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July 12 2020 4.49pm

Financial Guidance Thread

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View Goal Machine's Profile Goal Machine Flag The Cronx 18 May 20 9.11am Send a Private Message to Goal Machine Add Goal Machine as a friend

Protecting your loved ones

Insuring yourself against ill health or death isn’t at the forefront of everyone’s mind. Yet we don’t think twice when it comes to holiday, home contents or even pet insurance.

With death all around us, this sad time may be the perfect opportunity to consider what would happen if we died.

Think of yourself as a robot which brings home £3,000 per month. If your family were reliant on a cash machine in your lounge which spat out £3,000 per month, would you insure that?

The most common forms of personal protection are:

Life Assurance:

• Pays out a tax free, predefined cash lump sum on death, if it occurs during the term of the policy.
• Can be set up on a ‘decreasing’ basis, meaning the lump sum pay-out will reduce each year. This could be useful if the purposes of the protection is to pay off a capital and repayment mortgage.
• Alternatively, it could be set up on a ‘level’ basis which remains the same throughout the term.

Income Protection Insurance:

• A long-term policy that pays a tax-free regular income when the insured becomes unable to work because of a long-term illness or incapacity.
• The benefit will typically pay out 60% of the insured’s gross salary for the remainder of the term. This is to encourage the insured to return to work in future.

Critical Illness Cover:

• Pays a predefined tax-free lump sum to the insured upon diagnosis of a condition from a pre-determined list.
• The scope of cover varies between providers. All policies cover cancer, heart attack and stroke, others often include conditions such as kidney failure, Alzheimer’s and multiple sclerosis.

When thinking about protection, it’s not a case of choosing which one of the above suits you best. You want to cover yourself for every eventuality and each of the above can in fact be complimentary.

So, what are the most common barriers?

1. “If I’m sick, I’ll keep working”: People underestimate the severity of many illnesses and how long they could last. Whilst working, 1/8 are diagnosed with a critical illness and 1/7 will be signed off work for 6+ months due to illness. The average income protection claim is 5 years and 19 weeks.

2. “I already have cover from my employer”. Whilst true, these are not always as attractive as they may seem on the surface. My colleague’s client was part of his employer’s protection scheme and had life cover of 4x his salary on death and 6 weeks sick pay. Sounds attractive, right? He was diagnosed with prostate cancer and signed off work. After 6 weeks, his sick pay ended, and he found himself on statutory sick pay of £95.85 per week. To compound things, his company found themselves in financial difficulty several months later and he was made redundant. This meant that he had lost his company protection and that he was too ill to qualify for a new policy. He died at the end of last year, leaving his wife and two young children with a £180,000 mortgage debt.

People move jobs, get ill, are made redundant. Are you putting all your family eggs in your employer’s basket? Is your current protection actually sufficient?

3. “I can’t afford it” Have you ever researched rates? Certainly, whilst you are young and in good health, premiums are considerably lower. With income protection, by tweaking something like the deferral period (the period between your first day off work and your income benefits commencing) can make a big difference, as illustrated here:

Based on a healthy 35-year-old, earning £45,000 per annum (provides 60% of gross income of £2,250 for 2 years):
- 8-week deferral period: £16.80 per month premium
- 26-week deferral period: £11.33 per month premium

That’s about the price of a Holmesdale boiled burger with a warm Carlsberg out of a plastic bottle. What’s the price of peace of mind?

4. “Someone will look after me” For some, they will. Those with the bank of mum and dad can maybe go a few months. How long would your parents be willing/able to keep paying your mortgage?

Could the State help? Personal Independence Payments are non means tested and will pay a maximum of £151 per week. You might also qualify for Universal Credit (if you have less than £16,000 in savings) which will bring in an additional £594 per month for a joint claim.

Ask yourself, how would my family cope financially if I became seriously ill or died last night? Not at the forefront of your mind? Perhaps it should be.

 

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View Goal Machine's Profile Goal Machine Flag The Cronx 26 May 20 9.25am Send a Private Message to Goal Machine Add Goal Machine as a friend

5 useful tax tips – making use of your allowances

Are you or your spouse aged between 55-75, a UK resident with no taxable income? If so, here is how you can make a free £720.

As a non-earner, a UK resident can make a maximum gross annual contribution of £3,600 to a UK registered pension scheme. This must happen before age 75. A net contribution of £2,880 will receive 20% tax relief from the pension provider, thus grossing up to £3,600.

