A CASH LUMP SUM!

Under the new rules you can, in principle, take all of your pension fund out as cash. The downside to this option is that only 25% of what you take would be free of tax and so you could end up paying up to 45% tax on some or all of the rest that you take out as cash. If you are tempted to take large amounts out as cash, do get someone to help you crunch the numbers as to how much tax you will have to pay. Having saved the money carefully in the pension over all those years, it does not make sense to waste it now. And if you splurge now on the Ferrari, it could mean you would have little left for your future needs. So this Pension Freedom does not provide freedom from taxation, but it does allow a great deal of flexibility for managing how you take it out!

FREEDOM TO TAKE YOUR PENSION BENEFIT IN A VARIETY OF WAYS !

In the past you had very little choice in how you could use your pension savings. You were allowed to take 25% of the pension fund as tax-free cash, but the rest had to be used to purchase an annuity so as to secure an income for life. You would buy an income for life with your pension funds. The older you were, the more income you would be able to buy with your pension fund. (Do make sure you understand what an annuity is as it still can be a useful pension option. We would be happy to help explain what it is.)

AGE FREEDOM!

Previously pensions generally had a minimum age of 60 or 65 for taking the benefits. The current pension regulations allow individuals to take any or all of their pension benefits from age 55. There are some exceptions so it is worth checking with your pension provider. Do remember that you do not have to retire in order to be able to access your pension benefits. For those who are in their 40s or younger, we also need to sound a warning that this minimum pension age of 55 is likely to increase in the future as the State Pension Age increases.

“FREEDOM” NOT TO HAVE ONE!

The first “Freedom” one has is not to have any pension at all! If you are self-employed, you do not have to contribute to a pension (other than the State Pension) and even if you are employed, you can opt out of the company’s Workplace Pension. Clearly, however, there is not much value in a "Freedom” which means you have very little to live on in retirement.

A number of people plan to use other sources of income in their later years such as renting out property or down-sizing to recover value from their own property. We would advise all our clients to use pensions to provide at least part of the income they will need in retirement. If you are unsure of why this is a good idea, do take advice.

PENSION FREEDOM?

It is now 3 years since the Government launched changes to pension regulations which they called “Pension Freedom”.

Essentially they made changes which gave more choices as to how you can use your pension savings when you reach pensionable age. It is worth knowing your options if you are 55 or older or approaching age 55. We can use our experience and expertise to help if you have questions.

The choices we examine here primarily relate to personal pensions, also called “Money Purchase” and “Defined Contribution” pensions. If you have a Final Salary Pension (also known as a Defined Benefit Plan), you will need to seek advice from your pension provider as the rules are often different from scheme to scheme.

DON’T FORGET THE “RENT-A-ROOM” SCHEME

Do remember that, if income is tight, you can make tax-free income by letting out a room or rooms in the property you live in. Up to £7,500 can be earned this way with no tax liability.

CHEAP LIFE ASSURANCE

The most inexpensive type of life assurance is called term assurance. It is life assurance for an agreed amount of cover over an agreed term of years at a fixed price. For example life assurance of £100,000 over 25 years for a 30 year old would only cost about £6.00 per month and for a 40 year old only about £9.00 per month.

If you would like an estimate of the cost of life assurance for you, just call or email us. Let us know your date of birth, whether you are a smoker or non-smoker and how much life assurance you would like to have, and we can reply with an illustration from the open market within an hour or two. We do not charge for this service and, if you want us to arrange the life assurance for you, there is usually no charge by us to you as the life companies pay commission.

FIND OUT NOW HOW MUCH YOU COULD BORROW!

In case you would like to find out immediately how much you could borrow using a Lifetime Mortgage, just email us on info@sovereignfinance.org and let us have the following data:

1. Your date of birth (both dates of birth if two are involved)

2. The estimated value of the property

3. Anything unusual about the property

We will reply by email within two hours. There is no charge for this service. (Note: We have over 30 years of experience and know-how in dealing with all types of mortgages.)

SOME LIFETIME MORTGAGE EXAMPLES

One couple faced repossession of their property as they had had an interest-only mortgage and their plan for repaying it had not worked out.

