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;
Alternative Ways of Taking Your Pension After 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.)
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
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.
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.
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).
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
]]>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
Whole of Life Policies
Buying Life Insurance
Other Considerations
What Are The Different Types of Life Insurance?
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.
]]>Though it’s reasonable enough on the face of it, this leaves you twice as far out of pocket than you planned to be and could put you in an awkward position financially. Indeed, it could make it even harder for you to repay the debt in question, given that running out of cash can give rise to a whole load of extra expenses. For instance, it may mean you need extra time to cobble together money to pay a bill and then end up having to meet late fees too. In short, the unannounced decision to suddenly take back monies owed could wreak havoc with your carefully planned budget.
‘Setting Off’ is essentially the same thing as described above, but on a larger scale and with your bank in the role of the wallet-less friend. If you have money deposited with a bank, but also have a separate debt with the same bank (for example, you are behind on your credit card repayments but have cash in your savings account) they do, in some cases, have the right to go and simply take the money they are owed from you – even if you hadn’t had any intention of the money to be used in this way.
Whilst we all want to pay off our debts, we always have to prioritise. You’ll always put paying for your daily essentials, such as food and utilities, ahead of paying a debt. That’s a matter of simple necessity. Even if you do have enough capital available to start wiping out your dues, it makes sense to put paying for an expensive or essential debt (a high interest short term loan or a mortgage, for instance) ahead of paying for a relatively small, affordable unsecured debt like an outstanding credit card balance.
If a lender suddenly decides it’s taking what it’s owed without consulting you, your sensible plan for managing your money could be thrown out of the window. So, how do you avoid having the banks make a mess of things without your permission?
Keep it Separate
Obviously, if you have a bit of debt in one place and your savings safely stashed away somewhere else, one organisation is not going to go and hand your money over to the other without your express consent. Therefore, the simplest way to avoid any issues with setting off is to avoid taking out credit at the same institution you save with. If you’re already borrowing and saving with the same people, you will generally find it’s easiest to move your savings as opposed to your debts (though stoozing provides a helpful exception).
Of course, in this day and age it’s hard to tell whether banks are truly separate, or in fact part of the same larger conglomerate. For the purposes of setting off, it comes down to the banks legal identity, which in turn is determined by the way that the company is registered at Companies House. Generally, these are just the separate brand identities that you’ll be familiar with, but it is simple enough to check if you are unsure.
Know the Rules
The rules around setting off are contained within the Lending Code. The code is a set of rules that is adopted voluntarily by banks. However, though it’s not obligatory to sign up to the code, if an institution agree to use the rules then they need to adhere to them.
With regards to setting off, the code states that banks do not need to give a specific advanced warning before they move your money (if they did, you would just withdraw it or transfer it away from the account before they had a chance to get their hands on it!). However, they do need to make it known to you that there are a set of circumstances in which they may attempt to recover debts by moving your money at some point before they actually attempt to do so.
The code also states that banks need to make an effort not to leave you in a difficult situation. They should, in theory, never take an amount that will leave you struggling to pay for your day to day essentials and top priority debts (mortgages being the best example.) They are also warned to take extra care in dealing with people who are depending on benefits in order to make ends meet and those who are having to put money towards a special, important purpose, such as healthcare costs.
Finally, they are supposed to make you aware that money has been taken from your account to help you avoid unwittingly spending money that you no longer have. Disappointingly, there is no fixed time frame in which they are supposed to make this known to you.
If banks are setting off money from your savings or current account in response to the fact that you are falling behind with a debt, then they are supposed to make reasonable efforts to get in touch with you and discuss the matter first. It is only if you fail to respond to mail and calls that they are entitled to go ahead and move the money. This is just one of the many good reasons that you should be proactive in seeking an agreement with your bank if you find you are running into trouble with a debt.
If you get in touch with a non-profit debt counselling service such as Step Change then you may be able to get an extra 30 days breathing space. If you are struggling with debt and mental health problems then you may be able to get further dispensation. Click the link to read our guide to the subject.
If you are unsure of your bank’s policies it can bear fruit to simply approach them for clarification. Checking their terms and conditions is not always helpful as, in some cases, a bank will have an automatic right to carry out setting off. In such instances they do not need to explain the situation in their terms and conditions.
What Should I Do If the Rules Have Been Broken?
As stated above, in many situations a bank will be, legally speaking, perfectly entitled to move your money to recover what you owe. This means that, if it hasn’t put you into tangible difficulties, then there’s not a lot you can do about it, aside from moving your money elsewhere to prevent it from happening again.
If, on the other hand, the money has been whisked away from your account in a manner that contravenes the guidelines laid out above, then the bank should refund you. This should, hopefully, be a fairly straightforward process. As long as you can demonstrate that it is going to have a negative knock on effect that could lead you into hardship, they should have little choice but to refund you having had the situation explained to them in writing.
If they fail to do this then you need to look beyond your bank and refer to the financial ombudsman. They should help settle the dispute and can deem that you have been unfairly dealt with, irrespective of the fact that the bank has a legal right to use setting off. They are impartial and independent so you can be sure of an unbiased hearing. Better yet they are free, so you have nothing to lose by appealing to them.
