Raising Individual Financial Awareness - Essay Example

Raising Individual Financial Awareness (U50013) Introduction The issue concerned about by Mr. and Mrs. Murray’s family can be solved in the following report, which clearly explains what the pension crisis means, this area can be best used by Alan. There are also calculations on tax liability to which Fred can use to understand how much tax liability he owes to HMRC. The report also talks about important factor considered in calculating and understanding how a will affects the lives of the deceased and why it is important to have one. The report is comprehensive and entails all the financial and accounting details that the Murrays can implement to solve their financial issues. Raising individual financial awareness Pension crisis Pension crisis is a foreseen problem or difficulty in settling federal, corporate, and state pensions in the European nations and US. This might come about due a difference in the available resources to settle the pension and the pension obligations that arise. Studies show that the major factors contributing to this situation include lower birth rates, and most retirees living longer (The Economist, 2008). Reasons for this situation sometimes may vary depending on the nation. A good example is the current pension crisis in Pennsylvania. The country is facing this crisis due to its two-pension systems Public School Employees and State Government Workers both have over 40 billion dollars in debt (Priya, 2013). This crisis started surfacing back in 2001. A ten billion dollar hole was created in the pension systems when “Facing a flush stock market and a fully funded system, legislators raised benefits for state and school workers by 25 percent, hiked their own benefits by 50 percent, and created a cost-of-living increase for retired workers a year later” (Priya, 2013, para. 5). Therefore, from the above situations it is clear that the pension crisis situation is a predictable future situation. It is affected by the current financial actions carried out by the pension system and changes in demographics. Money purchase and final salary pension schemes There are a few key differences in taking up Money Purchase pension scheme or final Salary Pension scheme. These differences revolve around; who bears the risk, the calculation of pension to receive and performance of markets. In a Final Salary scheme, the benefits are promised, meaning individuals can compute the pension they are going to receive in advance basing on the salary at retirement and number of years as a member (WorkSmart, 2012). Money Purchase, on the other hand does not provide a means to calculate the final amount of pension an individual will receive. The size of benefits they will receive depends on the value of available funds when they retire. The contribution to the schemes is also another difference. For Final Salary, both employee and employer contribute towards funding the scheme. With Money Purchase, all the contribution is made by the employee and the employer only contributes top ups. In terms of risk, for a Final Salary scheme, the employer who bears all the risk and in Money Purchase, the employee assumes all risk. The final difference is that, with a Money Purchase pension scheme, an individual faces numerous risks depending on the performance of the markets. (Money Week, 2010) Right time to take up pension scheme When it comes to pension scheme, it is never too early to start, in fact the earlier the better. Most people do not want to take an early pension scheme. This is because they see the pay offs between the ages of 65 and 70 to be too far to start thinking about paying. At the age of 30 years, it is the best time for Alan to start paying for his pension. This is because the earlier he starts the little amount he contributes annually unlike if he starts in subsequent years. The other advantage of starting early is he will be able to receive better pension benefits because of the accumulated funds. This is much better if he takes up the Final Salary pension scheme, which factors in the period in which an individual has been a member of a pension scheme (WorkSmart, 2012). Total tax liability excluding NIC Non-savings income Basic salary £54,000 Bonus £900 × 12 = £10,800 Private fuel money £250 × 12 = £3,000 Personal allowance for being under the age of 65 years Total Non-saving taxable income = 54,000 + 10,800 + 3000 = £67,800 - £6,475 = £61,325 Dividend Dividend earnings = £30,600 Savings income Interest on cash ISA account £2,100 (not taxable) Interest from deposit account £20,800 Total taxable savings income = £20, 800 Taxable capital gains 2012/13 annual exempt £10,600 = £ 125,800 – £ (600 + 56,000 + 650 +6,000, 1,800) = 60,750 – 10,600 = £50,150 Company Car tax bands Diesel car with omission of 155g/km = £50,000 + £4,000 - £6,000 = £48,000 Tax liability Non-saving tax = 61,325 × 40% = £24,530 Dividend tax = 30,600 × 10% = £3,060 Savings tax = 20,800 × 20% = £4,160 Capital gains tax (in the income tax falls within higher rate) = 50,150 × 28% =£14,042 Car tax bands Basic rate below 99g/km = 10% Above 99g/km for every 5g/km = 1% = (155g/km – 99g/km) / 5 = 11.2 + 10 = 21.2% = £48,000 × 21.2% =£10,176 Total tax liability for Fred Savings tax + non-savings tax + capital gains tax + car bands + dividend tax =4,160 + 24,530 + 14,402 + 10,176 + 3,060 =£56,328 Pay as you as earn (PAYE) The PAYE system is a systematic process that is used for paying national insurance contributions and income tax. An employer is required by law to