Critical Illness Cover: Will Simplification Win the Race?
In the eyes of most reputable Financial Planners, and indeed our regulator, the FCA, protection is the cornerstone of your financial planning. Having a safety net in place to protect you from worst-case scenarios is a prudent move, and can ultimately mean that you and your family can be safe and secure, should the worst befall you.
When it comes to Life and Critical Illness Cover, there are a huge range of options available, but are they too complicated?
Back in the 1980s, Abbey Life and Allied Dunbar brought Critical Illness cover to the masses, which included six main conditions. Over the next 30 years, protection providers have seen the number of conditions covered as an opportunity to attract more customers: the more you cover, the more customers you’ll snare. It created a race in the industry to see who could overtake their competitor quickest. It also resulted in some providers now covering up to one hundred different conditions.
In many ways this has been a blessing for the consumer, as it gave them greater protection against a greater number of possibilities, but it’s also become increasingly complicated: Some illnesses trigger partial payments from your policy; some generate full sum assured pay-outs; some solely stick to the definitions of illness stipulated by the Association of British Insurers standards; and there are some that exceed these terms. Even on a very basic level, the glossy brochures and extensive reams of policy documents can give an information overload that can bamboozle clients and advisers alike. In short: too many options has led to a huge amount of complexity and confusion.
But now some providers are looking to simplify their offerings and have started grouping their conditions together. This will make it easier for advisers to explain to their clients what’s covered, and much easier for the clients to understand their position.
The industry and consumers alike are crying out for simplification and it seems that our pleas are starting to be met. The Critical Illness Race may now be drawing to a close, but watch this space to see who will win the simplification sprint.
Leaving a Legacy in Your Lifetime
Leaving a legacy to our loved ones is a common goal for many of us, but have you considered what you could pass on during your lifetime? With increasing unemployment and tough economic times, many clients want to help out their younger family members, so what is the best way to pass on some of your wealth now rather than after you’ve gone?
Lifetime gifting can be a rewarding way for you to see the impact your legacy can have. For example, you may want to help a loved one buy their first home, go to university, or simply enable them to have some security during these difficult times. But be warned- there are some rules in place that should be considered, so that you don’t end up eroding your gift through tax or lose some of your wealth to divorce, as an example.
Current legislation states that you can give away £3,000 per year free from Inheritance Tax (IHT). In addition, you can also give up to £250 to any number of people each year and parents can give £5,000 to each of their children as a wedding gift, grandparents can give £2,500, and anyone else £1,000.
However, there is an exemption to this. If the gift is regular and comes out of your income, and does not impede your standard of living, any amount of money can be given free of IHT. Larger gifts may also be covered by the Potentially Exempt Transfer (PET) rules. As long as you survive seven years after making the gift, and no longer receive any benefit from it, then the gift is outside of your estate for IHT purposes. If you pass away within seven years and the gifts are valued at more than the nil-rate band (£325,000 in the 2020/21 and 2021/22 tax years), taper relief may apply and is calculated on a sliding scale, if the gift was made between three and seven years before death.
Can You Trust Your Gift?
Gifting can be a good way of helping put your loved ones, and, in some cases, reducing your overall tax bill; however, once gifted, you relinquish all control over what happens with that money. You may be gifting to money to someone who you don’t trust to act responsibly, or may be concerned that a divorce will mean that your gift is lost to a non-family member.
To protect your gift, and retain some control, Trust planning can be an effective solution. There are many types of Trust available, and your personal needs and circumstances will dictate which is appropriate. Trust planning can be complex, and there are many legal requirements to consider, so it’s crucial that you speak to an expert before going ahead.
Before giving any money away, it’s important to consider what you may need in the future, and how much you can afford to give away. This is where Lifetime Cash-Flow Forecasting can be incredibly powerful, as this tool enables you to plot out various scenarios, potential issues and possibly purchases, to help you see how much you could gift without it having a detrimental impact on your own financial security.
How We Can Help
Estate and legacy planning is an incredibly rewarding exercise, which can benefit your family and loved ones for generations to come. It’s something we’re passionate about, so we have created a new webinar and online course, to give you an in-depth overview of everything you should consider. It’s free to access and can be found here
Alternatively, if you’d like to speak to one of our expert Financial Planners about your personal circumstances and needs, please get in touch.
