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FinanceNet.org https://www.financenet.org/ Tue, 02 Jun 2020 15:00:21 +0000 en-US hourly 1 https://wordpress.org/?v=6.4.3 Concessionary Purchase https://www.financenet.org/concessionary-purchase/ Tue, 02 Jun 2020 14:57:32 +0000 https://www.financenet.org/?p=2061

Concessionary Purchase Mortgages

The process of transfer of gift, or deed of gift, is a tough one in the property market. For example you may be gifting property to family members at a reduced price, which is a viable idea, and can benefit both participants involved in the exchange. Concessionary mortgages are often most beneficial to the person being gifted, even more so if they are a first time buyer, although you do not need to be a FTB to arrange this mortgage. There are a number of different transaction methods which are considered a concessionary mortgage, so it is important to know what the limitations are as well as the best way to go about arranging it.

Concessionary Mortgage Experts

If you want to buy a house which is sold at a lower price, you may be able to do this with a concessionary mortgage. These are sometimes known as Below Market Value, or BMV for short, or more frequently known as Gifted Equity. Below Market Value sales often occur between family members, however you are not limited to buying from relatives to obtain this mortgage. Other people include landlords, employers, property developers. It is also available regarding properties affected by section 106 legislation in regards to Key Workers.

Concessionary mortgages work by using the money saved (which is the difference between the asking price and what you paid), in place of or contributing to your deposit money. An example scenario: buying a house from a family member, which was up for sale at £150,000, however they will sell it to you at a 10% discount, providing you with £15,000 for your deposit.

How do you get gifted equity?

Most mortgage providers will require you to have a deposit which is at least 5-10% of the below market value selling price of which you are borrowing for. Some lenders will take 100% of the loan into account, regardless your application will need to meet all of their requirements.

It is important to seek out professional advice when trying to obtain gifted equity due to the requirements put in place by lenders in order to permit the purchase. Some terms deny the seller to remain living in the house following the purchase. For example if you bought the house from a family member, they would not be allowed to continue to live there. Sometimes there are tax complications which have requirements to be met also, so it is recommended to obtain independent legal advice.

Concessionary mortgages, or gifted equity, is not the same thing as gifted deposits. Gifted deposits is where the deposit is provided to you from someone out of the property chain and the property is sold at market value.

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Retirement Interest Only Mortgages https://www.financenet.org/retirement-interest-mortgages/ Wed, 04 Mar 2020 17:37:37 +0000 http://www.financenet.org/?p=1691 Retirement interest only mortgages or RIO as they’re sometimes known as, are simply interest only mortgages for the over 55’s but with a few differences. Like an Equity Release scheme, you borrow against the property but with an RIO you pay back the interest, not the loan, each month. You then have to pay back the loan against the property when you sell up, move into later life care or die. As always there are t’s & c’s but the standard one throughout, is that you have to pay back the interest over a definitive time frame. Whether that be an agreed amount of years or till you hit a specific age. Like many mortgages they come with restrictions, however it is designed to aid borrowers later on in life, and perhaps not in a financial position to get an ordinary residential mortgage.
If you needed a lump sum for any reason then you can withdraw this from the equity of your property; you might be helping your children get on the housing ladder themselves, paying for the trip of a life time or you need some work completed to your own property.
The great thing about RIO mortgages is that you don’t have to go through the painful task of proving your whole income/pension and have a full assessment you will have to detail that you can have the funds to make the payments. Some of the RIO schemes do let you pay off capital (plus the interest), thus reducing your loan so more of your estate can be passed to those that you want to leave it to.
All lenders have slightly different requirements on how much you can draw against your property, so it is worth getting an advisor to view your options and guide you to the right place. More and more lenders are reviewing their current deals as they have acknowledged that the current later life lending market needs, are not being met. People are living longer, so the products they currently have in place need updating. There are currently over 15 products available.
As a general rule of thumb if you want to borrow on an interest only basis you will be able to borrow less. Whereas if you wanted a larger sum to be drawn down against your property then you would have to look at a capital repayment. This will all also be down to the value of the property, if you meet the minimum income and minimum loan size. This financial assessment is small in comparison to a regular mortgage but all lenders under FCA guidelines will have to slightly review your income and outgoings to check you can keep up with the payments, as usually the only source of income is either a pension, savings or investments and not in employment.
RIO are somtimes better for you and for your loved ones who will be inheriting your property, as with Equity Release there will be much less equity in your assets.
If you are considering doing anything with your property, please do seek advice from a qualified financial advisor.

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Usave https://www.financenet.org/usave/ Wed, 31 Jul 2019 14:38:30 +0000 http://www.financenet.org/?p=1671


 

Yes there are loads of comparison websites that promise ridiculous savings or rates that never actually materialise, we all know that. However having recently used Usave, they are a little different.
I can’t comment on their broadband and utilities, but the loan comparison was very good. I’d considered HSBC and also looked at money.co.uk, but their rates varied too much.
The advertised rates started at 2.9% and went up to 15%, but once you got into the application stage it all started to sneak up.
I found Usave a bit harder work to get the rates, as in I had to fill in some details, but at least you’re getting the true rates and don’t feel mislead. Have a closer look here –
https://usave.co.uk/money/loans/personal-loans/
If anyone has a chance to look at the broadband rates I mentioned then try this link – https://usave.co.uk/utilities/broadband/

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Payment Protection Insurance (PPI) – When & Where To Buy It https://www.financenet.org/payment-protection-insurance-ppi-when-where-to-buy-it/ Wed, 01 Apr 2015 14:02:41 +0000 http://www.financenet.org/?p=1649 Table of Contents

Mention PPI to a random person on the street and their mind will invariably turn to the scandal that was the mis-selling of policies to customers from the 1990s onwards and the claims for compensation that have exploded in recent years. Subsequently, the very idea of payment protection insurance has been tainted despite the fact that, in some circumstances, it can be a suitable form of cover to get. In this article, we’ll explore the ins and outs of PPI and explain why someone might buy it.

If you were looking for an article detailing ways to reclaim mis-sold PPI, here’s a link to our comprehensive guide.

The Basics Of PPI

The idea of buying this form of insurance is to cover any payments that you might have on outstanding credit. This could be your mortgage, a loan, a credit card, or something similar.

In other words, if you lose your source of income for any number of reasons, the insurance company will continue to pay off one or more of the credit arrangements you have in place, thus preventing you from falling behind and potentially getting into financial difficulty.

Just like any form of insurance, you pay a premium – in the case of PPI it is usually monthly – and you can make a claim if and when you need to (assuming the right conditions are met which we’ll go into shortly).

The Types Of Payment Protection Insurance

When you take out a PPI policy, you will have to choose between the three types available:

  1. Unemployment cover will pay out should you lose your job through redundancy.
  2. Accident and sickness cover will protect you when you are unable to work after an accident or because of a long term illness.
  3. Accident, sickness and unemployment policies will provide cover under each of the above circumstances.

When you take on this form of insurance, you should think carefully about the type of protection you are most likely to require and what other cover you might have in place (see below for further details).

Looking At Policy Details

Just like any form of insurance, there is a significant amount of detail within a PPI policy that will directly impact how suitable it is for your circumstances. This section attempts to cover all of the most important points to look out for.

Excess/Deferred Periods

There will almost always be a period of time after you find yourself out of work before you are entitled to make a claim. The timeframe found most commonly on PPI documents is 30 days, although it is possible for this to be as much as 180 days.

Clearly you need to be comfortable with the excess period of any policy you buy, especially if it is longer than the standard 30 days. During this time, you will have to find a way to make the repayments on whatever credit you have covered.

Some policies do provide a process where your claim is backdated to the initial date of unemployment. So while you will not receive any money during the excess period, once you become eligible for payment, you will be paid for that entire time as part of your first instalment.

Generally speaking, a longer excess period will result in cheaper monthly premiums so think carefully about the length of time you might comfortably be able to continue making your credit repayments. If you have sufficient savings to cover 3 months worth of your mortgage, for example, then you can buy a policy that only starts paying out should unemployment continue past this point.

Length Of Payment

One thing to make absolutely clear is that PPI will only continue paying out for a fixed amount of time after a claim begins. This is usually around the 12 month period, but depending on your needs, you may be able to get a policy to cover you for anywhere between 6 and 24 months.

It goes without saying that if you find employment, you will stop receiving any further instalments. However, the exact timing of the last payout is something to look closely at – chances are that you will receive payments in 30 day blocks so if you enter work on day 25, for example, you may not be entitled to the money you would have otherwise received 5 days later.

This is worth thinking about if you can negotiate your new start date so that you don’t miss out on an instalment.

Type & Length Of Employment

Many PPI providers will have some stipulations about the type of employment that is required for their standard policies:

  • you will typically have to hold a full time position with an average working week consisting of at least 16 hours
  • these hours should ideally be for a single employer; if you work for multiple employers, you may not be able to get PPI
  • if you work full time but on a contract basis then this may also make it harder to buy cover
  • you should have been in employment consistently for at least 6 months, but more commonly 12 months is the minimum
  • self employed people can get cover, but the instances where you are able to claim might be quite restricted
  • it is highly unlikely that you’ll be eligible to make a claim if you were sacked from your job or if you leave without good reason
  • taking voluntary redundancy is also unlikely to result in a successful claim
  • if the redundancy is foreseeable (i.e. you know that your job is at risk before buying the policy), then you may not be eligible to make a claim

The Fine Print Regarding Sickness & Accidents

A PPI policy will not typically cover every type of illness or accident that may befall you. Here are some points to consider regarding this:

  • pre-existing illnesses or conditions will almost certainly be excluded from any claims – these should be disclosed to the insurer before purchasing
  • you may also be asked about yours and your family’s medical history which could impact the price you pay
  • incidences involving alcohol, drugs or other substance abuse are not likely to be covered
  • mental illness, including thing such as stress or anxiety, which prevent you from working are often excluded
  • pregnancy related conditions may or may not be covered and you should check before buying
  • some types of accident may not be covered by insurers – these may include those suffered during a high risk leisure activity such as skiing or mountain biking

Prices And Levels Of Protection

The amount you pay when buying payment protection insurance will vary depending on a number of factors, some of which have been mentioned above. Here are some of the other things that will impact the quotes you receive:

  • the thing that will impact the price the most is the amount of cover you require – a £100/month loan repayment is going to be much cheaper than an £800/month mortgage for instance
  • where you buy your policy matters a great deal – in general we recommend you avoid taking PPI out directly with the lender and, instead, look at buying a standalone policy from a separate company
  • the length of time that payments continue for also plays a big role in the price you pay – cover for 12 months is going to cost you less than for 24 months even if you only claim for a shorter period than this
  • how you pay also makes a difference – if you pay upfront in advance then it will work out cheaper than monthly instalments, but if you include the upfront cost in the loan itself then you’ll pay interest on it and it could end up costing more
  • you should ensure you are fully aware of the rights of the insurer to increase your monthly premiums should they wish to – they can do this for a number of reasons that they see as adding risk to your circumstances

Consider The Alternatives

There are other ways that you might be able to get by in the case of you losing your job. In some instances, these may be more appropriate than PPI and should be considered carefully before any policy is taken out.

Income protection insurance – this also pays out when you lose your job, but it works in a number of different ways.

Firstly, it pays out a percentage of the salary you have lost rather than a specific amount to cover the repayments of a debt. Depending on this percentage, it may be more or less than what you’d receive from PPI, but typically it will be more.

Secondly, you can choose to spend the money you receive in any way you like whereas an instalment from a PPI claim must go on the repayments of the debt specified in the policy.

Thirdly, you continue to receive payment from income protection for as long as you are unable to work or as long as the term stated on the policy. Unlike PPI, which is normally restricted to 2 years at most, it is possible to buy income protection that pays out right up until retirement age.

Critical illness insurance – this form of cover pays out a lump sum at the point at which you are diagnosed with a long term condition or suffer something such as a heart attack that prevents you from working.

It is designed to help pay off mortgages, loans and any other debts you might have among other things.

