Many of us will embark on a new diet plan or fitness regime for the New Year, but have you thought about giving your finances and legal affairs a makeover? Now’s the perfect time to review where you are both legally and financially, and to make sure you’re on track to reach your goals. Follow this 10-point checklist for a more prosperous (and very well organised) 2017.
1. Consider a LISA
LISAs – Lifetime ISAs – are the big news for 2017. Due to be launched in April, they allow you to save up to £4,000 a year tax free towards your first home (worth up to £450k) or towards retirement. After the first year of saving, the Government will boost your contributions by 25% – and after that, the boost will be paid monthly.
You’ll need to be over 18 and under 40 on 6th April 2017 to open a LISA (if you’re over 40 and a first time buyer, check out the Help to Buy ISA instead). LISAs are individual – so if you’re saving for your first house, both you and your partner can each open one and benefit from the 25% bonus. The bonus is paid until you reach the age of 50 but you can withdraw the money as a first house deposit at any time after the first year. Once you’ve withdrawn your deposit, the account will stay open – so you can use it again to save for retirement. If you are using your LISA to save for retirement, you can withdraw the money after your 60th birthday.
The total potential bonus is a tempting £32,000 but to get that, you’d need to open an account at 18 and keep contributing until 50. Remember that you’ll earn interest on both your contributions and the bonus payments.
Under current plans, withdrawing money from the LISA for any purpose other than your first house or retirement at 60 will attract a hefty penalty – 25% of the total balance. This will not apply in the 2017/8 tax year.
2. Review your mortgage
According to Trinity Financial Group, around half of Britain’s 11 million mortgage borrowers are on a fixed rate deal, with the other half on either a tracker, standard variable or discounted rate. Mortgage deals have never been so low – so now’s the time to calculate if you could save hundreds – or thousands – on your home loan by switching. Even if you’re locked into a fixed rate deal with an exit penalty, it’s worth calculating if you’d be better off with one of the super low rates on offer. The Money Saving Expert’s guide to best buy mortgages will help you work out if it would be worth switching.
It’s also worth considering whether, after switching to a cheaper deal, you could afford to pay the same as you paid previously (i.e. overpay) as this can knock years off your mortgage and save you thousands. Check to make sure the mortgage deal you’re interested in allows you to do this without a penalty.
Borrowers with savings that are under performing may also like to consider offset mortgages. These little known products allow you to offset the value of your savings against your mortgage to reduce your payments. For example, with an offset mortgage, if you owe £150,000 and you have £30,000 in savings, you would only pay interest on £120,000. You can choose to either pay the lower monthly mortgage payment, or keep paying interest on the full £150,000. If your mortgage rate was 3.5%, overpaying like this would reduce a standard 25 year mortgage term by 3 years and 8 months while saving you about £30,000 in interest.
Offset mortgages tend to have slightly higher interest rates than a standard mortgage so they work best if you have a decent amount of savings. Experts typically recommend this type of deal where borrowers have savings equivalent to 15 – 20% of their mortgage balance.
Offset mortgage can be extremely tax efficient for higher rate tax payers. While basic rate tax payers get the first £1,000 of interest paid on savings tax free, this is reduced to £500 for a higher-rate tax payer and £0 for a 45% tax payer. Offset mortgages allow higher/additional rate tax payers to effectively ‘earn’ the interest they don’t have to pay because of their offset savings – tax free. Considering that mortgage payments are made after income tax has been paid, the actual value of the benefit for a higher/additional rate tax payer is even greater than the mortgage interest rate.
Help to buy or switch
If your mortgage payments are high but you can’t switch because you would no longer pass the stricter affordability criteria, consider whether a family member could help you. A ‘joint mortgage single owner’ type loan allows a family member to be part of the application without appearing on the title deeds (thereby avoiding the 3% ‘second home’ stamp duty hike).
If you’re still trying to get a foot on the housing ladder, there are plenty of schemes around to give you a helping hand.
3. Review your debts
It makes little sense to save money if you’re paying a higher rate of interest on your debts. The solution? Consider either paying off your debts using some of your savings, or switch to a cheaper borrowing facility. There are plenty of credit cards offering 0% balance transfers for a low fee – the key is to make sure that (a) you repay the debt in the 0% interest period and (b) you don’t spend anything on the card. If you struggle to get good deals on cards and loans, check out your partner’s credit score – Noddle lets you view both the credit score and credit file for free.
