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Financial planning in your forties

Archive for August, 2018

Financial planning in your forties

Thursday, August 16th, 2018

It’s well known life begins at forty. Doesn’t it?

It should be an exciting decade, full of plans and aspirations. It’s also likely to be a time of optimum earning potential.

What’s more, it’s a crucial decade to take a step back and make sure your finances are on track to meet your goals.

There’ll be some decisions you’ll already have taken in your twenties or thirties, which will have had an impact. You may have bought your own home, for example, or put some savings away in cash, investments or pensions.

If things don’t look quite as rosy as you’d hoped, though, your forties are a good time to take stock, as there’s still time to make adjustments and give your investments time to grow.

Don’t forget, whatever savings you can make now will enable you to pursue your dreams later on.

Here are four key tips for shrewd financial planning at this important time of life.

Budget ruthlessly

Just because life may feel comfortable with regular pay rises and bonuses don’t fall into the temptation of spending more than you need. Do you really need that Costa coffee or M&S lunch every day?

Apps like Money Dashboard or Moneyhub can be helpful in showing you where your money’s going. Simple steps like cancelling subscriptions or switching bill providers can make a significant difference.

Historic studies show that investments usually outperform cash savings so any disposable income you can invest will be beneficial. If you can put money aside in a pension you’ll also be taking advantage of the tax relief available. Make sure you use your ISA allowance too for more accessible funds.

Carry out a protection audit

Think about what if the unexpected happened. Your forties are a time of life where you may find yourself part of what’s known as ‘the sandwich generation’ i.e. caring for elderly parents at the same time as looking after young children. This can put extra pressure on you. Make sure you’re protected should the worst happen by ensuring you have a good emergency fund in place. Also think about critical illness cover and life insurance.

Property plans

Your home will be a fundamental part of your financial planning at this time of life. If you feel you need a larger property, these are likely to be your peak earning years so now is the time to secure the best mortgage you can and find your dream home. On the other hand, if you’re quite happy where you are, it may be a good time to remortgage to get a better deal.

Family spending

Everyone’s situation is different. You may have children at university or you may still be having to pay for nursery fees. Whatever your position, make sure you budget accordingly and allow for inflation, especially if you’re paying private school fees. Work out the priorities for your family – the best education now or a house deposit in the future. It’s important not to derail your own life savings for the sake of your children as no one will benefit in the long run.

By doing some sound financial planning now, you’ll have more hope of continuing in the style you want to live, well beyond your forties.

The end of LISA?

Thursday, August 16th, 2018

The new girl on the block, in terms of saving products, seems like she may not actually be around for much longer. LISA, or the lifetime ISA, is being threatened with abolition by a Treasury committee, having only been on the market for 16 months.

The LISA allows those aged between 18 and 50 to save up to £4,000 a year towards a pension or a first home tax free, with the promise of a 25% government bonus capped at £1,000 a year.

However, a panel of MPs have highlighted significant drawbacks with the scheme. Some of the negative feedback has centred around the scheme’s complexity and that is confusing to customers.

The LISA has always seemed a somewhat odd product in that it has two very different target audiences; those saving for a house and those saving for a pension. It’s difficult to see how one product could hold the same appeal for both.

In fact, it has worked better as a vehicle for those saving for a deposit on a house than those using it as a pension allowance. After all, what first time buyer wouldn’t want an extra 25% from the government? It hasn’t been as appealing to those looking for a pension replacement.

The main problem is the 25% exit penalty imposed if you withdraw money from the scheme for any purpose other than retiring or buying a house. This is viewed as exceptionally high, especially as many savers do not realise the penalty is 25% of the entire pot. Those who have had to withdraw money earlier, for whatever reason, have lost more money than they expected.

It’s true that demand for the LISA not been strong and there has been relatively little take-up. What’s more, very few advisers have been keen to offer them.

To some extent, though, it seems a shame to talk about scrapping the scheme when it has only really just got started. If you or a family member fall into the age range and do qualify for a LISA, it could be worth investigating one now and make the most of the government bonus before time runs out.

Interest rate rise: What does this mean?

