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.

Pension Freedoms

The majority of pensions now basically consist of a pot of money. The current rules allow a person aged 55 or older to take 25% of the value of this pot tax-free. The rest can be used to set up an income for life or to draw down lump sums when needed. Any of these remaining funds that are taken out or turned into income are taxable. They are treated the same way as any other earned income in the year they are taken.

While the majority of people we see have the relatively simple type of pension described above, there are some complications with older pensions where there are certain guaranteed benefits built into the plan. It is worth having such plans looked at by a professional to ensure you are not missing out.

There are also many people who still will be able to benefit from better pension schemes termed

“defined benefit or final salary pensions” as they guarantee an income based on years of service and salary. We are available for assistance with such matters. Just give us a ring.

SOME TIPS FOR THOSE OF US GROWING OLDER (OR WITH FRIENDS OR RELATIVES GROWING OLDER!)

• If income is tight, consider the possibility of renting out a room or two. You can earn up to £7,500 a year from this free of any tax.

• As we reach a point where some help is needed with our affairs, we should consider taking out a Lasting Power of Attorney to ensure there is someone who will be able to assist when needed.

• Make sure you are not paying more tax than you need to. The new taxation of savings income and of dividends may work out in your favour.

MORTGAGE PRISONER? THE CHAINS GROW LOOSER!

Mortgage lenders are becoming more flexible in dealing with borrowers who are locked into their present mortgage arrangement for one reason or another.

 

 There are those who were self-employed and found that the self-certification of income enabled them to raise the level of the mortgage they needed. Others will have taken out a mortgage in the past where they paid only interest, and now are approaching the end of the agreed mortgage term and their strategy to repay the mortgage may not now be workable. Still others have reached an age where they can get only a very short-term mortgage or even no mortgage at all.

Problem: Age

Solution: Try your present lender to see if they can provide some flexibility or contact us as there are a number of small lenders who will take a more enlightened view about maximum mortgage ages.

Problem: Providing adequate income

Solution: Again, first try your present lender to see how they may be able to help. Then try us to see what can be achieved on the income that you can prove. There is a wide variation in the way different lenders calculate the maximum lending they will permit. And if you and your spouse are both aged over 55, it is worth seeing if a Lifetime Mortgage would provide a solution. A Lifetime Mortgage is based on your age and property value and can run indefinitely. There are no maximum age restrictions and there are no income requirements. (But do remember that a Lifetime Mortgage is only going to work where the mortgage is relatively low in comparison to the property value.) Give us a ring and we can let you know what can be done.

Problem: An interest-only mortgage reaching the end of the mortgage term

Solution: The first thing to do is to work out what you want to do. It may be that you can deal with the problem by simply selling your property and downsizing. It is also possible to speak with your present lender and get them to extend the term of the mortgage if that is going to enable you to repay it in the reasonably near future – say, up to 5 years. There are also still lenders who will do interest-only mortgages and it may be worth talking with us about those options. And there is also the Lifetime Mortgage option mentioned above where the mortgage owed is relatively small when measured against the property value.

RETIREMENT MENU

Cash please

Those who are 55 and older can now draw out all (!) of their pension fund as cash. So you can ask to have it all as cash (!)   BUT…

Tax! The downside is that with each pension only 25% of the fund can be taken tax-free.

Any amount that you take over and above this tax-free 25% will be taxed as if you had earned it in the Tax Year in which you draw it out. That amount is added to your other income and is taxed accordingly.
Example:
A person aged 55 is earning £20,000 per annum and paying about £1,800 in tax on those earnings. He has a pension fund worth £40,000 and he wants to take it all out. He would get the first £10,000 tax free. The remaining £30,000 would be added to his £20,000 other earnings and he would be taxed

as if he had earned £50,000. This would result in him paying £9,200 in tax instead of £1,800. So he would lose £7,400 of his £30,000 pension to the taxman. A person already earning enough to put him in the higher rate tax bracket (40% tax where the total income exceeds £43,000) could lose 40% of the money he takes out over and above the tax-free amount. In our example of a £40,000 pension fund, he would still get the £10,000 tax-free but lose £12,000 of the remaining £30,000 in tax). Therefore it is important to take tax into account when working out when to take money out of the pension.

(Note: this article refers to personal pensions only; the rules are different for a Final Salary Scheme where the benefit is based on the salary and years of service and some other special types of  pensions.)

Income Options

(Note: all these options assume that you take out the tax-free cash.)