It will not, however, cover unemployment caused by non-critical illnesses or accidents and it will not help if you are made redundant.

Savings – do you have sufficient savings (or other capital that could be easily turned into cash such as shares or bonds) to cover a period of unemployment? If so, ask yourself whether you really need to buy PPI to provide for this type of situation.

Employer benefits – does your employer offer out of work benefits for those staff members who suffer an illness or injury? Many companies, especially the larger ones, will continue to pay you some level of income even after your period of statutory sick pay ends.

Help from family members – while it’s not something many of us would enjoy asking for, it is worth finding out whether any of your family would agree to help out on the essential bills and credit repayments should you ever find yourself out of work.

Final Considerations When Buying PPI

This form of insurance doesn’t quite deserve the tarred reputation that it unfortunately holds thanks to the mis-selling scandal and, in the right circumstances, it can be a financial product worth considering.

When looking at quotes from different companies, always try to match the details as closely as possible to get a fair comparison. Don’t assume anything and ask questions at any stage where you feel unsure about something.

Always read the policy document thoroughly before committing and ensure that you are fully aware of the instances in which you won’t be covered; it is a legal obligation for insurers to make you fully aware of these when selling you a policy.

You have the right to cancel a new policy within the first 30 days and you should be refunded any premiums that you might have already paid (some costs may be deducted). You cannot be charged a specific fee for cancelling the policy. After this point, if you pay monthly premiums, you are usually able to cancel them at any time, although some insurers may specify a notice period in such a case.

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Equity Release Explained: Just How Does It Work? https://www.financenet.org/equity-release-explained-just-work/ Tue, 10 Feb 2015 17:34:37 +0000 http://www.financenet.org/?p=1631 If you own a property, either outright or with a small outstanding mortgage, you have a built up a store of equity that can be released to provide a lump sum, ongoing income, or both.

This guide will aim to answer all of your burning questions regarding equity release starting from the basics and progressing to every little detail imaginable.

Table of Contents

What Is Equity Release?

Your home, or other property you might own, has an intrinsic monetary value attached to it and this product effectively allows you to liquidate some of that value and turn it into cash.

By signing up to an equity release scheme from one of the many different providers on the market, you will choose between a lifetime mortgage and a home reversion plan, both of which will be explained in more detail in the upcoming section.

Either way, you can unlock a percentage of the value that is tied up in your home and use the money for a purpose of your choosing.

The types of companies that offer plans of this nature are varied; they are regulated by the Financial Conduct Authority and must be registered in order to legally sell these services.

Reputable companies will also be signed up to the Equity Release Council (ECR) which is the industry body representing the whole sector.

What Types Of Equity Release Are There?

The schemes on offer come in two types as mentioned above. We recommend that you carefully read through the forthcoming details of each before deciding which best matches your preferences and requirements.

Lifetime Mortgage

Much life a traditional mortgage that you get when buying a property, a lifetime mortgage is a loan that borrows against the value of your home. Interest is charged much like any other loan, and this is typically added to the overall repayment amount (although you can opt to pay the interest in monthly instalments).

When the property comes to be sold, either upon your death or through choice, the mortgage and any accrued interest is paid off, with the remaining sum going to your beneficiaries.

You will need to be at least 55 years of age to get a lifetime mortgage; if there is more than one person involved, this applies to all parties.

The amount you can borrow will depend on factors such as the value of your property and how old you are when you apply. It is possible to borrow as much as 50% of the market value of your home, although typically it will be more like 20% to 25%.

There are three variations of a lifetime mortgage which are as follows:

  1. A roll-up mortgage: the equity released is paid to you either in one go or in regular instalments and the interest is added to the overall loan amount. Both the original sum and the interest have to be repaid upon the sale of your home.
  2. A fixed repayment lifetime mortgage: the equity is released and paid to you as above, only this time the amount to be repaid is agreed in advance by you and the lender. It will be higher than the sum raised through the initial release and is once again repaid when your home is sold.
  3. An interest only mortgage: equity is released in the same way as in the other two instances, but this time you pay back the interest on a monthly basis rather than let it get added to the overall value of the loan.

You may be asking yourself what the advantages and disadvantages are of each type. Well, we’ve already thought of that and put together a little list for you:

  • One of the major pitfalls of a roll-up mortgage is the effect of compound interest. When this comes into play, you might find that the total amount to be repaid is double or even triple that which you released in the first place.
  • The fixed repayment option allows you to know exactly how much will be owed at the time the property is sold, meaning you do not have to pay any attention to the effect of compounding.
  • A downside of the fixed repayment option is that you might pay a much higher effective rate of interest if you die earlier than expected because you have already agreed how much is due to be repaid. Conversely, you might benefit if you live longer than the lender expects.
  • If you pay off the interest as you go, then upon selling the property, only the original amount of equity released will need to be repaid. This avoids the drawbacks associated with compounding.
  • Paying the interest as you go will mean that you have to manage your money to ensure that you can afford these payments. A potential problem if you intend to use equity release as a means of income is that interest payments will only serve to reduce the amount you receive.

As with any type of credit, it is always wise to compare every viable option out there to ensure that you get the best deal. There are, however, some things that you should look out for:

  1. A no negative equity guarantee: this is a vital component of any equity release product; it means that the amount required to be repaid will never be higher than the value of the property upon its sale. Every provider that is signed up to the Equity Release Council must provide one, but there are some less trustworthy companies out there so if this it not in the contract, walk away.
  2. A portable deal: you might find that you live with a lifetime mortgage for quite a number of years and if you think that you might want to move house in this time, you should make sure that you sign up to a scheme that is portable. This means that the loan can be transferred to your new property instead of having to be paid off.
  3. Type of interest: if you opt for an interest only mortgage, you will want to know whether the rates are fixed, capped or variable. If interest rates rise, your repayments might become unmanageable.
  4. Converting between types: some companies will give you the option to convert one type of lifetime mortgage to another. This will almost certainly be to switch between interest only and one of the other two options. This gives you the option to pay off the interest while you are still working, for example, and then switch when you retire (helping you to avoid some of the effects of compounding).

Home Reversion

The second type of equity release comes in the form of a home reversion. What this means is that you sell a part, or all, of your home in return for a cash lump sum or a regular income. You are allowed to remain living in the property, either without paying any rent or paying a fairly tiny amount thanks to a legal document called a lifetime lease.

The major downside of home reversion is that you will not be paid the market rate for the part of your property that you sell. Instead, you will get a lower sum, often significantly so. How this works is that you might receive 25% of the market value of the property, but have to hand over 75% of the equity contained within it.

The percentage of the value of your home that you will have to surrender depends on how much money you wish to receive and how old you are. How much you get is related to how old you are and how long the purchasing company expects you to live. Typically, the younger you are, the more you’ll have to give away in percentage terms relative to what you receive.

Home reversion plans are generally worse value for money in the long term than lifetime mortgages. People who might want to consider this option include those who want the largest possible lump sum or those with little need or desire to leave the property to beneficiaries when they die.

The minimum age requirement for a home reversion plan is usually 65, but the older you are, the better deal you will be offered.

What Is The Process Of Equity Release?

When you first decide to investigate equity release, you will need to speak with an independent adviser who can guide you through the process.

They will look at your financial situation and work out whether or not equity release is a suitable product for you. If it is, they will compare the available deals and discuss the costs and implications of taking out such a product. They will also provide you with a Key Facts Illustration with all of the details.

Assuming you are happy with the recommendations being put forward, your adviser will help you to fill out an application form and send it to your chosen provider.

The provider will arrange for a surveyor to come and value the property and you will then receive an offer letter telling you how much you can release. Your adviser will walk you through everything in this letter to ensure that you are fully aware of all the features and risks.

If you are happy to proceed then you will have to sign to say that you accept the offer being made. After some checks to ensure your legal ownership of the property, the money will be released to you.

How Long Does It Take?

From the time that you first contact a financial adviser to get details of the schemes available, you can expect to wait between 8 and 12 weeks before you receive either your lump sum or your first regular income payment.

Of course, this reflects a deal that is free from any major complications and is based on the swift signing and sending of documents. If you choose to think for a while, any time spent doing so needs to be added to the above estimate.

What Are The Costs Involved?

The cost of an equity release plan is not fixed and will vary depending on a number of things. A rough guide for most circumstances is between £1,200 and £1,500 and this is made up of the arrangement fees paid to the provider, the legal fees paid to your adviser/solicitor, the cost of valuation, and the cost to you of ensuring the property is fully covered by building insurance (normally a condition of lending).

Equity Release FAQs

There is an almost endless list of potential questions that might be asked with regards to equity release schemes. While we will do our very best to cover as many as possible, we recommend that you speak to an independent financial adviser to ensure that you fully understand the implications before signing any contract.

Can I Release Equity If I Have An Outstanding Mortgage?

If you are at an age where you would like to release some of the equity in your home, but you are still in the process of paying it off with a conventional mortgage, you could still be able to.

Most providers will insist that you use any cash received to first pay off the outstanding balance on your mortgage, but you will be free to do whatever you like with the remaining amount.

Bear in mind that your mortgage company may add early repayment charges if you go down this route, so find out what these are likely to be prior to arranging anything.

Can I Release Equity To Buy Another Property?

By and large, you are free to do whatever you like with the equity that you release from your home. If this means buying another property, you should not find yourself restricted by the scheme itself.

Depending on exactly what you want to achieve, however, you may find that it is difficult or impossible to buy that second property.

First of all, the size of the lump sum you receive will make a difference. If you are able to pay for the second property outright, you can go ahead and make the purchase. If, however, you need to get a mortgage to help pay for it, your age might prevent you from doing so. Many mortgage companies will flat out refuse a mortgage for people over a certain age, although if it is only a small mortgage with a short repayment term, it still might be possible.

If, on the other hand, you are looking to help your children to purchase their own home, you can use the equity released as a deposit or as part of the new breed of family mortgages.

Can I Release Equity From A Buy-to-Let Property?

If you own a property that you currently let out to a tenant (and either own it outright or are prepared to pay off the mortgage as discussed above), things get a little complicated. It might be possible, but there are almost certainly better ways than through an equity release scheme.

You could just sell the property which would release 100% of the value at market rate. The downside is that you would lose out on any increase in the value of the property and, of course, the rental income being generated.

Alternatively, thanks to this assumed income in the form of rent, you could be eligible for a buy-to-let mortgage although age restrictions might apply. You could take out a mortgage of £40,000 over 10 years, for example, and use the rental income to pay it back while spending the money on whatever you like.

What Are The Income Tax Implications?

The money that comes from releasing equity in your home is not subject to income tax regardless of whether you take it as a lump sum or in regular payments. What you do with the money afterwards – such as investing it, buying an annuity, or simply saving it (except in an ISA) – can lead to income tax being charged.

Can Equity Release Reduce Inheritance Tax?

Both types of equity release plan effectively reduce the size of your estate and thus can be used to mitigate inheritance tax that might be paid by your beneficiaries. At the time of writing, inheritance tax is 40% on the value of an estate over and above the £325,000 threshold.

So a property worth £325,001 or more will result in an inheritance tax bill needing to be paid.

If you release equity now, then upon your death, part or all of the proceeds of the sale of your home will go to the equity release company which leaves less of an estate to be inherited and will either reduce or avoid the tax burden.

What Effect Will Equity Release Have On My Benefits?

Depending on whether you are over or under the state pension age, you may be entitled to, and receiving, one or more types of government benefit. When you take equity from your property, either as a lump sum or regular income, you may find that your entitlement changes.

It is worth noting that this only applies to benefits that are means tested – it does not impact any benefit whose provision is not dependent on the claimant’s income or capital.

The question of how signing up for an equity release product will affect the types and amount of benefit you receive is not a straightforward one. There are multiple considerations to make and these should always be discussed by the person selling you the plan.

Here is a list of some of the main benefits that can be affected by your release of equity:

  • Pension Credit – this comes in two distinct parts: Guarantee Credit and Savings Credit. They are designed to ensure that the income received by a household reaches a minimum set amount.

