Did you know according to research published by the Nationwide in April 2011, almost half of parents in the UK are leaving their families at risk because they do not have any life cover in place and over three-quarters, have no protection against the impact of a critical illness. It is a sad fact that whilst most of us are quite happy to insure our car, our house, our travel arrangements – and even our mobile phones – to their full value, few of us take quite as much care over our health and loved ones.
It is very true that not everyone needs cover. Life insurance, for example, pays out a lump sum on death. For a family with small children the need for this cover is obvious. Take away the family’s main breadwinner and it would not take very long before the financial stability of the family was seriously affected. Remove the primary carer and a replacement needs to be found.
However, if you are single and have no financial dependents, you might consider it a waste of time leaving a lump sum which is unnecessary and just costs you money to fund.
Even for single people, though, there is still the consideration of what happens if you fall ill or have an accident and are unable to work. The State benefits available are intended to provide a safety blanket only. They will not help you keep up a lifestyle of holidays and eating out or make any in roads into repaying a mortgage.
So, before you make any decisions, you need to take a look at your own situation – and some of the following questions may help you to start thinking about what is most important:
• Do you have young children or others who are dependent on you financially?
• How old are your dependents?
• Will your dependents be heading to university?
• Do you pay school fees or nursing home fees for others?
• Will any current dependents become financially independent and if so, how soon will that be?
• Do you have debts (including a mortgage) which your beneficiaries could not manage, even if it were only for a short time?
• Do you have investments which might provide income if you were unable to work?
• Do you have any assets which could be sold if you were unable to work?
• Would you need to move house if you were less mobile?
• How do you travel about?
• How far are you from friends, relatives and local amenities?
The chances are small that any of these issues will affect any individual reading this  – but they will affect some of you and we have no way of knowing who until after the event. It doesn’t cost much to make sure that if it happens to you, you are fully prepared.
Life assurance is a staple form of protection which most of us understand and many see as a necessity.
The most common reason for buying a life assurance policy is to cover a mortgage but it should also form part of the review we undertake perhaps after getting married or, more likely, when we have children. Their financial future and emotional care needs to be secured just in case the worst happens.
For a single person with no dependents, life assurance may be completely unnecessary. If you have debts and no savings, however, then a small amount might be useful to pay expenses and prevent someone else being landed with those debts. There is also an argument that you should cover a mortgage but if you are happy to pass the property back to the bank, or if your beneficiaries are more than able to cover mortgage payments whilst the house is sold, then yes, there is probably no need for it.
If you have dependents, however, you need to look at the consequences for them if your income were removed. Your income pays for the mortgage or rent, for food, utilities, entertainment, holidays and maybe even school and university fees. Without you, the family would need to source an income from elsewhere – which might mean children losing their carer or going out to work rather than entering higher education.
Even if you don’t work, if the family were to lose you, the support you give the children and household would still need to be done – and there could be a considerable cost involved in replacing that, particularly if your children are still very young.
In addition to supporting these fundamental requirements, however, life assurance can also be used to reduce the financial impact of Inheritance Tax – or rather, to protect financial assets which have sentimental value but might be vulnerable to being sold. If your estate is worth more than £325,000 (2011/12) then your assets become liable for Inheritance Tax on death and, if beneficiaries are unable to meet that tax bill from other liquid assets, they may have to sell personal items – the family home, jewellery, antiques, etc – to meet the Treasury’s demands.

Permanent Health Insurance – Regardless of whether you are single or have several financial dependents, if you are suddenly unable to work, your income will disappear completely – and this will have a direct impact on both you and those around you.
Permanent Health Insurance (PHI) is less well known than life assurance but is just as important. In the event that you have an accident or contract a serious illness and are unable to work, PHI is designed to replace the income you lose. This is typically, up to three quarters of your gross income (i.e. approximately your net take-home pay), minus any state benefits for which your situation might mean you become eligible.
This income is paid until retirement age, until the end of the policy term or until you are able to return to work, whichever comes first. Consequently, whilst you are rehabilitating or coming to terms with changes in your life, you can be reassured that your financial position will be unaffected and that the bills will continue to be paid.
This type of policy can be of particular benefit if you are self-employed, i.e. when your job does not come with any sick pay or group pension & protection scheme benefits (of which this form of cover can sometimes be a part).
PHI has a reputation for being expensive, however it comes with a choice of deferral periods and the longer that deferral, the lower the risk. Therefore, if cost is an issue, simply extend that deferral period beyond 1 month to perhaps 3, 6 or even 12 months, and the costs come down significantly. If you receive minimum sick pay from work or savings which can get you through the short term, this cover can be very cost-effective.

