Financial Planning, Pensions Advice, Financial Adviser Dunfermline, Fife, Edinburgh and Central Scotland

Wednesday 22nd May 2019

When investing, there are numerous questions to answer, from how much risk you want to take to how much you’ll invest. Among these is how you’ll build up your portfolio. There are essentially two options to consider: deposit a single lump sum or drip-feed investments on a regular basis, known as pound cost averaging.

Pound cost averaging means you spread out when you purchase stocks and shares. It aims to help smooth out market volatility by purchasing at different points. This helps to reduce the risk of investing all your money at extreme highs but also does the same for extreme lows. Over the long term, it should mean you pay an average price for units.

Pound cost averaging is a common investment strategy, but what are the benefits of doing so and is it the right option for you?

Spread the risk: This is one of the key benefits of pound cost averaging. Investment markets experience volatility, with the costs of stocks and shares changing in line with a huge number of factors. It’s near impossible to consistently predict how prices will change. As you’ll be investing over a period of time, the theory is that you’ll buy at both high and low points, smoothing out market volatility. In contrast, if you invest all at once, you risk seeing your entire portfolio decreasing in value if you purchased at an extreme high.

Reduces market worries: It’s natural to worry about how investments are performing; you want to get the most out of your money. However, with volatility considered, focussing on the short term should be avoided. Making smaller, regular investments can help to give you more confidence in your strategy. With a lump sum deposit, it can be easy to try and second guess market movements to maximise returns through timing. With pound cost averaging, you should have defined points to invest, removing this additional consideration.

Build up a positive money habit: Whether you’re dividing a lump sum into instalments or investing from your income, using pound cost averaging can make investing a habit. You’ll be used to drip-feeding money into investments, a practice that can stick with you long term. Even small deposits can deliver significant returns over the long term, particularly when you consider the effect of compounding. It’s a strategy that can make investing part of your regular financial plan, rather than an area you think about occasionally.

Make use of allowances: If you’re looking for a tax-efficient way to invest, Stocks and Shares ISAs (Individual Savings Accounts) are often a good place to start. Returns generated in a Stocks and Shares ISA aren’t liable for Income Tax. However, you can only deposit up to £20,000 each tax year into ISAs and you can’t carry the allowance forward; if you miss the deadline, the allowance is gone. Pound cost averaging means you can plan monthly deposits with the allowance considered, removing the end of year rush.

Investing a lump sum

If you have a lump sum you want to invest, you may want to do so in one go.

If you’re looking for a hands-off approach to investing with a long time frame, this may be a suitable option; you won’t have to worry about making regular investments. However, there is a risk that you purchase at a high point in the market and experience a loss in value. Should this happen, keeping a long-term outlook in mind can help alleviate your concerns, historically, over the long term, markets have recovered.

In fact, research indicates that whilst a lump sum investment strategy does experience greater volatility, it provides greater returns. Figures from Schroders focussed on the US market demonstrate this:

  • A lump sum deposit of $37,200 in 1988 invested in MSCI World Total Return Index would now be worth $350,000 after delivering an annual return of 7.5%
  • In contrast, $100 monthly payments starting in 1988 for 31 years would now be worth $123,395 following an annual return of 3.9%

This huge difference can be attributed to the fact that a lump sum deposit means the money has spent a longer time in the markets and benefitted far greater from compound growth than a pound cost averaging strategy. Of course, a strategy of investing a lump sum depends on you having the assets available to do so.

As with all investment decisions, you should also consider how long you plan to invest for. As a general rule of thumb, you should look to invest for a minimum of five years, giving you a greater opportunity to ride out dips in the market.

What’s right for you?

There’s no single solution that’s right for every investor. There are benefits to pound cost averaging, but there are also advantages to investing a lump sum too. Your decision should be based on a range of factors, including your investing time frame, goals and current assets. If you plan to start or expand your current investment portfolio, please get in touch. We’re here to help you understand which strategy is right for you, as well as other key considerations such as diversification, withdrawing an income and potential returns.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

When you’re saving for the future, one of the key questions to answer is where you’ll place the money. Should you invest? If you do, what type of investment is right for you? It can be difficult to decide what to do and one of the first places to get started is to get to grips with the different asset classes.

First, though, what is an asset class? It’s the term used to describe a group of securities or investments that are financially similar. Your investment portfolio will typically include several different asset classes to spread risk through a strategy known as diversification, which we’ll look at more closely later on.

There are traditionally four asset classes:

1. Cash

Cash is the asset class that most people are more comfortable with.