Option 1: Leave the balance invested with the option to take out further funds in the future – either when your need is greater or when your tax position is more advantageous. This is called a Flexi-

Drawdown arrangement as it provides the flexibility for you to draw out whatever sums you want at any time you want them. But remember that once you have drawn out the tax-free element, any other monies you take out will be taxed. Such an arrangement also involves investing your pension fund so you would need to consider both the risk that comes with such investments as well as the provider’s charges for running the pension.

Option 2: Use the balance left over to set up a guaranteed income for life (an “annuity”). The amount of income received would depend on your age – the older you are, the more you would get. The amount of income you would get also depends on your state of health – the worse off you are health-wise, the greater the income you are likely to receive. You can set it up on just your life or so that it covers both you and your spouse/partner. The idea of guaranteed income is attractive but the current annuity rates are quite low so the amount of money you can obtain may be a bit disappointing.

Option 3: Take a short-term guaranteed income (a “temporary annuity”). This pays out a guaranteed level of income for a fixed number of years and then pays out a guaranteed sum on maturity – which can then be used again in Option 1 and 2 above or to repeat this Option 3 for a further term of years.

TAX NOTES for 2016/17

Personal Allowance      £11,000 (reduced for those with incomes over £100,000)

20% Rate Tax Band     £32,000 (adding in the personal allowance of £11,000 means

                                            that your income would need to be in excess of £43,000

                                            before the 40% rate starts to be charged)
Dividend Income Nil

Rate Band                   £5,000

Personal Savings

Allowance                   £1,000 (basic rate taxpayer), £500 (higher rate taxpayer)

ISA Allowance             £15,240 (same as last year)

Lifetime Pension

Allowance                   £1 million

Inheritance Tax Nil

Rate Band                   £325,000 (same as last year)

Annual Pension

Allowance                   £40,000 (reduced for those with income in excess of £150,000)

Rent-A-Room

Allowance                   £7,000 per annum - tax free (up from £4,250 last year)

State Pension              New Single Tier State Pension comes into effect

A NEW RETIREMENT MENU FOR PERSONAL PENSIONS!

RETIREMENT MENU

Minimum age 55

(Note: different rules apply to Final Salary/Defined Benefit Pensions and some other schemes)

Cash please

You can have it all as cash but only 25% of it tax-free. You will be taxed on whatever else you take out in the same way as if you had earned it in that Tax Year.

Income please Option 1: You can still get an income guaranteed for life (Annuity -see further

notes below)

Option 2: If you have health issues you may be entitled to a higher guaranteed income for life (Enhanced Annuity)

Option 3: Draw an income from your pension fund itself (Drawdown)

Option 4: Use a guaranteed fund to protect your investment but still be able to take an income (Guarantees).

State Pension please  The State Pension is increasing but the State Pension age is also going please up. To find out when you will receive your State Pension go to www.gov.uk/calculate-state-pension.

“Side Dishes”

You may have other sources of income to help in retirement. This might be investment income, or rental income from an investment property or income from letting out one or more rooms in your home  (Rent-A-Room scheme allows you to earn up to £7500 tax-free).

More on Annuities 

There are a variety of annuities available. The general concept is that you use all or some of your pension fund to buy a guaranteed income for life or for a specified period. The older you are, the more income you will get for your money. The guaranteed income can be for the person with the pension and a spouse or partner – to go on for as long as the last survivor is alive. The annuity can provide a level income or an increasing income. There are also annuities which are linked to investments so they can go up or down.

More exotic dishes

The pension rules are different for other types of pensions. If yours is not a personal pension, do feel free to contact us for guidance.

PERSONAL SAVING ALLOWANCE

From April 2016 the Government is introducing a Personal Savings Allowance which will exempt

the first £1,000 of savings income from tax for basic rate taxpayers and the first £500 for higher

rate taxpayers. This is in addition to the other allowances. From that same date there will no

longer be the automatic deduction of 20% income tax by banks and building societies on non-ISA

savings. From April 2016 there is also a new £5,000 dividend allowance for those who receive

dividend income.

UNLIMITED ACCESS TO YOUR PENSION FUND

Assuming the rules receive final approval, from the 6th of April 2015 those aged 55+ will be able to take unlimited amounts of cash from their pension. The first 25% will usually be tax-free and the rest will be taxed as income. It will be added to any other taxable income received during the tax year (e.g. your salary) and subject to tax at your highest rate. This new pension option is being call a “flexi-access drawdown”.