They also had other debts secured on the property. They did not have adequate income to afford a standard residential remortgage and the wife was quite a bit younger than the husband which meant that they could not get a big enough lifetime mortgage to pay off all the debts with charges on the property. We were able to source a Lifetime Mortgage provider who would work on the age of the husband only and all was sorted out just in time. Another man was single and owned his property outright. His income was pretty much enough to pay the expenses as they came due, but he had no children or close family and wanted to have access to funds to be able to enjoy life a bit more. It was possible to arrange a facility with a small initial borrowing and a considerable reserve which he could call on when needed. A recent survey was done to find out for what reasons people take out Lifetime Mortgages. The major reasons were as follows: 63% used it to pay for home improvements or renovations; 57% did it to meet a shortfall in income; and 55% did it to help their family in one way or another.

LIFETIME MORTGAGES

For those over 55, Lifetime Mortgages offer what is probably the greatest level of flexibility, including:

• Option to make no payments at all

• Option to make payments of interest regularly, or when you choose to do so

• Almost any past adverse credit can be considered

• There is no fixed term for the mortgage. It can last for life (or until the owner goes into care).

• There is a guarantee of no Negative Equity. So even if you choose to make no payments, the amount that has to be repaid at the end can never exceed the sale price of the property on the open market, regardless of how many years you have had the mortgage.

• You can take the maximum amount from the mortgage at the start, or take some to start with and have a reserve facility for drawing more when needed.

• You can use a Lifetime Mortgage to re-mortgage an existing property or to buy a new one.

• No income requirements or affordability calculations at all – the borrowing is based solely on the property value and the age of the borrower (note: where there are two borrowers on the mortgage, the lenders will use the age of the younger).

Here are examples of what the maximum borrowing could be currently (assuming a property value of £300,000):

Age 55       25% of value £76,000

Age 60       32% of value £97,000

Age 65       37% of value £112,000

Age 70       42% of value £127,000

Age 75       48% of value £144,000

Age 80       52% of value £156,000

(Note: there cannot be another mortgage on the property along with a Lifetime Mortgage so any existing mortgage must be paid off.)

Note: There are also options to have a Lifetime Mortgage on a rental property and on properties of unusual construction. However, the percentage of borrowing for a Lifetime Mortgage on a rental property is much less than that shown above.

BUY-TO-LET MORTGAGES

Generally Buy-To-Let (BTL) mortgages have already allowed lending well into retirement as the income to support the mortgage usually comes from the rental income only.

This age tolerance has become even more flexible with some lenders having no maximum age on when the mortgage has to be repaid. Do remember though that many BTL lenders have minimum initial income requirements. Contact us and we can make enquiries for you.

Do remember that most lenders also provide options to switch your mortgage product to a lower rate.

THE STANDARD RESIDENTIAL MORTGAGE

A number of lenders will now lend beyond the age of 70, some up to a maximum age of 89. A small number of lenders have also brought out a Retirement Interest Only Mortgage (RIO) which is an interest only mortgage with no fixed term. However, those lending beyond the age of 70 will normally only taken into account guaranteed income from pensions, investments or rental properties. The longer mortgage terms made possible by these older ages make a repayment mortgage much more affordable.

And to make it even more affordable, some lenders will allow interest-only payments either for all or a part of the mortgage. And some will allow down-sizing to be the means of repaying the mortgage. If you have guaranteed pension income or investment income or rental property income, there should be some options available for you. Contact us and we can find out what could be achieved. Generally this type of solution, i.e. standard residential mortgage, will have the best rates, and mortgage rates are still very competitive as the lenders seek to attract as large a share of the market as possible.

EXAMPLE: A long-standing client of ours had remarried and wanted to build a home of his (and her) dreams. He had a successful business but was in his 60s and the mortgage term offered made the borrowing unaffordable. We found a small Building Society who would do a longer term and also let him do half of it on an interest-only basis as he had a personal pension which he could access if needed.

ESCAPING THE MORTGAGE TRAPS

There has been a considerable increase in the number of options for mortgages for those aged 55 and older.

This represents a swing of the pendulum. Up to now lenders had been making it more difficult for older borrowers by restricting the maximum age they would lend to and tightening their calculations on how much they would lend. However this situation has been changing slowly, and these new options now give a number of ways for those in a mortgage trap to escape.

