Protection Advice FOR WHEN
Protection Advice – ‘Duty of Care’ has been around for a number of years now and is regularly used to ensure our clients are placed in an informed position in relation to their Protection needs. so make sure you talk to your advisor about Protection Advice.
Under Protection Advice – The FCA describes Duty of Care as: “a duty to use reasonable skill, care and diligence when providing advice, to demonstrate a standard of care as exercised by a reasonably competent adviser. highlight what they have observed including outstanding debt or lack of protection.”
Simply put, it’s about making sure our clients understand all the options when it comes to their protection, so they can take responsibility for their own ﬁnancial futures and that of their families, or take no responsibility and hope nothing happens, or in the worst case. put the problems with other people who hopefully can resolve it for them. But to do this our clients need to have the knowledge, or at least the awareness, of the issues/risks — and that’s where our real duty of care, as professional ﬁnancial advisers, comes to the fore.
Act now – But what if our clients don’t want any advice? Then it might be a good idea to talk about the other options they could choose (e.g. Savings/Assets, Bank Of Mum and Dad, State Beneﬁt) . and pointing out that perhaps they may not be as realistic as they might think.
For example, according to Legal and Generals Deadline to Breadline research* the average employee in the UK has savings that would last them just 32 days. And then there’s the State Beneﬁt which is currently just £92.05 per week sick pay — so with the average salary in the UK is £517 per week according to the Money Charity*, could your clients survive a pay cut of 82%?
Most people assume the government will take care of them and their families if they die or become too ill to work, but this isn’t always the case. Revisions to state beneﬁts over the past couple of years have made the ﬁnancial safety net less robust than before. The introduction of Bereavement Support Payments in 2017 represented a fundamental change to bereavement beneﬁts. (which are now only available for a maximum of 18 months) while the switch to Universal Credit has created uncertainty around what beneﬁts are available now and in the future.
More recently, in April 2018 the Department of Work and Pensions (DWP) introduced Support for Mortgage Interest (SMI) loans to help people cover their mortgage payments if they’ve stopped earning an income. This replaced previous state beneﬁts to cover mortgage interest payments. A crucial point that mortgage holders need to be aware of with this loan, is that the DWP will put a charge on the property.
Act now – It’s reassuring to know that your clients could still get help with mortgage payments. if they ﬁnd themselves in a tough ﬁnancial situation. But the ﬂip side is they now need to pay this money back with interest, charged currently at 1.7% per annum. It should therefore only be treated as a last resort, making it more important than ever that your clients protect their income to avoid getting into debt or losing equity in their homes.
SMI Loan ?
To qualify for an SMI loan a claimant needs to be getting one of the following beneﬁts: Income Support, Income—based Jobseekers Allowance, Income—related Employment and Support Allowance, Universal Credit or Pension Credit.
As mentioned already, in contrast with how the state helped with mortgage repayments before April this year, the amount received is treated as a loan and must be repaid when the person dies or sells their home. So, unless the home owner has protected their mortgage, the equity in the property will get eaten into, especially if they’ve not been able to work for a number of years.
Although the DWP don’t make any credit checks before offering someone a loan — so a person’s credit rating won’t be affected — they will apply a daily rate of interest to calculate how much the home owner will receive. The current standard interest rate used to calculate SMI is 2.61% per annum. This is an important point to consider, because this rate might well be lower than the actual interest rate for the loan with the mortgage lender. If this is the case, there will be a shortfall between the SMI payments and what someone has to pay their mortgage lender. So, for some people, taking out an SMI loan might not be their best option.
DWP benefits system
There’s also an upper limit on how much of their mortgage someone can get help on through SMI. For people getting Income Support, Income—based Jobseekers Allowance, Income—related Employment and Support Allowance or Universal Credit the limit is £200,000. But for people receiving Pension Credit, the upper limit is usually £100,000, unless the client was getting one of these other beneﬁts when they ﬁrst applied for the SMI |oan.
It’s also worth bearing in mind that there’s a long wait of 39 weeks, or nearly 10 months, from when someone makes a claim for the SMI |oan until they get their ﬁrst payment (unless they’re getting Pension Credit, in which case payments are made straight away).
What’s more, the DWP’s own ﬁgures show that the number of people accepting loans has ground to a halt in recent months. with 21,000 people either accepting or intending to accept the loan but nearly three times as many (61,000) having declined one. Unless people have some form of protection in place it’s hard to see how they will avoid falling into arrears.1
The DWP has conﬁrmed that any income people get from an insurance policy that speciﬁcally covers their mortgage payments won’t be taken into account when assessing means—tested beneﬁts. This applies to both legacy beneﬁts and Universal Credit. This means that people can take out insurance that’s intended to cover their mortgage payments. without any fear that their beneﬁts will be cut if they can’t make the repayments and need to make a claim.