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Glossary
Accounts such as these can be used to offset the asset of a deposit
account against the liability of a mortgage and only charge the borrower
interest on the difference. These accounts offer a high degree of flexibility,
but the ultimate decision must rest with the various interest rates available
on an all-in-one account against conventional mortgages and deposit accounts.
Some investors prefer to buy alternative investments such as antiques,
pictures, wine and classic cars. For those with knowledge and expertise in
their chosen area, this can be very lucrative. However, history has shown that
alternative investments are not without risk. Novices can have their fingers
burned unless they seek expert advice.
Conventional wisdom says that it is unwise to place all one's eggs in the same
basket. The process of asset allocation ensures that an investment portfolio
holds elements, such as equities, gilts, property, bonds, etc. to protect
against the significant reduction in value of any asset class. Smaller
investors will not have sufficient funds for full asset allocation. Hence, they
may be better advised to invest in collective schemes, such as unit or
investment trusts, or funds offering lower risk, such as life company
investment bonds. See Guaranteed
Equity, Income and Growth Bonds
Some investment products require you to tie up your money for a set Term to
qualify for (usually) enhanced benefits. For instance, Equity Bonds, Income and
Growth Bonds issued generally by life assurance companies have a maturity date
of normally 5 or 7 years. Some building Society accounts require the money to
remain untouched for extended periods. You should only invest money that you do
not require in a hurry in such products.
People often use the terms 'home insurance' or 'household insurance' in a
general way to refer to insurance that covers any aspect of their home and
belongings. However, these policies are usually split into separate sections
'buildings' and 'contents' and not all policies cover both. Buildings
Insurance, as opposed to Contents
Insurance, covers the structure of a building, including the
foundations, plus permanent 'fixtures and fittings' such as baths, fitted
kitchens, etc. The test is can it reasonably be removed and taken to another
home? If it can, then it is part of the 'contents' and it will not generally be
covered by a buildings policy. Buildings policies usually include outbuildings,
such as garages and garden sheds. Anyone with a mortgage should take out
adequate insurance to cover the re-building. Most mortgage lenders will insist
they do and it may work out cheaper to insure both contents and buildings
together.
Many investors have built up portfolios of residential properties, which they
let. Frequently, they borrow money on a "buy to let" mortgage and offset the
rental income against this cost. This can be very attractive as they benefit
from both the yield (rental income) and capital appreciation. As the stock
market has offered lower returns over the last few years, many investors have
moved funds into residential property. Some might say that this has fuelled the
rise in house prices. But, as the supply of rental property in the UK has
grown, yields have dropped. We are also looking at a period of lower rates of
increase in values. Investors who take out a "buy-to-let" mortgage should be
aware of these trends, avoid borrowing more than a reasonable percentage of the
overall value and budget for "void" periods when they are not receiving rental
income.
As opposed to income, is often described as the total assets of a person or
organisation minus their total liabilities. If this figure is negative they are
insolvent. The word can also be used in the sense of funds invested in a
company, either in the form of shares (share capital or equity) or loans (loan
capital).
CGT was first introduced in 1965. It is charged on real net gains realised on
the sale of an asset (i.e. profits after inflation) above a set annual level.
The main exemptions are owner-occupied property and chattels. Pension funds and
charities are exempt and no CGT is payable on assets realised as a result of
the death of the owner. Fixed-interest securities issued by both the government
and corporations in the UK are free of capital gains tax for most private
investors as are National Savings Certificates. Investors who think they are
liable for CGT should take professional advice as the rules for avoidance and
other reliefs are complex.
If you need to see a dentist, it can be an expensive as well as
an uncomfortable experience. The most popular type of scheme on the market to
prevent cavities from appearing in your wallet is a capitation plan. This is a
type of budget plan that spreads the cost of treatment. You save a certain
amount each month and this gives you access to most routine treatments.
Business analysts use this to represent the movement of funds through a
business during a given trading period, thus indicating the amount by which the
liquid resources have increased or decreased during that period. The movement
of funds can be shown in the form of a cash flow statement or forecast which
will provide information as to the sources and application of income and
capital during the period. It is as important for an individual as a company to
manage cash flow as part of their financial affairs to avoid "surprises", such
as unexpected overdrafts, which can prove expensive.
The Institute of Financial Planning is the UK professional body of those
committed to the development of the multi-discipline profession of Financial
Planning. Only those who have fulfilled the license and renewal requirements of
the Institute of Financial Planning can display the CFP license marks.
Certified Financial Planners will have MIFP, AIFP or FIFP after their name.
They will also operate on a fee basis. Frequently, a CFP will use
"Para-planners", effectively the equivalent of an articled clerk, to assist
them.
