25 June 2013

Should I ... Have a Lasting Power of Attorney?

Sadly I have come across a number of situations recently where a Power of Attorney is (or would have been) a good thing to have.
A Power of Attorney enables someone (the attorney) to act on behalf of someone else who has given them that authority (the donor). The current version is called the Lasting Power of Attorney (LPA). There are two types, covering finances and health, and either one or both can be in place, depending on your concerns.
The forms are quite long and there's a definite process you have to go through to affirm that the donor understands what they are doing, for example. And the LPA must be "registered" before it is used which involves the Court of Protection. Having said that it is not particularly difficult for someone willing to research it all.
I'm of the view that it is worth most older people (60+) with assets having at least the finances version ("Property and Financial Affairs") in place and signed off, perhaps even registered. The only exception might be someone whose assets are all held jointly with a spouse. Even then the fact is that one spouse is likely to be left on their own so it's as well to be prepared, perhaps with a younger family member cued up to be involved.
We can help with all this and arrange an LPA for you, whether or not you want to tie it in with any work on your finances. Get in touch.

19 June 2013

Fixed Term Annuities

With standard annuities generally offering poor value at present it is certainly worth looking at alternatives. One such is the "Fixed Term Annuity" - also called various other things (because they are not actually annuities at all!).
Here's some key points:
  • You could take the tax-free lump sum from your pension, but not take any income
  • You could take a pre-defined income for, perhaps, 5 years and then look at annuities again to see if rates had improved
  • If you have health concerns you might get a better annuity rate in 5 years time
  • Guarantees are available on the value at the end of the fixed term
  • Some investment growth may be possible depending on the product
  • If you die during the term, the death benefits available to beneficiaries are likely to be better than for a standard annuity
In summary, it's about keeping your options open - something which standard annuities don't let you do.
Professional advice is certainly needed when considering these products (you probably couldn't buy one without), but they are an increasingly important option in the difficult process of getting maximum value from pensions.

14 June 2013

Does this match your retirement plan?

Most people only think about their own retirement - and that only happens once in a lifetime so you don't get much chance to practice!

But I deal with retirement issues every day, and I'd have to say that it is worth having more of a plan than most people seem to. So here's some planning thoughts...
You could think of retirement in several main stages: 
Pre-retirement adjustments
Pre-retirement is about taking a look at your life in general and your finances in particular. Reviewing pensions, paying off any mortgage, considering any home improvements, perhaps taking some initial pension benefits like a lump sum to help with that. 
Part-tirement working
Many people don't just stop work all of a sudden. Continuing part time or starting a new low stress part time job is common - hence "part-tirement". Finances don't always allow a full stop, and after all you are probably going to have a good few years left, so there's still time to try something different.
Active enjoyment
This is the stage that many look forward to. Doing more travelling, supporting your family, or volunteering for your favourite charity are common activities. The question is whether the finances are there to support it. If you have any savings or investments it may be worth positioning them to provide an additional income at this stage.
Slowing down
And finally, there's likely to be a less active phase spent initially at home, but potentially in residential care. And that's certainly where some earlier financial planning is needed due to the costs involved.

So what's the plan?

One approach is to do some "lifetime cashflow planning". That can be a simple view on your finances, showing income / expenditure / assets for each year of potential life remaining. Things certainly won't turn out the way you initially plan, but it does enable you to take some informed decisions about what you are likely to be able to spend at the different stages.
Here's an example - let me know if you want help with your version! ...

7 June 2013

Interest-only mortgage problem yet to bite

Research from Experian shows that there are still plenty of interest-only mortgages around which will cause problems if people haven't organised a way of paying it off.
Most people claim they do have a plan for paying it off but around 260,000 don't.
There are three peak periods when interest-only mortgages will reach the end of their term:
  • 2017/2018 This peak is a result of endowment mortgages sold in the 1990's and early 2000's and typically consists of those approaching retirement with high incomes, high assets and high levels of equity in the property.
  • 2027/2028 This peak stems from mortgages typically sold from 2003 to 2009, i.e. the years running up to the financial crisis, when lenders were much less cautious than now, but this tranche starts in 2022. It "is characterised by less affluent individuals currently in early to mid-life stages."
  • 2032  This final peak stems from mortgages opened between 2005 and 2008, with higher loan to values and, again, higher income multiples. These are loans that have been converted to interest -only at some point. This tranche has concentrations of "highly indebted individuals with low or negative equity in the property at the point of maturity".
Anyone with an interest-only mortgage needs to take another look to make sure they have the capacity to pay it off.

3 June 2013

Should I ... take my pension lump sum?

Most pensions will provide the option of a tax-free lump sum when you start to take some benefits from it. And this is one of the more significant questions for someone approaching retirement.
There are pros and cons, of course, which will be different for each person. And in a short blog we can only really list the things to consider. Let's look at Defined Contribution (money purchase) and Defined Benefit (final salary) pensions separately.

Defined Contribution

Most pension plans will offer you the standard 25% tax-free lump sum when you take some pension benefits.
Here are the pros...
  • you get a tax-free lump sum to spend
  • you could invest it and potentially get a higher income than you might by buying an annuity (depending on a range of factors)
  • you could invest it and withdraw lump sums when required - it's good to have flexibility
  • you could invest it and buy a better rate of annuity later in life (perhaps when you are less healthy)
  • it's in your control
And some cons...
  • you get less income from your pension

Defined Benefit

Here the decision is rather different. It largely comes down to how much pension you are giving up by taking a lump sum, and that's down to the "commutation factor" which the employer offers - that's the level of tax-free lump sum which you get for every £1000 of annual income foregone. A typical commutation factor would be 15 - you give up £1,000 of annual pension income to get £15,000 of lump sum. The lower the factor is, the worse the deal on offer is.
So here's some pros...
  • you get a tax-free lump sum to spend
  • you may (just) be able to get a better income by investing it or buying an ill health annuity later in life - it depends on the commutation factor, but it's pretty unlikely
  • it's in your control
And the cons...
  • you get less income from your pension - in particular with a Defined Benefit pension you are likely to be losing out on inflation-linked increases in the income
There will always be non-financial considerations like how badly you want that world cruise, or the new conservatory, but one way of looking at the financial aspects is to do a simple spreadsheet of income received year on year by using each option.
... or you could always contact us to help you decide!

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