As the nights draw in and the year-end approaches, we should all take stock of how our finances fared in 2015 and start planning our options for 2016. A host of new accounts and products are due to come on stream over the coming months, as are changes to the tax rules; and we’re all going to be a year older, which has implications that are always best thought about in advance. Here are half a dozen ideas to consider for the year ahead.
Help the kids buy a home
From 1 December 2015, you can ease your children or grandchildren on to the property ladder with a Help to Buy Isa: the government will boost what you give them by 25 per cent, and your eventual inheritance tax bill could be reduced in the process. Would-be first-time buyers will receive £50 from the government for every £200 they deposit in the account. The bonus that can be received is capped at £3,000, meaning the maximum the saver can pay in is £12,000.
As you are already likely to be a homeowner yourself, and thereby ineligible for the account, and you’re also restricted to your own annual Isa allowance (£15,240 for 2015/16), it makes financial sense to gift money to the younger generations so they can open Help to Buy accounts in their own names.
The account will be available through most high street banks; account openers must be at least 16 years old and can make a maximum first contribution of £1,000, followed by £200 a month. On that basis it will take more than four years to reach the £12,000 limit, so the Isa won’t help anyone buy a home immediately, but it’s a great way to bolster your youngsters’ financial security as they grow up.
Here’s a tip to bag another £1,000 towards the deposit on that first flat. Newcastle Building Society plans to let customers hold more than one Isa product and split their annual allowance between them. So they could hold a Help To Buy Isa and use the remaining allowance in Newcastle’s Big Home Saver Isa, earning 2.2 per cent AER if they make monthly deposits. If they save £10,000-plus they will get an extra £1,000 when they take out a mortgage with the society.
Coming back to the advantages for you, the enforced four-years-plus timeline works nicely with gifting rules for inheritance tax purposes — reducing your estate and thereby diminishing the amount of tax your heirs will have to forfeit after your death. You’re allowed to gift £3,000 each year; so over four years, you can give your family member the £12,000 maximum Help to Buy Isa contribution, reducing your estate by the same amount.
This isn’t just a reward scheme
Marks & Spencer has just launched Sparks, a ‘members’ club’ which carries special offers, priority access to sales and invites to exclusive events such as personalised fashion styling sessions and even an all-expenses trip to M&S vineyards in South Africa — reserved for the store chain’s top-spending customers. Each time you shop, you’ll earn ten ‘Sparks’ just for making a purchase, plus an additional ten for every £1 spent. You’ll earn 25 for submitting an online product review and 50 for ‘shwopping’ — donating an old item of clothing that is passed on to Oxfam.
For the South Africa trip, you’ll need 17,000 Sparks to enter an exclusive prize draw. Assuming you make one purchase a month and earn 120 sparks, you need to spend £1,688 in a year to earn the rest — achievable if you regularly buy M&S groceries as well as underwear. Just 7,000 Sparks gives members access to the M&S sale 24 hours ahead of the crowd. The retailer will also donate a penny to a charity of your choice each time you shop.
P2P income can be tax-free
From April 2016, peer-to-peer (P2P) loans — in which savers’ money is pooled to make online loans to individuals or businesses, through firms such as Zopa and RateSetter — can be held within an ‘Innovative Finance Isa’.
Savers have embraced P2P lending to secure better rates than those on traditional savings accounts. Bank of England data shows the average annual return on cash Isas in August was just 1.43 per cent; by contrast, at Zopa the annualised projected return on savings used to fund two- to three-year loans is currently 3.8 per cent, while RateSetter’s one-year product expects to pay an annual rate of 3.5 per cent. Tie your money up for five years and P2P rates climb close to six per cent. These rates are not guaranteed and P2P products are not covered by the Financial Services Scheme which protects depositors’ capital — but both Zopa andRateSetter have funds in place that will pay out should borrowers default.
Andrew Lawson, chief product officer at Zopa, says: ‘The Innovative Finance Isa will help more UK savers and investors earn more from their money. The Isa wrapper provides an instant benefit by effectively increasing the net returns on offer through P2P.’