Nine out of ten families with children can get tax credits. Child Tax Credit is
a means-tested allowance for parents and carers of children or young people who
are still in full-time education. If your family has at least one child and meets the
other qualifying conditions you may be able to get Child Tax Credit. To find
out if you qualify, there are a number of links on the Inland Revenue website,
www.inlandrevenue.gov.uk. Alternatively, you can get an application
form from the Tax Credits helpline on 0845 300 3900.
Normally a payment to an intermediary for services rendered based on a
percentage of the value of the "deal". This is usually paid to the intermediary
by the product provider so there is often no direct fees paid by you.
The opposite would be a
fee that is fixed and agreed before the service is performed and is often paid by you.
People often use the terms 'home insurance' or 'household insurance' in a
general way to refer to insurance that covers any aspect of their home and
belongings. However, these policies are usually split into separate sections
'buildings' and 'contents' and not all policies cover both. Contents Insurance,
as opposed to Buildings Insurance,
covers your possessions, such as your television set, furniture, clothes, etc.
In other words, just about everything you would take with you if you moved.
While it is generally easy to determine whether an item is part of the
buildings or part of the contents, sometimes this is not immediately apparent
and policyholders should read the small print if in doubt. The test is can it
reasonably be removed and taken to another home? If it can, then it is part of
the 'contents' and it will not generally be covered by a buildings policy.
When buying and selling a house, conveyancing is the process of
transferring the title of a property from one legal party to another. In most instances,
the conveyancer will be the solicitor of the purchasing party. Some solicitors
outsource this function to a specialist firm, which can offer savings.
A form of insurance policy that pays out on the diagnosis of a specified serious or terminal
illness rather than a death claim. Dread diseases include myocardial infarction,
coronary artery bypass surgery, brain paralysis, chronic kidney failure,
cancer, paralysis, and major organ transplant. These illnesses require hospitalisation,
a long period of convalescence, and may lead to death. Regular
life insurance only pays when the insured passes away. It cannot help with the
financial burden of expensive medical treatments. Insurance on dread disease
and cancer has become increasingly popular as we become more informed about
serious illness. Schemes are decided at the time of insurance and professional
advice as to their benefits is strongly recommended.
Simple operations and medical treatments can be carried out without a patient
staying overnight. This obviously offers considerable savings. Some private
medical insurers offer enhanced terms to policyholders who accept day patient
or outpatient treatment.
Debt management principally relies on reducing debt where possible and ensuring
that the borrower is paying the lowest possible interest rate. Where a borrower
in over extended and in crisis, there are a growing number of organisations
that can offer assistance and advice on debt consolidation. They can also offer
advice on the pitfalls.
Many
mortgage lenders offer the incentive of a discount off their Standard Variable
Mortgage Rate for a period, often two years. This will offer lower payments
at the start of your mortgage. However, this may mean that there is a period
after that when the lender may charge for any alteration of the mortgage. The
size of the discount depends on the size of your loan and the amount you borrow
in relation to the value of your home. Other mortgage scheme incentives are a
fixed interest period or a cash sum. The benefits of each will depend on the
individual circumstances of the borrower.
If you wish to pay off your mortgage early, some lenders will charge an early
redemption penalty. This is clearly a waste of your money! Borrowers are
advised to read the small print and avoid this charge where possible.
Some savings and deposit accounts require notice
of one month or more to withdraw funds to qualify for higher interest
rates or other terms. The growing breed of easy access savings accounts offer no
notice or other barriers to accessing your own money and offer pretty much the
same levels of return. These accounts should be much more attractive to the
average saver.
Equities
is the term given to investments in a company listed on a stock exchange,
as opposed to fixed-interest investments and property. It is a general
term for ordinary shares having an interest in profits of a company. Equity
markets is a general term for shares on the London Stock Exchange and
similar exchanges across the world.
Older
homeowners can release the equity in their property to boost their income or
receive a cash lump sum, or a combination of both whilst still securely occupying
their own home. Homeowners generally need to be aged at least 60 to take
advantage of such schemes that require them to sell their home, or a percentage
of it, to a plan provider. The person can usually remain in the house
rent-free until the last remaining borrower dies (if a couple) or is transferred
into long term care. When the property is sold, the plan provider reclaims
their percentage with the remainder going towards specified beneficiaries.
However, the same percentage of any future rise in the value of the
home would also belong to the plan provider. Alternative schemes require the
homeowner to take out a fixed rate interest only mortgage on their property
and use the borrowed money to purchase a regular income. However, some home
income plans earned a very bad reputation in the late eighties and early
nineties and as a result have now been outlawed. Membership of the Safe Home
Income Plans (SHIP) organisation has helped restore confidence in the market.
