The new world experience of having to reduce costs and tighten our belts is no different for employers, as it is for household economies.
One area which we have experienced employers aiming to reduce costs is to look at the existing employee benefits package they have. Employers are now sensibly ‘shopping around’ for the most competitive terms, whilst still providing their staff with benefits to ensure that they remain a content and productive workforce, importantly feeling (and being) cared for by their employer.
Annual Review
I wholeheartedly agree with this review process (usually annually), aiming to ensure that the benefits (and providers) are reviewed regularly to ensure that costs are kept to a minimum, whilst still providing valuable terms. I have commented further on this at the end of this blog.
Legislative change
I believe that one of the key reasons why employers are starting to investigate the range, and providers, of their employee benefits is due to the legislative changes taking place around workplace pensions. We have noted these changes, known as Auto-Enrolment, many times in previous blogs / articles. These changes mean every eligible jobholder will be automatically enrolled into a workplace pension over the next few years. Unless the individual “opts-out”, the employee, the employer and the government (in the form of tax relief) will all contribute into the individuals’ retirement fund once enrolled.
Often legislation changes around taxation can have both a positive and a negative impact on benefits packages.
Taxation
Depending on the structure and type of employee benefit, the cost could be treated as a legitimate business expense and therefore tax deductible for corporation tax. Alternatively, the benefit provided could be classified as a benefit-in-kind (such as Private Medical Insurance/PMI) and taxable the hands of the employee.
These are important points and you may want to check these with your company Accountant before proceeding.
Cost Benefit of Employee Retainer
This change in pension legislation has prompted many employers to revisit the scope of the employee benefits they offer. Examples might be life cover, private medical insurance, travel insurance, income protection, dental or eye care and obviously pensions. This is only a small range of benefits which are at the disposal of an employer to offer their workforce. Staff attrition and high turnover rates can be a large business cost and significant time burden. If an employer can retain a satisfied and productive workforce through the offering of the appropriate employee benefits, then, in our communications with the businesses we work with, cost benefits usually follow.
Professional Advice
Whenever employee benefits are considered for introduction, or amendment, careful consideration should be taken for many reasons.
The most obvious, and easily calculable, is cost both on the employer and the employee. A more difficult issue to contemplate could be the political impact within the workforce if an unfair action is taken, e.g. the removal / reduction of a particular benefit. There are many instances where a contractual right to a particular benefit is included in an Employment contract.
I believe that a carefully designed, planned and implemented employee benefits package can be a useful method in attracting and retaining a quality workforce, whilst allowing a business to grow. I recommend professional independent financial advice should be used to assist the employer through the structure and agreed implementation of an appropriate employee benefits package to meet their individual requirements and budget.
No individual advice has been provided during the course of this blog. Employee Benefits should be planned for carefully and if you would like to receive individual advice on this subject, then please contact the team at Chapters Financial Limited on 01483 578800.
We look forward to working with businesses and partnerships across the South East & London.
Simon Hewitt BSc (Hons) Dip PFS
Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899. The Financial Services Authority does not regulate Tax advice.
Wednesday, 13 March 2013
Friday, 1 March 2013
Why we add value
The new world of UK retail
Financial Services commenced on 31st December 2012. If you haven’t
heard of these new initiatives and changes, they are called the Retail
Distribution Review (or RDR for short) introduced by the professions regulator,
the Financial Services Authority (FSA). We have posted other informative blogs
on this website relating to RDR changes that will affect clients and advisers
alike.
Change always brings challenges
and the RDR is no exception.
From a client’s perspective, what
should they now be looking for when seeking financial advice and help?
From Chapters Financial Limited’s
point of view, how we help you add value to your personal financial planning?
Transparency
Chapters Financial has continued
to operate a transparent Client Agreed Remuneration (CAR) model for the past 6
years. This is the model which the FSA has closely adopted for its new advice
regime. We are proud to continue to offer independent advice based on enquirers
needs and requirements.
Professional Service
The team provides an open,
friendly and professional service based on integrity, values and commitment to
the financial planning process. The initial meeting is usually provided at our
cost. If during this meeting we do not believe we can add real value, then we
tell the clients or enquirer accordingly.
Delivery
At the end of our initial
meeting, if agreed, we will produce documents which detail our clients’
objectives, how we aim to achieve those objectives and the fee/charges which
the client will incur for engaging our service. This relaxed and professional approach
means that we meet with the client’s requirements in a timeframe to suit them.
Chapters Financial Limited continues
to offer financial planning, advice and service as Chartered Financial Planners.
If you would like to discuss your Financial Planning with
one of professional advisers then please contact us on 01483-578800.
We look forward to working with you.
