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Category : News

Budget 2015 – Good or Bad News for Pensions?

So Budget 2015 has come and gone and everyone is now getting a little clearer about the impact that it will have on his or her income. Of course the budget is about a lot more than income tax and USC rates though, so we’ve taken a look at how Budget 2015 will impact an area that is close to our hearts – your pension fund and future pension planning.

So let’s take a look at all of the impacts;

 

Some areas of “no change”

First of all, there were a large number of areas that remained untouched in the budget in relation to pensions. The main ones of note are;

 

  • Marginal Rate Tax Relief: This is the one we always breathe the biggest sigh of relief about! The government have wisely continued the allowance of tax relief at your marginal (highest) rate on your pension contributions. This is really important to encourage people to save for their future.
  • Tax Relief Contribution Amounts: There are no changes to the percentage amount of your income that you can attract tax relief on, in respect of pension contributions. This percentage amount is driven by your age.
  • Net Relevant Earnings Limit: The percentage amount identified above is then applied to your income, in determining your individual maximum pension contribution that is allowable for tax relief. However there is a limit of €115,000 of your income or “Net Relevant Earnings” that can be used in calculating the maximum contribution allowable.
  • Standard Fund Threshold: This is effectively a cap on the size of pension fund that you are allowed to build up. There was no change to this in Budget 2015, the limit remains at €2m.

 

The Dreaded Pension Levy

The pension levy attracted a huge amount of commentary prior to the budget. This was an extremely penal levy applied to pension funds that was introduced in 2011. At that stage, the exchequer took 0.6% of the value of everyone’s private pension funds to fund jobs initiatives. This was then increased to 0.75% for 2014.

The good news is that the government have stuck to their promise of reducing the levy to 0.15% in 2015, and then totally abolishing it at the end of 2015.

This levy was really bad news for pension holders and was seen as a very unjust way for the government to raise revenue. First of all, there was a belief that it unfairly impacted private sector workers as the levy applied to all of their pension funds, unlike public sector workers. And secondly, on the one hand the government wants everyone to take responsibility and provide financially for themselves in retirement, and then they turn around and raid your savings!

While the percentage amounts might appear small, they really add up. If you ignore any investment gains or losses, a pension fund of €100,000 at 30th June 2011 will have been reduced by €2,700 as a result of the levy, by the time it ends in 2015. Good riddance to the pension levy!

 

Changes in income tax rates and USC rates

The top rate of income tax is reducing from 41% to 40% (good news), while USC rates are changing – reducing at the lower levels and increasing for earnings in excess of €70,000 and again for earnings in excess of €100,000 for self employed people.

Income tax relief is allowable on pension contributions. However there is no relief from USC. As a result of the reduction in income tax rates and the increase in USC rates, the effective tax relief on pension contributions for higher rate tax payers is reduced by about 2%.

What does this mean for you? Well, if you are a higher rate taxpayer and are in a position to make a personal / AVC lump sum payment to your pension, you are better off doing this in 2014 and indeed you can backdate this against 2013 taxes if paid before the Pay & File deadline.

 

So our overall verdict is that this was a good budget for pensions because of the reduction in the pension levy from 1st January next. Thankfully approved pension products remain as the most tax advantageous method of looking after your financial challenges in your later years.

What’s it costing you to keep your Cash on Deposit?

How times have changed for savers! It wasn’t so long ago that some deposit providers were offering retail savers interest rates of over 4% p.a.  As well as attractive returns, the capital was protected with an unlimited government guarantee through the Eligible Liabilities Guarantee (ELG) scheme.

But today we see interest rates that have decreased dramatically (now close to zero) and the ELG scheme now closed, meaning no protection for deposits over €100,000. Savers today are also now facing an increased DIRT rate.

And maybe the final straw emerged at the start of May as the OECD in its biennial economic outlook, called on the ECB to loosen policy even further “to move inflation more decisively towards target” and to be prepared to adopt unconventional measures such as negative interest rates or quantitative easing to prevent a drift into deflation. What does this mean to you and me? Well now you would pay the bank for letting them keep your money!

So now just might be the time to re-examine the approach you’re taking with your hard-earned nest egg and maybe take a look at alternative investments for your long-term savings.

