Increase Your Savings Vs Paying Your Mortgage Off Early

In the past six years, the Bank of England has presented home owners who have savings with a dilemma that it is difficult to resolve.

The slashing of the base interest rate to 0.5 percent has resulted in falling rates on mortgages, making borrowing to afford properties cheaper, but it has also seen the return on savings slump.

Therefore, a property owner with spare cash might be less concerned about paying extra on his already cheap home loan, but also might feel less than incentivised to pour cash into a savings account that offers a three percent APR.

This blog does not pretend to have the answers to this particular conundrum and could not give advice even if it did. Instead, in the next few paragraphs we will explore the various options of home owners and savers.

Paying off the mortgage faster.

By paying £10, £20, £50 or £100 extra off your mortgage every month you are speeding up the day that you finally are able to live mortgage free.

Being able to limit the amount of time you spend in debt to the bank will have the effect of cutting down on the overall interest payments you make.

It might seem like quite a sacrifice at the time, but the quicker the debt is repaid the less it will cost you in the long run.

If this is the case, then why does not everyone pay off their mortgages early? Most of us are fixated on spending in the moment and enjoying money while we have it, instead of delaying gratification for the future.

If you are planning to pay off extra on your mortgage every year then you need to ensure it is a sustainable monthly commitment.

Do not commit to overpaying more than you can afford, it might be easier to start off with a conservative sum that you know will be easy to stick to and gradually increase it as the months go by.

For some over payers the initial excitement and enthusiasm for excess payments wains as the months go by and ambitions slip. Therefore, in order for overpaying to be a serious, realistic strategy it must be maintained over the long term.

Adding to Savings

As mentioned above, the current financial climate is not one that suits savers. There are few incentives for prudent types who have spent years building up their nest egg.

The rates of return, whilst higher than the base rate set by the Bank of England are generally far lower than they were before 2008.

So why save at all?

There are still reasons to save, it is always important to have emergency funds tucked away, irrespective of interest rates.

Also your savings, if put in an ISA will enjoy protection from taxation and will accrue some interest every month.

The rate of interest is also unlikely to remain at a historic low either, meaning that in the next few years the returns on savings will improve.

The inevitable choice

As interest rates gradually increase, there will be an incentive both to save and to overpay on a mortgage.

Savings will be better rewarded with higher interest, but mortgage debt will be more expensive making it more important to repay it as quickly as possible.

Without a thorough audit of your circumstances and your financial strengths and weaknesses, it is difficult to know precisely which option to take, overpayment or saving.

This means that before you commit to either, it might be an idea to get some independent financial advice.

For more information please do not hesitate to contact the team at Ward Williams Financial Services Ltd on 01932 830664 or by email on wwfs@wardwilliams.co.uk.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

Use Your ISA Allowance Or Lose It

The phrase “use it or lose it” is very relevant to ISAs.  As of April 6^th 2015 you have 366 days to save up to £15,240 in your ISA.  Even though 2016 is a leap year, giving you an extra day to achieve this, it is recommended to get off the starting blocks quickly.  Let's cover the basics first.

What Is An ISA?

ISA stands for Individual Savings Account.  In very simple terms, you pay into an ISA out of your post-tax income.  You can either keep this money as cash or use it to buy investments.  You should know that there is a government-defined list of ISA-approved investments and you have to choose from these.  Having said that, the list is pretty extensive, so you have a good chance of finding something to suit you.  If you keep it as cash then the interest you earn is tax-free.  Generally speaking income earned from investments is also tax-free, but there are some exceptions.

How Does An ISA Work?

You pay into an ISA in the same way as you pay into any other bank account.  As previously mentioned the amount you can deposit in any one year is capped.  It is important to understand that this cap relates to the amount deposited rather than the amount in the account at the end of the tax year.  In other words, if you withdraw money, you cannot just put it back later.  Otherwise ISAs work much the same way as a standard savings account or as an investment-funding account.  You can even use the same ISA for both purposes, dividing your money as you see fit.

Do I Have to Pay into An ISA in One Go?

