Lifetime ISA set to help the self-employed save more

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1 FOSTERTALKMONEY The personal finance newsletter for members of FosterTalk published by Lighthouse Financial Advice AUTUMN 2016 Lifetime ISA set to help the self-employed save more If you are self-employed, you do not benefit from being enrolled into an employer pension scheme you have to fund your retirement yourself. We explain why the new Lifetime ISA may become your savings vehicle of choice. For self-employed people under 40 the new lifetime individual savings account (Lifetime ISA) is likely to be an ideal saving vehicle, for instance to help fund your retirement. Data shows that there could be a healthy market for Lifetime ISAs. According to research conducted for the Scottish Widows Retirement Report, at least 46% of people in their thirties are saving for retirement outside any pension fund to which they may be contributing. The typical extra amount these people are saving is 150 a month. This could already be in an current ISA and it suggests that a significant number of people could switch those savings into a new Lifetime ISA. (unless it is to buy your first house or you are terminally ill) you will lose the government bonus, and any interest or growth on it and pay a 5% charge. The Government is consulting on whether savers will be allowed to withdraw the money with benefits intact for other life events. Incentive to keep your money invested until you are 60 Ian Naismith, head of pensions development at Scottish Widows, says one of the main reasons young people do not save into a pension is their concern that they will not be able to access their money until they are 55, or even older in the case of some people. Also in this issue It s a family affair 2 Optimise your tax: use your reliefs and allowances 3 Strokes not just a disease of the elderly 4 Built for income how to fund a long-term retirement 5 The new accounts, which will be available from 6 April 2017, will have a number of attractive benefits. They will allow people between the ages of 18 and 40 to save up to 4,000 a year for retirement or to buy their first home. Tax benefit and bonus with certain conditions Savers will receive an upfront tax benefit of 25% on all money they invest in a Lifetime ISA up to the age of 50 a bonus of 1,000 a year if you save the maximum. Withdrawals are tax-free from age 60, giving people who save for the longer term a valuable double tax relief boost. Many will find the dual purpose of Lifetime ISAs attractive. You can use some or all of the money to buy your first home, which must cost less than 450,000. Or you can keep it until 60 and use it to supplement your retirement income. Access to your money Crucially, the money is not tied up you can withdraw it before you are 60, but if you do He says that the Lifetime ISA has a clever design in that it addresses this concern while also providing a strong incentive to keep the money until retirement. As such, it could have broad appeal for people looking for a flexible top-up to their existing pension arrangements. However, Mr Naismith emphasised that the biggest beneficiaries will be the self-employed. The self-employed do not currently save a lot for their retirement, he says. It is really important that they are given more suitable incentives and education to do that. The Lifetime ISA will help. He also gave a strong warning that employees should not see the Lifetime ISA as an alternative to an employer s pension as its benefits, especially the employer s contributions, make employers schemes much more attractive. The self-employed do not currently save a lot for their retirement, he says. It is really important that they are given more suitable incentives and education to do that. The Lifetime ISA will help. While Lighthouse Financial Advice endeavours to provide correct information, it cannot guarantee the accuracy of any information contained in this newsletter and no action should be taken or not taken solely based on the information contained in it. Professional financial advice should be sought before taking any action. Threshold, percentages, rates and tax legislation may change in the future. Lighthouse Financial Advice is a trading style of Lighthouse Financial Advice Limited. Registered in England No Registered Office: 26 Throgmorton Street, London, EC2N 2AN. Lighthouse Financial Advice Limited is an appointed representative of Lighthouse Advisory Services Limited, which is authorised and regulated by the Financial Conduct Authority. Both are wholly-owned subsidiaries of Lighthouse Group plc FOSTERTALKMONEY AUTUMN 2016

2 2 FOSTERTALKMONEY AUTUMN 2016 It s a family affair Juggling work and family life can be challenging, but what would happen if your family s income fell or even stopped overnight? It s no surprise these days that more and more Dads are taking a hands-on role in the home, with Mums taking on greater responsibilities in the workplace. Gender stereotypes are disappearing - quite rightly too. So, are you a working Mum or Dad with a family and financial responsibilities? Families looking after families Help and support from your family is key, as is taking good care of yourself so that you can take care of everyone else. And if you can also spend some quality time with your youngsters as well during the week, then, well, you re in a fortunate position. Not everyone manages it, and most working parents have to consider childcare costs of some kind along the way. Louise Colley knows that. She s Mum to 7-year old twins so she has first hand experience, working hard here with us at Aviva, and working hard with her family at home too. Childcare doesn t come cheap. I know that. I m really lucky, I get a lot of help and support from my other half but it s a fine balancing act between us. He collects the twins after school as he starts at 6am I do the morning drop at our child minder, which is a massive help otherwise we wouldn t be able to both work. But I also know that some parents aren t so fortunate, and that childcare costs have risen dramatically over the last five years. According to the Family and Childcare Trust, some parents are paying 1,214 more today than they did in That seems like so much money, but some Mums and Dads are paying thousands of pounds every year it really can be frightening, how it all mounts up. Your family, your needs Understandably, every family wants to do things their way. Everyone s circumstances are different, and what works for you may not work for everyone. But what s true for every family is that a secure income can make a big difference to the child care you choose and it may be hard to imagine how you d cope if that income disappeared. Recently Aviva launched their latest bi-annual Family Finances report. They discovered most of the parents they spoke to felt fortunate to be able to combine their family life with working, but it also meant someone had to quite literally hold the baby. As Louise says, I ve been lucky. I ve been able to juggle working and having a family, but if I put both my mum and work hats on together for a moment, one thing is crystal clear: it s never been more important for dual-income families to think about how they d manage if their finances changed overnight. Looking at life insurance, looking after your family It s well worth taking a few minutes to talk about life insurance as soon as you can with a professional financial adviser. In fact, it may take you less time to raise the subject with them than it s taken you to read this article which shows just how easy we can make it to find out what a life insurance policy may cost today. One thing is crystal clear: it s never been more important for dual-income families to think about how they d manage if their finances changed overnight.

