Archive for April, 2012
Scottish Friendly’s guide to life insurance for the over 50s. What are your options?
Whether you’re planning to spend time with your family, travel round the world or simply enjoy your retirement in peace and quiet, it’s important to make sure your loved ones are taken care of should the worst happen so you can get on with enjoying life.
If you’re looking ahead, it’s never too early to prepare for a time when you’re no longer around – having a plan in place means the people you care about could be protected financially when you die. It’s a misconception that life insurance has to be expensive or complicated. Many financial organisations offer competitive plans and when you start looking you might find yourself spoilt for choice…
Life Insurance choices…
The market is competitive and there is a great range of products out there. Do you need fixed term assurance – which covers a pre-determined length of time? Or are you looking for ‘whole of life’ cover – which protects you until you die? Do you want the policy to include cover for medical expenses or funeral costs? If you are 50 to 75 years of age, you may want to consider a type of life cover designed specifically for you…
Over 50s Plans: the basics
Lots of companies offer insurance plans designed specifically for the over 50s and if you take the time to browse the market, you should find a policy which offers great cover and value for money. When you’re selecting an over 50s Insurance plan, keep these basics in mind:
- Eligibility: Over 50s plans involve no medical history check and no awkward questions will be asked to determine eligibility – if you are old enough, you qualify for the plan
- Premiums: you’ll pay a fixed monthly premium for the duration of the policy. You’ll know exactly how much you need to pay every month. When you reach a certain age (usually around 85) your premiums will cease – but your cover continues in full.
- Cash Sum: after 2 years payments have been made, when you die the policy pays out a fixed cash sum to your beneficiaries provided you keep up your premiums. Bear in mind, inflation may reduce the value of the eventual pay out. Before 2 years, a return of premiums is paid.
The details…
It’s important to keep various details in mind with any Over 50s plan. Depending on how long you live, you may pay more in premiums than the plan eventually pays out. The pay-out may also be subject to inheritance tax (depending on the size of your estate). Tax treatment depends on individual circumstances and tax law may change in future.
Make sure you’re comfortable with the monthly premiums of your Over 50s plan. The price of premiums varies depending on gender, smoker status and age – men can expect to pay more than women, for example. If you stop paying premiums at any point (before the age cut-off at 85) you’ll lose your cover entirely – there’s no cash-in value in life cover for over 50s.
The Over 50s policy may be an attractive idea and could offer affordable life cover. If you’re concerned about which type of policy may suit you best, it might be worth talking to a financial advisor. An advisor may charge for any advice provided – any costs should be made clear before you meet. Plan ahead now, for peace of mind in the future!
Scottish Friendly has provided no advice in relation to this plan. If you are in any doubt as to whether a plan is suitable for you, you should contact a financial advisor for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk Advisers may charge for providing such advice and should confirm any cost beforehand.
Junior Individual Savings accounts – know the facts
In this article Scottish Friendly looks at Junior ISA facts. If you’re uncertain about how to set up a Junior Individual Savings Account for your child – don’t be: the good news is that the process is straightforward and it can be a great way to save or invest money, tax-free.
The Junior ISA is often confused with the Child Trust Fund – but as of 1st November 2011, the CTF was discontinued and replaced by the JISA. If your child already has a CTF they will be unable to hold a JISA at the same time. If you haven’t yet opened a JISA for your child, and are looking for information, take some time to read our guide.
The Basics:
- Eligibility: any child that is a UK resident and who isn’t eligible for a CTF may hold a Junior ISA. Children born on or after the 3rd January, 2011 are eligible for a JISA. Those still under the age of 18 who were born before September 2002 are also eligible.
- Age limit: you can invest on behalf of a child under 16. The JISA is held on behalf of the child, until they reach their 18th birthday. At that point, they may withdraw their money – the money in the account can only be taken out by the child – or allow the JISA to turn into a full adult ISA.
- Save or invest: the JISA, like the adult ISA, can be held in two categories – a ‘Cash’ savings product or a ‘Stocks and Shares’ investment product. A child may hold both types of account, subject to the annual subscription limit. Money within a cash JISA is protected and you’ll get out exactly what you put in (plus any interest due). A Stocks and Shares JISA, like any investment product, involves risk – stock market investments can rise and fall and the child could get back less than you have paid in.
- Tax free wrapper: the interest or returns a JISA generates are free from income or capital gains tax (tax is deducted from UK share dividends). This means the money you invest within a JISA could work hard for your child and not the tax man. Tax treatment depends on individual circumstances and tax law may change in the future.