This may include cash that is held in a current or savings account, cash ISA (Individual Savings Account), or Premium Bonds. It’s low risk; your money is secure. Under the Financial Services Compensation Scheme (FSCS), your money is protected up to a limit in the event of a provider collapsing too. Up to £85,000 is protected per person, per authorised bank or building society.

However, interest rates are currently low, and many accounts aren’t offering rates that allow you to keep pace with inflation. In real terms, this means your cash assets are losing value and your spending power is diminished over time.

2. Stocks and shares

Stocks and shares, also known as equities, represent a share of ownership in a company. The prices of shares vary and are determined by many different factors. When the prices of the shares you hold rise, you can make a profit through selling. This, hopefully, allows you to build wealth in line with, or exceed, inflation.

On the risk scale, stocks and shares would usually be the highest. The shares purchased will fluctuate in value. This means your holdings may rise and fall. As a result, investing in stocks and shares should be considered as part of a long-term financial plan with a minimum time frame of five years. Historically, stocks and shares have delivered returns over the long term, but you do need to consider the possibility that they will fall in value.

3. Property

Property is another asset class the majority of people are aware of. For some, it’s appealing because it’s a tangible asset that you can actually see and you’re likely to purchase.

There are two options for creating an income from property: capital growth and rental income stream. The performance of property assets is dependent entirely on the market and you also need to factor in that you may have additional expenses, such as maintenance, to get the most out of your investment.

4. Bonds

You may have heard of bonds also being described as fixed-income securities. These are issued by governments and companies as a way to raise capital. Those issued by the UK government are called gilts. The initial loan is returned at the end of a defined period, with interest being paid during the term. Bonds can be bought and sold, and their popularity will be dependent on how well the company is doing.

Bonds aren’t risk-free and there is a chance that you’ll receive less back than you initially paid. They are, however, generally considered lower risk than investing in stocks and shares.

Diversification: Managing investment risk

We’ve already mentioned diversification, but what does that term actually mean?

Diversifying your investment portfolio is about striking the right balance between low and high-risk investment. Generally speaking, those that are considered higher risk have the potential to deliver greater returns. Most portfolios should have at least some of their assets held in low-risk investments, such as a Cash ISA.

However, how a portfolio should be split will depend on your personal situation and attitude to risk. Over time, how your portfolio is split should change to reflect life goals too. For example, if you’re a worker earning a regular income with long-term goals you may be more inclined to invest in asset classes that are considered high risk. Alternatively, if you’re approaching retirement, you may want to reduce risk to limit exposure to volatility.

As a result, there’s no single solution for how your portfolio should be split between different asset classes. You need to think about the level of investment volatility you’re comfortable with, how long you’ll be invested for, and other factors. This is an area we can help you with. Your investment decisions should be influenced by your wider financial plan and aspirations. Please contact us to discuss your current asset class allocation and future investments.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

One in three middle-aged Brits is set to retire on the State Pension alone and many more face a shortfall in their pension. It could leave a significant gap between expectations and reality. If you’re not sure what income your pension could deliver in retirement, checking sooner rather than later gives you an opportunity to plug the gap.

Based on the spending habits of those that are already retired, Nationwide estimates that those retiring in the future will be almost £400 short each month. Over the course of a 15-year retirement, it leaves a shortfall of £68,000. When you factor in that those considered middle-aged today are likely to be in retirement for longer than 15 years and many will want to enjoy a comfortable lifestyle with some luxuries, such as holidays, the gap is even more significant.

The research also found:

  • Less than one in ten workers that are middle-aged have clear retirement goals
  • 52% are worried about affording retirement and 43% believe they won’t be able to afford the lifestyle they want
  • Just four in ten have a private pension in place
  • Over half of those saving into a pension don’t know the value of it

How much you need to save for retirement is dependent on the lifestyle you want to enjoy once you’ve given up work. However, if there is a potential shortfall, the sooner you discover it the greater the opportunity you’ll have to take action, whether you’re planning a retirement that’s focussed on taking it easy or one filled with new experiences.

What is your target income in retirement?

The first step to take is to calculate the level of income you need for retirement.

Many retirees find that their overall expenditure decreases once they give up work, as travel and other associated costs will be reduced. However, you may be planning to invest more in hobbies, family and travelling, for instance. When working out a target income, be sure to include both the essential bills and those luxuries you’re looking forward to, as well as any large one-off costs that will come out of your pension too.

To give you a general idea, Which? research indicates that the average retired household spends around £2,200 a month; £26,000 a year. This covers all the basic areas of expenditure, as well as a few small luxuries, such as European holidays and eating out. Those that enjoyed long-haul trips, new cars and other further luxuries were found to spend around £39,000 annually.

