Woodruff Financial Planning blog

Almost every business has staff or business owners who are integral to the success andprofitability of that organisation. Many such businesses would suffer adversely if one ofthese employees was to die. This could be loss of profits through loss of confidence in thecompany, withdrawal of credit, or the loss of contracts. Key person insurance seeks toprovide a cost effective and tax efficient way to protect against these losses.

If you have read our previous post on comprehensive financial planning, you will have seen the basic principles on what makes a comprehensive financial plan. Well, this post aims to give you some reasons why you might want to consider making a financial plan.

The Government today proposed to scrap the compulsory retirement age for most employees.  At the moment, it is perfectly legal for an employer to set a compulsory retirement age for its workforce, which can mean that employees can be forced to retire at age 65, whether they want to or not.

This seems unfair and discriminatory. As we live longer, the traditional retirement will no longer apply.  This may mean that some people choose to retire later (working longer), or may semi-retire.  This proposal seems a sensible step in making retirement decisions more flexible, and also allowing employees freedom of choice.

Of course, the reality for many people as they get to retirement age is that they have not done enough to save during their working life, meaning that real hardship could be forced upon them if they are required to retire in the normal way.  This proposal does not remove the problem of a lack of retirement income, but can mean that the over 65s are not forced into poverty.

The consultation period for this proposal ends in October, after which legislation could be brought in to turn this into law from April 2011.

If you are an employer, you will probably have heard about the NEST pension scheme, which will go live in October 2012.  These proposals are expected to go into force, although some review may take place under the new Government (there is a review underway at present, which is due to report back in September 2010).

Under the new rules, employers will have greater responsibilities to provide workplace access to pensions for their employees.

1. You will be required to enrol your employees into a scheme which meets the new standards
2. There will be a minimum contribution amount for employers and employees (see below)

NEST is designed to be:

• low cost
• open to any employer that wants to use it to meet the new duties
• an online pension scheme that’s easy to use
• easy for you and your workers to understand
• run in members’ interests by NEST Corporation

When will your company be expected to comply with the new rules?
The scheme is coming into effect in stages according to the size of employers from 2012 over a number of years.  The largest companies will be expected to set schemes up first, with the smallest coming in the following years.  The Pensions Regulator will give you one year’s notice of when your new legal duties come into effect. It will also write to you three months in advance to remind you that your duties are due to take effect and that you need to have a scheme in place.  Click here for a list of when companies will be expected to set up NEST schemes.

What are the minimum contributions?
There will be a gradual increase in the amounts that you must pay in to your employees’ accounts:

You will also be responsible for deducting employees’ contributions from their net pay, and to pay this money to the NEST scheme.

Here are the main details of the emergency budget, announced today.  We have commented on the implications to your personal finances.

• VAT – rises to 20%
  From January 4th 2011; this will increase the cost of goods;
• Income tax – raising the personal allowance by £1,000 from April
  A gain of up to £170 per year.  Higher rate income tax payers will not benefit from this change.

• Capital gains tax rises – to 28% for higher earners
  Basic rate earners remain at 18%; no return to taper relief or indexation relief.  This does help to keep things simple;
• Tax credits – reducing benefits to those earning over £40,000
  The government seeks to apply these to ‘those with most need.’
• Employer’s National Insurance – threshold to rise
  This means employers will pay slightly less tax

• Corporation tax – reduced
  Large companies cut from 28% to 24% over 4 years, and small companies to 20%
• Bank levy
  No details as yet, although France & Germany agree to follow suit;

• £30 billion reduction in spending by Government departments
• Capital expenditure on Government to remain level
  This should help businesses and employers to retain contracts and work;
• Public sector wages – 2 year pay freeze for those earning over £21,000
  Those below this amount will receive a £250 pay rise each year.
• Public sector pensions – A review into costs and benefits
  These were set to double in cost over 5 years.
• Pensions – phasing out the compulsory retirement age
  This will help with flexible retirement planning, a real necessity to modern lives.
• Pensions – bringing forward the proposed raising of the retirement age
  We will have to retire later than many expected, claiming our State pension later;
• Pensions – no forced annuity purchase at age 75
  This is a good move, since it will promote more flexibility with pensions planning.  Details are set to follow.
• State Pensions – rising in line with earnings, or 2.5% from April 2011
• Child benefit – frozen for 3 years
  The Government has kept the benefit open to all, but reduced the benefit in real terms.
• Disability living allowance – medical required
  It will be harder to claim this benefit
• Housing benefit – lower limits
  There will be restrictions on the amounts payable
• Alcohol and cigarettes – no changes
• Incentives for new business set ups outside of the South East
  1st 10 employees will save on Employer’s National Insurance

Always remember that your debt is someone else’s asset.  You should work to improve your balance between assets and liabilities.  To us, assets bring you financial freedom; liabilities hold you back.

So it should not be surprising that we advocate paying off debt as quickly as you can afford, especially unsecured debt like credit cards and personal loans.  Typically, a credit card will be one of the most expensive forms of debt, yet many cards only require a 2% minimum payment each month.  This may sound like you would pay off the debt fairly swiftly – after all, 2% per month means 50 payments to repay the whole balance, or just over 4 years.  But this does not take into account the effect of the interest payments.

