How does group insurance work?

How does group insurance work?

Whether you’re an employer that is considering offering group insurance to employees or a worker that benefits from group cover, it’s important to understand what it is, how it provides security and when it can be used.

Group Life Insurance is a popular benefit that’s usually offered by employers. It acts in a similar way to a Life Insurance policy, which an individual takes out. In the case of Life Insurance, the individual will pay regular premiums and should they die during the term of the policy, their loved ones will receive a lump sum. It’s a step that can provide peace of mind that your family will be taken care of financially should the worst happen.

As the name suggests, group insurance covers a group of people rather than just one and the ongoing premiums are usually paid in full by the employer. It’s a benefit that’s sometimes referred to as ‘death-in-service’ as rather than a fixed-term, employees will typically be covered while they remain employed with the company.

What would group insurance cover?

First, it’s important to note that group insurance policies can vary.

If you’re currently covered by a group insurance policy, you should review your employee handbook or talk to your employer to fully understand what’s covered. If you’re thinking about putting group cover in place at your business, there are different options to consider and weigh up how they’d suit your employees.

Typically, a group insurance policy will pay out if you die while employed, to either your family or a nominated beneficiary. The benefit amount is often linked to the employee’s income, such as two or four times their annual salary. So, an employee earning £40,000 with group insurance equivalent to four-times their annual salary would leave their loved ones a £160,000 lump sum if they were to pass away whilst employed with the firm.

This lump sum is usually paid free of Income and Capital Gains Tax. They also may be written into a trust, which will ensure the sum is considered outside of your estate for Inheritance Tax purposes. However, this isn’t always the case.

In some cases, group insurance provided by an employer may be extended to cover your spouse or civil partner and provide other benefits, such as bereavement counselling to loved ones. Again, this isn’t guaranteed for all group insurance policies so you should check your policy first.

The lump sum loved ones receive can help provide financial security while they grieve. It could, for example, be used to pay off an existing mortgage debt or ensure children’s school fees will continue to be paid even as household income is reduced or stops.

There are benefits to group insurance whether you’re an employer or employee.

Benefits of group insurance for employees

The key benefit of group insurance is knowing that your loved ones will be financially secure should something happen to you, without having to set up your own policy. However, it’s worth assessing if the policy offered by your employer would be enough and if other individual policies should support it.

Depending on your loved ones and plans, you may find that further Life Insurance is needed to cover the expenses they would face, such as the mortgage. However, with group insurance covering part of the necessary sum, the policy you take out can be for a smaller amount, lowering premiums. It’s also an opportunity to think about if you and loved ones would benefit from potential extras some policies offer.

While considering Life Insurance, you should also take the time to assess other forms of financial protection. This includes Income Protection, which would pay out regular amounts if you’re unable to work due to illness or injury, and Critical Illness Cover, which would pay a lump sum on the diagnosis of a specified critical illness.

You may not need all types of financial protection, for example, if an employer has a strong sick pay package, Income Protection may not suit you. However, understanding how these policies have the potential to provide security can help you choose the most appropriate ones.

The benefit of group cover for employers

As an employer, group insurance can form part of your benefits package to attract and retain key members of staff. During the recruitment process, it’s a benefit that can make your firm more attractive than competitors as a place to work. It’s a benefit that can help drive your business forward.

Group cover can supplement other benefits you may offer employees, such as a competitive pension scheme or sick pay policy. Taking steps to ensure that your employees’ loved ones would be taken care of should they die in service can help ensure employees know they’re valued and the company does the ‘right thing’. Although the scenario of an employee dying is rare, it can happen. By taking out group insurance now, you know that should something happen, the processes and support are already in place.

In addition, the premiums paid for the group insurance usually qualify as an allowable business expense for Corporation Tax purposes.

If you’d like to discuss group insurance, whether as an employee or employer, please get in touch.

Using your assets to create flexibility with a Final Salary pension

Using your assets to create flexibility with a Final Salary pension

Pensioners transferring out of their Final Salary pensions, also known as Defined Benefit pensions, have made headlines recently as retirees seek more flexibility. But using other assets to create a flexible income throughout retirement can mean security and the ability to create an adjustable income to suit retirement plans.

Final Salary pensions are often referred to as ‘gold plated’ as they provide retirees with security. The amount you’ll receive at retirement and the age at which you’ll receive it are pre-defined when you become a member. This is usually dependent on the number of years you’ve been a member and either your final salary or a career average. The pension you receive isn’t linked to investment performance, it’s a guaranteed income for life.

