LG Investment News

Welcome to our latest issue of Lyon Griffiths’ Investment News.

We aim to communicate the key current topics in the world of financial advice and highlight the up and coming issues in an understandable and digestible format.

In this Edition:

  • Beware of Pension Scams
  • Relevant Life
  • IFSCS Cash Protection
  • Twenty Somethings – Less likely to save or own a home
  • Lifetime ISA (LISA) – Is it worth a second look?
  • Probate Fees to Increase
  • UK Personal Debt

Beware of Pension Scams

Pension freedom has enabled those approaching retirement to consider a much wider choice of alternative options as to how to employ the pension funds they have accumulated through their careers.

However, unfortunately the introduction of such freedoms seems to have also attracted the interest of a number of undesirables and fraudsters.

A snapshot of the problem can be seen through the actions of the Insolvency Service. They detail on their website that they have applied to courts to wind-up 24 companies over the last three years where there has been evidence of them carrying out some form of pension misuse.  The service indicates there have been 3,750 victims of these 24 companies alone, and the misconduct has resulted in individuals and businesses losing over £200m.

Common tactics used by pension scammers are cold calls, the offer of free pension advice, lying about their level of expertise and qualifications and the offer of considerable investment returns from the solutions they offer.

It is worth noting at this point that cold calling related to pensions is now deemed illegal. Therefore, anyone making such an approach can automatically be dismissed as unethical. With individuals having taken forty or more years of hard work to accumulate such pension benefits it would seem right to take time to consider one’s options.

Individuals who continue to liaise with a known and trusted adviser to consider the appropriate options for their pension funds are likely to be better positioned to avoid pension or other forms of scammers.

Relevant Life

Life cover can of course take many different forms, enabling people to select the policy most appropriate for their individual circumstances, whether personal or business.

One such policy, considered by a number of businesses for individual employees between the ages of 17 and 71, is Relevant Life.

This policy can provide life and terminal illness cover, with the benefits payable to the employee’s family or financial dependents. If an individual is the director of a limited company, a Relevant Life policy such as this may be worth considering.

Relevant Life policies can also be taken out by sole traders and partnerships, but only for employees – not the owners of the business or partners themselves.

The sum assured under a Relevant Life policy does not have a statutory limit, but must be deemed as reasonable. Commonly, the maximum sum assured allowed by insurers ranges between 15 times up to 35 times the assured’s income, depending on their age. This income can include salary, bonuses, dividends paid in lieu of salary and any taxable benefits in kind.

It may be worth noting that:

· Premiums are not deemed to be benefits in kind

· Premiums are not assessed for NI

· Benefits are free from Income Tax

· Benefits do not count towards the Lifetime Allowance

· Most benefits are paid free of Inheritance Tax

· Tax Relief is available to the employer on premiums paid

The last of these points may make Relevant Life a particularly cost-effective option to consider. Net savings are said to amount to as much as 49% for some individuals.

FSCS Cash Protection

As market uncertainty increases, cash may become a greater consideration.

From 30 January 2017, the sum protected by the Financial Services Compensation Scheme in a UK regulated current or savings account and cash ISA increased to £85,000 from £75,000. However, it should be noted that the maximum compensation amount is per financial institution, and not per bank.

This raises the following question: what constitutes a financial institution?

It is important to consider how certain associated organisations relate to one another. For example, deposits with Halifax and Bank of Scotland, because of the nature of their association, would qualify for one lot of compensation across the two organisations, whereas you’d be entitled to two sets of compensation for deposits with RBS and NatWest (i.e. you’d be entitled to compensation for each). Additionally, when financial institutions such as building societies merge, this becomes a matter that may be worth further consideration.

Joint accounts qualify for double the FSCS compensation scheme allowance, due to each individual having their own allowance.

Compensation payments are made by the FSCS within one week of a claim.

In addition, there is a higher short-term protection allowance of up to £1m. This is available for six months following certain ‘life events’. The six month period commences once an individual becomes entitled to a payment, or once the amount has been paid into their account, whichever occurs later. A ‘life event’ includes monies received from the sale of a property (not buy-to-let), inheritances, redundancy or insurance and compensation payouts. The individual must provide proof of the source of the monies in order for compensation to be granted, the FSCS will pay the agreed figure (over and above the £85,000 allowance and up to the maximum of £1m) within three months of a claim.