The ombudsman can be reached online, or by calling 0800 0234 567 (or 0300 123 9123 from a mobile). Unfortunately, you cannot go straight to the ombudsman for help. You first need to try and come to an understanding with the bank (the ombudsman is really supposed to be a last resort). They will only be able to look at your case if you have already attempted dialogue with your bank, even if this only ever went as far as you complaining and the bank refusing to do anything about it.
You also need to bear in mind the timeframe that will apply when going down the ombudsman route, as they will only take on your case eight weeks after your initial complaint. If you really are left struggling as a result of your bank’s actions, two months is an awfully long time to be left in the lurch.
With all this in mind, as we frequently say on this site, prevention is better than cure. If you are at all worried about keeping on top of all the repayments you are supposed to be making, even if it’s not a major concern, split your savings and current account from your debts to avoid any possibility of setting off putting you in a tough position. If you are running into trouble, its best to contact your bank and confront the issue head on. Though it should be easy enough to get back money that is taken unfairly, your life will be simpler if it isn’t taken in the first place.
]]>Here we take a look at some of the simplest ways you can make the money you spend on petrol (quite literally) go further.
Increase the Fuel Efficiency of Your Car
There are a range of things that you can do to your car to get more mileage out of a tank, and none of them involve feats of mechanical ingenuity. Simple, simple things can really add up. For instance, if your tyre pressure is too low, you’ll create extra drag, meaning the engine has to work harder to get you where you’re going and more fuel is used up. Your unnecessary roof rack is also a big source of drag, so, if you don’t need it, take it off.
As well as aerodynamics, weight is a big issue as far as fuel consumption is concerned. Get rid of all the rubbish that’s accumulated in your boot, the backseat and the foot wells and you could find yourself manning a much leaner vehicle. Likewise, opting not the fill the tank all the way up when you’re at the petrol station will also leave your car running lighter.
Finally, look out for the air con. Whilst its effect on the temperature in your car may be cool, the toll it takes on the tank is anything but. If you’re travelling at low speeds, don’t bother with the AC. Just wind down the windows.
If you’re travelling at a fair old whack, then the opposite applies, as taking the windows down will (as well as turning the inside of your car into the eye of a tiny storm) also generate so much drag that you’ll be better off with the air con on.
Combine these steps with commonsense measures like turning off the engine when stuck in a jam and you can expect to drive your fuel efficiency up by more than 15% – a very noticeable difference.
Drive Smart
You’ll save even further if your driving style is economical. If you’re thinking ahead then, as well as being safe and considerate, you’ll also use less fuel. Being in a position where you can allow your car to slow naturally from losing momentum is much more efficient than slamming on the break every time you need to stop. By the same token, smooth, gradual acceleration will always be preferable to flooring it. Staying in the highest gear you can at any given time (without asking too much of the engine) is also going to save you fuel.
If you do all this well you can expect to stretch out your mileage by another 15%. On top of this, you will most likely find that you aren’t losing any time. Others may pull away quicker from the lights, but they’ll end up breaking harder when they reach the next set, making the whole exercise of rushing along somewhat futile.
]]>When it comes to selecting a method of growing your capital, grandparents are somewhat spoiled for choice. Whilst this means you’ll ultimately be able to go with a way of saving that will be suited to both you and your loved ones, it can make the process of finding that perfect option (or, indeed, the perfect combination of options) a little tricky.
Luckily help is at hand. In this comprehensive guide we’ll talk you through the various vehicles you could use, explain how they work and give an insight into their plus points as well as their potential pitfalls.
Contents
- Do Junior ISAs Offer A Good Deal?
- Are Child Trust Funds Still An Option?
- Are There Savings Accounts For Grandchildren?
- Easy Access
- Regular Savers
- Fixed Rate
- Credit Unions
- How About Buying Premium Bonds?
- Should I Buy Shares For My Grandchildren?
- Investment Trusts
- Unit Trust
- Oeics
- Index Funds
- Can I Open Them A Pension?
- Are There Any Tax Issues?
- Allowances
- Inheritance Tax
- Capital Gains Tax
Are Junior ISAs The Best Option?
If your grandchild was born after the 3rd of January 2011, or if they were born before September 2002 and are still under 18, they’ll be eligible for a Junior ISA. (Children born between those dates will have a Child Trust Fund instead, more on which down the article.)
As with any other ISA the returns earned by the money you deposit are tax free. There is a limit on how much you can pay in each financial year (currently £3,720) and unused allowance cannot be carried over.
Once money is paid in it can’t be withdrawn again until the account holder reaches 18, at which point they have full control of the funds. Guardians retain control of the account up until this point, although the holder can take over the running of the account at 16 if they wish. Though guardians can’t withdraw from an ISA, they can move provider any time they wish.
Once the holder is 18, the funds are simply moved from the junior ISA to a regular ISA. They do not need to be withdrawn unless the account holder so wishes.
There are two kinds of Junior ISA to choose from:
- Cash: These work in the same manner as a savings account, with money deposited earning interest at a rate set by the provider. At present 3.25% represents a market leading rate.
- Shares: The money you pay in is invested in a range of shares and earns a return depending on how well they perform.
Whilst buying shares present a risk, they can also bring substantially bigger returns. In general, if you are making a long term investment, you are less at risk as there is time for the markets to recover from blips or even major crashes.
