Posts By: DG Financial

FINANCIAL ADVICE DURING DIVORCE

Posted on September 23, 2024 by - Uncategorised

Your path to confidence and a secure future.

Divorce can be bewildering, especially when managing your finances. However, understanding your options can make the process more manageable. Financial concerns may not be your first thought during a marital breakdown. Still, given the significant impact divorce can have on your financial future, it’s crucial to take proactive steps to safeguard your financial security.

Often, decisions are made in emotionally charged settings, and the financial ramifications may not become apparent until much later. Involving professional financial advisers alongside your solicitor can be invaluable. People frequently consult financial advisers after a divorce settlement is agreed upon, but engaging a financial planner early on can help shape the settlement more effectively.

Role of professional advice

Your solicitor will handle the legal aspects of your divorce, while your professional financial adviser will focus on the long-term financial implications of your decisions. They will guide you throughout the process and beyond, helping you understand your financial situation thoroughly. They can also help to relieve the burden of decision-making and administration by assisting with paperwork and meeting deadlines.

Planning for your financial future post- divorce is imperative. Your needs and circumstances will likely change, making budgeting a necessity. Obtaining a copy of your credit report is a good starting point, particularly if you need a new mortgage.

Tax implications of divorce

Divorce is a complex process that involves the careful division of assets to meet the needs of both parties while minimising the tax impact. A vital aspect of a divorce settlement is understanding how it will influence your tax position, including Income and Capital Gains Tax. During a specific window, spousal exemption applies, and assets can be transferred on a no-loss, no-gain basis, which can help mitigate some tax liabilities. However, once this period lapses, you may be liable for Capital Gains Tax on certain assets.

Navigating these intricacies can be daunting, but this is where expert financial advice becomes invaluable to guide you through the process, helping you attain a favourable outcome while considering all relevant tax implications.

After the divorce, the familiar landscape of your financial life may be significantly altered, leading to numerous questions about your future. One of the most pressing concerns is whether you will have enough money to sustain your lifestyle. While this is challenging, your professional financial planner will provide the clarity you need through cashflow modelling.

This sophisticated technique projects your current financial status (income, expenditure, assets and liabilities), helping identify potential shortfalls. By analysing your monetary inflows and outflows over time, cashflow modelling offers a clearer picture of your financial future, empowering you to make informed decisions and plan confidently.

Your financial adviser will ensure you have the support and guidance needed to navigate this transitional period. They will help you understand your financial standing, set realistic goals and develop strategies to achieve them. Whether planning for immediate needs or securing long-term financial stability, their expertise is crucial in helping you move forward with confidence and peace of mind.

Pensions and divorce

Pensions often represent one of the most significant financial assets in a divorce settlement, making it crucial to address them effectively.

Seeking professional financial advice early on is essential to navigate the complexities and ensure a fair outcome. There are three primary ways to handle pensions during a divorce: pension sharing orders, pension offsetting, and pension attachment or earmarking.

A pension-sharing order is one of the most straightforward methods, as it divides the pension assets between the divorcing couple, providing a clean break. This means that each party receives their share of the pension pot, which they can manage independently. The advantage of a pension-sharing order is its clarity and finality, allowing both individuals to move forward without future financial entanglements related to the pension. However, the process can be complex and may involve significant legal and administrative work to implement the order correctly.

Pension offsetting, on the other hand, involves balancing the value of the pension against other assets within the marital estate. For instance, one spouse may retain the entire pension, while the other might receive an equivalent value in property or other assets. While this method can be flexible and cater to the unique needs of the divorcing parties, achieving a fair split can be challenging. Valuing pension benefits against tangible assets like real estate requires careful consideration and expert valuation to ensure neither party is disadvantaged.

Pension attachment or earmarking directs a portion of the pension benefits to the ex-spouse when the pension pays out. Unlike pension sharing, this method does not provide a clean break, as the pension remains in the original holder’s name. The ex-spouse receives the agreed portion of the benefits upon retirement.

While pension attachment can be more straightforward to arrange and implement, it ties the financial futures of divorced individuals together, potentially leading to complications. Additionally, the ex-spouse depends on the pension holder’s decisions about retirement timing and fund management, which may not always align with their interests.