- Subscription limit: at present, the limit on the amount of money you may save or invest tax free in a JISA each tax year for a child is £3,600. This amount may be split across the Stocks and Shares or Cash JISAs a child holds.
Why a JISA?
A Junior ISA is a way of building up a fund for your child to use at a time when they may need it most. At 18, children may be thinking about university, travelling or becoming more independent. A JISA could give them a head start in whatever direction they choose to go.
Once set up, anyone can contribute to a JISA: friends, grandparents and family. A contribution towards a child’s future could be an ideal birthday or graduation gift and one which will be all the more appreciated when the child turns 18 Sit down with your child in mind and think about what your savings or investment goals might be for their future. A JISA is a long-term plan and could be a useful way of demonstrating good financial practice. It’s never too early to get your child thinking about financial responsibility and, with a Junior Individual Savings Account, they have the option to be involved in planning for their own future when they turn 16.
Scottish Friendly has provided no advice in relation to these plans. If you are in any doubt as to whether a plan is suitable for you, you should contact a financial advisor for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk Advisers may charge for providing such advice and should confirm any cost beforehand.
Pensions: It’s just a rich man’s world
OK, OK, OK before Stan corrects me for starting off with a masculine reference, this could easily have been titled it’s a rich woman’s world but then how would I have forced in the obvious ABBA link.
I think that following the budget’s non-event over pensions it’s time that I returned to one of my biggest gripes about the financial services industry. The question of using an ISA over a pension.
I’ve got form on this subject indeed in financial services terms it’s probably as close as I ever get to religion, but in this analogy I’m certainly viewed as the outlandish nut job preaching against orthodox thinking.
So what’s my great heresy, well simple Pensions are totally unsuitable for the vast majority of the UK population as their main means of long term savings. Pension as a first port of call for investors should be confined to the rich and wealthy, the rest of us should use an ISA first strategy.
It’s not a case of this being an unfortunate technical failure I’m convinced this is part of a grand conspiracy by the vested interests of the industry to make life and earnings easier for themselves at the expense of their clients. Furthermore it lies at the root of many of the evils abroad in the UK financial services arena such as the appalling savings gap. Thankfully I suspect these vested interests are finally beginning to break down.
The failure of the industry (and I include the FSA and the financial media in that definition) in not adopting an ISA first strategy is something that should bring great shame on us all.
I did warn you it was a religion for me!
The ISA first strategy
Ask any focus group what’s the main problem with pensions and it all boils down to locking your money away. Now clearly when it comes to long term savings locking your money away can be a good thing, but when trust in the financial sector is at an all time low (according to the CEO of the FSA), it’s a recipe for ensuring that the last thing a client will want to do is legally lock their money away for 30 years.
And yet there is a simple solution to all this – let the client invest in an ISA. At least then they know that their money isn’t locked away for 30 years, it’s portable, accessible and just as tax-free.
So what is an ISA first strategy? Simple, when it comes to saving for your retirement customers should be encouraged to use their ISA allowance first. Whilst about half of the population use their cash ISA allowance, very few people (hat tip to Scottish Widows) use their stocks and shares ISA allowance, so every year this tax allowance goes down the plughole for about 9 out of 10 of the UK population.
Before anyone from the nanny state brigade comes along to argue that the problem with this is that clients can’t be trusted not to raid their savings, well if you truly believe that then you can still set up an ISA and make access hard, complicate and financially painful for the client that you so distrust.
More importantly the nanny state school have to look at the practical consequences of their decision to legally lock up client’s money, investors are voting with their purses and wallets and just not bothering to save. I’d rather a client tried to save and dipped into those savings when times get tough, rather than not bother at all. Those who know better than the muggles would clearly prefer the latter state of affairs!
ISA first then pension (if you want to)
Let me be clear here. I’m not against pensions far from it, I just feel that the vast majority of the population are better off investing in an ISA first and then – at the time of their choosing – they can tip their ISA bucket into a pension when they are closer to retirement.
This has several beneficial effects – firstly and rather obviously by moving the money into a pension later in life it’s locked up for a much shorter period of time.
Secondly, when you move your money into pension much closer to retirement you will have a much better idea of the tax landscape at the time. For example you may be able to identify that switching to a pension will provide you with an income in retirement that will be means tested away, in those circumstances you may well be better continuing to shelter your assets in an ISA which may well not have the same issues, it’s certainly a strategy that some investors prefer.
