Concessionary Purchase Mortgages
The process of transfer of gift, or deed of gift, is a tough one in the property market. For example you may be gifting property to family members at a reduced price, which is a viable idea, and can benefit both participants involved in the exchange. Concessionary mortgages are often most beneficial to the person being gifted, even more so if they are a first time buyer, although you do not need to be a FTB to arrange this mortgage. There are a number of different transaction methods which are considered a concessionary mortgage, so it is important to know what the limitations are as well as the best way to go about arranging it.
Concessionary Mortgage Experts
If you want to buy a house which is sold at a lower price, you may be able to do this with a concessionary mortgage. These are sometimes known as Below Market Value, or BMV for short, or more frequently known as Gifted Equity. Below Market Value sales often occur between family members, however you are not limited to buying from relatives to obtain this mortgage. Other people include landlords, employers, property developers. It is also available regarding properties affected by section 106 legislation in regards to Key Workers.
Concessionary mortgages work by using the money saved (which is the difference between the asking price and what you paid), in place of or contributing to your deposit money. An example scenario: buying a house from a family member, which was up for sale at £150,000, however they will sell it to you at a 10% discount, providing you with £15,000 for your deposit.
How do you get gifted equity?
Most mortgage providers will require you to have a deposit which is at least 5-10% of the below market value selling price of which you are borrowing for. Some lenders will take 100% of the loan into account, regardless your application will need to meet all of their requirements.
It is important to seek out professional advice when trying to obtain gifted equity due to the requirements put in place by lenders in order to permit the purchase. Some terms deny the seller to remain living in the house following the purchase. For example if you bought the house from a family member, they would not be allowed to continue to live there. Sometimes there are tax complications which have requirements to be met also, so it is recommended to obtain independent legal advice.
Concessionary mortgages, or gifted equity, is not the same thing as gifted deposits. Gifted deposits is where the deposit is provided to you from someone out of the property chain and the property is sold at market value.
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As a young person, unless you have progressed to the higher pay echelons quickly, you will have a limited amount of money left over each month after paying the typical expenses such as rent, food, utilities and travel.
Despite this, you are being given messages about the importance of both getting on the property ladder, and of saving into a pension. So just what is the best choice for a young person?
If this were a straightforward question to answer then this article would end right about now with a nice succinct statement, but there are a number of factors to consider before you decide the balance between saving for a deposit and saving for your retirement.
The Arguments For Getting A Mortgage Early
Buying a house is likely to be the single biggest purchase that you ever make and for many it is one of their main goals in life. Home ownership is seen as something that will typically pay off in the long term and that by taking this step, you are setting yourself up for a more comfortable retirement. But is this true? Let’s have a look at some of the main benefits of getting on the ladder sooner rather than later.
Lower Deposits Required
You may be thinking that an increase in house prices is great because it makes you richer on paper, but this is only true if you were to sell the property and downsize to release some of the equity that has built up.
Instead, one reason that changes in house prices are important is because in the medium term, they will almost certainly rise (see the graph of average UK house prices above) which means that the longer it takes you to save for a deposit, the larger it is going to have to be. In other words, putting all of your spare cash aside for a deposit will allow you to buy a home sooner (sounds obvious doesn’t it?) Or alternatively, if you take longer to save up a deposit, you may have to settle for something a bit smaller, or a property that is not in your ideal location.
Lower Total Mortgage Amount
Another reason why getting a mortgage as soon as you can is good for your long term finances is that the total size of the mortgage you have to get is likely to be smaller. If you wait 5 years before buying a home, the average price of a property might have risen by 20% – 40% or more (they can also go down of course).
Therefore, if you manage to buy sooner rather than later, a smaller overall mortgage will mean that your monthly repayments will be lower. With this being the case, you will have a larger amount of disposable income and so you can then put more money into a pension at this point.
For example, a £200,000 mortgage over 25 years with an interest rate of 4% would result in monthly repayments of £1,056 and a total repayment of £316,702.
Wait a year and the same property might require a mortgage of £210,000 and with the same term and interest, it gives monthly repayments of £1,108 and a total of £332,537.
That’s £52 a month difference which could go into a pension. It totals £15,835 over the term of the mortgage (£10,000 of that is the rise in the price of the property; the remaining £5,835 is the extra interest you end up paying).
Alternatively, a smaller total mortgage will allow you to choose a shorter repayment period which will result in lower overall repayments over the full term. The less you pay in total for your mortgage, the more you will have to put into a pension.
Let’s say that you can afford monthly repayments of £800. If you require a mortgage of £150,000 at 4% then you can have a repayment period of 25 years and the total bill comes to £237,527.
If you have to wait a couple of years because you are saving into a pension too, then the size of your mortgage could be £165,000 and at the same interest rate, this requires a 29 year term and results in a total repayment of £279,046.
So the delay in making the purchase not only led to a house price rise, but the resulting impact on the length of mortgage means that your total interest repayment is £26,519 higher too.
And finally, having a smaller mortgage with the same size deposit will mean that your loan-to-value (LTV) will be lower too. In other words, the percentage of the value of the property that is paid for by the mortgage is lower. The LTV plays a role in the interest rates that you will get offered by lenders, and so saving all of your money into a deposit will mean that your LTV is better and you will get better interests rates.