Thursday, August 9th, 2018

The Bank of England has raised interest rates from 0.5% to 0.75%, only the second rise in a decade. Currently, interest rates stand at their highest since 2009 and reflect what the Bank of England perceive as a general pick-up in the economy.

The Bank said that a rise in household spending has strengthened the British economy. Economic growth for the year is predicted to be 1.4% this year and the unemployment rate is expected to fall further below 4.2%, where it currently stands.

How does the rise affect you?

If you are on a variable rate ‘tracker’ mortgage, your repayments will increase. For example, if you have a £100,000 mortgage, this will add £12 to your monthly repayments.

It’s important to highlight that if you are on a fixed rate mortgage, your payments will stay the same until your base rate comes up for renewal. The Bank of England’s announcement does not mean that your rates immediately rise.

For prospective borrowers, the interest rate rise signals a change in the Bank of England’s tone. Further rate rises are a definite possibility. However, the Bank’s governor took a rather cautious tone which indicates that there are unlikely to be any more rises until 2019.

For the time being, base rates on mortgages are unlikely to rise above 3%. That said, the demand for rate fixes will be higher than usual this year.

Unfortunately for those of you going on holiday, after the announcement the pound fell by 0.9% against the dollar. This is due to the extreme political uncertainty surrounding the sterling with Brexit taking an unchartable track.

Reactions from U.K. businesses have been a mixed bag. The Institute of Directors, which represents about 30,000 members in the U.K., has said, ‘the Bank has jumped the gun’, whilst the British Chamber of Commerce similarly described the decision as ‘ill-judged’ at an uncertain time.

This negative perspective wasn’t unanimous among all lobbying groups. The Confederation of British Industry, the country’s biggest business lobby, welcomed the rise saying the case for higher rates had been building.

A small rise of 0.25% is likely to have a minimal impact on your finances. However, larger hikes down the line could have a substantial effect on the British financial landscape.

Monthly Market Summary – July 2018

Thursday, August 9th, 2018

Despite a brewing trade war between China and the U.S. and an increasingly uncertain post-Brexit future, on the whole, July was a buoyant month for global stock markets.

In the U.K., World Cup fever and hot weather propelled the retail and hospitality sectors to a successful month. In fact, the Centre for Retail Research estimated that every England goal was worth £165.3 million to the nation’s retailers.

Overall, the FTSE-100 index of leading shares was up slightly in the month. Having closed June at 7,637, it ended the month at 7,749 for a rise of just 1%.

On the continent, July was an unusually quiet month. Mainland Europe’s two major stock markets grew confidently during the month; both the French and German markets rose by 4% during July.

Whilst Europe saw a subdued July, Trump’s America had a chaotic month – something most of us have come to expect.

After imposing a 25% tariff on $34bn of Chinese goods in July, which provoked retaliatory measures by China, Trump is now proposing a colossal tariff that will affect $200bn of Chinese imports.

In typically brash American fashion, however, Wall Street has shrugged off the wide uncertainty these “Trump Tariffs” have caused , with the Dow Jones rising 5% in July.

Elsewhere, the Asian markets had a mixed bag. Shanghai and Tokyo closed up by 1%, whilst Hong Kong and Seoul fell by 1%.

This general upward trend could continue. However, the simmering U.S.-China trade war plus an, as of yet, directionless Brexit could bring some turbulence into global stock markets over the coming month.

On the subject of turbulence, if you’re flying somewhere abroad this month, we wish you a pleasant holiday.

Where to holiday with a weak pound?

Thursday, August 9th, 2018

If you are heading abroad over the summer, chances are you will be traveling to an E.U. country. 63% of us hope to travel to Europe in the next 12 months, making it by far the most popular destination for British holidaymakers.

However, in the run up to ‘Brexit day’ next March, the affordability of holidaying in Europe remains uncertain… Those of us who’ve visited the continent since the referendum will have already noticed that they are getting a lot less bang for their buck than previously.

As of yet we have very little information on how Brexit will look. With a ‘no-deal’ Brexit looking increasingly likely, it is possible that the pound will remain turbulent until it becomes clear how Brexit is going to pan out.