Remember, this is simply an average, your desired retirement income may be different. As a result, it’s important to think about how you’re likely to spend.

The next thing to do is to see how this matches up with your current retirement provisions.

If you’re a member of a Defined Benefit (DB) scheme, you can contact the scheme directly to understand the current level of retirement benefits you’ve built up. This income is guaranteed and often linked to inflation. The accrual rate will be defined too, allowing you to calculate how this income may change between now and the retirement date.

If you hold a Defined Contribution (DC) scheme, again, you can contact the provider to receive the current value of your pension. However, it can be difficult to work out what this means for your retirement income, as contributions may change, and the savings are typically invested. This is an area we can help with.

You may have more than one pension, and possibly a mix of both DB and DC schemes; make sure you check them all.

What should you do if you find a shortfall?

After you’ve done the above, you may find there’s a gap between your expected income and how much you need for the lifestyle you want. Don’t panic, uncovering a shortfall now is far better than not finding out until you reach retirement, when your options may be limited.

So, what options do you have? Among them may be:

  • If you haven’t already, check your State Pension projection. With the State Pension paying £8,750 each year, assuming you have 35 years on your National Insurance record, it serves as a useful foundation to build the rest of your retirement income on.
  • Increasing your contributions is one of the simplest ways to increase your pension pot if you have the earnings to do so. This may also mean you benefit from further tax relief and employer contributions to boost your savings further.
  • Assess how you could use other assets. Few retirees rely solely on their pension to create an income. Take a look at how savings, investment, property and other assets could be used to make up the shortfall.
  • Decide where you’d make compromises. If increasing your retirement savings isn’t an option, making compromises is an option. Would you be willing to work for a few extra years to achieve the lifestyle? Could you reduce retirement spending in any way?

If you’re worried about your retirement income, please get in touch. We’re here to help you make sense of where your retirement savings are now and how to get on track with your goals in mind.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulations which are subject to change in the future.

When estate planning, Inheritance Tax (IHT) can be a concern. Naturally, you want to leave as much as possible to your loved ones and ensure they’re not stressed about paying a bill at what is already a difficult time. Luckily, there are usually many ways you can reduce the IHT your estate will be liable for.

Despite this, IHT receipts are rising. For the tax year 2018/19, HM Revenue and Customs (HMRC) collected an additional £160 million in IHT when compared to the previous year. It means more than £5.4 billion was paid from the estates of the deceased.

It’s an issue that’s set to grow too. By 2030, Canada Life predicts the total amount paid in IHT could reach a staggering £10 billion due to the value of assets increasing while thresholds for paying no IHT remain static.

IHT is the amount owed on your estate when you pass away should it exceed certain thresholds. The standard Nil-Rate Band is £325,000. An estate valued up to this amount is exempt from IHT. In addition to this allowance, there is also the Residence Nil-Rate Band. This can be used if you’re passing your main home to children or grandchildren. It’s currently £150,000, rising to £175,000 in 2020/21.

Therefore, if the value of your estate is more than £475,000 for this tax year, or £500,000 from April 2020, some of your estate may go to the taxman rather than loved ones. However, with an effective plan in place, it is possible to eliminate or reduce an IHT bill. Among the things you can do are:

1. Make a will: A will is always an essential part of estate planning. It’s the only way to ensure your wishes are carried out when you pass away, without one in place, your assets will be distributed according to Intestacy Rules. This may vary significantly from what you want. It’s also an opportunity to assess the size of your estate and reduce IHT, for example, by the way assets are passed to loved ones.

2. Make full use of the Nil-Rate Band allowances: The value of your estate that falls under the Nil-Rate Band allowances is not liable for IHT. As a result, your first action should be to ensure you make full use of them where possible. If you’re married or in a civil partnership, you can pass on unused Nil-Rate Band allowances on to them. This means you can effectively pass on up to £1 million free from IHT from 2020/21 if your partner hadn’t used any of their allowances.

3. Use the gifting allowance now: Giving away assets now can help reduce the value of your estate, minimising the amount of IHT your estate will be liable for on your death. However, caution does need to be exercised here. For IHT purposes, assets given in the seven years before your death may be considered part of your estate, and therefore liable for IHT. However, you can gift up to £3,000 annually, which is immediately considered outside of your estate. Making use of this allowance can form part of your wider estate plan.

4. Give gifts out of your excess income: Following on from the above, gifts that are given from your regular income are also not included in your estate. These may include Christmas and birthday gifts. The key here is that you must be able to maintain your standard of living after making the gift. This can be tricky to understand in some situations, if you have any questions, please contact us. There are other gifts that are immediately excluded from your estate too, which can be found here.

