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By Balance team, Nov 14 2017 11:19AM

Last week, the Bank of England raised interest rates from 0.25% to 0.5%. This is the first time in over 10 years we have seen such a rise. Over the next 3 years, it has been predicted that interest rates will rise twice more too. So, how does this affect you?

Higher mortgage payments?

Unless you have a fixed-rate mortgage, you may be one of a probable 4 million householders who will now have to pay higher interest on their mortgage payments. Variable rate mortgages or ‘tracker rates’ will be greatly affected by the recent rise in interest rates. For example, if you’re on a variable rate mortgage and have an outstanding balance of £200,000 to pay, and your payments are £900 per month, the increase will see you paying an extra £25 per month, which is an additional £300 per year. On the other hand, if you have a fixed rate mortgage, which is due to finish in the next 12 months, you may be facing a steep increase in your monthly mortgage payments after you reach the end of your term.

Higher returns on savings and ISAs?

It’s not all doom and gloom! For those of you who are savers with variable rate mortgages, you may find that your increased mortgage interest payments could be offset by the increased interest on your savings accounts. Many banks and financial organisations have stated they will be passing the increased interest rate onto customers, which means you should expect better returns on your savings accounts. For example, if you have £10,000 saved in an ISA, you will have a better income, rising from £30 to £55.

Higher threat for investments?

Interest rates will have an impact on the stock market, but this could turn out to be more of a correction rather than a major hit. Some investors may see less attractive income streams, some may rush to sell, whereas others may choose this time to buy. Strategic bond funds can be a better way to minimise risk as fund managers have more freedom to invest into a mix of high-yield, better quality government bonds. Please talk to a professional if you are looking to change or review your existing investment strategy.

Higher income for pension annuities?

As interest rates helps providers decide on the annuity rates for retirees, the recent rise may lead to more income. However, this is still yet to be determined and the effect may only be very slight. Some providers increased their annuity rates before the expected interest rate rise to compensate for this. There could be costs, risks or benefits by delaying the purchase of your annuity. Therefore, if you’re looking to buy an annuity with your pension, and you’re unsure how the recent rise will affect you, please talk to one of our financial planners as soon as possible.

High time to create a sound financial plan

The recent rise in interest rates offers some opportunities for savers, despite the effect on mortgage payments. Therefore, now is a really good time to look at your savings and investment strategy to make sure you have a sound plan in place to take you to where you want to be in the future. Your savings and investment strategy will depend on the type of savers account(s) you have, your level of risk, as well as the number and diversity of fund options in your portfolio. Make time for a financial review today, so you can make the most of your hard-earned money.

If you’re concerned about the recent rise in interest rates and how this will affect your savings and investment strategy, please get in touch to speak to one of our team.

By Balance team, Oct 30 2017 09:04AM

Everyone seems to be talking about peer-to-peer lending these days. Also known as P2P lending, this is where money is loaned to businesses (or individuals) online, using systems that match lenders with borrowers. For businesses, it can prove to be an easier way to raise much-needed finance. For investors, it can provide a return on your money. But these accounts are not risk-free, despite the fact they are often positioned as being similar to a high-interest savings account. In this article, we explore peer-to-peer lending to give you the facts.

How does it work?

Since the financial crisis, it has been much harder for businesses to access finance. As a result, peer-to-peer lending exploded onto the financial scene. As the name suggests, at its core is the idea that investors lend their money to business that need it, and charge those businesses interest. The peer-to-peer lending accounts available online do two key things. Firstly, they set interest rates for each company that wants a loan, according to its likelihood of keeping up repayments. Secondly, they structure the accounts such that each investor is lending their money to hundreds of companies.

The biggest peer-to-peer lenders are Funding Circle, Zopa and Ratesetter.

What are the risks?

Despite the fact that these accounts are often advertised to look rather like savings accounts, they’re not. The possible return on your money is much higher than in a savings account, which tells you one thing: there’s much more risk involved.

Peer-to-peer lending is generally high-risk, typically providing unsecured loans to small or unproven businesses which can’t get funding from the banks. There is no guarantee that money will ever be repaid, which is a big risk for investors. Peer-to-peer online services are also not covered by the government-backed Financial Services Compensation Scheme, which protects savings of up to £85,000 (and other forms of investment too). Some lenders promise to protect investors’ money themselves and have a pool of money set aside for that purpose. But that promise is only as strong as the company, and the size of that pool.

Recently, two of the largest peer-to-peer lenders – Ratesetter and Zopa – have come under fire. Ratesetter was forced to reconcile a £9m loan that went wrong and has intervened in failing wholesale loans to protect its investors. Zopa investors have faced a dramatic cut in expected returns. The peer-to-peer market is facing a lot of questions, which means you need to be fully aware of what you’re getting yourself into. However, this industry is being developed, so things may improve in the future.