No, you can save over the course of the year if you want to.  Alternatively you can pay in a lump sum if that suits you better.

What's The Difference Between ISAs And NISAs?

Last year ISAs were given a revamp.  In short the limits were increased and they were made more flexible.  For a while these new-format ISAs were referred to as NISAs.  Sometimes they still are, but the term ISA is also in common use.  There is a limit to how long something can really be considered new.

How Do I Save into A NISA/ISA?

The short answer is however it suits you best.  If you have a regular income, you can set up a standing order to ensure that your ISA is topped up when you get paid.  If your income fluctuates you can deposit money throughout the year as you have it spare.  Alternatively you could save into a regular savings account throughout the year and transfer a lump sum at the end of the tax year.  That way you can take out and replace money without any penalties.

How can I make the most of my NISA/ISA?

Quite simply the more you put in, the more you can potentially get out.  In other words, if you possibly can, use your whole ISA allowance.

If you were unable to max out your ISA last year, now may be a good time to reflect on why that was.  If you simply didn't have the money, then that is fair enough.  Is there anything you could do to make your income go a little further this year?  Maybe now would be a good time to review the family finances and run a keen eye over your household budget.  If you did have the money but did not put it into an ISA, what specifically stopped you?  Did you just forget?  If so a standing order may be the answer.  Alternatively you could set a reminder on your phone or calendar to double-check if you should be making a deposit.

For more information please do not hesitate to contact the team at Ward Williams Financial Services Ltd on 01932 830664 or by email on wwfs@wardwilliams.co.uk.

What Are The Alternatives To Annuities?

It seems that wherever one looks in the media at the moment a commentator, government minister or journalist is stepping forward to tell us how awful annuities are and posing the question: why are annuities so bad?

This, therefore is an important statement that should be absorbed before we continue; not all annuities are bad, some offer good value for money and many policy holders are happy with their choice of product.

Some savers with policies have been busy asking themselves ‘how much is my annuity worth’, and at least a few will have been pleasantly surprised by the answer. Others will be demanding to know ‘how do I sell my annuity?’

Ok. That is that out of the way and the reason in this blog that there is a brief spell of objectivity is simple. If we are discussing the alternatives to annuities we should not start from the standpoint that they are all bad.

What do I need a policy to do?

For those of you who are asking: What is an annuity? It is a policy that used to be compulsory for most pensioners, sold by insurance companies, which guaranteed a fixed, monthly income for life in return for ones entire pension pot.

The role of any policy or plan that acts as an alternative to an annuity is simple, it has to last as long as you do.

An annuity will expire on the policy holder’s death, a factor that makes it attractive as it is a guaranteed income for life and will not run out before we head off to meet the great financial advisor in the sky.

Having the option of income drawdown presents savers with new options for finding more flexible retirement finance arrangements and one of the chief concerns for many is to limit the amount of tax liabilities on their lump sum.

On retirement, it was previously compulsory to buy a policy from an insurer unless one was lucky enough to have a final salary pension.

Now, as the restrictions have been removed savers have a number of choices when it comes to accessing their lump sum, a process which is referred to as ‘pension drawdown’.

Drawdown Options

Before April this year there were two main types of drawdown, capped and flexible. Capped drawdown meant that you could withdraw up to 150 percent of the amount per annum that you would have received each year if you had decided to purchase an annuity.

A flexible draw down enabled you to withdraw per year as much as you liked. There were more risks with the latter policy, but the risk was limited as your income from other sources needed to exceed £12,000 a year in order to be eligible for it.

Now the drawdown schemes have been simplified and replaced with flexi-access drawdown, which allows pensioners to take a quarter of their pot tax free in a lump sum withdrawal.

Subsequent withdrawals after the 25 percent tax free chunk are taxed at the standard income tax rates. If in a tax year you withdraw just £10,600 it will be tax free and the next £31,785 will be taxed at twenty percent, providing you have no other taxable income.

If you have already been part of a capped or flexible drawdown plan, as of April 2016 these plans will convert to the new flexi-access scheme.