Changes have occurred in all three types of mortgages – standard residential mortgage and re-mortgages, buy-to-let mortgages and lifetime mortgages.

ASSISTING OUR CLIENTS ACHIEVE THEIR OBJECTIVES

Here are some comments from clients we have helped recently:

“Once again thank you for your excellent service.”

Mr RJ of Burgess Hill

“Once again thank you for all of your assistance with the mortgage, we can’t thank you enough.”

Mr JF of London

MORTGAGE MARKETPLACE

The Bank of England still intends to start raising interest rates at some point in the near future although the recent reduction in UK economic growth may cause some delays.

Generally residential rates are gradually increasing but still remain very competitive. If you are in a position to take advantage of the low rates, we would recommend you do so now rather than later.

And even those mature in years are being wooed by lenders offering extended terms and competitive rates. So do make enquiries if you are in this worthwhile category! We would be happy to assist in providing quotes. With the Lifetime Mortgages available as well there are fewer and fewer who are Mortgage Prisoners!

UNDERSTANDING ANNUITIES

Another benefit of being older!)

The older you are, the higher the lifetime income you can buy with your pension fund!

In the past when you reached “pension age” – usually 60 for women and 65 for men, you could take your tax-free cash but then the only option you had for the rest of the money was to purchase an “annuity”. An annuity is an income guaranteed for life.

The annuity rates have generally gone down in the past decade or two and the new pension freedoms have led many people to taking other options. However, it is still worth knowing what your options are as regards annuities as they can provide a guaranteed level of income for as long as you live.

Annuity providers work out what they can offer based on how long a person can be expected to live. Detailed records are kept as regards how long people live and what they die of. This allows the providers to work out pretty precisely a person’s life expectancy. Generally people are living longer due to better diets and the medical treatments available. While that is good for us, it is not good news for the annuity providers as that means they will have to pay out the income they have undertaken to provide for a longer time. Do remember that annuity providers are businesses so there needs to be an element of profit for them.

If you have a sum of money in your private pension, you can find out what sort of return you are likely to get by just asking for quotes. Quite a bit of information is needed for precise annuity quotes including:

1) your date of birth

2) details of any medical conditions and treatment you have (or have had in the past)

3) information about serious medical conditions your immediate family may have suffered or died from before age 60

4) whether you are a smoker or have been in the past, and the level of smoking

In asking for an annuity quote you will also need to specify whether you want the income that is paid

remain the same, or increase over the years; to continue to be paid to a spouse if you die before them; and how frequently you want the income paid, e.g. monthly, quarterly or annually. The more “bells and whistles” you want, the lower the starting level of the income will be. While normally an annuity stops on the death of the person concerned, it is possible to arrange an option whereby it will be paid out for a specified number of years whether or not the person concerned is alive or not. As a rough guideline, for someone in good health here are some approximate levels of income that can be bought with money from your pension (shown per £10,000 of purchase price for a male and with no spouse’s income). You can compare the return on your annuity investment against other investment options. Do remember that annuity income is taxed in the same way as earned income.

Age                 Level Annuity                Annuity Increasing by 3% p.a. (Starting Level)

55                   £434 per annum (4.3%)          £259 per annum (2.5%)

60                   £473 per annum (4.7%)          £300 per annum (3.0%)

65                   £534 per annum (5.3%)          £358 per annum (3.5%)

70                   £610 per annum (6.1%)          £430 per annum (4.3%)

Lifetime Mortgages Becoming More and More Flexible

Some of the additional features of the Lifetime Mortgages are as follows:

1) You can borrow an initial sum and arrange a facility so that you can take further funds later.

2) While normally a Lifetime Mortgage can only be done on an owner-occupied residential property, there are now some lifetime mortgage lenders who will consider lending on a let property. This can be a very useful option for landlords who do not then have to sell the property to raise funds for care or for other purposes. In principle the landlord could even pass the property down to their beneficiary.

More Magic!

A Mortgage Which Requires No Payments; With No Income Requirements; For Any Purpose!

