Q. I have a Building Society Bond maturing at the end of December with a reinvestment option at an interest rate of 1.55% gross for a further year. This does not sound very good. Are there any better options? I am 72 and a non tax payer so I have been getting my interest paid without any tax deducted.
A. You could consider the new National Savings Bonds that are to become available in January. The interest rates for the new National Savings Fixed Rate Bonds for those aged 65 or over have recently been announced. These are 2.8% gross for a one year bond and 4% gross for a 3 year bond, which are very competitive rates in the current market. The limit for each issue is £10,000 so an individual could invest up to £20,000 in total or for a married couple who are both over 65 they could invest up to £40,000 in total. The minimum investment for each issue is £500. Interest will be paid annually. Tax of 20% will automatically be deducted although as a non tax payer this can be reclaimed from HMRC each year by completing form R40. Unfortunately National Savings do not operate the R85 system where non tax payers can have their interest paid gross. Although in your case as a non tax payer there is the problem of having to reclaim the tax each year I do expect there will be a great demand for these bonds.
Q. I am a member of the NHS Pension Scheme and understand that there is a new scheme starting in April next year. However I have also been offered a choice to change my existing service as well. Can you explain this?
A. In common with many public sector employers, the NHS is changing the terms of its pension scheme. Rather than benefits being based on service and your final salary, benefits accrued after 2015 will be based on the average of your earnings over your full career in the NHS. The amount you get for each year is more, but it will be paid from state pension age. This is the second time a new scheme has been introduced, but the 2008 scheme was only for new members. The 2008 scheme has a retirement age of 65, which was an increase from 60 under the previous scheme. After the introduction of the 2008 scheme, existing employees were given the option to join the new one, which offers better benefits if you retire at 65, but not as much on retirement at 60, where the old 1995 scheme is generally better. Not many people took up the first offer, but this “Choice” exercise is being re-run for those members of the old scheme who will now have to join the 2015 scheme (those close to retirement are protected from the changes). The Choice 2 exercise only affects benefits accrued up to the date of joining the new scheme. There is some useful information on the NHS Pensions website for those affected. It is quite a complex issue, but the earlier you intend to retire, or at least leave the NHS, the more likely it is that you are better staying in the 1995 scheme. If you intend to (or will have to) work through to 65 or beyond, the 2008 scheme offers better benefits. There are some tax issues for those on higher earnings, who should take financial advice from a Chartered Financial Planner specialising in NHS pensions before taking any action.
Q. I keep hearing GDP in the news, can you explain in simple terms what this is?
A. The gross domestic product (GDP) is one the primary indicators used to gauge the health of our economy. It represents the total value of all goods and services produced over a specific time period – you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year. Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total. The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports. As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within our economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labour to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It’s not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
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