You do not have to choose between cash or shares. You can have one of each option per a child. You can also transfer Junior ISAs, not only between providers, but also from cash to shares options and vice versa. Note that the annual pay in limit of £3,720 applies to both ISAs combined. You can split the allowance between them as you wish.
Things to Consider
- How Much Will The Tax Benefits Be Felt?: As a grandparent, interest earned from money you give to your grandchildren is tax free anyway. On top of this, even without the protection of an ISA, tax only has to be paid on interest from money paid in by a parent once it exceeds £100 a year. If they have two parents saving for them, that would be £200. That’s a lot to earn in interest in a single year by most people’s standards.
The only other time a child would be taxed would be if their annual income exceeded the personal allowance of £9,440. It’s very rare that that would apply.
However, in later life your grandchildren may find themselves in the higher rate tax band and facing substantial bills from the HMRC. By having built up a healthy pile of tax protected savings before they’ve even started earning you could be helping them on their way to earning some serious money that they’d otherwise have to pay as much as 40% on.
The fact that the real benefits of an ISA (i.e. protection from tax) will only come in later life provides a good incentive for your grandchild to keep building on the fund you’ve started as they get older, rather than simply spending it the second they get their hands on it (provided, of course, that the way the ISA works is clearly explained to them.)
- Funds Are Locked Away: Once you’ve paid money in, you can’t get it back again. If your generosity later leaves you struggling, there’s nothing you can do to get reclaim your gift. If, as discussed above, the tax benefits don’t really come into play, you need to consider if the returns on offer justify having your money locked away for so long. For example, you might be able to get a better rate from a high interest bond with a shorter term in your own name or the child’s. This would also give you more control over your investment…
- Lack of Control: You’ll have no say in how the money is spent. Once you grandchild is 18 they can do with it as they will. When they are younger the account is in control of their guardian, so unless that’s you, you can’t control how the money you put in is managed. For example, you might put in £1,000 into a shares based ISA only for it to be switched to a cash option.
What About Child Trust Funds?
If your grandchild was born between 1 September 2002 and 2 January 2011 they will have a CTF. This is a tax free account to which anybody can contribute. Indeed, contributions are started by HMRC, who would’ve provided a voucher for £50-£250 to be put into the account when the child was born.
Only a set amount can be deposited in the account each year. This is currently £4,000. (Be sure to let other contributors know before you pay in, as there will be penalties for going over this limit).
This allowance is renewed on the child’s birthday and then applies until their next one. The child’s guardians are responsible for managing the account (but they can take over this role themselves at 16). When they reach 18 they take complete control of the funds and can spend them however they wish. No money can be withdrawn until this time, nor can it be transferred to a different type of account or investment vehicle (though you can switch providers.)
There are 3 kinds of CTF your grandchild might have:
- Savings: Pays tax-free interest on the money deposited. Rates are set by the provider. At present the most competitive accounts offer around 3%. You can move to another provider to get a better rate at any time.
- Stakeholder: The money deposited is invested by the provider. There are limits on the types of risks they will take, and they are obliged to spread these across a range of investments, industries and markets. They will also move the money into lower risk areas as the child gets older. You cannot be charged for transferring this type of CTF to a different provider and the most they can charge for managing the account is 1.5%, though the actual amount may well be lower.
- Shares: Again the funds deposited are invested. You can either have the money go into your preferred fund from a small selection put forward by the provider (which you can later switch between) or, alternatively, you go for a ‘self select’ option. In this case you can pick a fund from a wider range and also buy shares directly if you so wish. Charges vary considerably depending on the type of account you go for and are often higher than you’d pay with a ‘stakeholder’ option.
Which kind of CTF your grandchild will have is down to their guardian, however, if you are planning to contribute you should understand what type of account you’re paying into. Only ‘savings’ options are risk free, however, the government do recommend going for an investment based option. Though it is possible that the value of investments could go down, historically investments outperform savings in the long run, and, as the money is locked away until the account holder reaches 18, you are dealing with the long term.
Things to Consider
There are some key criticisms of CTFs you should be aware of before choosing whether you want to save for your grandkids using such a product:
- Banks Have Less Incentive to Be Competitive: Now that Junior ISAs are in place banks are vying to win business in that area and worrying less about catering to those already on a CTF. As a result the rates on offer may go down across the board. As you can’t take the money out or transfer it to another product it means you could be lumbered with an underwhelming return.
- Lack of Control: Once the account holder is 18, it’s their money. There are no caveats or conditions you can place on their spending. As such, paying into a CTF while your grandchild is very little is a bit like handing over a lump sum of cash to someone you haven’t met yet.
Other Products
Aside from Junior ISAs and CTFs there are range of other products you can use to put money aside for your grandchild. These can be broken up into two broad groups: those that involve risk and those that don’t.
Risk Free Options
In general, any product that offers a return by paying a rate of interest can be considered risk free. This is because, unlike other investments, the only way you could end up financially worse off is if inflation were to outstrip interest rates.
Here’s a look at your interest based options;
Savings Accounts For Grandchildren
You can open a savings account in your grandchild’s name. Depending on how you wish to go about depositing money in the account there are a couple of different routes you could take.
- Easy Access: With an easy access account you’ll be able to pay in as and when you like and withdraw money you’ve put away at any time without penalty. The best rates tend to be in the region of 2%-3% but these can change according to fluctuations in the base rate or on the whim of the bank.