Money Saving Expert’s Credit Card eligibility checker is a great way to find 0% balance transfer deals that you/your partner could be accepted for. It leaves a soft search on your (or your partner’s) credit file which has no credit impact. Although your partner won’t be able to do a balance transfer of your card, many companies offer a 0% cash transfer which puts the funds in your partner’s bank account – you can then use them to pay off your card. Note that not all card companies advertise this deal and sometimes you’ll need to ask for it.
If you’ve not paid off the debt at the end of your 0% interest free period, switch it to another 0% deal to avoid paying excessive interest.
4. Make a Will
Surprisingly around two thirds of adults in the UK don’t have a Will. In our experience, this is often because people prefer not to think about the possibility that they might pass away sooner than expected. However, the recent spate of untimely celebrity deaths is a stark reminder that we should put our affairs in order as early as possible.
Without a Will, your estate will pass according to the laws of intestacy. These can have some unexpected effects. For example, if you and your partner are unmarried/not in a civil partnership and you should die, your partner won’t be entitled to any of your estate. If you’ve been living together for two years, your partner can apply to the Court for reasonable provision under the Inheritance Act, but there are no guarantees.
The ability for those close to you to make a claim for reasonable provision is another very good reason to have a Will. Although the Court does have discretion to make an award to certain ‘dependents’ as it sees fit (even if you have a Will), a Will helps the Court to better understand your wishes and feelings as to where your estate should go. You can also write a letter of wishes to be stored alongside your Will, further explaining why you have divided your assets up in a certain way.
If you’ve already got a Will, it’s advisable to update it at least every 3 years. You should also ensure you haven’t made a standard ‘Mirror Will’ – a type of Will that many married couples use to leave everything to their partner in the event of their death. The problem with this type of Will is that after your death, should your partner need care, the Local Authority can use all of the assets (including your share) to pay for care fees, leaving them with just £14,250 to pass on to the children.
Another common issue arises if your partner should remarry/enter into a new civil partnership after your death. Remarriage automatically cancels a Will and the new spouse/civil partner is then next in line to inherit the first £250,000 of their estate with the remaining estate being split 50/50 between the new spouse/civil partner and your partner’s children. Alternatively your partner may choose to make a new Will leaving everything first to their new spouse/civil partner. In either scenario, if your partner dies before their new spouse/civil partner, the assets you worked so hard to acquire during your lifetime and theirs could pass sideways out of the family, leaving nothing whatsoever for your children or grandchildren.
These problem scenarios can be avoided with some simple planning.
5. Make a Lasting Power of Attorney
Everyone aged 18 or over should have a Lasting Power of Attorney (LPA) for Financial Decisions. This important legal document allows you to nominate someone you trust to look after your financial affairs, should you lose mental capacity. This could happen to any of us at any time, due to illness or an accident – and without an LPA in place, your friends or relatives would have to apply to the Court for a Deputyship Order. The downside of this is that the person applying might not be the person you’d trust with your finances – and the cost of applying is extremely high. The fees involved with a Deputyship Order include:
- The Court’s application fee (£400)
- Legal fees (these vary from firm to firm – £600 – £2,000 is typical)
- A hearing fee if needed (£500)
- A new deputy fee (£100 per deputy)
- An annual supervision fee (typically £325/year)
- The cost of the Deputy’s bond (a type of insurance premium) – this depends on the value of assets being managed.
There are two types of Deputyship Order – one for financial decisions and the other for health/care decisions. The above fees reflect the costs for just the Financial Decisions order. When you consider that it costs so much less to make an LPA, clearly this is the better option.
Financial Decisions LPAs are also useful if you are incapacitated for a short period of time. Once registered they can be used with your permission – so if you are ill, on holiday or in hospital, you can allow your attorneys to carry out financial tasks for you.
6. Review your investments
Not all savings and investments perform as well as we’d hope, so it makes sense to review them regularly and consider whether you could get a better return elsewhere. Managing Director of wealth manager Tilney Bestinvest Jason Hollands explains:
Existing portfolios drift over time as different investments held don’t all move in tandem, which can lead to the risk profile of a portfolio mutating into something very different from what was intended. It is vital to review your portfolio and potentially give it the equivalent of a detox at least once a year.
