Personal Finance Questions – September 2009

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In our regular feature we will cover some of the topics which readers have been emailing us about. Naturally we can’t give direct financial advice but maybe some of these questions and their answers will be of interest to you.

I hear that ISA rules are changing in October, how does this affect me?

ISA contribution limits are changing on 6th October – here are some of our more popular articles on this subject –

Confused about the new ISA allowances and limits?

Reminder – cash ISA allowance is increasing

Change in ISA allowances – Budget 2009

What is an ISA?

My life insurance company wants to apply a Market Value Reduction if I surrender my Bond, why?

A Market Value Reduction can be applied on the surrender of a with-profits bond (or any with-profits fund for the matter) in times when stock markets and other asset classes may have fallen in value – we have seen this recently with the fall in world stock markets in 2007 and 2008.

The MVR is designed to provide you with a fair surrender value for your plan based on the performance of the underlying investments and also to protect those who remain behind  by basically ensuring you don’t take a “bigger slice of the cake” than you’re entitled to!

This article goes into more detail – Avoiding a Market Value Reduction (MVR/MVA)

I find it difficult to budget – how can I make this easier?

We all have income and expenditure to meet – some of it is the same each month, and some of it is variable.

I wrote an article a few months ago – cashflow forecasting – income and expenditure – there is a great spreadsheet you can download to help you plan and track your monthly income and expenditure.

I have a personal pension – what is the minimum age I can retire?

It is currently age 50, but this is about to change – see this article for more details and urgent actions you might need to take if you’re aged between 50 and 53 now.

My mother is a non-taxpayer. How can she reclaim tax paid on her building society interest?

To reclaim the tax she needs to complete an R40 – she can also register to receive the interest gross from now on – read this article.

And finally……

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Personal Finance Questions – August 2009

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In this post we will answer some of the many questions we are receiving from visitors to the site. Although we cannot answer your questions directly and we are not authorised to give financial advice were we see a theme running through questions from our readers we will provide a generic answer on the site.

I remember at school the teacher always used to say “ask a question – if you have a question you can guarantee that half the class also have the same question but are too scared to ask!”.

Where can I get a free income and expenditure spreadsheet?

We posted an article a number of months ago which has proved to be extremely popular. Our Excel spreadsheet allows you to enter income and expenditure over a 12 month period, broken down into months to see when your cashflow will be good, and not so good.

Here is the article – Cashflow Forecasting – Income and Expenditure Spreadsheet

When does the ISA allowance change?

The ISA allowance is set to increase to £10,200 for the over 50’s on 6th October 2009, with the increase coming into effect for the under 50’s from 6th April 2010.

More info on changes in ISA allowances 2009/2010 can be found in these articles:

New Tax Year – New ISA Allowance – 2009/2010
Changes in ISA Allowances – Budget 2009

How can I avoid paying tax on my Bank Interest – I am a non-taxpayer?

If you’re a non-taxpayer you can register to receive your bank and building society interest gross (i.e. with no tax deducted). All you need to do is fill out a simple form and pass it to your bank or building society.

See this article:

Non-taxpayers – ensure you receive interest on your savings with no tax deducted

I am a non-taxpayer – can I pay into a personal pension?

Yes you can, you are entitled to invest up to £3,600 (gross) each tax year (before 5th April 2010) and receive tax relief on the money you invest – basic rate income tax relief is received on each contribution you make – you effectively only have to invest £2,880 to have £3,600 invested – the pension company reclaims the difference from the Inland Revenue (HMRC) even though you have paid no income tax!!!

See this article:

Pension Planning for Non-Earners

Is Inheritance Tax payable on ISA Investments?

Yes, at the date of death the ISA loses its tax-free status and forms part of the deceased’s estate for calculating any liability to inheritance tax.

I want to surrender my Investment Bond but the life insurance company says it will apply a Market Value Adjustment – what is this?

MVA/MVR’s can be applied to a with-profits investment at the time of encashment if there has been a fall in the stock market during the period before surrender. This is to ensure the person surrendering the investment receives a “fair value” for their slice of the with-profits fund and to protect remaining investors from those taking their money out.

Some investment bonds have an MVA free date – usually on the 10th anniversary – check your paperwork issued at the time you took out the investment or phone your life company for more details.

Article – With-Profit Bonds – Avoiding a Market Value Reduction

Can a Personal Pension be paid to Both Partners?

No – the pension is only payable to the “annuitant” (the person who took out the pension and bought an annuity – an income for life – with the fund at retirement).

A widow(ers) pension can be added to an annuity as an option, at the time the annuity is purchased – usually 50% or 66% of the pension if the person whose pension it is dies first.

Did you know you can shop around for your pension at the time of retirement – it’s called the Open Market Option – more information on Personal Pensions

Can additional lives assured be included on an Investment Bond?