Understanding these options and their implications is critical in making informed decisions during a divorce. A professional financial adviser can provide invaluable assistance, offering tailored advice and helping you navigate the legal and financial intricacies involved. They can evaluate each method’s benefits and drawbacks based on your specific circumstances, ensuring you achieve a fair and manageable settlement.

Addressing pensions effectively in a divorce requires careful planning, expert guidance and a thorough understanding of available options. By engaging a financial adviser early in the process, you can ensure that your long-term financial security is safeguarded, allowing you to move forward with confidence and peace of mind.

READY TO TAKE THE FIRST STEP TOWARDS SECURING YOUR FINANCIAL FUTURE TODAY?

Divorce can be a complex and uncertain period, but you don’t have to navigate it alone. We’re here to provide you with tailored advice that meets your unique circumstances, ensuring you make informed decisions every step of the way. Contact us now for further guidance and support, and let us help you build a stable and prosperous future.

THIS GUIDE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

DIVORCE SETTLEMENTS ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

CASHFLOW MODELLING IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP, AND YOU MAY GET BACK LESS THAN YOU INVESTED.

THE TAX TREATMENT IS DEPENDENT ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN FUTURE.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

TIME TO REVISIT YOUR RETIREMENT PLAN

Posted on September 16, 2024 by - Uncategorised

Helping you feel more prepared for this stage of your life.

If you are in your 40s or 50s, you have likely contributed to a pension for quite some time. Over the years, you may have accumulated multiple employer workplace pensions. However, when did you last thoroughly examine your pension and retirement strategy?

Having a documented retirement plan can help you feel more prepared for this stage of your life, ensuring you have a sufficient income when you stop working. Here, we explore several factors to consider when reviewing your savings. If you don’t yet have a plan, in this article, we consider a helpful starting point.

REVISIT YOUR RETIREMENT PLAN

It’s always a good idea to reassess your plan to ensure you’re on track to achieve the retirement income and lifestyle you desire. Priorities and circumstances can change, necessitating adjustments to your plan.

BEGIN BY ASKING YOURSELF THESE THREE KEY QUESTIONS:

HOW WOULD YOU LIKE TO SPEND YOUR RETIREMENT?

Consider what you’d like to do during your retirement to help determine how much money you’ll need. Whether it’s holidaying, investing more time in hobbies or starting a new business venture, it’s crucial to account for everyday expenses such as rent or mortgage payments, household bills and food shopping. Additionally, it’s wise to set aside savings for potential medical needs or home care as you age.

When planning your expenses, don’t forget to factor in inflation. Prices tend to increase over time, so having an extra financial cushion can be beneficial.

WHEN WOULD YOU LIKE TO RETIRE, AND FOR HOW LONG?

Is the age you’d like to retire still the same, or has it changed? With life expectancy increasing, you’ll need to consider how much money you’ll need throughout your retirement. Dividing the total figure into an annual salary, followed by a monthly income, will help you determine if your savings are sufficient.

Consider how you’ll access your retirement income. Different options have various terms and conditions that affect your take-home pay.

DEBT REPAYMENTS BEFORE RETIREMENT

If possible, set goals to pay off any debts before you retire. Clearing debts can provide peace of mind, as it’s one less expense to worry about.

CHECK YOUR PENSION CONTRIBUTIONS

Your retirement fund could include workplace pensions, personal pensions, Individual Savings Accounts (ISAs), investments and the State Pension. When reviewing your pension pot, check the amount and track performance, and take action if necessary.

CONSIDER THE FOLLOWING WHEN REVIEWING YOUR PENSION POT:

  • Review your workplace pension contributions. Can you afford to increase them, even slightly? Even small annual increases can make a significant difference over time.
  • Check your employer’s contributions. Many employers offer benefits such as matching increases in your contributions to your workplace pension.
  • Keep track of all your pension pots to avoid forgetting about them. Consider whether you want to keep working part-time or flexible hours, which will give you more time to improve your savings.
  • Remember, the value of investments can fall as well as rise, and there are no guarantees.

When you start drawing benefits, the value of your pension pot might be less than the total contributions made.

