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Negative Interest Rates

Following on from last month’s article, I’ve had several people ask me about negative interest rates.

A negative interest rate is when you have to pay the bank to hold onto your money, yes you have to pay them a rate of interest on money you have in your account.

The Bank of England will do this to encourage you to spend your money or invest it. (A bank account is not an investment!) The idea is to stop unemployment increasing when economic times are tough.

If someone loses a job the Government loses the tax they would have paid and has to pay out more in benefits; a double economic downturn.

Negative interest rates make cash less valuable, which then encourages folk to spend their money. Increasing sales keep people employed and thus increases the tax take for the Revenue as profits go up and unemployment benefits do not increase.

Alternatively rather than spending your money, you can invest in shares. This provides companies with the capital they need to grow and expand, creating more jobs (less unemployment) and profits so the government pays out less and collects more tax, a double economic up-turn.

And don’t forget that not only can shareholders benefit from this growth and revenue, but there may be generous tax breaks available so they can retain a greater share of their returns.

And now a warning. If interest rates do fall further it is easy to see people being tempted by the new Finance ISA accounts, which is peer to peer lending as I explained last month. I saw a headline 8.7% p.a. tax free on offer this morning. Why pay to have your cash in a bank when it could earn 870 on 10,000?
With many new providers in this market there will be pressure for them to offer eye watering rates to attract funds to lend but who exactly are they lending to? What credit checks do they make, what experience of such lending do they have? Are the loans they make secured, how easy is it to get your money out etc?
The providers are regulated by the FCA which helps but you are not protected as yet by the Financial Services Compensation Scheme. There is no recompense in the event of an authorised firm ceasing trading.
If we do get negative rates please don’t keep your money under your mattress, it’s not insured! How markets would react to the news is uncertain but it may be sensible to see an IFA sooner rather than later so that you do not miss out on any opportunities that would help you avoid having to pay your bank for keeping your money!
Ring Georgina or Steve on 01277 630873 if you want to find out more

Second marriages - an inheritance dilemma

The number of people marrying for the second or even third time is higher than ever, but can bring difficult decisions.  Second marriages often leave spouses torn between the need to provide for their present partner and the desire to ensure that children from their previous marriage receive an inheritance.

Typically, couples decide that when one of them dies their estate goes to their surviving partner.  Upon his or her death, everything is passed to their children. 

However, second marriages create tough choices.  Leaving your entire estate to your surviving spouse (particularly if your home is the main asset), could put your children’s inheritance in a vulnerable position.  Your estate would form part of your spouse’s assets and they are free to decide who benefits when they die. 

This is a difficult subject to broach with your husband or wife as it raises awkward questions of trust.  But there are other issues.  Your spouse may have very persuasive children, or meet a new partner.  Even creditors, such as local authorities for care home fees, can threaten your children’s inheritance.

With careful will planning, however, you can have the best of both worlds.  A life interest trust will provide for your surviving spouse during their lifetime and your estate will automatically pass to your children (or beneficiaries chosen by you) when they die.  This method can be very effective if your main asset is your family home.  Upon your death you leave your property to your surviving spouse for the rest of their life (or until remarriage if you wish), and upon their death or remarriage, it goes to your children. 

When you make such decisions it is vital to seek legal advice.  Any complications, unless skilfully considered, could result in distress and financial loss to your loved ones.

There are many other techniques that can be used in your will to ensure that your estate is dealt with in the way you want.  To discuss any of the issues in this article please contact Ben Parmenter at Birkett Long LLP on 01206 217611 or for a free 15 minute consultation.