Twenty Somethings – Less likely to save or own a home

The ONS (Office for National Statistics) recently reported that twenty somethings are less likely to own a home than had been the case, and that fewer have accumulated any savings of note.

You may have seen that these findings have been highlighted by several media organisations over the last month including the BBC.

The proportion of 22-29-year olds owning their own home has fallen over the past decade by 10% from 37% to 27%.

Factors that may have impacted upon this change are led by the level of house prices and the income required to secure an adequate mortgage in order to get onto the housing ladder. However other factors such as the relative cost to an individual of further education is also thought to have had an impact.

53% of 22-29 - year olds having nothing in a savings account or ISA. This is up from 41% a decade ago. According to the ONS data circa 75% have less than £6,000 in savings indicating that buying a property is a more distant hope than it was for their parents.

It is said that if the savings habit isn’t in place in your 20’s it is unlikely to develop in your 30’s, 40’s or 50’s.

What can be done to assist? May be a combination of guidance and support.

Increasingly family members are assisting children and grandchildren to get started. This may take the form of encouragement to start saving, additional reward for saving or a combination of the two.

Andy Webb, a blogger on financial matters, suggests five basic steps for individuals to help themselves –

· Paying your savings first before anything else

· Automate your savings by using an App

· Round up your transactions to save using one of the available banking facilities

· Make it difficult to spend your savings by using arrangements more difficult to access

· Spend in cash where you can

In addition, for those wanting to assist a member of the family the level of assistance will of course depend upon individual circumstances and can assist short, medium or long-term goals.

For the short-term assistance may be given in several ways from accessing savings up to the use of Equity Release.

The meeting of medium and long-term goals may be achieved by using tax incentivised savings arrangements such as ISAs and Lifetime ISAs (LISAs).

As indicated each circumstance is different and requires good advice from both your IFA and legal adviser, taking account of the potential impact on such as your IHT liability and for some, social care entitlement.

Generational financial planning has always been a consideration. The ONS article has helped to bring this to the fore once more.

Lifetime ISA (LISA) – Is it worth a second look?

Although LISAs have been available through a few providers for over a year, they have not had the anticipated impact.

Is this the time to reconsider LISAs suitability?

LISAs are intended to assist with one of two things, buying your first home or retirement provision.

You can save up to £4,000 per annum and receive a 25% bonus, however there are penalties for withdrawing monies for other purposes.

Anyone aged 18 to 39 can take out a LISA and continue contributing up to the day before they are 50. The maximum available bonus is £33,000.

A LISA can be used for the purchase of a first-time property of up to £450,000.

It can be an appropriate tax efficient savings vehicle for parents or grandparents to use to assist their children or grandchildren.

If a couple are both first time buyers then they can both benefit from a LISA and double the potential bonus. However the maximum purchase price is still £450,000.

It can attract both regular contributions and lump sums and be invested in either equities or cash.

In late 2015 the Help to Buy ISA was introduced, and it is possible to hold both. However, a bonus can only be received through one and consideration has to be given to the use of one over the other or the holding of both. 

Primarily if the holder of the LISA is going to purchase a home for up to £450,000, are aged between 18 and 39, but are not going to do it within a year, then the LISA will give you a larger bonus.

For retirement provision, the funds accumulated in a LISA are intended to be accessed from age 60. Further consideration may be given to the relative benefits of a LISA compared to pensions and / or other alternative long term savings vehicles.

Probate Fees to Increase

The government did not proceed last year with plans to increase probate fees to a maximum of £20,000.

However, following consultation, they are to go ahead with replacing the flat fee of £155 with a sliding scale of fees ranging from £250 up to a maximum of £6,000.

At present a one-off fee of £155 is paid if using a solicitor to apply to the court for a grant of representation. The fee if applying in person is £215.

In future estates of up to £50,000 will be free, £50,000 - £300,000 - £250, rising to £2,500 for estates of £500,000 - £1m and a maximum of £6,000 for estates over £2m.

Secondary legislation is anticipated to be introduced later this month. Once enacted it is thought that 25,000 estates per annum will pay nothing and only 1 in 5 estates will pay more than £750.

However STEP has indicated that 85% of estates would have been liable for higher fees based on 2014-15 figures. 

