Working Tax Credit Entitlement - Essay Example

End-of Assessment Part A 1 a. The equivalised income of Magdi is £42,623. This is calculated using an equivalence scale of 0.61 that is divided to the annual gross income of £26,000. b. (i). The new equivalised income is £26,000. This is equivalent to the unequivalised income of Magdi because the total equivalence scale of the couple is 1 (0.61 + 0.39). (ii). The new equivalised income is more than half of Magdi’s equivalised income because the couple have changed the cost of achieving a standard of living. Since Sara is not contributing any income, Magdi becomes a breadwinner that would support the new household expenses where his sole source of income is used to pay for both their expenditures and the unpaid work of Sara for looking after the household. 1.2 a. The Working Tax Credit entitlement is b. Taking a part-time job is not a good idea especially when she is working 16 hours per week. First, she is not entitled to working tax credits. She needs to work at least 30 hours per week in order to be avail working tax credit entitlement. Second, she is not entitled to tax credits because she has no child. A mother with a child is entitled to tax credit even if she is working part time. 1.3 The total tax credit would increase because the working tax grows as their income dropped. Even if Magdi is working less than 30 hours per week, he is entitled to working tax credit because his father needs care. 1.4 a. Option A will bring more income into the household because the loss of income will be recovered. Furthermore, caring for his father can be done by Sara. The household will still be entitled to a working tax credit thus increasing the source of income which would include the attendance allowance given for the father that is tax free. Also, when Magdi works until the age of 65, he will not incur losses in his pension. b. Option B might bring new source of income for the household because the Magdi would be entitled to Carer’s Allowance. The Carer’s allowance can be paid to both Magdi and Sara. Carer’s allowance is designed to replace earnings that are lost through being a full-time care giver. 2 2.1 a. Their insurance payout does not match the full amount of their income loss because of state benefits will produce only a well below average income, thus the payout is insufficient to sustain an existing standard of living. Also, the payout is subject to inflation rates. When insurance is a level type the value of the payout income is lesser because it is affected by the inflation rate during such pay out. 2.2 a. Asymmetric information is a situation where one party knows something that another party does not. It is used to refer to information on insurance. Insurers have the information about probabilities of adverse events occurring and base their pricing decisions on those probabilities which they have worked out from their years of claims experience. Individuals, on the other hand, do not have access to this good information and find it difficult to judge the probability of events. b. When certain people has better information about an adverse effect that they may face, these people would more likely to buy insurance and continue taking it than those people who do not. Individuals who do not know their individual risks in adverse events will consider the insurance premiums as high and not worth it. c. People who previously did not have the insurance are forced to buy it because the government has made it compulsory. Even if these same people consider such insurance as not worthwhile, they will be forced by the government to avail it. Also, since they initially find the insurance as expensive, the insurers will choose to lower the premium in order to attract this type of people. People who previously did have the insurance will find that their premiums are reduced because the increase of insurance policy holders would spread the risk along the population. When the government the insurers to charge the same premium for everyone, the premium will be calculated by the insurers based on the average risks of the whole population. The probabilities on the insurance claims that they have will increase. Since the problem of adverse selection is minimized with the compulsory insurance, insurers will choose to build lower premiums. Part A Word Count = 740 Part B Several external factors in the economy can affect the household finances. Increase in inflation, increase in interest rates, rise of unemployment and sharp reduction in the average level of house prices greatly influence the income and expenditure of every household. Effect of Inflation Inflation occurs when there is a persistent rise in the price level of an economy. When inflation occurs, the money of the household buys less as prices rise. This means that a given amount of money will buy fewer goods and services. Therefore, the money loses its value over time. Consequently, the expenditure increases while their income remains the same. As a result, the household loses its savings or it may be spending more than what they are earning. Inflation definitely affects many financial decisions such as how much to save, whether to buy or rent property, and ensuring that retirement plans are inflation proofed. Household saving increases during inflation. When inflation is high, households opt to save more in order to stop the real value of their money from falling. When people adopt belt-tightening and stricter budgeting practice because of high prices, they tend to save more in the hope that their savings would help them cope up with the crises over time and the future would give them a better value for their money. Increase in inflation would be beneficial to persons who opt to buy houses than rent it in the long term. Because inflation affects the both nominal and real value of money, investments in properties such as a house would also increase its value. Furthermore, inflation would reduce the value of mortgage debt, whereas rents would generally increase over time. Thus, higher inflation rates would favour buying. People who plans their retirement buys annuity. The retirement pension is a type of annuity where the income is paid out for the rest of the person’s life. However, annuity is also affected by inflation. Persons who avail a type of annuity of annuity called level annuity are prone to the effects of inflation