Helping the Children onto the Property Ladder
It’s common for youngsters to want a place to call their own, but getting to the first rung of the property ladder can seem out of reach for most. If you’re a parent, you probably feel a bit obligated to give them a financial boost.
A number of schemes are out there that might be looking into to make getting your children into their own home – and out of yours – less of a stretch.
Help to Buy ISA
First-time homebuyers – those who have never owned property in or outside the UK – have an opportunity to save within a Help to Buy ISA.
The account offers a tax-benefited way to set aside funds specifically for the mortgage completion deposit with the potential to gain up to a 25% bonus on savings from the Government.
Account owners can save up to £200 on a monthly basis, with an initial deposit of up to £1200 in the first month.
Setting your kids up with a Help to Buy ISA lessens the financial blow of buying a home because the Government pays a bonus of up to £3,000 at the time the sale is complete.
So long as your children aren’t purchasing a home that costs more than £250,000 (£450,000 in London), the extra cash is theirs for the taking. While a Help to Buy ISA scheme can be helpful for your as parents, there are some things to watch out for.
The tax-free bonus is only applied to the first £12,000 saved, and a minimum of £1,600 must have been put away to receive any bonus at all. Additionally, the bonus is not applied until mortgage completion, meaning funds cannot be used for an exchange deposit.
The Help to Buy ISA must be held in cash, no investments, which means that due to low interest rates, you will only receive an interest rate of a couple of percent at best.
It is also important to note that Help to Buy ISAs must be used for properties purchased with a mortgage, not cash, and there is currently no assistance for prospective homebuyers who wish to rent the purchased home.
Account owners must also meet the following requirements: be a resident of the UK 16 years or older, and not have another active cash ISA established within the same tax year.
Savings and Investment Alternatives
In addition to the Help to Buy ISA, conventional savings and investment accounts can work to the make your children’s home buying dreams a reality. Regular savings accounts pay minimal interest but do allow for an easy way to shore up a mortgage or exchange deposit well before funds are needed.
Importantly, some of these accounts have restrictions on how many withdrawals can be made in a given time frame, while others require funds to be locked in for a set period of time prior to opening.
Investments also offer a method to save toward home buying goals without the contribution limits tied to ISAs. And while some investments provide a higher rate of return than conventional savings or Help to Buy ISAs, the risk of loss of capital is real.
In order to get your children out of your home and into their own, your upfront financial assistance may be a necessary factor. Help to Buy ISAs are a smart way to earn a bonus on funds without the tax burden, but it's important to understand the limitations.
Savings and investments also help towards reaching a certain amount of savings for a home purchase, but only when risk is balanced with potential reward.
To successfully get your children onto the property ladder, consider which methods or combination of accounts fit your circumstances best.
If you’re a woman, you’re statistically more likely to experience financial and emotional hardship throughout the process of divorce, especially if you are on the brink of retirement. One of the main challenges you may face at the moment is trying to pick your way through pension sharing, knowing that if it goes wrong you could be left short of money in later years.
What is Pension Sharing?
Pension sharing is the process of splitting pension schemes built up during working years. Any one of your ex-partner's personal or work-related pensions can be shared based on a percentage dictated by the financial settlement agreed during the divorce process. Pension sharing effectively awards a partner with a transferable credit for sticking it out in the relationship, creating a way to use funds that would have been available to both parties should the marriage have remained intact.
Considerations for Divorcing Women
If you are considering a pension sharing order, special care should be given to certain aspects of the process. First, pension sharing is based on a percentage of your partner’s pension valuation – not a hard and fast amount. This creates complexity due to the length of time that passes between agreement on that percentage and when the transfer credit takes place. Pension values fluctuate over time, especially when underlying investments are relatively high-risk. If markets take a turn for the worse, you may be left with far less than anticipated.
As an example, let’s say Mary is set to receive 50 per cent of Tom’s personal pension, currently valued at £250,000. Four months pass between the time a pension sharing order is granted and when the transfer credit is implemented, and Tom’s pension valuation has dropped to £170,000. Instead of receiving half the initial valuation, Mary is left with half of the current pension value - a difference of £40,000!
Managing the Time Risk
Remedies that lessen the blow of the moving target of pension valuation are scarce, but you can work quickly when pension sharing orders are in play to ease concerns. Overarching rules provide that pension sharing orders are required to be completed within four months, and pension providers must act swiftly to deliver the transfer credit. Also, asking for a pension valuation near the start of the implementation process is a sound strategy to safeguard yourself from drastically lower valuations.
