Top 10 Most Frequently Asked Financial Questions

1. I’ve seen a lot of negative press coverage about With Profit investments. Are they still suitable to invest in?
The concept of With Profits investments is simple. All of the money from different investors is pooled together and invested in items such as equities, bonds and property. In years of strong investment growth, the provider holds back some of the growth and uses this to smooth out poorer returns in other years.

The bad press received by this type of investment has largely been due to sustained falls in the stock market that left some With Profit funds financially weak and unable to provide the kinds of returns expected by investors. Some investors have found their policies subject to a 'market value reduction' when they have withdrawn from the fund. This means that the value of the policy when cashed is reduced so that it reflects the true underlying value of the fund’s investments and not the With Profits policy value that they may previously have been given.

With Profits funds are still however a valuable investment option but it is important to pick the right fund since the variation in investment returns between different funds can be significant.

Choosing a fund with financial strength is crucial because a With Profits fund that is financially strong can afford to invest lots of its money in equities, which provide a higher potential for strong returns. Weak funds are forced to hold their money in lower risk investments, which provide less opportunity for growth. This can result in poor With Profit fund performance.

The key therefore is to pick a fund that is financially strong and committed to investing in equities. However there is never a cast-iron guarantee with any investment product, although With Profits is a more cautious option.


2. I want to manage my savings in the most tax efficient way that I can. What are the options?
There are many options available to you but you should first consider what you want to achieve with your savings and over what period of time, as well as your attitude to risk.

One way of saving is through an ISA or Individual Savings Account. ISAs are not investments but wrappers that help to make investments such as cash and stocks and shares more tax efficient. Interest earned on a cash ISA isn’t subject to income tax and there is no Capital Gains Tax applicable on a stocks and shares ISA. You can currently invest up to £7,000 in a maxi stocks and shares ISA each tax year.

If you are saving to provide financial security in retirement, personal pension policies are a good option as tax relief is available on contributions. So for every £100 that a higher tax payer contributes, for example, it actually costs just £78 from their net income. Up to £18 could then be claimed back from the Revenue.


3. Where is a safe place to invest my NHS lump sum to enhance my income in retirement?
There are several options available that will provide you with an additional income in retirement. These include deposit accounts, guaranteed income bonds, ISAs, OEICs/unit trusts, investment bonds and purchased life annuities. Which option, or options, you go for should depend upon the level of risk you are willing to take with your capital.

Whatever investments you decide upon, a key factor to consider is that the investment provides a level of return greater than inflation; otherwise the buying power of your investment income will decrease over time. You should also consider how the investment and the income itself will be taxed.

You may decide to spread your lump sum, making sure you have easy access to some of the cash in case of emergencies. You could then invest the rest according to your attitude to risk, the time available before you want to start drawing an income and the guarantees on return that your require.

A bank or building society deposit account will provide one of the safest homes for your NHS lump sum however the returns received may not be particularly high and will be subject to taxation at your highest marginal rate.

Guaranteed income bonds, as their name suggests, can provide guaranteed rates of income and return on your investment, as well as the potential for growth on the money you invest, although access to capital may be limited.

If you want access to your capital at any point you could consider investment bonds, which can be used to provide an income through regular, tax-deferred withdrawals. Alternately there are OEIC/unit trusts which aren’t taxed on growth or income when held within an ISA. Both of these products can be arranged with investment funds suitable for those wishing to minimise the risk to their capital.


4. I’ve managed to accrue a good sum of cash, would it be better to use that money to pay off some of my mortgage or invest it?
Obviously, everyone’s circumstances are different but the generally accepted wisdom is that you should consider paying off your mortgage first.

With mortgage rates rising, it will be hard to find an investment that guarantees to provide you with a return high enough to outweigh the interest that you will continue to pay on your mortgage. For example, with a mortgage of £100,000 and a typical current variable interest rate of 7%, you would need a net return of 7% from your investment to match the interest on the mortgage. For a higher rate taxpayer this equates to a gross return of 11.7%.

So, when might it be in your best interests to keep the mortgage? There are two main circumstances which might legislate against early repayment. Firstly, if there are high charges associated with the early repayment of the loan you could find yourself with a hefty bill for making the repayment. You might therefore be better off waiting until the penalty period expires. Secondly, if you currently benefit from a very low ‘fixed rate’ on your mortgage, there might be more reason to consider keeping the loan as the required return on your investment would be much lower.

Your financial consultant will be able to talk you through the options available and help ensure that you make the right decision.


5. My fixed term mortgage rate is coming to an end. Can I avoid a hefty hike in my mortgage payments because of recent interest rate rises?
Since August 2005 the Bank of England base rate has risen from 4.50% to a current rate of 5.75%. As a result mortgage rates have increased, on average, by 1%. Therefore, while it might be preferable to switch to another deal when your current one comes to an end rather than revert to your lenders standard variable rate, it is unlikely that you will find the kind of deals that were available a few years ago.

If you are concerned about your payments increasing with potential future rate changes, then a fixed mortgage deal may still be your best option. However, there are other options available such as discounted, tracker, offset, capped or interest-only mortgages.

With so many different factors to consider many people find it difficult to decide which mortgage deal is right for their specific needs or just don’t have the time to compare deals. You may prefer to talk with a financial adviser. To make sure you get the best deal, find an adviser like Wesleyan Medical Sickness, which has access to products from the whole of the mortgage market and not just a limited range.


