BUYING A SECOND HOME?

An influx of second-home buyers in 2021 continues the boom from the previous year. That five-year plan to buy a bolt hole by the sea or in the countryside has come forward considerably for many buyers.

With many people released from the daily commute, thanks to more flexible working, families are looking for the perfect second home for weekends and longer breaks.

The option to rent the property out and make a little extra cash is an attractive and lucrative perk.

Even before the pandemic, UK holiday home owners were able to charge for a week what you might expect to pay for a private villa with a pool in Greece if they had a place in a desirable location such as Devon or Cornwall.

Rental rates have gone through the roof since the pandemic with many families taking staycations. This trend could continue even with the restrictions lifted on much overseas travel now.

One measure of the boom has been an increase in the number of transactions liable for the second home 3% stamp duty surcharge.

It hit a new high of 84,700 in the second quarter of this year, dropping slightly to 70,000 in the third quarter[1].

The demand is set to continue with a recent report[2] suggesting that one in ten UK adults between the ages of 35 and 45 has made plans to buy an investment property in the next 12 months.

The practicalities

While the idea of a gorgeous bolthole (and potential money-maker) is compelling, there are many financial matters to ponder. Firstly, there’s the 3% stamp duty surcharge when buying an additional home, which is charged on top of standard stamp duty tax.

For a £500,000 property, a second homeowner would pay a total of £30,000 with the 3% added.

Unless you’re a cash buyer, there’s also the mortgage to consider. You will need a deposit of at least 15% and if you already have a mortgage on your primary home, you will have to meet affordability requirements to take out a loan on your new purchase.

Once you buy the property, remember that you will be to pay a second set of bills such as council tax, water, insurance and energy bills, not to mention the extra costs to maintain it and redecorate where necessary.

When you have got your head round the finances, you’ll want to find somewhere that will grow in value, be accessible and, last but not least, be the kind of place you and other holidaymakers will enjoy visiting time and again.

Considering being a landlord?

Investing in a buy-to-let property is still a compelling option for some investors. It’s essential to buy in the right area where the yield is right – and where there’s enough demand.

Many landlords suffered during the pandemic as tenants who suffered a loss of income needed payment holidays from rent. Others ending their tenancies to move back in with family, leaving many properties empty.

Now that life is returning to a more normal state, city-centre rents that dropped during the pandemic are rebounding and landlords are feeling more positive about the market.

A survey of 600 landlords[3], revealed that the proportion of landlords feeling optimistic is the highest it has been for five years. 

If you plan to rent the new place out as a buy-to-let property you have to take out a specialist buy-to-let mortgage and your deposit should be at least 25%.

Landlords must also brace themselves for maintenance costs and times when their rental property is empty.

Want to know more?

Having a professional mortgage adviser can help as second home mortgages can be more complicated than getting a standard home loan, depending on how you’re going to use the place. It can also help to have someone to crunch the numbers on expected costs – and returns – and consider your wider financial situation.

Don’t forget that if you decide to sell a second home further down the line, if its value has increased since you bought it you might have to pay capital gains tax.

Your home may be repossessed if you do not keep up repayments on a mortgage. The firm is not responsible for the content of external links.

Source:

[1] https://www.gov.uk/government/statistics/quarterly-stamp-duty-land-tax-sdlt-statistics/quarterly-stamp-duty-land-tax-statistics-commentary

[2] https://www.aviva.co.uk/aviva-edit/in-the-news-articles/how-we-live-2/

[3] https://www.paragonbankinggroup.co.uk/news/news-releases/landlord-confidence-hits-five-year-high

BUDGET 2021 ROUND-UP

Chancellor Rishi Sunak’s Autumn Budget marked the roadmap for rebuilding public finances.

While major tax rises had already been announced earlier this year, the Autumn Budget contained a number of new measures that will affect savings, investments, pensions and financial planning as a whole.

Here are some of the most important things you need to know:

TAXES ON EARNINGS:

Lower National Insurance thresholds[1] included in the Budget would normally mean workers pay less tax.

Yet the Budget also confirmed the increase in National Insurance by 1.25% from April 2022, which means that most taxpayers will be subject to higher NI from next year. The more you earn, the bigger the impact on take home pay.