THE STATE PENSION AS AN INCOME SOURCE

The State Pension alone is unlikely to support your retirement. If you’re eligible, the amount you receive will depend on your National Insurance contribution record. You can check your State Pension forecast on the government’s website to see how much you could receive when you can claim it and if you can improve it.

UNDERSTAND YOUR RETIREMENT INCOME OPTIONS

From age 55 (57 from April 2028), you can access some or all of your pension beneits. Personal circumstances, lifestyle and health will influence your right income option. Some contracts restrict your options, and there are tax implications to consider.

CONTROL OVER YOUR RELATIONSHIP WITH MONEY

Planning for retirement is a step towards improving your financial wellbeing. It’s about how you feel regarding control over your financial future and your relationship with money. Focus on what makes your life enjoyable and meaningful now and in retirement.

 WANT TO IMPROVE  YOUR FINANCIAL WELLBEING?

Please get in touch with us if you require further information or assistance in planning your retirement. We’re here to help you navigate your financial future with confidence.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

RETIREMENT MATTERS

Posted on August 30, 2024 by - Uncategorised

Making the right decisions today could boost your retirement pot and make the future a whole lot better.

When considering retirement planning, pension savings are a crucial component of your financial strategy and essential for a comfortable retirement. Securing the right professional advice is critical, as decisions made at this stage will significantly impact you and your family.

Saving in a pension is one of the most tax- efficient ways to invest for your future. However, to many people, it’s understandable that pension rules seem like a minefield – and the most recent changes in pension legislation have made this already complex topic even more challenging. So what do the latest changes mean?

KEY PENSION QUESTIONS TO CONSIDER

How many different pension plans do you have? Do you have the details for each plan? Do you know how much is saved in each one? How well are they performing? What are the charges and levels of risk for each plan? How much income will you need in retirement to live life the way you want? Are your pension funds and other assets enough to provide that income?

REVIEWING YOUR PENSION PLANS

If you are unsure of the answers to some of these questions, this could be an ideal time to review your pension and retirement plans and make any changes to provide the future you want.

Recent changes in pension legislation may offer a beneficial opportunity.

You may already know that there have been two key changes to pension rules recently. This has created opportunities to increase pension savings for some people and take stock of what they already have.

REMOVAL OF THE LIFETIME ALLOWANCE TAX CHARGE

Firstly, the Lifetime Allowance (LTA) tax charge has been removed as of 6 April 2023.

Previously, anyone withdrawing benefits from their pension fund above the LTA of £1,073,100 (or the applicable fixed, enhanced, individual or primary protection amount) was subject to a tax charge. This charge could be either 55% or 25%, depending on whether they were taking a lump sum or income.

The Spring Budget in March 2023 reduced this charge to 0%. More recently, the Autumn Statement 2023 conirmed that the LTA would be removed entirely from 6 April 2024, which has now taken effect.

OPPORTUNITIES FOR PENSION CONTRIBUTIONS

As a result, you can now theoretically add to your pension (with set limits applying to tax relief) without worrying about a penal tax charge if you breach the old LTA. So, if you have had to stop paying money into your pension fund to avoid this tax, now would be a good time to discuss with us whether it would be prudent to add more.

INCREASED ANNUAL CONTRIBUTION LIMITS

Secondly, the maximum annual contribution has been increased from £40,000 to £60,000 subject to relevant earnings or those who have triggered the MPAA. It’s worth noting that this legislation could change again.

These changes could benefit you if you want to pay more into your pension and have a pension fund above or near the previous LTA figure or a higher fixed protection amount.

Additionally, if you stopped contributing to your pension and applied for ixed protection in 2012, 2014 or 2016, now would be a good time to discuss this with us.

A TAX-EFFICIENT WAY TO INVEST

At a glance, these changes seem to make pensions an even more tax-efficient way to invest – but pensions are complex, and these rules are not straightforward. There’s no guarantee that the LTA will not be reinstated, which could create issues. It is also possible that another protection scheme may be introduced if the LTA is reinstated.

Changing your pension contributions might also affect how you draw your salary. This means it’s desirable to get the right professional advice and consider your financial arrangements as a whole before making any decisions.