3 3 FOSTERTALKMONEY AUTUMN 2016 Optimise your tax: use your reliefs and allowances Britons are likely to waste 4.6bn in 2016 by not taking advantage of tax reliefs and allowances created for them by the government. Three in five taxpayers admit they haven t done anything to reduce their tax waste in the last year.* 1.9bn tax relief is likely to be wasted in the UK in 2016 by not utilising pensions. 47%* of savers think they are already paying as little tax as they could.* We look at what you can do to optimise the amount of tax you pay. Your savings You could keep more of your savings in an Individual Savings Account (ISA). In the 2016/17 tax year you can save as much as 15,240 into an ISA and then take any growth and income tax-free. Your investments Other than gains on residential property, you ll pay capital gains tax at 10% on any gains that fall within any unused basic-rate tax band you have. And you ll pay it at 20% on any gains that fall outside your basic-rate tax band. However, you only pay tax on the amount of any gain above the capital gains tax exemption. For 2016/17 this is 11,100. You can sell any assets you have that are not in an ISA or other tax-free wrapper for a gain up to the annual capital gains tax exemption ( 11,100 in 2016/2017) without having to pay tax (in that tax year) use it or lose it! Please remember if you re married or in a civil partnership, spouses and civil partners are treated as separate individuals so each has their own annual exemption. Your retirement plan Pensions can be the most tax-efficient way to save. For example, a basic-rate taxpayer only has to pay in 800 to have 1,000 invested in their pension pot. You should get tax relief on pension contributions you make. This is limited to the higher of 3,600 or 100% of your relevant earnings capped at 40,000 before tax charges may apply. This 40,000 is known is your annual allowance. It may be possible to use up any unused allowance you have from the previous three years. This is a complicated area so it s important that you speak to your financial adviser about it. Your estate the total value of everything you own There is a lot you can do not only to make sure that your estate (the total value of everything you own) goes to who you want, but also to minimise any inheritance tax that might be payable. Inheritance tax is paid at a rate of 40% on the value of your estate above your nil-rate band. The nil rate band for an individual in 2016/17 is 325,000. Ways of reducing the amount of inheritance tax payable include: making gifts using trusts leaving gifts to charity. You should seek professional advice to ensure you make the right decision at the right time. The information is based on our understanding, as at May 2016, of current taxation, legislation and HM Revenue & Customs practice, all of which are liable to change without notice. Sources: * unbiased.co.uk ** National Statistics HMRC Tax and NIC receipts, May Ways of optimising the tax you pay: make sure you use as much of your ISA allowance as possible take advantage of your capital gains tax exemption make the most of the tax relief you get when making pension contributions reduce the value of your estate to reduce inheritance tax that might be payable. The value of your investments can go down as well as up, so you could get back less than you invested. A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation. Tax advice which contains no investment element is not regulated by the Financial Conduct Authority.