UK Personal Debt

The media has recently given considerable coverage to the issue of personal indebtedness in the UK.

In this article we consider the latest data available on the extent of personal debt in the UK, the impact that such personal indebtedness could have upon the economy and the best approach for those finding it difficult to cope with the position they find themselves in.

The Office for National Statistics (ONS) indicates the increase in household indebtedness by £25bn in 2017, an average £900 per household. It has warned the Government that the current £200bn of personal debt is unsustainable.

The ONS report – titled “Making ends meet: are households living beyond their means?” – found that the deficit among UK households, equivalent to 1.2% of GDP, in contrast with a surplus equivalent to 2.7% of GDP in France and a surplus equivalent to 5.1% in Germany.

Phil Andrew – CEO of Step Change, a charity that works to help indebted households, has said that the ONS’s use of the term ‘living beyond their means’ is not helpful as the poorest sections of the population are in constant need of credit just to keep their heads above water.

Credit card spending in November 2018 of £11.3bn, was 7.5% higher than for November 2017. In fact, over that 12-month period credit card borrowing grew by 5.3%. Personal borrowing through loans and overdrafts growing by 2.5%. Of course this could be indicate a general trend to the more frequent use of credit cards for transactions as a result of stronger consumer protection and value-added benefits.

However, when one looks at the level of gross mortgage lending for recent months in comparison to the previous year, a down turn can be observed. This may indicate a general slow-down in activity related to the residential housing market.

Gross mortgage lending for November was £23.1bn, a reduction in mortgage lending by 2%. The number of mortgages being decreased by 10.6%, while approvals for other secured borrowing saw a 12.2% decrease.

With the so-called UK housing shortage is regularly highlighted in the media, and with much made of its impact upon rising house values, what other factors could be causing a slowdown in recent market activity?

Uncertainty surrounding the final outcome on Brexit may be one factor, and it is appreciated that this may be concluded by the time this article is published. Since the introduction of the Mortgage Market Review in April 2014 prospective house purchasers have of course had to understandably satisfy further requirements relating to the repayment of mortgage loans. It could be that in certain geographical areas of the UK the market is approaching close to a point where the house prices commanded have outstripped the market’s ability to pay. If that is the case and the impact is a reduction in average house values, then this could have an impact on the re-mortgage market (which is said to be down 20.3% year on year), ancillary markets as equity release and amounts available for older property owners.

The Bank of England raised interest rates in August last year from 0.5% to 0.75%. However historically this is still relatively low.

Should economic circumstances change following the outcome of Brexit discussions, this could cause a review of the UK Bank of England base interest rate. Such a review in interest rates is unlikely to see the rate reduced further. Therefore, although that would assist savers it would impact negatively upon borrowers.

Last year the National Audit Office revealed that 8.3m people were unable to pay off debts or meet household bills.

Pressures on household disposable income has a knock-on effect on the whole economy. For example the UK High Street has been hit by a number of developments (this being one of them), including the growth of online shopping. Therefore, concerns on household income have an impact on retailers, their margins, their share prices and their status as major employers. Indebtedness is an issue that can hit all ages and indeed backgrounds.

Although it could be argued that the responsibility for finding oneself in such an adverse position rests with the individual, for some it is the result of circumstances beyond their immediate control. These circumstances may include illness, bereavement, unemployment to name just three. Debt can soon get out of hand and can creep up on anyone due to a combination of factors.

Problems can escalate further due to individuals not feeling confident enough to discuss such issues with family, friends or an adviser. However, discussing such problems and mapping out potential solutions can be the first step to turning things around and getting affairs back onto an even keel.

This may all sound very obvious and straight forward; however, surveys and related articles, indicate that often family members or close friends are going through such difficulties without us being aware of it and leaving us being unable to assist them.

For those in a position to assist, it is important not to judge but instead to concentrate on finding the most appropriate solution.

IFAs are often in an ideal professional position to help. They are able to assist clients in cashflow modelling and can either reduce a person’s risk of indebtedness or address problems that have arisen since a previous review. Helping to ensure that those close to us, whether family or friends, take the right personal financial planning path for them is therefore extremely important.

 Past performance is not a guide to the future. We would always stress that the value of an investment as well as any income derived can go down as well as up. This document does not constitute personal advice; please contact us if you wish to discuss the suitability of any of the investments outlined.