To illustrate the impact that interest rates can have on overall repayments, let’s take a mortgage of £200,000 over a period of 30 years and assume that the two different rates on offer are 3.5% and 4%. At the lower rate, you will repay £300,374 but, at just 0.5% more, this becomes £316,702 – an increase of £16,328.
So as you can see, by saving hard and getting on the property ladder sooner, you can enjoy a smaller total mortgage (assuming house prices rise), a shorter mortgage term and a lower rate of interest. Put all of these things together and the savings you make are considerable.
Rental Prices Tend To Be Higher Than Mortgage Repayments
For a large number of people, the amount of money that they would have to pay in rent surpasses the likely mortgage repayments they would face for a similar property. So by managing to buy a home, you can take the money that you save on rent and put it into a pension at this later date.
Another consideration is that, assuming a constant interest rate, your mortgage repayments will not increase. This is in stark contrast to rents which are likely to rise – you are, in effect, at the mercy of the rental market and the whim of your landlord.
Home Ownership Upon Retirement
Let’s take the extreme example where you never put any money away for a deposit, but instead take it all and invest it in a pension. You may end up with a larger pension pot come your retirement (although this is not guaranteed), but you will not own a home.
This will leave you having to pay rent which will eat away at everything that you’ve managed to squirrel away over time. Or, you may find that the level of income from your pension is not enough to fund a property of a size to which you are accustomed.
Conversely, owning your home outright at the point of retirement will mean that all income received from your pension and any other savings you have can be spent on other things or kept aside for a rainy day.
The Arguments For Saving Into A Pension
Once all is said and done, the fact of the matter is that come your retirement, you will have to live off the amount of money that you have accrued in your pension (plus the state pension if you qualify for it) and any other savings you have at this point.
Therefore, it is very important that you put money into a pension at some point during your life so that when you come to cash it out, it is enough for you to live off. But this article aims to answer the question of whether it is better to save early or to try and buy property as soon as possible.
So let’s have a look at some of the reasons why saving some money into a pension early might be a good idea.
The Effects Of Compound Growth
When you put money into a pension, it doesn’t just sit there waiting for you to use it when you retire. Instead, in a good pension fund, it will grow year on year for a period of 40 years or more (depending on when you start saving and at what age you intend to retire).
A relatively modest rate of growth can take the money that you are saving and turn it into something much much larger.
Let’s assume that you were to put a lump sum of £3,000 into a pension and that the annual rate of growth was, on average, 3%. After 40 years, your initial savings would be worth £9,786.11 which is more than 200% extra for you to utilise in your retirement. Here’s a graph of the total pension pot over this period:
Similarly, if you were to save £200 a month into a pension over 40 years, then you might expect to have built up a £144,000 pot, but if you were to compound the interest monthly then you’ll actually find yourself with £278,512.39 – almost double what you put in.
So by getting some money into a pension early, you are able to benefit most from the effects of compound interest. This becomes even more evident when you consider the amount you’d get back from that same £3,000 initial investment if you delayed it by 5 or 10 years. If the money is invested for 35 years instead of 40, you will get £1344.52 less in interest and if you only have the money in a pension for 30 years then you will receive £2504.32 less.
You see, the biggest absolute increases in the total pot occur in the latter years; that’s just how compound interest works. So the first year’s interest, based again on our £3,000 lump sum and 3% growth, is £90 while the 40th year’s interest is £285.03.
Employer Contributions
Many people in work will now find that they are enrolled in a pension scheme automatically by their employer and this has some real benefits.
By law, your employer will have to contribute to your pension pot although many companies have been offering such deals for a long time. It is not uncommon for an employer to match any amount that the employee pays into a pension. This is, essentially, free money as it neither affects your salary or the rate of tax you pay.
If you pay £150,000 into a workplace pension over the course of your career and your employer matches this, then you will end up with £300,000 in total. Sounds good doesn’t it?
Government Tax Relief
The government wants people to save into a pension and they incentivise this by offering tax relief on the money that you put in.
You can claim tax relief that is worth up to 100% of your annual earnings with the maximum being £40,000. Thus, if you have additional savings or receive some other lump sum that you want to invest, don’t put it all straight into your pension; stagger your payments across multiple tax years so that you do not cross this threshold, or you will lose the tax relief on any amount over the limit.
Your pension provider will automatically claim the basic rate of 20% tax relief for you when you save – this is known as “relief at source” – but if you are a higher rate taxpayer, then you can reclaim the additional 20% (or more if you are in the highest band) through your self assessment.
Tax relief is not an additional amount that is added to your own contributions, but rather an amount that you get back from them. In other words, a 20% tax relief on a saving of £10,000 means that you effectively get £2,000 back because the government pays it instead and you only pay £8,000. This is in contrast to the government adding 20% extra, which on £8,000 would only amount to £9,600 (i.e. you actually get 25% extra on top of what you put into the pot).