The NI increase is not the only threat to income. By freezing the income tax thresholds until 2026 – announced in the March 2021 Budget – people on more modest salaries will also be dragged into higher tax brackets and pay higher tax bills.

A major report by the Institute for Fiscal Studies (IFS) [2] said that the combination of inflation and higher taxes would outweigh any wage increases for those on middle incomes. It warned that middle earners would be around £180 worse off next year compared to their present income.

CAPITAL GAINS TAX:

While there was no change for the capital gains tax thresholds in the Budget, the Chancellor announced that there will be an increase in the payment window for capital gains tax purposes in relation to UK property disposals. It has now been extended from 30 to 60 days. 

INHERITANCE TAX:

IHT thresholds were also unchanged in the Budget. The nil-rate band has been frozen at £325,000 since 2009/10, so IHT has been increasing in real terms over time. Had inflationary adjustments not been suspended, the nil-rate band would now be much higher at £417,000. 

SAVINGS AND INVESTMENTS

ISAs:

The annual ISA allowances were unchanged at £20,000 for the 2022/23 tax year and £9,000 for Junior ISAs meaning investors cannot shelter any more savings from tax.

The Budget also confirmed the rise to dividend taxes. Each investor can receive £2,000 in dividends a year without paying tax. Above that basic, higher and additional-rate taxpayers pay 7.5%, 32.5% and 38.1% respectively.

These rates will rise by 1.25 percentage points in April 2022. For basic rate taxpayers that means the rate will be 8.75%, and 33.75% and 39.35% for higher-rate and additional-rate taxpayers respectively.

GREEN SAVINGS BONDS:

The launch of the Green Savings Bonds was highlighted in the Autumn Budget. They were made available to customers via NS&I on 22 October. The NS&I Green Savings Bond is a three-year fixed-term savings product with an interest rate of 0.65%. Customers can invest between £100 and £100,000. Backed by a HM Treasury-backed 100% guarantee, they will be on sale for a minimum of three months.

PENSIONS:

The rate of pensions tax relief is often rumoured to be on the chopping block, but was left alone.

The allowance has been dramatically cut over the last decade and is now frozen at £1,073,100 until 2026. While this may appear high to most savers, it is leading to a growing number of workers risking breaching the limit. The Office for Budget Responsibility expects the CPI inflation rate to rise from 3.1% in September to 4% over the next year, which will further erode the real value of the lifetime allowance.

Rishi Sunak announced that the government will consult on changes to the charge cap – currently at 0.75% – for pension schemes to allow investment in illiquid future growth projects.

SPENDING:

While the cost of living crisis rages on with inflation rising, there was good news in that the planned rise in fuel duty has been cancelled. “After 12 consecutive years of frozen rates, the average car driver will now save a total of £1,900,” Mr Sunak said.

However, wholesale oil prices have been soaring, pushing up the price of a tank of fuel for drivers over the last few months.

The planned rise in alcohol duty has also been cancelled. In the future, the Chancellor will streamline duty rates which are currently different across many beverages.

Under the new regime there will be just six duty rates on alcohol – the stronger the drink, the higher the rate.

Domestic air passenger duty has been reduced for flights between airports in England, Wales, Scotland and Northern Island– the rate will halve to £6.50 from April 2023.

However, long-haul flights over 5,500 miles to destinations including Hong Kong, Singapore and Tokyo there will be a price rise of £7 per person travelling in economy. For destinations between 2,000 and 5,500 miles in economy will change from £84 to £87 – a rise of £3.

What can individuals do?

It’s worth doing everything you can to take control of your finances and save and invest as tax-efficiently as possible. With inflation rising it’s even more important to keep your money working hard.

That could mean taking advantage of tax breaks such as the annual ISA allowance and where possible consider having dividend-paying investments in an ISA where no tax is due, and ensure you think about inheritance tax planning sooner rather than later.

Source:

[1] https://www.gov.uk/government/publications/autumn-budget-2021-overview-of-tax-legislation-and-rates-ootlar/annex-a-rates-and-allowances

[2] https://ifs.org.uk/budget-2021

AGE AND DISCRIMINATION – and the need for retirement planning

Not a month goes by without a reminder that many of us are going to have to work longer to have a decent standard of living in retirement.