WHAT ARE YOUR OPTIONS?

If any of these questions apply to you, you may want to consider obtaining professional advice about your options. Do you have one or more old pension funds that might be treated differently under the new rules? Are you aiming to retire within the next couple of years, or would you like to retire earlier than you planned? Have you already made withdrawals from your pension but then returned to work?

Do you want to reduce the Inheritance Tax burden on your heirs? Might you inherit a pension soon? If any of these apply to you and you think you might be able to benefit from the recent changes, get in touch with us.

 TIME TO SECURE YOUR FINANCIAL FUTURE? 

Investing in a well-structured pension is a smart way to secure your financial future. With the potential for tax-free growth, it’s a powerful investment tool. Let us assist you in tailoring your pension plan to match your needs perfectly. Please contact us for more details or to discuss your specific pension requirements.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

TRUSTS – Being prepared for whatever lies ahead

Posted on August 16, 2024 by - Uncategorised

Building wealth often takes years of hard work, but without proper planning, it can quickly diminish within your lifetime and may not endure for future generations. We aim to collaborate with you to create a well-thought-out plan, ensuring you are prepared for whatever lies ahead.

Importance of Trust and wealth planning

Preserving wealth can be challenging. Threats include unprepared beneficiaries, asset mismanagement, family dynamics, taxation, and legal disputes. However, with sound wealth planning, these challenges can be mitigated and sometimes eliminated altogether.

Benefits of proper wealth planning
Tax-efficient wealth structuring: Optimise your wealth to minimise tax liabilities.
Risk reduction: Protect your wealth from potential risks.
Liquidity provision: Ensure access to funds when needed.
Confidentiality maintenance: Keep your financial matters private.
Minimised family conflict: Mitigate disputes among family members.
Business succession planning: Facilitate smooth business transitions.
Philanthropic enablement: Support your charitable interests effectively.

Save taxes and manage your financial affairs

When planning how you’d like to pass on the assets and capital in your estate, you can use some important financial tools. Trusts are very effective when undertaking planning, helping you save taxes and manage your financial affairs well.

A Trust is a legal arrangement designed to secure your assets for your beneficiaries. Think of it as a figurative security deposit box or treasure chest, where you can place your assets for protection and potentially shield them from certain taxes.

Trusts separate assets’ legal ownership from their beneficial ownership. The legal owner holds the title and is empowered to deal with and administer Trust assets, while the beneficial owner—as the name suggests—derives the benefit from them. This could be in terms of usage, income from those assets, or sale proceeds. However, tax savings are not the sole reason for establishing Trusts. For many, the primary goal is to safeguard funds for vulnerable beneficiaries, such as young children, individuals with disabilities, or those who struggle with managing money.

Why use Trusts?

Protection of vulnerable beneficiaries: Ensure financial security for those needing extra support.
Continued control over assets: Maintain influence over how and when your assets are distributed. For instance, through your Will, you can use a Trust to provide a home for a remarried spouse while ensuring that the property eventually passes to children from a previous marriage.
Efficient probate process: In England and Wales, probate can take approximately nine months to a year, causing delays in transferring your estate. Assets held in a Trust typically sit outside your estate, allowing executors to access them without delay. Trusts are versatile tools that help control your gifted assets while ensuring timely and secure transfers to your beneficiaries.

Gaining control through Trusts

A person known as the ‘settlor’ places assets into a Trust, which may include money, property, or other types of assets like life insurance policies and investment portfolios. This may be done during their lifetime (a lifetime trust) or can be triggered by death through a valid will (a Will trust). By placing the assets into this structure, the original owner may relinquish some of their rights and delegate responsibility to a trustee during their lifetime.

However, they can gain a lot more control in other ways. A settlor can project their wishes years into the future. Provided a Trust is set up correctly, you can determine who gets what and when with a good deal of precision. Trustees can be professionals (who work for a trust company) or any other competent person prepared to take on these responsibilities.

Very wide-ranging powers and tasks

Trustees can have wide-ranging powers and tasks, including settling tax bills and hiring investment management and legal professionals. If the trust is discretionary, meaning they have discretion regarding the distribution of assets, they might also have to make certain decisions about how to use the trust income and/or capital.

