Protecting your income is key to financial resilience
· Posted on: September 19th 2024 · read
Without an income, all other objectives will fail. Your income is the basis on which all life plans are made and as such it needs to be prioritised in terms of protecting it when making any financial planning arrangements, or just simply to maintain your lifestyle.
Maintaining an income is key to being financially resilient, and the foundation of any kind of lifestyle/financial planning. It should be considered before any investing & pensions/retirement planning.
By protecting your income you can ensure you don’t become financially vulnerable, should you be unable to work through illness or accident and lose your income.
How will loss of income impact you?
Unless you have significant savings, you're likely to feel the impact of lost earnings very quickly.
Many of us 'rent' our current lifestyle, paying for it each month through our earnings. If that regular salary was taken away, it may not just be your home you lose, but your entire lifestyle.
There are state benefits that you may be able to claim if you become long term sick or disabled and unable to work. However, state benefits are unlikely to cover all your outgoings, especially if you have a family to provide for. You can get £109.40 a week Statutory Sick Pay (SSP) for up to 28 weeks, which may help towards paying the basics such as:
- Mortgage/rent
- Household bills (electric, gas, water, council tax, internet, phone contracts, etc)
- Grocery/shopping
- Loans
- Car finance
If you’re not eligible or your SSP ends you may be able to apply for Universal Credit or Employment and Support Allowance (ESA).
See further guidance here.
What can you do about it?
You may also be entitled to sick pay through your employer which can really help you and your family cope financially through the early stages of being unable to work. Ensure you know the following regarding any cover:
- The level of sick pay, and how long it would be paid for.
- Is the level sufficient?
How income protection can help
If the base level of cover is not sufficient, one alternative is to take out a form of insurance called Income Protection.
Income protection is designed to pay out a monthly amount if you are unable to work due to illness or injury that results in a loss of earnings while you are covered by the plan.
It is available to employed and self-employed individuals. Features and options include:
- The level of cover is usually based on a percentage of an individual’s earnings, with 50% to 70% being common. The policy will only pay out when the policyholder’s income is reduced or ceases. It isn't designed to pay a benefit if the policyholder continues to receive their full gross salary from their employer.
- Payments are tax-free, unless arranged through a group scheme, in which case they're paid as taxable earnings.
- Income protection policies only pay out once a pre-agreed deferral period has passed, generally ranging from 1 to 12 months after a claim is made. The longer the deferral period chosen, the lower the premiums. The default deferral period tends to be 13 or 26 weeks.
- Cover payment periods can be selected for shorter terms periods (eg: 12/24 months), or for a longer selected period, eg, align to your intended retirement age.
About Income Protection Awareness Week (IPAW)
While personal income protection premiums cannot be offset against tax, the benefits are completely tax-free.
If your employer provides income protection cover, they can claim the premiums as a business expense, but must deduct tax and National Insurance from any payments made to you.
If your family’s financial security depends on your ability to earn an income, income protection is an essential component of your financial plan.
MHA can help
To discuss income protection, or for assistance with any other financial planning needs, please contact our wealth management team.
You may be affected by changes announced in the Autumn Budget 2024. Stay updated with key tax announcements on our dedicated Autumn Budget Hub.
MHA Caves Wealth is authorised and regulated by the Financial Conduct Authority (FCA), Financial Services Register number 143715.
Risk considerations and points to note
This is a marketing communication, general information only, and is not intended to be individual investment advice, a recommendation, tax, or legal advice. The views expressed in this article are those of MHA Caves Wealth or its staff and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. In particular, the information provided will not address your personal circumstances, objectives, and attitude towards risk. Therefore, you are recommended to seek professional regulated advice before taking any action. There are a number of risk considerations to be aware of as noted below. It's important you are aware of these as appropriate to your circumstances.
There are a number of risk considerations to be aware of as noted below. It’s important you are aware of these as appropriate to your circumstances.
- Application for cover is personalised, is occupation based and medically underwritten, so:
- Failing to disclose (& honestly) any requested or relevant information (including medical history information) may adversely affect any future claims you might make.
- Cover is only maintained whilst premiums continue to be paid.
- The benefits are selected at outset when the policy is written. Over time, changes in your circumstances or inflation may mean the original cover is insufficient for your needs.
- Cover levels should be periodically reviewed to ensure they remain sufficient
- The policy has no cash value at any time.
- There is normally no continuation option at the end of the selected policy term. So, once the term is reached, cover will cease.
- The maximum benefit payable has to take into account any benefits which would be paid under any waiver of premium benefits written into other policies. So, if you have a waiver of premium benefit (also known as contribution protection benefit) to cover payments on other policies/plans, this/these would be deducted from the maximum benefit payable on an income protection policy.
- The payment of any benefits may affect your claim to means tested benefits.
- The payment of any other payments, such as sick pay, may have an impact on the benefits payable.
- The level of benefit may be reduced if you receive other regular income, such as salary/reduced salary or pension income.