Chapters Financial Limited is authorised and regulated by the Financial
Services Authority, number 402899
Monday, 25 February 2013
A response to Moody’s downgraded UK Government bond rating
As many will already know, Moody's ‘downgraded the domestic- and foreign-currency Government bond ratings of the United Kingdom by one notch to Aa1 from Aaa.’ on February 22nd 2013. You will have seen much press comment on this issue and its potential consequences.
The purpose of this blog is to consider this issue further. The reality is that there is very little intrinsic value in this news; both the downgrade and the reasons for the downgrade were widely anticipated. It should be noted that the judgements of the ratings agencies have only a limited influence on the relative attractiveness of G7 Government bonds.
The UK’s new, lower credit rating
The UK has enjoyed the highest possible credit rating from Moody’s since March 1978. A little over a year ago, on 13 February 2012, Moody’s warned of a potential downgrade when it altered the outlook from ‘stable’ to ‘negative’.
We are not alone, and now, Britain joins France and the US, leaving just Canada and Germany among the G7 with an Aaa rating.
An Aa1 credit rating is the second notch in a rung of 21 possible ratings (see table 1), which are detailed below for reference and consideration:
Table 1. Moody’s Investor Services
Moody’s justifies the UK’s standing at this high rating as follows:
‘...the UK's creditworthiness remains extremely high, rated at Aa1, because of the country's significant credit strengths. These include (i) a highly competitive, well-diversified economy; (ii) a strong track record of fiscal consolidation and a robust institutional structure; and (iii) a favourable debt structure, with supportive domestic demand for Government debt, the longest average maturity structure (15 years) among all highly rated sovereigns globally and the resulting reduced interest rate risk on UK debt.’
In applying a ‘stable outlook’, Moody’s are not anticipating any change to the current rating in the next 12 to 18 months.
‘The stable outlook on the UK's Aa1 sovereign rating reflects Moody's expectation that a combination of political will and medium-term fundamental underlying economic strengths will, in time, allow the Government to implement its fiscal consolidation plan and reverse the UK's debt trajectory. Moreover, although the UK's economy has considerable risk exposure through trade and financial linkages to a potential escalation in the euro area sovereign debt crisis, its contagion risk is mitigated by the flexibility afforded by the UK's independent monetary policy framework and sterling's global reserve currency status.’
You might wonder then, why it is that Moody’s has downgraded UK Government debt...
Reasons for the downgrade
To consider this further, Moody’s suggest that there are three interrelated ‘drivers’ for its actions.
1. The continuing weakness in the UK's medium-term growth outlook, with a period of sluggish growth which Moody's now expects will extend into the second half of the decade;
2. The challenges that subdued medium-term growth prospects pose to the Government's fiscal consolidation programme, which will now extend well into the next parliament;
3. And, as a consequence of the UK's high and rising debt burden, deterioration in the shock-absorption capacity of the Government's balance sheet, which is unlikely to reverse before 2016.’
In short, the UK appears to be stuck in a protracted and unusually slow period of recovery. This has suppressed tax receipts; just as it inflates Government spending and all the while it remains in recovery it also remains highly vulnerable to any kind of external shock.
What could the impact be?
It is not possible to say with any certainty what the impact of this downgrade will be, but... as I wrote in my opening remarks there is very little news contained in Moody’s announcement. It was increasingly odd that the UK maintained the very highest rating when the US, which has made far greater progress toward a sustainable recovery, lost its Standard & Poor’s AAA rating 18 months ago.
There is some sympathy for Martin Wolf’s view, expressed in his Financial Times column on 23 February, which says:
‘The judgment of the ratings agencies adds next to nothing to understanding of the economic condition of such a well-known issuer... Armies of official and private economists understand the underlying data and closely follow developments. In this crowd of commentators, the rating agencies are just another voice... At most, Moody’s has reminded the world of what it knows... Partly for this reason, the downgrade is unlikely to damage the UK gilt market.’
The yield on the 10-year gilt was 32 basis points (0.32%) more than the equivalent German bond this time last year when Moody’s applied a ‘negative’ outlook for the UK. That ‘spread’ subsequently fell to 13 basis points in August last year, in defiance of Moody’s judgement, before rising steadily to a current spread of 55 basis points. I’ll leave it to you to decide if Moody’s are responding to the market’s judgement or if the markets are responding to Moody’s judgement.
Summary
Gilt yields have risen, of late, in lock-step with equity markets just as German, Japanese and US Government bond yields have. This will remain the dominant factor affecting gilt yields.
Moody’s downgrade follows a growing perception that the outlook for Britain’s fiscal position has not progressed. Underlying this are serious challenges for policymakers in the UK. Thus far, the Chancellor of the Exchequer has pressed ahead with austerity measures that have, by now, proven unwise in voracity at the same time as placing too much faith in the ability of the Governor of the Bank of England to support the economy single-handedly. A fall in sterling’s trade-weighted exchange rate is already underway. Perhaps the downgrade from Moody’s will add just a little impetus to sterling’s decline.