    Equity taken as a lump sum only gets accounted for if it pushes an individual’s total capital beyond the £10,000 threshold. Beyond this point the amount you receive will fall as an income of £1 per £500 (or part thereof) above the minimum is assumed. Eventually your entitlement would cease as the assumed income would meet the government set minimum amount.

    If you take an income, the amount of pension credit you receive will also fall to reflect this.

  • Council Tax Benefit (CTB) – the amount you receive depends on either the amount of capital you have or the level of income you receive (or both).

    If you take your equity as a lump sum and it pushes the amount of capital you own to over £16,000 then your entitlement to CTB would stop (unless you receive Guaranteed Pension Credit in which case you still receive full entitlement).

    If, on the other hand, you draw the amount as a regular income, the amount of CTB you receive may be reduced (the level of which depends on the income received).

  • Free healthcare benefits – if you are over the pension age and do not meet certain income or capital thresholds, you are probably entitled to help with costs such as dental treatment and visual aids; these may or may not be withdrawn.
  • If you are below the state pension age and you release equity from your property, it may also impact your eligibility for things such as Council Tax Benefit and various healthcare benefits.

    In addition, should you be on Income-Based Jobseeker’s Allowance, Income Support, or Income-Based Employment and Support Allowance, releasing equity can impact how much you receive or if you do at all.

You should always ensure that you release equity in the way that leaves you best off overall. Take too much in a lump sum and your income may fall considerably due to the loss of key benefits. On the other hand, you may find that any equity released as an income is partly offset by the reduction of benefits.

Can I Repay The Loan Early?

You should think of equity release as a long term plan which is only completed upon your death. While it is possible to repay a lifetime mortgage early, you could find that the redemption charges are quite severe.

If you took out a home reversion plan, the only way to get out of it is to sell the property. Given the large steaks often taken by the company, you will probably find it difficult to buy another property with the slice you are left with.

Can I Release Equity In A Property Abroad?

While the vast majority of companies will only allow you to release the equity in a UK property, there are a small, but growing, number of companies that deal specifically with overseas properties.

We cannot recommend any specific companies and we strongly advise you to look in great detail at any that you might come across. Do your due diligence before entering into any agreement.

What If I Have Bad Credit?

Because you have an asset in the form of property, getting a lifetime mortgage should not be an issue even with a poor credit rating. Unlike unsecured loans and credit cards, the lender has the safety in knowing that whatever happens, there is equity built up in your home to repay the debt.

And if you opt for a home reversion plan, it is not a form of credit per se, so your personal financial circumstances will not come into play.

How Is My Property Valued?

To calculate the amount of money that can be released from your home, the company must get a valuation from a chartered surveyor. This valuation must be independent so as to be fair to both parties.

If you believe that the valuation being proposed is too low, you can try and get a second opinion from your own independent surveyor, or you can pull out of the deal altogether.

Can I Move House?

With a lifetime mortgage product, assuming you have ensured that the contract contains mention of portability, you should be able to move home and keep the same deal.

If you opt for a home reversion plan, you will only be able to move house if you still hold a sufficient share in the property to finance a purchase – this is unlikely to be a realistic choice for many.

What If The Property Is In Joint Ownership?

If you own your home with a partner, the rules are fairly straightforward. First of all, you both need to meet the age requirements set out above (55 or over for a lifetime mortgage and 65 or over for home reversion) in order to qualify.

Next, if both of your names are on the contract, then if one of you dies, the other can remain living in the property until they also die or go into care.

What Is A Lifetime Drawdown Mortgage?

A drawdown mortgage sits somewhere between taking a lump sum and arranging an ongoing monthly income. Essentially the lender provides a cash reserve facility which means that you can withdraw smaller cash sums as and when you need them.

The biggest benefit is that you only pay the interest on the money that has been withdrawn and not on the total amount available to you so you face less compounding over time. There are downsides in that this facility may only last a fixed number of years or it may be withdrawn if the lender chooses to do so.

Do I Need To Give Power Of Attorney To Someone?

While it is rarely a condition that the person releasing equity has power of attorney arranged, it can be a good idea to do so. If you have an accident or fall ill and are unable to handle your own affairs then having a child or friend to deal with the arrangements is a sensible precaution to take.

If you have a lifetime mortgage, but did not take the full amount that was possible at the time, this person could then decide to release further equity in order to help pay for your care or other needs you might have.

Can I Release Equity From A Leasehold Property?

Most providers will accept leasehold properties for equity release, although the length of the lease will play a role. Generally, you should have a minimum of 30 years left on the lease from the date at which the arrangement ends – i.e. when you die.

So if they expect you to live for another 25 years, the lease might have to be 55 years or more for you to be able to go ahead with the deal. Depending on the cost, you can always extend the lease to a sufficient length beforehand.

What About Properties Of Non Standard Construction?

If you own a home that is not a standard brick or stone frame, or is a timber one built before 1950, you will find it much more difficult to find a suitable scheme.

Similarly, mobile homes and park homes are unlikely to be eligible and nor are Grade 1 listed properties (lower grades might be ok).

If you are unsure what type of construction your property is, look at the deeds and solicitor files from when you purchased the property. If you bought the property using a mortgage, you should also be able to find details on your mortgage documents.

Can The Money Be Used To Fund Care?

If you are looking to pay for care within your own home, equity release is certainly an option.

If, on the other hand, you need to fund care in a residential home, it is not a possibility. Instead, you will simply have to sell the property to fund your care.

What Are The Alternatives To Equity Release?

If you don’t want to opt for an equity release product as outline above, there are some other options available to you. These can allow you to get just as much of a lump sum (or even more), but there are other implications and considerations to make.

Remortgaging

Whether or not you have already paid off one mortgage on your property, you may be able to remortgage to effectively take some money out of your home to use how you like. Essentially, you will once again have to make monthly repayments and pay interest just like any other mortgage holder.

The chances of you securing a remortgage lessen as you get older. If you are 55 then you could be permitted one of quite some length, particularly if you still work. Remortgaging becomes less of an option for those over the age of 65 unless you can prove a significant income from other sources – although in which case you might be better off liquidising them instead.

Downsizing

By moving from your current home into something less valuable, you can pocket the difference in sale and purchase prices. The amount you get is only dependent on the disparity in value between the two properties.

While you do not have to pay a provider any interest or sell a proportion of your home at below market rate, there are other costs involved including stamp duty, estate agent fees, solicitor’s fees and those involved with actually moving.

The main downside is obviously leaving a place that you may have called home for a considerable length of time.

A benefit is that you can move into a property that is more suitable for your needs; this may be something on a single story or somewhere with fewer rooms to heat, clean and maintain.

Downsizing is not always a quick way to release equity though. Depending on the state of the market and the demand for properties like yours, it could take months or even longer for any sale to go through and there can be lots of stress involved if you find yourself in a chain.

Choosing The Right Option

With the array of options available to you, we highly recommend that you take your time making the final decision. Always seek independent advice, even if a deal seems like a good one on first impressions, and don’t be afraid to ask any and all questions that you might have during the process.

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Should I Get A Pension Or A Mortgage https://www.financenet.org/save-for-pension-or-mortgage/ Mon, 12 Jan 2015 11:23:56 +0000 http://www.financenet.org/?p=1601 pension or mortgage

As a young person, unless you have progressed to the higher pay echelons quickly, you will have a limited amount of money left over each month after paying the typical expenses such as rent, food, utilities and travel.

Despite this, you are being given messages about the importance of both getting on the property ladder, and of saving into a pension. So just what is the best choice for a young person?

If this were a straightforward question to answer then this article would end right about now with a nice succinct statement, but there are a number of factors to consider before you decide the balance between saving for a deposit and saving for your retirement.

The Arguments For Getting A Mortgage Early

Buying a house is likely to be the single biggest purchase that you ever make and for many it is one of their main goals in life. Home ownership is seen as something that will typically pay off in the long term and that by taking this step, you are setting yourself up for a more comfortable retirement. But is this true? Let’s have a look at some of the main benefits of getting on the ladder sooner rather than later.

Lower Deposits Required

You may be thinking that an increase in house prices is great because it makes you richer on paper, but this is only true if you were to sell the property and downsize to release some of the equity that has built up.

Instead, one reason that changes in house prices are important is because in the medium term, they will almost certainly rise (see the graph of average UK house prices above) which means that the longer it takes you to save for a deposit, the larger it is going to have to be. In other words, putting all of your spare cash aside for a deposit will allow you to buy a home sooner (sounds obvious doesn’t it?) Or alternatively, if you take longer to save up a deposit, you may have to settle for something a bit smaller, or a property that is not in your ideal location.

Lower Total Mortgage Amount

Another reason why getting a mortgage as soon as you can is good for your long term finances is that the total size of the mortgage you have to get is likely to be smaller. If you wait 5 years before buying a home, the average price of a property might have risen by 20% – 40% or more (they can also go down of course).

Therefore, if you manage to buy sooner rather than later, a smaller overall mortgage will mean that your monthly repayments will be lower. With this being the case, you will have a larger amount of disposable income and so you can then put more money into a pension at this point.

For example, a £200,000 mortgage over 25 years with an interest rate of 4% would result in monthly repayments of £1,056 and a total repayment of £316,702.

Wait a year and the same property might require a mortgage of £210,000 and with the same term and interest, it gives monthly repayments of £1,108 and a total of £332,537.

That’s £52 a month difference which could go into a pension. It totals £15,835 over the term of the mortgage (£10,000 of that is the rise in the price of the property; the remaining £5,835 is the extra interest you end up paying).

Alternatively, a smaller total mortgage will allow you to choose a shorter repayment period which will result in lower overall repayments over the full term. The less you pay in total for your mortgage, the more you will have to put into a pension.

Let’s say that you can afford monthly repayments of £800. If you require a mortgage of £150,000 at 4% then you can have a repayment period of 25 years and the total bill comes to £237,527.

If you have to wait a couple of years because you are saving into a pension too, then the size of your mortgage could be £165,000 and at the same interest rate, this requires a 29 year term and results in a total repayment of £279,046.

So the delay in making the purchase not only led to a house price rise, but the resulting impact on the length of mortgage means that your total interest repayment is £26,519 higher too.

And finally, having a smaller mortgage with the same size deposit will mean that your loan-to-value (LTV) will be lower too. In other words, the percentage of the value of the property that is paid for by the mortgage is lower. The LTV plays a role in the interest rates that you will get offered by lenders, and so saving all of your money into a deposit will mean that your LTV is better and you will get better interests rates.

To illustrate the impact that interest rates can have on overall repayments, let’s take a mortgage of £200,000 over a period of 30 years and assume that the two different rates on offer are 3.5% and 4%. At the lower rate, you will repay £300,374 but, at just 0.5% more, this becomes £316,702 – an increase of £16,328.

So as you can see, by saving hard and getting on the property ladder sooner, you can enjoy a smaller total mortgage (assuming house prices rise), a shorter mortgage term and a lower rate of interest. Put all of these things together and the savings you make are considerable.

Rental Prices Tend To Be Higher Than Mortgage Repayments

For a large number of people, the amount of money that they would have to pay in rent surpasses the likely mortgage repayments they would face for a similar property. So by managing to buy a home, you can take the money that you save on rent and put it into a pension at this later date.

Another consideration is that, assuming a constant interest rate, your mortgage repayments will not increase. This is in stark contrast to rents which are likely to rise – you are, in effect, at the mercy of the rental market and the whim of your landlord.

Home Ownership Upon Retirement

Let’s take the extreme example where you never put any money away for a deposit, but instead take it all and invest it in a pension. You may end up with a larger pension pot come your retirement (although this is not guaranteed), but you will not own a home.

This will leave you having to pay rent which will eat away at everything that you’ve managed to squirrel away over time. Or, you may find that the level of income from your pension is not enough to fund a property of a size to which you are accustomed.

Conversely, owning your home outright at the point of retirement will mean that all income received from your pension and any other savings you have can be spent on other things or kept aside for a rainy day.

The Arguments For Saving Into A Pension

Once all is said and done, the fact of the matter is that come your retirement, you will have to live off the amount of money that you have accrued in your pension (plus the state pension if you qualify for it) and any other savings you have at this point.