However, be cautious about “whatever funds are flavour of the month”.
MSE offer suggestions on a range of best buy investments.
Newcomer Nutmeg which offers an easy way to invest in funds may also be worth considering – they allow investment from £1,000 and their three year results are impressive, earning them a place in the top 25% best-performing investment management firms for both their “cautious” portfolio and their “high-risk” portfolios.
If you’re a buy-to-let investor, you’ll be aware of yet more forthcoming changes that are making buy-to-let investments even less attractive. Currently, landlords can deduct all mortgage interest (and other costs of finance) from their rental income before paying tax on the profits. From April, the Government will start to reduce the amount of mortgage interest tax relief you can claim. The timetable is as follows:
- 2017/18 – 75% can be deducted with the remaining 25% given as a basic rate tax deduction
- 2018/19 – 50% can be deducted with the remaining 50% available as a basic rate tax deduction
- 2019/20 – 25% can be deducted with the remaining 75% available as a basic rate tax deduction
- 2020/21 – All financing costs will be given as a basic rate tax deduction
Click here to see the Government’s guidance on the above.
For landlords purchasing property now, the solution may be to set up a company. Through a company, the full amount of mortgage interest can still be claimed against profits. However, existing landlords will need to discuss the full legal and financial implications of moving their current properties to a company as this may not be viable. Call us on 08700 120 130 to arrange an appointment with one of our independent property solicitors to discuss this further.
An increasing number of landlords are looking at property that is either exclusively commercial or mainly commercial with residential property attached (e.g. a flat above a shop). The new rules do not apply to commercial lettings – or to furnished holiday lets. Buy-to-let investors relying on mortgage finance to fund their investments may want to consider a change of investment strategy from residential to commercial, to help mitigate the effects of the tax changes.
7. Review your bank account
Banks are scrambling over each other to tempt you towards their accounts – and consequently there’s a huge range of great deals available. These include:
- Incentives to switch – up to £150
- Interest on your balance (sometimes more than a regular savings account) – up to 5%
- Cashback on household bills (Natwest/Santander)
- Packaged products that allow you to save on travel insurance, mobile phone insurance and breakdown cover for a low monthly fee.
Nationwide’s Flexdirect account also offers a 0% overdraft for a year if you switch, giving you the chance to sort out your finances.
The exact account that is right for you will depend on your circumstances – check out MSE’s guide to help you find your perfect product.
8. Check your bills
If you’re one of the thousands of people that allows their home and car insurance to simply auto renew every year, there’s a good chance you’re paying hundreds more than you need to. Rather than reducing your insurance for no claims, insurance companies often increase their premiums in the second year to make up for a discounted premium in the first year.
Fortunately, the Financial Conduct Authority (FCA) has ruled that, from April 2017, all insurers must flag up how much last year’s policy cost at each renewal, so customers can more easily see if they’re being ripped off.
Use price comparison sites to check if you could make savings – however, be aware that comparison sites don’t list all insurers. This is because they only advertise deals where they will get a commission for the sale. It’s worth asking around for recommendations and getting quotes from individual insurer sites, in addition to using the comparison sites. You may also notice some insurers charge less on their website than the quote you get from the comparison site.
You should also carefully checking your utility bills with an independent service to see if you could make savings there. Many people will renew with their current provider after a fixed rate deal expires because the provider will offer a new deal that appears to give them a bigger saving. However, providers’ calculations can often be confusing. For example, the comparison may be made between the new recommended tariff and their standard tariff, rather than the tariff that the customer has actually been paying.
It’s best to check your actual usage with an independent service rather than rely on any forecast that your energy company gives you. Comparison sites such Energyhelpline, uSwitch and TheEnergyShop can be helpful for comparing deals. The MSE Energy Club is also a great free service – this allows you to enter your exact usage and the amount that you’d be willing to switch for. For example, you might think it isn’t worth your time making the switch unless you stand to save £150 a year. The Club constantly monitors prices and notifies you throughout the year at any point where your target saving is available.
