Speeding up the process

Recent investigations by the Office of Fair Trading (OFT) show that ISA savers may not be getting a fair deal. Around 11% of Cash ISA holders switch their deposits to a new provider each year. However, following a ‘supercomplaint’ from watchdog, Consumer Focus, the OFT found that cash ISA transfers take an average of over 26 calendar days (against industry guidelines currently set at 23 working days).

Having to wait nearly five weeks after you have made a decision is a long time. In addition, over this period, the OFT found that consumers not only miss out on the higher rates which pushed them to transfer in the first place, there is also a period of up to five days during which they receive no interest at all! The OFT has, unsurprisingly, deemed this unacceptable and has now reached agreement that transfers and interest rates on cash ISAs become more transparent. From 31 December 2010, the OFT recommends that transfers take no longer than 15 working days. Consumer group Which?, however, wants to cut this further, to no longer than 10 days, and also wants a fully electronic transfer system to be set up.

The OFT has therefore recommended that research be done to see whether an electronic transfer system is feasible. They also believe the new rate of interest should be paid from day 15 of the transfer period – even if the transfer remains incomplete – and that interest rates be published on statements (from 2012). Despite the final disagreements, after so many years delaying the process, it is good to see that something is finally going to be done.

Funding a decent income

When making plans to start any pension plan, the first thing to consider is how much income you think you will need. Few people need as much income in retirement as they do while working – the mortgage may be paid off, children will likely have left home and day-to-day expenses will probably fall. However, with more leisure time available, you may have some ambitious plans for travel. All this needs to be considered so you can set some realistic expectations. Once this target figure has been determined, you can then begin to decide how much needs to come from a pension and how much can come from other means. For example, the state pension is £97.65 a week (for 2010/11), plus you may have money in ISAs or from rent from second properties. You may also decide to work part time or take some other type of temporary paid employment. Pension plan savings are then the first step in working out how to make up the difference. Unless you already have a significant work or personal pension arrangement in place, some form of additional saving will be required to meet your target. Just to give you an idea, using annuity best buy tables published in April 2010, because interest rates are at very low levels, £10,000 worth of annual income for a male aged 65 (with no guarantees built in) will require a pension fund valued at over £150,000. For females - or for those wanting to retire earlier than 65 - the fund required will be even higher. Hence the need to start planning and the earlier you start, the easier reaching your target will be.

Use your tax breaks

Benjamin Franklin's view that nothing is certain except death and taxes has yet to be disproved. However, using the tax allowances granted by the Government can at least help mitigate the tax side. At the basic level, there is a personal income tax allowance, an annual exemption from capital gains tax plus numerous tax credits dependent on your circumstances. Schemes like Gift Aid offer tax relief on donations to charity and there is also an Inheritance Tax (IHT) threshold below which nothing is due. Alongside, there are tax efficient investment products, such as Individual Savings Accounts and pensions, which provide relief from both income and capital gains tax (CGT) to differing extents. In addition, some individual assets are specifically exempt from CGT - your home, your car, certain personal jewellery, antiques and UK Government bonds (gilts). In terms of IHT, for the 2010/11 tax year, the threshold is £325,000 (£650,000 for married couples and civil partners) and the value of your estate above this is liable to tax. This can leave beneficiaries having to sell family heirlooms to pay the tax bill. However, there are exemptions available from this tax as well, and a little bit of planning can help you access the range of annual exemptions and allowances in advance. This can help you reduce the liability as far as is practical – or provide the means with which your beneficiaries can pay it without having to sell items of sentimental value.

What can parents do to save enough for their children's higher education?

Universities are expected to cut their budgets. There are also calls to stop subsidised tuition fees for higher earning families. Experts predict the change will be aimed at households with annual incomes of more than £25,000, so the middle classes will be hardest hit by any possible changes. With fees likely to rise, and the lack of likely financial support, the rising costs of living, and so on, is it surprising that so many students graduate with debts in excess of £20,000? The debate for many parents is whether or not they should be supporting their children.

When considering university education, as a parent you should be asking:
1. What will it cost to send my child to university for a year? As a rough guide you might consider:
Tuition fees £3,000
Accommodation £5,000
Books, beer and beans on toast £4,000
TOTAL £12,000
2. Can I afford it?
3. Before committing a great deal of hard-earned cash, is your child suited to university and will future employers see the benefit of this huge investment once your child is “released” into the big wide world?

So the question is, how best to provide the right amounts, at the right time in the most tax-efficient, least volatile and secure manner.

Cash provides security, but in today’s low interest rate climate, most deposit accounts offer little potential for growth. You could consider Cash ISAs, where the interest will be payable with no further liability to income tax, but again you need to do your homework to ensure you get a decent rate, and review it regularly.

Investments in equities over the long term might prove to be a more favourable choice. But, that all assumes you have time. Our advice would be to start as early as you can – the longer you have to save the less you need to put aside each month.

Some will favour child trust funds, but I have to say that I am not a fan of giving children control of large sums at a young age. They might prefer the beach in Bali, or might have some awful boy/girlfriend in tow! If the money is in the parent’s name, they retain control. You may agree to fund Bali or the awful boy/girlfriend, but it will be your choice!