5. Place assets into a trust: Assets placed within a trust are not considered part of your estate, and, therefore, aren’t liable for IHT. There are several different types of trusts and whether any are right for you will depend on your circumstances and goals. However, a trust can be useful in some cases, for instance, if you want to create an inheritance for children or still receive an income from the assets. For help understanding trusts, please get in touch.

6. Leave 10% of your estate to charity: If your estate is likely to be liable for a significant IHT bill, leaving 10% of your estate to charity can reduce the overall amount. Rather than paying IHT at the standard rate of 40% on assets above the Nil-Rate Bands, the rate will be reduced to 36%. It’s also an opportunity to support the causes or organisations that are close to your heart so it can be a win-win solution.

7. Take out life insurance: It isn’t always possible to eliminate an IHT entirely and you may be worried about how your loved ones will pay the bill. Taking out a life insurance policy and placing it in a trust can ensure it doesn’t eat into the inheritance you leave behind, as the sum paid out by the policy can be used to pay the bill. Placing the policy in trust is important, otherwise, it would be considered part of your estate and may increase your IHT bill further.

Please note: The Financial Conduct Authority does not regulate tax or estate planning.

Retirees are increasingly concerned about their money running out. With more responsibility placed in the hands of the individual, around how, when and how much income they’ll withdraw from their pension, it’s no surprise.

Pension Freedoms were introduced in 2015 with the aim of giving retirees more flexibility in how they used their retirement savings. The changes reflect a shift in retirement. In the past, many retirees followed a fairly similar path of giving up work on a set date and then using their pension to purchase an Annuity, providing a guaranteed income for life. However, retirement lifestyles have changed considerably in the last few decades. Pension Freedoms make it easier to match income with the desired lifestyle for retirement.

However, this extra choice comes with more responsibility for retirees. It’s led to increasing concerns among those both planning for retirement and those that have already started withdrawing from a pension. Research from Aegon found 38% of financial advisers say running out of money is their clients’ primary concern as more retirees opt to access pensions flexibly over purchasing a guaranteed income.

With this in mind, it’s important to weigh up both the pros and cons of each option, in relation to your personal retirement goals, before accessing a pension.

What are your options?

When accessing a pension, you’ve been paying into over your working life, there are three main options.

1. Annuity: First up, is an Annuity. This used to be the most common way to access a Defined Contribution pension. It’s a policy that you purchase, which will then deliver a pre-defined income for the rest of your life. The level of income will depend on a range of factors, including your age and health.

There are many different Annuity providers to choose from, so shopping around for the best deal is important. There are also various Annuity products to consider, some, for example, can be linked to inflation to maintain your spending power or will continue to pay out to a named partner on your death.

The key benefit of an Annuity is that the income is guaranteed; you don’t have to worry about running out of money in your later years. However, this comes at the cost of inflexibility and you may find that the rate offered isn’t as attractive as forecast investment returns.

2. Flexi-Access Drawdown: Since 2015, Flexi-Access Drawdown has also been an option for retirees. Typically, your money will remain invested and you’re free to access the funds as and when you choose to.

The essential thing to keep in mind here is that your money is invested. As a result, the value of your savings can rise and fall. Investment returns can help your savings keep up with inflation and hopefully improve your retirement income. However, you also need to consider what you would do if investments performed poorly.

The advantage of using Flexi-Access Drawdown is that you can change the level of income throughout retirement. As more retirees continue to work in some form or plan large one-off expenses, this may be useful to you. You’re also in control of your income. Of course, this comes with responsibility and can be viewed as a drawback as well as a benefit. You’ll need to ensure you’re withdrawing sustainable levels of income; there is a risk of spending too much too soon.

3. Lump sums: Should you choose to, you can withdraw your pension through a lump sum or multiple lump sums. Usually, only the first 25% of each withdrawal is tax-free and this option may not be the most tax-efficient as the remainder will be taxed as income.

However, there are times when a lump sum may suit your lifestyle goals. For instance, taking a lump sum could mean paying off your mortgage, funding a once in a lifetime trip or completing a home renovation project. It’s an option that can help make your retirement dreams a reality. As well as the tax implications you should carefully consider how you’ll create an income, do you have other pensions or assets that you could use? Taking a lump sum without a long-term plan could leave you financially vulnerable in the future.

Remember, you’re not obliged to access your pension at any point. Should you choose to, your pension can remain where it is. This can have some benefits if you’re concerned about Inheritance Tax, as money held within a pension is considered outside of your estate for this purpose.

Deciding which option is right for you

There’s not a single solution for creating the perfect retirement income. It will depend on your personal situation, provisions and priorities as you prepare to give up work.