It’s also worth checking to see if you’re paying too much for Council tax, compared to your neighbours. If you successfully challenge your Council Tax band, you can claim a rebate dating back to when you moved in the property (or no earlier than 1993) – potentially thousands of pounds. Here’s a guide explaining how to do the checks.
Finally, a review of your direct debits (including any automatic Paypal subscriptions) can save thousands a year of unnecessary payments for gym memberships, magazines, website subscriptions or unused paid TV services. This is especially worth doing in the run up to applying for a mortgage, where such payments may be calculated as part of affordability tests.
9. Boost your income
A quick and easy way to boost your income is to rent out a room in your home. ‘Rent a room relief’ is a little-known optional scheme that allows you to earn up to £7,500 in rent each year from a lodger, tax-free (this figure increased on 6 April 2016 from the previous limit of £4,250). The relief only applies for renting out a furnished room in your own home.
Another easy way to boost your income is to sign up for cashback websites. You might think sites like Topcashback offer a few pence here or there – but you’d be wrong! Cashback sites offer some amazing deals on all types of spending – from takeaways and groceries to insurance policies, flights and even business spending. Topcashback allows you to install a browser add-on so that when you visit a site that offers cash back through them, you’ll get a notification. All you then have to do is press a button to record your visit and the cashback from anything you spend will be added to your account. There’s also a phone app that gives you cashback on in store purchases. This can all add up to hundreds of extra pounds a year for making the same purchases that you’d make anyway.
10. Review your pension
Employers will have to provide all staff who are aged between 22 and the State Pension age (earning at least £10,000 a year) with a Workplace pension from 2018. This is known as ‘automatic enrolment’. Some employers have to enrol their staff before this date. You can opt out, but you should consider what you’ll be giving up very carefully if you want to do this.
Employers have to pay at least 1% of their employee’s ‘qualifying earnings’ into their workplace pension. This will rise to 3% in 2019 if approved by Parliament. The employer has to match the contribution. Effectively, this is a pay rise, so think carefully before giving that away – and remember, there’s no tax to pay on that contribution (subject to annual allowances).
Example: An employee with a salary of £25,000 contributing 1% towards their pension will receive £20.83 less pay a month. Your employer’s contribution plus tax relief is worth an additional £26.04 a month. You therefore receive £252 less pay annually, which adds £564 to your pension.
Before you make your decision, you should check if you have primary, enhanced or fixed protection on any current pension. This is where you will have fixed your lifetime pension allowance (currently it’s £1 million for anyone without protection). If you have protection you will lose it if you take your employer’s pension so weigh up the benefits.
Like your regular investments, you should also keep a close eye on how well your pension is performing and the overall costs. There are some risks involved in transferring your pension, such as exit fees and loss of bonuses – read this Which? guide to find out more.
Lifetime ISA or pension?
If you’re considering opening a LISA, you might be wondering whether it’s even worth having a pension. After all, the 25% Government bonus sounds like it would beat most pension returns, right? Wrong. Remember that you get tax relief on your contributions – so for every £4 you put into your pension, you’ll get £1 relief (i.e. the same bonus as the Lifetime ISA). For those that are employed, add to this the fact that your employer also has to contribute, and it’s a no-brainer.
However, for the self employed, the Lifetime ISA could be a better option.
A further advantage of a pension is that if you should lose your job and have to claim benefits, your pension pot won’t be counted when doing a means-test. However, the savings in a LISA will be counted – and you could end up using a large portion of these to pay for day-to-day expenses before you qualify for help from the Government. LISAs can also be used by creditors in bankruptcy proceedings, but pensions can’t. Most pension pots can also be passed on free from inheritance tax (see here for more info).
For decisions such as pensions and other investments, we’d always recommend speaking to an independent financial adviser – i.e. one that is not affiliated with any bank or financial institution. Unbiased.co.uk is a good site for locating independent financial advisers who are regulated by the FCA.
Hmm – you’ve done so well with your legal and financial affairs, maybe it’s time for a change of career too?
* = There is also a Court fee to pay for each document registered. The fee will be either £0, £42 or £84, depending on your income.
Disclaimer: The information in this article is for general information only and is not intended to be a substitute for professional legal or financial advice.