Mortgage Update: Interest Rate Predictions
The pandemic has undoubtedly shaken our economy, reflected in the Bank of England’s decision to slash the base rate to 0.1% in March 2020, just a week after being cut to 0.25%. In March 2021, the Bank of England said that this rate would remain in force. So what could this mean for mortgage rates? Theoretically, mortgage rates should have reduced in line with the base rate drop; however, the reality is that mortgage rates have been rising rather than falling. So, will this trend continue?
The Pandemic Mortgage Landscape
The coronavirus outbreak and two cuts to the base rate in quick succession in 2020 saw lenders withdraw thousands of mortgage deals, with riskier low-deposit mortgages becoming biggest casualties. A year on from the second base rate cut, there are 3,939 mortgages on the market – a drop of 31% on the 5,723 recorded last March.
Although we have recently begun to see some deals return to the market, the number of low-deposit mortgages available to first-time buyers remains 66% lower than a year ago. The average rate on a two-year fix is currently 2.57%, up 0.14% on last year, while five-year fixes have risen by 0.01% to reach 2.75%.
The difference in rates may appear to be inconsequential, but for borrowers with small deposits, the impact has been dramatic.
Negative Interest Rates?
In June 2020, the Bank of England stated that it was considering introducing a negative interest rate to help boost the UK economy in the future. In October 2020, they then went on to send a letter to lenders, questioning if they were prepared for a zero or negative interest rate, which seemed to indicate that a negative rate was still on the cards. In February 2021, the Bank of England compounded this idea by saying high street lenders should be ready for negative interest rates in July 2021, just in case they’re needed. However, if the vaccination programme leads helps to drive economic recovery, rates may keep their heads above that zero mark.
If a negative base rate were to be introduced, it would be the first time the rate had dropped below zero in the country’s history and it would have wide-ranging effects. Potentially, it could even mean you’d have to pay your bank to hold your cash; however, mortgage borrowing could become cheaper, which would be good news for people with mortgages.
The Bank of England’s Credit Conditions survey found lenders expected increased appetite for house purchases and re-mortgages in the three months to May after reported declines in Q1. Meanwhile lenders said overall spreads on secured lending to households had narrowed in Q1 and were expected to continue shrinking over the next quarter, suggesting rates would fall.
A net balance of –21.9 lenders indicated the demand for purchase loans dropped in the first three months of the year while demand for re-mortgages recorded a net balance of -29.3. This was compared to scores of 31.5 and 2.3 respectively in Q4 2020, marking a significant quarterly drop. 
For the next three months, a net balance of 42.8 was given for projected purchase demand in Q2, while re-mortgages were scored 14.4.
 Survey results are measured in net percentage balances between -100 and 100, weighting responses based on lender market shares.
Should I Switch Out of Bonds?
In our eyes, diversification is the key ingredient when it comes to investing, as it helps you to maximise the returns generated in a portfolio whilst limiting the losses. Putting ‘all of your eggs in one basket’ can prove to be highly detrimental to your overall investment strategy, especially at the moment if all of those eggs are bonds, accordingly to some schools of thought.
Historically, bonds have been regarded as a ‘safe bet’; an asset class that can help to reduce the level of risk in a portfolio and offer steady, if unspectacular returns. However, like any asset, they too, under certain circumstances, can fall in value and become riskier. We all understand that the value of bonds can ebb and flow, but if we look at historical figures, bonds have been good value over the last 40 years, as their prices have steadily risen, but are things now changing? There are a lot of mutterings that bonds are no longer a safe haven, but is this just a reflection of post-pandemic recovery?
In the first quarter of 2021 we saw a sell-off of Corporate Bonds, sparked by inflation fears in the US. Over the years, politicians have largely managed to quell inflation, but there are now many people who believe that it is in fact a necessary evil if we want to chip way at the huge debts created by the pandemic.
The suspicion that intentional inflation is on the cards was only intensified when the US 10-Year Treasury, arguably the most important interest rate in the world, rose to a recent high of 1.78% from 0.9% in January. As yields rise, the price of treasuries and bonds falls. The speed of this change has certainly unsettled the markets.
Fluctuations are of course normal, and we see them all of the time, for example, the UK government’s gilt yields rose sharply in October 2016 due to concerns over a hard Brexit. However, when something, i.e. bonds, are perceived as being low risk suddenly become a lot riskier in the first quarter of this year, we do start to question if they are still play a valuable in a portfolio.
