Efficient Wealth Update – November 2021

When Interest Rate Rises Loom, Remortgages Boom

If you read October’s Efficient Wealth Update, you may remember that we spoke about potential interest rate rises in 2022. In the world of mortgages, these predictions are already spurring borrowers into action, with figures from September already indicating that remortgage instructions have increased by 50%.

With the potential of higher monthly repayments looming on the horizon, it will also come as no surprise that more and more borrowers are also fighting to secure longer-term fixed rates, with over half of all remortgagors opting for 5-year fixed term options and two-fifths of remortgagors fixing for 2 years.

Another trend that emerged in the September findings was that nearly 45% of those looking to remortgage took the opportunity to increase their loans by an average of £21,584 and nearly a quarter of remortgagors sought new deals so that they could release equity (perhaps a reflection on the recent surge in divorce rates).

So, whether borrowers are looking to pay less, secure a lower rate, release money to pay off an ex-spouse, or simply to provide some more financial security following a turbulent and testing 18 months, lenders have been inundated with applications and processing times have been severely impacted.

For our clients, if your fixed-rate term is drawing close, or if you are unsure what the best type of mortgage is for your needs, we strongly encourage you to start your search earlier than perhaps you usually would. Whether you are simply looking for a better deal, or if you need to keep your monthly costs down, the general guidance is that the sooner you begin the remortgage process, the better your chances are of securing a good deal.

If you would like to assess what the best option is for you, we would be delighted to help. Please get in touch for a free consultation with our expert Mortgage Adviser by calling 01572 898060 or emailing [email protected]

Leaving a Legacy through Asset Protection

Why do we want to build wealth? Is it so we can buy plush homes, drive fast, sleek cars or sun ourselves in exotic climes? Or is actually for a far more personal reason: So that we can give our loved ones a comfortable, secure and enriched life?

For some people, filling our lives with exotic holidays, plush homes and sleek cars is a key motivation to make money; however, most of us also want to help those who we love by leaving behind a legacy that will give them the best start in lives, or enable them to continue to live out their lives with confidence and certainty.

But is just making money enough to guarantee this?

To help bring some clarity, clear-cut answers and confidence to this topic, we have teamed up with leading lawyer Jane Cowley who is a partner and family law specialist at Geldards LLP- a national legal practice with offices in Derby, Nottingham , Cardiff and London.

Taking place on Wednesday 24th November at 1000, our free webinar will show you how to:

• Avoid hefty Inheritance Tax Charges.
• Ensure that your house and capital are protected against third-party risks
• How to protect your legacy in the event of relationship breakdown or relationship changes within your family.

If you would like to learn more, or book your place, please click here

Passing on the Pension

The use of a pension pot as a tax-efficient way to pass wealth to family and loved ones without them incurring an Inheritance Tax liability has become fairly commonplace, and although we wish you a long life, should you die under the age of 75, your beneficiaries may not be liable for any Income Tax on future withdrawals from that pot. This is because, under current rules, if you die before the age of 75, you can pass on defined contribution personal or workplace money-purchase pensions to loved ones free of Income Tax or Inheritance Tax, provided payment is made within two years of death.

These make for attractive tax benefits indeed, but ones that Mr Sunak might just be targeting as part of his mission to re-coop government spending on Covid-19 bailouts. Currently, there is no Inheritance Tax liability at any point on pensions, even if the total value of your estate exceeds the nil-rate IHT threshold – making pensions a very tax-efficient way to pass on family wealth - although worth noting people typically cannot pass on defined benefit "final salary" pensions on death, unless schemes have specifically made provisions for spouses and dependents.

Carl Emmerson, deputy director at impartial think tank the Institute for Fiscal Research, has attacked pension tax breaks as "indefensibly generous" and "very, very beneficent", calling for them to be reviewed. In his opinion, he stated, it was "unfair" to allow families to use their pensions to pass on wealth free of IHT, when they are primarily designed to save for retirement.

Earlier in the year, the chancellor froze Inheritance Tax allowances for five years. A move that will boost HMRC revenue as asset prices and estate value increase. Should the chancellor make moves to charge IHT on pensions the response by many will be highly negative, and risks de-incentivising future generations from saving into their pensions in the first place.