While this is valuable, retirement lifestyles have changed enormously over the last few decades. Today, many retirees want a flexible income to suit their lifestyle, where income needs may change significantly over time. As a result, some retirees have chosen to transfer out of a Final Salary pension in return for a lump sum that can then be deposited in a Defined Contribution pension scheme, which can be accessed flexibly. However, this isn’t in the best interests of most people.

The benefits of a Final Salary pension

The key benefit of a Final Salary pension is the level of security it offers. You don’t have to worry about investment performance or ensuring pension withdrawals are sustainable. You know that you’ll have a regular income for the rest of your life.

What’s more, many Final Salary pensions have auxiliary benefits too. This could include paying a pension to a spouse or dependent should you pass away. Depending on your personal situation, these can be valuable in providing peace of mind and play an important role in your overall financial plan.

While a Final Salary pension does provide security, you may also want income flexibility in retirement. Assessing and using your other assets means you may be able to have the best of both worlds. Three options for creating flexibility with a Final Salary pension are:

1. Defined Contribution pensions

First, you may also hold a Defined Contribution pension. These types of pensions are more common than Final Salary pensions and if you’ve worked for several companies, you may have a mix of Final Salary and Defined Contribution Pensions.

With a Defined Contribution pension your contributions, along with employer contributions and tax relief, are added to a pension pot which is then invested. The value of the pension is dependent on contributions and investment performance. Once you reach age 55, this pension becomes available to access in a range of ways, including taking a flexible income as and when you need it.

Using a Defined Contribution pension to supplement the income of a Final Salary pension when you need it can create flexibility without having to sacrifice security. One thing to keep in mind with a Defined Contribution pension is that you’re responsible for deciding how it’s invested and that withdrawals are sustainable with your plans in mind. Having a regular income through a Final Salary pension can relieve some of this pressure but it’s still important to assess how you’re using pension savings.

2. Depleting savings

After decades of diligently saving, some retirees are reluctant to start depleting their savings, even if providing financial freedom in retirement has been what they are saving for.

It’s natural to worry about accessing savings. You may be concerned that you don’t have enough or that an unexpected expense will need to be covered. Having a strong financial plan in place can help put your mind at ease here. Using a range of tools, including cashflow planning, we can show you how your wealth will change over time, including if you begin to access your savings to add to your Final Salary pension income at certain points in retirement.

3. Using investments

Finally, investments held outside of a pension can also provide a useful boost to your retirement income when you need it. These may be investments that are held within an ISA or an investment portfolio.

Selling investments can provide you with a cash injection when you want it, for example, if you’re planning a once in a lifetime experience or big-ticket purchase that your typical Final Salary income wouldn’t cover. As with savings, it’s important to understand how accessing your investments at different points in retirement will affect your wealth and financial security to provide peace of mind.

Please contact us if you have a Final Salary pension and want to understand how it can fit into your retirement plans. By looking at your lifestyle goals and priorities during retirement, we can help you create a plan that matches your aspirations, including creating income flexibility where needed.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Transferring out of a Defined Benefit pension is not in the best interest of the majority of pension savers.

A Defined Contribution pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income will also be affected by the interest rate at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulations which are subject to change in the future.

Coronavirus affects the saving habits of 6 in 10 people

Coronavirus affects the saving habits of 6 in 10 people

Coronavirus has affected many aspects of our lives and research shows that savings are one area that may have been affected. Whether you’ve had to dip into savings or have been able to put away, it’s important to look at your financial plan to ensure you’re getting the most out of your money.

According to research from Aegon, six in ten peoples’ savings have been affected by the pandemic in some way. These people are split into two distinct categories:

  1. 31% of savers reported they have increased savings during lockdown as other costs, such as commuting to work and entertainment were cut. On average these savers increased the amount they put away by £197 per month.
  2. In contrast, 28% of savers said they’d been forced to reduce the amount they were saving each month or stop saving altogether. On average, savings were decreased by £159 per month.

Steven Cameron, Pensions Director at Aegon, said: “While coronavirus is first and foremost a health crisis, it is having a big impact on the nation’s wealth. Our consumer research shows six in ten of the population have changed their savings levels since the start of the crisis with a stark divide between those who have been able to save more because their expenditure in lockdown has reduced and those who have had to cut back or stop regular savings. If this divide in savings patterns continues for any length of time, it will have a big impact on the future financial security of different groups.”