A 40% taxpayer would only have to contribute £6,000 to get £10,000 in total, while any higher rates of tax than this will mean even higher tax relief (within the above limits).
Put It All Together
If you combine the effects of employer contributions and tax relief and apply compound interest to it, then you’ll soon see how a relatively modest personal contribution can quickly add up to a significant pension pot over time.
This, then, is why putting some money away into a pension as soon as you can is a sensible approach to take to funding your retirement.
So What Should I Do? Save To Purchase Property Or Save Into A Pension
As stated earlier, this question is not one to which there is a straightforward answer. You have to weigh up a lot of factors before you can come to any solid conclusions; these include:
- The amount of rent you currently pay versus the likely amount you’d pay in mortgage repayments – any difference can be put into a pension after all.
- The expected rate of house price inflation over the coming 5 to 10 years – if this is relatively low (or even negative) then the argument for saving for a deposit becomes weaker, but if it is high then you should probably do all you can to save for a deposit at the expense of saving into a pension.
- The expected increase in rental prices – if this is significant then you will probably be better off getting a mortgage sooner rather than later.
- The expected growth rate of your pension – a government report in 2012 suggested that medium term rates of return will be lower than they were previously.
- The difference in mortgage interest rates for varying loan-to-value percentages – if there are particularly attractive (low) interest rates for those with a bigger deposit relative to their mortgage, then saving for this bigger deposit is a generally smart move. If there is little difference then you can probably aim for a smaller deposit.
Right now, it is the opinion of this website, that for a young person who eventually wants to buy a home of their own, any money that they can put aside should go towards a deposit rather than into a pension. We say this primarily because of current and expected house price inflation and the historically low interest rates that are leading to some very attractive fixed rate mortgage deals.
This recommendation may change in the future based on how these and other things change.
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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.
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]]>The world of stocks and shares is no exception to this trend and, no matter the size of the investment you’re looking to make trading online can seriously reduce the costs you would have, until recently, been unable to avoid.
Execution Only
The majority of internet share dealing operates on an ‘execution only’ basis. This means that the stock broker, who handles transactions on your behalf, will only act under your instructions and will not advise you in any way. This makes the whole process cheaper, as it means that even the best firms, will only be giving you a stripped down version of their full services. However, it means that you are on your own when it comes to making decisions, something you should bear in mind when picking an online trading account.
Nominee Accounts
Another thing to be aware off is that, when trading online as opposed to using paper stocks, the shares you buy will normally be held in what is known as a ‘nominee account’. This means that they are held on your behalf in an account registered to the stock broker.
Dividends that your shares earn will be paid into your account, however, as your name will not appear on the company in question’s register, you may not receive their annual reports. You may also miss out on any other perks that the shares attract.
Of course, you will still benefit if the value of the stocks that you buy goes up, but, as the shares are not in your name, there’s no way that you can sell them on your own behalf. Instead, you’ll need to sell them using the same broker you first bought them through. Further more, you will be obliged to pay a fee if you decide to move your stocks and shares to an account with another firm.
Costs
The costs associated with these forms of account are, on the whole lower than usual. The charges for selling and buying are very low in most instances. For example one firm charges just one percent for buying shares (with a minimum charge of £2.50). These charges are usually higher when it comes to selling. Be cautious of accounts which offer very low charges. They will inevitably make the money back further down the line, normally via a quarterly subscription charge.
If you think you’ll trade large amounts, you can save money by picking an account that charges a flat rate of commission rather than a % rate. As with any other method of buying shares you’ll have to pay a stamp duty of 0.5% of the transaction.
You should also make sure you match the type of account you get to frequency with which you think you’ll be likely to trade. This is because certain accounts will charge you for falling to make a certain number of trades per a month (as it lowers the firm’s commission.) It’s a false economy to save on charges by getting a regular trader account if you don’t intend to use it often.
Frequency of Trading
If you are only going to trade every now and again it might be wise to use an infrequent trader account, where you buy shares in batches from your broker. The online broker will collect these orders from all of their clients and buy them in bulk at a set time of the month. With these accounts there are no ‘inactivity charges’ to worry about, so if you don’t feel like trading you won’t be penalised.
The main drawback here is that the price of shares can change in the time between your order and their purchase. Find out the dates in the month purchases occur and make decisions as close to that day as possible to minimise of the chance of the price fluctuating before your order is carried out. Charges for these accounts are very low.
Regular trader accounts have a minimum requirement on the number of transactions you must make, the advantage being that they are done in real time, so you know for the certain the price you are paying.
Many come with features to help you do this if you are time poor, for example you may be able to set the account to buy and sell into different companies at set prices determined by you in advance.
Other Things to Consider
When picking a broker, make sure they have access to the markets and products you are interested in. Inquire as to whether you can trade stocks kept in an ISA. Make sure the broker supplies good information and see if they provide decent software to help you trade. Many brokers will let you try an account before you buy, which can be a good idea.
Spread Risk
Never invest more than you can afford to lose. Buy into different companies to ensure not all of your eggs are in one basket and use stop loss orders to make sure that, if a share starts to plummet in value you can sell it automatically and limit your losses.