For inheritance tax (IHT) purposes, an individual's estate
is his/her total assets less total liabilities. Proper estate/inheritance
tax planning could save your family hundreds of thousands of pounds. IHT is
essentially the tax charged on what you leave behind when you die, formerly called death duties. IHT
will be due at 40% of the value of all the assets you leave behind on death above the
first £263,000. Professional advice should be sought to make the best use of
the various exemptions and other avoidance schemes using gifts and other
transfers. Since many of these require decisions to be made several years in
advance of death. Proper estate planning can offer major advantages.
Investment that aims to avoid companies that are involved in certain activities
such as the manufacture of armaments, cigarettes, animal research or alcohol,
or that are involved in trade with countries deemed to have infringed certain
human rights. They can also be investments in companies where the emphasis is
placed on the protection of the environment, charitable works and medical
research or other benign activities.
Normally a payment to an intermediary by you for services rendered that is fixed and
agreed before the service is performed. The opposite would be a
commission normally based on a percentage of the value of the "deal"
and paid by the product provider to the intermediary.
One
of the recent mis-selling scandals has been based on advisers incorrectly advising
members to leave a final salary pension scheme which, owing to the cost
of provision, are becoming increasingly rare. These are schemes that offer predetermined
levels of pension benefit, usually expressed as a fraction of final
salary, which give a higher pension than most other schemes. A typical scheme
would offer a pension of one-sixtieth of the final salary for each year of
service within the company or as a member of the scheme. If you are lucky enough
to be in a final salary pension scheme, it is almost certainly not worth leaving
it. But, although the ultimate level of pension benefits in retirement is
determined, the cost of provision is not and accordingly contributions are indeterminate
and need to be reviewed on a regular basis by a professional
adviser.
The word Ombudsman originates from an independent arbitrator sponsored by the
state in Scandinavian countries. In the UK the term is used to describe a
parliamentary commissioner appointed to impartially arbitrate complaints by the
public against major industries or institutions. The Financial Ombudsman
Service has been set up by law to help settle individual disputes between
consumers and financial firms and provides consumers with a free, independent
service for resolving disputes. They can consider complaints about a wide range
of financial matters from insurance and mortgages to savings and investments.
But the service is not a regulator ('watchdog'), a trade body or a consumer
champion. Neither can it give personal advice about financial matters or debt
problems. Their role is to settle disputes, without taking sides. You do not
have to accept any decision it makes and are always free to go to court
instead. But, if you accept an ombudsman's decision, it is binding on both you
and the firm. Telephone 0845-080 1800 or visit
www.financial-ombudsman.org.uk for further information.
It
is often difficult to see and understand how the long-term effects of financial
decisions that we make now impact on both our own lives and on those who might
inherit our estate. Prudent investors will plan for the future and are well
advised to seek professional advice. See
Certified Financial Planner.
The Financial Services Act 1986 established a framework for the protection
of investors which requires the registration and monitoring of investment
businesses under the ultimate control of the Treasury. This Act was superseded
by the Financial Services and Markets Act 2000, which formed the Financial
Services Authority (FSA) as an independent non-governmental body with the
authority to regulate investment business. As from the beginning of 2005, the
FSA has also taken over responsibility for the regulation of General Insurance
and Mortgages. The FSA has four statutory objectives which are to maintain
confidence in the financial system, promote public understanding of the
financial system, secure the appropriate degree of protection for consumers and
reduce the extent to which it is possible for a business carried on by a
regulated person to be used for a purpose connected with financial crime. More
information, including the ability to search for regulated firms or
individuals, is available on their website,
www.fsa.gov.uk.
A security (or stock) that carries a fixed rate of interest (coupon), normally
payable for a predetermined period. Issuers of such investments can be
governments, local authorities and corporations. Such stock has many different
forms but is generally known as gilts for UK government issues and loan stock
for corporate issues. When you buy a gilt, you are lending the government money
in return for regular interest payments and the promise that the nominal value
of the gilt will be repaid (redeemed) on a specified later date. The rate of
interest will be in the name of the gilt (e.g. 6% Treasury 2028 is a gilt
issued by the Treasury which pays 6% interest p.a. and is repayable in 2028).
You don't have to hold a gilt until it is redeemed as they can be traded just
like shares and their prices continually move in line with supply and demand.