Critical Illness – The third main type of protection which we are all encouraged to consider is Critical Illness cover which is often linked with life cover. As the name suggests, this pays out an agreed amount if you become incapacitated or contract a serious illness. Critical Illness pays out a lump sum when that serious illness is diagnosed. The objective is that you can then fund your rehabilitation, pay for changes you need to make to your lifestyle or help you adapt your living environment. For example, you may need to move house to be nearer your relatives or friends. Or, you may need to make changes to your house to add new facilities or accommodate new mobility requirements. Alternatively, you may simply want to give up worrying about work and money and make the most of your opportunities whilst you still can.
Like PHI, Critical Illness can be just as beneficial, maybe more so, for single people with no dependents as for those with a family. For those on their own, the income from such a policy may be all they have to fall back on in the event of such problems.
One thing you need to be aware of with Critical Illness is it comes in many forms with many different definitions of what constitutes ‘critical’ (i.e. under what circumstances the benefits will be paid). Make sure when you discuss the options for cover with your adviser that you understand fully what you are getting for your money – and most importantly what is excluded. Simply looking for ‘cheaper’ in this particular scenario, might leave you bereft if you do not read all the small print.

To alleviate this burden, the Pensions Acts 2007 and 2008 make changes to the Basic State Pension, the State Second Pension and introduce new employer duties for pensions.The employer duties

From October 2012, employers will be required by law to:

• automatically enrol all their eligible employees not already in a good quality pension scheme into a Qualifying Workplace Pension Scheme (QWPS) on the day the employee becomes eligible, and
• pay contributions for every employee who does not opt-out of the QWPS.

Timetable

The employer duties will be staged in over 4 years from 2012. Larger employers will have their duties imposed first, smaller employers last. Any employer with less than 50 employees will have their staging date set depending on the last two digits of their PAYE reference number.

The costs

The amount of contributions that must be paid in order for a scheme to be treated as a QWPS is being phased in as follows:

All employees earning more than the personal income tax allowance of £7,475 will be automatically enrolled into a pension scheme from 2012

* The minimum difference includes tax relief available on employee contributions.

Quality Qualifying Workplace Pension Scheme (QQWPS)

Employers can avoid much of the administration burden associated with automatic enrolment by setting up a QQWPS where:

• the total minimum contribution is 11% of qualifying earnings, of which

at least 6% must come from the employer,

• there is no option to phase in contributions, and
• automatic enrollment dates can be postponed up to 90 days allowing a ‘sweep up’ of eligible employees all at once at the employer’s convenience.

Eligible employees

All employees will have to be auto-enrolled unless:

• they are already in a qualifying workplace pension scheme,
• they are under the age of 22,
• they are over the State Pension Age, or
• they earn less than £7,475 a year (in 2011 terms).

Employees can only ‘opt-out’ once they have been auto-enrolled.

Non-eligible employees must be given the option of opting in to pension saving.

Auto-enrollment is the responsibility of the employer, not the Government or the pensions industry. The Pensions Regulator will oversee employer compliance and has the power to fine employers for non-compliance.

National Employment Savings Trust (NEST)

Employers who do not have, or who will not set up, their own QWPS will have the option of using NEST. This scheme is designed to be low cost and is specifically aimed at low to medium earners. There will be certain restrictions applying to NEST:

• there will be a general ban on transfers in or out,
• there will be an upper contribution limit (currently £3,600 each year),
• limited retirement options and
• limited investment options.