Tax
Regardless of whether you buy your shares online or through other means, remember that any gains you make from increases in share prices will be taxed by the government unless you invest via a self-select ISA.
]]>Here we take you through five of the shares being touted by the experts and weigh up their credentials for you should you wish to buy them online.
Vodafone
Vodafone had a big year in 2013. Their share price rose by 50% and is now higher than it has been for over a decade. This is partly down to the group having sold a massive asset – a 45% stake in the US telecoms company Verizon Wireless – for a whopping $130 billion. This historic deal is going to end up showering shareholders in cash, with quite a large portion of the funds being paid out in eagerly awaited dividends.
Obviously, such a big move brings with it some uncertainties. One thing you should expect is for the share price to go down once the dividend has been paid, as is normal. After this point, it remains to be seen just what the future holds, but those backing Vodafone as a good bet are largely doing so on the basis that, having been slimmed down, it will be more attractive to an American firm looking to move into Europe, with AT&T being the name bandied about.
A takeover bid would push up share prices significantly, especially if a bidding war ensues. Some think that Japanese firm, Softbank, may also be interested.
Of course, this is just speculation, but then even rumours of a takeover can cause jumps in price. As ever, you do need to look at the potential downsides. Whilst the cash from the Verizon sale is very nice for existing shareholders, it takes away some growth potential. The company is now also more tightly bound to the fortunes of Europe, which could also be seen as a negative.
Wolseley
Last year saw a lot of attention from the press toward the construction market, and, whilst the upturn over here was marginal, it was more pronounced over the pond. This trend should benefit the building materials firm Wolseley. It’s protected its profitability through difficult times and may do much better now that economic conditions are turning in favour of the sector.
The group have traditionally used a strategy of using bolt on acquisitions to drive their growth. They didn’t manage to find too many attractive targets last year, which one might assume would make them more likely to aggressively seek out more opportunities in 2014. Indeed, it’s been reported that they currently have seven or eight possibilities all ready lined up.
There are also signs from within that management are feeling confident about the company’s fortunes. They recently introduced an annual dividend policy, for example. This requires long term planning to budget for and can be taken as a sign of assured stability. Their balance sheet also looks pretty good, with debt levels nice and low.
Detractors can point to a recent track record of low yields and a very high price to earnings ratio as reasons to stay away, but if you like the outlook for construction in 2014, they could be your chance to benefit from it.
Monitise
Mobile banking looks like it will only get bigger as smartphones and tablets become more affordable and people become more comfortable with the ease and convenience that banking apps offer. As such these apps are big business and Monetise provide the technology behind a range of mobile banking apps, including, amongst others, the offerings available from Lloyds, Natwest and HSBC.
On the downside, the company, being relatively new, has yet to turn a profit and, as many like minded people see the potential inherent in their position, the share price has already gone up a fair bit, meaning if you want to sit back and wait to assess the company’s direction you may miss out on a bargain as other speculators swoop and push the price into regions where it could start to look less attractive.
Last year, giving their position on the group, Goldman Sachs said that a projection of 50% year on year growth could be viewed as “conservative” – a good indicator that more rapid expansion could well be on the cards.
Thomas Cook
On the surface it seems a bit odd that one of the best performing shares of 2013 would make the list of tips for 2014. As stated above, once a good thing becomes obvious it loses a bit of its value. Thomas Cook is a blindingly obvious performer with the price having shot up 250% over the course of the last 12 months. Simply based on these staggering figures you might assume the stock has nowhere else to go, but that could be a case of not seeing the wood for the trees.
Consumer confidence is on the up as the recovery seems to be gaining traction, unemployment is falling and interest rates are still low whilst inflation is calming down a little. All of these things stand to work in favour of the holiday giant. They have further cost cutting measures to come that will improve profitability further, they are developing their online arm and, even as things stand, most people would call the price to earnings ratio relatively low.
Barratt’s
Another one you might look to for exposure to construction is Barratt’s, the house builders. The government is doing its best to stimulate the property market, notably through Help to buy and other first time buyer schemes. In the view of some, these schemes make property look like a bad investment, with fears of a bubble taking off the shine. Others are less sceptical, believing that the policies will only help. Where you stand on this issue will likely determine your stance on Barratt’s. The share price rose 64pc last year and could be set to continue on the up.
This article does not constitute any form of professional financial advice – the value of shares can rise and it can fall and it is the duty of the investor to make an informed decision of their own. FinanceNet.org will not be held liable for any changes in share value or any losses should they arise.
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]]>Unit trusts offer relatively few complications for investors, but how do you know if they are the right investment for you? Asking some of the following questions will help you answer that question.
How flexible are you?
Some investors like to trade on the stock exchange as if they were having a cold shower: they just want to get in, reap the benefits and then get back out as swiftly as possible, by buying shares and selling them soon after for quick and easy money. This shouldn’t be the case with unit trusts (nor really should it be with shares), which are more a medium-to-long-term investment.
The other thing is that the price of units tends to be forwarded, which means the price you pay is set at a future time in the day that has not yet taken place. As a result, you don’t know how much the unit will cost at the time that you order the unit(s). You should leave a margin either side of the minimum and maximum you are prepared to spend per unit to cover the price. You can also specify a limit for your fund manager of how much you are willing to pay for a unit.