4 4 FOSTERTALKMONEY AUTUMN 2016 Strokes not just a disease of the elderly The number of working age men and women who have a stroke is rising 1. However, by adopting healthy behaviours you can help reduce the likelihood of having a stroke in the first place. No-one likes to talk about death or illness, so it s no surprise that talking about these with a financial adviser can be difficult. There can be a tendency to think that it won t happen to me, and therefore overlook buying insurance that protects you and your family against the financial consequences of such a devastating event. Unfortunately, serious illnesses, such as strokes, affect people of all ages, so what can you do to reduce the chances of it happening to you? What is a stroke? A stroke happens when the blood supply to part of your brain is cut off, causing brain cells to be damaged or die. This damage can have different effects depending on where it happens in your brain. People in the UK suffer from strokes approximately 152,000 times a year. Although traditionally thought of as a condition of old age, one in four strokes occur in people under 65 years of age. One in eight strokes are fatal within the first year, but advances in medical care have helped reduce mortality rates in the UK by 46% between 1990 to The financial costs of having a stroke Because the mortality rates have reduced there are now more stroke survivors living in the UK. According to statistics, 1 in 54 people in the UK have survived a stroke 1. Unfortunately, these people often face a number of other financial and health problems. Strokes are the largest cause of complex disability in the UK and half of all stroke survivors will suffer some form of disability 1. Research by the Stroke Association looked into the financial impact of stroke on survivors: 69% of years olds were unable to return to work 65% of year olds reported a decrease in household income. Household expenses increased for 58% of stroke survivors, including heating, transport costs, care costs and household adaptations 1. Risk factors and prevention The majority of risk factors, such as smoking, being overweight, having a high blood pressure or high cholesterol levels could be controlled as part of a healthy lifestyle. In fact, 80% of strokes could be prevented by simple lifestyle changes 1 : Physical inactivity increases your risk of having a stroke by 50%. Being overweight increases your risk by 22%, and obese by 64%. Moderate exercise reduces your risk of having a stroke by 27% 1. That s why VitalityLife s healthy discounts and rewards are so important. They offer incentives, such as half price gym membership (a joining fee will apply) and free stop smoking sessions with Allen Carr, to encourage you to lead a healthier lifestyle, which in turn reduces your risk of suffering from a variety of health conditions. And their data proves that it works; their members using wearable devices are nearly 30% more likely to have a healthy BMI than those that don t 2. How VitalityLife s Serious Illness Cover can help With traditional critical illness insurance, strokes need to be of a certain severity for policy-holders to receive a payout. And if you did receive a payout, you d be unable to take out cover again due to your medical history. Unfortunately, 30% of stroke survivors go on to have a recurrent stroke or mini-stroke 1. If these people had a traditional critical illness insurance they d be unable to protect against this financially. VitalityLife s Serious Illness Cover is different. Due to their severity-based approach, where they pay out based on how severe your condition is, you ll get a payout to match the severity of your condition. So if you have a stroke of a lower severity and are able to return to work, the payout you d receive would be lower but you d still have cover in place to protect your in the future. And VitalityLife pays all valid stroke claims, so you ll receive a payout that is suited to your own personal circumstances. 1. Stroke Association, January VitalityLife internal statistics 80% of strokes could be prevented by simple lifestyle changes, such as walking more. If these people had a traditional critical illness insurance they d be unable to protect against this financially. VitalityLife s Serious Illness Cover is different.

5 5 FOSTERTALKMONEY AUTUMN 2016 Built for income- how to fund a long-term retirement With a retirement that could span decades rather than years, where can you find a sustainable, long-term income stream to meet your needs? One key issue for people who are retired or approaching retirement is how they can obtain a decent, long-term level of sustainable income which has the potential to last throughout their retirement. The traditional annuity with its guaranteed income may still be the preferred choice for many, but it may not necessarily be the most suitable option for everybody, and more people are expected to consider other income investment options following the radical changes to pensions regulations that came into effect in Spreading the risk An alternative that may interest people approaching retirement or already retired is a multi-asset income fund. Multi-asset funds offer diversification by investing in a range of different asset classes, such as bonds, company shares, property, and alternative assets. One such fund is the Premier Multi-Asset Monthly Income Fund. Regular monthly income The Fund has a strong focus on delivering a good income stream for investors, on a monthly basis, by investing in a range of different incomeproducing funds managed by leading investment companies. All of the underlying investments are chosen for their ability to pay attractive levels of income. In its most basic form, this approach can be seen as a not putting all your eggs in one basket style of investing. By investing in many different types of asset and funds, investors are not overly reliant on a single asset or fund to provide the income. Natural income no need to cash units in Broadly speaking, there are two popular ways of getting income from an investment. One is cashing in units or shares. The amount of income paid out will depend on the number of units cashed in and their price at the time this was done. The level of income can potentially be managed, but the amount of shares that need to be encashed to achieve the level of income you desire will depend on their price on the date of they are sold. This route means that the number of units or shares will decrease over time, so there is the risk that your pot of shares could be completely eroded over time. Investing in assets that generate income An alternative option is to receive natural income from underlying income-generating assets. This is the income that you receive from your investment as dividends, which are aggregated from the dividends of the portfolio s underlying dividend distributions. So, the income in this case is the number of shares in a fund multiplied by the dividend per share. The income can fluctuate over time but no shares have to be cashed in, meaning you will have your full pack of shares to get paid dividends for as long as you hold the investment. The income share price will also fluctuate but should have the potential to grow over time. Crucially, a natural income can provide investors with a steady income stream even in troubled markets. Income for the longer term Premier s multi-asset income funds are built on the principle of natural income. Hence we look to construct a diversified portfolio of incomegenerating investments that aim to pay an attractive dividend per share to our clients over the long term, with no need to cash in shares to pay the income, which is why we believe our multi-asset income funds could be of interest for retirees whose main objective is long-term income. A long-term sustainable income is what many people are looking for when they retire. Premier Asset Management has been managing investors money for over two decades. We offer a range of investment solutions designed to achieve different long-term investment objectives, such as regular income, longterm investment growth, or a balance of both, and cater for the varying risk appetites of investors. The value of your investments, and the income you receive from them, can go down as well as up, so you could get back less than you put in.