Employee Benefits

You’re not legally obliged to have life insurance for a mortgage, but some lenders may consider it a precondition for letting you borrow money to buy a home.

For many homeowners, having financial protection in place makes sense. If you own a property, a mortgage is likely to be the biggest debt you leave behind should the worst happen, so having a policy in place can help give you peace of mind.

With the average house price in the UK currently around £238,000*, a lot of homeowners will have a mortgage to pay, so it’s understandable that people want to spend any spare income wisely.

If you have children, a partner, or other dependents living with you who rely on you financially, taking out mortgage life insurance could be considered important expenditure.

Buying a Home with a Partner

Life insurance is important to consider when buying a house as a couple. When buying with your partner, your mortgage repayments could be calculated based on two salaries. If you or your partner died while your mortgage loan was still outstanding, would one of you alone be able to keep up the regular mortgage repayments?

Life insurance can help protect the family home by paying out a cash sum, which can be put towards the remaining mortgage balance if you die during the length of the policy. Your loved ones can use the pay out to help clear the outstanding mortgage debt, meaning they can continue living in your family home without worrying about the mortgage.

Life Insurance as a Landlord

If you’re buying a home as an investor, or you already own a home and you’re looking to rent it out, you may still need life insurance. This way, you can help cover the remaining balance in the unfortunate event you pass away.

This can help ensure continuance of any rental income for your beneficiaries as it reduces the need to sell the property to clear the mortgage. You might want to increase your life insurance cover to account for the higher mortgage liability should you refinance your investment property or portfolio.

Do I Need Life Insurance if I Don’t Have a Mortgage?

Life insurance is not only relevant to homeowners. While it’s true that renters are less likely to take out life insurance, that doesn’t mean you don’t need life insurance if you don’t have a mortgage.

If you’re a tenant, think about the financial impact of the loss of your income if you were no longer around. If you live with your family, could your loved ones afford the rent in your absence? What about other costs like household bills or childcare costs if you have a family. In essence, life insurance is always a good idea if other people rely on you financially, it is not just for those with a mortgage.

• Level term life insurance - this could pay out a fixed lump sum if you die during the length of the policy, and help your dependents to pay the mortgage (interest only) or help maintain their lifestyle and everyday living expenses.
• Decreasing life insurance - this is designed to help protect a repayment mortgage so the amount of cover reduces roughly in line with the way a repayment mortgage decreases.

If you do take out life insurance or decreasing life insurance you can add critical illness cover to your policy at an extra cost.

It could pay out a cash sum if you’re diagnosed with, or undergo a medical procedure for one of the specified critical illness covered during the length of your policy, and you survive a specified term from diagnosis (usually 14 or 28 days depending upon the provider).

A home is so much more than an asset, and whatever type of life insurance you choose, paying a small monthly premium can help your family carry on living there if you are no longer around.

The right policy for you depends on your individual circumstances, speak to a member of the Nockolds Wealth team to find out more.

Having a child is one of the greatest moments in your life, but children bring with them a few extra expenses. What if one, or both parents were to die, would your child’s future be protected?

Some expenses to consider:

• Mortgage or rent - the mortgage or rent still needs to be paid, even if a parent passes away.
• Debts - any joint loans or credit cards will need to be paid by the surviving partner - finding the money to pay these off can be difficult for just one person.
• Everyday essentials - they include food and utilities such as gas and electric, which can quickly become a burden.
• Childcare - as a parent, you’ll want to ensure your children are well cared for.
• Education - further education is expensive with student debt at all-time highs, financial support from parents is usually essential.

How Can I Ensure that the Above Expenses are Taken Care Of?

Put Yourself First
This means reducing debts such as credit cards, loans or mortgage as well as planning for you own retirement. Otherwise these liabilities will fall to your family to deal with after you’ve gone.

Start Saving
Once you’ve got debts under control, then you are in a position to start saving and putting money away. It may make sense to save for your children in a tax-efficient Junior ISA to put the money in their names rather than as part of your estate. Starting when your children are young means that any funds have longer to grow.

Protect Your Income and Home
It is essential to protect your income and home in case anything happens that could risk your family’s financial wellbeing, such as illness, injury, or premature death. It is crucial to consider mortgage or rent protection, income protection, life insurance, and critical illness cover.