How ambitious are you?
Being an open-ended collective investment scheme, many people can join the unit trust and fund managers can increase the number of units if it is appropriate. You can buy as many units as are available if you wish to, depending on your resources and availability. If you do not have major sums of money to invest, or do not wish to invest large sums, unit trusts are a viable alternative, providing an affordable way to invest.
The fact that lots of people can join the trust also means that the fund managers have more resources to purchase securities and the option to diversify the investment, helping to hedge against risk and increase the chances of higher returns. There are two components to returns: first, there is the income raised from the underlying investments, such as in the form of dividends or interest, and secondly, the value of the securities held by the fund itself can also increase.
How much do you know about investment?
Though it’s always wise to know as much as possible about an investment before parting with your money, one of the good things about unit trusts is that there will be a fund manager looking after the investment for you. One of the main decisions you will need to make, however, is whether to place your money into an actively managed fund, in which your fund manager would buy shares selectively, or in an indexed fund, in which the fund manager buys a broad range of shares matching a market index, such as the FTSE 100.
You can follow unit trust progress by reading the financial press and, of course, your fund manager’s reports, but you will not have to do any of the buying and selling on the stock exchange. And being a unit trust, you buy units from the fund itself, and sell them back to the fund, rather than trade them on the stock exchange.
How often do you study the stock exchanges?
Studying the stock exchanges frequently is important when you are choosing a unit trust. There is a range of different unit trusts and their objectives, likewise, vary. Some concentrate on investing in shares, others on buying both shares and bonds, some on real estate, etc. Studying the markets and reading the financial press regularly can provide you with an insight into which sectors, indices, etc. are profitable or where you would like your own money to go. You can then choose a unit trust accordingly, or, once you’ve already joined a trust, switch to a different trust within the fund management company if you require.
Unit trusts are a good investment both for newcomers to the investment world and for old financial hands, though if you are in a hurry to make money, you may wish to trade on the stock exchange directly. If you are otherwise flexible in your aims, they are a good investment, likewise if you are not overly rigid with the amount of money you can invest. Even if you cannot invest particularly high sums, unit trusts still provide flexibility.
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]]>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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]]>Depending on individual circumstances this figure can end up much higher but, by the same token, it is also possible to spend significantly less than this.
Here we give an overview of the process of getting divorced, look at the various costs involved and offer advice on what you can do to minimise them.
What Are The Standard Court Fees?
Even in the most straightforward divorce cases, you still have to pay two different sets of court fees, once to get proceedings started and once to have your divorce finalised.
Filing for Divorce
If you are looking to initiate proceedings you need to petition for divorce. This involves filling in a divorce petition form giving some details of your situation and stating your grounds for divorce. This form should be sent to your nearest county court.
To have your petition filed and get the divorce started you will need to pay a court fee of £340. If the recipient of the petition fails to respond it won’t stop you being able to proceed but it could slow things up and you may incur further costs in having to have a bailiff serve the forms to them. To avoid this, if possible, it’s best to discuss matters with your spouse to secure their cooperation before beginning.
Obtaining a Decree Nisi and a Decree Absolute
If your spouse has no objections to your petition you then need to apply for a ‘Decree Nisi’. (If they dispute your petition you may need a court hearing or mediation).
You don’t have to pay anything to get a Decree Nisi, however you cannot get a ‘Decree Absolute’, the final stage in terminating your marriage, until at least 6 weeks after obtaining the Decree Nisi.
To have your divorce finalised you simply need a notice of application for a decree nisi to be made absolute and pay the £45 court fee. Once you’ve done this you’re marriage is over and you should inform any institutions who will need to know this and be sure to alter legal documents such as life insurance policies or wills that are based around your previous relationship.
Affidavit
Normally, even in uncontested divorces, you will have to have swear an affidavit during court proceedings. This has be done in front of a solicitor and costs £7.50.
Can I Get Help With Court Fees?
You can get a reduction or even a complete exemption from court fees if you are on a living on a low income or benefits. To apply for a remission or to claim back after having paid the fee you need to use an EX160 form. You can find full details of how to go about doing this with this guide to applying for a court fee remission.
Can I Get Help With The Paper Work?
If your divorce does remain uncontested, having it go through will simply be a matter of filing out the appropriate paper work. This is relatively straightforward and you can get written guidance on filling them out when you download them. (You can do this at the HM Courts and Tribunal Service’s form finder website.)
However if you do require help over the various hurdles in an uncontested divorce it can be acquired at relatively low cost. There are sites out there who will do all the paper work for you. For example www.quickie-divorce.com will take care of proceedings for £67.
Alternatively, you can get packages that include limited legal advice, guidance and checking of forms for under £300 including VAT, such as the Co-Op’s DIY divorce range.
Whilst this could make life a little easier, it should be stressed that the forms are simple and free guidance on filling them out is also easily available free of charge.
Working Together to Keep Costs Down
When you petition for divorce you can opt to demand that your spouse pays your divorce costs. Obviously, if they’re likely to agree this will save you the cost of the fees, however, the easiest way to keep the cost of a divorce down is to keep it uncontested.