Note: Those with Final Salary Pensions (i.e. those based on the number of years you have worked and your salary when you retire) will not have the same unlimited access based on the proposed rules – unless they transfer their pension to a Money Purchase Scheme, i.e. one with a cash value.

Pitfalls to avoid:

1. Taking out too much, too quickly.

If you take it all out, you will have nothing to fall back on and you could pay high levels of tax. You can keep the tax low by taking amounts out annually at a level which keeps you from paying a higher rate of tax.

2. Once you start taking it out, you will severely limit how much you can then put into an existing or future pension.

Instead of  being able to contribute up to £40,000 a year into a pension, you will be limited to only

£10,000 a year. However, careful handling can enable you to gain some access to your pension fund while also being able to contribute up to the maximum of £40,000.

Tax Facts!

Some key tax facts to remember for 2014/15:

Personal Tax Allowance: £10,000

Higher Rate Tax Band: starts at £41,865

Capital Gains Tax Annual Exemption: £11,000

Inheritance Tax Nil Rate Band: £325,000

Maximum Pension Lifetime Allowance:
£1.25 million
Residential Property Stamp Duty: the same as last year.

THE AUTUMN STATEMENT

If we focus on the changes taking place in April 2014, we have the following tax changes: 1. Personal Tax Allowance increased from £9,440 to £10,000 2. Basic Rate Tax Band down from £32,010 to £31,865 (meaning that with the first £10,000 earned being subject to nil tax, you will not start paying 40% tax on earnings until they exceed £41,865 – marginally better than last year’s £41,450). 3. Individual Savings Accounts (ISAs) go up to £11,880 (last year £11,520) with half of this(£5940) able to be put in a Cash-ISA. 4. The main rate of corporation tax will be cut from 23% to 21% from April 2014. 5. A £1000 business rates discount in 2014/15 will apply to retail properties including pubs,cafes, restaurants and charity shops; and a 50% business reoccupation relief for businesses that move into retail premises that have been empty for a year or more. There is no change in the Property Stamp Duty Tax (still nil on purchase prices up to £125,000, 1% up to £250,000, 3% up to £500,000, 4% up to £1 million, 5% up to £2 million and 7% for over £2 million). The threshold for Inheritance Tax also remains unchanged at £325,000. The Capital Gains Tax Exemption is another tax allowance that is not changed this year –remaining at £11,000. And for those with significant pension savings, there is actually a reduction in the amount of pension they are entitled to accumulate in their lifetime (Lifetime Allowance) from £1.5 million to £1.25 million. The future carrots being dangled include: 1. From April 2015 no employer’s National Insurance tax on employees under the age of 21. 2. From 2015/16 married couples who are not higher rate taxpayers being able to possibly benefit when one spouse is not earning enough to use up all of their Personal Tax Allowance. Effectively this will be worth up to about £200 a year less tax for the couple to pay. 3. The Capital Gains Tax Exemption is promised to go up to £11,100 from April 2015. And then there is the contentious issue of an 11% pay rise for Members of Parliament from April 2015!

Pension Alerts

The maximum allowance for pension savings is £50,000 in this current 2013/2014 tax year but it reduces to £40,000 in the following tax year. The Pension Lifetime Allowance is also reducing from 6 April 2014. Currently it is £1.5 million but will go down to £1.25 million. If you are one of the lucky ones to have this as a problem, do take advice as you may have some options to help you.

Be aware of your Tax Allowances

Be aware of your Tax Allowances and take advantage of them and ensure your spouse does so as well - if you are married.


                                                       2012/13                                          2013/14

Personal Tax Allowance                   £8,105                                           £9,440

For those aged 65/74                       £10,500                                         £10,500 (no change)

For those 75 and over                      £10,660                                         £10,660 (no change)


Note: The Age Related Allowances above are only available to those whose total income is less than £25,400 in the current Tax Year and £26,100 in the new Tax Year.

Changes you should know about

• There is a reduction in the amount a person can earn before he starts having to pay 40% tax. Taking into account the personal allowance, in this Tax Year (2012/2013) 40% tax kicks in above £42,475. In 2013/14 it will kick in at the lower level of £41,450.


• The maximum pension contribution annually will reduce from £50,000 to £40,000 but not until 2014/2015, so it will still be possible to contribute up to £50,000 in 2013/2014 (Note: there is no change to the rule that the maximum personal contribution an individual can make is limited to 100% of their taxable earnings; so, if their total taxable earnings are less than £50,000, this earnings level becomes their limit; however, there is also no change to the fact that a company can contribute up to £50,000 to an employee’s pension - even if that is more than his taxable income).