The main influences on prices are the market's view of future interest rates
and inflation. Prices tend to fall when interest rates rise and when inflation
is on the increase. Low interest rates and low inflation makes gilts more
attractive. Since this is the opposite of what equities might do, gilts can
form an important asset class in a balanced portfolio. Index-linked gilts pay a
lower rate of interest than fixed-interest gilts, but both the rate of interest
and the amount paid on redemption rise in line with inflation. If the gilts are
redeemable, the redemption sum will be paid to whoever is the owner at the
redemption date. Redeemable gilts are classified as longs (redeemable after
fifteen years or more), mediums (redeemable between five and fifteen years) and
shorts (redeemable within five years). The amount redeemed will not be the
market price of the bonds at the time of redemption, but its nominal value
(usually £100). You can buy gilts directly, or you can buy shares in investment
and unit trusts that invest in gilts. The direct route tends to be less
expensive, and the Bank of England offers a low cost service. Income from gilts
is liable for income tax but capital gains are tax free.
Some
mortgage lenders will offer a period, normally 2 to 5 years, where the interest
rate is fixed after which it will revert to the Standard Variable Mortgage
Rate. This can make budgeting for mortgage payments easier for borrowers
in the first years. Sometimes the interest rate is also at a discount as
a further incentive. However, this may mean that there is a period after that
when the lender may charge for any alteration of the mortgage. Other mortgage
scheme incentives are a discounted variable rate for a set period or a cash
sum. The benefits of each will depend on the individual circumstances of the
borrower.
All companies with five or more employees are obliged to, at the very
least, offer employees the ability to contribute to a personal pension scheme.
Many companies will also contribute to such schemes. However, some employers
have gone one stage further and provide their own company scheme. Such schemes
are usually highly advantageous to the staff. Nevertheless, there have been some
notable failures, often caused by the collapse of a company, when there are not enough
employees contributing into the scheme to pay pensioners what they might have
expected. As a result, many employers are not offering this facility to new
employees. The rules and regulations are complex and professional advice is
strongly recommended, particularly regarding the merits of leaving a scheme.
These bonds are issued generally by life assurance companies with a maturity
date of normally 5 or 7 years. From a single premium (investment), they provide
investors with either a guaranteed amount at the maturity date or a guaranteed
regular income until maturity at which time the original premium is returned.
Many Bonds are now using derivative products, such as futures and options, to
smooth performance. However, the word to be careful about here is "guaranteed".
These Investment Bonds are not always without risk, as many investors found
with the so called "precipice bonds" which failed to return capital invested
when an event, such as the stock market index falling below a set level,
triggered a substantial reduction in the capital returned when the bond
expired. A professional adviser will be able to assess the risk and advise you
of the most appropriate investment for your needs.
Many insurance experts advise it's worth picking a critical
illness or other protection policy with guaranteed premiums. Most
term policies now work this way, with the advantage that the monthly
cost is fixed throughout. The alternative is a reviewable policy,
which can become much more expensive as the policyholder gets older.
Typically, a reviewable policy will recalculate premiums every 10
years. Whole-of-life policies are normally reviewable, but the
increasing costs mean quite a large proportion of policyholders let
their insurance lapse in later life. Another way to cut costs is to
pick a policy that provides reducing cover over the term. This is a
common feature on cheaper life assurance policies, and also
available for critical illness. Typically, the policy benefit
matches the outstanding capital on a repayment mortgage, which
gradually decreases over the mortgage term.
If you are unable to pay your mortgage, and your property is repossessed and
sold, the lender can still chase you for a shortfall if the amount raised by
the sale doesn't cover your debt. A mortgage indemnity allows a mortgage lender
to recover the costs incurred from a repossession by pursuing the former owner
for the difference between what the property was sold for and what the former
owner still owes under the mortgage. Some mortgage companies have insisted that
borrowers take out an insurance policy to cover the potential liability - know
as a mortgage indemnity guarantee. MIGs are most common where the deposit being
put down by the borrower is less than 10% of the sum borrowed. Typically a MIG
will add £1,600 to the cost of a £100,000 mortgage. However, MIGs have come in
for a lot of bad publicity, and are not as common now as they used to be. Some
lenders have abandoned them altogether.
The total amount that you are able to borrow from a mortgage
company is based on a multiple factor of the income of the
borrower(s). This is to ensure that the borrower has a reasonable
chance to meet the monthly payments. A typical lenders' income
multiples would be for a maximum loan of 3 times the main income
plus 1 times the second income or 2.5 times joint incomes if higher.
If the ration of Loan to Value (LTV) is lower, say around 70% or
less, the multiples may be increased.