Make a Will
We always recommend that you have a Will in place. If you have young children, you state in your Will who you would like to be their legal guardians in the event that both their parents have died. The guardians would make day to day decisions regarding their care.

Where you are leaving your estate to your children, you name in your Will who would manage assets for the children until they are old enough to inherit, these people are called your trustees.

This is an important role as your trustees would decide what access your children have to funds and how these funds are managed. The trustees and the guardians can be the same people but do not have to be. It is important that you choose trustees that you are confident could manage the funds effectively for the children. You can have a maximum of four trustees, and so this can be a combination of relatives, friends or a professional such as Nockolds Solicitors if required.

The youngest your children could become absolutely entitled to funds from your estate would be 18, however it is possible to increase this age (for example, to 21 or 25) if you do not feel your children would be financially mature enough at 18.

Assets would then be held in a trust for the children until they reached that age. Funds can be given to the children prior to this, for example if they want a new car or to go to university, but this would be at the discretion of the trustees. The trustees decide what provision is made for the children’s maintenance, and it is likely they would pay a monthly allowance to the guardians to cover the cost of their care.

You may be asking the legal guardians and trustees to take on this role for many years in the future and so it is important that you consider who to appoint carefully and check with them that they are happy to undertake the responsibility.

For new parents, there’s so much going on but protecting the future of your children is one aspect which shouldn’t be ignored. Planning is crucial in making sure the financial future of your family is secure should the worst happen.

Saving, Insurance and making sure you have a valid Will in place are some of the ways you can help to provide the financial protection your family needs in the event of your death. Speak to a member of the team to discuss your individual circumstances and find out more.

When you’re deciding how much to save into your pension there are a few things to think about:

• How much can you afford?
• How much have you already saved into your pension(s)?
• How much are you allowed to save into your pension?
• How long have you got until you retire?
• Are you likely to increase or decrease your pension contributions in the future?
• How much do you expect your investments to grow between now and your retirement?
• How much will your employer contribute to your pension, and do they offer contribution matching?
• How much income will you need in retirement?

One of the key benefits of saving towards a pension is the tax relief. Pension contributions are a great way to claim back some of the tax you pay, and even non-taxpayers can get tax relief added to pension contributions.

The amount of tax relief you receive depends on your income tax band, if you’re a basic rate taxpayer you can normally get tax relief at source at the basic rate of tax (currently 20%) on regular and one-off payments into your pension.

So, a contribution by you of £80 means £100 will go in to the pension as the Government pays the other £20. Similarly, if you pay tax at £40%, that £100 pension contribution will only cost you £60.

Pension Contribution Limits

When you’re deciding how much to pay into your pension it’s important to bear in mind the pension contribution limits in relation to both the lifetime allowance (currently £1,073,100) and annual allowance limits (currently £40,000). Few people are at risk of exceeding these limits, but if you do then you could face a tax bill.

If you don’t have an income or you earn less than £3,600 per year, your annual pension contribution limit is £3,600, including tax relief.

For most savers, the current pension contribution limit is 100% of your income, with a cap of £40,000. If you earn £26,000 a year, you can save up to £26,000 (including tax relief) into your pension in one year. If you earn £50,000 a year, you can save up to £40,000 (including tax relief) into your pension.

For very high earners, a tapered annual allowance will apply which affects people who earn over £200,000 per year and could potentially reduce the allowed limit down to £4,000.

While the above contribution figures apply specifically to defined contribution (or money purchase) pensions, it is important to note that the level of benefit accrued within a defined benefit (or final salary) pension scheme is also subject to the annual allowance, but is calculated on the basis of how much the benefit level has increased each year (rather than being based on any contributions into the scheme).

The rules on pension contributions can be complex and you should seek independent financial advice to discuss your own individual circumstances.

It’s important to keep an eye on your pension saving and make sure you’re on track to save enough for your retirement. Contact a member of the Nockolds Wealth team to discuss your circumstances and pension savings in more detail.

Important Information

People are now more likely to have a number of different jobs during their career and will often be enrolled into a new pension at each new workplace. This means you may end up with several pension plans with different providers, and it can be confusing trying to keep track of them all.