It’s Not the First Time
In 1994, bond investors were caught off guard when the Fed interest rate shot from 3% to 5.5%, causing yields to shoot up, and bond values to fall. Dubbed as ‘The Great Bond Massacre’, the casualties of this rate shift were numerous.
It is unlikely that these events will be repeated, but in our current world of record-breaking interest rate lows, coupled with massive fiscal stimulus, markets will continue to fret about the return of inflation and its effect on bonds. Whilst interest rate rises, and inflation, are not on the cards yet, the murmurs of these prospects has already caused concern.
Are Bonds Still Valuable?
Despite recent fluctuations, a diversified portfolio, which could include bonds, is likely to still be the best strategy to help you meet your financial goals. It would be incredibly remiss, and inaccurate, to say that one particular asset class is ‘wrong’ or ‘bad’, as everyone’s individual circumstances shape their individual portfolios.
Yes, it is fair to say that bonds have demonstrated more risk in recent months, but like all asset classes, there will always be volatility to some degree. If you are concerned, or feel that your portfolio is too bond-heavy, please get in touch and we will happily review your situation.
Golf Day 2021
On Friday 7th May 2021 Efficient Portfolio is looking forward to hosting our Annual Golf Day. This event is our way of thanking you for your continued support of Efficient Portfolio and to give you the opportunity to meet and network with likeminded people. Sadly, we are restricted by numbers, so places are allocated on a first-come, first-serve basis.
Please join us with a guest from 1200 at Luffenham Heath Golf Club for a full round of golf, refreshments and a late afternoon/evening meal. Please note that the format for 2021 will see all players allocated their own individual tee-time and your meal will be served on a rolling basis.
The Building a Better Business Webinar with ESP
When it comes to the financial side of your business, hiding from your problems could lead to its demise, whether that is you not realising the true worth of your efforts, or you having to work longer and harder than you should. So, what should you be considering?
Chartered Financial Planner, Charlie Reading of Efficient Portfolio, and Chartered Accountant, Wayne Searle of ESP Business Solutions, have joined forces to bring you the ‘Building a Better Business Webinar’: A free, interactive talk on Tuesday 4th May at 3pm that will give you the crucial steps all business owners need to take to achieve clarity, confidence and certainty over their finances.
Find out more and register here
Charlie’s Mini Blog
This month’s book recommendation may not seem very financial, but it couldn’t be further from the truth. Climate Change is probably the investment world’s greatest threat, and its greatest opportunity. If we continue to see temperature rises, we will see mass migrations from areas of the world that are no longer inhabitable, we will see devastation in cities as a result of rising sea levels, and we will see continual increases in natural disasters like wildfires and storms. This would be devastating for businesses, and Bill Gates predicts that it would be the economic equivalent of the COVID pandemic every 10 years - not a pretty picture.
That said, it is also the investment world’s greatest opportunity. Companies forming part of the solution, helping us get to net zero carbon emissions by 2050, will receive more government support, more private investment and also attract more of the limelight.
When you read ‘How to avoid a climate disaster’ (and I hope you do) you will realise that, whilst this is a massive problem to solve, there are key strategies that can make net zero possible. When I read it, I immediately wanted to focus more of my investments on helping the solutions, but I soon realised that, by finding specific companies to target, I could barely scratch the surface of the problem. However, by investing in a well-constructed portfolio ethical portfolio, like the PortfolioMetrix Sustainable World, which creates a risk managed investment solution investing in companies that are part of the solution, I can actually make a much greater impact.
I am no expert in renewables or carbon capture - who am I to be picking individual companies to back? But by funding the solutions through the guidance of investment analysts, I can very much be a part of the solution. A solution that couldn’t be more important for our children or our planet.
Possibly the most important book you’ll read this decade is Bill Gates’ How to Avoid a Climate Disaster: The Solutions We Have and the Breakthroughs We Need. It is far and away the best book I have read on the subject of climate change. It takes a smart person to make something complex sound simple, and Gates is certainly a smart guy.
The book is easily digestible, insightful and is as much about the solutions we are working on and the solutions we need as it is about the problem. I would encourage everyone to read this, and to make their own decisions based on it. If nothing else, you’ll be the best educated person on the subject at almost any dinner party!