Past performance is not a guarantee of future performance. Fund values can fall as well as rise and are not guaranteed.
At Chapters Financial, we have been planning client’s investment planning for many years, offering high quality independent financial advice. Because each consumer is different, as is their financial planning needs, no individual advice has been provided in this Blog.
Keith G Churchouse,
Chartered Financial Planner, Director,
Chapters Financial Limited Chapters Financial Limited is Authorised and Regulated by the Financial Services Authority. Number 402899
The purpose of this blog is to consider this issue further. The reality is that there is very little intrinsic value in this news; both the downgrade and the reasons for the downgrade were widely anticipated. It should be noted that the judgements of the ratings agencies have only a limited influence on the relative attractiveness of G7 Government bonds.
The UK’s new, lower credit rating
The UK has enjoyed the highest possible credit rating from Moody’s since March 1978. A little over a year ago, on 13 February 2012, Moody’s warned of a potential downgrade when it altered the outlook from ‘stable’ to ‘negative’.
We are not alone, and now, Britain joins France and the US, leaving just Canada and Germany among the G7 with an Aaa rating.
An Aa1 credit rating is the second notch in a rung of 21 possible ratings (see table 1), which are detailed below for reference and consideration:
Table 1. Moody’s Investor Services
| Rating | Description |
| Aaa | The highest quality and lowest credit risk |
| Aa1, Aa2, Aa3 | Rated as high quality and very low credit risk |
| A1, A2, A3 | Rated as upper-medium grade and low credit risk |
| Baa1, Baa2, Baa3 | Rated as medium grade, with some speculative elements and moderate credit risk |
| Ba1, Ba2, Ba3 | Judged to have speculative elements and a significant credit risk |
| B1, B2, B3 | Judged as being speculative and a high credit risk |
| Caa1, Caa2, Caa3 | Rated as poor quality and very high credit risk |
| Ca | Highly speculative, near or in default, some possibility of recovering principal and interest |
| C | Lowest quality, usually in default, low likelihood of recovering principal and interest |
Moody’s justifies the UK’s standing at this high rating as follows:
‘...the UK's creditworthiness remains extremely high, rated at Aa1, because of the country's significant credit strengths. These include (i) a highly competitive, well-diversified economy; (ii) a strong track record of fiscal consolidation and a robust institutional structure; and (iii) a favourable debt structure, with supportive domestic demand for Government debt, the longest average maturity structure (15 years) among all highly rated sovereigns globally and the resulting reduced interest rate risk on UK debt.’
In applying a ‘stable outlook’, Moody’s are not anticipating any change to the current rating in the next 12 to 18 months.
‘The stable outlook on the UK's Aa1 sovereign rating reflects Moody's expectation that a combination of political will and medium-term fundamental underlying economic strengths will, in time, allow the Government to implement its fiscal consolidation plan and reverse the UK's debt trajectory. Moreover, although the UK's economy has considerable risk exposure through trade and financial linkages to a potential escalation in the euro area sovereign debt crisis, its contagion risk is mitigated by the flexibility afforded by the UK's independent monetary policy framework and sterling's global reserve currency status.’
You might wonder then, why it is that Moody’s has downgraded UK Government debt...
Reasons for the downgrade
To consider this further, Moody’s suggest that there are three interrelated ‘drivers’ for its actions.
1. The continuing weakness in the UK's medium-term growth outlook, with a period of sluggish growth which Moody's now expects will extend into the second half of the decade;
2. The challenges that subdued medium-term growth prospects pose to the Government's fiscal consolidation programme, which will now extend well into the next parliament;
3. And, as a consequence of the UK's high and rising debt burden, deterioration in the shock-absorption capacity of the Government's balance sheet, which is unlikely to reverse before 2016.’
In short, the UK appears to be stuck in a protracted and unusually slow period of recovery. This has suppressed tax receipts; just as it inflates Government spending and all the while it remains in recovery it also remains highly vulnerable to any kind of external shock.
What could the impact be?
It is not possible to say with any certainty what the impact of this downgrade will be, but... as I wrote in my opening remarks there is very little news contained in Moody’s announcement. It was increasingly odd that the UK maintained the very highest rating when the US, which has made far greater progress toward a sustainable recovery, lost its Standard & Poor’s AAA rating 18 months ago.
There is some sympathy for Martin Wolf’s view, expressed in his Financial Times column on 23 February, which says:
‘The judgment of the ratings agencies adds next to nothing to understanding of the economic condition of such a well-known issuer... Armies of official and private economists understand the underlying data and closely follow developments. In this crowd of commentators, the rating agencies are just another voice... At most, Moody’s has reminded the world of what it knows... Partly for this reason, the downgrade is unlikely to damage the UK gilt market.’