Additionally, knowing where the pension credit is to be transferred well before the transfer credit is implemented is a critical step. It is rare that you are eligible to take ownership of a transfer credit under the same work or personal pension scheme already in place by your partner. Instead, transfer credits are applied to pensions in your name. If you do not have a pension prior to a pension sharing order being granted, you should work with a professional to create one.
Speed and planning ahead are not the only means to a successful end with pension sharing orders; you have the opportunity to protect yourself from lower valuations and transfer credits by building some flexibility into financial settlement documents. For instance, if other marital assets – cash, property, collectibles etc. – are available, these can be offered up to make up for any delay between the initial valuation and the actual transfer credit.
The Bottom Line
Pension sharing can be a viable method to achieve financial stability long after your divorce is finalised, but only when expectations are realistically set. Be proactive when it comes to obtaining the valuation and determining where the transfer credit will ultimately land, and make sure that you know your options if a shortage surfaces. The financial aspects of divorce are far more manageable when you remember the process of pension sharing requires equal parts time and patience, with a pinch of flexibility thrown in for good measure.
Achieving a degree of financial stability throughout retirement years does not happen on a wink and prayer alone. Without a respectable amount of effort put into planning for sustainable income prior to leaving the workforce, your dream retirement years could quickly turn into a far different, rather dreary reality.
Fortunately, minding the retirement income gap – that is, making sure you do not outlive your assets – can be achieved by focusing on two crucial components of income planning: longevity and investment performance.
The Challenges
Part of the struggle in planning for the appropriate amount of income in retirement is the unpredictability of life expectancy. Although research provides data on average lifespan for males and females born in certain years, pinpointing the exact moment income is no longer needed is an impossible task. You may initially base retirement income needs on a 20-year retirement, but should health or other circumstances change, you may be forced to stretch your assets an additional five, 10 or even 15 years.
Similarly, adverse health diagnoses may mean an increase of income for a shorter period of time. If you selected an annuity as the sole vehicle for generating retirement income, shifting cash-flow to meet changing needs is not an option. When flexibility is not infused into your retirement income plan from the start, specifically through diversification of income sources, minding that gap may be out of the question.
Mr Market
Market performance lends a hand in retirement income planning as well. In an ideal plan, underlying investments are able to generate a return high enough to sustain a selected withdrawal rate. For instance, following the conventional rule of thumb suggesting one take no more than a 4% withdrawal from assets each year typically allows retirees the ability to survive the worst of what the broad market has to offer in terms of performance, all while sustaining an adequate level of income.
Managing Drawdown
However, research has found that maintaining a 4% withdrawal rate throughout retirement years actually results in excess funds – more than double initial asset worth for 2/3 of individuals. The traditional school of thought surrounding the 4% rule is a safe place to start when it comes to not outliving assets, but money is left on the table for a large number of retirees who do not include some degree of flexibility within their overarching plan.
Sound income planning is paramount for individuals if they want to ensure the hard-earned money set aside specifically for retirement is able to satisfy cash flow needs over time. However, the unpredictability of market performance and longevity make creating a concrete income plan a true challenge. To mind the retirement income gap, it is necessary for individuals to create a plan that carries a degree of flexibility, not only in terms of the source of retirement income but also as it relates to the amount withdrawn each year.
If you are retiring soon you’re probably looking forward to
taking advantage of the new pension freedoms, which give you more flexibility
and control over your retirement savings.
However, before you go jumping in with both feet it might be worthwhile giving
some thought to the challenges that you are likely to face in arranging a
secure and flexible income for retirement.
Now that you’re no longer required to purchase a lifetime income annuity, there
are a few questions to consider:
* Should I buy an annuity at all?
* If not, then how should I manage my pension pot
to make sure I have enough income to cover my spending?
*And perhaps most concerning of all; am I likely
to outlive my savings?
A report by Retirement Advantage, published last week highlights the compromise
between having a secure income and having the flexibility of a drawdown
pension. It turns out that what most people value above anything else is
security and certainty of income (43%), and coming a close second was
flexibility (34%).
Unfortunately, it can be tricky to find a middle ground
between the security of a guaranteed income and the flexibility of being able
to access larger sums in case of unexpected circumstances.
Long lives the annuity
While the days of the traditional annuity-for-all might be
over, the certainty of a guaranteed income still makes good sense for those who
value security, especially if the annuity is set to rise with inflation.
Annuities are still one of the only options for insuring you against outliving
your savings.
But annuities aren’t for everyone, particularly if you’re looking for
flexibility. Annuities are a one-size-fits-all deal, which won’t adapt to your
changing needs. For example:
* If you are unfortunate enough to die 5 years into
retirement an annuity won’t leave anything behind for your loved
ones.