An Example
Let’s say you owe £5,000 on a credit card, with a typical interest rate of 20%.  Some cards have lower rates, some higher.  The minimum payment at 2% per month would be £100 per month.  How long do you think this would take to pay the balance off, assuming no further spending on the card?  The answer is 109 months, or just over 9 years!  The interest you pay on this is a staggering £5,840 which is greater than the initial amount owed.

Putting this another way, that TV you bought on your credit card did not cost £1,000 as advertised in the shop.  If pay off the balance using the minimum monthly payment, it will end up costing you £2,168! What’s more you’ll probably be paying for it long after you have replaced it…

Obviously, the actual figures depend on your actual debt and the interest rate.  If you want to work out how much interest you will repay, check out our debt calculator.

What happens if you overpay on your debt?
We would recommend that you repay the most expensive debt you have (by interest rate) as quickly as you can afford to.   This will have the effect of greatly reducing the amount you repay in interest, and will probably take years off your debt repayments. You should check with your lender whether there are any penalties to overpay your debt, as some loans do this.

Let’s take the example above – you owe £5,000 on a credit card at 20%, with minimum payments of 2% or £100 per month. Set out below is the effect of making various overpayments:

• Pay the minimum payment
  £0 overpayment (£100 total) – 109 payments totalling £10,840
• Overpay by £10 per month
  £10 overpayment (£110 total) – 86 payments totalling £9,430, saving 23 months (nearly 2 years) and £1,410 interest.
• Overpay by £30 per month
  £30 overpayment (£130 total) – 62 payments totalling £8,057, saving 47 months (nearly 4 years) and £2,783 interest.
• Overpay by £50 per month
  £50 overpayment (£150 total) – 50 payments totalling £7,359, saving 59 months (nearly 5 years) and £3,481 interest.
• Overpay by £100 per month
  £100 overpayment (£200 total) – 33 payments totalling £6,522, saving 76 months (over 6 years) and £4,318 interest.

Don’t make the expensive mistake of just paying the minimum on your debts.  Take control of your finances and start getting your money working for you.  Check out our free debt calculator on our website.

With the UK election due on the 6th of May, we thought it might be useful to look at the policies of the main 3 political parties.

Tax

Comments
It is obvious that after the election that taxes need to rise, or services need to be cut (or both), to combat the heavy borrowing taken by the State during the credit crunch.  We would expect more measures to be announced after the election.

Financial products

Comments
Employers won’t be happy about the proposed changes to company pensions, but we do think this is a good thing. Anything which encourages people to start saving towards their retirement will go some way to solving our demographic time bomb.

The commitment to increase pensions in line with average earnings is a welcome change, although this does not make up for the many years where state pensions fell behind average incomes.

We are generally not in favour of replacing the FSA (with the Bank of England or anyone else). This is not because of any particular view other than we are not convinced that this change would make any difference to consumers.  Actually, most of the same people would probably run the new regulator, and all this would achieve is more cost to us as a business, and therefore to our clients.

For more information see:

http://www.labour.org.uk/policies/home

http://www.libdems.org.uk/pocket_guide_to_policy.aspx

http://www.conservatives.com/Policy.aspx

Here is our summary of today’s budget.  This is not designed as a comprehensive list of the areas covered, but rather a commentary on the financial implications.

Stamp Duty
Stamp duty below £250,000 has been abolished for 1st time buyers from midnight tonight. 90% of first time buyers won’t pay stamp duty. This applies for this tax year and next tax year only.

But for properties over a £1million, stamp duty will rise to 5% (from 4%). Mind you, that’s a whopping £50,000 tax on such a property purchase!

Entrepreneurs relief
Good news if you own a business – entrepreneurs relief has been doubled to £2 million.  This means that you only pay 10% tax on the profits from the sale of your business, rather than 18%.

ISAs
As previously announced, maximum allowable tax-free ISA contributions are to be £10,200 from April (for everyone).  These limits will increase by inflation each year in future.

Income tax, national insurance, VAT, capital gains tax
No changes not already announced.  Obviously, the 50% tax on earnings over £150,000 has already been announced.

Tax relief on pensions
Confirmation of previously announced restrictions on tax relief on pensions, which affect top earners.  See here.

Public sector pensions
Reforms will be made to cut the pensions bill, which sounds ominous if you work for the state…

Freezing of inheritance tax thresholds
For a further 4 years, which effectively means a slight tax increase as assets (hopefully) increase in value.

Mortgages
HMRC is to open discussions with mortgage lenders on the formal introduction of an income verification service.  We are unsure how this would work in practice as this data is out of date by its nature for the self-employed by at least 9 months.

Fuel duty rises
Next month’s planned 3p increase in fuel duty will be staged to soften the blow. It will go up by 1p in April, another 1p in October and a final 1p in January 2011.

Bank bonuses
An extra tax on bank bonuses has already been announced.  The 50% extra tax has raised £2 billion (twice as much as predicted).

Tax evasion
The Government will be harsher on those caught evading tax offshore. They expect to raise up to £500 million per year.  Those caught will be fined up to 200% of the tax evaded.

Housing benefit
To be cut back for expensive properties.

Basic bank accounts
Everyone will be guaranteed access to a bank account – surely a necessity of modern life?