Ultimately, it is this which will determine whether or not the pound remains weak against the Euro – something that will have a large effect on how our future holidays feel.

In light of all this dreary information, looking outside of the eurozone for your future holidays may be your best bet for your wallet.

This is because the pound has not fallen equally against all currencies. In fact, it has actually gained against some. These countries are generally long haul destinations, although there are a few closer to home.

For instance, since Brexit, the notoriously flakey Argentine peso has fallen 72% against the pound. So, if you want a really good value holiday, your best bet is a 14 hour flight to Buenos Aires.

For those of you who prefer culture and history to warm seas and white sand, Russia should be on your agenda. E.U. and American sanctions have hit the Russian economy hard since part of their Army “accidentally” invaded Ukraine in 2014.

This has meant Sterling has gained 13% on the Ruble, excellent for those of you who don’t mind swapping St Petersburg for Santorini.

Closer to home – but equally lacking in quality sunbathing – Iceland is significantly cheaper than it was a year ago: The Icelandic krona has fallen by 11% on the pound.

Traditionally pricey Switzerland is also cheaper than usual. The Swiss franc is 7% weaker than it was a year ago. If skiing is your thing, the sliding franc makes Switzerland a viable option.

Unfortunately, landlocked Switzerland and freezing Russia and Iceland have very little to offer those of you who want a beach holiday.

Luckily, the pound has risen by 10% on the Indian rupee, so the sandy beaches of Goa and Kerala are an affordable option. What’s more, the Brazilian real is 18% weaker than it was last year. So, for those of you hankering for warmer climes, these may be your best bet.

The sweeter side of VAT

Monday, August 6th, 2018

Legal cases are always most fascinating when they make apparent the law’s many intricacies and ambiguities. VAT tax disputes may not always seem like the most interesting subject. However, a recent tribunal ruling showed how captivating they can be…

Kinnerton Confectionery is a company that primarily sells sweets marketed at children – if you’ve ever seen Peppa Pig Sweets, Kinnerton are the company behind them. Most of these – as confectionary products – are standard VAT rated at 20%.

However, the company recently moved out of their normal market and into the allergen-free market, creating a nut, gluten, egg and dairy-free ‘Just Luxury Dark Chocolate’ bar. This got complicated when they sold their new product with a zero VAT rating.

For those of you unfamiliar with the intricacies of VAT confectionary law (most of you, we expect!), here is a brief summary of the U.K law relevant to this case:

  • Most food for human consumption is zero rated
  • However, confectionary should be standard rated – this includes chocolate bars
  • Cakes and ingredients for making cakes are zero rated

This means that cooking chocolate, when marketed as such, should be zero rated because it counts as a cake ingredient.

To avoid full tax liability, Kinnerton branded the chocolate as suitable for cooking. They wrote on the packaging it was ‘ideal for cakes and desserts’, wording that largely mirrors that used by other cooking chocolate manufacturers. Because of this, Kinnerton thought they had a strong argument for zero rating the chocolate bar.

Products placed in the confectionary section tend to receive greater attention than those placed in the baking aisle, but are usually standard VAT rated. By creating a confectionary product that was zero rated, Kinnerton Confectionery tried to have their cake and eat it.

HMRC, however, were quick to catch on. They argued that because the product was often sold alongside confectionary items, it wasn’t marketed or sold as a cooking ingredient. Basically their argument rested on the premise that, although Kinnerton stated that it was suitable for cooking, this didn’t equate to the product being a cooking chocolate.

HMRC decided to appeal against the chocolate bar’s tax status, and their assessment was upheld by a judge. Kinnerton was ordered to pay HMRC a £258,470 liability and had to standard rate their product.

The rather vague distinction between confectionary products and standard foods has resulted in a few strange VAT anomalies. Strawberry flavoured powdered milkshakes, for instance, incur standard VAT; chocolate flavour, however, is VAT free. An even more bizarre example is that gingerbread men with just two chocolate eyes are zero rated; add chocolate trousers and they become liable to full VAT.