Another Financial Tool Starting at Age 55

I am talking about the Lifetime Mortgage where the borrowing is based only on age and property value. These have become more and more flexible so you can either opt to make no payments with the mortgage repaid on sale of the property, or you can choose to make interest payments so the amount you owe stays the same. With Lifetime Mortgages the older you are the more you can borrow! As there is no fixed term to the mortgage, you do not have to worry about having to move out or come up with a large lump sum in your future years.

Here are some examples of what the maximum borrowing might be on a property with a value

of £300,000:

Age 55 £76,000 (25% of value)

Age 60 £97,000 (32% of value)

Age 65 £112,000 (37% of value)

Age 70 £127,500 (42% of value)

Age 75 £144,000 (48% of value)

Age 80 £156,000 (52% of value)

COMING OF AGE!

It is time to look at the advantages that come with reaching the larger numbers of years of age!

Age 55 – A Magic Age of Pension Freedom

Reaching age 55 is a milestone and with that milestone comes access to your private pension benefits. Here some key points for the 55er’s amongst us to be aware of:

• You don’t have to retire to take your pension benefits. You can continue to work and even continue to pay into a pension.

• You don’t have to take all of the benefits at one go – you can take the tax-free cash and leave the rest to build up. You can then draw out additional amounts whenever you wish (note: whatever you draw out over and above your tax-free amount is taxable). • You can take all of the benefits immediately if you want to (but there can be significant taxes to pay!).
• At any time from age 55 onwards you can take the benefits. • Previously you had to take out a lifetime annuity with all of your pension except the tax-free cash element. That is no longer true although you still have the option to use some or all of your pension fund to buy a lifetime annuity (which will give you a guaranteed income for life) – see section on annuities in this newsletter.
• If you do not need the pension benefits, you can create a very tax-effective life assurance arrangement by just leaving it invested and nominating who you would want to receive it. You can change your mind about the beneficiary at any time.

• For those lucky few who have what are called “final salary” pensions, the options above generally will not apply but the income you will enjoy will probably more than make up for it.

• Warning – this access to the magic circle of your pension funds will not always be pegged at age 55. As the Government increases the State Pension age in the future, they are committed to also increasing this minimum pension age.

(Note: these are only approximate levels of borrowing. In some cases it may be possible to borrow somewhat more than what is shown above and in other cases, the borrowing that is possible may be less. Interest rates vary depending on the lenders and the level of borrowing. Usually they are fixed for the term of the mortgage and vary from 3.9% upwards. In the case of a couple the borrowing will be calculated on the age of the younger. The Lifetime Mortgage has to be the only mortgage on the property.)

THINKING AHEAD!

We cannot stress enough the importance of thinking ahead when you get to the age which qualifies as ”older”. This is very much a personal matter but if we are blessed with a long life, it is likely that the time will come when we will need help – whether that be physical help or help in looking making decisions about finances. We would recommend that those reaching retirement age look into Lasting Power of Attorneys (LPAs). These allow you to appoint who you want to help you, should the time come when you need help.

In thinking ahead, making a Will is also a vital action, but that should be done really as soon as you start a family or acquire assets that you would want to pass down to specific people.

NEW TAX ALLOWANCES

Here are the new tax allowances effective from 6 April 2018:

• Personal Tax Allowance (the amount you can earn before paying any tax at all) goes up to £11,850 per year;

• Basic Rate Tax Band goes up to £34,500 per year (so a person would have to earn in excess of £11,850 plus £34,500, i.e. £46,350, before they would start having to pay 40% tax);

• Capital Gains Tax (the amount of profit you can make on a transaction such as sale of shares before you have to pay tax) goes up to £11,700;

• Inheritance Tax nil-rate band (the amount that an estate has to be valued at before an Inheritance Tax/Death Duty has to be paid) stays at £325,000 but the extra allowance, which can be achieved by leaving the main residence to direct descendants, goes up to £125,000;

• The ISA (Individual Savings Account) limit remains at £20,000;

• Rent-a-Room Scheme tax allowance remains at £7,500 per annum (this is from the letting out of furnished accommodation in your home).