6. Should I steer clear of endowment mortgages as I've read that they don't necessarily clear the loan when the mortgage ends?
Endowment mortgages have received something of a bad press recently. With this type of mortgage you don’t repay any of the capital you borrow during the term of the loan. Instead, the endowment policy should grow to produce a lump sum large enough to repay the loan in full at the end of the pre-agreed period - normally 25 years. Monthly payments are made up of interest on your mortgage loan and the premium for the endowment. Within the package you also pay for life insurance to cover repayment of the loan if you die. However, there is no guarantee your endowment will pay off your mortgage and this is the position many borrowers have found themselves in.

The issue with some low-cost endowment policies is that the final maturity value has not met the forecasted levels. Endowments are an option as long as you understand the risks being undertaken. The FSA has prepared a guide "Will your investment or savings plan pay off your mortgage?", which is available from their website www.fsa.gov.uk.

The good news for Wesleyan customers is that all existing Wesleyan Assurance Society endowment policies are guaranteed to repay the original mortgage capital in full.

7. Would Added Years be the best way to increase my income in retirement, or would a personal pension or a regular ISA/unit trust be better?
The decision to buy Added Years remains a personal choice depending on various factors including your attitude to risk, anticipated salary increases, age at retirement, life expectancy, plus investment performance and applicable charges.

Added Years may suit those who prefer the comparative safety and guarantees inherent within the NHS Pension Scheme, rather than trusting stock market movements.

Contributing to a personal pension plan builds up an individual fund which is applied at retirement to secure a combination of income and tax-free cash. Your contributions to pension plans, whether via a personal pension or added years will normally qualify for tax relief at your highest marginal rate of tax.

Doctors favouring maximum flexibility and liquidity of their funds may however prefer to pay regularly into Individual Savings Accounts (ISAs) or to Unit Trusts. ISA benefits are available as tax-free cash, although no tax relief is available on your contributions. These benefits can usually be taken at any time, unlike pensions where the payment of benefits is normally limited to doctors aged over 50.

This is a highly complex area and expert financial advice is vital. Wesleyan Medical Sickness will always give you a comparison of the possible returns from a personal pension against those from a Added Years contract. A good proposition for many is a mixture of the two.


8. I’m concerned that I won’t have enough pension for the lifestyle I want at retirement. How can I find out what my NHS pension will be at retirement and if I want to pay more into it what is the best way of doing this?
The NHS Pensions Agency can give you an idea of the pension you have built up so far, along with what you might expect to receive when you retire. The information you receive about your benefits can be difficult to understand. A good Financial Consultant who specialises in providing retirement planning advice to members of the NHS pension scheme will be able to help you make sense of your forecast.

The first stage is to identify what kind of lifestyle you want to have in retirement along with what your anticipated outgoings might be. You can then identify the gap between what the NHS Pension Scheme is expected to provide and what you would ideally like as a retirement income. A Financial Consultant can then help you put plans in place to meet your retirement goals and give you an indication of whether additional funding might be required.

You can contact the NHS Pensions Agency at NHS Pensions, Hesketh House, 200-220 Broadway, Fleetwood, Lancashire, FY7 8LG. Members of the Scottish NHS Pension Scheme can contact: The Scottish Public Pensions Agency, 7 Tweedside Park, Tweedbank, Galashiels, TD1 3TE.


9. How will changes to the NHS superannuation scheme and the Lifetime allowance affect me?
The NHS Pension Scheme was established in 1948 and designed to meet the needs of employees at that time. Changes in the working patterns of people in the NHS, along with changes in legislation have triggered a process of modernisation to ensure the scheme continues to meet the needs of today’s employees.

The final changes have now been agreed and they include an increase in the retirement age to 65 for new members, tiered contribution rates depending on pay levels, a change in the pension accrual rates for new members and the removal of the 40-year membership limit. Once agreed, the changes are anticipated to take effect in 2008.

The Lifetime Allowance is the maximum amount of ‘tax privileged’ pension benefits that you can accumulate in your lifetime. If, when you come to take your pension, your benefits exceed the Lifetime Allowance, you will be subject to a tax charge.

For the majority of people, their pension benefits will be within the Lifetime Allowance. However, the Lifetime Allowance may present an issue for individuals in generous occupational pension schemes such as the NHS Pension Scheme and who also have relatively high earnings. For such people it is vital to obtain financial advice from a Financial Consultant who understands the NHS pension scheme.


10. If I just want a financial health check but decide not to take any of the advice given will I be charged?
This largely depends upon the adviser you see. Some advisers work on a ‘fee basis’, whereby you pay a fee for the benefit of their advice. The fee may be charged upfront or on completion of the work. It may be a fixed amount or, more often, based on an hourly rate.

Those advisers who don’t charge fees will generally work on a commission basis. In this case, they will only receive income if you proceed with their recommendations. They won’t charge you for their time in assessing your circumstances and making recommendations if you decide not to proceed follow their advice.

Some financial advisers, such as those working for Wesleyan Medical Sickness are salaried and will not charge you for advice if you decide not to take up their recommendations.

As with most aspects of financial planning, there is no ‘one-size fits all’ solution and you should consider which approach suits your personal circumstances as well as options available from your chosen adviser.


The above information doesn’t constitute advice. A full analysis of your circumstances needs to be undertaken before advice can be provided. Please remember that your home may be repossessed if you do not keep up repayments on your mortgage

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