Description
Life
Cover - Term Insurance
This pays
out a cash sum (or a regular income) in the event of death within a specified
period of time, thereby protecting the policy beneficiaries within the
specified time period.
- Cheapest way to
buy large sums of life cover.
- No payment is made
on survival after the term of the policy is finished. Policies do not
have a cash value.
- Policies may be
renewable at their end, meaning that they can be replaced without any
further medical evidence.
- Policies may have
a Conversion Option which allows a new whole life or endowment policy
to be effected at the end of the term policy, without any medical evidence,
albeit for a higher premium.
- Policies can be
effected on a level sum assured basis or an increasing sum assured,
whereby the cover increases over the term of the policy, normally in
line with inflation.
- Decreasing Term
Insurance can be effected where the amount of cover decreases on a year
by year basis, an example being Mortgage Protection Insurances.
- Term Insurance
may also be effected to pay out a series of regular tax free sums
instead of a lump sum on death.
Personal
Pensions
These are pension schemes
run by an insurance company, or a friendly society, or a Building Society,
or a Bank or a unit trust for anyone employed or self-employed who is
not in an employers' pension scheme. The scheme is not dependent on the specific
job and therefore enables an individual, to change jobs or move in and out of self-employment and still
retain the
same scheme. It is a 'Money Purchase Scheme', where the pension benefit is
dependent on the amount paid into the scheme, how the scheme investments grow,
deductible charges and the pension that can be bought as an annuity at
retirement from the value of the investments made.
- Tax relief on
contributions
- Capital growth
on investments are tax-free
- Tax free investment
income added to the fund, unless it is dividend on shares or distribution
from unit trusts, which are taxed at 10%
- At retirement
a part of the proceeds (usually up to 25% of the investment value) can
be taken as tax-free lump sum
- The scheme may
include other benefits, e.g. pension for the spouse and dependants,
life cover, illness income cover, accelerated pension in case of inability
to work due to ill-health etc.
- Normal retirement
age can vary between
the ages of 50 and 75
A Mortgage
is a loan secured against the property to be purchased. There are mainly
two categories of mortgages and the are:
Repayment Mortgages
- the amount borrowed (Principal) is paid off gradually together with
interest
Interest Only Mortgages
- Only the interest on loan is paid during the term of the loan. Some
arrangement is made at the same time to pay off the loan at the end of
the term. There are a number of ways that this can be done as enumerated
in the following paragraphs:
- Low Cost Endowment
Mortgage - These are linked to an endowment policy which can either
be unit-linked or based on with-profits. If the investment in the policy
grows at reasonable rate, then the policy will produce enough at the
end of the mortgage term to pay off the loan and even produce some extra
cash. But there is no guarantee of this happening.
- ISA Mortgage -
The objective here is to build up sufficient funds through ISAs to pay off the
initial loan at the end of the mortgage term. As ISAs are tax-free savings,
ISA mortgages are tax-efficient provided the investment required to
generate the required amount is within the annual investment limit for
each year. They are also flexible for short-term underpayments.
- Pension Mortgage
- This is the most tax-efficient mortgage as both contribution to the
pension plan and fund growth is tax-free. The idea here is to use some
or all of the tax-free lump sum available at retirement to pay off the
initial loan amount. But it may have an adverse effect on possible retirement
income. Using one financial tool to meet two different objectives, i.e.
paying off the mortgage loan and having a reasonable sum at retirement
may cause a conflict.
Individual
Savings Accounts (ISA)
The main government
scheme to encourage savings through a tax-free wrapper in a wide range
of investments. These replaced PEPs and TESSAs from 6 April
1999. Ranges of investments are through three main components cash (bank
& building Society accounts and National Savings), insurance (investment
type of insurance plans) and stocks & shares (unit trusts, OEICs, investment
trusts, direct investment in shares, corporate bonds and gilts). The total
investment possible is £7000 for each tax year. Individual limits also apply to each
component. Capital growth is free of capital gains tax, so are the share
dividends and distributions from unit trusts and OEICs. But from April
2004, tax reclaim on the latter will not be possible.
- Available to any
one aged over 18
- Two types of ISAs,
mini-ISA and maxi-ISA, corresponding to different types of investment
· Mini-ISA invests in one of the three components (cash or insurance
or stocks & shares)
- Maxi-ISA must
have stocks & shares component, but can also include the other two components
- In any one tax
year investments are possible in up to 3 mini-ISAs or 1 Max-ISA
- Maximum limit
for each component of Mini-ISAs are cash £3000, Stocks & shares £3000
and insurance £1000 for the tax year of 2000/2001. Thereafter the upper
limit for each component is reduced to £1000, £1000 and £3000 respectively
- For Maxi-ISA limits
are £3000 for cash, £1000 for insurance and £7000 for stocks and
shares
- There are no regulatory
lower limits set
- Investments can
be withdrawn any time, although there may be penalties in relation to
the set-up charges of the scheme
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