As you are aged over 55, you can withdraw this pension. This can be withdrawn in its entirety as a lump sum, of which 25% (£900) is tax free and the remaining 75% (£2,700) is taxable. However, as you have no taxable income, this £2,700 withdrawal will fall within your 0% tax personal allowance (which is £12,500 in the 20/21 tax year).

The £2,700 withdrawal will have an emergency tax code applied to it by the pension provider, which would be a £331.66 deduction, but this can be reclaimed in full by contacting HMRC directly, who will put a cheque in the post.

Are you a basic rate taxpayer and have a spouse with taxable income below £11,250? Perhaps you should you consider the marriage allowance

An individual can transfer 10% of the £12,500 personal allowance to a spouse/civil partner. This is only permitted where the other spouse/civil partner does not pay tax higher than basic rate.
By doing so, the higher earning spouse will have their personal allowance extended from £12,500 to £13,750. Meaning £1,250 (the 10%) of earnings will be taxed at 0% rather than 20%, this is a saving of £250 per year.

Use your ISA allowance

ISA’s allow you to contribute up to £20,000 per tax year. The benefit of an ISA is that all growth is tax free, meaning the compounding effect is greater and investments are free of capital gains tax when sold. This can be a huge money and hassle saver when holding investments such as mutual funds or direct equities.

The benefits of an ISA are a little wasted on cash savings as the interest on cash is classed as ‘savings income’. A basic rate taxpayer has a £1,000 savings income allowance anyway and the current low interest rate environment means you’d need a lot of cash savings to get £1,000 of interest at the moment.

Split your assets with your spouse

Households often have a main breadwinner, who pays more tax than the other partner. Interspousal transfer of assets are allowed, so substantial tax savings can be made by transferring assets into the name of the lower income earner.

Example: Mr Eagle earns £60,000 per year and is married to Mrs Eagle who is a housewife looking after their two young children. They own a rental property jointly which generates £1,000 per month which they split £500 each.

As Mr Eagle is a higher rate taxpayer, he pays 40% income tax on his £500, meaning his net income from the property is £300 per month. Mrs Eagle has no other income, so her £500 all falls within her annual £12,500 personal allowance and is therefore tax free. She takes the full £500.

By transferring the property into Mrs Eagle’s name, she will take the full £1,000 per month, which is still within her £12,500 personal allowance. There is no tax for her to pay.

Use your annual capital gains tax allowance

For non-ISA and pension savings, each individual has an annual £12,300 CGT allowance. Any gains over this threshold will be taxed upon sale at 10% (basic rate) or 20% (higher rate) for investments, or 18%/28% for property (excludes main residence).

Before you sell, can you spread the sale in stages over two separate tax years? For example, selling some shares in March and the rest in April. Or, can you transfer these assets to a spouse so they can also use their £12,300 allowance?

 

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View Badger11's Profile Badger11 Flag Beckenham 26 May 20 10.34am Send a Private Message to Badger11 Add Badger11 as a friend

Thanks these posts are useful I hope the HOL community appreciate it.

 


One more point

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View Goal Machine's Profile Goal Machine Flag The Cronx 26 May 20 1.36pm Send a Private Message to Goal Machine Add Goal Machine as a friend

Originally posted by Badger11

Thanks these posts are useful I hope the HOL community appreciate it.

You're welcome, Badger. Hopefully there's a useful nugget of information there for everyone.

I'm, planning to get a few more articles written this week, is there any particular topic you'd be interested in?

 

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View Badger11's Profile Badger11 Flag Beckenham 26 May 20 1.38pm Send a Private Message to Badger11 Add Badger11 as a friend

Originally posted by Goal Machine

You're welcome, Badger. Hopefully there's a useful nugget of information there for everyone.

I'm, planning to get a few more articles written this week, is there any particular topic you'd be interested in?

Estate planning / avoiding death duties would be interesting.

 


One more point

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View AERO's Profile AERO Flag 26 May 20 2.18pm Send a Private Message to AERO Add AERO as a friend

Would be interested in thoughts on Capital Gains Tax .I am thinking of selling my buy to let flat (second home) in Croydon but know I might get hit with a tax bill.Feel free to pm me too .Thanks

 

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View Goal Machine's Profile Goal Machine Flag The Cronx 26 May 20 4.07pm Send a Private Message to Goal Machine Add Goal Machine as a friend

Originally posted by Badger11

Estate planning / avoiding death duties would be interesting.

That would be a good one. I'll aim to have that ready for Monday.