There are two main types of pension scheme available:

• Defined Contribution (or money purchase) – you and/or your employer make contributions (in which you may also benefit from tax relief) to build up a personal pension pot that you can then use to provide an income in retirement. The value of your pension pot and the retirement income it will provide is not guaranteed and depends upon the total amount of contributions made, the investment growth achieved and the level of charges applied.
• Defined Benefit (or final salary) – is a special type of employer sponsored pension scheme that provides members with a guaranteed retirement income for life that usually increases each year to protect against inflation. The level of retirement income received will be based upon a member’s final (or averaged) salary and their length of service.

The Financial Conduct Authority (FCA) and The Pensions Regulator believe that it will be in most people’s interest to keep any benefits held within a defined benefit pension scheme*.

As such, the sole purpose of this article is to highlight the main factors when considering the potential consolidation of defined contribution pensions only. The considerations for a potential transfer of a defined benefit pension is beyond the scope of this article and would require specialist pension transfer advice (that is not available from Nockolds Wealth).

One of the options you have for your defined contribution pensions is to combine all of them into one single pot.

Benefits of Consolidation

Less hassle: By combining all your pensions into a single plan you can reduce the hassle which comes with managing and keeping track of different pots to a single plan which is easier to manage.

Reducing paperwork: A new plan could allow you to view your pension online. You can check your balance, make top ups and withdrawals online with minimum paperwork required.

Greater control: With a single pension plan you can ensure that the funds are invested how you want them to be in line with your attitude to risk, as well as finding it easier to track performance and being aware of the fees and charges you are paying.

Improved retirement planning: It can also be easier to see what your retirement will look like, and giving you an idea of how big a shortfall there is between your current pension savings and the size of the pot needed to provide you with a comfortable retirement.

Flexibility: A lot of older pension plans do not give you as much choice over how you access your money. By switching to a new single plan you could have greater flexibility over access to your money when you need it.

These are some of the benefits of consolidating your pensions, but it is also important to make sure that you are aware of all the details of your existing pensions as you could potentially be giving up some valuable benefits.

Things to Check Before You Consolidate

Safe Guarded Benefits: Some pension plans have valuable guarantees attached, such as guaranteed annuity rates or guaranteed growth rates which may be lost if you decide to transfer out from the scheme. So, it is always important to check whether you are entitled to any of these, and if you still want to go ahead with the transfer despite this.

Protected Tax Free Cash: Some older pension plans may have an enhanced tax free cash entitlement above the usual 25% which may be lost on transfer.

Exit fees and charges: Some plans especially older ones may put in place an exit fee or penalty if you want to move your money to a new plan. The fee will usually be a percentage of your pension savings, although if your pension is in a ‘with-profits’ fund then your exit fee may come in the form of a Market Value Reduction (MVR). You should carefully consider whether any perceived benefits of moving the funds to a new pension outweighs any exit fee, charges or MVR that may apply.

In addition, where a new pension has higher charges than any existing pension(s) it is also important to consider whether the new plan offers sufficient additional benefits to warrant the additional cost.

As you can see, there is a lot to think about before consolidating your defined contribution pensions and you should seek independent financial advice. Speak to a member of Nockolds Wealth to find out more.

This article looks at defined contribution pensions, most commonly known as personal or workplace pensions. They work by building up a pension fund from contributions made by you, your employer and tax relief from the government.

The value of your pension and the income it will provide isn’t guaranteed and depends upon the total contributions made and investment growth after charges.

Pension freedom rules introduced in April 2015 now give you more flexibility over how you can access your pension benefits.

For most people, the earliest you can access the money without significant tax penalties is age 55 (rising to 57 in 2028). As pensions are designed to support you throughout retirement, ideally you should wait as long as possible before accessing them. This will give you time to consider your options and determine how best to use your pension during retirement, as well as giving your pension fund more opportunity for growth. In most cases, 25% of the fund is available as ‘tax free cash’, with the remainder being used to provide a taxable income. A brief summary is provided below of the main options for accessing your pension benefits.

Annuity

Annuities allow you to exchange some or all of your pension fund for a secure income for life. It can help those who want certainty or to cover essential expenditure. There are a wide range of options available to suit differing needs (such as spouse’s benefits, escalation and guarantee periods), which all have an impact on the annuity rate available. Shopping around for the best rate in the market is therefore crucial, especially if you smoke or have a medical condition as you could receive an enhanced annuity rate.

It is important to think carefully about the annuity options you choose, as once selected they can’t be altered in the future, even if your circumstances change.

