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

Sunday 17th February 2019

The retirement milestone should be one that’s celebrated. But all too often it’s one that’s affected by doubt and uncertainty too. Giving up your working life is a big decision and one that’s in your hands. However, knowing when you’re ready to retire and in the financial position to do so can be challenging.

As you approach retirement, it’s common for money to be a concern. After all, you’ll be giving up your salary and you’ll be responsible for making sure that your pension and other retirement provisions provide you with the lifestyle you want. When assessing if you can afford to retire, there are some key factors to take into consideration:

  • Life expectancy and health: It’s impossible to calculate if you’re retirement provisions will support you throughout your life, without first considering your life expectancy. Those retiring today can expect to live into their 80s, with some reaching their 100th For most people, that means your pension and assets need to provide an income for between 20 and 40 years.
  • State Pension: Your State Pension provides a foundation to build your retirement income on. Your first step should be to check whether you have a full record of National Insurance contributions and what your weekly income from this will be. You can check this here.
  • Personal Pensions: Throughout your working life you’ve probably contributed to several Personal Pensions. If you don’t already know, you should get an up to date valuation of each. From here, you’ll need to decide how you want to access your pension. There are several different options, from an Annuity that will provide a guaranteed income to those that are more flexible to suit changing lifestyle needs. This is an area we can help you with.
  • Other assets: Other assets can also be used to fund your retirement plans, from savings to property. If you intend to use these throughout your retirement, including them in your initial financial plan can give you a more accurate picture of the income you can expect.
  • Expenditure: With an understanding of your assets and projected income, you’ll need to compare this to your expected expenditure. A general rule of thumb is that you need two-thirds of your current income to maintain your lifestyle in retirement. Of course, this will vary depending on your priorities and plans.

Even with these calculations, it’s normal for there to be some doubt. This is where cashflow modelling can help. It can give you a visual representation of how your wealth and income will change over time, demonstrating the lifestyle you’re able to lead. It can also be used to show how different decisions and unplanned events may affect your retirement income too. For example:

  • How would your annual income be affected if you decided to retire three years early?
  • How would downsizing boost your disposable cash?
  • What would happen if investments underperformed?

With a grasp on how your decisions will influence finances, you’ll be in a better position when deciding when the right time to retire is.

Don’t forget the emotional side

While retirement planning often focuses on the financial side and ensuring you have enough to support yourself, you shouldn’t underestimate the psychological process of giving up work.

Your career has likely influenced you and your lifestyle for decades. It may play a big part in your social life, wellbeing and sense of pride. As a result, giving up work needs to focus on more than just the money you’ve stored away in your pension. Asking, ‘How will I spend my time in retirement?’ is just as crucial as looking at how you’ll spend your money.

For some people, the question of when they’re ready to retire comes down to the emotional side more than the finances. You may have enough saved to comfortably retire now but if you’d miss working and your aspirations still centre on your career, it’s probably not the right time for you. Your decision needs to balance both money and emotions.

If you’re still uncertain about giving up work, remember the decision doesn’t have to be final. More retirees are taking advantage of flexible working options once they’ve passed traditional retirement age, with some choosing to go back to work in some form. Whether you opt to work part-time or freelance from the comfort of your home, retirement isn’t as linear as it once was. Today’s agile workforce and technology means you can carve a path that suits you, including continuing to work if you choose to.

Working with a financial planner

As financial planners, we help you combine the two distinct yet key considerations when you’re considering retiring; can you afford to and are you ready to?

Financial planning puts your aspirations and goals at the centre of the strategy. As a result, it helps forge the retirement you want with your financial situation in mind. Our goal is to give you the confidence to give up work when you’re ready to. Many clients find they’re in a better financial position than they believed, allowing them to retire sooner, support family, or follow other dreams.

If you’re struggling with a retirement decision, please contact us. We’re here to help you get the most out of your retirement years and give you the confidence to move ahead with plans.

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.

Pensioners are increasingly taking advantage of the Pension Freedoms introduced in 2015. While the move offered far more flexibility in how you take an income in retirement, it also means there’s more responsibility on your shoulders too. For retirees that have chosen to leave some or all of their pension invested, protecting its value and the income it provides is important.

Flexi-Access Drawdown allows pensioners to leave some or all their pension invested, rather than purchasing an Annuity that provides a guaranteed income. It’s an attractive option for two key reasons:

  • Firstly, it allows pensioners to withdraw flexible amounts of money when it suits them. As retirement lifestyles and aspirations change, this can be beneficial.
  • Secondly, as the money remains invested, it has an opportunity to continue growing. With retirement lasting longer, a useful way to potentially boost pension income.

But how can remaining invested during retirement affect your income, and why might you need to protect it?