Normally minimum deposits are simply notional amounts (£1, for instance) however, maximum deposits are often potentially restrictive, with £20,000 being the limit in many cases.
- Regular Savers: With these accounts you have to deposit each month. The amount deposited will normally have to be between a minimum of £10 or so and a maximum amount of around £100.
The account will usually only be open for a year, or else until a maximum deposit limit has been reached (this puts a cap on how much you get from such an account). There will be penalties for withdrawing from the account before this time. However, in return for these various restrictions, you will get a higher rate. The market leader offers 6%, but around 4% is more common. Rates are variable.
- Fixed: With these accounts a set rate is paid over a set term, for example, you can secure a return of 2.5% over 5 years. You won’t be able to withdraw during this time and there will be a fairly low ceiling on how much you can deposit, £3,000 being typical.
Things to Consider
With interest rates so low it could be easily argued that now may not be the best time to go for a long term fixed account. On top of this you can better rates from a regular saver account which you only need to commit to for a year. After milking a good rate you’ll be free to switch around and see if you could do the same again.
If you do want the security of a fixed rate you could use the peace of mind it will give you to offset a more adventurous investment, perhaps using a shares based fund to chase a better return.
- Credit unions can be a great alternative to the accounts on offer from the traditional high street banks. They are not-for-profit organisations that are setup and run in the best interests of their members and the community. They generally exist to serve people in a particular location or workers of a specific industry.
The rate you will receive from on savings in a credit union are not always apparent up front as they pay a dividend rate based on how well they have done that year, in contrast to the stated interest rates you will get from most other institutions.
This does not meant that they offer bad rates, and for junior accounts the rates can be surprisingly good. The rates are decided by the committee in charge of the union so if they decided that child savings are more important, they can award greater dividend rates to those.
In fact, the Greenwich and Bexley Credit Union paid out a rate of 5% on junior savings in the year ending April 2014 and 4% in the year before that.
You can find your nearest credit union using the search functionality on this helpful website.
Do Premium Bonds Offer A Good Rate Of Return?
You can buy premium bonds for your grandchild and then nominate a guardian/parent to hold them. Your gains from premium bonds are tax free. Though premium bonds are risk free (NS&I, who run the scheme, are backed by the treasury so you can’t lose your capital) it’s actually something of a gamble as to how much interest you’ll be paid.
For every £1 you put in you receive a bond. Each bond is entered into a draw each month. 1.8 million bonds will win £25, 30,000 bonds will win £50 or £100 and 5,000 will win between £500 and £1,000,000.
There are about 44 billion bonds in the country and you can hold a minimum of 100 or a maximum of 30,000. On the basis of the probabilities involved you can expect a return of about 1.5% per a year. This in the same region as most adult savings accounts at present due to historically low interest rates.
Things to Consider
As premium bonds are tax free this normally may makes them a more attractive investment depending on how much tax you’re expecting to pay. However, as explained above, children wouldn’t be paying tax on interest they earned with your money anyway, so it doesn’t really make sense to consider this a bonus.
In addition, you need to be aware that this average of 1.5% is heavily skewed upwards by the big prizes. Most people will receive less than this. Of course, there is always a chance you’ll win big, so it can be worth putting some money aside in this way, but you should probably consider using other methods of saving in conjunction with it.
What About Investing In Shares?
Shares are usually considered the best form of long term saving. Though the value of your investment can go down, so long as you spread risk, over the years your money is likely to grow at a rate that will outperform even the most generous interest rates.
Under 18s cannot hold unit trusts or investments trusts in their name, but you can set one up and name as the beneficiary and they’ll receive the money when they come of age. Income will be treated as theirs, which can add a tax efficiency boost to your returns.
Investment Trusts
Putting your money in an investment trust is a bit like buying shares in a company. There a limited number of ‘shares’ available and, depending on how many you own, you’ll get a cut of the profits the fund makes. As with any other company, you can buy shares in an investment trust through a stockbroker.
All those investing will pool their money together, putting in the hands of fund managers who will then put together a diverse portfolio of stocks, shares and other assets from around the world. This variety means risks are relatively low.
To buy into an investment fund not only will you need to pay the broker commission, you’ll also have to pay management costs, but these are lower than with other forms of managed investments.
Unit Trusts
These are similar to investment trusts in that they are a managed, collective investment. As with an investment trust, you’ll benefit from economies of scale in paying for the charges involved and you’ll gain easy exposure to a diverse portfolio of assets.
The key differences are that with a unit trust you actually own your portion of the assets in the fund, rather than owning shares in the fund. This subtle difference can be important. For instance, if someone wants to sell their shares in an investment trust they can simply find a buyer on the stock market. The assets involved are unaffected. If somebody wants to take their money out of a unit trust their portion of the assets would need to be sold in order to pay them, thus affecting the fund.
Secondly, an unlimited number of people can buy into a unit trust, whereas an investment unit only has a limited number of shares it will issue. A third and important difference is that managers of investment trusts can borrow money with which to invest. This could give you greater returns, as you’ll profit from risks the lender took, or it could mean your returns are eaten into by interest payments.