Now that gold plated final salary schemes are a distant memory for most and because we are failing to save enough, there are many pensions pots that just won’t stretch far enough. Combined with the fact we are all living longer, there’s a very real need to keep an income stream going for longer.

Working longer is good advice but there are challenges along the way – age discrimination being one.

Almost 3 million recent job seekers over 50 (52%) believe their age has made employers less likely to hire them, according to a new report[1].

The ‘Working Late: Over 50s and employment’ study found that 46% of job seekers aged 50 – 59, and 64% of job seekers aged 60 – 69 felt their age put them at a significant disadvantage when looking for jobs.

It’s not just about those switching jobs later in life, however. Many retired people decide to enter back into the workforce – perhaps after a change of heart about retirement or due to a shift in circumstances.

Another study[2] revealed a lack of confidence in re-entering the world of work. More than half (55%) of retired people aged over 55 did not believe they would be able to find a paid job and only one in five who would like to work were confident they would be able to find paid employment.

The bleak outlook, particularly for women, is reflected in the latest official labour market statistics for the three months to August 2021[3] that show the effect on older workers of the coronavirus pandemic.

There has been a fall of 89,000 workers aged 65+ compared to the first three months of 2020. This is a percentage fall in employment of nearly 6.3%, nearly four times the rate seen in the 16-64 age group. There were 283,000 more ‘inactive’ over 65s since the pandemic – mostly retired – and nearly seven in 10 were women.

Be prepared

Looking for work is often motivated by money. When asked about driving factors for why over 50s were searching for a job, 29% stated it was wholly financial.

However, it’s not all about the cash. Over a quarter (26%) said that their search was driven entirely by other aspects, including life satisfaction as well as social and mental health benefits. The majority of respondents stated their motivations were equally financial and non-financial.

If working later in life is going to be viable, it is important that older groups are given the opportunities and support they need to stay in work.

From a financial planning point of view, this all reinforces the need for careful retirement planning to ensure your finances can stand up to these and any other challenges ahead.

The latest number crunching on retirement living standards[4] tells us the money needed for a comfortable retirement has increased by £600 to £33,600 a year for one person and by £2,200 to £49,700 for a couple.

While this differs for every individual, the earlier you start the better, regardless of the level of income needed.

For those worried about their finances and the implication it has on when they might retire, it is better to be aware of the options available than bury your head in the sand. An adviser can help you navigate your options, whatever your age.

Source:

[1] Over 50s in the labour market: a report for Legal and General. Centre for Economics and Business. 2021

[2] Just Group, Research conducted by Opinium on behalf of Just Group among 1,043 UK retired and semi-retired adults aged 55+, between 21st and 26th April 2021

[3]https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/earningsandemploymentfrompayasyouearnrealtimeinformationuk/october2021

[4] The Pension and Lifetime Savings Association’s retirement living standards, October 2021

CALLING ALL BORROWERS – is it time to remortgage?

With mortgage rates so low at the moment, it seems like a no brainer for borrowers to explore if they are getting the best deal on their home loan.

The idea of reducing mortgage payments seems even more attractive while prices for everything else seem to be rising, whether that’s energy bills or your weekly food shop.

Rates on mortgages remain extremely competitive with two and five-year rates available under 1%.

Borrowers have been taking advantage of record low rates in their droves. The latest figures show remortgage approvals in the summer grew to their highest level since last March[1].

Since a mortgage is likely to be your largest monthly outgoing, it’s crucial to get the best deal possible to ensure you don’t pay more interest than you need to.

The golden rule is not to slip onto your lender’s standard variable rate (SVR) when your existing deal comes to an end. The average SVR today is around 4.4%.

Fixed rate mortgages remain popular as they allow you to lock into a rate for a number of years, bringing peace of mind that your monthly repayments won’t rise during that time.

If you are worried about interest rates rising and you’re on a variable rate, you might want to switch to a fixed-rate loan to buy certainty over repayments.