Therefore, it is very important that you put money into a pension at some point during your life so that when you come to cash it out, it is enough for you to live off. But this article aims to answer the question of whether it is better to save early or to try and buy property as soon as possible.

So let’s have a look at some of the reasons why saving some money into a pension early might be a good idea.

The Effects Of Compound Growth

When you put money into a pension, it doesn’t just sit there waiting for you to use it when you retire. Instead, in a good pension fund, it will grow year on year for a period of 40 years or more (depending on when you start saving and at what age you intend to retire).

A relatively modest rate of growth can take the money that you are saving and turn it into something much much larger.

Let’s assume that you were to put a lump sum of £3,000 into a pension and that the annual rate of growth was, on average, 3%. After 40 years, your initial savings would be worth £9,786.11 which is more than 200% extra for you to utilise in your retirement. Here’s a graph of the total pension pot over this period:

Similarly, if you were to save £200 a month into a pension over 40 years, then you might expect to have built up a £144,000 pot, but if you were to compound the interest monthly then you’ll actually find yourself with £278,512.39 – almost double what you put in.

So by getting some money into a pension early, you are able to benefit most from the effects of compound interest. This becomes even more evident when you consider the amount you’d get back from that same £3,000 initial investment if you delayed it by 5 or 10 years. If the money is invested for 35 years instead of 40, you will get £1344.52 less in interest and if you only have the money in a pension for 30 years then you will receive £2504.32 less.

You see, the biggest absolute increases in the total pot occur in the latter years; that’s just how compound interest works. So the first year’s interest, based again on our £3,000 lump sum and 3% growth, is £90 while the 40th year’s interest is £285.03.

Employer Contributions

Many people in work will now find that they are enrolled in a pension scheme automatically by their employer and this has some real benefits.

By law, your employer will have to contribute to your pension pot although many companies have been offering such deals for a long time. It is not uncommon for an employer to match any amount that the employee pays into a pension. This is, essentially, free money as it neither affects your salary or the rate of tax you pay.

If you pay £150,000 into a workplace pension over the course of your career and your employer matches this, then you will end up with £300,000 in total. Sounds good doesn’t it?

Government Tax Relief

The government wants people to save into a pension and they incentivise this by offering tax relief on the money that you put in.

You can claim tax relief that is worth up to 100% of your annual earnings with the maximum being £40,000. Thus, if you have additional savings or receive some other lump sum that you want to invest, don’t put it all straight into your pension; stagger your payments across multiple tax years so that you do not cross this threshold, or you will lose the tax relief on any amount over the limit.

Your pension provider will automatically claim the basic rate of 20% tax relief for you when you save – this is known as “relief at source” – but if you are a higher rate taxpayer, then you can reclaim the additional 20% (or more if you are in the highest band) through your self assessment.

Tax relief is not an additional amount that is added to your own contributions, but rather an amount that you get back from them. In other words, a 20% tax relief on a saving of £10,000 means that you effectively get £2,000 back because the government pays it instead and you only pay £8,000. This is in contrast to the government adding 20% extra, which on £8,000 would only amount to £9,600 (i.e. you actually get 25% extra on top of what you put into the pot).

A 40% taxpayer would only have to contribute £6,000 to get £10,000 in total, while any higher rates of tax than this will mean even higher tax relief (within the above limits).

Put It All Together

If you combine the effects of employer contributions and tax relief and apply compound interest to it, then you’ll soon see how a relatively modest personal contribution can quickly add up to a significant pension pot over time.

This, then, is why putting some money away into a pension as soon as you can is a sensible approach to take to funding your retirement.

So What Should I Do? Save To Purchase Property Or Save Into A Pension

As stated earlier, this question is not one to which there is a straightforward answer. You have to weigh up a lot of factors before you can come to any solid conclusions; these include:

  • The amount of rent you currently pay versus the likely amount you’d pay in mortgage repayments – any difference can be put into a pension after all.
  • The expected rate of house price inflation over the coming 5 to 10 years – if this is relatively low (or even negative) then the argument for saving for a deposit becomes weaker, but if it is high then you should probably do all you can to save for a deposit at the expense of saving into a pension.
  • The expected increase in rental prices – if this is significant then you will probably be better off getting a mortgage sooner rather than later.
  • The expected growth rate of your pension – a government report in 2012 suggested that medium term rates of return will be lower than they were previously.
  • The difference in mortgage interest rates for varying loan-to-value percentages – if there are particularly attractive (low) interest rates for those with a bigger deposit relative to their mortgage, then saving for this bigger deposit is a generally smart move. If there is little difference then you can probably aim for a smaller deposit.

Right now, it is the opinion of this website, that for a young person who eventually wants to buy a home of their own, any money that they can put aside should go towards a deposit rather than into a pension. We say this primarily because of current and expected house price inflation and the historically low interest rates that are leading to some very attractive fixed rate mortgage deals.

This recommendation may change in the future based on how these and other things change.

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Can I Cash In My Pension? https://www.financenet.org/can-i-cash-in-my-pension/ Thu, 20 Mar 2014 16:42:26 +0000 http://www.financenet.org/?p=889 can I cash in my pension?

This is a very in-depth look at the ways that you might be able to cash in some or all of your pension, but it is quite a technical subject which is why we always recommend that you seek independent, expert advice before doing anything. There are lots of companies that might offer help, but, if you are at least 55 years of age, we recommend that you click here to contact Age Partnership (link opens in a new window) as they are one of the leading firms who can walk you through everything and answer any questions you might have after reading this article.

As we all know, the purpose of a pension is to provide for us in later life once we’ve retired. In order to entice people to put money aside for their future, pension schemes come with many benefits. The downside of this is that they’re also highly restrictive in terms of when and how they’ll allow you to access the money you’ve paid in.

The tax relief that comes with paying into a pension (20% if you pay the basic rate, 30% in you pay higher rate and 50% if you’re in the highest band) makes it a very efficient way of saving. In fact, by the time you come to draw on it, as much as half your pension could be made of tax relief. In return for this help, part of the deal in taking a pension is that this money has to be used to support you in later life rather than for any other purpose.

You might be asking yourself “can I cash in my pension?” but, aside from in a few special circumstances, you will not be able to receive any of your savings until you hit at least 55 (though normally the terms of your plan will specify a higher age, such as 60 or 65) at which point you’ll be able to take as much as 25% of the funds as a tax free lump sum payment. The rest you’ll use to provide yourself with a regular income for the rest of your life, usually by buying an annuity.

Though by far the most common route, this is not the only way of taking your pension. Depending on your circumstances there may be other options available to you. In this guide we’ll look at;

Taking a Pension Before 55

Alternative Ways of Taking Your Pension After 55

cashing in a pension before 55

Taking Your Pension Before 55

Whilst the vast majority of people need to wait until 55 to access their pension funds, there are a limited number of exceptional circumstances where you may be able to start taking payment from your pension plan early;

Ill Health

If you are incapacitated due to ill health you may be able to draw your pension early, but only in certain cases.

Qualifying for Early Payment

As far as HMRC are concerned, to qualify for early payment you must;

  • Have left your job due to the condition(s) in question.
  • Be unable to perform the same kind of work due to the illness.
  • Be able to provide confirmation from a doctor that this will remain the case until you reach pension age.

However, as well as fulfilling these criteria, you will also have to satisfy whatever extra terms your pension plan provider might have. There is a good chance these will be more detailed and stringent, so you should contact your administrator if you believe you may be entitled to withdraw money on grounds of ill health.

If you do qualify to take your pension early you will normally have the same options as to how you can take payment as you would if were simply retiring, with as much as 25% available as a tax free lump sum. Again, this will depend on your pension provider’s particular policies. Tax will be paid on the money you receive as income in the same manner as if you’d retired.

Should you recover from your condition and find you’re able to work again before your retirement age, your pension provider may reduce the level of your payments or stop them altogether. This is at their discretion, so contact them for details.

Serious Ill Health Lump Sums

In extreme cases you may be able to receive your entire pension as a single lump sum, depending on the rules of your scheme. Such payments are known as a ‘serious ill health lump sum’, and can only be paid in cases where;

  • A doctor has confirmed that you’re expected to live no longer than a year.
  • You’ve not started receiving your pension.
  • You’ve not used up your ‘life time allowance’. (This is the amount you can pay into pensions before you stop benefitting from tax relief and, currently stands at £1.25 million.)

Lump sums received under these rules are completely tax free as long as you’re under 75. If you’re over 75 you’ll be taxed 55% on the entire amount.

You may still be able to receive a serious ill health lump sum if you’ve used up your lifetime allowance, however, everything in excess of the limit will be taxed at 55%. (As stated above, if you’re older than 75 this rate will be applied to the whole amount, regardless of whether you’re under or over the lifetime amount.)

what is the protected pensions age

Protected Pension Age

Though you now need to be 55 to be able to draw your pension, this wasn’t always the case. If you had a pension before the 6th of April 2006, and if on the 5th April your pension allowed you to take your payments before 55 without having to gain the consent of an employer or trustees, you may still be able to receive payments before 55 now.

In such cases you may qualify for what’s known as a ‘protected pension age’. This will ensure you can withdraw your pension at the same age you would’ve been able to as per your pension arrangements on the 5th of April 2006, even though the rules have since changed.

Protected Pension Age Criteria

There are extra criteria that will determine whether this is the case depending on the type of scheme you were on at the time:

Personal Pension or Retirement Annuity Contract (RAC): The job you were employed in must be one recognised by HMRC as needing to pay a pension before 50 and you must have had the right to withdraw your pension before age 50 (as opposed to 55) on 5th April 2006. You should ask your scheme administrator if this is the case.

Company or Public Sector Schemes: You must have had the right to withdraw before 55 on the 5th of April 2006 and, in addition, this must have been set out in the rules of scheme on or before the 10th of December 2003.

Transfers

If you do have a protected pension age, moving your pension will mean you lose the right to withdraw before 55. The only way you can transfer your pension and maintain your protected pension age is by transferring all the funds in the scheme in question to the new scheme at the same that another member of the old scheme also transfers their rights to the new scheme. Even then, you can only do this as long as you haven’t been a member of the new scheme for more than a year.

Payment

If you want to use protected pension age rules to take your pension before the age of 55 you must start to take payment from all pots under the protected scheme. You cannot leave part of the funds to be paid later.

Employment

If you start taking your pension before 55, unless you’re on a personal pension or RAC, it can potentially have an affect on your employability.

If your protected pension age is under 50 there are usually no restrictions. You can normally take your pension and stay working with the same employer if you so wish. However, if you own or control the company who sponsor your pension, you need to leave before you can take it.

If your protected pension age is between 50 and 54, you have to leave your employer in order to take the pension. You can then immediately start working for another company as long as they are not linked to your old employer or your pension scheme. If you want to rejoin your old employer you must wait at least six months. This rule doesn’t apply if you are coming back into a completely different job. In such cases you only need to wait one month before you can return.

pension liberation fraud

Pension Liberation Fraud

Aside from the examples given above, once you’ve invested in a pension, though you can move it into a different pot, you cannot get the money out again until you reach the commencement age. Whilst this helps to ensure that you don’t chip away at the fund, it can also mean that, frustratingly, if you fall on hard times, you’ll be unable to use make use of the money.

Unfortunately, there are some dubious schemes out there that will look to capitalise on this frustration. Various firms will claim to be able to help you get your hands on your pension pot before time by finding ways around the rules. Normally, they will revolve around having you transfer the pension to them, then allowing you to ‘borrow’ from them as they loan a portion of the money back to you. The rest will usually be put into hard to track overseas investments over which you’ll have little or no control.

The combination of administration fees and lack of tax rationale inherent in such schemes mean the pension holder is left much worse off, often to the tune of hundreds of thousands of pounds. The The Pensions Regulator and HMRC both warn under no uncertain terms that such schemes should be avoided.

