Things to do during lockdown – Part 3

These are uncertain times during which the UK Government has advised its citizens to remain at home in order to stay safe and to protect our vital National Health Service. The UK lockdown measures have now been extended until early May. Therefore if you find yourself with some available downtime during this period, it may be a worthwhile exercise to put your basic financial planning “house in order” with the help of our simple checklist.

Review old insurance policies

Every month, do you see that direct debit leave your bank account and go off to an insurance provider for that protection policy you took out many years ago? Or do you have that prehistoric mortgage endowment policy which you keep receiving annual statements for? Do you know what you are actually covered for and whether this is sufficient for your needs?

Insurance may also need updating following changes in your personal and financial situation and/or following certain life events, including:

• A new job or changing to self-employment.
• You may have sold your business and be considering retirement.
• Marriage or divorce.
• Children or grandchildren.
• A change in either yours or your partner’s health.
• Paying off a debt or other liability.
• Moving to a new house or buying/selling property.
• Making financial gifts from your estate.

Right now might be the time to review your protection policies to ensure you are adequately covered in the event that you may have a need to make a claim on your insurance policies. If you cannot locate your original policy documents, you should contact your insurance provider to find out what exactly you are covered for.

As you review these policies, you should also check if your life assurance policies are held in trust. Ensuring these policies are written under trust will mean that when the funds are paid out, they do not automatically form part of your estate or your beneficiary’s estate on your death.

Consider new insurance policies

If you do not have any insurance currently in place, then this is something that you may wish to consider. Putting in place a basic level of protection is probably more affordable than you think, and you could buy certain life insurance for just a few pounds a month.

There is currently (and what is referred to in the industry as) a ‘protection gap’ in the UK. This means that a large proportion of the UK would be left financially vulnerable should they, or their spouse, pass away prematurely or suffer an illness or injury that would affect their ability to earn. Despite this apparent financial vulnerability and need for a safety net, a research study by the Financial Conduct Authority (FCA) highlighted that 65% of the UK adult population has no form of insurance. Among the 35% who do have some form of insurance more of them have critical illness insurance (10%) than income protection (4%) and it is estimated that from c 26.7 million households in the UK, just 300,000 have an income protection policy in place.

Given the recent COVID-19 pandemic and the increasing levels of staff being furloughed or made redundant now could be the time to consider your ongoing protection needs for you and your family.

Consider making gifts

Right now might be a time that someone close to you needs some financial support more than ever and you may want to help. Making an outright gift from capital is usually classed as a Potentially Exempt Transfer for Inheritance Tax (IHT) purposes. This means that if you were to pass away within seven years of making the gift, it would form part of your estate for IHT purposes unless the gift qualifies for an exemption.

One such exemption is the IHT exempt annual allowance of £3,000 per tax year. Each individual is able to make an outright gift of £3,000 per annum which is immediately exempt from their estate for IHT purposes. In addition, once the current year’s allowance has been maximised, you are able to utilise the previous year’s unused allowance meaning the first gift could amount to £6,000, which is immediately exempt from IHT.

Each tax year you can also give away up to £1,000 per person in consideration of marriage or civil partnership (or up to £2,500 for a grandchild and up to £5,000 for your son or daughter).

Finally, where you have the disposable income to do so, gifts out of income could also be immediately exempt from IHT provided the gifts are from disposable income, the intention is to establish a regular pattern of gifting and, they do not adversely impact on your standard of living.

Concerns have been raised about the potential longevity of these valuable reliefs with several influential reviews calling for wholesale change to the IHT regime. With asset valuations potentially lower, if you feel that you are in a position to do so, now may be an opportune time to make those gifts.

Charitable donations

You only have to hear the story of Captain Tom Moore, a 99-year-old war veteran who has raised an enormous amount for NHS Charities Together by setting out to walk 100 lengths of his garden before he reaches 100, to realise how many people are making charitable donations during the lockdown. You may be making donations to a charity close to your heart at this time too.

If you are a UK tax payer, when you make these donations, you are usually able to elect to apply Gift Aid to these contributions meaning the charity you are donating to receives an extra 25%, at no cost to you.

In addition, if you pay tax above the basic rate, you can claim the difference between the rate you pay and basic rate on your gross donation (i.e. the donation amount after gift aid is applied). You should therefore remember to make a note of the donations you make so that you can apply for the additional relief on completion of your self-assessment tax return.

If you need some support with your financial planning, please do not hesitate to contact us.