The yield on the 10-year gilt was 32 basis points (0.32%) more than the equivalent German bond this time last year when Moody’s applied a ‘negative’ outlook for the UK. That ‘spread’ subsequently fell to 13 basis points in August last year, in defiance of Moody’s judgement, before rising steadily to a current spread of 55 basis points. I’ll leave it to you to decide if Moody’s are responding to the market’s judgement or if the markets are responding to Moody’s judgement.
Summary
Gilt yields have risen, of late, in lock-step with equity markets just as German, Japanese and US Government bond yields have. This will remain the dominant factor affecting gilt yields.
Moody’s downgrade follows a growing perception that the outlook for Britain’s fiscal position has not progressed. Underlying this are serious challenges for policymakers in the UK. Thus far, the Chancellor of the Exchequer has pressed ahead with austerity measures that have, by now, proven unwise in voracity at the same time as placing too much faith in the ability of the Governor of the Bank of England to support the economy single-handedly. A fall in sterling’s trade-weighted exchange rate is already underway. Perhaps the downgrade from Moody’s will add just a little impetus to sterling’s decline.
Past performance is not a guarantee of future performance. Fund values can fall as well as rise and are not guaranteed.
At Chapters Financial, we have been planning client’s investment planning for many years, offering high quality independent financial advice. Because each consumer is different, as is their financial planning needs, no individual advice has been provided in this Blog.
Keith G Churchouse,
Chartered Financial Planner, Director,
Chapters Financial Limited Chapters Financial Limited is Authorised and Regulated by the Financial Services Authority. Number 402899
Tuesday, 12 February 2013
Long Term Care, Care Costs and Inheritance Tax
I am not sure I have ever seen two high-profile financial planning issues linked so closely by Government before, namely that of Inheritance Tax and care costs for Long Term Care. The recently commissioned Dilnot Report has done much to correctly move the issue of care costs forward.
Both topics are emotive subjects for both families and those in their older ages. They will generate much text over the next few months. The new plans (subject to confirmation and detail) is to cap long term care costs at £75,000 with assessment for this cap starting at a new level of £123,000. With care costs for many running at around £1,000 per week, as an example, you can soon work out that with £52,000 per annum being spent on care costs, it is easy for estate values to fall quickly. Ironically, this has the 'advantage' of reducing future Inheritance Tax liabilities.
The 'generosity' of this change offered by the Government will not be without expense. We are all aware that they have no money and this change will need to be afforded. This is planned to be achieved by freezing Inheritance Tax (IHT) levels until 2019. In George Osborn's Autumn Statement at the end of 2012, the current Inheritance Tax nil rate band allowance for an individual of £325,000 was going to increase to £329,000 from tax year start 2015/2016. This plan has now clearly changed to accommodate this new planning.
The devil may well be in the detail and I am sure there may be a few more changes before these (apparently) now linked allowances are finalised.
No individual advice has been provided during the course of this blog. Both Long Term Care and Inheritance Tax should be planned for carefully and if you would like to receive individual advice for your circumstances, then please contact the team at Chapters Financial Limited on 01483 578800
Keith Churchouse, FPFS
Director, Chapters Financial Limited, Guildford, Surrey
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.
Both topics are emotive subjects for both families and those in their older ages. They will generate much text over the next few months. The new plans (subject to confirmation and detail) is to cap long term care costs at £75,000 with assessment for this cap starting at a new level of £123,000. With care costs for many running at around £1,000 per week, as an example, you can soon work out that with £52,000 per annum being spent on care costs, it is easy for estate values to fall quickly. Ironically, this has the 'advantage' of reducing future Inheritance Tax liabilities.
The 'generosity' of this change offered by the Government will not be without expense. We are all aware that they have no money and this change will need to be afforded. This is planned to be achieved by freezing Inheritance Tax (IHT) levels until 2019. In George Osborn's Autumn Statement at the end of 2012, the current Inheritance Tax nil rate band allowance for an individual of £325,000 was going to increase to £329,000 from tax year start 2015/2016. This plan has now clearly changed to accommodate this new planning.
The devil may well be in the detail and I am sure there may be a few more changes before these (apparently) now linked allowances are finalised.
No individual advice has been provided during the course of this blog. Both Long Term Care and Inheritance Tax should be planned for carefully and if you would like to receive individual advice for your circumstances, then please contact the team at Chapters Financial Limited on 01483 578800
Keith Churchouse, FPFS
Director, Chapters Financial Limited, Guildford, Surrey
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.
Friday, 1 February 2013
Sick Pay Cover – Do you have enough?