There are also a few promises the Chancellor has made for the future such as promising to raise the Inheritance Tax nil rate band in 2015/16 and also to make increases in the Capital Gains Tax Allowance, but I do not think we are being too cynical if we choose to ignore these until they actually happen! 2012 saw the Property Market pretty much flat, but the rental incomes generally increased as those who were unable to buy, had to rent. This has tempted landlords to buy more property. 2012 also saw the insurance market turned a bit on its head as a result of an EU Gender Directive – dictating to insurance companies that they had to give men and women equal insurance quotes – despite the over-riding statistical proof that young men have more automobile accidents than young women and that women generally live longer than men. 2013 also sees the FSA (Financial Services Authority) morph and divide itself into two new bodies – the FCA (Financial Conduct Authority) and the PRA (Prudential Regulatory Authority). We will have to wait and see whether this change will mean.

Taking with one hand

When it came to personal investments in his Autumn Statement on 5 December, Chancellor George Osborne gave with one hand and took away with the other. He extended the Isa allowance for the 2013/14 tax year to £11,520 – up from £11,280 in 2012/13 – and the government is consulting on whether to allow Aim shares to form part of an Isa. The Chancellor also raised the child trust fund and junior Isa limits – from £3,600 to £3,720 a year. Equally, he made a small extension to the capital gains tax allowance – from £11,000 in 2014/15 to £11,100 in 2015/16. However, pensions were subjected to a raid. The annual contribution limit was reduced from £50,000 to £40,000 for the 2014/15 tax year. This was mitigated to some extent by some changes in the carry forward rules, which mean that investors are now able to carry forward any unused allowance from the previous three years to the current tax year. Meanwhile the lifetime allowance is to be reduced from £1.5m to £1.25m from 2014/15. That said, the Chancellor was more generous with drawdown limits, which are to be increased from 100% of the value of an equivalent annuity to 120%. Some commentators suggested the basis for the calculation should move away from the 15-year gilt yield and, until this happens, income levels were likely to remain low and fluctuate over time. Osborne also made some changes to business tax rates, including extending the temporary doubling of the Small Business Rate Relief scheme until April 2014.

TIME FOR A FINANCIAL REVIEW

Review all of your cash deposit accounts
Find out what interest rate you are receiving. You may be shocked to find interest rates of 0.10% in monies held in a saving account with the glorified name of “Gold” or “Silver” savings account. Look for a better rate. You should be able to achieve at least 2.0% or better.

Use your Capital Gains Tax Allowance
If you have investments that have gone up in value you can realise tax-free profits of up to £10,600. As with your ISA allowance, you cannot carry this forward. So you use it or lose it!

Be aware of your Tax Allowances
Personal Tax Allowance: 2011/12 = £7,475; 2012/13 = £8,105
For those aged 65/74: 2011/12 = £9,940; 2012/13 = £10,500
For those 75 and over: 2011/12 = £10,090; 2012/13 = £10,660

Note: The Age Related Allowances above are only available to those whose total income is less than £24,000 (2011/12) and £25,400 in the new Tax Year.

Review Your Life Assurance Arrangements
Pull out the documents and see how much you are covered for, and for how long. You may find a policy is coming to its end, and you can also ask us to check the cost to ensure you are not overpaying for your life assurance or critical illness insurance.

Review Your Pensions
You may have pension pots in various places from previous employments or pension saving arrangements. Find out what the fund values are and what funds you are invested in. You can then look squarely at what you are likely to have available in your later years and act accordingly. We will be happy to help you work out what these might add up to eventually. Make sure that all of these pension providers have your current address so they do not lose track of you.

Review Your Mortgage Arrangements
If you on your lender’s Standard Variable Rate and paying more than 4.5%, find out what else your lender can offer and contact us to find out your other options.

MAXIMISE YOUR INCOME

1) Maximise the income on your savings. Keep in touch with how much interest you are receiving from your cash savings. One poor soul received 0.1% interest for over two years before he finally wised up. There are various websites you can use to search out the best savings rates such as: www.moneyfacts.co.uk and www.moneysupermarket.com

2) If appropriate, find out if you are eligible for any benefits such as Pension Credit or Working Family Credit.