Getting advice

If, before now you have been wondering ‘what is an annuity’ or ‘how do I sell my annuity?’ it might be worth getting some professional advice on annuity policies, drawdown schemes or other alternatives.

For more information please do not hesitate to contact the team at Ward Williams Financial Services Ltd on 01932 830664 or by email on wwfs@wardwilliams.co.uk.

What's My Pension Worth?

It is hard to argue about the importance of saving for old age.  Those still of working age need to look at how they are going to finance their later years.  Those already retired need to think about getting the most out of their available finances.  The exact rules around pensions and savings can be changed in line with government policy at any given time.  Indeed the pension system has just been through an overhaul and with an election looming, politicians of all colours are setting out their plans for the future of pensions and the pensions of the future.  In reality, however, these plans only have any meaning to people who are focused on saving for retirement.  Let us therefore look at some key questions on the topic. 

What Is A Pension Pot? 

Quite simply a pension pot is a common term used to describe savings which are specifically to finance retirement.  People contributing to a pension pot may get assistance from the government (in the form of tax relief) or from an employer (in the form of contributions). Pension contributions are usually locked away until you reach retirement age.

How Do I Calculate My Pension?

There are plenty of online calculators to help with this.  We strongly recommended to keep track of how your pension is doing so that you know where you stand.  If you do decide you need to take action, sooner is usually better than later.  

https://www.moneyadviceservice.org.uk/en/tools/pension-calculator

I Do not Like What I'm Seeing, How Can I Build A Healthier Pension Pot?

You can save more money, you can manage your savings more effectively or you can do both.  It can help to look at this question in the light of your overall financial situation.  For example if you are carrying high-interest debt, such as credit-card debt, then it may well be in your best interests to focus any spare cash you have on paying this down.

Once you have cleared your debt, you can then divert the funds to building your pension.  If you do have spare cash and are in employment, then it may be useful to look at making extra contributions to your workplace pension.  This can be particularly helpful if your employer will top up any contributions you make.  If you're unsure about locking cash away until you retire, then it may be worth looking at ISAs as an alternative.  Although contributions to ISAs are made out of post-tax income, generally speaking the income they generate is tax-free and the money in them remains accessible if you need it.

https://www.moneyadviceservice.org.uk/en/articles/isas-and-other-tax-efficient-ways-to-save-or-invest

https://www.moneyadviceservice.org.uk/en/articles/cash-isas

https://www.moneyadviceservice.org.uk/en/articles/stocks-and-shares-isas

What Do I Need To Know About Getting More From My Pension Pot?

For many years getting more from your pension pot generally meant getting the best deal on an annuity.  Now there are more options for those with pension pots.  With this in mind, it can be very helpful to get some professional advice before taking any significant decisions on how best to use your pension pot.

 http://www.telegraph.co.uk/finance/personalfinance/pensions/11468752/New-pension-rules-to-let-retired-savers-cash-in-annuities.html

It is also advisable to keep up to date with any changes which may affect pensions.  For example at the current time, the Conservatives have a proposal to allow holders of annuities to sell them on.  If enacted this could have massive implications for existing pensioners. 

It's also worth remembering that, generally speaking, pensioners have access to the same savings and investment products as those of working age.  For example they get exactly the same ISA allowance as working adults.  There are even some savings products tailored specifically to their needs (e.g. pensioner bonds).  These can all help pensioners to make the most of their finances.  

For more information please do not hesitate to contact the team at Ward Williams Financial Services Ltd on 01932 830664 or by email on wwfs@wardwilliams.co.uk.

http://www.moneysavingexpert.com/savings/pensioner-bonds

https://www.moneyadviceservice.org.uk/en/categories/pension-basics

https://www.moneyadviceservice.org.uk/en/articles/pension-information-guide-to-the-basic-facts

https://www.moneyadviceservice.org.uk/en/articles/why-save-into-a-pension

http://www.ft.com/cms/s/0/e29b4934-c7ce-11e4-8210-00144feab7de.html#axzz3WoVeWRHM