I recently completed a financial plan for a director of a successful local company. Amongst the usual planning for pensions and life cover, I also wanted to address a much overlooked (and vital) area, which is the protection of income in the event of inability to work due to ill health. In this case, the topic was especially relevant because the business was young and very much reliant on its director to drive sales. He was clearly good at this because of the trajectory of profits achieved so far.
With no cover elsewhere, other than capital achieved from sales within the company which would deplete quickly without its sales 'driver', this was an area of exposure that once identified, the director wanted to address promptly.
Far too few people consider the impacts on their household finances in the event of them being unable to work due to ill health. Statutory Sick Pay (SSP) only pays for a maximum of 28 weeks at a level of £85.85 gross per week (2012/13) paid by the employer with income tax and National Insurance to be deducted.
In this blog, I wanted to look at the factors that can affect the final monthly premiums offered on Income Protection Policies, all of which are subject to medical underwriting.
The obvious factors are existing health condition, age and if the applicant is a smoker (which would see premiums lift significantly).
The other main factors which now influence premium levels are as follows:
G-Day
The recent EU ruling on the equalisation of rates between men and women has seen the most dramatic increases on male applicants for income protection policies. In some cases the increase has been as high as 40-50% increase for a male applicant in comparison to pre-G-Day (Gender Equalisation day of 21st December 2012), although a more typical increase could be around 25-30%. Conversely, female applicants should see a reduction of their premium in comparison to their premiums pre-G-Day, although I don’t believe it will be as large a discount as the increases seen for males.
End date / Term
As noted above, the maximum term which SSP pays is 28 weeks, however most Income Protection Plans, also known as Permanent Health Insurance (PHI) policies, can be set with a cover period up until the applicants 65th Birthday, possibly even longer depending upon the insurer. Obviously the longer the cover period (especially with the policy term into the advanced age range of 55 to 65) will increase the premium accordingly, however this longer period can be invaluable when planning your protection needs because it allows for some income provision beyond the Statutory Sick Pay (or even an employers’ own sick pay arrangements).
Inflation uplift / Escalation
At the outset of the insurance policy you can select whether the cover amount will stay level (cheaper premiums) or escalate / increase (usually in line with inflation as an example). Escalation will increase the monthly premium, but if the policy is to be in force for many years (for example a 30 year term) then at the point of claim the escalation of benefit could prove very worthwhile if the claim is towards the end of the policy term.
Waiting Period
This is sometimes referred to as a deferral period and is the length of time the claimant has to be unable to work due to ill health before a claim will be paid. The longer you set the deferral period the cheaper the premiums will be, however planning should be taken to ensure that sufficient other funds / income are available to provide for loss of income during the selected waiting period. Examples of waiting periods might be 4, 8, 13, 26 or even 52 weeks.
Calculation of amount of cover (maximum)
One of the key drivers for insurance premium costs is obviously how much cover is required and, therefore, the amount the insurer will have to pay in the event of a claim. In my opinion, the key minimum cover should be the amount the individual pays towards household costs on a monthly basis. However, in most cases this is not the ideal and careful consideration should be taken in planning the appropriate level of cover.
Dividend v Salary
This is a very important issue, especially considering my example case mentioned above. This is because many business owners / directors pay themselves nominal salary and higher dividend amounts for tax, and potentially cash-flow, purposes. Many insurers may not include the dividends in their calculation of a claimants income, so the desired amount of cover may not be available, or even paid, in the event of a claim. Some insurers may apply an increase in premium to reflect that they will include dividends. Careful attention of the terms and conditions of the income calculation allowed must be considered before starting the policy.
Guaranteed / Reviewable Premiums
The final major point which could affect the premium illustrated is whether the premiums are guaranteed (i.e. they will not change, apart from escalation if chosen, during the term of the policy) or reviewable. Reviewable premiums allow the insurer to calculate premiums collected against claims amounts paid and if they believe that there is a discrepancy then they can amend the premiums accordingly. This review tends not to be done on an individual basis but rather on a demographic basis for the insurers “risk book”. Guaranteed premiums tend to be slightly more costly at outset, but at least you know what you will be paying during the term of the policy.
Individual or Employer pays the premium
Generally speaking, insurers have an understanding that all income protection policies which an individual can hold will pay a combined maximum of 50% of a claimants gross annual earned income. This will normally be paid on a tax-free basis if the individual pays the premium. If the premium is to be paid for by the employer, then the maximum available is usually 65-75% of the claimants gross income paid on a taxable basis.
As you would expect, each element noted above is likely to have an effect on the final premium offered. Being independent financial advisers (IFA's) we have the ability to use the whole market to search out competitive providers in most circumstances.