Unsurprisingly, employment status had a big impact on whether savings were cut or boosted. Those needing to cut back are more likely to have been furloughed, potentially meaning taking home just 80% of their normal salary, or self-employed as income may also have been affected. While support is available for self-employed workers, they’ve typically had to wait longer for this to come through.

On the other hand, those that have remained working throughout the lockdown, either as keyworkers or from home, are likely to have maintained their income while seeing other outgoings decrease.

If your saving habits have changed, it’s important to review this in line with your financial plan. What steps you should take will depend on which of the categories you fall into.

Saving more during the pandemic

If you’ve been in a position to save more during lockdown, it’s worth looking at where your savings are going and if it’s the most efficient place.

Interest rates are low at the moment, which can mean your savings are losing value in real terms over the long term. If you already have an emergency fund established, ideally with around three months’ worth of outgoings in a readily accessible account, you should look at the alternatives. This may include a fixed-term savings account, where your money is locked away for a defined period, or investing if appropriate for your goals.

When looking at where to place your increased savings, it’s important to keep your goals and overall financial plan in mind. While investing can be a way to increase value over the long term, it’s not appropriate if you’ve decided to save for a holiday next year, for example.

Saving less or using savings during the pandemic

If your saving habits have been negatively affected by coronavirus, it’s important to understand the impact.

You may have been forced to dip into your emergency fund, for instance, depleting your usual safety net. First, you shouldn’t feel guilty about doing this, after all, you’ve put that money aside to help you weather unexpected events. However, you should keep track of what is being used and how you’ll replenish savings once you’re in a financial position to do so.

Where your regular savings have been reduced or halted, the long-term impact is something that should be considered. In many cases, a few months of lower saving contributions are unlikely to have a huge impact on financial security in the long term. But it’s worth assessing if goals are still within reach to provide peace of mind. You may find that increasing savings once you’re able to or delaying plans for a while is necessary.

While lockdown restrictions have eased, some workers are finding their routine will remain disrupted in some way in the coming months. It’s important to review your financial plan in light of personal changes if needed, it can help keep you on the right track.

It’s not just savings that Covid-19 may have affected in terms of finances either. The pandemic caused short-term volatility in stock markets which may have impacted investment portfolios and pensions, for example. If you have any questions about your financial plan and goals, please get in touch.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Junior ISAs: Everything you need to know about saving for children

Junior ISAs: Everything you need to know about saving for children

Building a nest egg for a child can help set them on the path to a financially secure future and highlight why saving is important. One of the most popular ways to save for a child or grandchild is using a Junior Individual Savings Account (JISA). During 2017/18, money was added to over 900,000 JISAs.

Money held in a JISA isn’t accessible until the child turns 18, making it an excellent way to save for the milestones they’ll reach in early adulthood. You may choose to save with the hope that it will be used to fund further education, learn to drive or get on the property ladder. Having a lump sum to use can make it easier for children to achieve goals and create a secure foundation as they become independent.

JISAs: The basics

JISAs operate in much the same way as adult ISAs do.

You can use a JISAs to save in cash, earning interest on deposits, or to invest and hopefully deliver returns over the long term. JISAs are also a tax-efficient way to save, interest or returns earned are tax-free.

One area where the JISA does differ is the subscription limit, the amount you can deposit each tax year. In this year’s budget, Chancellor Rishi Sunak significantly increased the JISA subscription limit from £4,368 in 2019/20 to £9,000 in 2020/21. The new limit means parents and grandparents can build a substantial nest egg for children.

The JISA annual allowance can’t be carried forward and if it’s not used during the tax year, it’s lost.

A parent or legal guardian must open a JISA on the child’s behalf, however, other family and friends can then contribute as long as the annual limit isn’t exceeded.

The money placed within a JISA belongs to the child and can’t be withdrawn until they’re 18, apart from in exceptional circumstances. However, when the child reaches 16, they will be able to manage the account, for example, transferring to a different provider to achieve a better interest rate.

If you’re considering open a JISA on behalf of a child, one of the first things to do is decide between a cash account and a stocks and shares account.

Cash JISA vs Stocks and Shares JISA

As with adult ISAs, you have two key options when saving through a JISA: cash or invest.

Both options have pros and cons, which one is right for you will depend on goals and time frame.

Cash JISA: The money deposited within a Cash JISA is secure and operates in a similar way to a traditional savings account. Assuming you stay within the limits of the Financial Services Compensation Scheme (FSCS), the money would be protected even if the bank or building society failed. The deposits within a JISA will then benefit from interest, helping savings grow. While JISA interest rates are typically more competitive than the adult counterparts, you still need to consider inflation. When interest rates don’t keep pace with inflation, savings lose value in real terms, reducing spending power. Over several years the impact can be significant.