Yes – you can have more than one “life assured” on an investment bond at outset. Parents might like to consider adding their children – this allows the investment bond to continue after death of the parents. Consult an Independent Financial Adviser.

Is it true that the longer you save the bigger your money will grow?

Yes – this is related to “compound interest” and the “time value of money”. In basic terms, interest earned on a savings account will, in subsequent years also earn interest.

For example, if you invested £100 in year 1 at an interest rate of 10% (if only!) – at the end of year 1 you would have £110. In year 2 you would earn interest on the £100 initially invested and the £10 interest received in year 1 – so the interest received in year 2 would be £11 (£10 on the initial amount invested and £1 interest on the £10 interest added at the end of year 1!).

Interesting articles: –

It’s not how much you save but how long
The Rule of 72 – The Time Value of Money

This is a selection of the many questions we receive – please contact us if you have a question and we will try to answer it in a future posting.

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Personal Finance Questions – April 2009

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In this new feature we will answer some of the many questions we have been receiving from visitors to shrewdcookie.com. It is often said that if you ask a question chances are that many other people also want to ask that very same question.

Although we receive a large number of personal questions we have to remind you that we do not give financial advice on this website – we encourage you to visit an independent financial adviser, solicitor or accountant if you wish to discuss any particular course of action which may be prompted by an article you read on our site.

1. What are the new ISA allowances announced in the recent Budget?

The ISA limit is increasing from £7,200 to £10,200. The change comes into effect for the over 50’s from 6th October 2009 and from 6th April 2010 for the rest of the population. Of the new £10,200 limit, upto £5,100 will be allowed for Cash ISA investment, with any surplus between the amount you place in a Cash ISA up to £10,200 being available to invest in a stocks and shares ISA.

2. Inheritance Tax – who pays?

The liability for paying inheritance tax lies in the hands of the executors/administrators of the deceased’s estate. Inheritance tax is payable within 6 months after the end of the month in which the person passed away. It is possible to pay Inheritance Tax in instalments over up to 10 years – this is the case in circumstances where say the estate includes a house. There is an interest charge if you pursue this method of paying Inheritance Tax – http://www.hmrc.gov.uk/ for more details.

3. I am married to someone who was not born in this country – how does this affect our Inheritance Tax position.

Where a spouse is deemed to be non-Uk domciled then the Interspousal transfer is limited to £55,000, there in no limit to the Interspousal transfer where both partners are UK domiciled – no liability to inheritance tax on first death if you leave all your assets to your marital partner. Consult a solicitor or accountant about your own particular situation.

4. How do I get a State Pension Forecast?

To obtain a forecast of your state pension entitlement, based on your national insurance record you need to fill out and submit a form BR19 – this article – “How Much State Pension will YOU get” gives more details.

5. If I invest a lump sum now how can I easily calculate how it will grow between now and retirement?

Using the Rule of 72 – by assuming an interest rate and dividing this into 72 will tell you how long that money will take to double in value. For example, at 6% your money will double in value every (72/6) 12 years. If you had say 36 years to retirement, at 6% growth your money would effectively double 3 times. See this article for more details.

6. Can I back-date my ISA investment to use last years allowance?

No – your money needs to be invested by midnight between 5th and 6th April each year to use the ISA allowance for that tax year – there is no way to backdate an ISA investment. A case of “use it or lose it”!

7. I am a female born in 1954 – when do I get my State pension?

State retirement age for men and women is being equalised to 65 for both sexes. See this article . There is also a State Pension Age calculator provided by The Pension Service – enter some basic details and it will tell you exactly when you qualify for your State Pension.

8. Can I hold Cash in a Stocks and Shares ISA? What is the tax liability?

Yes – many providers offer a “cash park” facility whereby you can invest temporarily in cash and then switch into stocks/funds over the short term. There is the facility to receive interest on this cash held but the interest is subject to tax and a non-taxpayer cannot reclaim this tax either. See this article for more details.

9. What is the minimum deposit on a mortgage for first-time buyers?

There is no legal minimum deposit, the minimum is set by market forces – we are currently suffering from the “credit crunch” whereby lenders are being cautious about lending to people particularly with the housing market currently falling. Therefore, more and more people are being expected to make a deposit when buying their first homes – typically 10% or more is required to obtain a good interest rate product – see “5 tips for first-time buyers” for more details.

10. What is the “deferred period” on my income protection plan for?

The deferred period is the time between notifying the claim to the life office and the benefit being paid out. The plan is designed to provider a replacement income in the event of long-term absense due to illness or accident. The longer the deferred period, the lower the risk to the insurance company of having to meet a claim which therefore means a lower premium. See these article on “income protection” for more information – “Income Protection – an introduction” and “Critical Illness Cover versus Income Protection”.

These are just some of the areas we have received enquiries on in the past month. Although we cannot reply directly please ask a question and we will try to feature it in the next FAQ article next month. Add a comment below or complete this short form to contact us.

Simon