Questions to ask

There are now a vast number of peer-to-peer lending services available – some are more reputable and secure than others. Always fully research the online service you are considering and ask them these questions:

1. Are you tied in for a period of time, or can you get your money back on demand?

2. What happens if the loans fail?

3. What level of cash reserves does the lending service have to remedy any problems?

4. Do you have visibility of where your money is going?

5. What is the maximum potential loss you could face?

Understanding the alternatives

If you’re looking to get a better return on your money, we would always look at a diversified investment portfolio. Whereas peer-to-peer lending accounts are completely focussed on loans (which are known as bonds in the investment world), a diversified portfolio will have a mixture of different types of investment. That includes bonds with large businesses and governments, stocks and shares, and property. Spreading your risk between different types of investment means that your money is more likely to do better in the long-term.

In short, peer-to-peer lending accounts are certainly not suitable for everyone, but could be an ingredient in a wider investment portfolio.

If your interest in peer-to-peer lending is the fact that you can directly help smaller businesses, perhaps consider investing through crowdfunding. It’s a topic for another blog, but this route at least enables you to choose the businesses you want to support, read their business plans and really get involved in their future. Just be aware that some ventures will be successful and you’ll make a return on your money, but others will certainly fail and your investment can be lost.

If you’re looking at ways of improving the returns on your money, it is always worth speaking to a professional financial planner, who will review your situation and provide sound advice aligned with your objectives. There may be various savings and investment strategies that you have not considered.

Are you looking for financial planning advice? Please get in touch to speak to one of our team.

By Balance team, Oct 23 2017 11:18AM

In the Spring Budget 2017, the Chancellor announced that the tax-free Dividend Allowance would reduce from £5,000 to £2,000 in January 2018. Previously, basic rate taxpayers were not required to pay tax on dividends due to 10% ‘notional tax credit’. However, the Dividend Tax Credit was abolished in April 2016 and replaced with the new Dividend Allowance. If you’re a director-shareholder and you receive over £5,000 in dividends, you will be facing a personal tax liability in January, due to the new Dividend Tax.

What does this mean?

At present, all basic taxpayers receiving dividends over £5,000 (the current Dividend Allowance), pay tax at a rate of 7.5% - for higher rate tax, this would be 32.5%, and additional rate taxpayers would pay 38.1%. If you are a director-shareholder of a company and you are taking remuneration as a small salary topped up with dividends, it is likely that you will face a personal tax liability in January 2018.

For example - if your non-dividend income was £40,000 and your dividend income was £9,000, you will be paying £50 more in tax.

The new measures are expected to hit family-run businesses the hardest, where a couple working together may be splitting an income and could find themselves thousands of pounds worse off. If you are worried about how this will affect your business, please speak to one of our team.

What do I need to do?

Basic rate taxpayers who receive more than £5,000 in dividends will need to complete a self-assessment tax return. However, even if you are a higher rate taxpayer, you won’t pay tax on dividend income less than £5,000, as this will be covered by the tax-free allowance.

What doesn’t it affect?

Obviously, the Dividend Allowance does not affect any non-dividend income. If you are an investor with a moderate level of share income, there may only be slight (if any) changes to the tax you owe. Plus, any dividends received by pension funds and ISAs are unaffected by these latest changes. This includes dividend income received through shares in an ISA, which will stay tax-free. For further clarification, please refer to the HRMC Dividend Allowance Factsheet, which has a range of helpful examples and scenarios.

What can I do to prepare for tax liabilities?

If you are worried about your tax liabilities, firstly, speak to your accountant. Then, look at ways you can save and prepare for any tax spend. As we have mentioned above, ISAs are not affected by the new dividend tax. So, it might be time to review how you currently save and invest your business income. Depending on your level of risk and size of wealth, there are various savings and investment strategies you could consider. Speak to a professional financial planner, who will review your situation and can offer advice aligned with both your personal and business objectives.

If you’re a shareholder and you’re concerned about financial planning for your tax liabilities, please get in touch to speak to one of our team. We would be more than happy to advise you on ways you can save to sustain and grow a successful business.

By Balance team, Oct 23 2017 08:09AM

Writing or updating your Will can be a complex matter, especially as there are certain roles and responsibilities that you will need to give to specific people. Not only do you need to name the people you wish to inherit from you, known as “beneficiaries”, but you will also need to name an Executor, Trustees, as well as a Guardian if you have children under the age of 18. In this article, we explain these different roles to help you understand what’s involved before you give people certain responsibilities:

Executor – what do they do?

This is the person you would name in your Will to look after your affairs once you have passed away. The role of an Executor is to deal with the estate administration; they will have specific legal responsibilities for winding up your estate including reporting and paying off any debts and Inheritance Tax (IHT). Until the probate process is complete, all outstanding debts are paid, and your estate has been passed to the named beneficiaries in your Will, the Executor will be held responsible.

You can have more than one Executor, especially if you want your children to equally manage your affairs. However, in some situations, you could consider appointing a professional Executor, who can step in and look after the more complex side of estate management. This can be a good option if you are worried about any potential family disputes, or in case your chosen Executor decides they cannot carry out this role, whether due to ill health or due to the legal and financial responsibilities involved.