The 2016/17 Isa allowance is likely to be announced in the Chancellor’s autumn statement in late November. Rules that apply to existing cash and stocks-and-shares Isas are also expected to apply to P2P Isas. The annual Isa allowance can be used across a combination of different Isa accounts.
At the same time that the new Isa becomes available, P2P interest will also qualify for the new Personal Savings Allowance. Basic-rate taxpayers will be able to earn up to £1,000 of interest with no tax liability and higher-rate taxpayers will be able to earn up to £500. Patrick Connolly, a financial adviser at Chase de Vere, says: ‘For some people this will reduce the appeal of holding P2P within an Isa wrapper’, and warns that investors shouldn’t go for the Innovative Finance Isa just because it seems to offer attractive tax-free returns. ‘You need to understand the risks fully, then determine whether this is a suitable investment to hold as part of your overall portfolio,’ he adds.
Save with a challenger bank
If you’re in the market for a fixed-rate savings bond, a ‘challenger bank’ is probably offering the best interest rate. The top-paying bonds over one, two, three, four and five years are all currently provided by new and growing banks, according to Savingschampion.co.uk.
For example, Secure Trust Bank’s Fixed Rate Bond5 Year Term (Series 23) pays 3.11 per cent gross on balances of at least £1,000. The account must be opened online at securetrustbank.com. But Anna Bowes at Savingschampion says: ‘Be aware that you are not allowed to access your funds during the term and interest must be paid to a separate account.’ Other challenger banks at the top of tables include Charter Savings Bank, RCI Bank and Aldermore. As for the established high street banks, Bowes adds, they ‘remain largely conspicuous by their absence from the savings accounts sections of the best-buy tables’.
Things to do before you get old
None of us likes to think about the possibility of becoming incapacitated by old age, illness or accident. But a Lasting Power of Attorney (LPA) set up while you are fit and well is a wise precaution that appoints friends or family members of your choice to act on your behalf if it should ever become necessary.
‘You can’t set up LPAs once you become sick,’ explains Joanne Baker of Hillhampton Wills & Probate Services. ‘Instead, your loved ones will have to apply to the Court of Protection to act on your behalf, which can be costly and stressful for all involved. Therefore it’s advisable to set up LPAs before you reach old age.’
LPAs are managed by the Office of the Public Guardian (OPG), a government body, and there are two types. The first is a ‘health and welfare LPA’ that allows the selected friend or family member to liaise with doctors and care staff on your behalf. The second is a ‘property and financial affairs LPA’ that allows your appointees to manage your day-to-day affairs — such as paying bills, claiming benefits and liaising with your insurers. You can create your own LPAs by going to the OPG page of the Gov.uk website. ‘The process is straightforward but time-consuming and cumbersome, says Baker. ‘If you have complicated affairs or are not comfortable with long legal documents, a professional will-writer or solicitor cancreate them on your behalf for a fee starting from around £250.’ However you create your LPAs, you should register them immediately with the OPG, a process that can take 12-14 weeks to complete and costs £110 per LPA.
The pitfalls of executorship
Death and taxes, according to cliché, are the only two things in life that are certain — and one of these days you may be asked to be an executor of a friend or relative’s will, a task not to be undertaken lightly, and which can sometimes turn into a nightmare. Few of us realise that executors face unlimited liability if mistakes are made — and liability doesn’t expire once the estate has been resolved. Executors can be held responsible for mistakes for up to 12 years, or 15 if children are involved. And the number of executors falling foul of the rules is rising: High Court figures reveal there were 107 claims in England against executors for breach of duty in 2012, but 368 claims in 2013.
The answer is executor liability insurance: policies protect individual executors against legal or financial claims resulting from their actions. The cost of cover varies by estate value and can be claimed back from the estate as ‘reasonable expenses’. While, probate usually takes between six and 12 months, policies are annual.
Laura Whitcombe is knowledge and product editor of This is Money and the co-author of Money Made Easy 2015/16.