Copyright © 2008 by "Ian McKeever & Co" · All Rights reserved · E-Mail: ianmckeever@actuaries.eu.com
Valuing Your Future
Ian McKeever & Co Consulting Actuaries
Market Views
Markets
Markets
Why should the government have to rescue banks?
The banking Crisis
The banking Crisis
Economic Views
The Economic Outlook
The Economic Outlook
Professional
Services
Services
Issued by Ian McKeever & Co. Authorised and regulated by the Financial Services Authority in the conduct of investment business
What Government Borrowing means for you
What it means
What it means
Post Retirement
If someone is phasing the realisation of their pension policies or if they are taking income drawdown the issues are as for retirement. Otherwise there are three problems that can arise.
1 Estate and IHT Planning and how to leave your estate to your heirs in the most tax efficient manner.
2 Equity release and generating extra income in order to maintain your standard of living.
3 Income tax planning and the age allowance.
Estate & IHT Planning
In theory if you give away your assets and live 7 years you escape Inheritance Tax. However in practice there are other considerations.
First you need to ensure that you and your spouse have enough money to last you both out.
Control can frequently be an issue particularly with a family business. This may involve future succession, where for example there are children of a previous marriage to consider. It may involve making provision for minors or others who you wish to benefit but whose best interests may not be served by giving them direct access to the money. You may merely want to have the option of adding additional beneficiaries in the future, such as additional Grandchildren.
A number of plans are on offer providing Inheritance Tax advantages but all have some disadvantages. There is no plan that is suitable in all circumstances and it is important to identify which is most appropriate to your needs and therefore identify which plan achieves the greatest tax savings while also meeting your other objectives.
Most involve giving away something but the structure is all important as such plans are frequently impossible to unwind or at least expensive to unwind and can be costly in other ways too.
Sometimes it might be appropriate to make investments entitling the investor to business assets relief, but this carries with it risks that may not be acceptable.
This is a situation where advice tailored is to your particular circumstances is essential.
Income Release & Generating more income
The principle of equity release is simple, at least in concept. You sell the right to get some, or all of your home, after the death of both your spouse and yourself. The money generated can then be used as you please to improve your quality of life while continuing to live in your house.
There are two ways achieving this objective:
The mortgage plan involves you keeping title to your house but mortgaging the property. Frequently the interest simply rolls up until you die when the house is sold. The loan and interest is then repaid from the proceeds and the balance passes to your estate. The total available to the lender is limited to a proportion of the house value at death, although that proportion is usually 100%.
Under the home reversion plan ownership of the house passes to the provider subject to your rights.
In either case the loan or reversion will fall in and the house sold if the lives go into long term care.
The amount available under either type of plan may be similar but the practical effects for heirs at least are very different.
Under the mortgage plan the charge on your estate is initially the amount of borrowed. If you die soon after taking the loan the reduction in your estate is only slightly more than the sum you withdrew in the first place. However the longer you live the more the interest builds up and the greater the reduction in your estate. You get the benefit of all the growth in the value of your house to the extent that it is not eaten up by interest charges and there is generally a provision limiting the amount to be repaid on your death to the value of the house.
The interest rate on lifetime mortgages is generally higher than for an ordinary fixed term mortgage used for house purchase. The interest rate may or may not be fixed at the outset. The proportion of the house value given up depends on when death occurs, how house prices appreciate during the period of the mortgage and of course the interest rate charged. However, although it is not certain, you should expect the proportion of the house value given up to increase over the period of the mortgage.
It is worth checking on is who will actually be in charge of selling the house at the end of the day. You must appreciate that the company granting the loan is merely interested in getting that loan repaid as quickly as possible. As long as the loan and interest is repaid, it has no interest in getting the best price for the property; its interests are best served by a quick sale. This may not be in the best interests of the beneficiaries of the estate. However even with the mortgage structure, it is possible to ensure that some of the house value goes to the estate.
The reversion option has the benefit that the depletion in the estate is fixed at the outset, if only in terms of the proportion of the house value given up. Although this may be beneficial if the person making the arrangement is long lived, if they die on the day after making the arrangement the loss to the estate will be several times the amount received.
However when the house does eventually come to be sold all parties have an interest in maximising the sale price.
Within each of the basic structures outlined above a number of options can be built into the arrangement. As with most investment transactions those who assume risk expect to be rewarded with higher returns. and so any guarantees come at a cost. On the other hand guarantees are attractive and it is matter of finding the deal that best suits you.
Lenders assume a number of risks in this situation and consequently expect to be rewarded appropriately. Equity release is a useful tool in financial planning but it is expensive and should not be undertaken lightly.
Age allowance
People over the age of 65 have their personal allowance for income tax increased from £5,435 to £9,030 and at age 75 this increases again to £9,180. However where their income exceeds £21,800 in the tax year every £2 of income over that threshold reduces their age allowance by £1. This in effect creates a marginal tax rate of 30% until their personal allowance is reduced to basic level of £5,435. (These figures are for the tax year 2008/9 and higher figures are likely to apply in subsequent years)
Those people entitled to married persons allowance because of their age are also likely to find this allowance clawed back in much the same way.