Above all else, the key thing to remember is that your portion of a unit trust is tied directly to the value of the assets your manager has amassed, whereas, in an investment trust, how valuable your share is will be decided by the demand of the stock market (which may not mirror the value of the assets you’ve bought into, as shares in investment funds are almost always sold at a ‘discount’ compared to their ‘true’ worth.)
As with investment trusts there are charges for buying and management fees.
Oeics
Oeics (Open Ended Investment Companies) are the same as unit trusts in most of their major details. The biggest difference for consumers is how pricing works. With a unit trust there are always two prices: a buying price (bid) and a selling price (offer). The difference between the two is known as the spread. This spread has to be taken into account when reckoning up one’s gains or losses. With Oeics there is just one price that applies to both buyers and sellers.
Index Funds
With an index fund, the assets you invest in are not selected by a manager, rather they are put together automatically by tracking an index (such as the FTSE) comprised of the best performing stocks on the market. Some do this by buying into all companies in the index, other will go for a certain cross section.
A big advantage of doing things this way is that you will have lower ongoing costs as there’s no manager to pay. On top of this, when markets are rising these funds often do better than those that are actively managed.
One problem with ‘passive’ funds is that if a certain company or industry come to dominate the index then your risks are not spread as wide as they might be.
Pensions
It’s always a good idea to start sooner rather than later when it comes to investing in a pension. You can get the ball rolling from the moment your grandchild is born by paying into a junior SIPP.
Up to £3,600 can be paid in each year, however, as the government pay tax relief of 20% of top of all contributions you only have to put in £2,880 to get the most out of a pension. The money is also free to grow without incurring income tax or CGT.
Of course, they will not be able to access the money until they reach 55, so if you are looking to provide help for key life events such as a wedding or buying a first home, you’ll need to go for a different vehicle.
As they will have to wait such a long time to get hold of the money you need to think about the potential consequences of making such a long term investment. For example, pension rules might change in that time, or you grandchildren may have no need of the money when they actually reach that age.
What’s The Most Tax Efficient Way To Save?
Finally, it’s helpful to understand the tax issues surrounding the way you go about putting your money aside as you want as much as possible to go to your kin rather than the taxman.
Allowances
Children are subject to the same personal allowance as adults (£9,440 for the 2013/2014 tax year). As long as their total income does not exceed £100,000, then earnings below the personal allowance threshold are tax free.
However, different tax rules apply to the interest earned by children from accounts funded by their parents. Of this money only the first £100 is exempt from tax. Anything over this is taxed as part of the income of the contributing guardian (known as the ‘settlor’). You’ll need to include details of this income on your tax return using a SA107 form. (Note that each parent has a £100 allowance, meaning as much as £200 can be earned tax free.)
The good news is, this rule doesn’t apply to grandparents. You can give as much as you like and the interest it earns will not be taxed as part of your income.
In addition you have ‘gift allowances’ you can use. You can make small gifts of £250 a year which are tax free. There’s no limit to the amount of small gifts you can give as long as each recipient only gets one per year. So, if you have ten grandchildren you can give them all £250 a year without incurring tax.
You can also have an allowance of £3,000 a year for any gifts you make over £250 in value. You can even carry unused allowance from one year into the next (but no further).
You can give a grandchild a gift ‘on consideration of marriage’ (This is basically a gift given on the condition that they marry) of up to £2,500 tax free.
If you are planning on providing for your grandchildren after you’ve passed away, using these gifts can be more tax efficient that saving up a lump sum to bequeath in your will…
Inheritance Tax
The Inheritance Tax threshold is £325,000 (this is set to rise to £329,000 by 2015.) Anything you leave behind you over this is taxed at 40% (or a lower rate of 36% if you give 10% of your estate to charity.)
If your estate is bigger than this and you are planning on using it as a way of funding your grandchildren’s future you should consider making canny use of your annual gift allowances to get them their money tax free.
If you have a spouse it is worth remembering that you can you can leave them any amount tax free and that any of the £325,000 that you don’t use will be passed to them. Effectively this means that you’d only need to worry about IHT if your combined estate is worth more than 650,000. Otherwise, splitting your estate so that neither of you are over the threshold is an easy way to avoid paying HTC.
If you do have a larger estate in can be prudent and highly cost effective to pay for tax advice to help rationalise your affairs. You should also make a will to ensure the way your money is left to whom you wish it to be and in the right proportions. If don’t have a will the funds will be allocated according to intestacy laws, which may not reflect your wishes and may well not be optimal tax-wise.
Capital Gains Tax
If you set up a trust containing assets such as shares or property, the trust may have to pay Capital Gains Tax should these be distributed from it. This will only apply if the assets have risen in value above the level of the ‘annual exempt amount’ (which is £11,000 for 2014/15).
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]]>Offering such securities as collateral can make it easier to raise finance, whether you do this by taking out a loan secured against your car or by obtaining a further advance to your mortgage. However, whilst, this approach can help you access larger sums of money than might otherwise be possible, it is a risk. If for any reason you are no longer able to make repayments, you could be left without key possessions. You could even lose your family home (or, in the case of a defaulted bridging loan, you might actually lose two houses.)
