Trump to the left of us, Brexit to the right…stuck in the middle with EU

There has been a lot of uncertainty surrounding Brexit and what impact this will have on people’s investments and pensions. A question I have been asked recently by clients, is whether they should move their investments to a safer fund or stick with their current strategy. At any given time, you need to accept the value of your investment when reviewing it. What you wish it was worth is not as important as taking a cold hard look at your circumstances for how you wish to strategize your investment going forward.

There are some things I would suggest you consider before giving any sort of advice:

  •  How long do you have before you will most likely need to mature your investment?

  • How much of your money can you afford to lose?

  • How will you react if you lose a significant value of your fund? Will you cash in your investment or move to a safer option or remain committed to your fund strategy?

  • What portion of your fund/investment would you call significant?

What has this got to do with Brexit? It has everything and nothing to do with it. I would not recommend that people try to time the market in terms of getting in and out of investments. Brexit may be the most immediate danger to the stability of the market, but it won’t be the only one over the coming years. So, if a person learns to see their investment as something that will go through good and bad periods, they will improve their chances of making the right decisions at different times.

One of the important things to note, is how long you plan to invest your funds. The longer you intend on investing your money the potentially greater the risk you can afford to take. The next thing is trying to work out how comfortable you will be with these fluctuations and this will help determine how much risk you can take.

So, what will happen with Brexit? Well, nobody really knows. Perhaps it will be a “Hard Brexit”. Maybe there will be a referendum or an election which will change the direction the UK is taking. What impact this has on investments is anybody’s guess. One would not expect that Brexit should lead to a worldwide recession like the crisis of 2007/08.

Did you also know....?

Did you know... you can get Whole of Life cover which offers you several options once you have paid into it for 16 years. Following this time, every year thereafter you will have an option to continue paying or encash the policy (receiving up to 70% of your premiums back) or stop paying for the cover and you will maintain a specified amount of Life cover forever.

Did you know... Aviva Best Doctors is a second medical opinion for any chronic or troubling ailments affecting quality of life. Your partner, your children and your parents are automatically included on this benefit. The list of best doctors around the world may clarify that you are getting the best care/treatment or they may recommend an alternative (or newer) treatment. For example, sports injuries, skin diseases, cancer, blood diseases to name just a few. This feature is available at no additional cost and Aviva will match the lowest market price available for the cover.

Did you know... a Financial Broker has access to the best prices and special offers that are not always available through individual financial institutions and in most cases can save you money on a policy. A broker is not tied to one provider so can compare companies to find the best deal and price.

Did you know... some people may be hesitant to apply for life assurance for personal health reasons. I recently helped a 63-year-old client to obtain life assurance cover even after she went through an aggressive form of breast cancer 7 years ago. Even if she had been declined in this application, since she was under 80 years of age, there is an over-50’s life policy available to apply for irrespective of your health.

Did you know... that some people are able to drawdown all their pension funds into their hands as cash. This can be dependent on the type of pension you hold and the amount in that pension.

Did you know… that tax refund/relief is available for people who take out salary protection which pays them an income if they cannot work due to illness or injury. This tax relief is like a pension contribution and is at your standard rate of income tax (20% or 40%). So, if you were paying €50 per month, you would receive tax relief/refund of €10-€20 per month.

Did you know… that a lot of self employed people take out salary protection, life cover and make pension contributions where the company pays the premium.

Did you know....?

Did you know... after the recent budget many people will now get full access to their Approved Minimum Retirement Fund (AMRF). This is the case when their annual state pension is over €12,700 per year.

Did you know... the inheritance threshold for children is now €320,000 before tax is due. This means that they can inherit up to €320,000 from your estate but everything over this amount is subject to Capital Gains Tax of 33%. This tax will accrue interest very quickly if not paid when it falls due.

Did you know... both parents can avail of an annual gift exemption for their child up to €3,000 per year without it counting as inheritance. Parents can setup an annual savings plan of up to €3,000 per year (paid monthly if desired) with their child as the benefactor which can be a way of utilising the annual exemption over a long period of time.

Did you know... most life assurance companies are treating vape smokers as full smokers. This can potentially double the cost of all assurances. There is still currently one company that doesn’t charge smokers the full extra cost.

Did you know... most people take out life assurance (mortgage protection), when they take out a mortgage. In some cases this is directly through the mortgage provider who cannot offer the most competitive cover or the best benefits.

Did you know... not all life assurance is the same. Some life companies have extra benefits for free on their life cover plans. For example, some companies have an extra benefit which allows you, your children and your parents’ access to a second opinion professional service.

Did you know... some companies have more life cover and serious illness coverage for children. One company in particular offers up to €25,000 serious illness cover for children, hospital cash payments and overseas children’s cover.

Did you know... in most cases these extra benefits do not cost anymore because the life companies will price match with their nearest competitor. What frequently happens is that it is easier for people to take out life assurance with the mortgage so many people are losing out on benefits because they have not reviewed what they were covered for initially.

