Financial Planning: Five in 5
Welcome to this edition of Financial Planning five in 5 – your quick roundup of five key financial insights in just five minutes, designed to keep you informed and ahead.
Our first topic is gilt yields, which is currently ranging between 4.2% and 4.8%, investing in UK government bonds offers a tax-efficient, low-risk way to manage large cash reserves.
For business owners, ensuring your company is protected has never been more important. Shareholder protection, key person insurance, and business loan cover can also provide financial security in times of uncertainty.
Meanwhile, mortgage rates continue to fall, with expectations of further cuts, making this a crucial time to review your options and secure the best deal.
Inheritance tax planning is also coming into sharper focus with new rules from April 2027, highlighting the need for careful financial planning.
For teachers affected by pension scheme changes under the McCloud judgment, assessing your options before retirement is essential to ensure the best possible outcome.
Get the full insights below, and as always, we’re here to help with any questions.
Gilt investments
Investing in gilts, or UK government bonds, offers several benefits. Firstly, they are considered low-risk investments since they are backed by the UK government, making them a safer option than leaving cash in the bank (for amounts above the FSCS protection limit of £85,000, held with a single bank). As of February 2025, gilt yields range from around 4.2% to 4.8%, depending on the maturity.
One significant advantage of gilts is their favourable tax treatment. Individual investors are exempt from capital gains tax on gilts, meaning any profit made from selling them is tax-free. The interest earned on gilts is subject to income tax but can be offset using your personal savings allowance. For higher-rate taxpayers, the equivalent gross yield is approximately 7% to 8%, and for additional-rate taxpayers, it is around 7.7% to 8.7%.
It is a tax-efficient and safe way of keeping large amounts of cash earmarked for an upcoming project or perhaps a particularly large tax bill, as you can select the maturity date that is best aligned to when you will need the funds.
Business protection
Business protection is an essential safeguard that ensures a company can continue operating smoothly should a director, partner or key employee suffer a critical illness or pass away. Having the right financial protection in place enables businesses to recover quickly and minimises disruption during difficult times.
Shareholder protection
If a shareholder dies or is diagnosed with a critical illness, the remaining owners may face uncertainty about the future of the business. In some cases, the deceased’s family may decide to retain their shares, potentially becoming involved in the company’s daily operations – something that may not align with the interests of the existing shareholders or business more generally.
A shareholder protection policy ensures that funds are made available to buy out the shares of the critically ill or deceased shareholder. This allows the remaining shareholders to retain control, safeguard the business and provide fair compensation to the family.
Key person insurance
Key employees may play a critical role in a business’s success. If a key individual passes away or is unable to work due to a serious illness, the impact on the business may be significant.
With key person insurance, funds are made available for the business to meet the costs of replacing the key person, provide a reserve to sustain the business or compensate the business for a potential loss of revenue.
Business loan protection
Many businesses rely on loans to fund growth, operations or directors’ loans. If a business owner or partner passes away or becomes critically ill, outstanding debts can put financial pressure on the company.
A well-structured business protection plan ensures that companies can continue to operate smoothly, even in the face of unexpected challenges.
- For partnerships: Each partner takes out a life insurance policy held in a business trust for the benefit of the other partners. In the event of a claim, the payout is used to repay their share of the business loan, ensuring financial commitments are met without impacting cash flow.
- For sole traders: Loan protection is arranged on the trader’s life and placed in trust for their family, allowing any outstanding debt to be settled without forming part of the deceased’s estate for inheritance tax purposes.
Mortgages
To understand where mortgage rates are going, we first need to consider the central interest rate set by the Bank of England (BoE). Since late 2021, the BoE has increased central rates to tackle inflation.
The good news? It seems to be working. Inflation has fallen, allowing the BoE to begin cutting interest rates. In August 2024, the central rate dropped from 5.25% to 5%, followed by another cut to 4.75% in November, and now 4.5% at the time of writing.
Short-term expectations have shifted. A surprise drop in inflation has revived hopes for rates falling below 4% by late 2025. Forward bond prices even suggest rates may settle around 3.85% within 18 months. However, this sentiment is ever changing, underscored following the rise in inflation from 2.5% to 3%.
If inflationary pressures continue to ease, further reductions are likely. However, the pace and extent of these cuts remain uncertain, as they depend on economic conditions both domestically and globally. The BoE takes a cautious, data-driven approach, reviewing interest rates based on such key factors as:
- the rate at which prices are rising;
- growth of the UK economy;
- employment levels.