Simple Isn’t Always Sufficient

Several Solicitors took part in ‘Free Wills Month’ during October. An initiative providing free drafting or amending of simple Wills. However, whilst a simple Will might be a good option for some (in particular those with very straightforward circumstances or limited assets) for the vast majority of people, their simplicity is simply not appropriate.

In seeking out the simple solution many turn online, where it is estimated that around 5% of all UK Wills are written - about 60,000 Wills per year (although it could as high as 150,000 over the last 18 months as a result of the pandemic focusing minds on the future).

Independent research firm Funeral Solution Expert identified that 65% of UK consumers who believe their affairs are simple, actually have much more complex needs when it comes to their Will and that the prequalification criteria of online Wills might be missing some of these vital needs.

Michael Culver, Chairman of Solicitors for the Elderly commented further on the findings related to some online Will providers, stating:

“It’s shocking that whilst solicitors are required to have professional indemnity insurance covering claims potentially as high as £2m or £3m (and many firms go for optional additional cover that can take this as high as £10m per claim), other professionals offering wills limit their liability to the cost of the will. £200 compensation doesn’t seem sufficient to cover a mistake that could end up costing someone their entire estate or inheritance.”

Your ‘typically family unit’ no longer exists, we live in a time of high divorce rates, long-term co-habiting, step-parenting and remarriage. This diversity builds complexity, and whilst the best case would be every household in the country having a Will in place, the Will must be carefully considered to ensure wishes are carried out as originally intended.

Inheritance Tax boost for HMRC

HMRC figures released on September 21st revealed a £700m annual increase in Inheritance Tax Receipts from April to August 2021, hitting £2.79bn for the period. The increase follows on from Chancellor Rishi Sunak's move to freeze the nil rate band in last year's Spring Budget. Other contributing factors to note might include estate values having risen as a result of strong investment returns, a continual rise in property values, and sadly, an increase in the average number of deaths of those within the 60+ age bracket at the hands of Covid-19.

It was in March, Rishi Sunak announced that both the nil rate band and residence nil rate would remain frozen at existing levels until April 2026, at £325,000 and £175,000 respectively, meaning many families are already receiving increased IHT bills due to rising property and share prices. Having been tasked with forming a plan to recoup massive Covid-19 related government spending, the increase in Inheritance Tax receipts will likely be a very welcome source of additional revenue for Mr Sunak.

For those with a potential tax liability, estate planning options such as making regular gifts, investing tax-efficiently, or considering the use of Trust planning, could potentially eliminate the risk of any tax bill.

No doubt, the Autumn budget will reveal where the Chancellor has bigger fish to fry, but this one is certainly worth watching and planning for, particular at a time when the Prime Minister seems to be leaning towards a range of measures to bring revenue into the treasury, as demonstrated in his recently announced new health and social care levy.

Charlie’s Mini Blog

I recently watched an interview with the founder of Netflix on TED. He talked about how they started as a business shipping DVDs to people’s home, then progressed to streaming other people’s content to where they are now one of the largest creators of original content. This transformation has been astonishing and quick, and when you compare it to Blockbuster video, who used to have a store on every high street, it has been devastating. Kodak is another example that sprung to mind. They invented the digital camera, but it was their refusal to embrace it that ultimately cost them the business.

It got me thinking about financial services. As a small business it has been impossible for us to access the best technology, and this has both hampered our growth, hampered our service quality and increased our costs. The companies with deep pockets, usually backed by private equity, can afford to invest heavily in their technology and systems which puts them at a massive advantage in the market. Having the best technology means you put more power at the fingertips of the consumer, allowing them to create a more tailored service. Whether its watching tv or shopping on Amazon, a technology experience that removes barriers is the future of all industries, and financial services is no different.

Think about how you bank now compared to 20 years ago. I honestly can’t remember the last time I stepped inside a branch, and almost never even have to speak to anyone over the phone as I can do almost everything myself online. Financial advice may not get this far for some time, but a hybrid approach is already here - hence us wanting to partner with the leading provider of technology, True Potential.

Henry Ford once said that if he’d asked his customers what they wanted, they would have said a faster horse and cart. What they needed however, was a car. We believe that partnering with True Potential, the creator of the market’s leading technology, will be a massive step forward for our clients, and they can enjoy a fast track to the future of financial planning; one that will continue to evolve, just like Netflix.