No individual advice has been provided during the course of this blog. Protection in the event of either death or ill health should be planned for carefully and if you would like to receive individual advice on this subject, then please contact the team at Chapters Financial Limited on 01483 578800
Simon Hewitt BSc (Hons) Dip PFS
Financial Planner
With no cover elsewhere, other than capital achieved from sales within the company which would deplete quickly without its sales 'driver', this was an area of exposure that once identified, the director wanted to address promptly.
Far too few people consider the impacts on their household finances in the event of them being unable to work due to ill health. Statutory Sick Pay (SSP) only pays for a maximum of 28 weeks at a level of £85.85 gross per week (2012/13) paid by the employer with income tax and National Insurance to be deducted.
In this blog, I wanted to look at the factors that can affect the final monthly premiums offered on Income Protection Policies, all of which are subject to medical underwriting.
The obvious factors are existing health condition, age and if the applicant is a smoker (which would see premiums lift significantly).
The other main factors which now influence premium levels are as follows:
G-Day
The recent EU ruling on the equalisation of rates between men and women has seen the most dramatic increases on male applicants for income protection policies. In some cases the increase has been as high as 40-50% increase for a male applicant in comparison to pre-G-Day (Gender Equalisation day of 21st December 2012), although a more typical increase could be around 25-30%. Conversely, female applicants should see a reduction of their premium in comparison to their premiums pre-G-Day, although I don’t believe it will be as large a discount as the increases seen for males.
End date / Term
As noted above, the maximum term which SSP pays is 28 weeks, however most Income Protection Plans, also known as Permanent Health Insurance (PHI) policies, can be set with a cover period up until the applicants 65th Birthday, possibly even longer depending upon the insurer. Obviously the longer the cover period (especially with the policy term into the advanced age range of 55 to 65) will increase the premium accordingly, however this longer period can be invaluable when planning your protection needs because it allows for some income provision beyond the Statutory Sick Pay (or even an employers’ own sick pay arrangements).
Inflation uplift / Escalation
At the outset of the insurance policy you can select whether the cover amount will stay level (cheaper premiums) or escalate / increase (usually in line with inflation as an example). Escalation will increase the monthly premium, but if the policy is to be in force for many years (for example a 30 year term) then at the point of claim the escalation of benefit could prove very worthwhile if the claim is towards the end of the policy term.
Waiting Period
This is sometimes referred to as a deferral period and is the length of time the claimant has to be unable to work due to ill health before a claim will be paid. The longer you set the deferral period the cheaper the premiums will be, however planning should be taken to ensure that sufficient other funds / income are available to provide for loss of income during the selected waiting period. Examples of waiting periods might be 4, 8, 13, 26 or even 52 weeks.
Calculation of amount of cover (maximum)
One of the key drivers for insurance premium costs is obviously how much cover is required and, therefore, the amount the insurer will have to pay in the event of a claim. In my opinion, the key minimum cover should be the amount the individual pays towards household costs on a monthly basis. However, in most cases this is not the ideal and careful consideration should be taken in planning the appropriate level of cover.
Dividend v Salary
This is a very important issue, especially considering my example case mentioned above. This is because many business owners / directors pay themselves nominal salary and higher dividend amounts for tax, and potentially cash-flow, purposes. Many insurers may not include the dividends in their calculation of a claimants income, so the desired amount of cover may not be available, or even paid, in the event of a claim. Some insurers may apply an increase in premium to reflect that they will include dividends. Careful attention of the terms and conditions of the income calculation allowed must be considered before starting the policy.
Guaranteed / Reviewable Premiums
The final major point which could affect the premium illustrated is whether the premiums are guaranteed (i.e. they will not change, apart from escalation if chosen, during the term of the policy) or reviewable. Reviewable premiums allow the insurer to calculate premiums collected against claims amounts paid and if they believe that there is a discrepancy then they can amend the premiums accordingly. This review tends not to be done on an individual basis but rather on a demographic basis for the insurers “risk book”. Guaranteed premiums tend to be slightly more costly at outset, but at least you know what you will be paying during the term of the policy.
Individual or Employer pays the premium
Generally speaking, insurers have an understanding that all income protection policies which an individual can hold will pay a combined maximum of 50% of a claimants gross annual earned income. This will normally be paid on a tax-free basis if the individual pays the premium. If the premium is to be paid for by the employer, then the maximum available is usually 65-75% of the claimants gross income paid on a taxable basis.
As you would expect, each element noted above is likely to have an effect on the final premium offered. Being independent financial advisers (IFA's) we have the ability to use the whole market to search out competitive providers in most circumstances.
No individual advice has been provided during the course of this blog. Protection in the event of either death or ill health should be planned for carefully and if you would like to receive individual advice on this subject, then please contact the team at Chapters Financial Limited on 01483 578800
Simon Hewitt BSc (Hons) Dip PFS
Financial Planner
Chapters Financial Limited
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.
