Our ...November Newsletter 2012
We hope you had a good summer (such as it was) and that business is buoyant as we move towards the end of the year. In this edition we cover some very topical issues: Pensions Reform and the Retail Distribution Review. We also have a useful article on how to fund a capital purchase without involving the bank. Read on and we hope you find the articles interesting.
In this issue:
- How to fund a capital purchase without using your bank
- How to retain your child benefit payments
- Why will your gender be irrelevant from 21st December?
- RDR – what is it and why should I care?
If you would like any further guidance or advice regarding the subjects raised, please click here and we will be pleased to help.
Do you need funds for a purchase within your business such as a property, fixed assets or perhaps some land to build new offices? With the continued reluctance on the part of the banks to lend, one option that may be available to you is to fund the purchase as a loan via your pension from a Small Self Administered Scheme (SSAS).
A SSAS can loan up to 50% of the net fund value to the sponsoring employer but there are some restrictions to bear in mind:
· The loan must be secured as first charge on assets that are, and will remain, at least equal to the face value of the loan
· The interest rate of the loan must be at least 1% above the prevailing base rate
· The term cannot exceed 5 years
· It must be repaid by regular payments of capital and interest
Highly Tax Efficient
Providing the above restrictions are all met, this can be a highly tax efficient way to fund a purchase within your business. Not only will the contributions to your SSAS benefit from corporation tax relief, all repayments of the SSAS loan are tax deductable too.
The ideal security for a SSAS loan would be commercial property and land but residential property can also be used along with most tangible moveable property.
However, it should be noted that SSAS loans cannot be made to a third party connected in any way to a SSAS member. Equally, a SSAS established by a self-employed business owner or partnership may not lend money back into their business.
To discuss whether a SSAS loan back could work for you, please contact Simon Jackson on 01926 651122.
Are you one of the million families who received a letter from HMRC warning you’re to lose some or all of your child benefit next year? If so, there are certain circumstances in which you may be able to avoid this.
Currently child benefit is paid at £20.30 per week for the first child and £13.40 for each child after that, totalling £2,450 per year for a family with 3 children.
But from January 2013 child benefit will be withdrawn from any household where one parent earns £60,000 or more and for those earning between £50,000 and £60,000, child benefit will be reduced and they will need to submit a self-assessment form, essentially paying the benefit back via a tax charge at the end of the year.
Many families concerned about having to pay a substantial tax bill or reluctant to disclose personal financial details to HMRC will consider opting out of child benefit altogether.
However there are some options for you to consider that, under current legislation, may enable you to retain your benefit.
1. Increase your pension contributions. If you can afford to increase your pension contributions to reduce your pre-tax wages to £50,000 or below, you’ll not only retain the child benefit but you’ll also avoid paying income tax on those contributions. *
2. Salary Sacrifice. If your employer offers a salary sacrifice scheme you may be able to ‘sacrifice’ some of your salary for non-cash benefits such as childcare vouchers or unpaid holiday. This also applies to pension contributions and topping up your pension via a salary sacrifice scheme will reduce the NI paid by both you and your employer.
3. Incorporate a company. If you’re in a position to incorporate, you can pay yourself a wage below the £50k threshold, and if needed, draw additional funds via dividends from your shareholding.
There are potential drawbacks to each of the options above so it is essential to consider your options carefully. To discuss whether these may be appropriate for you, please call Simon Jackson on 01926 651122.
* Pension income drawn during retirement is liable to income tax.
On 21st December 2012, the cost of all life insurance and protection policies will increase, in some cases significantly.
This is due to the EU Gender Directive which requires that all insurance and protection policies are calculated on a gender neutral basis. Currently, women pay less for life cover than men due to their longer life expectancy and men pay less for income protection. But this is all set to change on 21st December when men and women must pay the same premiums for all new policies.
There has been lots of press coverage regarding the effects of the directive on car insurance policies however the changes will have a far wider impact than that. All protection policies will be affected including pension annuities, income protection and critical illness cover.
The gender effect will result in most women having to pay more for life and critical illness and men will pay more for income protection.
But this isn’t the only issue affecting the cost of premiums. From January 2013 life insurers will lose a tax loop hole which enabled them to offset the costs of their life insurance business against the profits from their investments. These costs will inevitably be passed on to the consumer and as a result, premiums will rise by as much as an additional 10%.