 

Why shouldn’t you just hold cash?

Well apart from the reason outlined above, where soon you might be actually paying for the privilege, people often think that holding cash is less risky than investing. However this isn’t necessarily so. It’s worth considering some of the reasons why it might be preferable to move some or all of your cash into investment funds. While this approach may not be for everyone, there are many savers who are not happy seeing themselves getting gradually poorer.

Inflation risk: This is often overlooked especially when interest rates are low.  Any price inflation will erode the purchasing power of your savings as costs rise.

Lost opportunities: Sitting on cash can mean missing potential growth in market upswings. If out-of-favour investments can be bought at a low price, then you may get a higher return over time.

No return on investment: For savings to grow, investment returns in equities and bonds can help build assets in a way that cash can’t particularly in a low/no interest rate environment.

Tax advantages: Returns from investment policies through life assurance companies grow tax free, and tax is only payable when the policy is encashed (or after 8 years, whichever is earlier).  This compares with tax paid on the interest on deposits, which is usually applied yearly.

Time horizon: it’s wise to have cash in hand to take advantage of investment opportunities, but a portfolio that is too conservative may not generate enough returns to reach your financial goals – saving for a deposit for a house, building up an education fund for your children etc.

 

How can I get the best return with the least possible risk?

Getting the best return for you may not be about getting the highest return possible.  It’s about how much risk you’re comfortable taking to achieve a particular return on your investment.

To do this, we can help you to identify your own risk profile. In order to achieve higher returns, you must be willing to accept some risk. However you can tailor your investment to suit your attitude to risk.  For example, with Standard Life’s MyFolio Active funds, you can select from five funds.  Each holds a combination of lower risk assets and higher risk assets, which are adjusted to maximise the potential returns for your attitude to risk.

Getting independent advice from us in this really important area can help you focus on your lifetime goals, such as saving for retirement or building a college fund for your children.  With good impartial professional advice, you can be confident that you have a flexible and efficient plan in place for your long-term financial future. And a chance of watching your money grow and achieving your financial goals.

If you want to get your money working harder for you, we’d love to hear from you and help you invest in a way that meets your appetite for risk.

Warning: If you invest in these funds you may lose some or all of the money you invest.

 

Warning: The value of your investment may go down as well as up.

 

Warning: This investment may be affected by changes in currency exchange rates.

The Financial Lives of our Clients

We spend our days helping clients to plan their financial futures. What we see is that people face similar challenges depending on their stage of life. At the same time of course, each and every one of us has a unique set of circumstances, has our own specific financial objectives and needs bespoke advice to help us reach our goals.

You see, financial planning is not an exact science. It depends completely on those unique circumstances; your current and potential earnings, your family situation and your assets and liabilities to name but a few factors. And it also depends on what it is you are trying to achieve. For you, is it all about comfort in retirement or are you seeking to maximise your wealth in the shorter term? Is the security of your family your primary concern?

While we clearly acknowledge that everyone is unique, we thought it might be useful to give you a sense of the type of issues that many of our clients see as the big financial challenges at various stages in their lives, and the typical solutions they seek out from us.

 

 

The carefree years: Age 20 – 35

Ah the carefree years! At least that’s how they start out for this age group before they start placing one eye on the future. For most of our clients in their late teens and early twenties, there are really just a small number of areas that they come to us looking for help with. The first area of focus is savings, often with one eye on building a deposit for that eventual house purchase.

As our clients move through their twenties and into their thirties, mortgages tend to dominate as we help people get loan approval for that first home. As many of our clients also get married at this time and start their families, they tend to focus on getting protection (health insurance, life assurance, income protection etc.) in place to safeguard their families financially. The very forward-thinking of our clients also turn their attention to building education funds for their children and also their retirement funding. These smart people realise that the earlier they start their funding, the more they are likely to have available at retirement!

 

 

The growth years: Age 35 – 50

Hopefully now the mortgage is not hurting quite as much and there is a little spare cash available for other purposes. At this stage in our clients’ lives, we see a real commitment to pension funding – making sure that they can maximise the tax breaks available and finding the best pension vehicle for them. We also find at this stage that our clients become a little more aware of their infallibility (remember how indestructible we all felt when younger?), and want to ensure that they have the right protection in place to protect themselves and/or their families against the financial consequences of ill-health or death.