The Dangers

Methods of taking money from a pension early are usually dubbed as ‘Pension Liberation Operations’ and are essentially illegal as, in contrivance with pension regulations they (claim) to allow access to any percentage of a pension fund as a lump sum at any age. (As stated above the most you can receive as a lump sum is 25% – with the exception of trivial commutations which we’ll look at down the article – and, by law, 55 is the earliest you can receive any money.)

By stepping outside of the law you’ll be putting yourself at risk, not just from the illegitimate company you may be dealing with, but also from the authorities. If caught, you could be hit by unauthorised payment charges from HMRC which could equate to as much of 70% of the monies you’ve received.

Even if you managed to evade such penalties, those running the scheme will charge you an extortionately high commission, typically 20% of the amount transferred. Between these fees and the potential penalty charges, by attempting to liberate your pension as cash, you could lose the majority of your savings straight away. Needless to say, even if you do end up with some cash, you’ll having nothing left in the pot for later life.

On top of this, lump sums are often paid out as loans, the terms of which are extremely punitive. There will generally be a high rate of interest which will further erode your savings. The rest of the funds will be left in the hands of the company and they will usually invest them at their own discretion, leaving you with no control of your money and placing your savings at further risk.

Normally, those running such schemes attract customers by cold calling, mass texts, spam mail or via a website. If you are approached by anyone offering to give you early access to your pension, look out for the following danger signs.

  • Contact encouraging you to use such a scheme coming out of the blue.
  • This should be even more of a warning sign if you’ve had credit problems in the past as schemes often target those facing bankruptcy or other credit problems. This is a hallmark of schemes that ‘’liberate’ the pension as a loan.
  • The use of overseas investments. These are used to make payments harder to trace if the organisation is shut down.
  • The offer of a cash bonus for immediate transfer. This is generally not an incentive offered by aboveboard pension schemes.
  • Promising to use ‘legal loopholes’. Whatever ‘loophole’ they believe they may have found to transfer you the money, if it is clear to HMRC that you’re liberating your pension, you will be hit with heavy penalty taxes.
  • Requesting detailed personal information.
  • Using a courier to send documents for you to sign. This tactic can increase pressure on you to rush into an agreement.
  • No mention of the tax implications of such payments.
  • Lack of proper documentation to accompany the transfer. Unfortunately, those running the scheme will look to leave you in the dark as much as possible.
  • Insistence that the pension be transferred quickly and frequent pressure to rush decisions. The scheme could be shut down at any moment and they will want to get hold of your pension pot before they are caught.
  • As a general rule you must remember that only in a very limited set of circumstances can you legitimately access pension funds before you’re 55. Any scheme which offers to give you access to the money before this time will pose a substantial threat to your savings.

To avoid becoming a victim of such schemes, look out for the above signs and;

  • Refuse to give personal/financial information to cold callers.
  • Conduct thorough research into the background of any company trying to persuade you to transfer your pension.
  • Demand a statement showing how your pension will be paid after retirement and information on who will be managing your money until that time.
  • Seek independent advice before making a pension transfer.
  • Never rush into any decision regarding your pension.

If you think that you may have been the targeted by the administrator of a pension liberation fraud operation, you should contact Action Fraud either through their website or by calling 0300 123 2040.

cashing in a pension over the age of 55

Alternative Ways of Taking Your Pension After 55

Once you’ve reached 55, depending on the terms of your scheme, you may be able to start taking money from the fund. As discussed before, once it’s available most people take a portion of their savings as a tax free lump sum and then sell the remaining pension pot to an insurance company in return for a lifelong income in the form of an annuity. Whilst this is the most common course of action, there are other ways of receiving the money…

Taking a Pension Early Using Pension Unlocking

Not to be confused with the shady world of pension liberation, pension unlocking only applies to those over the age of 55 and is a legitimate way to make use of your pension before you’ve retired.

Whatever the commencement age of your current pension plan, as long as you’re over 55, you can unlock the funds earlier by moving them into a personal plan and then, with help of an unlocking specialist, cashing in your tax free lump sum, leaving the rest to either buy an annuity immediately or at a deferred date in the future.

Whilst this may sound like an attractive prospect, just as with pension liberation, taking your money early by unlocking it can leave you much worse off in the long run and is only suitable for a limited number of people.

If you are unsure what the best choice is when it comes to getting the most from your pension, we highly recommend that you contact Age Partnership (you must be at least 55 years of age) who can talk you through the options available to you.

The Downsides of Unlocking

For one thing, taking the lump sum will leave you with a reduced fund from which to draw from once you do actually retire. This could seriously affect your quality of life in the years to come. If you start taking income as well as the lump sum (assuming you don’t use income drawdown – more on which later) the impact will be double as not only will the funds available have to be spread over a greater amount of time, by taking early payment, you also miss out on the opportunity to keep your pension growing.

Secondly, even though the lump sum is tax free, taking your pension early is actually very inefficient in tax terms. This is because the regular payments you receive are counted as income on top of your wages and taxed accordingly. If you waited until you retired to receive them you would probably be in a lower tax category than you were as a worker. Conversely, if you take them early you could even be pushed into a higher tax bracket, further diminishing the return you’ll get out of your savings. By the same token, this increased income could also eliminate your ability to claim certain state benefits to which you might otherwise be entitled. On top of all this you will usually have to pay an advisor a fee for unlocking your pension.

Aside from eroding your savings, depending on your particular pension type and the arrangement you have in place with your plan provider, their maybe other consequences on unlocking your pension;

Penalties for Unlocking

There are a number of benefits that might be included as part of your pension package. By transferring your fund away to have it unlocked, you may also be giving up some of the following;

  • Your Terminal Bonus: In the case of pension funds that are linked to investments, the profits earned are usually added in a series of bonuses. The terminal, or final, bonus ensures who have received all of you share of the profits your money has earned before you leave the plan. If you transfer out so as to unlock your pension, you may sacrifice your final bonus.
  • Your Guaranteed Benefits: Many occupational schemes, especially ‘final salary’ pensions, come with a number of very attractive guarantees to assure your financial well being. The level of pay you’ll receive may be assured by your employer, and they may also take care of inflation proofing the fund for you. They will also usually be backed by the Pension Protection Fund and could also offer your dependents benefits too. You may surrender some or all of these privileges by unlocking.
  • Your Annuity Rates: Some personal pensions give access to guaranteed annuity rates once the plan has matured. These are often well in excess of the market level. Unlocking may mean you have to settle for a less attractive rate, and therefore live off a lower income.
  • Your Protection from Creditors: Though an obvious asset, pensions are often protected from your creditors should you fall into debt or become bankrupt. However, if you unlock your pension and realise its value as cash, you’ll lose this protection.

what is income drawdown?

Income Drawdown

Often used as an alternative to buying an annuity, with income drawdown you start taking a regular income from your pot whilst the bulk of the funds are invested and (assuming they perform well) continue to grow. Once you’re over 55 you’re able to move some or all of your pension into an income drawdown plan, regardless of the commencement age of your current plan. In this sense, like unlocking, income drawdown can allow you to get hold of your pension money earlier.

Income Drawdown Rules

Whether or not you’ll be able to use income drawdown to take money from your pension will depend on the policies of your provider, but normally you’ll have to have a minimum amount saved, generally in the region of £100,000.

There is a maximum amount that can be withdrawn using income drawdown. This is equivalent to the amount that could be acquired by the same person through a single life annuity based on Government Actuary Department rates. There is no minimum amount you have to take. Indeed, you don’t need to take anything.

The exception to this rule is if you use what is known as ‘flexible drawdown’. In this case there is no limit on how much you can withdraw, however, you must be able to show that you’re receiving pension income of at least £12,000 a year from other sources (previously £20,000 before March 27th 2014). These can include annuities, other pension schemes and state pension benefits.

Limiting Risk

Whether or not taking income this way will eat into your pension depends on how your investments perform and whether you adjust your income accordingly. Ideally, you should only withdraw from the returns your money yields. Normally, such plans are flexible enough for you to ensure that this is the case.

For example, you can designate from which of the investment vehicles you’re using that your income should actually be taken from. By only taking money from safe options, such as cash or government gilts, you can ensure any losses made in riskier areas, such as the stock market, aren’t crystallised as a payment, but are left in the fund and given a chance to recover.

So, whereas income drawdown lacks the guarantees of an annuity, it does allow for a larger degree of control and offers the potential to keep your savings growing. If you find poor returns are forcing you to eat into your capital, should you wish, you can always take your money out of the plan and simply buy an annuity.

Once again, the best way to be sure you are utilising your pension in the most effective manner is to seek independent advice. We suggest Age Partnership as our pension experts of choice (you must be 55 or over for them to be able to help).

does trivial commutation apply to me?

Trivial Commutation

As previously stated, once you’re able to access your cash, you can usually only take 25% of your savings as a tax free lump sum. However, if your pension is relatively small, thanks to what is known as ‘trivial commutation’, once you’ve reached 60 you can take your whole pension in one payment.

There are a number of factors which will determine if this option is available to you…

The Size of Your Pension

Whether or not you can obtain a cash lump sum will depend on the value of your pension. If it’s worth more than a set limit, you won’t be able to cash in the whole pot at once.

The rules governing how this limit is set have recently changed. Before April 2012 it was calculated by working out your pension rights as a percentage of the lifetime allowance (the amount of pension savings you can make before exceeding the threshold for tax relief). If your pension rights amounted to more than 1% of the lifetime allowance, you could not cash in.

However, these rules have now been changed and the limit is set at a fixed level each tax year (currently £30,000 for commutation periods beginning on or after 27th March 2014). Whilst this simplifies things slightly, working out whether you’re below the limit is still fairly complex, depending on the type of pension in question.

If you have more than one pension plan then their combined value must be below £30,000. Otherwise, the most you can take as a cash payout is 25% of their total value. This applies even if one, or indeed all, your pension plans are worth less than £30,000 individually.

Working Out the Value of Your Pension

Defined Benefit Pensions

  • If you are on a defined benefit scheme (often referred to as a final salary pension) which has yet to be paid, how much it is worth will depend on how long you worked for the firm in question and what fraction of your final salary you accrued each year. The employer or the scheme provider should be able to tell you exactly how much your pension would be worth in cash terms.
  • If you’ve already started to receive such a pension, whether or not it exceeds the limit will be calculated by taking the amount you receive year on year and multiplying it by twenty. If you already took a lump sum, this will also be added on to the total.

Defined Contribution Pensions

  • If you have a private pension consisting of your own contributions then the provider will be able to tell you its current market value and whether or not this exceeds the limit. (Your statements will also tell you its current market value, but its best to get a specific commutation figure from the provider.)
  • Again, if you’ve already started to receive payments, the value of your pension (for purposes of testing against the limit) will be calculated by multiplying your yearly income by twenty.

Pensions in Payment Before 2006

If you started receiving your pension prior to April 2006 calculating its value is a little more complicated. You may need to seek advice to get an accurate idea of whether you’re under the limit.

Exceptions

Under new rules you can receive a cash payout even if you do not meet the criteria outlined above. As long as you’re over 60, you can receive as much as £10,000 in a lump sum from an occupational pension. However, taking such a payment will cancel your right to benefits from the scheme. Furthermore, you can not have transferred out of the scheme for at least three years previous. If you are a controlling director of the company that sponsors the pension, you cannot take such a payment.

Again, with a non-occupational pension (such as a SIPP, for instance) you can take a payment of up to £10,000 even if you do not meet all the triviality criteria. You still need to be over 60 and it will mean surrendering your rights to further benefits. You can take up to 3 of these smaller pensions out as cash regardless of whether they are occupational or non-occupational.

Tax Issues with Trivial Commutation

Unfortunately, it is very common for lump sums paid out under the triviality rules to be taxed incorrectly. This is because, if paid by an ex-employer, they will apply your old PAYE tax code to the payment, whereas if it’s paid by a pension provider they will have to use an emergency code.

In both cases there’s a strong chance you will be overcharged as neither of these codes will take account of unused tax allowances you may have built up or the tax you’ve already paid. Unfortunately, if you are overcharged reclaiming the money is no easy task.