The decisions you make around accessing your pension can affect your income for the rest of your life; some decisions are irreversible. As a result, it’s important to consider how your needs and goals may change throughout retirement, as well as how decisions could deplete your wealth. This is an area where financial planning can help. Our goal is to help you find a financial solution that is appropriate for the retirement lifestyle you want to achieve.

Above, we’ve outlined the three main options open to you when accessing a Defined Contribution pension. However, you don’t have to exclusively choose one option, though you can if you prefer. Many retirees use a hybrid approach to create an income that suits them. For instance, you may choose to purchase an Annuity to create a base income that’s reliable, accessing the remainder of your pension flexibly as and when it’s needed.

If you’d like to work with us to discuss your retirement income options, please get in touch.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

With pensions available to access and spend from the age of 55, you may decide you want to make one or more withdrawals before you give up work completely. However, there are a number of things to consider before proceeding, including the Money Purchase Annual Allowance (MPAA).

First, it’s important to understand how accessing your pension early will affect your long-term financial security before you even begin to consider making a withdrawal. Your pension is designed to support you throughout retirement, and there can be a real risk of running out of money in your later years. In some cases, taking out money at the age of 55 is the right decision. However, you need to carefully weigh up the drawbacks to assess if it’s right for you.

The MPAA

If you’re withdrawing money from your pension at 55, you may be planning to still work in some form. As a result, you may want to continue contributing to your pension, building up benefits further for when you do decide to retire completely. But you would be limited by the amount you can put away each year and still receive tax relief due to the MPAA if the amount you withdraw exceeds the tax-free allowance.

The MPAA is just currently £4,000 per tax year, severely restricting how much you could contribute to your pension. This compares to the usual pension Annual Allowance, which is the equivalent of your income, up to £40,000. If you’re used to putting sizeable contributions into your pension each month, and hope to continue this, the MPAA could have a serious impact on your financial plans.

It covers not just your contributions, but those your employer may make too. So, if you’re part of a generous pension scheme where your employer makes significant contributions on your behalf, you could find yourself breaching the MPAA quicker than expected.

Going over the MPAA may mean you end up facing an unexpected tax bill and that paying into a pension isn’t the most effective way to save for retirement.

Many pensioners are unaware of the MPAA

Whether the MPAA will affect your pension savings and retirement goals before making a withdrawal is important. However, it’s an area many of those that have accessed a portion of their pension aren’t aware of.

According to research from Canada Life, over a fifth of people over the age of 55 that were accessing their pension flexibly did not know the annual limit they were now restricted by.

Canada Life’s Technical Director Andrew Tully said: “The severe restrictions on the amount that can continue to be paid into a pension once benefits have been withdrawn are likely to catch many people out, leaving them vulnerable to large tax bills.

“Navigating the various rules around pensions and retirement can leave people exposed, especially if they have chosen a DIY retirement. Many people are taking advantage of the Pension Freedoms and yet have no plan to fully retire for many years, so the MPAA is likely to catch out the unwary.”

A transitional retirement is becoming increasingly popular among retirees, with thousands choosing to gradually give up work, it’s likely that the number of people affected by the MPAA will rise.

What should you do if you want to access your pension early?

As we mentioned above, the first step to take here is to fully understand how it could affect your overall retirement income. If you knew taking a lump sum at the age of 55 would mean your aspirational retirement lifestyle became unaffordable, would you be willing to make compromises? You may find that taking a lump sum now could improve your financial security now and, in the future, for instance, if it were used to pay off debt. Make sure you’re aware of how it’ll affect you in the short, medium and long term before you make a withdrawal.

Next, you should think about whether you’ll still contribute to your pension after this point. If not, you don’t have to worry about the MPAA. But if you do, it’s worth looking at what your current pension contributions are and how you expect this to change. In some cases, again, the MPAA won’t affect you. However, if you’re hoping to put more than £4,000 into retirement savings, you should weigh up the cost of doing so.

In some instances, it can be worth surpassing the MPAA and paying the tax bill when the time comes. For example, if you benefit from generous employer contributions that still make it an attractive option. On the other hand, there may be alternatives that are now better suited to you, such as saving into an ISA (Individual Savings Account) or investment portfolio.

If you’re unsure whether the MPAA will affect your retirement plans, please contact us. We’re here to help you understand how the decisions you make now could affect your future.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

What’s your approach to planning for retirement? It’s often an exciting milestone, but it may also be mixed with conflicting emotions. After all, it’s likely to signify a great change in your life and you may not have a clue what you want to do with your increased leisure time. Embracing some of the aspects of a Japanese tradition known as kanreki could help.