By settling out of court quickly you can avoid having to use solicitors. If the divorce is contested you will need attended court hearings and will, as a result, will need help from legal professionals. You will have to consult a solicitor and will also probably need to use a barrister as well. If there are multiple hearings this can become incredibly expensive.
If you are able to work together you and your spouse can easily keep unavoidable costs to a minimum and completely avoid the need for expensive legal battles. For instance, one of you will need to a petitioner and one a respondent. It does not particularly matter who is which in terms of lasting affects, but if it is not agreed before hand it can create animosity as one party will feel they are on ‘the receiving end’ of things (not least because all the stated grounds of divorce will relate to their behaviour rather than the petitioners.)
This can mean the respondent feels the need to defend themselves. If they do, you will both need to go to a court hearing, which will take up more of your time and money. Alternatively, they may start their own divorce proceedings and give their own grounds for divorce. Again this adds more time and expense (there’s a £230 to pay) to the process.
If you are able to decide between you how you’ll spilt the costs and you understand from the outset that it makes no difference who divorces whom or on what grounds you can avoid things being drawn out of an unnecessary desire to ‘set the record straight’.
(It should be noted that under certain grounds for divorce the respondent will normally be told to pay the costs instead of the petitioner by the court. However this does not need to be a problem, as long as you agree to just split costs before hand. If you’re the respondent you don’t need to worry about this as counting as an admission of guilt that could be taken into account with consideration to how assets will be split or how custody might work. This would only apply in cases of very extreme unreasonable behaviour.)
What About Fixed Fees Divorces From Solicitors’ Firms?
If you want legal professionals rather than an online service, you can hire a solicitor to take your case for a set fee of around between £1,000 and £1,500 (it will be about half this if you are the respondent rather than the petitioner).
This will normally cover;
- Disbursements
- Some level of consultation
- Completion of all forms
- Court fees
- Communication
As you can see from the above list, aside from the fact that you will get a consultation, there is very little included here that you cannot do for fee yourself or at low cost, so think carefully about whether you need such help.
These fixed fees are only usually available for straightforward, undefended divorces and the fees will not cover any work relating to getting your financial arrangements in order (splitting assets, property and pensions etc) or arranging custody of children.
Can I Apply For Legal Aid?
Legal Aid used to be available to help those on low incomes take legal action to overcome problems in their lives. However as of April 2013 this has been comprehensively cut in a wide range of areas, divorce included.
You now only will only be eligible for legal aid to help with the cost of a divorce in cases where domestic violence, or a significant of violence, can be proven. As a result about 200,000 more cases a year will have to be paid for privately.
More Complicated Cases
Whilst attaining the legally recognised status of divorced is fairly easy, unless you can do it with your spouse, sorting out financial arrangements and custody is not so easy. Even if your relationship has stayed amicable, if you have assets such as property and if there are children involved you will need the help of legal representatives to help ensure you get a fair deal. Even if this does not entail fighting it out in court, at around £100 an hour, mediation behind closed doors can still be costly.
Obviously, how much you will end up paying in such cases will vary according to your circumstances but there are various things you can do to try and stop costs spiraling out of your reach.
The most important is to get a very clear estimate of how much your case is going to cost and to establish how you’ll be expected to meet this estimate. For example, by having fees reviewed and paid monthly can ensure you aren’t hit by an astronomical bill out of the blue.
Secondly, you should be prepared to put in as much effort as possible handling tasks that you can perform yourself to ensure they aren’t done on your solicitor’s time. For example, your solicitor will require fairly detailed information about your finances. If you can get organised and do this for them you can avoid being charged for having them do it.
You also need to be smart with your communications. Letters and phone calls to your solicitor between scheduled meetings will cost you. It’s best to save anything you need to say until you’re face to face and raise it as part of a planned agenda. On the other hand, you need to able to respond quickly to communication from your solicitor or they may have to bill you for time spent trying to get their instructions.
Being able to come to a quick agreement with your spouse wherever you can will also speed things up and help keep costs manageable.
Problems With The Industry
In February of 2013 the legal ombudsman warned that solicitors were not doing enough to help clients keep costs down and act in their best interests. Indeed, close to 20% of all complaints about legal professionals related to divorce cases making it the single worst performing area of law.
A quarter of these complaints related to cost. In one famous case which recently garnered much media attention a woman was presented with a bill which was £15,000 higher than the original quote she received. Amongst the hard to decipher list of costs it was discovered she’d been charged £4,000 for photocopying.
The report, entitled The Cost of Separation, found that two key problems were to be found in solicitors failing to keep their clients updated on the size of the bill they’re amassing and, perhaps more worryingly, failing to advise their customers to take a more conciliatory, less expensive approach wherever possible.
Given that lengthy legal battles can costs the best part of £100,000 it’s vital couples should be aware of how much they can save buy avoiding the necessity for court judgments.
The key is to, as stated above, take a DIY approach to your divorce and, where this is not possible to demand a clear outline on price from the start and to keep constant tabs on the price. Always be aware that pursuing an aggressive course of action with regards to settlements will be costly and does not guarantee you a favorable result.