Stocks and Shares JISA: Rather than earning interest, the money deposited within a Stocks and Shares JISA is invested with the aim of delivering returns. The key benefit is that it offers an opportunity to create higher returns than interest would offer. However, all investments involve some level of risk and in the short-term, it’s likely volatility will be experienced at some points. This means the value of savings can fall based on the performance of investments. However, historically, investments have delivered returns over a long-term time frame.

So, which option should you pick?

How you feel about investment risk should play a role in choosing between a Cash JISA and a Stocks and Shares JISA. However, the time frame is also important. Typically, you shouldn’t invest with a short time frame (less than five years) as this places you at a higher risk of being affected by short-term volatility. In contrast, longer time frames give you a chance to smooth out the peaks and troughs of investment markets.

If you’re unsure whether building a nest egg through cash or investing is right for you, please get in touch.

You don’t have to choose between a Cash JISA and a Stocks and Shares JISA either. If your goals mean you want a mix of cash savings and investments when building a nest egg, it is possible to open both types of JISA in your child’s name. The total contributions to JISAs must not exceed the annual subscription limit.

If you’d like to start saving for your child or grandchild, please contact us. Whether you want to invest through a JISA or discuss alternative options, we’re here to help you create a plan that meets your goals.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

What would negative interest rates mean?

What would negative interest rates mean?

With interest rates at an all-time low and the economy facing uncertainty, you may have read headlines about whether negative interest rates are the next step. But what would that mean in practice and is it an option that would really be considered in the UK?

Ever since the 2008 financial crisis, interest rates have been low. Earlier this year, there were suggestions that the Bank of England would gradually start to increase its Base rate as the economy continued to recover. However, the Covid-19 pandemic has changed that. In March, the central bank decided to cut the interest rate twice in a month.

Lowering interest rates is one of the tools central banks around the world use to stimulate economic growth as it lowers the cost of borrowing. With coronavirus disrupting normal business practices, the Bank of England first cut its base rate from 0.75% to 0.25% on 11th March 2020 and then slashed it again to 0.1% on the 19th March 2020, the lowest it’s ever been.

With the interest rate hovering just above zero, the possibility of negative interest rates is rising.

How would negative interest rates affect you?

You can split the impact of negative interest rates into two areas depending on whether you’re saving or borrowing.

Let’s start with saving.

Usually, when saving, you’d earn interest on the deposits. For example, with £1,000 in a savings account earning 3%, you’d receive £30 after a full year. If the interest rate is negative at -3%, you’d instead owe the bank £30, in effect paying to save your money.

Once you factor in the impact of inflation on your spending power, savings can quickly become eroded if interest rates are below zero. While using a saving account is still important in some cases, such as holding your emergency fund, it may mean that alternatives should be considered to get the most out of your money, such as investing.

Moving on to borrowing, in theory, negative interest rates are good news.

The cost of borrowing should reduce as interest rates fall. Using a mortgage as an example, you’d still need to make repayments, however, with a negative interest rate, the outstanding amount is reduced each month by more than what you’ve paid. It can reduce debt quicker. However, it’s worth noting that some mortgages have a ‘floor’ interest rate that it won’t go below.

Negative interest rates: From Europe to Japan

While negative interest rates have never been implemented by the Bank of England they have been used elsewhere.

Sweden’s central bank cut interest rates to -0.25% in July 2009, in the wake of the financial crisis. Since then it’s been used by other European banks too, including the European Central Bank which covers the 19 countries that have adopted the euro, as well as Japan.

There are a variety of reasons why negative interest rates are used. However, during times of recession or economic hardship, people and businesses tend to hold on to their cash, waiting for the economy to improve. A lack of spending by businesses and individuals can weaken the economy further. As a result, negative interest rates can be used to encourage people to spend and drive the economy forward, though there are risks associated with the practice too.

While negative interest rates have been used before, they are by no means the norm and are still considered unconventional.

So, are negative interest rates coming to the UK?

It’s impossible to say for certain and much of the decision will depend on how the economy and businesses respond over the coming months. When asked about the potential for negative interest rates to be introduced in May during a Treasury Select Committee, the Bank of England’s governor Andrew Bailey said negative interest rates were under ‘active review’.

Bailey added: “We do not rule things out as a matter of principle. That would be a foolish thing to do. But can I then follow that up by saying that doesn’t mean we rule things in.”