* Or if after signing the contract you learn that you
have an incurable disease that will reduce your life expectancy to a
precious few years. In this case, your annuity won’t give you any flexibility
to take extra income so that you can enjoy your final years.
Drawing on flexibility
An alternative approach might be to self manage your
retirement savings through a drawdown pension.
The safest way to go about this would be to pick a reasonable life expectancy
(say 100), invest your pension pot in line with your attitude to risk, and each
year withdraw enough money to cover your expenditures ensuring that you don’t
leave yourself short for the future.
The increased flexibility of being able to withdraw money as and when you need
it is likely to have a wide appeal, particularly as life is uncertain and often
results in unexpected costs.
However, what is gained in flexibility is fundamentally lost in security. You
can have no certainty that your pension pot won’t run out during your lifetime,
particularly as the value of your pot is linked to the uncertainty of your
investments.
Additionally, tough spending decisions will need to be made at least annually
because you now have the prospect of outliving your pension.
The best of both
So is it possible to have both a secure and flexible
retirement income?
One option might be to use your pension to annuitise your essential expenditure
and invest the remaining amount into a drawdown pension.
This would provide you with the security of a guaranteed income each year for
the rest of your life to cover your basic needs, whilst delivering the flexibility
to drawdown additional income, as you require it.
An important decision
You will have worked hard throughout your life to ensure you
have a secure income in retirement that is flexible enough to meet your
changing needs. This should be a simple and straightforward affair, however as
the landscape changes, challenges are likely to present themselves.
Securing a certain and flexible retirement income is one of the most important
decisions you are likely to ever make, at this important juncture in your life
serious consideration should be given to how best to manage these potential
pitfalls.
Millions of pensioners and those approaching retirement will now have the chance to raise their state pension income by up to £25 a week with the launch of a new scheme.
From 12 October 2015 to 5 April 2017, you are able to apply to make a ‘Class 3A voluntary contribution’ to top up your State Pension by up to £25 per week.
Under the deal, you can choose to top up your weekly basic state pension by between £1 and £25 a week.
How much you need to contribute will depend on:
* How much extra pension you want to get each week
* How old you are when you make the contribution
If you are 65 now and you want to buy an additional £1 a week for life it will cost you £890. If you want to buy the full £25 (or £1,300 a year) it will cost you £22,250.
Cheap Annuity?
The reaction to this has been generally good, with a string of experts pointing out that this is effectively a very cheap annuity.
For example, if you had wanted an annuity that provided you with £1,300 per year, on the open market you would pay around £35,000, rather a lot more than the £22,500 that the Government are asking for.
Effectively, you’re getting an annuity rate of 6%, far better than the 3% available on the open market.
On top of that, factor in that your spouse can inherit 50% of your State Pension on your death and it looks like a bargain, doesn't it?
Double Taxation
In many ways the scheme - known as Class 3A - looks generous, but it may not necessarily be the best way to boost your pension.
The state pension top up is likely to be paid with money that has already been taxed, and will have tax applied a second time when taking the income from your topped up state pension.
This is in contrast to an annuity purchased via your pension where the contributions are exempt from tax, the growth of the funds are exempt and tax is only applied when taken as an income.
All of this will reduce the net amount of income that you receive.
Payback Period
So how long would you have to live for you to get your money back?
Lets say that you hand over the £22,250 for the extra £25 a week.
* If you are likely to fall below the personal allowance tax threshold of £10,600 and will not pay tax on the income, it will take 17 years for the state to return to you the money that was yours anyway (£22,250/£1,300). You’ll need to live to 82 to break even.
* For those who will be basic rate taxpayers, you can expect 21 years before you break even at age 86.
Given that the average life expectancy in the UK is 81.5 years, it may not seem like such a good deal after all.
Other Options
To receive the full state pension, you are required to have 30 qualifying years of national insurance contributions.
For those who don’t, luckily you can pay to plug the gaps. Each year costs you £733.20 and will get you an extra £200 a year.
That’s a payback of less than four years for non-taxpayers and just over four years for 20 per cent payers. That’s got to be better than 17 and 21 years with the State Pension top-up.
Alternatively, you could consider deferring your pension. Each year that you defer your pension, you will receive a 10.4% increase in your annual payment. The payback on this would equal 9.6 years, not quite as good as 4 years but certainly a lot better than 17 years!
As always, the devil is in the detail. Despite the headline cheap annuity, it pays to consider the opportunity cost.
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