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Premium Bonds, the benefits of using a Discretionary Fund Manager and the best way to plan and pay for your funeral arrangements.
This month we look at the new mortgage market review process, Premium Bonds, the benefits of using a Discretionary Fund Manager and the best way to plan and pay for your funeral arrangements.
Impact of the new Mortgage Market Review (MMR) process
The new Mortgage Market Review (MMR) rules introduced by the Financial Conduct Authority (FCA) came into force on 26 April along with a new set of guidelines which mean that the rules governinghome loans are tightening, with lenders now needing to conduct a full affordability check which applicants must pass.
The new process essentially sees lenders asking applicants a series questions about their spending habits and lifestyle in order to ascertain whether they can afford to repay the new mortgage they are applying for.
These rules incorporate stricter filters to the mortgage application process which are expected to impact on both the amount people will be able to borrow and the length of time an application may take.
The rules have been introduced to prevent the return of the pre-crisis mortgage lending which has been widely described as “reckless”. Under the new rules, it is the lenders, rather than the borrowers, who are checked by the regulator to ensure affordability checks for mortgage repayments are being carried out properly.
However, with house sales in the UK increasing by 24% in the first three months of 2014 compared to the same period in 2013 according to figures from HM Revenue and Customs (HMRC), the pressure on back office staff is going to have an impact on processing times for mortgage lenders and waiting times for those looking for a new or re-mortgage deal. Individuals looking to find a good deal could be facing weeks of delays waiting for an appointment with lenders’ mortgage advisers.
A Business Development Manager at one of the UK’s largest lenders warned that customers could expect waiting times of up to four weeks before they can see a lender’s in-branch mortgage adviser. He also advised that lenders’ face-toface meetings could take between three and three-and-a half hours to discuss all relevant information now that the new rules have come in (these meetings should not usually be longer than an hour when using an IFA such as French and Associates).
As independent mortgage advisers we have been working with lenders’ intermediary services on these new rules now for at least two years. This period of time has allowed both lenders and independent advisers a chance to enhance and streamline the whole process so that you as a customer do not have to spend three hours or more completing an application for a mortgage.
After the Budget – Pensions, ISA limits and Premium Bonds
The Financial Conduct Authority (FCA) recently issued post-Budget pension guidance for providers and others dealing with consumers at retirement.
The Budget announcements in March gave consumers more flexibility with their pensions than ever before, allowing them to draw down as much of their pension pot as they like at their marginal tax rate, and making annuities a far less attractive option for those with pension pots.
As well as pension changes, Mr Osborne’s Budget announcements also included attempts to stimulate tax-efficient investment through ISAs and NISAs (New Individual Savings Accounts). The ISA subscription limit for 2014/15 is currently £11,880, rising to £15,000 from 1st July. The subscription has increased along with more simplified rules of investment. From 1st July, a maximum of £15,000 can be invested wholly incash or stocks and shares in any proportion the saver chooses in the new ISA (NISA) product.
Figures revealed recently showed a slump in individual annuity sales (Legal and General’s sales have reportedly dropped by 40% and Standard Life’s by 50% – much of this was thought to be the result of cancellations in the ‘cooling off’ period which coincided with the Budget announcements). But one area which is seeing growth since the Budget is Premium Bonds.
Premium Bonds have been available since 1956 – introduced as a means of controlling inflation and also to incentivise the general public to save money, a single premium bond could be purchased for £1. Now, more than fifty years later they are one of the UKs most popular form of savings account with over £47 billion invested in them. They have been available to buy online since 2005. With Premium Bonds, an investor can take their money out of the bond whenever they wish without losing the original
investment. They can be purchased by individuals over the age of 16 and each bond sold is entered into the prize ballot
two months after being purchased. There is one top prize of £1 million per month but from August 2014, there will be two
top prizes drawn per month.
Presently, Premium Bonds require a minimum investment of £100 and permit a maximum of £30,000 per person. The Budget announced the limit increasing to £40,000 as of June this year, and to £50,000 per person as of April 2015. Opinion is divided as to whether they are simply a form of ‘lottery’ where the chances of winning are low, or whether they are in fact a risk-free form of investment, offering a good rate of return (typically, the values of the prizes paid are determined by the interest rate which is usually in line with the Bank of England base rate).
Premium Bonds do not pay interest, instead there are cash prizes which are tax free and secured by the government and so deemed low risk. Presently, the odds of winning per £1 unit are 26,000 to 1, and the annual prize fund return is 1.3%, which is below the rate of inflation, and hence investments in Premium Bonds are subject to inflationary risk.
When planning for your future, it is always recommended that you seek professional advice in order to get the best
solution for you. At French and Associates we provide comprehensive advice and guidance which is tailored
to your individual needs and requirements as well as geared towards securing your finances for the future. For more
information, please contact us.
The benefits of a Discretionary Fund Manager (DFM)
Discretionary Fund Managers (DFMs) are investment professionals who manage their clients’ monies through selection, purchase and sale of investments to match their investment objectives, time scales and risk profile. Working for the benefit of the client, their role is to maximise investment returns and to protect the fund in falling markets.
There are typically two types of DFM:
- A traditional DFM who builds a bespoke portfolio for clients – this usually comes with a minimum investment of just over £120,000.