For those who are in the fortunate position of having some spare money, they also seek help in building an investment portfolio, particularly in the current low deposit rate environment.

 

 

The consolidation years: Age 50 – 65

As the state pension age moves out (eventually to 68) over the next few decades, this consolidation period is going to expand. We see our clients at this stage furiously continuing to build up their pension funds. However at this stage many are looking to take some of the risk out of their portfolios as they recognise the damage that could be done by a large drop in the value of their funds as they approach retirement.

Another area that we get asked a lot about among this group is in relation to the whole area of wealth transfer. Our clients have seen the reduction in Capital Gains Tax thresholds and the increase in the CGT rate, and seek out ways to avoid leaving their families with big tax bills. These tax bills can often result in families being forced to sell an inherited family home, just to pay the tax bill. So we help them plan the transfer of wealth in a tax efficient way.

 

 

The Drawdown years – age 65+

And now the spending years – hopefully! This is where hopefully you get to enjoy the fruits of your labour and your careful financial planning over the years. Usually our clients no longer have a salary coming in at this stage, but of course we hope that we’ve been able to help them accumulate a good pension for themselves!  Our work with clients who are in the latter stages of their lives tends to be around helping them manage their spending wisely. The risk these clients want to avoid is running out of money, so we help them to manage their assets carefully.

What we also see among this group is the amount of time they spend thinking about others and how important their legacy is to them. They are thinking a lot about their families in particular and how they can leave a lasting legacy (financial and otherwise) with them. Again we help them with their wealth transfer strategy to ensure their financial legacy is valuable and accessible for their families.

 

We hope this article gives you a sense of the types of challenges our clients face. If you would like to discuss your own particular situation with us, we would of course be delighted to hear from you.

How well are you looking after your Business Partner?

The health and welfare of your business partner is a really important factor in your financial planning. After all, they have probably been working alongside you since you came up with the idea for your business, and also have shared the highs and lows as your business survived those difficult early years and has hopefully grown as time went on. Your partner has toiled alongside you, shared the stresses and hopefully you’ve built a business you’re both proud of. It wouldn’t have been the same, or indeed may not have happened without them.

 

Now I want to tell you a story about a situation we came across recently. Two business partners (let’s call them Tom and Gerry) built a great manufacturing business in the Southwest of the country. They built a great business that supported them nicely and indeed also a small team of dedicated staff. Unfortunately Gerry developed a very serious medical condition and passed away after a very short period of time. Tom was of course devastated; the 2 men had been a great team working together, very reliant on one another and sharing everything down the middle. And that included having an equal share of the value of the business. They had never felt the need to formalise the situation, they were very trusted friends to each as well as partners.

 

After Gerry’s death, his son who had just finished college decided that he would (with his mother’s blessing) take his father’s place in the business, minding what was an important financial asset to them. Tom was not 100% happy with this as he now had an equal business partner again, but not the one he had built the business with. The 2 partners tried hard to make it work, however they just had very different visions for the business. In the end, after real slippage in the business and quite a bit of bad feeling creeping in between Tom and Gerry’s family, Tom managed to secure a sizeable bank loan and bought out Gerry’s family.

 

Tom now owns all of the (smaller business), under pressure to pay off the loan and without his friend alongside him. And all of the angst and financial pain could have been avoided… Unfortunately, such situations are repeated frequently each year around the country.

 

Business Protection

There is a range of business protection solutions available to help businesses survive the death or indeed the serious illness of someone that would result in a financial loss for a business. These solutions provide a number of benefits for businesses;

  • They offer real peace of mind benefits to the directors or partners, as they remove the financial worries associated with the death or serious illness of a colleague.
  • They remove the need for businesses or surviving partners to borrow money to buy out their partner’s share of the business.
  • They remove the need for a surviving family member to take the deceased’s place in the business.

 

In the situation mentioned earlier, if Tom and Gerry had co-director’s insurance to the value of their shares in the business on each other’s lives, all the stress would have been avoided. When Gerry died, Tom’s insurance policy would have paid out, and he would have been in a position to immediately buy out Gerry’s share of the business for a fair price and keep control of it – which could have been agreed as a right for each of them when effecting the policies.