Getting a refund will require a P45 form from the pension payer showing the amount you’ve been paid and the tax that’s been taken. In practice the payer may well be unaware that they have to do this, so you will need to insist that they fulfil this obligation.

Furthermore, as they are fairly unusual, many HMRC staff are not very well versed in dealing with in-year tax refunds, which can slow things down. To claim a refund during the tax year you need to get in touch with your tax office and request a P53 form on which you will have to give full details for your income for the year. You can then return this along with the P45 mentioned before.

If you are not sure that you’ve been overcharged and are not in urgent need of the money, or the tax year is near its close, you can wait to receive a tax refund from HMRC, who will review your tax situation and (hopefully) pay you the funds you’re due automatically.

Other Considerations

All or Nothing: If you opt to receive a trivial commutation from a pension plan, you have to take 100% of its value at once.

Benefits: If you receive state benefits which are means tested, receiving a lump sum could mean you are no longer able to claim. Your entitlement to pension credit may also be affected. If this would be an issue for you, it could be prudent to seek advice before taking a payout.

Time Limits for Multiple Payouts: If you have more than one pension that you’d like to receive in full as a trivial commutation, you need to take all the lump sum payments within 12 months of taking your first. Bear this in mind if multiple payouts are part of your retirement plans. Even though you have to take all payouts within 12 months of each other, it’s possible to spread them over separate tax years to avoid excessive charges. Remember that you can only cash in if the combined total you receive is below £30,000. If you exceed this amount you will be taxed on the whole amount at a penalty rate of 40%.

Tax Efficiency: If you take payment in the same tax year that you retire your total earnings will, in all likelihood, be higher than in later years, so you might find you’re better waiting before receiving the money as you’ll be in a lower tax band. By the same token, your personal allowance for tax goes up at 65 and again at 75, so if you are approaching either of these birthdays it could be worth waiting until the tax year in which you’ll become entitled to the higher allowance.

Other Types of Triviality Payment

Under triviality rules you can also take a payment of up to £18,000 when a pension scheme winds up. In the case of scheme winding up your age is no restriction to being able to take the payment.

If you take a payment from a scheme that has wound up on a non-voluntary basis it will not count towards your threshold when calculating whether or not you’re able to take triviality payments from any other schemes you might have.

If you are the beneficiary of the pension of someone who dies you can also receive up to £18,000 as a lump sum regardless of how old you are.

Related Articles

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How to find out if you have a PPI claim https://www.financenet.org/how-to-find-out-if-you-have-a-ppi-claim/ Thu, 20 Mar 2014 16:29:39 +0000 http://www.financenet.org/?p=443 am I owed PPI and other FAQs

Table of Contents

As the total compensation figure for mis-sold PPI cover tops £13 billion; millions of UK households are reaping the benefits of digging out their paperwork and making a claim.

What is PPI?

PPI is Payment Protection Insurance that was often sold alongside loans, credit cards, store cards, mortgages, and other credit agreements. PPI can also come under alternative names such as credit insurance, credit protection insurance, or loan repayment insurance. The purpose of this form of insurance was to cover you in the event of illness, disability, loss of employment, death, and other circumstances that would prevent you from being able to make your repayments.

How do I know if my PPI was mis-sold?

In broad terms, PPI was mis-sold to you if any of the following applies:

  • If you felt ‘pressured’ into agreeing to PPI
  • If it was not made clear that PPI was optional
  • If you were advised to take out PPI even though it wasn’t suitable for your personal circumstances
  • If you thought that agreeing to PPI was mandatory in order to secure credit, or that it would increase the chances of your application being approved
  • If key exclusions were not explained to you at the time, such as being self-employed or having a pre-existing medical condition
  • If your personal circumstances would have prevented you from being able to successfully make a claim on your PPI
  • If you were unaware that your agreement had PPI, or it was added without your knowledge
  • If it was not made clear that you would be liable for paying additional interest on any PPI premium applied to your credit amount
  • If it was not made clear that your PPI protection would end before you had paid off the credit agreement in full

There may be other scenarios where PPI was mis-sold. If you are in doubt, you can contact the Financial Ombudsman for a decision.


who can make a claim for mis-sold PPI?

Who can make a claim?

If you entered into any credit agreement before April 2012 where PPI was included, the chances are that you are eligible to make a claim. Here are some of the common FAQs that might be applicable to you.

Can I claim PPI if I don’t have any paperwork? Or I can’t remember the name of the company?

Yes. It doesn’t matter if you can’t find any documentation or can’t remember the name of all your previous creditors. You can check your credit record through a credit referencing agency as this will give you a list of names. Each company should have a record of whether or not you took out PPI with them, so whilst any documentation you do have will make the process easier; it is not essential for making a successful claim.

Can I still make a claim if I’m not sure what I was told at the time?

Yes. If you can’t remember what was said to you when you were sold PPI, it is still possible to make a claim. In these cases, if the PPI you bought wasn’t relevant to your personal circumstances i.e. you were retired but the insurance covers unemployment, your occupation fell under an exclusion, or you had a pre-existing medical condition which made you ineligible then you should be able to claim back PPI.

Can I claim against current credit agreements?

Yes. Provided that you entered this agreement before April 2012 and PPI was mis-sold, you can make a claim for any ongoing, existing credit.

Can I claim PPI if I live abroad?

Yes. You can make a claim regardless of where you currently live, provided your PPI was bought through a UK company.

Can I make a claim even if the company no longer exists or has been taken over?

Yes. You can still make a claim even if the company you originally bought your PPI from has since gone into administration, been dissolved or gone bust. The FSCS (Financial Services Compensation Scheme) is in place to protect consumers in exactly this situation, and you should still be able to get the full refund due to you.

You can make a claim even if the original finance provider has since been taken over by another company. In this situation, your claim would go to the new company.

Can I make a claim if I’ve been declared bankrupt or had an IVA?

Yes. You can make a PPI claim after your bankruptcy or IVA agreement has ended. However, you need to be aware that any refund could potentially be clawed back under the clause ‘unrealised asset’. The financial provider, particularly if it was a bank, may try to argue that they want to offset any amount against the sum you originally owed them. If you have a certificate of completion for your IVA, then this argument may be null and void but it’s very much a grey area of law at the present time.

There is no rule against making a PPI claim whilst you are bankrupt or within an IVA agreement, however, it is worth bearing in mind that any ‘windfall’ will be immediately seized to help pay off your existing creditors.

Can I claim PPI on behalf of a deceased relative?

Yes. You can claim back PPI on a policy taken out by a now deceased relative. However, each individual’s circumstances are different, and not all claims will be successful or directly benefit you. You will need proof of your relationship to the deceased as well as evidence of their passing, such as a death certificate in order to make a claim.

Is there a time limit?

No. There is no time limit on how far back you can make a claim. It is worth noting that banks and other finance companies are not required by law to keep records over 6 years old, so if your PPI was sold prior to that, then it may be more difficult and take longer to make a claim unless you have all the relevant paperwork.

Types of credit that you claim back PPI:

  • Secured loans
  • Personal (unsecured) loans
  • Mortgages
  • Credit cards
  • Store cards
  • Car finance
  • any other credit facility

Who cannot make a claim?

You won’t be able to make a claim if you have ever benefited from the PPI you bought, i.e. you were out of work for 3 months and your PPI covered your repayments for those 3 months.

If your PPI cover would have covered you and you could have successfully made a claim in the event of accident, illness or death; then you are less likely to obtain a refund unless you can prove it was mis-sold in a different way.

how long does a PPI claim take?

How Long Does A PPI Claim Take?

If you think that you are owed PPI and wish to make a claim then you’ll probably want to know how long it might take before your case is settled and you receive any money due.

One thing you should be aware of is that while private claims companies often say they can get your money back quicker than doing it yourself, there is no basis for this if you are organised and willing to do what is necessary for a quick resolution.

The only thing you have to ask yourself is whether or not you have the time to go chasing your lender and/or the ombudsman should you need to – a claims specialist can take care of this for you.

Stage 1 – Filing Your Claim With Your Lender

Time scale – up to 8 weeks

When you first contact your lender to file a formal claim for compensation, the amount of time taken for them to respond to your case does vary and while some companies move swiftly, others are known to prolong the process as much as they can.

Banks and other lenders are liable for the whole amount plus interest but some may try to avoid a portion of this by offering you a lower deal for a quick resolution. While you obviously want to proceed with your claim and any subsequent payment in a timely manner, don’t be lured into the trap of accepting a smaller offer of compensation than you are entitled to.

If, after 8 weeks, you still haven’t had a response from your lender (or your lender has refused your case) then you will have to contact the Financial Ombudsman Service (FOS).

Stage 2 – Going to the Ombudsman

Time scale – up to a year

If, for any reason, your lender is not willing to settle your case directly then you will have to approach the Ombudsman and have them resolve it based on the evidence provided by both parties (you and the lender).

Because of the sheer volume of new claims coming in from PPI and other financial products, the FOS has added a further 1000 staff but even so it can take a long time for them to reach their decision.

The length of time required to process your case depends on how complex it is and whether or not any further information is required and how long it takes to obtain it. In rare circumstances it can take as much as a year to reach a climax while other cases might be settled in just a few months.

While the FOS typically reviews case in the order they receive them, there are some special circumstances where a case may be prioritised. These include situations where:

  • the claimant would face significant financial hardship if any delay were to occur (e.g. the threat of repossession of the claimant’s property).
  • a delay might impact the claimant’s health or wellbeing or cause undue distress and inconvenience.
  • the claimant might experience a significant worsening of their financial position should the case not be resolved (e.g. a debt not being repaid until compensation is received).

One thing any claimant can do to ensure the fastest possible resolution to their case is to provide requested information as fast as possible – next day recorded delivery is recommended.

Stage 3 – Receiving The Compensation

Time scale – up to 8 weeks

Once your PPI compensation claim has been resolved and you are satisfied with the amount to be paid, you will usually receive either a cheque or direct BACS payment.

Some lenders may require you to confirm you are happy with the amount (assuming it didn’t go to the Ombudsman) but others will arrange for payment automatically unless you tell them otherwise.

While most lenders state that they will aim to pay the agreed amount with 28 days, there are many reports from members of the public stating delays of up to 8 weeks. These claimants were told that this is due to the number of claims being processed.

What This Means For You

If you haven’t yet made a claim for any PPI you believe was mis-sold, what you should take from this article is that the sooner you start the process the better. Because of the long time frames that can be involved, there is no reason to delay – get all of the relevant information together now and either speak to a PPI claims company or write to your lender and include copies of all the evidence you have gathered.

should I go it alone when reclaiming PPI?

Should I Go It Alone When Reclaiming PPI?

One question many individuals will naturally have is whether they should attempt to claim a policy with or without the help of a third-party accredited claims institution.

In such a situation, there are both pros and cons of attempting to file a claim individually and you must consider various options before undertaking what can prove to be a monumental task.

Claiming By Yourself

First, let us examine the potential benefits of filing a claim individually. The most obvious benefit is that there will be no added expense in regards to paying a claims company for providing their services. The fees incurred can often be quite substantial and, depending on the size of the claim, may very well leave the claimant little financial remuneration at the end of the process.

Should you choose to “go it alone”, you must ascertain the specifics of any dispute you may have. This may be quite clear should there be sufficient evidence that misselling has occurred. Such instances may include, but are not limited to, overpriced policies, an insufficient explanation upon purchase, the so-called “mandatory PPI” required for a specific loan or possessing a policy whose clauses prohibit the policyholder from using it.

Should these factors be obvious and should you have direct evidence, personally filing a claim is recommended because the processes involved are relatively straightforward. Simply stated, if an individual case is clear-cut and enough evidence already exists, then a third party’s involvement may be redundant and costly.

Employing The Services Of A PPI Claims Company

One of the main pitfalls with filing a PPI dispute is that such evidence may not be altogether apparent. An advantage of partnering with a claims specialist is that they are familiar with all the laws and associated nuances. Any necessary information regarding either the policy or the issuer can be found expeditiously and other important variables such as if the FSA has already taken appropriate action can make the claims process much easier. They can also reduce how long it takes for a PPI claim to reach a conclusion – in other words, you may get your money sooner.