Did you know... many people I meet for the first time are not aware of their pension entitlements at retirement. Most people know that they should save into a pension for retirement but they may not understand what they will be getting from their pension at retirement. As a rule of thumb you are normally entitled to a tax free lump sum from your pension and the remainder of it is income subject to income tax.

Pension Update: AMRF and Potential Retirement Options

When you retire you are usually given several options for your pension savings. In most cases it involves a tax free lump sum and an option with the remaining balance. This is normally an option to buy a Pension/Annuity for life or alternatively to reinvest the balance into another pension vehicle called an ARF (Approved Retirement Fund) or an AMRF (Approved Minimum Retirement Fund).

A new revenue update carried out in recent months may be very beneficial for anybody who has or will have an AMRF after drawing down their pension benefits. Previously pensioners who held an AMRF could not access their funds before they were 75 or unless they had a guaranteed pension/annuity of €12,700 a year. This created problems for those who were on the full State pension but with no other income as the maximum they receive is €12,651 (€243.50 per week).

As a result of this update, Revenue will now accept the Christmas Bonus payments to those receiving payments from the Department of Social Protection. This means that some people who were originally below the €12,700 annual income threshold are now eligible to deduct more income from their AMRF policy.

AMRF holders currently on the maximum rate of State pension should be able to access their funds in full in December this year after they receive the Christmas bonus on their State pension. Some people may not pay income tax over age 65 if their total income is less than €36,000 (married couple) or €18,000 (single person). A person/couple could use this as a strategic way to drawdown these pension benefits in a tax efficient manner.

Over a period of years, a retiree may be able to completely withdraw their current AMRF tax-free. They could withdraw it faster but might pay some tax on the withdrawals. I would always suggest that the most prudent way of doing this is with the help of a qualified accountant who can help calculate the most tax efficient way for your personal circumstances.

If you feel you may meet the €12,700 income criteria at this time, you can look to attain official documentation to confirm this. Some people do this by contacting the social welfare services office on 1890 500 000 and request a “Statement of Social Welfare Payments”.

What is a Guaranteed Pension/Annuity?

This is effectively a guaranteed Income for life and is taxable as income. The state pension, public service pension and private pensions are the main methods of building up such an income.

Unknowingly Underinsured - Restructuring Mortgage Protection

A new study undertaken by a leading life company has found that many families who fell into arrears on their mortgage during the recession may now be underinsured on their mortgage protection policy.

The impact of the recession resulted in around 1 in 8 mortgage holders, at its highest in 2013, falling behind on their payments.

As mortgage protection policies generally cannot be restructured, in most cases a new policy would need to be put in place to reflect the fact that the mortgage isn’t reducing or to match the revised mortgage agreement.

While no one likes to keep considering issues relating to their own or loved ones’ mortality, it’s important that policy owners take the time to reassess if their cover is adequate especially if they have a family with an ongoing need for a home to consider.

The case study looked at a couple who had taken out a €300,000 mortgage for 30 years in 2004, the couple also took out the equivalent amount of mortgage protection.  In 2014 their bank agreed to switch them to interest only for 4 years and they then return to full repayment in 2018. Should either pass away the individual left behind would currently have a payout shortfall of €11,569 – that being the difference between what they owe and what a typical mortgage protection policy would cover.

When the interest only period ends, the lender will re-establish repayments in one of two ways. They may extend the term sufficiently to ensure that if the homeowner resumes the monthly repayments at the original amount the loan will clear, usually after an extra couple of years. Or they can increase the regular repayment amount so that the arrears are repaid over the original mortgage term. Either way, there’s likely to be a shortfall. The higher the repayment, the quicker the shortfall may reduce.

There are a number of situations where mortgage holders in arrears enter into special agreements with their banks where it would be necessary to review or amend the mortgage protection cover in place to avoid any underinsurance. Some options designed to help the homeowner stay in their home are as follows;

  1. Interest Only – over one year (probably beyond 2 years) regardless of whether the term is extended or repayments are increased in the remaining years

  2. Interest Only – up to one year

  3. Reduced Payment (less than interest only)

  4. Reduced Payment (greater than interest only)

  5. Term Extension

  6. Arrears Capitalisation

  7. Payment Moratorium

  8. Deferred Interest Scheme

  9. Split Mortgage

Protecting Your Legacy

Saving enough of your hard-earned money into your pension to prepare for retirement is a good idea. But how do you protect what you have saved and make sure it goes to your family

 The advantages of having a retirement fund include tax relief on your contributions, tax-free growth on its investment and you can take a tax-free lump sum at retirement of up to €200,000. However, if you were to pass away what you leave behind as a legacy financially, including your pension, will more than likely be subject to tax.

Your Total Retirement Fund

Think of your total retirement fund as a pot. If you leave your pot to your child it will potentially be subject to inheritance tax or income tax. By using a small proportion of the value of your pot on an annual basis you can set up and pay into a life insurance policy, which will cover the tax bill that will inevitably be due. In this case, 100% of your child’s inheritance from your retirement fund can be protected.