According
to Norwich Union, of all the people currently unemployed, nearly 2 million
people are off work for more than six months due to a long-term illness or
injury. Statistically, you're almost twenty times more likely to suffer a breakdown
in health lasting more than six months than you are to die before you are
65. Before April 1995, you could qualify for long-term sickness benefit if you
were rendered incapable, by illness or disability, of doing your own job of work.
Now the rules state that you will only qualify for long-term sickness benefit
if you cannot do any job of work. If you do qualify, it's currently around only
£63.25 a week before tax, which doesn't go that far. There are a lot of
protection products to select from, such as private medical insurance, mortgage
protection cover, critical illness cover, accident, sickness and unemployment
cover, that all, to varying degrees, overlap with each other. The products you
need will depend largely on your life stage and what you and any dependants
would stand to lose if you died or became unable to work. The features and
benefits of the various schemes are complex and it is worth seeking
professional advice, as some cover can be very expensive.
"But in this world nothing can be said to be certain, except death &
taxes", said Benjamin Franklin in 1789. Income tax is payable on all forms of
income received by citizens in the UK. Tax on earnings is normally deducted
from an employee's pay packet via PAYE (Pay as You Earn). Other income must be
declared in a tax return and assessed by the Inland Revenue according to
current tax rates (Basic rate (currently 10% on first £2,020 and 22% on next
£29,380) and Higher rate (currently 40% above £31,400)) less allowances. You
may well need professional advice if you have complex tax affairs, such as
multiple sources of income, or are self-employed. More information is available
from the Inland Revenue website,
www.inlandrevenue.gov.uk.
The Financial Services Act in 1986 introduced the concept of an Independent
Financial Adviser (IFA). IFAs are obliged to make recommendations to clients in
the light of all the various financial products available. They can accordingly
be impartial in their recommendations on the basis of offering "best advice".
All IFAs must offer their clients the ability to pay an agreed fee as opposed
to the IFA deriving a commission from the sale of an investment product. The
alternative would have been advice from a tied
agent or a direct salesman who can both only offer advice on the
products of one provider. However, the biggest change surrounding the provision
of financial advice has been introduced by the Financial Services Authority
(FSA) on the 1st December 2004. The new rules, known as "de-polarisation", will
allow some tied agents (such as some banks and building societies), as well as
some advisers who are currently independent, to become multi-tied. The
multi-tied adviser will offer consumers the choice of products from a
limited range of companies they have selected. Some organisations feel that
with these changes comes the added risk of increased consumer confusion, making
it a more important time than ever to highlight how the advice process works
and help consumers to decide what is the right type of advice for them. See
Multi-tied agents, Tied Agents
and Key features.
IHT are the death duties that replaced capital transfer tax in the 1986 Finance
Act. More than 96% of estates do not have to pay any inheritance tax because
they are below the threshold, which after 6 April 2004 is £263,000. A person's
estate includes the total of everything owned in his or her name, the share of
anything owned jointly, gifts from which he or she keeps back some benefit, for
example, a house still lived in and maintained, although given to someone else
and assets held in trust from which he or she gets some personal benefit, for
example, an income. If your estate (including assets held in trust and any
gifts you have made within seven years of your death) is less than the
threshold, no inheritance tax will be due. However, some outright gifts are
exempt. To make best use of the available reliefs, careful Estate Planning is
required, which may require professional advice. See
Estate Planning.
More complex operations, where a patient must be kept in hospital overnight,
are obviously more expensive than simple operations and medical treatments that
can be carried out without an overnight stay. Some private medical insurers
offer enhanced terms to policyholders who accept day patient treatment. The
exact cover required will depend on personal choice and cost.
A borrower's monthly payments will only cover the interest on the
outstanding loan, without reducing the loan itself. The advantage is
that monthly outgoings will probably be lower than those on an
alternative repayment mortgage, where each monthly payment pays off
interest and something towards the quantum of the loan. With a
repayment mortgage, the loan is reduced to zero at the end of the
term. The disadvantage of an interest only loan is that the loan is
still outstanding and it will either require an investment built up
elsewhere to pay it off, such as an endowment policy, or the sale of
the property to release funds. Professional advice is strongly
recommended to avoid unwelcome surprises.
A collection of investments held by or to the
account of an individual, corporation, fund or trust. Normally the portfolio
will have predetermined objectives, such as capital growth or income. It may
also be managed in a certain way such as a discretionary portfolio, or even
contain certain types of investment, such as an equity portfolio or unit trust
portfolio. See Asset Allocation.
