Topic: Life Planning

The Close Call

It seems like we have been talking about an increase in interest rates for some time now. Although we seem to have had a ‘close call’ today with the Monetary Policy Committee voting 7:2 in favour of holding rates at the historic low of 0.1%, they did comment that interest rates could rise “from now onwards”.

I think we have reached the point of ‘when’ and not ‘if’ interest rates will rise and it seems it will only be a matter of weeks.

This may come as a relief to savers, who will be pleased to see the meagre rates paid on savings increase, even if only slightly.

Borrowers on the other hand beware. The cost of borrowing will most likely climb faster than the ‘official’ Bank of England Base Rate as lenders try to price in future interest rate increases as well.

With this said, the Bank does not expect rates to be above 1% by the end of 2022 – still ridiculously low by historical standards. If you had offered a mortgage borrower a sub 1% rate back in 2006, I am sure they would have taken your right hand off!

So, what financial planning actions can we take now to prepare for the seemingly now inevitable rate rise?

First off, for savers, you may wish to avoid locking into any long-term products or bonds. It seems very likely that the rates available on these longer term savings products will go up in the coming months in line with interest rates, so it may be sensible to park some cash in an easy access account for a few months and see what deals come along in the new year.

Borrowers on the other hand should consider the opposite actions – think about locking in for as low and as long as you can. It may even be worth paying an early repayment charge on an existing mortgage to access a new, lower, fixed-rate deal, but of course this will require careful consideration. We have been saying it for years, but I think we may now look back and see this current era as the lowest mortgage interest rates have ever been and ever will be.

As always, if you need any assistance with your own financial planning, please don’t hesitate to contact a member of the Buckingham Gate team.

Care Fees Update, National Insurance & Dividend Tax & Budget Date

Care Fees Update

We have this week finally seen the much-hyped changes to care fees announced.

This is an issue that has been ignored and deferred by successive governments. There have been countless consultations and suggestions over the years, but none of them have really moved far off the starting line. But now we have a new care fees system.

I think most people will now be aware of the key points which are as follows:
The ‘full fees capital means test’ limit will be increased to £100,000. This means that if you have over £100,000 of capital assets (including the family home, unless it continues to be occupied by a partner, relative or dependent aged over 60), you will be responsible for your care fees in full.

There will also continue to be a lower limit of £20,000 below which assets will not be taken to fund care fees.

For those with assets between £20,000 and £100,000, there will be a partial contribution required towards care fees, with this increasing the closer you are to the £100,000 asset limit.

In addition to the above, there will remain a (very significant, but far less publicised) income based means test that says that if you have sufficient income to pay your own care fees (regardless of capital), then a contribution could still be required.

All of the above will be subject to a cap on what an individual will be expected to contribute to their care fees. The cap will initially be set at £86,000. Beyond this point, no individual will have to pay towards their care costs.

So far so good, however, as usual, we have been looking beyond the headlines to try and find some of the devil in the detail.

The most significant point not really being covered in the mainstream media is that the whole set of rules above only apply to your personal care costs, not your ‘hotel’ costs (‘hotel’ costs being the cost of staying in accommodation, food, utilities etc).

As such, the amount an individual could pay in their lifetime for how they would view their ‘care fees’ could well be much greater than the £86,000 cap when you factor in the ‘hotel costs’.

Now, to be clear, this has always been the case. Hotel costs have always been assessed separately from actual personal care fees, but people often don’t appreciate that there is this distinction.

As such, the new proposals are a welcome addition to the care fees system and at least provide some degree of certainty.

What is perhaps more interesting is that these proposals could well pave the way for insurers to re-enter the long-term care market and produce the first real insurance products for long-term care in several decades.

We will continue to monitor developments and will of course report on anything significant that becomes apparent in the months ahead.

National Insurance & Dividend Tax

In order to pay for the above, the government has introduced an additional 1.25% levy to be added to national insurance as an interim measure and then split out as essentially a third kind of tax on employment income.

Moving forward, you should see your income tax, national insurance and a ‘health and care premium’ on your payslips.

In addition, the dividend tax rates have also had 1.25% added, meaning the basic rate of dividend tax will rise from 7.5% to 8.75%. Dividends will still represent a tax efficient income source for most people, although of course these changes make them slightly less attractive.

What they also do is increase the relative attractiveness of capital gains as a form of ‘income’, especially when levied on shares and bonds, as this is charged at a basic rate of 10% and a maximum rate of 20%, even for higher rate taxpayers.

Budget Date

Finally, we do now also have a confirmed budget date of 27th October 2021. This budget will be particularly telling as the UK continues to recover from the Covid pandemic.

We will of course continue to monitor any proposed tax changes and will report to clients anything that might be relevant to their financial planning.

The Time Is Now

You may recall I wrote a blog back in the middle of 2020 (doesn’t that feel like a long time ago now!) about designing how you want your life to look as we emerge from lockdown. Of course in hindsight, it seems I was a little naïve to think that lockdown was ‘over’ at that point.

Ready, Steady…

There seems to be a bit more of a buzz around the place in the past few weeks. Since the 12th of April and the reinstatement of at least a couple of our (previously taken for granted) freedoms, I detect a sense of joy and optimism in people who I meet.

Lies, Damn Lies and Speculation

As budget day approaches, the volume of rumour, speculation and mistruth is stepping up in traditional fashion.

Of course, there are the old favourites (you know, the things that the media report ‘might’ happen in the budget every single year, but never seem to actually occur) such as the removal of the 25% tax-free cash on pensions and restrictions to pension tax relief (for what it’s worth, I don’t believe we are likely to see either at this coming budget).

A Message From Matt – 11th December 2020

So how is it that we have already arrived at the end of 2020?

I think this year has been the ‘fastest, slowest’ year I have ever experienced. In some senses 2020 really seems to have dragged on. It seems forever since I saw my family or friends properly and I am sure we are all looking forward to hopefully getting back to this kind of thing as we move into the Spring next year and beyond!