So, what can you do to mitigate this risk? Here we look at the couple of options open to you:
Payment Protection Insurance (PPI)
This form of insurance is designed to cover you if your earning power is compromised and, as a result, your debts become problematic. Policies can be obtained from lenders and insurers and will usually include certain caveats that need to be born in mind. For example, the self employed are normally excluded and there are limits on the circumstances that will be covered if you need to stop working and neither back pain or stress fall within the scope of your standard PPI plan.
You will need to be in full-time permanent employment on taking out your insurance and you will not be eligible to claim for any conditions that pre-date your cover.
(You should be aware that PPI is always optional. In the past these products have been mis-sold, with consumers being left under the impression that they had no choice but to take out PPI alongside their line of credit, even if it was of no use to them. If this has happened to you, you can reclaim the cost of from the PPI provider).
Income Protection Insurance (IPI)
Not to be confused with PPI, income protection insurance has some important differences. Much like PPI it will payout if you are unable to work due to illness, disability or as the result of an accident (redundancy cover can also be added as an additional extra). However, unlike PPI, you’re able to set exactly when your policy would kick in after you’ve stopped working. The longer the span of time you set, the lower the premium you’ll get.
So, if for instance your employer will pay for 6 months worth of sick leave as part of your terms of employment, you can tailor your cover to reflect this and save money in the process.
Policies remain in place until the end of the term, which you might typically set as your retirement age. If you claim and then go back to work you still have your cover in place.
As you’d expect premiums are normally related to how much of a risk you present to the underwriter in terms of your health, lifestyle, gender and age. If these factors make a policy unaffordable there are budget options with capped payouts, as well as ‘age related’ policies where your occupation and other risk factors are not considered.
Mortgage Payment Protection Insurance (MPPI)
As the name suggests, this form of insurance is intended solely for the purpose of covering your mortgage repayments should you be unable to work. As with the above products, payments only start after a set period of you leaving employment (usually between 30-60 days) however, many providers will back date payments to the start of this period once it has elapsed.
Unlike the options listed above, MPPI will cover unemployment as standard, but you will not be able to claim on it for as much as the first six months of the plan, meaning you will need an alternate provision (such as savings or a redundancy package) during this time.
There will be a cap on how much you can receive monthly, so this may not be appropriate if your mortgage is especially large.
]]>Alternatively, it may be used by somebody who needs to raise finance quickly and doesn’t have time for a mortgage to be arranged, for example, someone whose bought a property at auction and needs to pay before the agreed settlement date. Likewise, a developer might use a bridging loan if the property they’re buying is uninhabitable and cannot be mortgaged.
Normally, you’ll be able to borrow up to 80% of the equity of your property and the loan will last for a term spanning from a few months to a year or more. There is usually a minimum amount you can borrow between £10,000 and £30,000.
There are two types of bridging loan:
Closed: This is where you have a clearly defined arrangement in place for obtaining the capital to clear the loan. For example, you may have already exchanged on the sale of your property and, therefore, are able to demonstrate to a lender that your sale is unlikely to fall through.
Open: This is where the sale of the property you are moving out of is not yet assured. Obtaining finance in this scenario is much more difficult and lenders will need to find ways of assuring themselves that you’ll be able to repay them.
What Interest Rates Can I Expect?
Bridging rates are not cheap. In general you’ll be charged interest monthly at between 2% to 3% above the base rate set by the Bank of England, on top of which you’ll need to pay an arrangement fee which could cost you as much as 1.5% of the loan value. Even ignoring the fee, if you work out the rate in terms of APR, it will be in the region of 20% or so, more than double what you’d expect to pay on a mortgage.
In general, the lower the interest rate on offer, the higher the arrangement fee you’ll be charged and vice versa. Getting the best deal for you depends on the amount you are borrowing and how quickly you expect to repay the money. If you have a set date by which you are confident you’ll be able to clear off the loan, calculating whether a higher fee or a higher interest rate will favour you is a simple business.
What Are The Risks?
Defaulting: These loans are only cost effective in situations where they prevent the chain of your move falling apart and thus ensure that the money you’ve spent on all the previous arrangements won’t be wasted.
It’s imperative that you have an exit strategy in place otherwise you could end up lumbered with a mortgage-sized loan with a very high rate, which on top of your actual mortgage, you’ll likely find impossible to pay. As a result you’ll have no choice to default and may even have to consider becoming insolvent. As you’ll see below, given the securities your lending against you’ll have a lot to lose.
Double Security: Some lenders will demand not only your current home, but also your new property as security. This means both could be at risk if you are left unable to get rid of the first. Again it needs to be stressed, you should be highly confident of selling the first property if you’re taking a bridging loan to facilitate a move. (On a more positive note, offering both properties as security will make the loan cheaper.)
Lack of Regulation: Bridging loans only have to be regulated if they are ‘first charge’. (This means they are the primary source of finance being used to buy the property. This would apply if there’s no mortgage in place, or if you aren’t going to be using a mortgage.) If they are second charge, they won’t necessarily be subject to regulation. Given the consequences you could face if the loan becomes unmanageable, you may prefer to have the option of complaining to the financial ombudsman.
What Are The Benefits?
Become a Cash Buyer: If you’re not going to be using a mortgage to purchase your new property you are essentially a cash buyer. This can help you wrangle a discount as this is generally how people prefer to be paid. It can also help you save costs such as arrangement fees or commission to mortgage brokers.