 

There are a number of different types of business protection solutions available to suit the different types of business structures.

 

Co-director’s insurance

This would have been the answer to Tom & Gerry’s issue! Each director insures themselves against the death of their partner, enabling them to buy out the partner’s shares on death and/or serious illness. As an alternative, the insurance can be effected by the company itself.

 

Partnership insurance

Similar to the above, a partnership takes out insurance, protecting itself against the death or serious illness of an individual partner, enabling them to compensate the deceased partner’s estate for their share of the partnership.

 

Key person insurance

This helps a business to minimise the impact of the death or serious illness of a key employee. The insurance can be used to quickly attract a replacement employee or indeed to pay off loans of the company that may have been guaranteed by the deceased.

 

So the good news is that Tom & Gerry’s situation can be avoided. The key to finding the right solution is getting the right advice. And that’s where we come in! If protecting the future of your business is a concern to you, please give us a call and we can walk you through your options.

Photo courtesy of glasseyes view

10 Lessons to Teach your Children about Money

Every Irish child has at some stage heard an exasperated parent saying, “You know, money doesn’t grow on trees”. You may have even used it yourself! While it is a valuable lesson for a child, there are many ways we can guide our children to help them understand money and put them on the right path to managing their money wisely.

Here are some ways that you can help your kids with their financial futures. As the lessons apply to different age groups, we’ll start with a few for children who are still at a very early stage in their financial lives.

 

1. Establish a savings routine

This can start as soon as children start to receive pocket money. Encouraging them not to spend it all as they receive it and instead to save for a bigger treat to be bought every few weeks or months can set in place the benefits of delayed but ultimately greater rewards. We all know the benefits as we’ve got older of saving for holidays and cars etc. instead of borrowing and paying back far more than the actual cost.

 

2. If it looks too good to be true, well it probably is.

While we all may associate this only with a “great” share tip that eventually turned into a very expensive lesson, this is a useful lesson for children too. My nephew recently bought a 1,000 piece jigsaw from a friend of his for only 20¢ and was delighted with himself. That was until a few days later that he found the last four pieces were missing…

 

3. Look after the pennies and the pounds will look after themselves

Another old saying that many of our parents used but well worth remembering and passing on to our children. This one is all about small amounts eventually making a big difference, teaching children the value of not getting complacent and wasting what seem like insignificant amounts of money to them.

 

4. Beware borrowing

It’s important for children to understand debt. The line from Hamlet of “Neither a borrower nor a lender be” is probably not the best advice for kids as they grow up today. After all, they’ll probably need a mortgage one day and using debt can sometimes deliver savings – for example where there is a significant discount for paying a full year’s subscription in advance.

However children need to learn to plan debt carefully and to avoid expensive debt, particularly buying impulse purchases using credit cards that they won’t be able to immediately pay off.

 

5. Share our own mistakes

Now here’s one to test us all! We’ve all made mistakes over the years. Maybe we ended up overweight in property six or seven years ago, maybe we didn’t get proper independent financial advice early enough in our lives.  Tell your children about lessons you’ve learned and how they can avoid making these same ones themselves.

 

6. Make companies fight for your business

Your children need to understand that they have real buying power in relation to a lot of the products and services that they purchase. They offer the potential of being very long-term customers, the types that brands really want to attract. So whether they are opening a bank account, booking a hotel, getting car insurance, buying a car, some electronics or even just clothes, they should get into the habit of making sure they get the best price by haggling.

 

7. Plan your financial future

This is probably the most important lesson of them all… Financial planning shouldn’t start when people hit their forties and start worrying about retirement. Financial planning should start at a very young age; when children are thinking about all the things they want, but can’t afford! Choices have to be made, careful decisions need to be taken and a plan needs to be put in place to manage their limited resources to achieve the maximum effect and/or enjoyment!

 

8. A bank’s job is to sell to you

Banks are a necessary service provider for everyone and your children will need one (if they don’t have one already). But children need to understand that banks don’t provide their services and products for free. At the end of the day they have shareholders who want to see a return. That return is achieved by selling products to all of us – loans, credit cards, investments, insurance.

