subject of much heated discussion, these are multi-asset funds provided by insurance companies. Performance is, to some extent, insulated from day to day market movements, and if chosen carefully, a good fund will provide slow but steady growth. [Either you let the market choose the performance, or an insurance company!]
Cost: Long term performance will be worse than more direct investments; the return you get is decided by the insurance company; some companies' funds have performed badly for some time.

Products with Guarantees
Typically an insurance bond provided by an insurance company, these offer various levels of guarantee on your investment's performance.
Cost: You have to pay for the guarantee one way or another - either with higher product charges or by giving up some investment performance.

12 December 2011

What can you achieve with trusts?

Trusts have various benefits to financial planning. Here are some things that you can use them for.
Give money to children, but don't give them access until they are 18 (or possibly older ages)

Pass the benefits of a life assurance policy to the beneficiaries promptly without waiting for probate on the deceased person

Avoid Inheritance Tax on your investments - various options here, depending on the situation - some provide limited ongoing access to the investments for your own use

Avoid a future Inheritance Tax liability on a pre-retirement pension fund by passing it to the children not the spouse ("spousal bypass trust")

Pass assets to grandchildren (e.g. for education) - skipping a generation who have their own assets / IHT liability

Trusts are basically simple - you are creating a new legal identity which can own something. But they can get complicated when considering taxation, so it is always worth taking professional advice in setting one up (and in managing its investments if it has any, since the trustees have a legal responsibility towards the beneficiaries).

4 December 2011

A Generation Retiring into Poverty?

I read some interesting views on the future of pensions from the Cass Business School recently which I generally agree with.

After the current generation of would-be retirees - those in their 50s and 60s - there will be a generation of people who will have an impoverished retirement. That probably means those currently in their 30s, and 40s who don't see the need (or aren't capable) of saving sufficiently for retirement. The generation behind that will have learnt some lessons and will have saved enough to see them through, partly through the Government's auto-enrolment plans - but don't think that will be the whole story because it won't. And retirement age will have increased to match longer lives by then.

The reason it will take that long is that attitudes have to change. Politicians will not be much help in this since they are fundamentally ill-equipped to deal with such a long term structural problem.

2 December 2011

More people are giving to charity

It was good to hear today that more people are giving to charity in spite of the economic news, according to a survey for the Charities Aid Foundation, although the average amount being donated is down.

The key thing for me is to make that giving effective. And that means regular, targetted, and tax-efficient.

Regular because that's what benefits a charity the most; targetted because no-one can afford to help with every need in the world; and tax-efficient because if the government has provided tax breaks to encourage charitable giving it's worth using them.

For more information see our website: Effective Charity Giving. This covers Gift Aid, and a number of other tax-efficient ways to give, including how to reduce your Inheritance Tax liability.

1 December 2011

Do you need life insurance?

I used to think of life insurance salesmen as being only one step above doorstep double glazing salesmen! But that didn't stop me believing that life insurance of various types was A Good Thing (as well as double glazing!).

Life insurance - or more generally "financial protection" - is most important for younger people with families to protect, perhaps. But it is also relevant in the second half of life. Mortgages often last for the whole of a working life and even into retirement these days. And you don't want your spouse to lose their home if you die just before you retire because they can't afford the remaining payments.

Cover for health is also worth considering - such as "critical illness" cover (I can say that from personal experience), while for self-employed people particularly, Income Protection cover can provide valuable cover.

"Whole of life" cover can also be a good way of dealing with an Inheritance Tax liability, or perhaps to ensure that there is sufficient cash available to pay for a good funeral (which are increasingly expensive).

I don't think of myself as a life insurance salesman(!), but I am a financial planner who firmly believes that selecting the right set of financial products is important for a secure future - and that includes financial protection.

How to get a pension like a public sector worker's

There are some interesting numbers on public sector pensions in this article in This is Money. To get an equivalent pension to a reasonably well paid state worker (£40k on retirement), contributions of £600 a month for the whole of a working life would be needed (the article says - and that feels about right to me).

This would amount to somewhere between 20% and 30% of income going to pension contributions (my calculations).

No-one's saying that public sector workers aren't worth their salt (I hope). Nor that (as usual) negotiations couldn't have been handled better. So there is certainly some sympathy around, but in these straitened times we all need to be aware of the cost of what is being provided in order to keep things as fair as they can be. And it isn't fair that everyone else has to contribute at the expense of their own futures.

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