The next BoE announcement is scheduled for Thursday 20 March 2025.
So, what should you consider?
- Lock in a new rate six months early
Most lenders allow you to secure a mortgage rate six months before your current deal expires, ensuring you avoid the lender’s standard variable rate (typically 6–8%). If rates rise, you’ve locked in a cheaper deal; If they fall, you can switch to the lower available rate. - Don’t stay loyal to your lender
Re-mortgaging with your current lender isn’t always best. A ‘whole of market’ broker can compare deals across lenders. As rates fall, banks compete for business, so shopping around could save you money. - Check your loan to value (LTV)
Your mortgage rate is tied to your loan to value – the percentage of borrowing against the property’s value. For instance, a 15% deposit/equity means an 85% LTV. The lower the LTV, the better the rates you access, with key thresholds at 90%, 85%, 75% and 60%. Reducing your mortgage slightly could unlock significantly lower interest rates.
Inheritance tax planning
Following changes announced in the Chancellor’s Autumn Budget, pensions will form part of an individual’s estate from 6 April 2027. This shift means more assets will fall within the 40% inheritance tax (IHT) threshold, reducing the legacy left behind for intended beneficiaries.
With careful planning, there are effective ways to manage your estate and minimise the tax burden, ensuring more of your wealth reaches the people you intend.
One of the simplest ways to reduce your IHT liability is by spending your money. With the help of cashflow modelling software, you can project your lifetime income and expenditure, explore custom ‘what-if’ scenarios and design a carefully structured drawdown strategy to balance financial security, enjoying your wealth without fear of running out and reducing tax on your estate.
Another common way to mitigate IHT is to give money or assets to beneficiaries during your lifetime. This can be achieved through exempt transfers, gifts from excess income or by placing assets in a trust, to name a few. By doing so, these assets are removed from your taxable estate while allowing for a structured distribution to beneficiaries.
For those who wish to retain control of their assets while reducing IHT, investments qualifying for business relief (BR) offer a potential solution. Qualifying investments held for a minimum of two years can be passed on free from IHT, providing an opportunity to preserve wealth, maintain control and reduce tax.
Life insurance can also play a role in IHT planning, particularly when written into a trust. This may be particularly helpful when passing on property, for instance allowing a beneficiary to retain the family home rather than having to sell it to cover IHT.
McCloud judgment
In April 2015, the government implemented changes to the Teachers’ Pension Scheme (and other public sector pension schemes), which altered how future pension benefits would be calculated for most teaching staff. Before April 2015, Teachers’ Pension Scheme calculated the pension benefits in the final salary scheme, and from April 2015 the career average scheme was introduced.
Teachers who were within 13.5 years of their normal pension age (NPA) when the government consulted on these changes remained accruing pension benefits in the final salary scheme after 1 April 2015. Other teachers joined the career average scheme from this date. This protection given to teachers closer to their NPA was ruled age discriminatory based on the Court of Appeal’s December 2018 judgment.
Teaching staff that were both in service on or before 31 March 2012 and with continuous service on or after 1 April 2015 are impacted by the transitional protection remedy.
To remedy this age discrimination, the service accrued between 1 April 2015 to 31 March 2022 (known as the remedy period) has been rolled back into the final salary scheme. All teaching staff impacted by the transitional protection remedy joined the career average scheme from 1 April 2022, including previously protected final salary scheme members.
Teachers will be given the choice at retirement as to whether they wish to take final salary (legacy) scheme benefits or career average (reformed) benefits regarding their service accrued during the remedy period.
Some teachers will be better off under the legacy scheme, and some will be better off under the reformed scheme. The best option is not always obvious, due to the flexibilities teachers have to choose a higher tax-free lump sum, in exchange for a lower pension.
Also, for higher earners who have previously paid annual allowance tax charges during the remedy period, these calculations will have changed following the rollback into the final salary scheme, and amended scheme pays elections need to be submitted to HMRC. Teaching staff impacted by this will receive a remedial pension savings statement, which will be uploaded to the secure members’ area of the Teachers’ Pension Scheme website. There is a deadline of three months from the date of the remediable pension savings statement to submit any amended annual allowance tax charges.
If you require any assistance regarding the McCloud ruling, please do not hesitate to contact Moore Kingston Smith Financial Advisers.