ISAs
are an ideal way to build up a fund to, for instance, pay off a mortgage. They
were introduced on 6th April 1999 to replace PEPs and TESSAs. They are not an
investment in their own right but are a tax-free wrapper in which you can shelter
investments. Adults living in the UK can invest a maximum of £7,000 per year
in each tax year or up to £3,000 in a mini cash ISA. Investment may be made
in three components, which are equities, cash and life assurance. Stock and
share investments that can be held in an ISA include unit trusts, open-ended
investment companies (OEICs), investment trusts, ordinary shares, preference
shares and fixed interest corporate bonds. Income from some ISA investments
(corporate bonds) is tax-free and you don't have to report it on your tax return.
Capital gains are also exempt from CGT. ISA plans are sold by stockbrokers,
IFAs, fund managers, banks and other authorised financial institutions. You can
buy a plan and take advice on what to put in it, or you can have a
'self-select' ISA and make your own decisions. But, investment is not without
risk. Careful choice should be taken of the funds invested. For instance, many
investors lost out when technology shares tumbled. As the fund grows,
professional advice should be sought to ensure the capital is protected as much
as possible.
All advisers must provide customers with two 'keyfacts' documents, explaining
their status, tied, multi-tied or independent, the services they offer and a
menu of their charges. This should enable consumers to properly understand the
value and cost of the adviser's proposition, and to shop around for the best
type of advice for them.
This is insurance against any legal liability to pay compensation and court
costs where the insured has been found negligent in respect of injuries
sustained by another person or damage to property. It may or may not be
included in other insurance schemes, which is worth checking.
Literally, a life insurance policy will pay a lump sum on the death of the
insured. This is usually called Term Assurance and the insurers liability ends
at the end of the term. Term assurance is often used in conjunction with a
mortgage to pay off the outstanding loan in the event of the death of the
borrower. This might avoid the deceased dependants being without a roof over
their heads. In the case of life policies that include investments, which have
a cash value, in addition to the life cover, a savings element provides
benefits which are payable before death. In the UK, endowment assurance
provides the policyholder with life cover or a maturity value after a specified
term, whichever is the sooner. Many mortgage lenders will insist that a borrow
takes out appropriate life cover.
(Assurance is peculiar to some English Insurance companies but means the same
as insurance where life insurance is concerned).
This is the ratio of a mortgage sum to the value of the property to be
purchased. If the LTV exceeds 80%, some mortgage lenders will charge a higher
rate of interest or some other penalty to accept the higher risk.
The current maximum limit is £7,000 that can be invested by an individual in an
ISA during one tax year. See Individual Savings Account (ISA) for more details.
The current limit is £3,000 that can be invested by an individual in a Mini
Cash ISA during one tax year. The investment must be held in cash and, as it is
not possible for an individual to take out more than one ISA a year, it is not
possible for the investor to also take out a Maxi ISA, even to top up to the
£7,000 limit. See Individual Savings Account (ISA) for more
details.
NB. You can, however, take out an additional Mini Stocks and
Shares ISA to the value of £3,000 and an insurance ISA of £1,000,
making a total of £7,000.
This insurance will pays your mortgage for a limited period if you can't work
or are made redundant.
Since the introduction of the Financial Services Act in 1986, the biggest
change surrounding the provision of financial advice was introduced by the
Financial Services Authority (FSA) on the 1st December 2004. The new rules,
known as "de-polarisation", will allow some tied agents (such as some banks and
building societies) to become multi-tied, as will some advisers who are
currently independent. Under the previous system, there were only two types of
financial adviser, independent (who advise on all products in the market) and
tied (who can only advise on products from one company). Under the new rules a
new type of adviser, called "multi-tied", is created. The multi-tied adviser
will offer consumers the choice of products from a limited range of companies
they have selected. Some organisations feel that with these changes comes the
added risk of increased consumer confusion, making it a more important time
than ever to highlight how the advice process works and help consumers to
decide what is the right type of advice for them. See
Independent Financial Adviser, Tied
Adviser and Key features.
Some savings and deposit accounts require notice
of one month or more to withdraw funds to qualify for higher interest
rates or other terms. The growing breed of easy access savings accounts offer no
notice or other barriers to accessing your own money and offer pretty much the
same levels of return. These accounts should be much more attractive to the
average saver.
Simple operations and medical treatments can be carried out without a patient
staying overnight. This obviously offers considerable savings. Some private
medical insurers offer enhanced terms to policyholders who accept day patient
or outpatient treatment.
The long-term nature of pensions saving requires careful planning to ensure
that the complex rules are taken advantage of early enough to make a
difference. The amount required to fund a pension often surprises, and
frightens off, savers. However, professional advice at an early stage is
strongly advised to maximize benefits.
