Safeguarding your income and family wealth

What would happen to your family if something were to happen to you or your partner? We all want to protect what’s important to us. And while most people recognise the importance of taking out insurance to cover valuable possessions such as their homes and cars – even pets – far fewer have sufficient protection in place to protect themselves or their families should something unexpected happen to stop them earning income.

Financial protection

Could you and your loved ones cope financially if you had an accident or fell ill and couldn’t work? According to figures from the Office of National Statistics in 2010 [1], 20 per cent of British men and 10 per cent of British women died before their 60th birthdays. Thousands of Britons under the age of 60 are also diagnosed with a critical illness every year and even more are involved in accidents that affect their ability to work.

Many of us expect the Government – or our employers, if applicable – to step in should we become unable to work. However, even if you are employed full-time, your employer will generally stop paying your full salary after a period of time and the State benefits you qualify for can offer only limited help – particularly if you have a mortgage. While most major life events can’t be foreseen, they can be planned for, and here we explain some of the different types of protection available that could help support you or your family in times of crisis.

Life insurance

If the worst should happen, life insurance will provide your family with a guaranteed cash lump sum or income to help them cope financially in the event of your premature death.

You can choose between cover that pays out the same amount no matter when you die, cover that increases in line with inflation, or perhaps cover that’s related to your mortgage, decreasing in line with any outstanding balance. It is worth checking whether your employment contract includes a death in service benefit that will go to your family should you die.

Critical illness insurance

More than eight in ten cancer patients find themselves in a difficult financial position, according to charity Macmillan Cancer Support [2], who estimate that cancer costs the average patient £570 a month due to hospital travel and loss of earnings.

Critical illness cover can offer a financial lifeline to people who develop a serious medical condition. It pays out a tax-free lump sum if the policyholder is diagnosed with a life-threatening specified illness covered by their plan – and you can use any payment you receive any way you want.

While most of us tend to worry about the most common serious illnesses such as heart attack, cancer and multiple sclerosis, critical illness cover can also protect you against a much wider range of specified conditions.

It also makes sense for individuals with no dependants to consider critical illness cover to help maintain their current standard of living.

Income protection insurance

Income protection insurance is designed to help cover your outgoings while you are unable to work – right up to your chosen retirement age.

It essentially pays a selected percentage of your monthly income. Depending on the provider, you can choose to receive up to 75 per cent of your gross salary, but again, you will pay less for cover if you think you can survive on a lower percentage.

Payments usually start after a specified period, for example, 4 or 13 weeks. Many people will defer the start of payments until after any sick pay they are entitled to with their company has finished – most insurers would reduce a claim by any sick pay you are entitled to anyway.
You could even choose to defer the benefit payments for up to two years, perhaps based on having other plans that could support in the interim, such as critical illness cover.

Ensure that you – and your family – are fully protected

Life insurance, critical illness insurance and income protection insurance are designed to protect you in different financial and emotional situations. For many, having a combination of the three is the best way to ensure that you – and your family – are fully protected should the unexpected happen. If you have no dependants, a combination of critical illness cover and income protection may be more appropriate. To review your particular protection requirements, please contact us for more information.

[1] Office of National Statistics: Mortality in the United Kingdom 2010, released 20 January 2012
[2] Macmillan Cancer Support – Cancer’s Hidden Price Tag 2013 report

Choosing the retirement option that’s right for you

Your retirement should be something to look forward to, not worry about how to make ends meet. Whatever you want to do, understanding how to build up enough retirement savings and how pensions work should help you achieve your goals.

Your accumulated pension pot will have been hard-earned over years of work. It is only right you eventually have the freedom to choose how and when you access your money during your retirement.

At the moment, people don’t have total flexibility when accessing their defined contribution pension during their retirement – they are charged 55% tax if they withdraw the whole pot. But from April 2015, people aged 55 and over will only pay their marginal rate of income tax on anything they withdraw from their defined contribution pension – either 0%, 20%, 40% or 45%.

How the current system works
Under the current system, there is some flexibility for those with small and very large pots, but around three quarters of those retiring each year purchase an annuity.

Current pension pot options
Currently, you can take up to 25% of your pension pot tax-free. With the remaining amount, you have these options:

If you are aged 60 and over and have overall pension savings of less than £18k, you can take them all in one lump sum – this is ‘trivial commutation’

A ‘capped drawdown’ pension allows you to take income from your pension, but there is a maximum amount you can withdraw each year (120% of an equivalent annuity)

With ‘flexible drawdown’, there’s no limit on the amount you can draw from your pot each year, but you must have a guaranteed income of more than £20k per year in retirement

Buy an annuity – an insurance product where a fixed sum of money is paid to someone each year, typically for the rest of their life

If you withdraw all your money, you are charged 55% in tax. Regardless of your total pension wealth, if you are aged 60 or over, you can take any pot worth less than £2k as a lump sum, as this classifies as a ‘small pot’.