Only Pay For The Credit You Use: In most cases there are no fees for early repayment so you only pay for the credit for the period in which the gap between purchase and sale actually needs to be ‘bridged’.
Save A Chain Collapse: Whilst bridging loans are expensive, so is the process of arranging a move. If things fall apart the money you’ve spent on valuations, surveys and other such costs of moving house will have been for nothing.
Speed: These loans can be arranged very quickly. Indeed, with some lenders you may even be dealing in hours rather than days, let alone weeks or months. This is vital if you are looking to save a chain.
Retained Interest: You will normally have the option to avoid paying interest on a monthly basis. Instead you can defer and pay it all at once when your lump sum comes in.
Using a Broker: Bridging finance brokers
How Can I Obtain A Bridging Loan?
As well as a good credit history, you will have to pass affordability tests to show that you can handle the finance in your hands going forward. This will include giving details of your exit strategy. This might be a loan offer, an exchanged contract, a missive to sell on or a decision in principle from a bank.
Depending on the lender in question the type of property you want will also factor into whether or not you can fund a purchase in this manner. As bridging loans are a specialist product, it can be worthwhile investigating lenders that deal exclusively in such loans, however, they are now widespread enough that highstreet banks also offer them.
What Are The Alternatives?
Letting: By remortgaging your current home you can release the equity you need to put down a deposit on the house you’re looking to buy. You’ll pay the new mortgage out of your income whilst converting the mortgage on your old property to a buy-to-let product. The rent paid to you by your tenants will cover your repayments on the first loan.
Obviously, this will only work if you are confident of finding tenants willing to pay high enough rent, which will depend on the area of the country you’re based in. You can, of course, always sell the property later.
A No Fee Mortgage: If you obtain a No Fee Mortgage (a mortgage where appraisal and arrangement fees are waived in return for a higher rate) on your new property then you maybe able to finance the purchase of a new property even before releasing the equity from your existing assets. This could end up being far more affordable in the long run provided you can cover both loans during the period between purchase and sale.
Wait: The simplest solution shouldn’t be overlooked. If you are struggling to sell your home as it is, taking out what essentially amounts to a second mortgage isn’t going to anything to make it easier to get your sale through, but it will up the stakes massively. By putting yourself under such pressure you’re going to weaken your position as a seller.
]]>Though it’s far from impossible to bag a great mortgage deal on your own steam, there are a number of advantages that come with engaging the services of a broker.
Independent Expertise
It should go without saying that your broker will be an expert on mortgage products and the market in general. But then that will also apply to any lender from whom you might buy directly. So why is their expertise worth any more?
For one thing, it’s important to remember that the broker isn’t selling you the mortgage so much as selling you their help in ensuring you end up with a product that’s both suitable and great value. Therefore they no interest in leading you one way or another.
Of course, not all brokers work by charging a fee. Some earn their living from commission paid by the lenders themselves. However, if you’re worried your broker will do little else but point you in the direction of their highest paying provider and pocket a referral fee, you should now that the facts of how they stand to be paid in any given situation will be made available to you.
All mortgage brokers have to supply a Key Facts Document, containing within it all the ins and outs of their commission and fees, ensuring transparency in their actions.
Information Is Not The Same As Advice
You may think that, so long as you talk to enough lenders, whether by visiting the branches of banks or talking to call centre staff, you’ll eventually have enough information to make the right choice.
However, you need to remember that whilst information is one thing, advice is quite another. Most of the people acting as a point of contact for mortgage providers aren’t legally qualified to offer advice. All they can do is tell you about their products. They can’t say whether they are a good fit for your situation. A broker can.
Influence
There aren’t many instances in life where the average consumer gets to throw their buying power around, much less when it comes to obtaining a mortgage. If anything, you’ll find yourself bending over backwards to demonstrate that you match the lender’s criteria.
If you’re with a broker then you’ll have a little more weight behind you. As they may be responsible for bringing any one lender a good deal of business they could be able to push the process along in a way you’d struggle to.
Protection Against A Poor Decision
Given how long you’ll have to go on paying for it, picking the wrong mortgage can be a costly mistake to make. If the decision was your own, then naturally enough, you have no one else to blame. You simply have to live with your error.
If, on the other hand, you were advised to take a mortgage that turned out to be ill-matched to your circumstances and consequentially unaffordable, you can complain and get compensation.
Save Time And Energy
Of course, using a broker will cost you money, but it will save you a great deal of time and energy. Realistically, it would take a great effort for you to compare every mortgage available to you, double check that you meet their criteria and make a decision.
This could be even harder if you’re a non-standard case. For a broker this won’t pose a problem. They’ll know where to look whether you need a lender offering help for first time buyers with only a small deposit or are looking to buy-to-let.
]]>However, you don’t have to be a big corporation to make the disparity between different rates of interest work in your favour. With a little bit of cunning you can take advantage of a ploy known as ‘stoozing’ to line your pockets through your everyday spending habits. Though it may sound too good to be true, it’s endorsed by well respected money-smart people such as Martin Lewis and is a tried and tested way to get the best out of your cash. Here we guide you through how to make use of this ingenious ploy.
How It Works
The first step is to obtain a credit card offering 0% interest on all spending. Of course, this isn’t always as easy as it sounds. The best cards will require you to have a good credit score. Likewise, if you have debts on existing cards, you should focus on looking for a card offering 0% balance transfers rather than one where spending is interest free (although some do provide both.)