Monday, 14 January 2013
The State Pension......and the possible changes ahead?
This week we have seen our coalition Government turn their attention to the State Pension and the way the current benefits are provided. I am sure there will much press coverage, comment and concern about future changes, both for those who may be effected in the shorter term, from 2017, and for those who hope to claim this benefit into the longer term.
I wanted to provide a summary, and for the purposes of this Blog, I have divided this into the following sections:
The Past and Present
Currently, the basic State Pension amounts to £107.45 per week. This income is paid gross, but is taxable and increases with the Consumer Prices Index (CPI) with a minimum guarantee of 2.5% if CPI falls below this rate, which it did in 2012. On top of this, you might also receive additional State Pension income from past accrual of the State Earnings Related Pension (sometimes known as SERPS) or its successor, the Second State Pension (S2P). I have seen this additional pension benefit when added see the overall pension paid double on regular occasions.
My current understanding is that those who have State Pension benefit in payment before 2017 will not be affected by the possible proposals.
You can probably tell that this can be a complicated calculation when taking into account all the varying factors, with a maximum accrual achieved over 30 years (proposed to increase to 35 years). Here lies part of the perceived problem and the target to simplify the process. It is also proposed that no State Pension will be achieved, with a proposed minimum of 10 years National Insurance accrual to qualify for any State Pension.
How do I check my current State Pension benefit?
You can check your current accrual of your State Pension by completing a BR19 State Pension Forecast Form (available here).
State Pension Deferral
It is currently possible to defer the State Pension after your normal State Pension age (which we know as been increasing over recent times and still increasing), seeing the benefit deferred increasing by 1.0% for every 5 week period. This increase amounts to 10.4% over a full year and this option can be beneficial in financial planning for those who, as an example, continue to work and have no immediate need for the income.
For information, this increase can be taken as taxable cash or increased taxable income. It will be interesting to see if this option survives the final ruling on future changes.
The Future?
The new proposals put forward for 2017 suggests a flat rate of State Pension of around £155.00 per week in total (about £144.00 per week in today’s terms). Of course, this figure may change when everything is finalised. Past SERPS and S2P accrual (which might have given a higher income if the rules had not changed) will be gone.
Of course and as usual, there are winners and losers by changes in legislation. Winners are likely to lower earners and some have indicated females who opted out of the State Pension many years ago. Losers are likely to be higher earners or medium earners who did not contract-out of SERP's (option started in 1988 and stopped around 2 years ago).
Summary
It is suggested that the other 'winner' in these proposals will be the Government, with an overall reduction in long term costs. We are all living longer and, understandably, this places greater burden on the pension system, whether that be the State system or private sector schemes. Clearly, planning for your future retirement will become ever more important to secure future benefits.
No individual advice has been provided during the course of this blog. Pension and retirement planning should be planned for carefully and if you would like to receive individual advice on this subject, then please contact the team at Chapters Financial Limited on 01483 578800
Keith G Churchouse FPFS
Director, ISO22222 Certified Financial Planner
Chapters Financial Limited, Guildford, Surrey
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.
I wanted to provide a summary, and for the purposes of this Blog, I have divided this into the following sections:
The Past and Present
Currently, the basic State Pension amounts to £107.45 per week. This income is paid gross, but is taxable and increases with the Consumer Prices Index (CPI) with a minimum guarantee of 2.5% if CPI falls below this rate, which it did in 2012. On top of this, you might also receive additional State Pension income from past accrual of the State Earnings Related Pension (sometimes known as SERPS) or its successor, the Second State Pension (S2P). I have seen this additional pension benefit when added see the overall pension paid double on regular occasions.
My current understanding is that those who have State Pension benefit in payment before 2017 will not be affected by the possible proposals.
You can probably tell that this can be a complicated calculation when taking into account all the varying factors, with a maximum accrual achieved over 30 years (proposed to increase to 35 years). Here lies part of the perceived problem and the target to simplify the process. It is also proposed that no State Pension will be achieved, with a proposed minimum of 10 years National Insurance accrual to qualify for any State Pension.
How do I check my current State Pension benefit?
You can check your current accrual of your State Pension by completing a BR19 State Pension Forecast Form (available here).
State Pension Deferral
It is currently possible to defer the State Pension after your normal State Pension age (which we know as been increasing over recent times and still increasing), seeing the benefit deferred increasing by 1.0% for every 5 week period. This increase amounts to 10.4% over a full year and this option can be beneficial in financial planning for those who, as an example, continue to work and have no immediate need for the income.
For information, this increase can be taken as taxable cash or increased taxable income. It will be interesting to see if this option survives the final ruling on future changes.