As with all investments, there’s a chance it can decrease in value. Should you decide to make a withdrawal at a low point, you would need to sell a larger percentage of your pension fund to receive the same level of income. This means that your savings are used quicker, which has a knock-on effect that reduces future growth too. This is known as pound-cost-ravaging.

As a result, it’s recommended that retirees take a lower level of income when their investments are underperforming. However, it’s a step that many are failing to take. According to research from Zurich:

  • 36% of people keeping their pension invested through retirement do not have a cash safety net to fall back on, meaning they could be hit harder if markets fall
  • Among the 64% that are holding cash in reserve, fewer than one in ten would think to use it if there was a significant drop in the stock market
  • 49% of people taking an income in drawdown said they would continue to withdraw the same amount in the event of a market correction; just 12% would scale back withdrawals

Alistair Wilson, Zurich’s Head of Retail Platform Strategy, said: “A staggering number of retirees appear to be in the dark over how to protect their pensions if stock markets tumble. Withdrawing the same level of income in a downturn could take a bigger bite out of your pension fund – yet it’s a trap that’s easily avoided.”

What steps can you take to protect your pension?

1. Hold a cash reserve

Holding some of your savings in a cash reserve gives you an opportunity to ride out bumps in the market. If investment values fall, using your cash assets, rather than withdrawing from your pension, can help protect value.

How much you should hold as a reserve will depend on your personal circumstances, including living expenses and other liquid assets you have access to. This is a step many retirees are taking but the research suggests a high portion will be reluctant to use cash. However, it’s a step that could improve value and wealth in the long term.

2. Understand what withdrawal rate is sustainable

Understanding how much you can sustainably afford to withdraw from your pension is a critical step before you proceed with Flexi-Access Drawdown. When you choose this route, you’re responsible for ensuring that your pension will continue to support you throughout your life. As a result, investing some time in understanding what’s sustainable is important.

Again, a sustainable level will depend on your personal circumstances. But an annual withdrawal rate of around 3% can be a benchmark for some. As a result, if the value of investments falls, so too will the withdrawal amount. If you want help in understanding how you can take a flexible income from your pension, please contact us.

3. Regularly review investment performance

If your pension does remain invested in retirement, you need to take a more active role in monitoring its performance. As this will have a direct impact on your income, regular reviews should be considered essential.

While monitoring performance should be a step you take, it’s important to remember that short-term volatility is normal. Don’t panic if you see that your pension has decreased in value but have a plan in place for when it happens.

4. Take action when needed

Reviews alone aren’t enough, you need to take action when necessary. Should investment values fall, scaling back the amount you’re withdrawing or even stopping can help preserve the value of your pension in the long term. Often dips are only temporary, and you’ll be able to begin sustainably withdrawing the same level of income again in future.

Of course, you need assets you can fall back on. This is where a cash reserve can help provide you with security should a downturn occur.

If your investments are too volatile, you may benefit from diversifying or reducing the level of investment risk you’re taking.

5. Seek professional advice

Working with a financial planner can help create a retirement plan that works for you, bringing together your aspirations with your pension savings. By working with a professional, you can be more confident in the decisions you’re making and understand how potential investment downturns will affect your income.

If you’re using a Flexi-Access Drawdown product or are considering doing so, please contact us. We’ll help you understand how market volatility could affect your income in the short, medium and long term, and the steps to take to safeguard your retirement aspirations.

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. Your pension income could also be affected by the interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Retiring is a milestone many of us look forward to as it draws near. The prospect of leaving the world of work behind and having more free time to dedicate to the things you enjoy is certainly appealing. But research suggests that many of those approaching retirement don’t know when they can expect to receive their State Pension, putting their financial security and plans at risk.

The State Pension age has gradually been increasing for women over the last few years and it’s now increasing for all. Yet research commissioned by Age UK, suggests that many of those approaching retirement aren’t aware of the changes. The poll found:

  • One in four people aged between 50 and 64 don’t know when they can claim their State Pension
  • Almost a fifth found their State Pension age was higher than expected
  • Three in ten people have never checked their State Pension age

Caroline Abrahams, Charity Director at Age UK, said: “Clearly, there is still much confusion about the age at which people can expect to receive their State Pension and our worry is that many who have few resources to fall back on are in for a nasty shock.”

While you can choose to retire before collecting your State Pension, it’s important to understand the level of income you can expect to receive and how it will change over time. As a result, knowing your State Pension age and how much you’re entitled to should be considered a priority.

The State Pension has changed a lot in recent years.