 

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View Goal Machine's Profile Goal Machine Flag The Cronx 26 May 20 4.10pm Send a Private Message to Goal Machine Add Goal Machine as a friend

Originally posted by AERO

Would be interested in thoughts on Capital Gains Tax .I am thinking of selling my buy to let flat (second home) in Croydon but know I might get hit with a tax bill.Feel free to pm me too .Thanks

Hi Aero, I'll get a piece done specifically on CGT on second properties.

I'll send you a PM tomorrow as there's a few questions to ask.

 

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View cryrst's Profile cryrst Flag Chatham 26 May 20 5.07pm Send a Private Message to cryrst Add cryrst as a friend

I see tax limits and brackets are changing next year. What's the difference GM.

 

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View Eden Eagle's Profile Eden Eagle Flag Kent 26 May 20 6.51pm Send a Private Message to Eden Eagle Add Eden Eagle as a friend

Originally posted by Goal Machine

Morning John, good question.

My thoughts are that as interest rates are so low, you would be better off dragging out that mortgage for as long as you can and instead divert the extra 10% into an investment which is suitable for your risk appetite. If you're new to investing, it would be sensible to discuss with an adviser who could recommend something suitable.

As you have a relatively long investment time horizon (5-10 years), the short term volatility is less of an issue for you, so can afford to take a little more risk (and likely better returns). By saving and investing for 5-10 years, you will have a larger lump sum at the end of that period compared with the reduction of your debt.

The lump sum at the end of the 5-10 years will provide you chunk of money to either pay towards your current mortage or towards the new house.

Think of this way, 5% growth (not guaranteed, but realistic for a 'moderate' investment) vs 2% interest to be repaid. 3% difference may not seem much, but it is huge if compounded over 10 years.

It's sounds like you're in the trap of long term cash savings in your ISA. Your 1.16% interest compared to 2.5% inflation means your cash savings are losing their spending power by approximately (2.5% - 1.16%) 1.34% per year. A cash ISA can be transferred into a Stocks and Shares ISA. As its a transfer, it doesn't count as a contribution.

I do enjoy your articles GM but have some concern over your “advice” in this instance - if John is considering purchasing another property within 5 years then I would look at reducing the mortgage balance through over payment as, which you point out, there are no guarantees that an investment will grow at 5% pa whereas reducing the mortgage provides certainty of the debt reducing and could ensure that John qualifies for a lower rate mortgage in the future as he would have a reduced LTV. This could also help John to achieve a shorter mortgage term on the new property which would reduce the interest payments.

Were the 5 years to coincide with a market contraction such as we have seen recently then he might be in a position to sell his investments at a low price (and a probable significant loss) to enable him to purchase a property.

I would take the same view with the cash ISA’s and not consider transferring to a S & S ISA.

Just a thought....

 

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View the.universal's Profile the.universal 26 May 20 7.33pm Send a Private Message to the.universal Add the.universal as a friend

Originally posted by Eden Eagle

I do enjoy your articles GM but have some concern over your “advice” in this instance - if John is considering purchasing another property within 5 years then I would look at reducing the mortgage balance through over payment as, which you point out, there are no guarantees that an investment will grow at 5% pa whereas reducing the mortgage provides certainty of the debt reducing and could ensure that John qualifies for a lower rate mortgage in the future as he would have a reduced LTV. This could also help John to achieve a shorter mortgage term on the new property which would reduce the interest payments.

Were the 5 years to coincide with a market contraction such as we have seen recently then he might be in a position to sell his investments at a low price (and a probable significant loss) to enable him to purchase a property.

I would take the same view with the cash ISA’s and not consider transferring to a S & S ISA.

Just a thought....

When it comes t these decisions, no one knows what will happen so I think it’s fair enough for GM to give his view.

It’s a question of risk appetite. If you’re happier to invest in the stock market it’s higher risk, with higher potential returns or even a negative as you mention.

Low risk = pay down the mortgage. Not sexy but it will give you a completely predictable ‘return’.

Then it’s up to the person to decide.

 


Vive le Roy!

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View cryrst's Profile cryrst Flag Chatham 26 May 20 7.45pm Send a Private Message to cryrst Add cryrst as a friend

Originally posted by the.universal

When it comes t these decisions, no one knows what will happen so I think it’s fair enough for GM to give his view.

It’s a question of risk appetite. If you’re happier to invest in the stock market it’s higher risk, with higher potential returns or even a negative as you mention.

Low risk = pay down the mortgage. Not sexy but it will give you a completely predictable ‘return’.

Then it’s up to the person to decide.

And who doesnt like a gamble. Probably loads which is why I'm potless I guess still a buzz though.

 

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