- Another type of DFM offers discretionary model portfolios – risk rated but not usually bespoke – these carry reduced charges and have lower minimum investment amounts.
A DFM has the resources of a team of researchers who look for investment opportunities which are then scrutinised by their analysts before being proposed as an opportunity for consideration to their Investment Committee. This type of fund manager should be able to read market changes and have the confidence to take detailed decisions regarding investments. In essence, they add another layer of diligence to the investment process.
A DFM should have the investment expertise and knowledge of investment performance to be able to see the bigger picture in terms of offering their clients the best returns for the level of risk that a client wishes to accept.
Usually, a client and their discretionary fund manager will sign a discretionary management agreement that sets out the
terms of the relationship. There are many benefits of using a DFM, including:
- they have access to a wider range of investment asset classes
- they can tailor a portfolio to the needs of each client
- the client often enjoys regular face-to-face meetings with their DFM in order to discuss their portfolio and individual requirements
- the client receives bespoke reporting – often gaining online access to their portfolio and transaction history for tracking purposes access to funds at institutional rates
For more information on the benefits of using a DFM, please contact French and Associates.
Funeral Plans – a good investment for your future
Funerals can be expensive and may cost thousands of pounds. Many people worry that when they die they will not leave enough money to pay for their funeral. This worry can be avoided if you arrange a funeral plan to pay for a funeral in advance.
A funeral plan is one way of providing for your future funeral; managing your money by putting planning in place makes good financial sense.
You can arrange a funeral plan for your own funeral or someone else’s as long as the funeral itself is held in the UK. Funeral plans are basically investments with a plan provider or a funeral director since the money you pay (either a lump sum or instalments) can be invested into a trust fund or an insurance policy. The money is then used to pay for the funeral.
In terms of regulation and the protection of your money, funeral plan providers must use insurance methods and trust funds which are properly regulated by the Financial Conduct Authority (FCA) so your money is adequately covered by compensation arrangements.
The sensible thing to do is to make sure you use a registered provider with the Funeral Planning Authority.
If you are considering the benefits of starting a funeral plan, the team at French and Associates can advise on a range of suitable options for you to help you make the most of your finances for the short term and long term future. For more information, please contact us.
The consequences of pension busting
Budget changes announced in March by the Chancellor brought a new degree of flexibility to individuals dealing with their pension arrangements. However, along with this came new dangers too, in the form of ‘pension liberation’.
‘Pension liberation’ (also known as ‘pension busting’ or ‘trust busting’) is the process by which people release their pensions before retirement, converting them entirely into cash (they do not keep their pension savings for retirement). There are no lawful means to achieve a release of funds before retirement through pension liberation.
Pension busting should not be confused with ‘pension unlocking’. With pensions unlocking, a person aged 50 or over can legally release up to 25% of their total pension as a tax free lump sum. The FCA warn that unlocking your pension will almost certainly mean you will have less income in retirement and as a result, unlocking is only suitable for a very limited number of people and circumstances.
Organisers of pension liberation may claim that they can release your pension as a cash lump sum through a ‘legal loophole’.
However, this ‘legal loophole’ does not exist and by organising pension liberation, those involved may be committing criminal offences such as fraud (false representations) and money laundering.
In order to release your pension, it must first be ‘transferred’ out of the pension scheme that holds it for you. Transfers are undertaken on the understanding that the transfer value (money representing your pension rights) will be used to provide you with pension benefits in retirement (for example, providing a tax free lump sum and a regular income or ‘annuity’).
In ‘pension liberation’ transfers, the money transferred is not used to provide pension benefits in retirement. Your pension scheme would not part with a transfer if it suspected that it would be released in cash. In order to mislead your pension scheme into parting with your transfer, the organisers of pension liberation will have to pretend to run a legitimate pension scheme which provides pension benefits or may pretend to be agents authorised to work for recognised pension companies.
Converting a pension into cash might sound very attractive to people who urgently need the money. But beware, you can only use your pension fund once. If you liberate your pension, there will be no tax free lump sum or income from it when you retire. Also, as part of the liberation transaction, you will probably have to pay the organisers a ‘commission’ or ‘arrangement fee’ and you may have a number of ‘deductions’ made from the transfer value before you get it. You might be told these deductions are from a number of different things, but typically, you may get around 70% to 75% of your transfer value once the organisers have taken their cut (deductions will vary).
You might be told that part of the deduction will be paid to HM Revenue & Customs to cover your income tax. However, it is extremely unlikely that money will be paid to HM Revenue & Customs on your behalf to cover tax due on a liberated pension because this kind of transfer activity is simply not lawful.
If you have liberated your pension, you will be contacted by HM Revenue & Customs for appropriate tax. The tax is charged to you at a special rate of 55% to reflect the tax relief pension savings get. It is also likely that you will becharged additional penalties or charges or interest by HM Revenue & Customs. More information, including examples, can be found at the HMRC website.
At present, the Pensions Regulator is considering the most effective ways to prevent pension liberation by warning pension schemes when a new activity is discovered as well as providing fact sheets like this one to raise awareness of the consequences of pension liberation.
Our experts at French and Associates can provide expert advice on a range of options available to
individuals looking to maximise their assets for their future retirement including maximising the efficiency of pension
arrangements. For more information, please contact us.