In 2010, the State Pension age was 65 for men and 60 for women. However, women’s State Pension age has gradually been increasing and in November 2018 equalised with men. Gradual increases mean that by October 2020, both men and women will need to be 66 before they’re entitled to the State Pension. Further plans mean it’s expected to reach 67 in the next decade. As life expectancy rises, it’s likely that further increases to the State Pension age are on the horizon.

There have also been changes to the State Pension itself. The new State Pension system affects those reaching State Pension age on or after 6 April 2016. The amount you receive under the new system is dependent on the number of National Insurance (NI) credits you have.

Checking your State Pension

Luckily, it’s relatively simple to check your State Pension.

The government’s calculator lets you check when you’ll reach State Pension age and your Pension Credit to calculate your income. You can find the tool here.

There have been several news stories recently that have highlighted the importance of understanding your State Pension.

Women born in the 1950s have been affected by the equalising of the State Pension, leaving some struggling financially as they were unprepared or uninformed of the changes. It’s led to a campaign group representing women affected urging the government to give women born in the 1950s the State Pension they would have received if the changes had not occurred. It’s a situation that’s currently under judicial review following a High Court ruling.

You may also have heard of parents having less NI credits than expected due to not applying for Child Benefit when they were taking time off work or working reduced hours to raise children. To maintain a NI record when bringing up children, parents must apply for Child Benefit, even if they know they’re not eligible to receive it.  It means some parents could receive less State Pension than anticipated.

As a result, keeping track of your State Pension age and projected income is crucial for effectively planning your retirement.

Why your State Pension age is important

Even when you’ve made other retirement provisions, your State Pension age is crucial.

For many, the State Pension offers a foundation to build your retirement income on. It can provide a base level of income and security as you enter retirement. Your State Pension is likely to be an important part of your financial plan as you give up work, whether you want to wait until your State Pension age, retire early, or even continue to work. It’s a factor that should inform the decision you make about other income streams and your overall retirement aspirations.

If you’d like to discuss how your State Pension age affects your retirement plans, please contact us. We’ll help you put your projected State Pension income into the context of your wider retirement goals and other provisions you’ve made.

The long-awaited ban on pension cold calling came into effect on the 9th January 2019. In a bid to protect pensioners being targeted by fraudsters, the ban has now been approved into law. It’s a move that should help the Financial Conduct Authority (FCA) and other organisations reduce pension fraud.

Previous figures released by the FCA and The Pensions Regulator (TPR) have shown how devastating pension scams can be. On average, victims lost £91,000 in 2017. It’s a significant sum that could have a long-lasting effect on retirement plans, as well as causing stress.

Pensioners and those approaching retirement are often targeted by scammers through unsolicited contact. In fact, Citizens Advice previously suggested 97% of scam cases about pension unlocking services stemmed from cold calls.

Attempting to entice pension savers, scammers will often offer ‘a free pension review’, the ability to unlock a pension early or suggest investments that are ‘high return, low risk’. These suggestions should be a red flag. However, a poll found almost a third of those aged 45 to 65 wouldn’t know how to check if they’re speaking to a legitimate pension adviser or provider. 12% would also trust an offer of a ‘free pension review’.

Highlighting the scale of the problem, TPR recently revealed it’s investigating six people for pension fraud. It’s believed around 370 people have been persuaded to transfer around £18 million.

An attractive target for criminals

It’s easy to see why criminals are targeting pensions. Some savers may find pensions complex, meaning they’re far more likely to be duped into giving away their pension or personal details. On top of this, a pension is often one of the largest sums of money people have saved over their working life, and many don’t regularly check it. As a result, it’s thought many pension scams go unreported.

This, combined with the way criminals target pensions, has led to increasing calls for pension cold calling to be banned. After delays, it’s a step that’s now been taken. So, what does this mean for you?

Firstly, it does offer you more protection. You know that if you’re receiving a cold call from someone wanting to talk about your pension, you should hang up. Reputable providers and advisers that you want to work with will take note of the ban and cut out this form of contact if they’ve been using it previously.

But that doesn’t mean you should let your guard down. A ban on cold calling doesn’t mean fraudsters will stop using this tactic if it continues to work. Awareness of the ban and giving pension holders the confidence to step back from unsolicited contact is crucial. There are also loopholes that criminals will try to exploit to pose as genuine advisers and providers.

1. Calling from abroad: The cold calling ban only applies to UK phone numbers. As a result, it’s thought that fraudsters will call from abroad, allowing them to navigate around the ban.

2. Contact via email and text: The new legislation only covers calls, not unsolicited contact via email or text. While this is an area that’s covered to some degree by EU regulations, it’s still something to be cautious of.

Six steps to prevent pension scams

The risk of being targeted by scammers wanting to get their hands on your pension is still very real. These six steps can help you reduce the risk.