While interest rates have been a record low of 0.1%, last month the Bank of England cautioned it may soon raise the base rate to combat rising inflation, which jumped to a nine-year high in August [2], not helped by soaring energy prices.

A rise in interest rates usually feeds through to mortgage rates.

The cheapest mortgages today are still reserved for those with the largest deposits, as they pose a smaller “risk” than those with only smaller sums. Yet savings could still be made for those with much smaller deposits.

It’s not just those coming to the end of their existing deal who might want to remortgage. Homeowners with a substantial amount of equity in their home might want to release some money – perhaps to fund a renovations or perhaps to help younger family members get on the property ladder. This works by taking out a new mortgage that is larger than your existing mortgage.

Or you want to remortgage to overpay by more than your lender will allow. If you have come into some money perhaps with a large bonus from work or an inheritance, you might be keen to pay off a chunk of your mortgage to save on interest payments and fast-track being mortgage-free. Most mortgages come with a limit on the amount by which you can overpay. Remortgaging is one way to pay down the loan and get a better rate.

Finding the best deal

Now is a very good time to check if it’s possible to secure a good rate. Lender competition is fierce, which has helped drive mortgage rates down over the last 12 months.

But it’s important to find the right mortgage – and not simply go for the cheapest rate. That’s because there are other things to factor in such as the arrangement fee and valuation and legal costs. It might be cheaper to go for a loan that carries a slightly higher rate if the fee is far cheaper than the loan with the lowest rate.

It’s also important to explore what’s on offer from all lenders in the market which is where a good mortgage adviser can be helpful.

Your adviser will look for the best mortgage for you and they can give you access to far more products than if you went direct to a lender. They also have access to exclusive deals not available to borrowers who don’t have a broker.

A mortgage adviser deals with lenders on a day-to-day basis which means they will know what the application process is like for each one and which lender can process things with minimal delays.

It can be more difficult for certain groups such as self-employed workers to get a mortgage. An adviser can help by approaching the more flexible lenders for your circumstances.

Some mortgage offers are valid for up to six months so even if your existing deal doesn’t expire until 2021, you can still secure a low rate now. It may even work out cheaper if you end your current deal early and have to pay early repayment charges.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Source:

[1] Bank of England Money and Credit report – August 2021 

[2] https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/august2021 

CARE COSTS –

THE LOW DOWN

It’s impossible to predict what kind of care might be needed in your later years. But it’s a certainty that we will all need it in some form. Requirements will range from an hour’s assistance at home every day to full-time residential nursing care.

In England alone, Age UK estimates that 1.2 million older people will be in need of care and support by 2040 [1]. That doesn’t necessarily mean being in a residential care home. Some will require little or no formal care and some will fall somewhere in the middle. This can make it difficult to plan ahead – and many don’t bother.

A study revealed that almost all (96%) parents over 60 admitted that they have not put any plans in place to pay for any long-term care and just 21% of these intend to make provisions at some stage. [2]

Having a pot of money in place for care needs is sensible to reduce the risk of facing huge unexpected bills at a time when you won’t want added stress. Here are some of the things you need to know about long-term care planning.

PAYING FOR CARE IN LATER LIFE

Care costs are paid for either by you – known as self-funding – local authority or NHS funding. The government support on offer is reserved for those with total capital assets worth less than  23,250 [3] in England. The threshold is 50,000 [4] in Wales and 28,750 [5] in Scotland.

If your assets do fall under these limits, you’ll go through a financial assessment with the local authority to see what funding you’re eligible for. While around half of care home residents are self-funding [6], most people are completely unprepared for any care costs.

THE COST OF CARE

Without knowing what kind or level of care you’ll need, there’s no blanket figure that all individuals should set aside.

However, the cost of residential care routinely takes people by surprise. The average cost of a residential care home in England is  681 per week. This increases to  979 per week, or  50,000+ a year when nursing care is included [7]. But families can easily face far higher costs if you or a loved one ends up with particularly demanding health needs.

REDUCING WEALTH TO AVOID CARE FEES

Reducing the value of the assets that are considered as part of a local authority financial assessment could backfire as very strict rules apply. If the council believes you’ve deliberately given away your home or other assets to avoid paying care fees, it will treat those assets as if they still belong to you.