PENSIONS USED AS LIFE ASSURANCE OR INHERITANCE PLANNING

The new Flexi Pension Plan rules have opened up new opportunities for pension plans to help with life assurance and passing the pension down to beneficiaries in a tax-efficient way. If you have a personal pension plan (these rules generally do not apply to Final Salary/Defined Benefit Pensions), you can nominate anyone you want to be the beneficiary. If you die before age 75, the value in the pension can pass to the beneficiary with no tax at all (!). If you die after age 75, it still passes to the beneficiary but would be taxed at the beneficiary’s tax rate. The beneficiary can also opt to set up his own flexi-pension with the monies and would be able to take money out when he chose, or even leave it to a beneficiary of their choosing.

WORKPLACE PENSIONS/AUTO-ENROLMENT

Those with a pension in their workplace will have an enforced increase to their pension contributions

from the 6th of April. Instead of both the individual and the company putting 1% of their salary into

the employee’s pension, it increases to 3% by the employee and a minimum of 2% by the employer. Someone earning £20,000 could find his monthly contribution going up from £14.00 or so per month to £40.00 per month. While that may not be a welcome extra cost, do remember that the increase also means more from the employer and, taking into account the additional amount the Government has to put in, that £40.00 per month taken from the employee would end up with them getting £83.00 in their pension – over 100% return on their money. Not bad!!

PENSIONS UNDER THE GUN

The Government, as it comes under pressure to make savings, continues to eye the tax advantages that pensions have – particularly as regards the tax-free cash that can be taken out. If you are looking to take your pension benefits, you might want to look to do that sooner rather than later. The same is true if you are looking to top-up your pension. Depending on your income currently you (or your company on your behalf) can put up to £40,000 per annum into your pension and get tax relief on it. For a basic rate taxpayer that means by contributing £32,000 he can get £8,000 from the Government to boost it up to the £40,000. A 40% taxpayer could end up with the £8,000 from the Government to boost it up to £40,000 and also get a further £8,000 in tax relief. It is worth reviewing your pension

planning. We can assist.

MORE FIRST-TIME BUYERS

While the amount of Buy-To-Let buying has gone down, there has been a definite increase in first-time buyers looking to get onto the property ladder. Lenders are looking to keep interest rates as

low as possible to continue to attract these new buyers, and are trying to be as flexible as they can in finding solutions such as involving parents in the transactions in one way or another. This can be by means of providing a deposit or acting as guarantor or even going onto the mortgage itself.

BUY-TO LET SLOWING DOWN

The Government’s actions of increasing the Stamp Duty on buying a second property, and also making letting less attractive tax-wise, has slowed the property market down. Those looking to start or continue letting need to become familiar with the new rules so as to make sure the activity remains profitable.

MORTGAGE STRATEGIES

First: Ensure you have the best rate you can achieve with your mortgage. In some cases the existing rates are variable but very attractive so changing them may not be a good idea. But generally you should make sure you are not just staying with your lender’s SVR (Standard Variable Rate) for lack

of a bit of initiative and asking for better.

Second: If you have an interest-only mortgage, you should review your plan for paying it off by

the end of the mortgage term, and make sure that plan is still workable. For some that may meandown-sizing, but where down-sizing may have looked attractive many years ago, when one is older it can look less attractive to have to move out of a place you still enjoy living in and moving away from an area you know and where you have friends and activities you enjoy. If you are in that situation, you may wish to move over to a repayment mortgage to get it paid off, or look at a Lifetime Mortgage to buy yourself more time. Lifetime Mortgages have become more and more flexible. Avoid the Interest-Only Mortgage Trap!

A NEW TAX YEAR!

As we thaw out from a remarkable period of cold weather, we move into the new

Tax Year with some uncertainties. Interest rates have started an upward move although

the Chairman of the Bank of England has promised that these would be small and far apart.

Brexit still is the focus of most of the Government’s attention when there are a number

of other areas that should be dealt with. Nevertheless, personal financial matters to be

addressed are pretty much the same as they have been for quite a while, i.e. getting the

best possible mortgage rate, while also making savings – using pensions or ISAs and

ensuring those savings make as good a return as possible.

WORKPLACE PENSIONS – PAYMENTS TO INCREASE

If you are employed and paying into a Workplace Pension, you should be advised by the

provider or your employer that the minimum payments will increase from 6 April 2018.