]]>Spread betting involves speculating on the direction of a financial asset. That asset could be a share, commodity, index or option. With spread betting you do not actually purchase the financial asset you are speculating on. The spread bet is a derivative of the underlying asset.
If you correctly predict the movement of the underlying asset then you can profit, similarly, if you are incorrect then you will make a loss. Financial spread bets allow you the opportunity to make a profit– or loss– on both up and down movements.
Spread betting takes its name from the fact that you are quoted two different prices for any given spread bet. These are the price at which you can buy and the price at which you can sell. The difference between the two is known as the spread.
How Does Spread Betting Differ From Traditional Trading?
One difference between spread betting and stock market trading is the absence of commissions. When buying or selling shares online or options listed on the stock market through a broker you are charged a commission. This may either be a flat rate or a percentage of the total purchase or sale price. This commission is how a stockbroker earns their income. In contrast, with spread betting the company mainly earns their profit from the spread– the difference between the buy and the sell price.
Advantages Of Spread Betting
- No commissions – As mentioned above one of the key advantage of spread betting is the fact that there are no commissions. This is particularly advantageous for frequent traders.
- Low deposit requirements – Many spread betting firms will allow you to make trades with as little as a 5% deposit. So for example, with £5000 on deposit with a spread betting firm you could have the equivalent exposure of £100,000. Do not forget that losses are also subject to leverage– and can similarly exceed your initial deposit.
- Wide range of trading tools – Spread betting companies offer a wide range of trading tools which can be used to help reduce your risk. This includes being able to place guaranteed stop orders which close a trade at a specified price no matter what the underlying market conditions are.
- Access to a many different types of assets – From a single spread betting account you can have the ability to speculate on a wide range of financial assets. This includes commodities, options, indices, currencies, shares and bonds.
- Tax advantages are available – Spread betting can have tax advantages depending on where you are located. In the UK there is no stamp duty or capital gains tax on any profits that are made.
- Profit from falling markets – Unlike purchasing shares or an index fund you can profit from both a falling and a rising market with spread betting. While your profits are essentially limitless, so too are your losses. The more the financial asset moves in the direction that you have predicted the greater your profit– or if it moves against you, the greater your loss.
The Importance Of Keeping Up-To-Date With Key Financial Indicators
To augment your spread betting training it is critical that you keep up-to-date with changing conditions in the market. There are economic calendar events that financial spread bettors need to be aware of and keep track of. Not only must the spread bettor know what announcements are important, but also what impact these will have. Announcements from the world’s largest economy – the US – such as average weekly jobless claims, building permits and manufacturer’s orders are all leading indicators which may signal the future direction of financial markets.
In Ari Kiev’s book ‘Trading To Win’ he highlights the critical importance of having access to the latest information: ‘To be a super-trader, you’ll need an edge to overcome the laws of probability and the uncertainty of the marketplace. That edge comes from information flow, the ability to correct your habits in terms of the market’s characteristics.’
The spread bettor should also make use of spread betting training resources and educational material. There is a wealth of free resources available on the internet that the spread bettor can use to become educated in how to profit from these financial instruments. As with many endeavours, failing to prepare with spread betting, is simply preparing to fail.
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]]>As a result, various organisations are attempting to make it easier for first time buyers to get past these barriers. If you’re struggling to finance a move you may be able to benefit from a number of different schemes that could help you make that first purchase.
Government Schemes
The government have recently updated the schemes available to assist those struggling to buy a home, and there are still more to come. Here’s a look at the various initiatives available;
Help To Buy Equity Loans
This scheme, which only applies to new build properties, allows you to purchase a home with only a 5% deposit.
Of the remaining 95% of the house price only 75% needs to be covered by a mortgage. The final 20% can be paid for using a loan from the government. The terms of these loans are extremely favourable. As well as being interest free there are no fees payable for the first five years.
After this period you’ll be charged fee of 1.75% of the house price, which will rise in line with RPI plus 1% year on year.
You do not need to repay the loan until you either sell the house or come to the end of your mortgage term, but you also have the option pay it back before time should you so choose.
You don’t have to be a first time buyer to make use of the scheme but you must have a good credit history and be able to demonstrate you’ll be able to put down the 5% deposit and meet the other costs of moving house, such as stamp duty. If you already own another property you’ll need to have your name removed from the deeds before completing your move. Finally, you can only use a Help to Buy loan for properties costing less than £600,000.
To look for eligible properties you need to find the Help to Buy agent for your area.
HomeBuy Direct
This scheme is very similar to ‘Help to Buy Equity Loans’ but with a couple of key differences. For one, it is only available for people with a combined household income of less than £60,000. The other key difference is that the equity loan, of which half is provided by the government and half by the housebuilder, can account for up to 30% of the price of the house. This means that between your deposit (which must be at least 5%) and the mortgage you only need to cover 70% of the house price, making it even more affordable.
Aside from these differences, the loans have the same terms as with the Help to Buy equity loan scheme.