In many cultures of East Asia, reaching your 60th birthday is significant. This is because of the traditional 60-year calendar cycle, meaning you’ve completed one ‘cycle’ through the zodiac; reaching 60 is a chance to be born again and start afresh.

It’s a milestone that’s celebrated throughout the region. In Japan, it’s called kanreki, hwangap in Korea and Jiazi in China.

As you approach 60 in the UK, your thoughts might be turning to the next chapter of your life; giving up work and enjoying your retirement. But while you might celebrate your birthday with family and friends, it’s not really considered a time to reflect and start planning for everyone; perhaps embracing some of the kanreki traditions could help more of us look forward to starting a new journey.

It’s natural to worry about retirement, whether it’s your financial situation that is causing concern or the fear of the unknown. Taking the time to plan what you want out of the future can make your path clearer. This is where kanreki could provide some inspiration.

That doesn’t mean you have to don the traditional kanreki outfit of bright red sleeveless jacket and hat associated with the celebration, though if you want to, we’d fully support it! ‘Why the colour red?’ you might ask; it symbolises both youth, reflecting being born again, and celebration in Japanese culture, perfect for those planning their retirement.

However, with or without the time-honoured clothing, there are ways that the kanreki can support your path to retirement.

Taking time to reflect

With often modern, hectic schedules, taking time to reflect is something that we could probably all benefit from doing occasionally.

A kanreki is viewed as a point where you’re reborn, giving celebrants an opportunity to look over their last six decades and think about what they want in the future as they start anew. Retirement might not be tied to a specific date anymore, but it’s still often associated with embarking on a new journey.

Rather than plunging into retirement without reflecting on what you want to achieve or just focusing on the financial side, a kanreki approach affords you some time to really consider what you want from it.

  • What’s most important to you?
  • What does your ideal retirement look like?
  • What experience are you looking forward to?

Answering these types of questions can help create a financial plan that truly reflects your aspirations and helps you get the most out of your retirement.

Looking back at your achievements

As you start on the next adventure, looking back is just as important. Kanreki is often used to look back at the achievements you’ve already ticked off and celebrate the life you’ve lived. It’s a good opportunity to think back over fond memories, successes and the people that mean the most to you.

While you should also weigh up the missteps you may have taken along the way, it’s important to focus on the lessons learnt from them and how they’ll serve you in the future.

Planning your new beginning

Having looked back at the past and considered what you want from life, it’s time to embrace another kanreki transition; planning for the future. It’s a step that should be considered essential if you’re to get the most out of retirement.

With your aspirations in mind, you can start looking at how your retirement provisions can be used to help you achieve them. While retirement goals often focus on the short term, perhaps travelling, splurging on a new car, or doing up the house, planning your new beginning should look further ahead. You’ll need to consider how your day-to-day retirement life will look and the income needed to maintain it for the rest of your life, indulging in a few luxuries and experiences along the way of course.

Preparing your estate

In the past, when life expectancy wasn’t so long, kanreki also symbolised handing the baton on to the next generation. Whether you plan to hand over the reins of the family business or not, it’s still relevant to modern retirees. Setting out your estate plan should be considered a priority.

It might not be in keeping with the celebratory feel of kanreki, but it is important. As you prepare for retirement taking steps such as updating your will and Power of Attorney are key, as is considering whether your estate will be liable for Inheritance Tax.

If you’re planning your retirement, whether it’s your kanreki or not, please contact us. We’re here to help you get the most out of the next stage of your life and give you the tools to fully enjoy retirement.

The investment market has been experiencing volatility lately and it may mean you’re considering whether your current risk profile is still appropriate. All investments carry some risk but there are numerous different risk profiles to consider; what’s right for one person can be very different from another.

Calculating the level of risk you can afford to take with your investments can be complex, there are numerous different factors to consider, including these six:

1. Timeframe: One of the first things to consider is how long you’ll remain invested for; the minimum timeframe should be five years. Historically, markets have delivered returns over the long term, but in the short term, values can rise and fall. The longer you’re in the market the more time you have to ride out these dips and reduce the risk of losing some of your capital. Therefore, as a general rule of thumb, the longer you plan to invest for the more risk you can take. Of course, this isn’t the only factor you should consider when you’re making investment plans.

2. Capacity for loss: All investments carry some risk, as a result, you should ask yourself how you’d feel if you were to lose some of your capital. No one wants to think about losing money they’ve invested, but understanding the potential implications of doing so and your capacity for loss is crucial before you forge ahead. If investment values decreasing could harm your financial security, it’s typically a good idea to look at alternatives to investing.