For these reasons, many prefer to have their trust administered by professionals, paying them annual fees from the Trust’s assets.

However, others looking to structure family wealth may appoint a mixture of professional and family friend trustees to create a balance of objectivity and personal knowledge of the beneficiaries’ situations and needs.

Emotional aspects of trust management

Combining professional expertise with personal familiarity can ensure that both the technical and emotional aspects of trust management are adequately addressed.

Professional trustees bring technical know-how and impartiality, while family friends may offer deeper insight into the beneficiaries’ circumstances.

By thoughtfully selecting Trustees, you can achieve effective and empathetic management of your trust, ensuring that your wishes are fulfilled as intended. A blend of professional and personal trustees can provide a balanced approach, safeguarding the beneficiaries’ financial and personal interests.

Types of Trusts

Various types of Trust are available, and the Settlor needs to decide which type is best suited for the circumstances.

A quick summary of the principal types of trust is as follows:

Bare/Absolute Trusts – Where the settlor transfers the legal ownership of assets to the trustee for the benefit of the beneficiary absolutely.
DiscretionaryTrusts–The beneficiary has no entitlement to income or capital from the assets held under trust. All distributions are entirely at the trustees’ absolute discretion.
Interest in Possession Trusts–The beneficiary holds a right to the trust fund’s income or the right to use trust assets.
Flexible Trusts–The beneficial interests of these trusts can be altered.
Note that these are just a few examples; many other types of trust can be used under different circumstances.

Tax planning and Trusts

It’ll be of no surprise that one of the main reasons for using Trusts is for tax planning and mitigation. For example, when an individual dies, their estate (i.e., net assets) is subject to Inheritance Tax (IHT), meaning the beneficiaries may lose up to 40% of their net inheritance.

If assets are put into trust during a settlor’s lifetime and they survive seven years, they are not part of the estate on death and may escape IHT at that time, subject to the 14-year rule. Trusts are used in certain IHT planning arrangements for the settlor’s benefit, such as Gi% and Loan Plans, Discounted Gi% Trusts, and Flexible Reversionary Trusts.

Trusts in Wills

Trusts are frequently created in Wills, particularly where the beneficiaries are minor children who need someone to look after them financially. Any asset left to a minor under a Will is effectively held in trust for the minor by the executors until the minor reaches majority unless the will allows payment to be made to a parent.

Trusts can be explicitly created in Wills to ensure that a beneficiary does not benefit until some other age is attained or a condition is fulfilled. There are many other reasons for setting up trusts, notable examples being to provide a pension, provide for families, assist a charity, give property to those who legally cannot hold it, and gain protection from creditors and business protection.

TIME TO CREATE A PERSONALISED PLAN THAT PROTECTS YOUR WEALTH AND LEGACY FOR FUTURE GENERATIONS?

We understand that the wealth you wish to protect encompasses more than traditional assets. Please contact us to discuss your requirements and create a personalised plan that protects your wealth and legacy for future generations.

THIS GUIDE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE ESTATE PLANNING, TAX ADVICE, WILL WRITING OR TRUSTS.

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

BUSINESS MATTERS – FINANCIAL PROTECTION

Posted on July 19, 2024 by - Uncategorised

How to recover quickly and minimise the impact should the worst happen

Whether you’ve been in charge of a successful business for several years or have only recently started up your own enterprise, it’s important to understand the challenges and potential pitfalls and to think of ways of minimising their impact.

How much is a key employee worth to a business? And how would, or could, that business cope without them? Many private businesses rely on one key person. Financial protection is vital to allow your business to recover quickly and minimise the impact should the worst happen.

KEY EMPLOYEES ARE VITAL TO A BUSINESS

Business protection helps to protect a business should a director, partner, member or key employee suffer a critical illness, become unable to work due to a disability or die prematurely. It helps to make things right when things go wrong. Key employees are vital to a business.There are several different types of business structures in the UK, all governed by different rules that determine the business’s legal status and how it is run. “these rules include the amount of tax you pay, who is entitled to the profits, and who is liable for any debts run up by the business.

