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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.

By Balance team, Oct 4 2017 10:22AM

You’ve worked hard to acquire your wealth, so have you thought about how you could spend your money? In this article, we look at some fun and interesting purchases to help you enjoy the finer things in life…

“Whoever said money can't buy happiness simply didn't know

where to go shopping.”

Bo Derek

1. Classic cars to supercars

Have you ever wanted to own that car? Whether it’s an old classic or a supercar, buying a beautiful vehicle could be something you pass down to the next generation. One thing to note – you will need to consider where you will keep your car as luxury models such as Ferrari, Aston Martin, etc. may need air-conditioned, temperature-controlled garages to reduce the risk of deterioration to bodywork, etc.

2. Designer labels and haute couture

Whether it’s the archetypal ‘little black dress’ or a pair of Jimmy Choos, why not consider treating yourself to a designer item for your wardrobe? This could be a reliable ‘go to’ for special occasions or simply because you just have to have it! We all need to spoil ourselves once in a while…

3. Jewellery and watches

With so many luxury brands out there, the world really is your oyster. Tiffanys are still a firm favourite for many people, especially when it comes to special items such as engagement rings. Again, a beautiful piece of jewellery can be handed down to your children, becoming a lovely sentimental family item. There’s also an entire market for expensive watches, such as Cartier, Hublot, Rolex, etc., many of which will increase in value over time, so make sure you arrange adequate insurance cover for this type of purchase.

4. Luxury travel and cruises

Always wanted to travel more? These days, you don’t need to wait until retirement to take a luxury cruise. Many companies offer shorter cruises around the Mediterranean, offering gorgeous views and stop-offs at various Greek islands. If you have the money, you could consider chartering your own yacht to take your partner or family on a tailor-made cruise. If you’re not keen on cruises, you could use a boutique travel agent to design a bespoke itinerary for you that includes World Heritage Sites across Europe, the USA or Asia. Choose your activities and level of accommodation, and they should be able to arrange all your flights and transfers, so all you have to do is sit back and relax.

5. Second homes and holiday property

Are you drawn to a particular place? Perhaps you find yourself revisiting the same holiday destination year-after-year? Have you considered buying a holiday property in this location? We always advise fully researching any foreign property and the country’s laws before you commit to any purchase. However, if you have found a gem to invest in, you may even create a second income from letting the property out to holidaymakers while you’re not there. A holiday or second home doesn’t need to be outside of the UK; you may have decided on a beautiful location closer to home for your retirement. It might be worth investing into a property simply to give you much-needed weekends away from a busy work schedule. Always seek professional advice before using your savings to make a large purchase in case there are any tax liabilities.

6. Speedboats to superyachts

If you have a holiday property near the ocean or a lake, owning your own boat can be a wonderful way to unwind. This could be a classic speedboat or a sailing boat to take the family on fun outings. Some activity centres offer ‘powerboating’ courses which will enable you to gain a licence to man your own luxury powerboat. Sailing is a fun activity, which could result in you taking up a new hobby too. Perhaps you have always wanted to own a yacht? Bear in mind this could cost anywhere upwards of £100,000 and you will need to consider insurance and mooring fees. If you have ever been to Monaco, you may have watched the superyachts winding their way into the harbour – one of the most expensive superyachts ever built is the History Supreme, costing $4.5 billion!

7. Art and antiques

You don’t have to be an expert when it comes to buying art and antiques – always buy items you genuinely like without considering whether they will increase in value (they may not). A beautiful painting or sculpture can be a great addition to your home, and something to pass onto family members in the future. Antique furniture is another lovely way to finish off a room and could be an individual item to match your existing home furnishings.

8. Interior design and furnishings

Why not consider professional interior design when it comes to your home? There are many luxurious wallpapers, finishings and furnishings available these days, but most of us are simply too busy - or not trained - to be able to match fabrics, patterns and colours despite our best efforts. A professional interior designer should be able to create spaces that reflect how specific rooms are to be used, whether it’s for dining, socialising or unwinding.

9. Home cinemas and entertainment

There is an increasing trend whereby people are redeveloping their homes to create unusual spaces, such as home cinema rooms. This doesn’t necessarily need to be a large space – some people install limited seating for family and friends. Plus, you could consider having a dual-use room by having a pull-down projector screen fitted to the ceiling. There are some excellent home entertainment systems available which will give your room a full surround sound experience, so you will feel as if you are in a real cinema.

10. Smart tech and home automation

Another increasingly popular trend is to connect your home to apps on mobile devices such as smart phones. You can control everything from heating, lighting, curtains and blinds to switching the oven on to warm up before you get home. This has an added security benefit because you can control your home remotely, giving the impression to outsiders that you are there when you may be away sunning yourself on holiday!

If you are interested in other ways to make the most of your savings, please get in touch to speak to one of our financial planners, who will be able to carry out a full strategic review.

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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