Effect on your business

These changes represent a substantial opportunity to set up QWPSs or QQWPSs ahead of 2012 to minimise the impact of the employer duties on your corporate clients. There are also risks:

• employers with existing schemes will level down contributions to the legislative minimum, and
• individual clients paying regular contributions may stop after 2012 when they are auto-enrolled into their employer’s pension scheme.

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. The information provided is based on our current understanding of the Pensions Acts 2007 and 2008.

Key facts

The framework for these new laws is already in place in the shape of the Pensions Act 2008.¢  Employers will, for the first time, be required to automatically enrol eligible employees into a pension scheme.

¢  Employers will, for the first time, be required to pay pension contributions for any employees who join and stay in the pension scheme.

¢  The Pensions Regulator will police and enforce these new laws.

¢  Even if you have an existing workplace pension scheme, you may have to make changes so that it complies with the new laws.

¢  Employers can either use their own pension scheme to comply with these new laws or rely on a Government built scheme – the National Employment Savings Trust (NEST) scheme.

Do you want to keep control of your employee benefits package or rely on someone else, who knows nothing about your business, to do it for you?

How we can help

As financial advisers with 30 years experience in the pensions industry, we’re familiar with the challenges that businesses will face in light of these new laws and regulations.

We can:

¢  Help you review your existing workplace pension scheme to make sure it will comply with, or exceed, the new requirements, or

¢  If you haven’t got a pension scheme yet, we can help you put one in place.

And we can help with arrangements such as salary exchange that can save you money and offset the impact that these new laws will have on your business.

What happens next?

It’s up to you:

¢  You can wait until 2012 and let someone else, who knows nothing about your business, set up and run a pension scheme for your employees

or

¢  You can set up your own scheme and retain complete control over your benefits package.

These changes are only just over 2 years away – don’t leave it too late

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. The information provided is based on our current understanding of the Pensions Acts 2007 and 2008.

For more information contact us http://www.townandcountryfinancial.co.uk

DECISION TIME

In order to plan an investment strategy effectively, it is first worth clarifying your targets. For example, are you saving for a lump sum – to pay for university at 18 or for a wedding at 30? Or, do you need an income – perhaps to help with school fees?

Your time line and how you need that money will be the two most important determinants of your investment strategy. After all, if you have eighteen years or more over which to raise the money, you can afford to take more risk. However, if you need an income and you need it quite soon – in five or seven years for example, the amount of risk you can take may be limited.

TYPES OF INVESTMENT

Once you know what you need and when, the next thing to look at is how much money you have to invest and what investments there are to choose from. We will not go into detail about the actual asset classes available, this can be done later but we can outline some of the questions you might need to ask yourself before you decide what approach is most suitable for you.

How much risk can I take?

Can you tolerate short-term fluctuations in your capital value in exchange for a higher potential return? In general, if you have a longer-term horizon you might find the potential of some volatile assets outweigh the apparent safety offered by lower risk options. However, even if you are saving for 18 years, if short-term losses will stop you sleeping at night, then the lower risk options are for you.

Will I be protected against inflation?

Inflation is a hot topic at the moment and retaining the purchasing power of your investment over the long term might be difficult without taking some risk. With interest rates at such low levels, many deposit accounts are not paying enough to make up for the price increases we are currently seeing. Over short periods, the risks of more volatile options might not be worth taking – but over 10-20 years, if you want your investment to grow in real terms and not just in absolute terms, you may need to consider other options.

How is the world likely to change as my children grow up?

If you are investing over 18 years, the world could become a very different place. China might overtake America as the world’s largest economy. Countries such as Britain and France could fall behind the likes of India or Brazil. If you are willing to take a few risks, perhaps you could consider a little exposure to such opportunities, just in case.

Do I need an income?

If you need an income from your investment then at some point you will have to find a product that will pay one. Some investments are designed specifically to pay predictable levels of income so that you know where you are from month to month. Others offer the chance either for a higher income or one which has the potential to grow – but will be less consistent and may even require the odd subsidy from your capital to meet specific needs.