Currently the minimum payments have been 1% of salary by the employee and 1% by the

employer. These will increase to 3% by the employee and 2% by the employer. A person earning

£20,000 per annum (and with a scheme where the full pay is used to calculate the payment) would

see an increase in their deduction from about £14.00 per month to about £40.00 per month. While

that is a large increase, if you take into account what the Government adds and what the employer

adds, that £40.00 paid in would mean a total of about £84.00 going into the pension – a return of

210%! It is something to be aware of and budget for.

WHY DO PEOPLE TAKE OUT A LIFETIME MORTGAGE?

A recent survey was done for those taking out Lifetime Mortgages as to how they used the monies raised:

55% to help their family

63% to pay for home improvements or renovations

17% to take a holiday

19% for getting care provided at home

57% to meet a shortfall in income

We have also seen a number of people taking out a Lifetime Mortgage to clear an existing mortgage – particularly an interest-only one which is reaching the end of its term and where the money is not available to pay it off, and where the people do not want to have to sell their property.

MORTGAGES WITH NO MINIMUM INCOME

The Lifetime Mortgage provides a facility for borrowing based solely on your age and the value of the property. The older you are, the more you can borrow and you have the options of either paying just the interest for as long as you wish; making payments now and then; making regular payments so as to reduce the amount borrowed (as with a standard repayment mortgage); or letting the interest build up and be paid from the eventual sale of the property. Here is a sample of the maximum borrowing possible at various ages on a property with a value of £200,000:

Age 55       21% of value £42,000

Age 60       26% of value £52,000

Age 65       31% of value £62,000

Age 70       36% of value £72,000

Age 75       41% of value £82,000

Age 80       46% of value £92,000

Note: These are not guaranteed levels of borrowing. In some cases it may be possible to borrow

somewhat more than shown above, and in other cases, the borrowing may be less.

MORTGAGES FOR THE OVER 55s

There is more flexibility now for those over 55 to be able to take out a mortgage. You still need to meet the lender’s income requirements but earned income in many cases can be accepted up to age 70. Beyond age 70 the income the lenders will take into account usually needs to be pension income or income from property rental or investments.

AUTUMN BUDGET

There was not much excitement in the Chancellor’s Autumn Budget but the removal of Stamp Duty for First Time Buyers on purchases of up to £300,000 (£500,000 in the London area) should help boost the property market. Many tax matters were not changed.

For example, the total that can be put in ISAs (Individual Savings Accounts) each year was not changed. There were some other tweaks in the Budget and here is a brief summary:

The Personal Tax Allowance is increasing from the 6th of April 2018 from £11,500 to £11,850. This

is the amount you can earn before you have to pay any tax. You will pay tax at 20% on earnings

you make above this £11,850 up to a further £34,500. This means that in the tax year 6 April

2018 to 5 April 2019 you would not start paying higher rate tax (40%) until your total earnings

exceeded £46,350 (£11,850 plus £33,500). Those with earnings in excess of £100,000 still face the

progressive loss of their Personal Tax Allowance and those earning over £150,000 will pay the

Additional Rate (45%) on any income they have in excess of £150,000.

Some additional changes were:

• Pension Lifetime Allowance increasing from £1,000,000 to £1,030,000;

• Capital Gains Tax Annual exemption increasing from £11,300 to £11,700;

• The Inheritance Tax nil-rate band will stay at £325,000 but the Residence Nil-Rate Band (the rather complicated allowance for those who, when they die, pass their private residence on to family members) was increased to £125,000. So a couple who die and pass the property they have lived in to their family would not have to pay any Inheritance Tax unless the value of their joint estate exceeded £900,000;

• Those receiving the State Pension will be pleased at the 3% increase in their pension payments. If they also have savings, the Bank Base Rate increase could mean that they also might receive a bit more income from their savings;

One useful allowance that has been continued is the Rent-A-Room scheme whereby you can rent out furnished rooms in the home you live in and make up to £7,500 free of tax. You can let as much of the house as you wish as long as you live there as your residence.

PENSION FREEDOMS

Generally you are now able to access some or all of your private pension benefits from age 55. You are entitled to make the decisions as to how you us the pension benefits you have.

We would be happy to make those options clear to you. Also, if you lost touch with a pension benefit you feel you had from a past job, you can use the Government’s free Pension Tracing Service to track it down. For further details ring the Service on 0800 1223104.