Always choose someone you trust, whether this is a family member or a friend – and you must ask them whether they are happy to be an Executor. There is a lot of time-consuming admin involved, so ideally, ask someone who has a good eye for detail and a good head for figures.

Trustees – why do I need these?

This is way to protect your estate if you want someone to inherit from you in the future at an agreed time, i.e. when a child reaches 18 years of age. You would need to choose at least two Trustees (legal requirement) and, again, you need to choose people you fully trust to manage your estate and who will act in your best interests. Like the role of the Executor, they will be required to submit records to HMRC, so it is a good idea to choose Trustees who are competent from a financial perspective. Remember – these people will be responsible for managing your estate should you pass away, and always ask whether they are happy to carry out this role before officially naming them in your Will.

Will-based Trusts will also require you to name Trustees – most of the time, these will be the same people as the Executors, unless they are under 18 years of age. It is worth considering a Will-based Trust due to the various tax benefits and added protection it may give you and your family in the future.

Guardian – do you have children?

If you have children then you must nominate a Guardian to legally care for your children, should you and your spouse/partner pass away before they reach the age of 18. Without a legal Guardian named on your Will, your children’s care could end up being managed by social services. We suggest choosing a responsible, trusted person who shares similar values, morals and beliefs as you and your partner. After all, should the worst happen, you will want your children to be brought up as you had intended. It is a good idea to check their financial situation and make provision in your Will for the costs of raising your children should you pass away. This is often forgotten when people appoint a Guardian. Again, always make sure they are happy to carry out this role for you. Usually, you would only appoint one Guardian, as things can get very complicated if you choose, for example, a married couple and they break up in the future, etc.

Always seek professional advice before updating your Will, as it well worth checking all options available to you - for example, Trusts - to help you protect your estate from either tax liabilities or disinheritance issues, i.e. the wrong people inheriting from your estate.

If you need to update or write a new Will, and you’re unsure of the implications, please get in touch to speak to one of our financial planners, who will be able to advise.

By Balance team, Oct 17 2017 08:36AM

Pension scams have hit the headlines again this week. In recent years, “pension freedoms” have enabled more and more people to get caught up with suspect ‘investments’, where bogus companies persuade you to part with your pension pots. Even for people under the age of 55, many are enticed into scams where the intention is to see their money go a bit further, so they can enjoy a comfortable retirement. However, in reality, some people lose every penny they have ever worked for.

Our motto is: if it sounds too good to be true, it probably is... So, this week, we have listed a few typical pension scams and phrases to watch out for:

“Pension liberation”

If someone calls you, or writes to you out of the blue, using the above phrase, this should set off alarm bells. “Pension liberation” scams are where people are persuaded to either cash in their pension pots or transfer their money into certain investments. Typically, you would receive a cold call and then be sent a letter or a brochure. You are likely to be presented with some ‘interesting’ ways for you to invest your pension money. You may be told that you can take money out of your pension before the age of 55 (you usually can’t unless you fall seriously ill). Remember, if you have made provision in your pension for withdrawal before 55, you could be liable for a huge tax charge and transfer fees from your provider (up to 55%). Other words to watch out for are ‘loan’, ’loophole’ and ‘one-off investment’.

“Overseas investment”

One of the most common types of pension scam involves being persuaded to handover money to go into an “overseas investment”. For obvious reasons, different countries are governed by different rules and, therefore, your money is unlikely to be protected by UK law.

Typical overseas investments include the following:

Foreign property – some of which will either not exist or will never be built…

Foreign businesses – covering all sorts of industries including hotels, vineyards and plantations, you could be enticed by phrases such as ‘new industry’, environmentally friendly’ and ‘unique’ – these days, there’s rarely a truly unique offering in any business sector...

Foreign charitable projects – although there are some genuine overseas charities who do some great work, there are many unscrupulous people who will pull on your heart strings and manipulate your emotions by trying to persuade you to give money to a project that will ‘better someone’s life’, usually a young person or a child. In reality, the project may not even exist and your money could be going into an unknown bank account…

“Self-Storage Units”

Earlier this year, the Serious Fraud Squad issued a warning relating to people who have been persuaded to invest their pensions into self-storage units or storage pod investment schemes. Thousands of investors have been affected by this particular type of pension scam – read more about this in our blog article, Worried about the £120m Pension Scam?

Warning: Whether it’s cash, a pension or any other type of savings, never invest unless you are 100% confident that you are dealing with a reputable, fully insured company. Never ever agree to take out a lump sum or your whole pension before carrying out thorough security checks on the company offering you the investment.

Please, if something like this has caught your eye, please speak to one of our professional advisers who will happy to give their expert view.

On the subject of pensions, if you have a final salary/defined benefit pension scheme and you need to know what your options are, then why not download our pension guide?

For a general guide to retirement planning, please visit our Big Life Events – Retirement page.

If you have been offered an investment opportunity, which you think may be a pension scam, please get in touch to speak to one of our financial planners for advice. We would be more than happy to review your existing pensions and help you plan for a safer retirement.

Regular news and views from the Balance team. You'll find our thoughts about pensions, investments, ways to save tax, facts about finances and plenty more.


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