3. Investment goals: What do you want to get out of investing? Do you want to grow your wealth as much as possible or create a portfolio that will deliver a reliable income? These two goals are likely to lead to very different investment strategies, so it’s important to define what you want to achieve through investing early on. Whilst goals are important, they shouldn’t be the sole focus. Taking a high-risk strategy because you want the opportunity to realise significant returns could seriously affect your financial security if you don’t have the capacity for loss, for example.

4. Current investments: If you already have investments, these should play a role in any new investments you plan to make. Your entire portfolio should consider diversification and spreading risk as much as possible. Holding a significant portion of your investment portfolio in a single industry, for instance, would mean any downturns in this area would have a far greater impact. On the other side, spreading risk means you have a chance to take advantage of more opportunities too.

5. Other assets: As recent market conditions have highlighted, investments can and do experience volatility. This can mean the value of your investments decreases at points. Should you need to, do you have other assets you can fall back on? Ideally, you shouldn’t invest without first building up an emergency fund at least. Looking at what other assets you have is critical for calculating your overall financial resilience and therefore the level of risk you can afford to take.

6. Overall attitude to risk: Whilst it’s important to keep the above factors in mind, it’s also important that you feel comfortable with any financial decisions you make. Taking the time to understand how and why the above influence should play a role in investment decisions can help you make the right choice for you. Ultimately, though, your overall attitude to risk and investing will play a role too. You may be in a position to accept a higher level of risk, but if this leaves you feeling worried and concerned about your financial security, for example, there may be alternatives that are better suited to your views.

Remember; regularly reviewing your investment risk is important. As priorities and goals change, investments that were once right for you may no longer be. Likewise, you may find that as your wealth increases, there are new investment opportunities to be taken advantage of. Your investment strategy should be reviewed in line with your wider financial plan and aspiration to ensure it still accurately reflects your goals.

If you’d like to reassess your current investment portfolio or have further assets to invest, we’re here to help you understand how your risk profile should influence decisions.

Please note: The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

As the start of a new tax year begins, it’s often a time to consider how your financial plan is shaping up and ensuring it’s still relevant for aspirations and goals. You may be thinking about how you’ll use your ISA (Individual Savings Account) allowance this year or how to make the most of investable assets. One key area you should be considering is your pension.

As you plan for retirement, there are three important changes to keep in mind when you’re saving and building an income.

1. Auto-enrolment minimum contributions increase

The auto-enrolment initiative to encourage more people to save for retirement has been hailed a success; with ten million more people saving into a pension. From April 6 2019, workers making the minimum contribution will see their pension contributions rise. This is the latest in a series that aimed to gradually get employees used to the idea of saving for retirement. There are no further planned rises in the future, but they could be announced at a later date.

In the previous tax year, employees were contributing at least 3% of their pensionable earnings. This has now increased to 5%. The average UK employee is expected to pay an extra £30 each month.

Whilst it does eat into the income received and could place pressure on low earners, there are two benefits to the rise. First, by saving more consistently, workers are putting themselves in a better financial position for retirement. Second, employer contributions have increased too, from 2% to 3%, delivering a welcome boost to pots.

It’s also important to note that the Personal Allowance, the portion of income where no tax is paid, has increased to £12,500. This may help to offset some of the income losses for those paying minimum auto-enrolment contributions.

2. Lifetime Allowance increase

The Lifetime Allowance (LTA) is the total amount you can hold in a pension without incurring additional charges when you reach retirement.

The LTA is increasing in line with inflation. This means it’s risen from £1.03 million to £1.055 million for 2019/20. However, it’s still below the high of £1.8 million in 2011/12. If your pension is approaching the LTA, it’s a crucial figure to keep in mind. The additional tax charges placed on your pension can be as high as 55% if you were to make a lump sum withdrawal.

Whilst the LTA can seem high, it’s easier to reach than you might think when you consider how long you’ll be paying into a pension for. If you’re approaching the LTA there may some steps you can take to mitigate the amount of tax you’ll pay. If you have a Defined Benefit pension, the value of your pension is typically calculated by multiplying your expected annual income by 20. For a Defined Contribution pension, the total value will be considered when applying the LTA, this includes your contributions, as well as employer contributions, tax relief and investment returns.

3. State Pension increase

For many retirees, the State Pension provides a foundation to build their retirement income on. Thanks to the triple lock, which guarantees annual rises, those already claiming their State Pension will notice an increase.

Each year the State Pension rises by either the previous September’s CPI inflation, average earnings growth, or 2.5%, whichever is higher. For 2019/20, this means a 2.6% rise to match wage growth. What this means for you in terms of money will vary slightly depending on when you retired, your National Insurance record and, in some cases, the additional pension benefits built up.