There are many instances where people have held a PPI policy for a number of years. In fact, some have continued to pay into a policy for a decade or more. In these instances the potential financial return can be large enough to warrant employing a claims professional; not only can they make certain the paperwork and eventual result is in order but whatever fees may be accrued will be relatively minor in comparison to the overall refund.

Also, it is important to note than most PPI claims specialists operate on a system where if they pursue a claim unsuccessfully they will not charge a fee. It is therefore in their best interest to ensure their clients are rewarded.

A Fork In The Road

The path you choose to pursue ultimately depends on your individual circumstances and how your policy was initially presented upon purchase. Should you choose to pursue a claim on your own, you must first understand the time and effort which may be involved. Regardless, there is no harm in scheduling a no-obligation appointment with a PPI claims specialist who can determine the merit of a claim on a case by case basis.

What should I do now?

If you think that you were mis-sold PPI, then it is in your best financial interests to consider making a claim. Whilst the BBA (British Banking Association) was recently denied the opportunity to cap refunds for PPI by applying a cut-off date; there are no assurances that this won’t eventually happen.

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Life Insurance Advice https://www.financenet.org/life-insurance-advice/ Thu, 20 Mar 2014 12:16:12 +0000 http://www.financenet.org/?p=718 Although it’s not something any of us like to dwell on, there will inevitably come a time when you can’t be there to provide for your loved ones. Taking the time to make sure arrangements are in place to ensure they’ll be provided for once you’ve gone can provide you with peace of mind and assure your family’s future financial security.

There are a wide range of life insurance products available and before you can compare policies it’s important to understand which form of insurance will best suit your own particular circumstances.

In this article we’ll cover the following;

(click on a section to skip to it)

‘Term’ Policies

  1. Level Term
  2. Decreasing Term
  3. Increasing Term
  4. Family Income Benefit

Whole of Life Policies

  1. With Profit
  2. Guaranteed
  3. Over 50s’ Plans

Buying Life Insurance

  1. Setting Your Level of Cover
  2. Joint and Single Policies
  3. Critical Illness
  4. Switching Policies
  5. Brokers

Other Considerations

  1. Writing In Trust
  2. Waiver of Premiums
  3. Disclosure of Medical Information

 

 

What Are The Different Types of Life Insurance?

life insurance advice
Life insurance products can be broken down into two broad groups; policies that have a ‘term’ (a set period of time for which the policy applies) and those that apply for the whole of the holder’s life, with the first category being far and away the most popular.

First, here’s a look at the variety of different ‘term’ life insurance products out there;

Level Term Life Insurance

This is one of the most common and cost effective ways of protecting your loved ones against the financial difficulties that they might have to face should you die. Its simplicity lies in the fact that, as well as applying to a fixed term, the amount that the policy stands to payout is also fixed. Whether you’ve held the policy for a day or a decade, you’ll receive the full amount decided upon when you took it out. Likewise, your premiums will stay the same level for the duration of the term.

One of the main benefits with this kind of insurance is that it’s incredibly easy to budget for your cover, as you’ll know just how much you’ll have outgoing on a monthly basis for the entirety of the term. The only difficulty is deciding how big a lump sum you’ll need to cover yourself and whether this will translate into an affordable monthly premium. (We’ll discuss the things you need to consider when setting your level of cover further down the article.)

One drawback (if you can rightly call it a drawback) of such policies, is that if you survive the term you’ll receive no payout whatsoever. Moreover, your policy will have no cash in value at any time. On the bright side, at least you’ll still be alive!

Luckily, if you do require on going cover once your plan has come to an end, most policies have a guaranteed renewal clause, meaning you won’t suddenly find yourself without the protection you need. Often the premiums offered will be higher on renewing, which is understandable as, with the original term having elapsed, the insurer is much more likely to have to make a payout second time round.

Note that, in cases where your health has deteriorated considerably during the course of your policy, you may find you are unable to renew as an ‘uninsurability clause’ may come into effect. With this and all other policies, if you fail to keep up your payments for any reason you may lose your policy (with the possible exception of scenario where a waiver of premiums applies, more on which down the page.)

You may see this and other life insurance products referred to as ‘assurance’ rather than insurance. There is no difference in policies labelled one way or the other, it’s just some providers use one word and some use the other. Technically assurance applies when you are insuring against something that will definitely happen, such as death. However, as there’s no guarantee that you’ll die during the term, it’s still called insurance a lot of the time.

Decreasing Term or Mortgage Term Life Insurance

Whereas level term life insurance offers a fixed pay out no matter when in the term it is claimed, as the name suggests, with decreasing term life insurance (which is also sometimes referred to as mortgage term life insurance) the sum to be paid out goes down over time.

This is because the policy is designed specifically to cover the amount left outstanding on your mortgage should you die. As you continue to make repayments and your debt decreases, so to does the amount your policy stands to pay out.

Despite the fact that the pay off goes down overtime, the premiums you pay stay fixed throughout the term, just as with a level term policy. The difference is that, as you would expect given that your cover goes down over time, a decreasing term policy tends to be significantly cheaper than a level term policy offering equivalent cover.

(Note that to obtain this type of insurance you will need to be on a mortgage where you are not merely repaying the interest on the loan, but also the original capital.)

Increasing Term Life Insurance

In contrast to the product described above, with these policies the level of cover you have actually increases over time. In some cases it will be upped annually or at another regular interval as a way of ensuring that the effects of inflation do not diminish the value of your policy. In other cases you can arrange to have your level of cover increased should a certain event occur which marks a major change in your circumstances, for example if you get married or have a child.

With these policies you can expect that your premiums will also rise if your cover increases, however, these raises will only ever be a reflection of the increased value of the policy. Your premium rating (the insurers assessment of the level of risk you pose based on your health and other circumstances) will stay the same. So, as with a level term option, changes in your health during the term won’t result in bigger premiums.

Family Income Benefit

If you’d prefer your family to be provided with a regular stream of money rather than a single lump sum, you might want to consider using a family income benefit product.

Policies have a set term, 20 years being a typical example, during which you pay a fixed premium. If you die at any point during this term your family will receive a set level of regular tax free income for the rest of the term.

These policies are not usually renewable, so you can be left without cover at the end of your term. Furthermore, they have no cash in or ‘surrender value’ at any point. If you survive the term you’ll not be remunerated in any way.

Obviously, the cover provided by family income benefit isn’t as great as level term insurance and doesn’t allow for the same level of forward planning. However, as they are cheaper, they provide an affordable way to get a basic level of cover.

Whole of Life Assurance

With a whole of life insurance plan there is no ‘term’. The policy remains in place permanently until the holder dies. As with ‘term’ policies, there are various different types of whole of life policy, all of which have their own particular characteristics;

Balanced/ Unit-Linked/ With Profit

With these forms of insurance part of the premiums you pay go towards assuring the lump sum for your payout, whilst the rest go into a pool of funds which the insurer invests into various assets.

The lump sum paid out at the end of the policy will depend on how well these investments perform. The sum you will receive is guaranteed at a certain level, but the extra profits you receive on top of this are determined by how well the investments perform. The profits from the investments are added to your policy annually as ‘reversionary’ bonuses. Once added, your bonuses become part of the policy’s guaranteed sum.

These policies have what are know as ‘reviewable’ premiums, rather than ‘guaranteed’ premiums. They will start out at a fixed rate, normally for ten years or so, at which point they will be adjusted. According to how well the investments attached to the policy are doing, your premiums may have to go up to ensure that the guaranteed sum you originally wanted can in fact be delivered. Otherwise the assured sum may have to come down.

In recent years many people holding such policies have found their premiums being raised considerably and such policies have come under fire as many consumers have found themselves forced to shell out higher than expected rates simply to maintain the same level of cover.

This is a particular problem if unaffordable premium rises come when you are of a more advanced age and would find it hard to find alternative insurance. There is even an argument to suggest that such arrangements make it possible for insurers to charge what they like, as holders will have little choice put to pay up, or lose their cover. (Whole of life policies can usually be cashed in after the first two years, but it is likely that, if your premiums are being raised, cashing in your policy will entail a considerable loss.)

Always be careful to understand what parts of your policy are guaranteed and which are subject to change if you are considering a policy with an investment element. Furthermore, be sure to thoroughly research how well the insurance company’s policies have performed in the past to get an indication of whether they’re one of the providers that have been helping to give these products something of a bad name.

Guaranteed Whole of Life Insurance

Also know as not-profit whole of life insurance, this is a much more straightforward form of insurance. In essence it’s the same idea as level term insurance, in that both the payout and the premiums are set from the outset, only there is no term. The policy only comes to an end when it pays out on your death (assuming you continue to pay your premiums.) As you’d expect, these policies tend to be more expensive than level term options as the insurer knows for sure they’ll have to pay out eventually.

Specialist Over 50s Insurance

There are a number of insurers who provide plans aimed specifically at those over 50 who find themselves without insurance and, as a result of their age, are more likely to have health problems that might prevent them getting onto other plans.

Typically, these plans are open to anyone over the age of 50 who can afford them, with no medical barriers to acceptance. Premiums are fixed at a rate depending on how big a pay out you require. There is no term, but unlike some other whole of life policies, these plans cannot usually be cashed in.

Buying Life Insurance

When buying life insurance there’s a lot more to consider than just which type of cover is most suited to you. Here’s a look at the various other questions you’ll need to think through;

How Much Cover Do I Need?

Most people choose to set their cover at a level that will cover their family’s main ongoing expenses whilst maintaining a good standard of living. Outstanding debts are therefore of paramount concern and, in many cases, a mortgage will the biggest worry.

As a result, a lot of home owners choose to set their cover at a level that will allow them to pay off the remainder of their loan (with enough left over to cover other expenses), whilst choosing a term of equivalent length to their loan agreement. This way they know that if that do out live the term of their policy, the burden of their debt will already be gone.

Aside from simply covering debts, another rough guide you can use to get an idea of how much cover you may need is to multiply the annual salary of your family’s top earner by ten. This should provide enough to cover the care of children if, for example, one partner needs to temporarily give up work.

As well as setting an appropriate level of cover, with the exception of whole of life policies, you also need to think about exactly how long you’d need the cover for, as there’s no point taking out more protection than you need. For example, if your main aim is to be able to provide for your children should you die, the term need only extend to such a time as they’ll be able to cope for themselves. If it’s for a partner that you help support financially, it could just run until they’ll be able to claim their pension. Finally, don’t feel like you have to go for a nice round number. If you only need a 19 year term, take out a nineteen year term. There’s no need to round it up to 20.

Should I Get a Single or Joint Policy?

If you and your partner are weighing up your insurance options you will likely find that you can save a significant amount of money by going for a joint policy rather than insuring yourselves individually.

However, you need to bear in mind that a joint policy will give you a much lower level of cover. This is because the policy will only pay out for the first death. This means that should you or your partner pass away, the survivor will be left without any further cover.

It’s always worth comparing quotes for a joint policy against the combined cost of what you are able to obtain individually. In addition, remember that it could be possible to use a combination of individual policies to better reflect your financial situation. For instance, if there’s a large discrepancy in your incomes, you may find you get all the cover your family needs for a better price by placing the main earner on, for example, a guaranteed whole of life plan, whilst the other partner takes a cheaper option.

Do I Need Critical Illness Cover?

Critical illness policies are often offered alongside or as add ons to life insurance policies, however, you should think carefully before signing up to a policy. Though they sound as if they’re designed to give you financial protection should you be unable to work, they usually only cover a limited set of specific conditions.

You may well find that by having a life insurance policy in place with some form of income protection policy, you may not even need any more cover. If you are interested in taking out a serious illness policy you should make use of a specialist adviser who’ll be able to work with you to ensure you end up with the cover you need.

Should I Switch Policies?

If you already have life insurance, but feel you could have got a better deal elsewhere, you aren’t stuck. If you can secure a cheaper quote, you’re free to go ahead and take at a new policy before cancelling your old one.