TYPE OF BUSINESS AND ITS PARTICULAR NEEDS

Business protection is available for partnerships (including limited liability partnerships), shareholders, sole traders and key employees. It can also be used to ensure repayment of a business loan in the event of the death or critical illness of a partner, key person or sole trader. How the arrangement is set up will depend on the type of business and its particular needs. Losing one or more of your key employees can cause disastrous problems. Sales may be lost. Credit can become more difficult to obtain. Profits may shrink. Momentum may be lost. Also, hiring and training a replacement will cost you time and money.

PROTECTING BUSINESSES EVERY STEP OF THE WAY

Most astute business owners insure physical assets from destruction. But when it comes to a business owner’s most valuable assets – key employees – many forget to take the same precautions. Whatever type of operation you run, if successful, will grow and evolve over the years. If you’re just setting up your first business, the challenges you face may be very different from those you may encounter ten or twenty years later.

To help you understand more about these risks, consider these key areas:

KEY PERSON INSURANCE

It is designed to compensate a business for the financial loss brought about by the death or critical illness of a key employee, such as a company director or other integral staff member. It can provide a valuable cash injection to the business to aid a potential loss of turnover and provide funds to replace the key person.

You cannot replace the loss of a key person, but you can protect against the financial burden such an event may cause. Without the right cover in place, you could also risk losing your business. Key person insurance can be utilised in several different ways – for example, to repay any loans taken out by the key person, to help recruit and fund the training costs for replacement staff, to meet the ongoing expenses while the level of sales recovers; or to facilitate payments for outside consultants or expert advice that may be required.

Businesses need to be insured, but covering the risk of losing a key employee is not legally required. Because of this, it’s easy for businesses to overlook this protection. But remember, your employees are your most valuable asset.

SHAREHOLDER AND PARTNERSHIP PROTECTION

This provides an agreement between shareholding directors or partners in a business, supported by life assurance, to ensure that there are sufficient funds for the survivor to purchase the shares. It is designed to ensure that the remaining partners or directors retain control of the business, but the value of the deceased’s interest in the business is passed to their chosen beneficiaries in the most tax-efficient manner possible. The shares might pass to someone without knowledge or interest in your business. Or you may discover that you can’t afford to buy the shareholding. It’s even possible that the person to whom the shares are passed becomes a majority shareholder and is in a position to sell the company. The shareholding directors or partners in a business enter into an agreement that does not create a legally binding obligation on either party to buy or sell the shares but rather gives both parties an option to buy or sell. For example, the survivor has the option to buy the shares of the deceased shareholder, and the executors of the deceased shareholder have the option to sell those shares. In either case, the exercise of the option creates a binding contract; there is no binding contract beforehand. This type of agreement is generally called a ‘cross option’ agreement.

CROSS OPTION AGREEMENT

This is also known as the ‘double option’ or ‘put and call’ agreement. By taking out a cross-option agreement, you will determine what will happen to the shares in the business if one of the owners dies or becomes critically ill. This agreement mustn’t be binding regarding the sale of the shares because this will prevent you from claiming relief from Inheritance Tax.

OTHER PROTECTION OPTIONS AVAILABLE

There are various options to choose from, including life cover only, critical illness cover, or combined life cover and critical illness cover. You can select different levels of cover and terms depending on your specific requirements, and policies are available that pay out a regular income in the event of sickness.

CALCULATING THE LEVEL OF COVER REQUIRED

The cover required is typically measured by reference to the key person’s contribution to the business’s profits. This may be based on the following information: past profits and projections for the future; the effect that the loss of the key person would have on future profitability; the anticipated cost of recruiting and/or training a replacement; the expected recovery period, for example, the length of time before a replacement is effective; and the amount of any loan(s) that would be called in on the death of the key person. The death or prolonged illness of a business partner, key employee or shareholder could put your business under considerable financial strain. No one can predict what will happen in the future, but you can ensure that you have the right protection to keep your business successful should the worst happen.

RELEVANT LIFE COVER

A relevant life policy is an alternative way for an employer to set up life cover for a key employee efficiently, without using a registered death in service group life scheme to benefit the employee’s dependents.

THIS GUIDE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE. A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.