If you’ve retired since 6 April 2016, you’ll be on the single-tier State Pension. Should you have a full National Insurance record of 35 qualifying years, your State Pension will rise from £164.35 to £168.60. Over the course of the year, it means an extra £221 in your pocket, helping to maintain spending power.

For those that retired before 6 April 2016, your new State Pension will depend on which tier you fall into. Those receiving the basic State Pension will see a boost of £3.25 a week, taking the weekly amount received to £129.20. If you benefit from the additional State Pension, the maximum cap has risen from £172.28 per week to £176.41.

If you’d like to discuss your pensions and retirement plans, including how changes in the new tax year may have an impact, please contact us.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

Premium Bonds have been around since 1956 but they’ve recently been in the headlines again after the technology behind the popular saving option has been revamped. But before you put your hand in your pocket, it’s crucial to understand what Premium Bonds are and how they can potentially offer you a return.

Firstly, despite the name, Premium Bonds differ significantly from standard bonds. A bond represents a loan, with the investor receiving specified repayments over a defined period of time, interest may be variable or fixed. They are used by companies, governments and other organisations to raise capital. Premium bonds, on the other hand, are an investment product that doesn’t deliver interest or dividend income. Instead, you’re entered into a prize draw to receive tax-free cash each month.

Introduced over six decades ago by the then Chancellor, and later Prime Minister, Harold Macmillan, Premium Bonds have paid out prizes totalling more than £19 billion. The product was conceived to encourage more people to set savings aside, with the incentive of potentially securing a life-changing, tax-free prize in the process. It’s a strategy that worked, thousands of people use the NS&I product to save.

The evolution of ERNIE

The distribution of the prizes falls to ERNIE; the Electronic Random Number Indicator Equipment.

Every month, ERNIE is fired up and picks which lucky Premium Bonds will win a prize, ranging from £25 to £1 million. The investment product’s recent attention is down to the latest reincarnation of ERNIE being unveiled. Back in the 50s, the original ERNIE was almost the size of a room and took three days to select the random winners. Today, ERNIE 5 is the size of a pea and uses quantum computing to draw three million winners in just 12 minutes.

Since the launch of Premium Bonds, various other products offering cash prizes have launched, such as the National Lottery. But where Premium Bonds differ is that you can withdraw your initial investment, backed by a Government guarantee.

What else do you need to know?

First, for every £1 you invest in Premium Bonds, you’re given a unique number. This is the number you’ll hope ERNIE picks out. As a result, the more money you place in Premium Bonds the greater your chances of winning. NS&I lists the annual prize fund interest rate at 1.4%, but this will vary hugely between different people and even each year on the same Bonds. The odds of winning with a single £1 bond number is 24,500 to 1.

  • You can invest as little as £25 through Premium Bonds
  • The maximum that can be invested is £50,000
  • All prizes are tax-free
  • Premium Bonds can be purchased as gifts, including for children aged under 16

Should your purchase Premium Bonds?

As with all financial decisions, this will come down to your priorities.

Premium Bonds do have a certain pull; the thrill of being in a prize draw for £1 million every month is certainly appealing. However, if you’re looking for a regular income or guaranteed returns, they may not be right for you.

You also need to consider the impact of inflation on your savings. As you won’t be generating any interest on your savings, the value will fall in real terms. Inflation refers to the cost of living rising, which means your spending power will decrease if savings remain static. It’s important to note that in today’s climate of low-interest rates, inflation eating into your spending power should be considered when holding money in cash accounts.

Two of the key initial advantages of using Premium Bonds can also now be found with other savings and investment products.

Security: If ensuring your money is secure, Premium Bonds can be attractive. You know that you’ll be guaranteed the investment you put in when you decide to cash out. However, cash accounts may also suit your needs if this is a priority. Under the Financial Services Compensation Scheme (FSCS), up to £85,000 per person per authorised bank or building society is protected.

Tax-free returns: Choosing to invest in Premium Bonds means any prizes you did win would be received completely tax-free, which can be attractive. But changes to how savings are taxed means it may not be the incentive it once was. The Personal Savings Allowance (PSA) means if you’re a basic rate taxpayer you can earn up to £1,000 in savings income tax-free, or £500 if you’re a higher rate taxpayer. You can also use your annual ISA (Individual Savings Account) allowance, currently £20,000, to save and invest tax-efficiently.

With both these factors in mind, you need to decide whether a guaranteed return is more important to you or a potential ‘big win’ you have a chance of being picked for with Premium Bonds. If you’d like to discuss Premium Bonds in the context of your wider financial plan and goals, please get in touch.

Please note: The Financial Conduct Authority does not regulate NS&I products.

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