A
premium bond is a returnable £1 deposit entered for monthly draws for tax-free
prizes of between £50 and £1,000,000. There is a maximum holding of
30,000 premium bonds per person. They are administered by the Department of
National Savings and the prize fund is distributed to winners drawn at random
by ERNIE (Electronic Random Number Indicator Equipment). Premium bonds are
eligible for prize draws once they have been held for a complete calendar
month, following the month in which they were bought. Each bond is then
eligible for every subsequent draw. Statistically speaking, if you have the
maximum allowance of £30,000, with what National Savings calls 'average luck',
you can expect to win 10 to 12 times a year. If you win the minimum prize of
£50 twelve times a year that's an effective return of two percent on your
capital. If you have £5,000 of bonds, statistics from National Savings show you
have a one in 6.5 chance (or 13 to 2 if you prefer bookies' odds) of winning
any of the 550,000 prizes every month.
Some savings and deposit accounts
require regular contributions to qualify for higher interest rates or other terms. The
growing breed of easy access savings accounts offer no notice or other barriers to
accessing your own money and offer pretty much the same levels of return. These
accounts should be much more attractive to the average saver.
Some financial advisers will ask for a retainer fee to keep your name on their
client list. This might be presented as an annual subscription, a quarterly
report service, an annual review or other service. The fee may or may not be
deductible from any other fees you generate from requesting further advice.
The assessment of the viability of taking insurance policies to protect certain
risks as against the cost of bearing them oneself. This can apply to
individuals where in business they may assess the risk of a key executive dying
and cover him with insurance, or with insurance companies where they may decide
to reinsure a certain proportion of their risks elsewhere.
The State Second Pension replaced the State Earnings Related Pension Scheme
(SERPS) in April 2002 to pay a top-up pension based on employed people's
earnings. It may be better for anyone earning over an upper limit to opt out in
favour of a private or occupational pension scheme. As there will be less and
less State pension money available to go around, it is vital that we all make
extra provision for our retirement through some form of savings vehicle. A
professional adviser will be able to help you choose.
For those that are self-employed or otherwise unable to demonstrate a regular
income, some mortgage lenders allow borrowers to "self-certify" their earnings
to calculate the amount that can be borrowed. Expect to pay a premium of a
percent or two over the Standard
Variable Mortgage Rate of interest to use such a mortgage.
SIPPS are a personal pension where you or your appointed fund
manager is directly responsible for choosing from the wider range of
investments that other Pension Schemes allow. With a traditional
personal pension, your choice is limited to funds run by the
insurance company. With a SIPP you can invest in the shares of any
company listed on a stock exchange recognised by the Inland Revenue,
which is appealing to people who are interested in the stock market
and think they have the knowledge and skill to get superior
performance themselves. SIPPs incur higher charges than normal
personal pensions of around 2% per annum as opposed to charges on a
stakeholder pension that are capped at 1%. This really makes SIPPs
only suitable for those with at least £50,000 to invest, and
preferably nearer £100,000. Any less, and the charges will be
disproportionately high. However, the new breed of internet SIPPS do
allow individuals to manage their own pension investment portfolios
at lower charges.
Stakeholder pensions were introduced in April 2001 to provide a low-cost,
transparent and flexible way for people to save for their retirement. Charges
are capped at 1% per annum. Money invested in stakeholder pensions will be
invested in the stock market. On retirement a quarter of the accumulated
capital can be taken out as a tax-free cash sum, and the rest has to be used to
buy an annuity that pays the retirement pension. Employers with five or more
employees who do not offer any kind of pension scheme will have to provide
access to a stakeholder scheme. £3,600, including basic rate tax relief, can be
invested in the stakeholder pension each year. Basic rate tax of 22% will be
claimed on your behalf by the pension company running the pension. So, the
maximum you actually pay is £2,808 per year. Many investors would be better
served with a personal pension plan, that mostly have the same charging
structure, and a professional adviser will be able to recommend an appropriate
product.
Government tax on the transfer of assets imposed by the Inland Revenue who need
to stamp documents to complete the purchase of such assets. Currently, stamp
duty on share purchases applies at the rate of 0.5%. It does not apply to sales
of shares. Stamp duty on property purchases applies on a sliding scale. For
property over £60,000 it is 1% of the purchase price. Over £250,000 it is 3%,
and over £500,000 it is 4%.
Structured
investment products use futures or derivatives contracts to provide performance,
rather than investing in the underlying assets. Inevitably, we will
see more investment products that use structured vehicles to smooth performance.
However, these are not always without risk, as many investors found
with the so called "precipice bonds" which failed to return capital invested
when an event, such as the stock market index falling below a set level,
triggered a substantial reduction in the capital returned when the bond
expired. A professional adviser will be able to assess the risk and advise you
of the most appropriate investment for your needs.