It’s worth remembering that part of the beauty of a product such as level term insurance is that you’re premiums are set at a fixed rate for the whole of your term. This is attractive as, inevitably, we’re more at risk of dying as we get older. Therefore, if a considerable amount of time has passed since you took out your policy, you may find it harder to get a cheaper premium on a new plan.

Conversely, if you’ve made significant improvements to your lifestyle during the course of your policy may well find you stand to make some big savings by switching or getting a new quote. This is especially worth doing in cases where your risk of death is indisputably diminished. For example, you may have high premiums due to holding a position in a dangerous occupation, which you’ve since left for an office job. Similarly, making the switch from being a smoker to a non-smoker will make a major difference to how much you’re expected to pay. (Within the industry the standard for qualifying as a non-smoker is to have been completely free of cigarettes and tobacco for at least a year. Needless to say, you won’t be able to smoke again or you’ll invalidate your new policy.)

If planning a move, you also need to think about the fact that, unless you have a policy with a cash value (such as a with profits whole of life plan, for instance) you won’t be getting any return on the premiums you’ve already paid. It makes sense to factor this loss into your calculations when deciding if it’s worth moving to a new plan.

Should I Buy Through a Broker?

Using a broker can save you thousands of pounds, especially if they’re cheap. Indeed, brokers only exist in the first place because they have access to deals that insurers simply won’t offer to individuals. So, even you are able to hunt down the perfect policy on your own, there’s still a good chance you’ll be paying more by going direct.

However, whilst choosing to use a broker is relatively straightforward decision, picking which one to use is a little trickier. All brokers have different arrangements with insurers and different levels of access to different deals, so it’s important to shop around as much as possible to see who can offer what you want at the best price.

The advantage here is that since many life insurance products are very straightforward (for instance, with level term insurance you pick your level of cover, the length of your term and then either survive or claim) you can rest assured that you won’t be losing out by simply going for the cheapest policy that provides the cover you’re after. This makes the sometimes laborious process of shopping around a lot easier.

As many of these products are so simple, you can make further savings by going for an ‘execution only’ broker. When you take on a broker on this basis they will simply find the best deal for the cover you tell them you need, rather than furnishing you with advice. Of course, if you’re situation is a little complicated enlisting the help of a professional to help figure out an airtight insurance plan can be very prudent. Brokers will offer a ‘with advice’ service which, as the name suggests, will entail helping to establishing the best policy for you, as well as tracking down a great deal.

If you want to make sure that your life insurance plan makes sense alongside your other financial affairs you may be better off talking with an Independent Financial Advisor than a broker, as they’ll be able to take a wider view of things.

Other Considerations

Finally, here are a few other considerations you should think about before taking out a policy;

Writing In Trust

Your life insurance policy counts as part of your estate along with all of your other assets. As such, it’ll be subjected to inheritance tax which can take quite a toll on the amount your loved ones will end up receiving. One step you can take to avoid paying more inheritance tax than necessary is to place your policy in a trust.

When an asset is placed in a trust it is set aside and handled by a trustee until the beneficiaries are intended to receive it. By writing a life insurance policy in trust you can ensure that, when you die, the funds will be paid directly to those intended to receive them. It won’t go into your legal estate and will therefore not contribute towards the £325,000 threshold under which no tax is payable.

Another advantage of having your policy written in trust is that your named beneficiaries will receive their money quicker. This because probate (the process which establishes whether the executor of your estate has the right to deal with your possessions) does not to need to be granted for the trustee to pass the money on to people it’s intended of.

Having a policy written in trust is straightforward and will generally be offered to you as a free optional service by your insurer at the time you take the policy out.

Despite the many upsides to writing in trust, there are potential down sides. For instance, you will lose some of the flexibility you might otherwise have. Trusts are difficult to cancel once they’ve been put in place, so you need to think carefully before setting things in stone and be sure to seek out advice as to whether it’s the best thing for you.

Waiver of Premiums

In most cases, if, for whatever reason, you find yourself unable to pay your premiums, you will lose your plan. Needless to say, if you’ve spent a decade or more paying into a policy only to loose it, it could have disastrous implications for you and your family.

Going for a policy with a waiver of premiums provision can help you ensure that, should you be able to continue working due to an ailment of some kind, you’ll remain covered. Normally, such a provision can be added to a policy for a relatively low increase in premiums. If you think there’s a chance that illness will prevent you from being able to pursue your line of work, this could be something to consider.

Non Disclosure Can Result in Refusal to Pay Out

Obviously, (at least for most kinds of life insurance) the healthier you are the cheaper your premiums will be. This is because the insurers stand to benefit from your vitality. In the case of policies that have a set term, being in good health means there’s a better chance you’ll survive the length of your cover, and, in the case of a whole of life plan, living longer means you’ll contribute more towards the inevitable payout.

This does not mean that you’ll get better value by failing to speak up about any health issues that you might have. Aside from any specific exclusions that might apply to the policy, there will be a clause where it’s stated that the non-disclosure of relevant medical information will invalidate the policy.

This means that, following your death, if it comes to light that you held something back, there may be no pay out for your loved ones. Given that many insurers will check through your health records, it’s important to be thorough. This can apply to even seemingly innocuous things such allergies, so make every effort not to leave anything out.

Again, when dealing with brokers, you need to tell them of any relevant health problems you might have as, if they don’t know about your issues they may put you onto to a plan assuming that you’re in perfect health.

If you do have a range of medical issues, or if you don’t like the idea of having to disclose your medical issues, you could find that, even though they are expensive, it’s cheaper for you to with a plan that requires no medical information, such as the specialist over 50s’ cover discussed up the page.

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What Is The ISA Allowance For 2014/15? https://www.financenet.org/what-is-the-isa-allowance/ Tue, 18 Mar 2014 12:21:12 +0000 http://www.financenet.org/?p=844 what is the ISA allowance?

From 1st July 2014, ISAs are changing; cash ISAs and stocks & shares ISAs will remain as separate accounts, but they will fall under an over-arcing single named account called “NISA” or New ISA.

If you have already subscribed to a cash ISA or stocks & shares ISA since 6 April 2014, you need to check with your provider to see if you can top-up. Some providers may not allow you to do so, in which case it can be worth considering changing providers to one that will allow you to take advantage of the additional allowance of a NISA.

Benefits Of The NISA

  • A NISA blurs the lines between the two separate accounts, enabling you to have greater choice and freedom to control your money between the two.
  • The current allowance for tax-free savings within your NISA is £15,000 per annum; an increase of £3,120 from the previous cap for 2014/2015 of £5,940 for cash ISAs and £5,940 for stocks & shares ISAs.
  • You can either make regular payments up to your total £15,000 allowance throughout the tax year, or make a one-off lump sum payment.
  • You can now choose how to split your total NISA allowance. The rule of only being able to save a maximum of half your ISA limit in a cash ISA has been lifted.
  • Under the new regulations, you will be able to transfer your stocks & shares ISAs to a cash ISA – even from previous years. So, if you decide that you don’t like how the stock market is performing for you, but your money has previously been tied up in stocks & shares, you will now be able to transform some or all of your existing stocks & shares ISAs into a cash ISA.
  • You will be able to transfer your money between your cash ISA and stocks & shares ISA are many times as you like (although it may be worth checking with your provider if there is a financial penalty for doing so).
  • Any interest on cash held in a stocks & shares ISA is now tax-free.

What Isn’t Changing?

  • You will still only be allowed to subscribe to one cash ISA and one stocks & shares ISA in a tax year.
  • You can still transfer your cash ISA to a stocks & shares ISA.
  • You can still open ISAs with different providers.
  • You are still allowed to hold additional, historical ISAs that you are no longer paying into.

What About Junior ISAs?

The overall structure and subscription process for a junior ISA will remain the same, but the amount you can save will increase to £4,000 in 2014/2015.

What About Withdrawals?

Of course, you can withdraw from your cash or stocks & shares ISAs as before. However, if you then decide to replace any withdrawn funds, this will count as a new payment towards your total NISA allowance so it is important to think carefully before making any withdrawals.

For example: you put £15,000 into an ISA during a tax year, but later in that same tax year you decide that you need to withdraw £4,000 to perform emergency home improvements. You cannot then put another £4,000 into your ISA until the tax year is over and a new one begins. Similarly, if you deposit £8,000 into an ISA but then decide to withdraw £2,000, you can only put another £7,000 into the ISA throughout the rest of the tax year. In other words, the £15,000 limit is based on total deposits and not the amount you have in an ISA at the end of a tax year.

Important note: HMRC have advised that you do NOT withdraw funds from your existing stocks & shares ISA in order to top up your cash ISA as these funds will be treated as a ‘fresh payment’ and may take you over your total NISA allowance. You should arrange a transfer through your stocks & shares ISA provider.

When Is A Cash ISA Best For Me?

It goes without saying that a cash ISA provides you with tax-free interest earned on your savings, whereas a normal savings account opens you up to taxable interest. However, it can be extremely useful to compare the exact rates of interest involved in order to determine whether or not you’re getting the best deal.

For example: if a non-NISA savings account is offering you an interest rate of say 3.0%, but a cash ISA offers 2.0%, you may think that the standard saving account offers the better rate. However, you have to factor in tax deductions for non-NISA accounts.

This means that at the basic tax rate, your interest attracts 20% tax, or 3.0% – 20% = 2.4%. In this instance, the savings account proves to be the better product.

At the higher tax rate, your interest attracts 40% tax, or 3.0% – 40% = 1.8%. In this instance, the cash ISA account works out best.

It can be worth shopping around to find the best interest rates and you may find that current accounts with linked savings accounts offer some of the most competitive incentive rates to sign up. You shouldn’t become complacent though, as most of these rates are variable or only introductory so you should be prepared to move your money if the interest rate stops being such a good deal.

With the government making greater inroads into helping savers make the most of their money, as well as providing more freedom to decide how to save, there has never been a better time to look at NISAs.

Use Your New ISA Allowance Regardless Of Low Rates

The sad state of affairs that our economy has been in over the last few years means that the Bank of England is having to keep the base rate of interest at a record low and despite recent signs of growth, this is unlikely to change a great deal over the next few years (a gradual increase in rates has been suggested as the most likely scenario by governor Mark Carney).

While low interest rates may be good for homeowners and businesses, for those of us who rely on our savings to provide an income, it is a disaster which has forced many to tighten their belts. It’s not good news for those who want to build up a nest egg either as interest on accounts accrues far slower than it used to.

While this may be the case, there is still a very good argument for taking full advantage of your yearly NISA allowance.

Save Now, Transfer Later

While cash ISA rates may not be very high now, the beauty of the system means that you can build up savings year by year and transfer them around to get the highest interest rate.

Therefore it makes sense for you to save as much as you can in your NISA each and every year. Because the interest on cash ISAs is free of tax, if you manage to save a significant amount now, then when rates improve in the future (which they almost certainly will in the long term) you will be in the best position possible to benefit from these higher rates.

But I Can Get Better Rates Now!

While it is true that some traditional savings accounts currently offer higher rates of interest than cash ISAs, if you choose to put your money into a regular account instead of an NISA and the financial tax year ends, you cannot then utilise your NISA allowance for that tax year – it is gone forever.

One thing that you can do in this circumstance is to leave your money in the savings account until the very last moment and then withdraw it and fill up your ISA as much as possible in the few days before the tax year ends on April 5th. This way you get the benefit of the higher interest rates for the majority of the year AND the ongoing tax free income that an ISA can provide.

So you don’t have to lose out in the short term to get the best in the long term.

Clearing Up The Jargon

You’ll see that this article sometimes uses NISA while talking about ISAs at other times. Here is an explanation as to why:

NISA is the term we use here to describe the umbrella name under which cash and stocks & shares ISAs sit. It is a term that has been made up by the government but since it is an abbreviation of “new individual savings account”, we don’t think it makes sense to talk about a ‘cash NISA’.

The consumer is used to, and comfortable using, the term ISA and we write for the consumer so while this continues to be the case, we will continue to use ISA to talk about actual accounts while using NISA when talking about total limits.

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