As always, it’s important to keep an eye on your financial plan with current conditions in mind. However, responding to speculation should be avoided. Instead, if you’re concerned about the introduction of negative interest rates, keep in mind that your financial plan has been built with your goals at the centre. There may be a time when negative interest rates are announced and we’re here to help you assess your financial plan if this should happen. Please get in touch if you have any questions.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

5 ways you can reduce tax liability in retirement

5 ways you can reduce tax liability in retirement

When you retire, there are a lot of financial decisions that need to be made as you start accessing the savings and investments you’ve built up. It’s natural to have lots of questions about your financial security at this point, such as:

  • How much income will I receive from my pension?
  • How long will my savings last for?
  • How should I access my pension?

But one important question is often overlooked: How much tax will I pay?

How and when you access your pension, savings and investments can have an impact on your tax liability. Planning your retirement income with tax in mind can help reduce the amount of tax you pay, helping your savings go further. It should be one of the areas you consider as you approach retirement and that financial planning can help you understand with your circumstances in mind.

In some cases, it’s possible to create a tax-free retirement income or reduce liability greatly. So, what should you consider when assessing retirement income?

1. The Personal Allowance

The Personal Allowance is the amount of income you’re entitled to receive tax-free each year. For the 2020/21 tax year, the Personal Allowance is £12,500 for the majority of people. As a result, it’s important for planning your retirement income.

The Personal Allowance covers all forms of income, including your State Pension and income from investments, for example. Once you factor in all income sources in retirement, the total will likely exceed the Personal Allowance, but it provides a base for building a tax-efficient income. As the allowance resets with each tax year, spreading out or delaying taking an income at times can help you fully make use of the tax benefit.

It’s worth noting that if you’re married or in a civil partnership, the marriage allowance allows one person to transfer up to £1,250 of their Personal Allowance to their partner too.

2. Pension withdrawal tax-free allowance

If you’ve been paying into a Defined Contribution pension during your working life, it will usually become accessible when you turn 55. This includes 25% available to withdraw tax-free. You can choose to take a 25% lump sum, tax-free, when you first access your pension, or you can spread the tax-free benefit over multiple withdrawals.

How and when you access your pension can have an impact on your income and lifestyle for the rest of your life. So, it’s important to understand the long-term impact of taking the tax-free lump sum.

3. Withdrawing from ISAs

ISAs (Individual Savings Accounts) offer a tax-efficient way to save and invest. Each tax year, adults can add up to £20,000 to ISAs, either contributing to a single account or spreading it over several. Through an ISA you can either save in cash, earning interest, or invest to hopefully deliver returns. The key benefit of ISAs is that interest or returns earned aren’t taxed.

As a result, you can make ISA withdrawals to supplement your pension income and other sources in retirement without increasing your tax liability.

4. Capital Gains Tax allowance

Selling certain assets for profit can result in Capital Gains Tax, this includes personal possessions worth more than £6,000 (excluding your car), a second home, and shares that aren’t held in an ISA or PEP (Personal Equity Plan).

However, there is an annual Capital Gains tax-free allowance, for individuals it is £12,300. In retirement, this can be a useful way to increase your tax-free income. It’s important to understand your assets, their value and how they can create an income.

5. Dividend Allowance

If you’re invested in companies that pay a dividend, the Dividend Allowance can boost your income without affecting the amount of tax you need to pay. This is on top of any dividend income that falls within your Personal Allowance.

For the 2020/21 tax year, the dividend allowance is £2,000. Carefully planning your investments and expected dividend allowance can help you boost your retirement income by £2,000 without facing additional tax charges.

If your dividend income exceeds the allowance, you will need to pay tax. The tax rate is linked to your tax band and may be as high as 38.1% if you’re an additional rate taxpayer.

Depending on your circumstances and goals, there may be other allowances and reliefs you can take advantage of too. Using a combination of saving products, such as personal pensions, stocks and shares ISAs and general saving accounts, it may be possible to achieve the retirement income you want while reducing tax liability. Whether you’re nearing retirement or are already retired, it’s worth considering how much tax you’ll pay and whether there are allowances that apply to your situation.

Planning for taxation changes

While the above information is accurate for the moment, allowances, levels of taxation and reliefs do change. As a result, it’s important that your retirement plan and income are reviewed at regular points. This allows you to take advantage of any changes and adjust how and when you take your income if necessary. If you’d like to discuss your tax liability during retirement, please get in touch.

Please note: The Financial Conduct Authority does not regulate tax planning.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Levels, bases of and reliefs from taxation may be subject to change and their value depends on individual circumstances.