deduct national contributions and tax from an individual’s wages before they are presented to them (AdviceGuide, 2013). Tax is deducted throughout the year on each time payment is made to an individual. It is the employer’s responsibility to forward these contributions to the HM Revenue and Customs (HMRC). A taxpayer is entitled to a P60 form, which is sent to each taxpayer indicating the total amounts submitted to HMRC from the previous year. All individuals whose tax is deducted through PAYE, the system can also be used to deduct any other additional taxable income entitled to an individual (AdviceGuide, 2013). Importance of writing a will A will is a document that leaves instructions about what one wants to be done with their personal possessions, land, and estate after one dies. There are many reasons as to why creation of a will is very important. One of the importance of a will is that the individual guarantees that his or her possessions will go to the preferred recipients (Finanziario Fulcro Investment, 2011). The existence of a will speeds up the process of the court review effectively. The deceased may also outline how he or she may want their properties to be used in the future. Another decisive factor is that a will prevents the need for the court to order the relatives to produce financial paperwork such as financial statements to distribute the assets of the deceased fairly. A will is used to guarantee the guardianship of the children of the deceased by stating who the desired guardian of the children is. This is usually important for parents that have young children. It can also provide conditions that limit when and under which circumstances the beneficiaries may access the inheritance. For example, the deceased may provide a condition that one of the beneficiaries can only have access to their assets when they attain the age of 25. Most importantly, a will prevent fighting within the family and ensures that the spouses are well taken care of when the individual dies. The Laws of Intestate Succession When a person dies ‘intestate’, this is a situation, which a person dies without a will. In a situation where the deceased fails to prepare a will, the state uses the default statutory scheme that is known as the intestate succession rules (College, 2003 - 2010). This provides the foundation of disposition of the deceased’s possessions. Intestacy statutes use an order of preference, usually near relatives, in determining how the assets will be distributed. For example, according to the Law of Intestate Succession of Pennsylvania, the statute states, “If the decedent was survived by his or her spouse and had no surviving children or parents, the surviving spouse receives the decedent’s entire estate….” (Wolf, 2009). In this case, Anne should go to court and claim the estate on the basis that she was Henry’s, surviving spouse at the time of his death. The Last Will and Testament of Charles Darwin The Last Will and Testament of Charles Darwin met certain conditions that could make it valid at the day of its execution. The testator in the presence of two witnesses signed the Will (global-wills, 2013). In this will, Admon was the testator that signed it; the two witnesses were William Erasmus Darwin and George Howard Darwin who were the sons to Charles Darwin. Charles Darwin had already reached the age of the majority by the time of writing will. He voluntarily drafted it without any evidence of duress or undue influence (Essortment, 2013). The will was written, thus making it valid. By the time this will was being written, Charles Darwin was of ‘sound and disposing’ mind. The will was proved for authenticity "in the Principal Registry of the Probate Division of the High Court of Justice” (Essortment, 2013 para. 9) References AdviceGuide, 2013. The Pay As You Earn (PAYE) system. [Online] Available at: http://www.adviceguide.org.uk/england/tax_e/tax_how_to_pay_income_tax_e/the_pay_as_you_earn_paye_system.htm [Accessed 9 April 2013]. College, N. P., 2003 - 2010. NPC. [Online] Available at: http://nationalparalegal.edu/willsTrustsEstates_Public/IntroEstatePlanning/IntestateSuccessionRules.asp [Accessed 12 April 2013]. Essortment.com, 2013. Essortment. [Online] Available at: http://www.essortment.com/valid-will-19135.html [Accessed 12 April 2013]. Finanziario Fulcro Investment, 2011. Finanziario Fulcro Investment. [Online] Available at: http://www.ffifinance.com/index.php/ask-ffi/439-importance-of-writing-a-will68 [Accessed 12 April 2013]. global-wills.com, 2001. global-wills.com. [Online] Available at: http://www.global-wills.com/articles/will/make_a_valid_will.html [Accessed 12 April 2013]. Money Week, 2010. Investment Advice: Final salary and money purchase pensions. [Online] Available at: http://www.moneyweek.com/investment-advice/glossary/f/final-salary-and-money-purchase-pensions [Accessed 10 April 2013]. Priya, A., 2013. Pension crisis is going to hit hard. [Online] Available at: http://articles.philly.com/2013-04-08/news/38348690_1_pension-crisis-pension-tsunami-two-pension-systems [Accessed 10 April 2013]. The Economist, 2008. The trouble with pensions: Falling Short. [Online] Available at: http://www.economist.com/node/11529345 [Accessed 9 April 2013]. Wolf, B. &. A., 2009. the law of Intestate Succession in Pennsylvania, s.l.: s.n. WorkSmart, 2012. What is the difference between salary related and money purchase schemes? Which is better?. [Online] Available at: http://www.worksmart.org.uk/money/what_is_the_difference_between_salary_related [Accessed 8 April 2013]. Read More