because the buying power of the income is reduced. A safer type of annuity is called increasing annuity which is protected from inflation. Increasing annuity like RPI (Retail Price Index)-linked or fixed rate annuity pays out income that increases over time. However, persons planning for retirement would need to invest extra money to compensate for the effect of inflation over the years when the savings are building up and once the pension starts. Effect of Interest Rates Interest rate is the price of credit to a borrower. It is a consequence of the government’s monetary policy where the money supply is changed in order to affect the availability and cost of credit. Interest rates affect the mortgage debts of borrowers. When interest rates are high, the mortgage rate may increase and the total amount a borrower will pay would also increase. Changes in mortgage rate would also change the expenditures of the household where allocation for payment of mortgage would increase when rate increases. This would eventually cause lower disposable income for the household. Because rise in interest rates would make mortgages more expensive, people will choose not to buy properties through debt. Coupled with a high unemployment rate, the household income would further fall and lessen the capacity for people to afford mortgages. On the other hand, an increase in interest rate would benefit the savings of the household in the bank. Some savings products like term bonds secure the saver for a fixed period at a fixed interest rate. These types of products are less attractive when interest rates are high. Some products pay regular interest during the period. Products with variable interests would increase its rate as the interest rate of the economy increases. With compounding, a saver can accumulate greater value in the long run. Effect of Unemployment Unemployment rate is a measure of joblessness in the country. It is one of the most closely watched statistics in the economy. The rate of unemployment is expressed as the number of unemployed individuals divided by the total number of persons in the civilian labour force. There is unemployment when the supply of labour is greater than the demand for it. Unemployment causes the unemployed a loss of income. When an unemployed has outstanding debts, loss of income would diminish the capacity of the household to finance existing mortgage payments. When this happens, owners experiencing financial difficulties would be forced to sell their properties. It is in job losses that people that people avail debts and, later on, experience problems with it. When the expenditure of the household remains constant from the time the source of income is gone, the deficit between expenditure and income will be financed by using up savings or by acquiring debt. When a new source of income is not obtained or unemployment continue to exist, the expenditure of the household would further increase with the additional interests and charges on the debt. Over time, the household would decide to acquire another debt. When this occurs, compounding problems with debt would further disturb the stability of the household. It is essential that an unemployed person must find a new job in order to gain back the household income. Also, during the stages of unemployment, budgeting must be strictly followed and unnecessary expenditures should be avoided. Effect of Household Price Sharp reductions in the average level of house prices have varying effect on different people. For households who are first time buyers, this would be an opportunity for them to buy a house or invest on a property. When the supply of available houses increases, the prices would decrease. Buyers will have different choices available for them. They can either finance the purchase of a new house either by using up their savings or by taking debt or by employing a percentage of both. The amount of money used to purchase the house will be lesser than what they have planned when the house prices were high. This would create additional savings on the part of the buyer because a portion of the money that was allocated for buying a house will not be consumed. On the other hand, owners of houses will incur losses in their assets. A house is a property that is considered as an asset of the household. When the level of house prices decrease, then the value of the house decrease. This means that the amount of the money they used to purchase the house is higher than the subsequent value of the house. If the purchase of the house was financed by debt, then the mortgage payment is greater than the value of the house itself because the household has already paid more than the present market value of the property. Furthermore, a low priced house would become a liability for the household in the long run. If the price level would not rise back, then the owners cannot choose to sell such property because they will be selling at a loss. Importance of Financial Planning It is important that households plan their finances and prepare for several circumstances such as those illustrated above. People must find out relevant information when they assess their situation. They must consider the inflation rates, interest rates and unemployment rates that would affect the household. When deciding on a financial plan, they should be able to equate the above rates in order to prepare themselves for their effects in the future. During times of increase in inflation rates, the budget plan shall be reviewed and should be aligned to the possible decreases in expenditures. As mentioned, inflation rates increases the prices of goods and lowers the value of the money. During these times, the household should opt to save more and spend less. When interest rates increase, the household shall stay away from acquiring new debts. Increase in mortgage rates would associate to an increase in expenditures in the future. Since the income of the household will remain constant, the increase in expenditures would lessen the savings of the household. The household should opt to save more in order to exploit the benefits of high interests in savings. Under unemployment, the household shall also stay away from acquiring debts as much as possible in order to prevent future problems with the cash flow. They must practice tightening their belts and spending only on necessities. Word Count = 1400 Read More