You could therefore end up paying hundreds and possibly thousands of pounds more for the same amount of cover after 21st December (see tables below).
So what should you do?
If you already have cover for life, critical illness and income protection then don’t worry, you don’t need to do anything. But if you want to change something on your policy or increase your cover in the future, then now is the time to talk to your adviser.
However, if you haven’t really thought about cover or you’ve put it off for whatever reason, it’s time to give it some serious thought. Many providers are setting deadlines ahead of 21st December for accepting gender-specific premiums, so the sooner you act, the better.
To discuss your own particular needs for life cover or general protection please call Helen Jeffrey on 01926 651122.
Whilst there are many variables at play when calculating premiums, the tables below illustrate the potential effect of the Gender Directive:
|Product Type||Currently on average….||Potential impact of Gender Directive and loss of insurance tax loop hole**|
|Income Protection||Women pay 65% more than men||+20%||-28%|
|Critical Illness (with Life)||Men pay 10% more than women*||+6%||+16%|
|Term||Men pay 10% more than women||+3%||+22%|
|Underwritten Whole of Life||Men pay 20% more than women||-5%||+15%|
*In some cases, women pay more than men
**Adding together the estimates provided by LV=, June 2012 and Actuarial Profession, March 2012. The changes to costs will vary by individual, product and provider.
45 year old non-smoker buying £150,000 level term life cover for a 20 year period:
|Current Monthly Premium||Potential Average Effect of the Gender Directive||Indicative Premium from 21 Dec 2012||The Potential Impact|
|£32.69||+20%||£39.23||An increase of £6.54 a month totalling £1,569.60 moreover the full term|
|£54.79||-28%||£39.45||An decrease of £15.34 a month totalling £3,681.60 less over the full term|
These figures are for illustration purposes only. Current monthly premium is based on LV= premium as of 1 July 2012.
The assumed increases and decreases are based on expectation of the average effect of the EU gender directive from 21/12/12.
Premium changes will depend on individual circumstances and could be higher or lower than the averages and amounts indicated.
From 1st January 2013 the Retail Distribution Review (RDR) will come into force which will radically change the way you buy financial products.
1) No more commission
Firstly, Financial Advisers will no longer be paid by commission on the products they arrange, instead they will charge a fee and must agree this with you before any work is undertaken.
Why is this?
These new regulations stem from an analysis in 2006 by the FSA which indicated that consumers were losing millions of pounds a year because advisers, driven by commission, were encouraging them to switch pensions, in many cases unnecessarily. RDR is intended to remove this bias, ensuring that you the consumer receive only the products you need and which are best suited to your requirements.
In addition, with an adviser charging fees you are more likely to benefit from ongoing advice rather than one-off recommendations from commission-based IFAs which make no consideration for any future change in your circumstances.
Tip : Are you still paying Trail Commission?
Trail (or renewal) commission, is paid to financial advisers over the lifetime of financial products to cover the cost of giving you ongoing advice. Unfortunately some advisers fail to do this and you end up paying for advice you never receive. Even after January 1st next year you will continue to pay commission on any products you purchased prior to that date and if you are not receiving ongoing advice, then it is probably time to consider your options.
2) Independent or Restricted?
RDR also requires that advisers must be absolutely clear as to whether they are independent or restricted. Advisers designated as Independent have access to the whole of the market rather than being tied to specific products and can therefore secure more cost-effective options. Previously, advisers may not have been clear about their status in a bid to conceal this from their clients.
Tip: If you are unclear whether or not your adviser is “restricted”, check in your Terms of Engagement details.
3) Raising the Game
The third major change under RDR relates to the standards of service provided by the industry. All advisers must hold a higher minimum qualification than was previously required, they must commit to a higher level of ongoing professional development and they must all adhere to a stricter code of conduct.
Sources estimate that this requirement alone will see 10% to 30% of financial advisers leaving the industry altogether.
Tip: Is your financial adviser properly qualified?
If you are unsure, try the Unbiased website which will help you find a properly qualified adviser together with further information on the qualifications that advisers must have.
Want to know how JJFS is implementing these changes? Please click to read our brief overview: RDR – What is it and what does it mean for you?
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