Proposed changes
Commencing 6 April 2015, from age 55, whatever the size of a person’s defined contribution pension pot, the proposal is that you will be able to take it how you want, subject to your marginal rate of income tax in that year. As previously, 25% of your pension pot will remain tax-free.

There will be more flexibility. However, for those people who continue to want the security of an annuity, they will be able to purchase one, and those who want greater control over their finances can drawdown their pension as they see fit. People who want to keep their pension invested and drawdown from it over time will be able to do so.

To help people make the decision that best suits their needs, everyone with a defined contribution pension will be offered face-to-face guidance on the range of options available to them at retirement.

Interim changes
There have been a number of interim changes that took effect from 27 March 2014, prior to proposed changes that commence from next April.

These include:

The amount of overall pension wealth you can take as a lump sum has been increased from £18k to £30k. In addition, the amount of guaranteed income needed in retirement to access flexible drawdown has been reduced from £20k per year to £12k per year

The maximum amount you can take out each year from a capped drawdown arrangement has been increased from 120% to 150% of an equivalent annuity

The size of a small pension pot that you can take as a lump sum, regardless of your total pension wealth, increases from £2k to £10k

The number of personal pension pots you can take as a lump sum under the small pot rules increases from two to three

Who benefits?
The interim changes will mean around 400,000 more people (according to the Government) will have the option to access their savings more flexibly in the financial year 2014/15.

From April 2015, the 320,000 people who retire each year with defined contribution pensions will have complete choice over how they access their pension.

‘Save smart’

We’re becoming increasingly good when it comes to cost cutting, according to the latest findings of an annual online survey from long-term savings and investment specialist Standard Life by YouGov PLC.

Today, more than 9 out of 10 of us (92%) actively manage our costs to make our money go further. There has been a strong growth in the number of people reviewing phone tariffs, internet tariffs and utility providers, and these days more people are looking online to find the best deals.

Controlling costs
More young people in particular have taken steps to actively control their costs in the past year. 42% more under-25s are regularly reviewing their phone and internet tariffs to save money, and 33% more are making sure they pay off their credit cards each month.
Meanwhile, 21% more people aged 55 and over report that they set themselves a weekly or monthly budget. However, as a nation, the number of people budgeting has declined by 5% this year.

Potential for higher returns
While most Britons are busy cost-cutting – buying things second hand, reviewing insurance premiums, budgeting and ensuring they get the best deals all round – those who are ‘saving smart’ by using an Individual Savings Account (ISA), either a Cash ISA (41%) or a Stocks & Shares ISA (11%), remain in the minority. Even fewer say they plan to actively save in a Cash ISA (38%) or a Stocks & Shares ISA (9%) this tax year.

From July this year, you will be able to save up to £15,000 in the New ISA, and you will also be able to transfer ISA savings freely between cash or stocks and shares. Therefore, rather than putting all of our money away in a savings account, you now have a chance to save smart with even more of your money. The higher ISA limit also increases the opportunity you have to invest in stocks and shares tax-efficiently, with the potential for higher returns than if you keep everything in cash.

Helping you ‘save smart’:
1. Use as much of your ISA allowance as possible each tax year. Between 6 April and 1 July, there are temporary limits of £5,940 for Cash and £11,880 for Stocks & Shares ISAs. After this, the new ISA (NISA) rules apply and you will have the chance of greater tax-efficient growth over the longer term by being able to invest £15,000 each tax year.

2. Always hold some money in cash to cover your outgoings (such as your rent, mortgage, food and utilities) in case of emergencies, before looking to invest for the longer term. But make sure you are getting the best interest rate on your cash by looking at both savings accounts and Cash ISAs.

3. If you are dipping your toe in the stock market for the first time, you should obtain professional advice when it comes to choosing funds for a Stocks & Shares ISA.

4. The important thing is to think about how much risk you are willing to take. You may also want to consider ‘risk-managed funds’, which have been growing in popularity with some investors. They provide you with a diversified portfolio that is managed for you, with the aim of providing the best possible return, in line with your chosen level of risk.

Tax rules and legislation can change and the information given here is based on our understanding of law and current HM Revenue & Customs practice. The value of an investment can fall or rise, so you may not receive back the amount you invested.

All figures, unless otherwise stated, are from YouGov Plc. Total sample size for the 2014 survey was 2,591 adults, 2009 adults in 2013 and 2,004 adults in 2012. Fieldwork was undertaken between 5–7 March 2014, 25–28 January 2013 and 23–27 February 2012. The surveys were carried out online. The figures have been weighted and are representative of all GB adults (aged 18+)