TAX EFFICIENCY

Once you know what assets you are looking for, you can then decide how to access them and with children being non-earners, the last thing you want is for their hard earned growth to end up in the hands of the taxman. Thankfully when it comes to children there are plenty of ways to protect it:

1) Use your children’s personal allowances. Children have a personal allowance, the same as an adults (£6,475 for 2010/2011). You can fill in a form R85 from HM Revenue & Customs to have any income received from their savings account or investment paid tax-free. However, you do need to be aware that if you give money to your child that produces more than £100 gross income a year, the whole of the income from that gift is taxed as if it were yours.

2) Individual Savings Accounts (ISAs). These are free from both income tax and capital gains and are likely to remain the first port of call for saving, including for children. Almost any investment (collective funds, cash, shares) can be held within an Isa. There is no set holding period and every individual can invest up to £10,200 each year. Note: ISAs are not open to children in their own name until they reach the age of 16 for cash or 18 for stocks & shares.

3) Child savings bonds. These are offered by friendly societies and allow parents, grandparents, other relatives and friends to all save up to £25 a month on behalf of each child with the benefits then being earned free of further tax. The bond must have a term of at least ten years, mature on either the child’s 18th or 21st birthday and the contributions must be maintained to earn the tax benefits. However, they do offer a valuable alternative, particularly if you are not the child’s actual parent.

4) Pensions. These are still a niche choice for investing for children, but can provide a solution in certain circumstances. Investments into a pension attract tax relief on the way in, but tax is payable on any income received. From the age of 55 investors can take out 25% of the value of their fund as a tax-free lump sum which can be useful in paying for a wedding or helping your children find a deposit for their first home. You can also put up to £3,600 gross every year in a pension on behalf of your child. It will cost a basic rate taxpayer just £2,880 and tax relief is added by the government, but the child will not be able to access the money until they are 55.

5) Trusts. Legislation over the past few years has eroded many of the tax planning advantages of trusts. In general, these are now used to control access to the funds rather than for tax planning. A bare trust is the most common. Income and capital gains are treated as those of the children, which means that they can use all their allowances each year. It also gets round the problem that children cannot hold shares in their own name.

6) Child trust funds (CTFs). Although CTFs were stopped in the 2010 Emergency Budget, millions of parents still have active CTF accounts for their children. Parents, family and friends can add a total of up to £1,200 to the account each year. There is no tax to pay on any income or any gains from the fund. However, as with savings accounts, it remains in the child’s name and they will ultimately have control over how it is spent.

7) Life company regular saving plans. These tend to be used by more sophisticated investors, particularly offshore domiciliaries, expats and international executives. Investors can use them to build up a tax-free lump sum and then assign segments of it to their children. These segments are usually paid out tax-free as long as they fall within a child’s tax free allowance but in the meantime, the policyholder retains control of the investment policy. However, minimum investment levels may be higher than some other options.

HOW TO INVEST

Investment trusts. These are a popular investment for children. They are a type of collective fund, so can invest across a range of assets in order to diversify risk, and are listed on the London Stock Exchange. There are lots of different underlying investment strategies available – from emerging markets to solid, global blue-chip stocks and even corporate bonds – so you can pick and choose the type of fund you require. They have some inherent advantages: They tend to be cheaper than other forms of collective equity investment. Also, they are accessible for smaller savers; using specific savings products you can buy in at a low minimum investment level – perhaps as low as £25 per quarter.

Unit trusts/OEICs. These are also collective funds. Again, they are available from a wide range of fund managers with a wide range of different investment strategies, including bonds, equities and alternatives. These tend to have slightly higher minimum investment levels than investment trusts. Savings plans usually start around £50 per month though some providers offer lower minimum investments to encourage smaller savers.

Individual shares. This is a higher risk option. Put simply, if one company goes bust in a collective fund, an investor may lose 1-2% of their money. However, if that company is the only share that investor owns and it goes bust, he loses all his money. Nevertheless, the rewards can be impressive for those in a position to take the risk.

Conclusion

Investing for children is not so different from investing for any other purpose. You need to decide on your time horizon and attitude to risk and this will inform your investment strategy. You then ensure that saving is done in the most tax efficient way possible. There are a few short-cuts, but disciplined planning is the best way to ease the burden of your dear little things.