NewBuy
The new buy scheme is also similar in that it allows you to purchase a home with only a 5% deposit. Again you don’t actually have to be a first time buyer to use the scheme, however you cannot use it to buy a second home or to purchase on a buy-to-let basis.
The property has to be a new build from a builder taking part in the scheme and can cost no more than £500,000. You also need to be a UK citizen or have indefinite leave to remain.
Other than that, you simply need to apply to one of the six lender’s participating in the NewBuy scheme as you would for any other form of mortgage. If you fulfil their criteria you can obtain a loan for up to 95% of the property.
You can look for properties available through the NewBuy scheme here.
Help to Buy Mortgage Guarantee
This scheme is another aimed at allowing people who would otherwise struggle to raise a big enough deposit to buy a home. The government will provide the mortgage lender a guarantee against 15% of the loan and, in return, they will offer mortgages of up to 95% of the price of the house. This means that, as with the other schemes described above, you only need a 5% deposit. however, it is significantly different in that it can be used to purchase both new builds and existing properties.
The scheme will not come into effect until January 2014 and will be available for properties costing up to £600,000. The property must be the main home of the person buying it and owned solely by them.
You will still have to secure a mortgage from a lender, passing their checks as you would normally, and it remains to be seen how affordable the rates on offer will be.
Shared Ownership Schemes
If you’re keen to have your money going towards ownership of a property instead of simply seeing it go into the hands of your landlord but cannot afford to take on a mortgage, you may be able to get help from a housing association.
Through a shared ownership scheme you could use a mortgage to buy between 25%-75% of your home whilst paying rent on the remainder. You will be eligible for this scheme if you earn less then £60,000 and are renting either a council or housing association property.
You can buy more shares in the home following your initial purchase though, the price you’ll need to pay could fluctuate up or down from your initial purchase depending on movements in the property market.
If eventually come to own the house outright and want to sell it the housing association has the right of first refusal, which means they can decide whether or not they want to buy it back before you can accept any other offers. If you only own a share of the house the housing association can look for a buyer to ensure your share is sold to someone in housing need.
The government’s Help to Buy shared ownership scheme is oversubscribed and therefore has to prioritise applicants. Existing social tenants and serving members of the armed forces are top of the list followed by those deemed to be ‘key workers’ by the local authority (these are generally people in roles such as policing, nursing and care work.) Anyone else who fits the criteria for the scheme, can demonstrate that they can afford their payments, don’t have adverse credit history, and cannot afford to buy a suitable home by another means will be dealt with after that.
Schemes From Lenders
Many lender’s have their own initiatives aimed at giving those with only a small deposit the chance to own a home. One popular method is to provide economical ways for family and friends in a stronger financial position to help a first time buyer obtain a property.
Mortgages Designed To Allow Parental Help
Obviously these products vary from lender to lender but generally they work on the same basis – whilst the homebuyer needs only a 5% deposit, their ‘helper’ (be this a parent or other loved one) will need to provide funds equivalent to between 10% – 20% of the property’s value. This money is held as a security in a special account where it will earn a decent amount of interest (usually 2-3%). The money is locked in this account for a set period of time (about three years) after which, as long as the homebuyer has kept up their repayments, it’s returned along with the interest it has earned.
The benefit here is that, thanks to the security you’ve been provided with, you can get a 95% mortgage and a rate that would normally come with a 75% mortgage, making it much more affordable in the long term.
Another way parents can help make buying a home more affordable for their children is through a ‘family offset mortgage’. These work in the same way as a regular offset mortgage, where savings are used to cancel out the interest on an equivalent portion of the outstanding loan. The difference is parents can link their savings account to their child’s mortgage (assuming they are happy to stop earning interest on their money.)
90% – 95% Mortgages
Though it may seem to go against what we hear about lending in the current financial climate, there are many lenders in the UK who offer mortgages to those with small deposits as part of their standard product line. Naturally, rates are comparatively high at close to 6% in some instances. (With a 25% deposit you’d expect a rate closer to 3.5%)
Other Offers from Other Financial Institutions
Financial institutions have a range of other products designed to make it easier for first time buyers to proceed with a purchase even if they only have a small deposit:
Save to Buy Accounts: You open a savings account or ISA in which you save towards your deposit. Once you’ve held the account for a set period of time (six months or so) as long as you’ve paid in regularly, you’ll qualify for a 95% mortgage and will receive a cash gift depending on how much you saved.
Mortgages Guaranteed by Local Authorities:
Some lenders already have schemes similar to the upcoming Help to Buy mortgage guarantee plan in place. You can get a mortgage with a 5% deposit so long as the local authority is happy to back you for 20% of the house price.
Offers from Developers
Aside from participating in government backed schemes, many property owners may offer their own deals to first time buyers who only have a small deposit available. Here are some examples of the sort of offers developers are currently offering:
Deposit Match: If you have a 5% deposit the developer will provide another 5% meaning you can benefit from access to a smaller 90% mortgage with a more affordable rate.
Shared Equity: Works in a similar way as the government’s equity loans, except the interest free loan comes from solely from the developer.
Family and Friends Schemes: Work in a similar way to the mortgage products described above.