For people with a high marginal rate of tax because of this it is worth considering the various tax-free investments or particularly at older ages an insurance bond where a surrender of 5% a year can be treated as a capital distribution for tax purposes. See High Rate Taxpayers
1 Estate and IHT Planning and how to leave your estate to your heirs in the most tax efficient manner.
2 Equity release and generating extra income in order to maintain your standard of living.
3 Income tax planning and the age allowance.
Estate & IHT Planning
In theory if you give away your assets and live 7 years you escape Inheritance Tax. However in practice there are other considerations.
First you need to ensure that you and your spouse have enough money to last you both out.
Control can frequently be an issue particularly with a family business. This may involve future succession, where for example there are children of a previous marriage to consider. It may involve making provision for minors or others who you wish to benefit but whose best interests may not be served by giving them direct access to the money. You may merely want to have the option of adding additional beneficiaries in the future, such as additional Grandchildren.
A number of plans are on offer providing Inheritance Tax advantages but all have some disadvantages. There is no plan that is suitable in all circumstances and it is important to identify which is most appropriate to your needs and therefore identify which plan achieves the greatest tax savings while also meeting your other objectives.
Most involve giving away something but the structure is all important as such plans are frequently impossible to unwind or at least expensive to unwind and can be costly in other ways too.
Sometimes it might be appropriate to make investments entitling the investor to business assets relief, but this carries with it risks that may not be acceptable.
This is a situation where advice tailored is to your particular circumstances is essential.
Income Release & Generating more income
The principle of equity release is simple, at least in concept. You sell the right to get some, or all of your home, after the death of both your spouse and yourself. The money generated can then be used as you please to improve your quality of life while continuing to live in your house.
There are two ways achieving this objective:
The mortgage plan involves you keeping title to your house but mortgaging the property. Frequently the interest simply rolls up until you die when the house is sold. The loan and interest is then repaid from the proceeds and the balance passes to your estate. The total available to the lender is limited to a proportion of the house value at death, although that proportion is usually 100%.
Under the home reversion plan ownership of the house passes to the provider subject to your rights.
In either case the loan or reversion will fall in and the house sold if the lives go into long term care.
The amount available under either type of plan may be similar but the practical effects for heirs at least are very different.
Under the mortgage plan the charge on your estate is initially the amount of borrowed. If you die soon after taking the loan the reduction in your estate is only slightly more than the sum you withdrew in the first place. However the longer you live the more the interest builds up and the greater the reduction in your estate. You get the benefit of all the growth in the value of your house to the extent that it is not eaten up by interest charges and there is generally a provision limiting the amount to be repaid on your death to the value of the house.
The interest rate on lifetime mortgages is generally higher than for an ordinary fixed term mortgage used for house purchase. The interest rate may or may not be fixed at the outset. The proportion of the house value given up depends on when death occurs, how house prices appreciate during the period of the mortgage and of course the interest rate charged. However, although it is not certain, you should expect the proportion of the house value given up to increase over the period of the mortgage.
It is worth checking on is who will actually be in charge of selling the house at the end of the day. You must appreciate that the company granting the loan is merely interested in getting that loan repaid as quickly as possible. As long as the loan and interest is repaid, it has no interest in getting the best price for the property; its interests are best served by a quick sale. This may not be in the best interests of the beneficiaries of the estate. However even with the mortgage structure, it is possible to ensure that some of the house value goes to the estate.
The reversion option has the benefit that the depletion in the estate is fixed at the outset, if only in terms of the proportion of the house value given up. Although this may be beneficial if the person making the arrangement is long lived, if they die on the day after making the arrangement the loss to the estate will be several times the amount received.
However when the house does eventually come to be sold all parties have an interest in maximising the sale price.
Within each of the basic structures outlined above a number of options can be built into the arrangement. As with most investment transactions those who assume risk expect to be rewarded with higher returns. and so any guarantees come at a cost. On the other hand guarantees are attractive and it is matter of finding the deal that best suits you.
Lenders assume a number of risks in this situation and consequently expect to be rewarded appropriately. Equity release is a useful tool in financial planning but it is expensive and should not be undertaken lightly.
Age allowance
People over the age of 65 have their personal allowance for income tax increased from £5,435 to £9,030 and at age 75 this increases again to £9,180. However where their income exceeds £21,800 in the tax year every £2 of income over that threshold reduces their age allowance by £1. This in effect creates a marginal tax rate of 30% until their personal allowance is reduced to basic level of £5,435. (These figures are for the tax year 2008/9 and higher figures are likely to apply in subsequent years)
Those people entitled to married persons allowance because of their age are also likely to find this allowance clawed back in much the same way.
For people with a high marginal rate of tax because of this it is worth considering the various tax-free investments or particularly at older ages an insurance bond where a surrender of 5% a year can be treated as a capital distribution for tax purposes. See High Rate Taxpayers