Flexible access

Flexible access lets you dip into your pension while the remaining fund stays invested.

New pension rules were introduced in 2015, governing everything from how you access your pension to what can happen to your pension after you die.

Pensions are typically held outside of your estate, which means that should you die before fully accessing your pension, your beneficiaries can normally access your retirement savings without having to include them within any inheritance tax calculations.

The type of pension you have will determine how much your beneficiaries can claim and when they can claim it in the event of your death.

Defined Contribution Pensions

Your beneficiaries can usually access whatever is left in your pension via drawdown payments, a lump sum or buying an annuity. They will have two years to claim a death pension, after which point tax may be charged.

Generally, if you die before your 75th birthday your pension benefits can be received by your chosen beneficiaries tax-free. If you are 75 or older, they'll pay income tax on what they receive.

It’s also important to check that your plan allows the full use of options as some older plans may not, meaning your beneficiaries could find that the only option available to them is annuity purchase or to take a lump sum (which may not be the most tax efficient option).

There may also be tax implications for your beneficiaries if the amount you leave behind in your pension, when added to the amount of pension accessed before death, exceeds the Lifetime Allowance (currently £1,073,100).

Defined Benefit Pensions

Defined benefit schemes usually offer lump sum death benefits and scheme pension.

The lump sum death benefit will usually be a set amount or a multiple of salary. Lump sum death benefits are tax-free if the member dies under age 75, the lump sum is within the member’s lifetime allowance and it is paid within two years of the scheme administrator becoming aware of death. Lump sum death benefits are usually only payable on death before retirement.

A scheme pension is usually based on a reduced percentage of the member’s pension entitlement, for example 50%.

On death of the member the scheme pension can only be paid to a ‘dependent’ which means a spouse or civil partner, your child aged under 23 (or older but dependent due to a disability), any of your financial dependents or anyone mutually dependent on you.

The scheme pension is taxable as income regardless of the member's age when they die.

You should check the scheme rules so that you are aware of the death benefits available under your own scheme.

Annuity

If purchased, annuity death benefits can include guaranteed periods, joint life/nominee annuities and value protection. Paid tax free if the original annuitant was under 75 when they died or taxed at the marginal rate of the recipient if the annuitant was 75 or over when they died.

If death benefits haven’t been purchased by the annuitant at outset, then nothing is payable when they die.

State Pension

It’s possible to pass on your State Pension payments after death but this can only go to your spouse or civil partner. The main pension rule governing State Pensions in death is whether you reached State Pension age before or after recent State Pension changes came into effect on 6 April 2016. Your spouse or civil partner will need to be over State Pension age to claim extra payments from your State Pension.

If you reached State Pension age before 6 April 2016 and receive the Basic State Pension, your spouse or civil partner may be entitled to some basic State Pension, which is based on your National Insurance Contribution (NIC) record.

However, this is only applicable if they haven’t built up a full basic state pension in their own right and will only be of benefit if your NIC record is more complete than theirs. Your spouse or civil partner will not get any basic State Pension if they remarry or form a new civil partnership before they reach State Pension age. In some instances, it may be possible to pass on a State Pension lump sum on death and your spouse or civil partner could qualify for bereavement benefits.

If you contributed towards an additional state pension, such as the state second pension or the graduated state pension, your spouse or civil partner may be able to inherit some of this additional state pension if you die.

If you reached State Pension age after 6 April 2016 and (will) receive the new State Pension, your spouse or civil partner may be able to inherit an extra payment on top of their own State Pension entitlement.

You should contact the Pension Service to get information about your State Pension.

Points to Consider

It is important that you check the scheme or plan rules so that you are aware of the death benefit options for your beneficiaries.

It's also crucial that nomination/expression of wish forms are kept up to date and fully reflect your wishes. A death benefit nomination helps to guide the scheme trustees/administrators when exercising their discretion and they will rely on the most recent nomination form they have received. Nomination forms can normally be changed at any time, to reflect changing circumstances.

In respect of defined contribution pensions, the new rules around who can inherit make it even more important that nomination forms are correctly completed. If you want someone other than a dependent to inherit and would like them to have the option of inherited drawdown, you must name them on the nomination form – a lump sum can, however, be paid at the trustees’ discretion to a non-dependent even if there is a surviving dependent.

Speak to a member of Nockolds Wealth if you need assistance or to find out more.