You may or may not be familiar with what is known as a Section 72 life insurance policy which is used to help offset an inheritance tax liability. It is a special insurance policy taken out specifically to help pay taxes arising from inheritance. If setup correctly, the money paid out, when it is used to pay these taxes, will not be subject to tax.

You may leave your Approved Retirement Fund to your husband or wife to make use of when you pass away. It won’t be subject to inheritance tax but any money they take out of it will be liable to income tax.

• If they decide to cash in the entire fund it will be subject to PAYE at marginal rate

(plus PRSI and USC).

• If they don’t take any money out, the fund will still be subject to tax. From the year they turn age 61 ‘Imputed Distribution Rules’ will apply which means income tax is payable on an annual minimum withdrawal amount drawn down from the fund.

And when your spouse passes away the retirement fund may then be left to your children. Alternatively, you could consider leaving your retirement fund to your children.

Case Study: “I don’t really know what we have, how can you help and if so, how much will it cost?”

Enquiry:

I received a call from Mary, a potential new client, asking me how I could help her and her husband to understand their current cover and pension provisions. She stated she had a mortgage protection policy but wasn’t sure exactly what this covered. She remembered her partner (Peter) taking out an insurance policy which included some illness cover but didn’t remember exactly why they had the policy. They both had various pensions with different companies and employers and she wanted to see if it would be worthwhile merging them.

Cost:

Mary hadn’t previously used a broker so was a bit apprehensive. “Before we go any further, what is the cost for you to review our policy’s?” I responded with “If you are happy for me to be your broker on these policies, there is no additional cost for you.” Mary: “But how do you get paid?” Me: “In many cases a broker’s fee is included in a policy whether you use a broker or not. You can request a fee-based charge which I can calculate based on work required but this will not reduce the cost of your existing plans.” In short, most people prefer to pay through fees paid direct from the pension/life providers.

Information gathering:

Mary asked me to investigate their policies and I informed her that if both partners simply sign a document entrusting me as her broker, I could obtain all the information required to review her policies. Mary asked if this would change her policies in any way or cost her more money. I reassured her that this just allowed me to discuss her policies with the companies but that it did not authorise me to make any changes or give any instructions that would impact these plans. I emailed this one-page document to Mary and they both signed and returned it to me.

Meeting:

I met with Mary and Peter following my review and was able to outline the exact cover and pension savings they currently held, along with the pro’s/con’s to making changes or leaving in place. They informed me of their priorities and as their children were in their teens there wasn’t a necessity for as much life assurance, so they decided to direct more of their funds towards their pension.

Peter had become a non-smoker, so a cheaper price or more cover for the same cost became available to him. Mary had the option to combine two pension plans, however she was better off moving it into a pension bond in her own name. If she had chosen to combine, she would have lost a tax-free lump sum option that was unavailable in her existing employers pension plan.  

Second Opinion?

Being diagnosed with a serious illness would be an emotionally overwhelming experience if it happened to you. You would have lots of questions: What will happen now? Is the diagnosis correct? Will the treatment be right? How can I be sure? Now, there is someone to help you answer these difficult questions. The result could save your life. If you or a loved one were diagnosed with serious illness, Aviva Best Doctors - Second Medical Opinion can help.

What is Best Doctors - Second Medical Opinion and how can their service help?

  • Best Doctors - Second Medical Opinion is a global organisation which brings the world’s leading medical expertise to you and your family offering a second opinion when you need it most.

  • Best Doctors - Second Medical Opinion has a unique and well-renowned network of over 53,000 peer reviewed medical professionals. Having such expertise at their fingertips and supported by a truly caring service team, is the reason why thousands of people around the world turn to Best Doctors - Second Medical Opinion when they need it most.

  • Best Doctors - Second Medical Opinion can help you with those questions that are likely to be racing around your mind if you were diagnosed with a serious illness.

An in-depth review of your medical files will be conducted by a Best Doctors medical specialist to help verify your diagnosis and treatment options. The process can reduce potentially serious complications that can result from a misdiagnosis, and help you and your treating doctor determine the proper course of action.

But Best Doctors - Second Medical Opinion isn’t just for serious life threatening illness. You can use the service for any chronic or troubling ailments affecting quality of life. For example, sports injuries, skin diseases, cancer, blood diseases to name just a few.

This feature is available at no additional cost and Aviva will match the lowest market price available for the cover. It can even be used for conditions diagnosed before you took out your Aviva policy and is available with the following Aviva protection policies.

  • Term Cover

  • Mortgage Protection

  • Specified Illness Cover

  • Personal Income Protection

  • Executive Income Protection

  • Pension Term Assurance

Terms and conditions apply. If you currently have a Life Assurance policy and wish to review your cover, it’s worth consulting a financial broker.