Thirdly, and more importantly, using the ISA first strategy you can hold off investing your money into a pension until such time as you are a higher rate taxpayer. That way you will capture higher rather than basic rate tax relief.
Meaning you can be significantly better off! Indeed on current difference between basic and higher rate relief you could be up to 33% better off using a ISA first strategy. In practice it’s unlikely to be that high and tax treatment of any plan, pension or ISA depends on your individual circumstances and can change in the future, however even capturing half that amount can make all the difference between a mediocre and a comfortable retirement.
FSA rules on projections make it decidedly impractical for me to from demonstrate this with detailed numbers but it’s covered in more detail in the Telegraph article.
A x B = B x A
So why don’t clients use their ISA allowance? Some say it is because clients are terrified of the stock market (and hence a stocks and shares ISA) where they are not guaranteed to get back all of their original investment? I can understand that, especially given the market over the last decade, but the argument doesn’t hold water as these very same clients are normally investing in funds that would qualify for a stocks and shares ISA through their pension. So it can’t be risk that’s the problem.
The argument generally proceeds along the lines of “ahh but with pensions you get tax relief on your payments and the sooner you get it the more you earn”. At this point I usually lose it (the argument and my temper) and respond like Hugh Laurie playing House.
Let me be clear it’s a mathematical truism (if tax rates stay the same) that it makes no difference if you get the tax relief now or on the day before retirement. As long as you are getting tax free growth (which, other than taxes on dividends, you are in a pension and an ISA,) then you will it makes no difference when you get tax relief.
So if you use your ISA first you can have access, flexibility in retirement and you can be significantly better off. This isn’t a debate about pension versus ISA it’s game set and match to ISAs.
Locking-in
So why doesn’t the ISA first strategy prevail in the industry?
It all boils down to the same reason that I’m typing this blog on a QWERTY keyboard – Ken Arrow’s first mover advanatge. The current layout of a standard western keyboard is not the most efficient. The most commonly used letters (the vowels for instance) are not exactly placed in the ideal spots for speedy typing. However we tolerate this inefficiency as we are locked-in to the QWERTY method of typing and no one can be bothered to learn how to type all over again, even though in the long run it will make us faster and better at putting words on screen.
So too it is with the financial services industry. Pensions have been locked-in to life company and pension provider’s systems. After A-day in 2006 when the ISA first strategy effectively became unanswerable, the cost and effort involved in switching from pension to ISA first became a difficult business case for an organisation to justify.
Surely with such intransigence from the industry we could rely on the independent advice sector to pull the providers into an ISA first strategy. It was after all clearly in their client’s best interests? But no: There was silence.
The commission conspiracy
I’ve heard the answer that advisers were not interested in the ISA first strategy because it was too complicated. Please, are you telling me that pensions are simple! More importantly guiding a client through complication towards their best interest is what an adviser is paid for!
No, there is something else going on here. Pension first survived because it locks the client into their plan, and with a lock-in comes upfront commission to the adviser. You can’t go paying out large amounts of upfront commission if the client might just up a leave the next day. The latter is quite possible with an ISA, but a pension, that’s a different story it’s much stickier and less likely to move.
So the industry has locked itself in to a pension first strategy, at the financial expense of investors themselves, for entirely self-serving reasons.
The media were sold a pass by their own admirable need to offer balance to any story, especially one that bucked conventional thinking. So when looking at the ISA first strategy they would get a range of opinions from advisers and providers who, remarkably, would all give the same answer and pour cold water on the idea, it wasn’t balance they were getting but a common vested interest.
How the regulators tolerated this I really don’t know. The Financial Service Authority brought in RU65 to rightly force advisers to justify if they were not recommending a stakeholder pension, but where was the equivalent requirement to justify an ISA as opposed to a pension?
But let’s be thankful for the abolition of commission for financial advice, that at least will break the unholy alignment of interests between the providers and advisers. And as if by magic the industry is suddenly warming to the idea of an ISA first strategy – now called a corporate wrap. There’s no legislative change in favour of ISA first but the end of commission is breaking the unholy alliance that kept clients locked in to pensions unnecessarily.
ISA first, at last
With these commission changes in place I’m quite confident (short of another fundamental change in tax legislation) that in 10 years time the ISA first strategy will be the most common way of saving and investing for retirement. Pensions will still be used but they will be used strategically and generally only in later life.
I always thought my tombstone would have “ISAs are better than pensions” carved into it, i’m hoping that soon I’ll be able to upgrade to “I told you so.”