If you are in a position to acquire such a card, the question of which to go for will be determined by a combination of two factors: the length of introductory 0% offer (it only ever applies for a limited time) and any extra rewards you stand to gain through using the card. Some of the best credit cards available in the UK today offer almost a year and a half of 0% spending to those with decent credit history, whilst others give bonuses such as clubcard points or vouchers.
When you have the card, switch all your spending over to it, setting up a direct debit to cover the minimum monthly repayment. As all your spending goes through the card, save for the aforementioned direct debit, your current account is left unscathed. You should then take this money and set it to work earning you interest, be it in an ISA or a high-interest savings account. It’s best to go for an option that won’t penalise you for withdrawals or limit your access to your money, as you may have to move quickly to pay off your balance at some point.
If you have a flexible or offset mortgage, your biggest financial gains are to be made by using the extra cash you have available to pay in and reduce the interest on your loan.
When the offer is coming to an end, pay off the balance using your savings and, as there’s no interest to be paid on the debt, you’ll be able to cover it with a nice margin left over. Alternatively, you can switch to another 0% offer and continue as before, though the fee for transferring the balance may eat up a lot of your profits.
Another ploy would be to simply take out another card with 0% on spending and run through the whole cycle again, keeping your savings piling up all the while.
Risks
If you do this wisely it’s basically a risk free way to make money. However, mistakes could hurt you. The most obvious error to avoid is failing to remember when the 0% offer expires. If you’re still piling all your spending on your credit card when the new rate kicks in, you could end up wiping out all your efforts in a single month.
Secondly, this tactic will mean you have a high level of unsecured debt whilst you’re playing the stoozing game. Of course, the whole point of the system is that you are using what you’re saving in interest to make money rather than spend it, but nevertheless it can impact on your ability to borrow until the balance is cleared. Of course, once it is cleared, it will constitute a positive contribution to your credit history.
Your credit history also needs to be considered if you want to use the scheme multiple times or on a few different cards at once, as a high number of applications across a short space of time can raise a red flag for anyone inspecting your file.
]]>Luckily, partial and full remissions are available in a number of scenarios.
In Receipt of Benefits
If you are in receipt of the following benefits you can get a full remission;
- Income related Job Seeker’s Allowance
- Income Support
- Working Tax Credit (as long as you aren’t also receiving Child Tax Credit)
- Pension Credit
- Income-related Employment and Support Allowance
To prove that you are in receipt of these benefits you need to include an official letter from the organisation responsible for your payments in the documentation you provide as part of your application. So, depending on the benefit in question this might be the Job Centre, The Department for Work and Pensions or the HMRC.
This letter will need to show your title, full name, address and postcode and confirm that you are currently receiving that benefit. It will also have to be less than a month old at the time you make your application (except for Working Tax Credit or Pension Credit, which will be valid as long as they refer to the current financial year.)
Low Income
If you have a low level of income you can also get a full remission. What’s classed as a low income will depend on whether you are single or part of a couple and whether you have any children, as shown in the table below. Note that even if the court fees are being charged as part of the cost of getting divorced, as you’re still legally married you count as a couple for remission purposes.
If you have more than 4 children the threshold goes up by £2,930.
| Annual Income (Gross) | Single | Couple |
|---|---|---|
| No Children | £13,000 | £18,000 |
| 1 Child | £15,930 | £20,930 |
| 2 Children | £18,860 | £23,860 |
| 3 Children | £21,790 | £26,790 |
| 4 Children | £24,720 | £29,720 |
You will need to be able to prove your income. If you are employed, you can do this by providing your last three month’s payslips (or last four weeks’ slips if you’re paid weekly). If you’re self employed you can prove your income with a tax return, HMRC self assessment or other documentation.
You also have to declare any other income you may have of any kind. Be it income from stocks and shares, rent from a lodger, a pension or child benefit.
Low Disposable Income
You can also get either a full or partial remission based on the level of your disposable income (the amount you have left over once essential expenses have been paid for).
To apply for this form of remission you will need to show your income as described above, but you will also need your monthly expenses. These consist of;
- Housing Costs:You can show these with a bank statement, tenancy agreement, mortgage statement or other form of documentation.
- Child Maintenance: If applicable you can demonstrate your costs by producing a court order, child support agency assessment, signed voluntary agreement.
- Child Care Expenses: If you have to pay for childcare, be it in the form of a nursery.
- Court Order: If you have a court order to pay an individual or organisation monthly instalments you can list this as an expense.
As well listing however much you are spending on the above you can also add fixed amount for the following;
- General Living Expenses: £315 a month.
- Dependant Children: £244 a month per child.
- Partner: £159 a month.
When you’ve submitted you evidence the court will work out your disposable income and if it’s less than £50 a month you will get a full remission. If it is more you will get a partial remission based on how much you can afford.
Applying
To apply you need to fill in a EX 160 form (which you can download by following that link) and collect the evidence you need to support your application as detailed above. You can either post this to the court you are dealing with or take it their in person.
Refund
If you paid a court fee and think you would’ve been eligible for a remission you can apply retrospectively for up to 6 months from making payment. As well as evidence to show your eligibility for a remission, you need to provide evidence of having paid the fee.
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