Where a mortgage borrower has a poor credit record, such as County Court
Judgments (CCJs) or bankruptcy, they can find a loan from the growing number of
Sub-Prime lenders. However, borrowers can expect to pay several percent over
the Standard Variable Mortgage
Rate to access these loans. A professional mortgage adviser will be
able to advise on the most suitable loan.
As our financial affairs get more complex, the opportunities to avoid paying
tax by careful use of the rules and regulations become more relevant. In the
same way as with Financial Planning, prudent tax management to avoid Income Tax
and other taxes, particularly Inheritance Tax (IHT) can be very beneficial. A
professional adviser will be able to help you minimize the tax you pay now and
in the future. See Inheritance Tax
(IHT).
The Financial Services Act in 1986 introduced the concept of "polarisation" of
financial advice where an Independent Financial Adviser (IFA) is obliged to
make recommendations to clients in the light of all the various financial
products available as opposed to a Tied Adviser or a direct salesman who can
both only offer advice on the products of one provider. However, the biggest
change surrounding the provision of financial advice has been introduced by the
Financial Services Authority (FSA) on the 1st December 2004. The new rules,
known as "de-polarisation", will allow some tied agents (such as some banks and
building societies), as well as some advisers who are currently independent, to
become multi-tied. The multi-tied adviser will offer consumers the choice of
products from a limited range of companies they have selected. Some
organisations feel that with these changes comes the added risk of increased
consumer confusion, making it a more important time than ever to highlight how
the advice process works and help consumers to decide what is the right type of
advice for them. See Independent Financial Adviser,
Multi-tied Agents and
Key features.
An indirect tax levied on the value added in the production of a good or
service, from primary production to final consumption. A company or trader
registered for VAT pays suppliers VAT additionally to the cost of goods or
services purchased, which is known as input tax. VAT is also added to the sales
cost of their product to customers, which is known as output tax, which is
borne in full by the consumer. The difference between output tax and input tax
is payable to the government through Her Majesty's Customs and Excise. In the
UK, housing, books, education, health services, basic foods, exports and some
financial services are excluded from the tax, which has been 17.5% since April
1991.
A type of mortgage agreement in which, according to variations in the Base Rate
(as set each month by the Bank of England) and other market rates, the interest
rate of the mortgage is varied by the lender.
VCTs are a type of investment trust that invests in small unquoted companies
with assets of under £15 million, including AIM and OFEX companies. They are
designed to attract risk capital from higher rate taxpayers by giving them tax
concessions. The tax benefits they offer are 40% capital gains tax deferral,
provided the shares are held for a period of no less than 3 years, 20% income
tax relief on the amount of the original investment and all dividends are tax
free and all gains on disposal after 3 years tax exempt. But when the shares
are sold, the original capital gains tax liability will be re-triggered. VCTs
are only allowed to invest in companies under a certain size, and there is a
limit on how much they can invest in any one company. The idea is that they
must apply their funds to genuinely risky entrepreneurial ventures. It is
therefore worth considering an investment term of even as long as 8-10 years to
see the full benefits. Like investment trusts, VCTs are quoted on the London
Stock Exchange and their share price may trade at a discount to net asset
value.
Where a property is available to be rented, voids are periods when the property
is empty between tenants. Where the property in question has been purchased as
an investment, for instance on a "buy-to-let" mortgage, there will not be any
income during void periods to repay the mortgage or other outgoings. It is
therefore important to budget for reasonable "voids" when considering such an
investment.
Whole-of-life insurance, as opposed to term insurance, lasts throughout your
life so your dependants are guaranteed a payout. It should not be a surprise
that it can cost substantially more than term assurance, which expires after a
set period. Care should be taken when considering whole of life policies and
professional advice is strongly recommended. Schemes can be attractive as they
give you life cover and have a surrender value at any time. But, to surrender
and get your hands on the money, you have got to cancel the policy and lose the
life cover. Also, some policies are reviewable. You may find that, after 10
years, your insurance company tells you that either your premiums are going up
or you are going to have to accept a lower level of cover.
A general term for the rate of income from an investment expressed as an
annualised percentage and based on its current capital value, i.e. the
relationship between income generated and the value of the principal. Yield is
normally quoted as a gross annual equivalent. See: annual percentage rate,
compound interest, coupon. There are a number of different types of yield
applied to various types of investment. Most are quoted as a gross figure (i.e.
without making deductions for charges and tax) and some as net figures (showing
the actual return to the investor before higher rates of tax). Where the
investment fluctuates in value exact calculation can be quite complex and often
shorter approximate formulas are used.
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