There is the option of putting money into a trust, but getting financial advice to do so is crucial to ensure you’re not breaking rules about “deliberate deprivation of assets”.

THE IMPORTANCE OF FINANCIAL PLANNING

Boris Johnson has recently announced that from 6th April 2022 to 5th April 2023 National Insurance contributions will increase by 1.25% to 13.25%.The increase will apply to: Class 1 (paid by employees) which will help pay for Social care.

The topic of long-term care is not one commonly discussed among families, however. Only 28% say they have discussed the costs of long-term care with their parents [8]. Yet the number of people that need to have care in later life is likely to rise with the growing number of “older” old people.

A financial adviser can help you make a plan to provide for long-term care costs, and take the uncertainty out of the situation, should it arise.

If you don’t end up needing to pay for care, then your savings can simply be passed on to family as inheritance.

Source:

 [1] Age UK: Health and Care of Older People in England, July 2019

[2] Schroders Personal Wealth, Family and Finances Report, 2021

[3] https://www.nhs.uk/conditions/social-care-and-support-guide/money-work-and-benefits/paying-for-your-own-care-self-funding/ 

[4] https://gov.wales/charging-social-care

[5] https://careinfoscotland.scot/topics/care-homes/paying-care-home-fees/capital-limits/ 

[6] https://www.carehome.co.uk/advice/who-pays-what  

[7]  Which? Care Home fees article

[8]  https://assets.ctfassets.net/l7z7tzydh3um/33sO4i2cz07rq0zMAhf7Db/515ca15d5d8c4d6af047aaac3f26dbe3/SPW_Family_and_Finances.pdf  

MARKET VOLATILITY

AND RISK

Investors have much to think about when choosing and understanding investments. Extreme market volatility during the pandemic provided the most recent demonstration of how markets can swing wildly. Understanding volatility is vital to the overall process of choosing the right investments.

So what is it exactly?

Volatility is up-and-down movement of the market. It is a measure of risk but it is not necessarily the same as risk. A share can be high risk but not volatile, for example. Volatility keeps on changing, so there are periods of high and low volatility.

Volatility can be triggered by any number of things. The UK stock market can fluctuate because of problems on home soil as well as global issues. Goings on in the Eurozone, the US and problems as far flung as China all had a turbulent effect on markets. But volatility and short-term losses are inevitable and it’s important to accept they are part and parcel of investing.

It’s not possible to know when a big drop in the markets will hit. But the good news is that periods of losses are often followed by strong rallies, as we’ve seen since the coronavirus vaccines started to be approved and rolled out. 

Investors only worry about volatility when shares are falling. When this happens, remember that any loss or gain is only realised when holdings are sold. Until then, any losses (or gains) are just on paper.

It’s easy to fall into the trap of worrying about short-term movements, but since investments are for the long term, short-term volatility is not necessarily a reason to panic and make drastic changes.

Should you feel nervous, you can review the reasons why you chose your investments and take comfort that in time your savings should recover.

Risk is an important aspect of investing. The aim of an investment is to generate returns that will help to achieve your long-term goals. But this means taking some necessary risks to get there.

Matching your attitude to risk with your investments is crucial to getting the right portfolio for your needs. There’s no one-size fits all advice when it comes to investing, yet spreading risk is often said to be the golden rule of any stock market investment.

Strategies of long-term investing, diversification and regular saving will help smooth out any bumpy rides – in other words, volatile periods.

Diversification across different markets and asset classes will enable your savings to adapt to different markets, and crucially, reduce exposure to one individual area.

By investing regularly – a monthly amount – market dips can actually work to your advantage. When share prices go up, the value of your stocks rise. When they go down your next contribution buys more. This is known as “pound-cost averaging”. Regular investing also removes the need to get the timing right. Plus, buying stocks at a lower price means you get a higher return when the market swings back up.

The relationship between risk and return is an important one. All investments carry some element of risk but the higher the risk, the higher the potential return. But there are no guarantees. If you are considering an investment that offers high returns, ask yourself if you can afford to lose some or all the money you invest.

Your capital is at risk. The value of your Investments can go down as well as up and you may get back less than you invest.