Children need to learn to separate the necessary services banks provide (current accounts, mortgages, deposit accounts) from the other optional products that they might try and sell them.

 

9. Fund your pension early

Every 10 years earlier that you start a pension, your fund approximately doubles. So children need to be taught that pensions are not for old people! They are for savvy young people who have planned their financial futures and who want to make their financial objective throughout life easier to achieve.

 

10. Get cover while it’s cheap and accessible

Life assurance, income protection and other such products are much cheaper and easier to get (younger people are healthier, underwriters take a more benign approach) so young people should get cover in place early. They should look potentially at convertible policies that they can maintain cover on, off into the future. These could be very valuable, particularly if they are unfortunate to suffer from ill health as they get older.

 

Does Independent Financial Advice Deliver Better Outcomes?

This article does not go into all of the reasons (of which we believe there are many!) why it makes sense for consumers and business owners to avail of the services of an independent financial adviser. We hope that we demonstrate these to you every time in our dealings with you!

Instead, this article brings a more scientific approach to answering this question. It refers to 2 separate pieces of structured research that have been carried out in this area, each carried out with the aim of identifying whether people who received advice achieved better outcomes than those who did not.

The most recent research in this area was commissioned jointly by the Professional Independent Brokers Association and Standard Life. It was conducted by Research Plus in July 2013 among 1001 adults aged 18+ across the Republic of Ireland. The results were very interesting in that they identified three key findings;

  • Those who get financial advice have pensions that are 53% higher on average.
  • Those who get financial advice have 14% more life cover
  • Those who get financial advice have on average 80% more savings and investments.

Of course there could be many reasons for these findings. People who avail of the services of an independent financial adviser may have a greater propensity to save and invest? But this on it’s own does not explain the difference.

To help us answer this, we refer to a very comprehensive independent study carried out in Canada on households in December 2010, comparing the financial outcomes of advised versus unadvised clients. The study was conducted on over 10,000 households, with a follow up survey on approximately 3,600 of these conducted six months later. The Canadian Centre for Interuniversity Research and Analysis on Organisations carried out the research.

The first finding was in relation to the amount of financial assets for households that use an adviser versus those that don’t. Households that use a financial adviser have significantly larger financial assets – in fact the results showed a multiple in excess of four times higher!

One again could be sceptical and pass the findings off as being that those consumers with money go to advisers, while those with fewer resources just go it alone. However, more importantly, this report draws a link between advice and greater financial assets. The study considered the direction of causality — i.e. that wealth follows the advice rather than the other way around.

On average, participants that used an adviser achieved a 173% greater increase in financial assets over those without an adviser, assuming the same starting value of assets and a greater than 15 year time period! There was similar outperformance over shorter time periods too!

To achieve 173% over a fifteen year time horizon would require a 7% p.a. compound return. Other studies have suggested that the addition to return from the better choice of funds adds about 3% p.a., so the study suggests the extra return arises out of a combination of better fund selection, increased savings rate, better diversification and greater tax efficiency. This is the value that your independent financial adviser helps to deliver!

The study also found that the increase in the value of financial assets as a result of using a financial adviser begins to be seen after four years. Specifically it found that for participants that used an adviser for 4-6 years, financial assets were 58% greater than for non-advised households. The difference in financial assets is explained by higher household savings rates (for advised households) and increased allocation to non-cash investments.

So this is the hard data that demonstrates the value that an independent financial adviser can bring to the management of your financial affairs. But of course your adviser offers many more benefits;

  • Helping you to identify all of your financial goals and objectives.
  • Building a risk appropriate portfolio to help you achieve your desired outcomes in a controlled manner.
  • Finding the very best products in the market to help you achieve your objectives.
  • Staying abreast of all the changes in personal taxation, products and other market developments to identify opportunities for you.
  • Regularly reviewing your portfolio to ensure you stay on track to achieve your goals.

In short, we’re there to help you protect yourself and your loved ones from financial shocks, to help you grow your financial assets and to provide for your retirement in a tax efficient manner. And as demonstrated in the research, to deliver much more favourable outcomes to you in the process!

We really welcome your comments. Please feel free to leave any views in relation to this article below.

Now that’s Innovation!

