Planning Personal Finances - Essay Example

Introduction: In this fast moving world there are many accidents and contingencies which needs to be covered by people so people have to look for different options we have analyzed following options: Permanent health insurance (PHI) policies Units in a Unit trust (Mutual Fund) Term life assurance policy Occupational and Personal Pension Plans Government and corporate bonds Company shares Managed/Investment bonds. Each scheme is analyzed and explain in detail to assist people to make a right choice. Permanent health insurance (PHI) policies Definition These policies are made to pay benefits to policyholders who are not in position to work due to some illness or accident. These are also known as Income Protection Insurance (IPI). (Income Payment Protection Insurance) Benefits PHI policies have many benefits in comparison with other insurance policies: Returns are paid when the policyholder becomes “incapacitated and after the deferred period have passed and continue until death, recovery, retirement or the term.” (Income protection insurance) Benefits are paid usually weekly or monthly and are free of tax. If premiums are regularly paid then the insurance company cannot deny insuring. Waiver option is available for premium for this policy. Restrictions Policies are useless if you got unemployed due to the reason other than illness or accident. Long deferred periods ranging from 4 to 52 weeks. Premium increases for short deferred period. If benefits are more than the income of policyholder then the policyholder will obviously choose to stay at home and get the benefits. Investment The investment in this policy is bit expensive due to the fact that its gives a lot of guarantees. If a person cannot afford high premium then he can negotiate the premium by increasing the deferred period. Taxation Payments made by the individuals did not get any relief in tax. Payments made by the employers are allowable expenses in terms of taxation and these are benefits to the employees as taxable. Benefits paid by the insurance company to the policy holders if an accident or illness occurs are exempt from income tax and National Insurance contributions for individual policies For group policies, benefits are paid as taxable and National Insurance earnings. (Income protection insurance) Units in a Unit trust (Mutual Fund) Definition A unit trust is a form of collective investment constituted under a trust deed. Life Cover These are simply based on profit and “loss basis of the companies purchased by the Mutual Fund. There is no specific coverage. You will get insurance coverage.” (Dictionary - Definition of unit trust) Investment Each unit is rated daily by the fund manager based on the net asset value of the unit. Therefore there are no specific investment requirements more you invest more you will yield in the form of dividend. Taxation Dividend In case of dividend if the income is received or accumulated it is given a credit @ 10%. For example, if an investor gets a dividend of 90p then total dividend would be counted as 100p as 10% credit built in it. Tax payers who fall in starting rate and basic rates and non tax payers does not have to do any other things in this regard. No refund will be accommodated by HMRC (Her Majestys Revenue and Customs) on this claim by non tax payers. In case of taxpayers who falls in higher rates they need to pay a further of 22.5% of the net dividend, as their total liability is 32.5% and the tax credit is 10%. In other words we can say that the dividend is 10% covered with taxation. Capital Gains Tax Capital gains are fully taxable in excess of £9,200 therefore any profit made above £9,200 will be paid in tax on the rate applicable in that particular circumstances. It should be noted that the losses made on disposals can be adjusted with profits made during the year and then the tax would be calculated. Further the losses accumulated can be carried forward for indefinite period. Term life assurance policy Definition Term life assurance is a policy which gives coverage at a fixed payment rate for decided period of time which is normally limited in nature. After the period has lapsed coverage automatically expires and the rates and premiums also get changed. It is on the client either to leave the coverage or obtain more coverage by making different payment on different terms and conditions. In case of death of insured during the term, the benefits of insured will be paid to the beneficiaries. Investment This insurance policy is the least expensive. It is easiest way to make a coverage amount per premium pounds basis spread over some period of time. Taxation The premiums paid are not allowable expenses in income or corporation taxes. Occupational and Personal Pension Plans Definition Occupational pension schemes are the schemes in which the employers make an arrangement to gives pensions and related benefits to the employees of the entity. (The Pension Act 2004) An individual can also make contributions on his own by making an arrangement with an insurance company or some