3) If you are aged 55 or over, look at possibly taking some of your pension benefits such as the Tax Free Cash immediately to augment your income. Note: some people may have lost track of pension benefits they have had, but there is a tracing system to allow you to hunt those down. Contact us for more information on this.

4) If you are really struggling with making ends meet, but have a house with little or no mortgage, look into Equity Release options. Here again it costs nothing to find out what is possible and we are happy to research your options for you without charge.

CUTTING COSTS

The cost of living is increasing. That includes food, heating, travel and electricity. It is time to check to make sure that you remain in the Happiness Zone. To qualify for the Happiness Zone you need to have more money coming in than going out. If you are already there, pat yourself on your back. For those not there, it is worth looking at some ways to make some savings.

1) Reduce the cost of your credit. If you have ongoing, ‘never-ending’ credit card balances, you will be paying a very high interest rate. Check out possible personal loans to see if you can save on the costs. Changing it into a loan will also mean that the debt will eventually be gone! If your debts are too high to deal with by means of a personal loan, find out about remortgage possibilities. You may be able to score twice – once by lowering the costs of your credit, and secondly by lowering your mortgage payments by getting a better mortgage interest rate from another lender. It will cost you nothing to find out what your options are. Just give us a ring.

2) Really face up to your financial situation. Take the last 3 months and see what your spending has actually been. List out everything. Then compare it to your average income. You will soon see how much you need to cut back. Or, if you are already in the Happiness Zone, you can look at savings for the future.

3) Make sure you are not paying more tax than you have to. If you are employed, you should check your Tax Coding to see if it is correct. The Tax Man has certainly been known to make mistakes. If you are over 65, check to see that you are making the most of the extra personal allowance to which you are entitled. That can save almost £500 a year in tax. If you have investments, do not forget to take advantage of your Capital Gains Tax Allowance. It allows you to take profits out of your investments of up to £10,600 without having to pay any tax at all.

A NEW TAX YEAR FULL OF CHANGES

The Tax Year 2010/2011 is bringing many more changes to our finances than is immediately obvious. The changes, and promised changes, leave one feeling like the Matrix has shifted or that one has walked through Alice’s Looking Glass (depending on your preference of books and films). There are substantial changes in pension legislation yet again and talk of major changes to the State Pension. There are some boosts in personal tax allowances, but higher VAT and rising costs of petrol and basics leave many living a bit on the knife edge and dreading the moment when the Bank of England finally increases the Bank Base Rate.

So what has changed and how do we need to respond? Pensions deserve the closest look because they are likely to impinge on our lives most in the long term. In the previous decades those working many years for major companies could rely on a worthwhile pension when they reached State Retirement Age - which for many, many years had been age 65 for men and age 60 for women. The quality pension schemes have been subjected to harsher and harsher regulations over recent years, and the great majority of companies can no longer afford to keep them going. Even the Blue Ribbon public service schemes, such as the Civil Servant Pension Scheme, can no longer be afforded by the Government and will have to change. The Government’s talk of a higher State Pension to help handle this problem is so far in the future that it really is little more than an effort to raise hopes and avoid a backlash from the other changes. The Government cannot even afford the current level of State Pension, which is why they are having to extend the State Retirement Age.

Budget 2011 - Tax

Chancellor George Osborne had already decided to raise the personal allowance to £7,475 from 6 April this year. He used this latest Budget to extend that allowance by another £630 to £8,105 from April 2012. He has also brought down the rate at which people start to pay higher rate tax from £43,875 to £42,475. As a legacy from the last Labour budget, the personal allowance will still be withdrawn completely at an income of £115,000. The Chancellor has also announced that, in future, tax allowances will be increased in line with the Consumer Prices Index rather than the Retail Price Index. Historically, the Retail Price Index has been higher, so this could have a long-term impact on the value of such increases for all taxpayers. The rules on inheritance tax and capital gains tax (CGT) remained largely unchanged. However, anyone leaving more than 10% of their estate to charity will see their inheritance tax bill fall by 10% while the amount qualifying for Entrepreneur’s Relief on CGT - where tax is charged at 10% rather than 18% or 28% - has doubled from £5m to £10m. There were some changes at the top end of the investment scale. Upfront tax relief on Enterprise Investment Schemes will rise from 20% to 30% while the amount that can be invested annually will rise from £500,000 to £1m. The Chancellor is also relaxing some of the rules around eligible companies for these and venture capital trusts to expand the potential for attracting this type of investment.