The market for financial protection products has seen some great innovations over the last few years, and all to the benefit of the consumer! First of all, the cost of protection products in general has fallen, due mainly to advances in medical science helping to reduce claims and also the product providers competing keenly with each other on price.

In order to compete with each other today, the battleground for product providers has moved on from simply reducing prices to adding exciting and valuable features and benefits for customers. Long gone are the days of consumers simply deciding whether it is life cover, serious illness cover or income protection that they need, they now rightly demand access to the exciting additional benefits on offer. Today’s market presents a challenging (but interesting!) role for financial advisers to stay ahead of these innovations, to ensure that we continue to offer the very best cover to our clients.

So, as we put in place new cover for people and review existing cover for clients looking to save money and access new benefits, we’ve identified a few innovations in the Irish market that we think you might like to be aware of.

 

Underwriting has got more client friendly!

Long gone are the days of the perceived “default setting” being the requirement of clients to travel to a doctor for a medical examination. In many cases these medical examinations have been replaced with alternative methods of gaining the required information, but in a far more friendlier way for applicants.

Today if an underwriter requires more information than that provided in an application form or by the client’s own doctor, they may seek either of the following;

A nurse medical: This is where a nurse travels to your home or office and carries out the medical examination at a time and place that suits you. As a result, you don’t have to waste time travelling for a medical and enduring the inevitable wait in the doctor’s surgery.

Tele-underwriting: This is where the information is simply requested in a phone conversation with a medical professional. They ask all of the questions that you would have been asked in a doctor’s surgery, and of course still have the opportunity to ask follow-on questions where they need more information (this is hard for them to capture through a written form completed by you). Again it saves you the bother of having to attend a doctor’s surgery.

 

Best Doctors

One of the providers that we deal with now offers a really exciting service to their protection customers. You can now access Best Doctors, which is a global organisation bringing the world’s leading medical expertise to you and your family, offering a second opinion when you need it most. In the event of you suffering a serious medical condition, a Best Doctors medical specialist will help to verify your diagnosis and treatment options, and will conduct an in-depth review of your medical files.  The process can reduce potentially serious complications that can result from a misdiagnosis, and help you and your treating doctor determine the proper course of action.

Being diagnosed with a serious illness would be an emotionally overwhelming experience if it happened to you. You would have lots of questions and nagging doubts:

  • What will happen now?
  • Is the diagnosis correct?
  • Will the treatment be right?
  • How can I be sure?

Best Doctors will help to assuage these concerns. It’s also included as a benefit of the policy!

 

Income Protection Deferred Periods have got shorter and shorter

The deferred period on income protection policies is the amount of time from the date of accident or onset of illness, until the claim will begin to be paid. This traditionally was anything from 3 months to a full year. This frustrated some potential customers who reckoned they would be recovered and back at work before the claim would even begin!

We now see deferred periods as short as four weeks on offer. In fact, for professionals and other lower risk occupations, income protection cover can now be secured from the very first day of illness of accident – no deferred period at all! Now that is real innovation as a result of listening to the needs of customers!

 

Some great policy features

Some of the providers include some lesser-known but really valuable added benefits on their policies to make them stand apart. These include;

Rehabilitation support on income protection policies: For income protection claimants, recovery means a chance to return to work or to begin a new career. Some providers offer resources and assistance to help you get back into the workforce when you are ready.

Relapse benefits on income protection policies: There are policies available that will immediately restart paying your benefit if you have a relapse within six months of returning to work. There will be no deferred / waiting period in this case.

Partial benefits and career changes for income protection claimants: There are providers who clearly recognise the benefits both to themselves and to the claimant, of the claimants getting back to work. However the claimant may only be able to work reduced hours than before their illness or accident, or indeed may need to change careers to a less demanding job. Providers have financial and other supports available to claimants to help them achieve these ambitions.

Terminal illness benefits on life assurance policies: Many life assurance policies will pay out the full benefit immediately on diagnosis of a terminal illness, removing the financial stress at this very difficult time for a family.

 

These are just a sample of some of the great innovations available today. Unfortunately all of these innovations make your choices a bit more difficult. But that’s where we come in! It’s our role to stay abreast of these changes and to ensure that our clients have the very best benefits in place at the lowest cost. If you’d like to find out more about any of these innovations, please give us a call.