other provider. These schemes will also enjoy similar tax advantages as that of occupational schemes. Normally individuals invest during their employment life and then enjoy the pension in their post retirement life. Investment Occupational Pensions are contributed by the employer during the employment of the employees which can enjoy the benefit. Personal Pensions are contributed by an individual on his own and he is paid a return when he attains a particular age as required in the policy. Taxation There are various advantages attached with an scheme in respect of tax which got itself registered. Some of the advantages are assets grow free from income tax, capital gains tax and corporation tax, employees are allowed to contribute out of their untaxed income and employer contributions are allowed in tax as deductible expenses. Only funded schemes are allowed to get registered. Company shares Definition Documents issued by the Company to raise finance and give ownership in the Company are known as Shares. Investment Shares are valued in stock exchanges based on demand and supply of shares. It is not necessary that the shares are available on par value normally companies on their incorporate stage issues shares on par value later on they are revalued within the market based on the market forces determined prices. Earnings: Earnings from shares are from two sources: a) The value of the share can rise when the performance of the company involved is trading. The gain on this type of increase is known as capital gain. b) Dividend is the payment from the profit of the Company. In some years when the Company is not in a good position or facing financial crunch may decide not to give dividend. Taxation Dividend “A small salary combined with dividend payments avoids large National Insurance (NI) payments. Also, for higher rate tax payers, dividends are taxed less than the higher rate tax of PAYE tax.” (Dividends – calculation, payment and taxation) Capital Gain When you make a profit or gain while selling, exchanging or giving away or otherwise disposing off your investments either “in the form of shares or other investments which are securities or debentures you will have to pay Capital Gain Tax.” (Capital Gains Tax on shares: the basics) Managed/Investment bonds Definition Life insurance companies sales Investment bonds and allows you to invest in a variety of funds which are managed by professionals. These are designed to give long term capital growth, but they are also valuable for short term income generation as well. The minimum amount of investment requires varies from £5,000 or £10,000. When you purchase of bond some units depending on the market value will be given to you in your choice of fund. Fund holds different portfolio of investments, such as shares or securities, the price of your units will increase and decrease in line with the value of your investment. Investment In past days, investment bonds were provided with a choice of 6 to 12 units being linked with each other. These funds were being covered in different field which varies from UK shares market, overseas shares market, properties market, interest based securities fixed and floating and liquid assets such as cash. Investors were given the choice to switch in between these funds for 2 or 3 times a year or they can get managed funds which were managed by professionals. Returns on the funds are distributed through bonuses as decided by the issuing companies’ i.e. insurance company with the main aim that the investor does not suffer the ups and downs of the stock exchanges. However, in the event of down going stock markets many issuing companies cut their dividends (bonuses) dramatically. Investors’ money was lost and the profit is also declining therefore this gave rise to Investment bonds. Which are more profitable and less risky? Investments bonds are “linked with distribution funds and they are geared to give a regular income by making an investment in equities and bonds and sometimes property.” (Investment Bond Guide) Taxation “These bonds are just like life insurance policies, the insurance companies have to pay tax on the income and growth generated by the investment held in a bond.” (Investment Bonds) Investors neither have to pay Capital Gain Tax on any profit nor they have to pay basic income tax on any of the income associated with these funds. References: Why isn’t life insurance compulsory? http://www.independentfinancialservicesuk.co.uk/Insurance.mspx Insurance for Dummies http://books.google.com/books?id=rJywok6s4kgC&printsec=frontcover#v=onepage&q&f=false Theory and practice of insurance http://books.google.com/books?id=CoSYojFGf-cC&printsec=frontcover#v=onepage&q&f=false Dividends – calculation, payment and taxation http://www.ir35calc.co.uk/dividends_calculation_taxes.aspx Capital Gains Tax on shares: the basics http://www.hmrc.gov.uk/cgt/shares/basics.htm Investment Bond Guide. http://considered-choice.co.uk/Investment-Bonds/investment-bond-guide.html Investment Bonds. Retrieved from http://finance.mapsofworld.com/bond/investment-bonds.html Read More