The Future?
The new proposals put forward for 2017 suggests a flat rate of State Pension of around £155.00 per week in total (about £144.00 per week in today’s terms). Of course, this figure may change when everything is finalised. Past SERPS and S2P accrual (which might have given a higher income if the rules had not changed) will be gone.
Of course and as usual, there are winners and losers by changes in legislation. Winners are likely to lower earners and some have indicated females who opted out of the State Pension many years ago. Losers are likely to be higher earners or medium earners who did not contract-out of SERP's (option started in 1988 and stopped around 2 years ago).
Summary
It is suggested that the other 'winner' in these proposals will be the Government, with an overall reduction in long term costs. We are all living longer and, understandably, this places greater burden on the pension system, whether that be the State system or private sector schemes. Clearly, planning for your future retirement will become ever more important to secure future benefits.
No individual advice has been provided during the course of this blog. Pension and retirement planning should be planned for carefully and if you would like to receive individual advice on this subject, then please contact the team at Chapters Financial Limited on 01483 578800
Keith G Churchouse FPFS
Director, ISO22222 Certified Financial Planner
Chapters Financial Limited, Guildford, Surrey
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.
Wednesday, 2 January 2013
Economic Data & Views for 2013 and beyond
Some of our clients will know
that to maintain our high standards and independence, we consult with a
specialist investment company, Cormorant Capital Strategies Limited, to ensure
that our investment recommendations remain current and robust.
Cormorant Capital Strategies has
collated the following thoughts using recently published data, giving views on
various economic issues. Please note
that future predictions are, as suggested, only predictions and cannot be
relied on for the future. These indicators can and will change. Past
performance is not a guarantee of future performance.
A review of the latest OBR Economic and
Fiscal Outlook
The Office for Budget Responsibility (OBR) published its latest
Economic and Fiscal Outlook on 5th December.
1. Gross Domestic Product
Not surprisingly, given its forecast in March for economic growth in
2012 at a rate of 0.8%, the OBR has had to concede that the ‘economy has
performed less strongly... than we expected’. A similar concession would be
required from the median of independent forecasts too; back in March the
consensus outside forecast was 0.5%. Barring surprising strength in the fourth
quarter, it seems likely that output in 2012 will be flat or negative. The
OBR’s updated 2012 forecast is for a fall of 0.1% year-on-year.
Its central forecast for 2013 calls for 1.2% growth (not dissimilar to
the median of independent forecasts of 1.1%) and for 2.0% the following year
rising, optimistically, to 2.8% in 2017. The OBR’s range of estimates suggests
that there is a 1-in-5 chance that the economy will shrink during 2013.
Output remains 3.0 %
lower than during its prior peak in the first quarter of 2008.
2. Inflation
Consumer Price Index inflation is expected to fall in the next few
years from the current rate of 2.7% (November) toward the target rate of 2.0%
from 2015 onwards. The OBR, just like the Bank of England, have been surprised
by the larger-than-expected upward effect of tuition fees and domestic energy
price increases.
3. Employment
The employment situation is characterised by relative strength, given
such poor rates of economic growth. The OBR’s revised forecast shows a 0.7%
decrease (from 8.7% to 8.0%) for 2012 since the March issue of the Economic and
Fiscal Outlook.
4. Government Debt
The OBR are forecasting Public Sector Net Borrowing[1]
(PSNB) to come in at around 5.1% of GDP by March 2013. Exclude the transfer of
Royal Mail pension assets to the public sector and this rises to 6.9% of GDP.
Public debt[2]
is expected to continue to rise toward a peak of 80% of GDP in early 2016.
5. Summary
Economic output remains substantially below the level it reached early
in 2008. The latest central forecast projections from the OBR suggest that the
British economy will not recover the ground it has lost until the final quarter
of 2014. If the OBR is correct in its assessment, relatively low growth in the
years ahead will be accompanied by sustained low rates of inflation (though CPI
will remain above target in the short term) and a steadily improving employment
situation. Total government debt will peak in 2016 at a level close to 80% of
GDP with net borrowing at its highest in 2014 at something like £100 billion.
No individual financial advice is provided during the course of this
Blog.
I hope you have found this information of interest.
Happy New Year to all our Blog readers. I hope 2013 is a
prosperous year for us all.
Keith G Churchouse FPFS
Director, Chapters Financial Limited
Chapters Financial
Limited is authorised and regulated by the Financial Services Authority, number
402899.
[1]
Public Sector Net Borrowing: A measure of
the amount of money the Government has had to borrow in order to bridge the gap
between expenditure and revenue.
[2]
Public Sector Net Debt: A measure of how
much the UK public sector owes (to UK private sector organisations or overseas
institutions) at a point in time.
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