1. Understand your pension: The more you understand about your pension, the better the position you’re in to safeguard it. For instance, scammers may suggest they can help you access your pension before the age of 55. However, this is only possible in very rare circumstances and should be done by contacting your pension provider directly.

2. Don’t make any quick decisions: Pension decisions can affect your income and financial security for the rest of your life. As a result, you should take your time. Reputable professionals will understand this, while criminals will try to pressure you into making a snap decision.

3. Be cautious of all unsolicited contact: While the cold calling ban does offer some protection, you may still be targeted by unsolicited contact. Be cautious when responding to any type of communication you’re not expecting.

4. Check the authenticity of who you’re speaking to: The FCA Register offers a simple, effective way to check if you’re speaking to a regulated person or company. Be aware that criminals may use the genuine details of an adviser or firm. So, if you’d like to talk to a professional, call them directly using the details listed on the register.

5. Ask questions: Scammers rely on you taking them at their word. Asking questions can help you uncover the lies they’re telling. From investment risk to legislation, genuine providers will be happy to answer your questions, understanding that any pension decision is a big one.

6. Be realistic: The golden rule ‘if it sounds too good to be true, it probably is’, certainly applies to pensions. There’s no simple way to significantly boost your pension savings or access it early. If there were, more people would be doing it.

If you’d like to discuss your pension, whether you think you’ve been targeted by scammers or not, please get in touch. We’re here to help you understand what your pension options are.

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.

How much do you know about your pension? Do you believe that you’re responsible for your retirement plans?

In the UK, around a quarter of individuals feel that their employer, the state or a pension provider is more responsible for their pension than they are, according to a report from State Street Global Advisers.

But while it can seem like a daunting topic to get to grips with, your comfort in your later years and ability to achieve retirement dreams is reliant on your pension. As a result, do you really want to hand over the reins?

The report assessed three core areas for retirement planning; responsibility, choice and advice. It evaluated these concepts on a scale of one to five, with five being the highest. The UK scored just 2.3. This compared to 4.9 in the US and 4.7 in Australia.

In the UK, the research found:

  • Only 14% of the working population are extremely confident in being financially prepared for retirement
  • But 18% don’t expect to make any sacrifices in retirement
  • Just 33% of retirees are confident their money will last in retirement

The findings suggest that there’s a disconnect between Brits and their pensions. More than seven in 10 are not confident about their finances supporting them throughout their later years. As a result, getting to grips with how they work can give you more certainty and set you on the right path.

If you’re looking to boost your pension knowledge, here are seven things you should know about Workplace Pensions to get started:

1. Your pension will be made up from contributions from you and your employer

If you have an end pension goal in mind, it can seem like a daunting target to reach. But it can seem far more manageable when you break it down.

The first thing to note is that most people with a Workplace Pension will benefit from employer contributions. Thanks to auto-enrolment more people than ever before are seeing their pension savings increase due to employer payments.

The amount your employer pays in will depend on legislation and your workplace policy, so be sure to check your contract or employee handbook.

2. You’ll benefit from tax relief too

On top of employer contributions, you’ll also likely benefit from tax relief. Again, this helps to increase your savings beyond what you’re putting in. In fact, it’s estimated that tax relief spending costs the government around £55 billion a year, delivering a boost to the nation’s retirement savings.

Tax relief means that some of the money you would have paid in tax on your earnings goes into your pension. The level of tax relief you benefit from will depend on the Income Tax band you’re in.

3. Your retirement savings are invested

On top of employer contributions and tax relief, there’s another incentive to pay into a pension; the potential investment returns.

The money in a pension can be invested, helping contributions outpace inflation and grow. The compounding effect, where the returns are reinvested to generate returns of their own, means your initial contributions could grow significantly as you work towards retirement.

Pension providers will usually offer several different investment options, reflecting varying levels of risk. The general rule is the longer you will be investing for, the greater the level of risk you can take, but it’s entirely dependent on your personal preference. Your financial adviser can help you determine the appropriate level of risk to take.

4. There are contribution limits

If you want to maximise the benefits of saving into a pension, there are two limits to be aware of.

The first is the Annual Allowance. The amount you can put into a pension each year is currently capped at £40,000 or 100% of your earnings, whichever is lower. If you exceed this amount, you won’t receive tax relief and may face additional charges.

Once you start making withdrawals from your pensions, the annual limit is reduced to £4,000.

The second is the Lifetime Allowance. You will usually need to pay tax if your combined pensions are worth more than this limit. It is currently set at £1.03 million and is based on the total value of your pension, not just your contributions. The rate payable will depend on how you choose to take your retirement income.

5. Pension Freedoms give you more flexibility when you retire

In the past, you may have been put off saving into a pension as you had little choice when you came to collect it.

However, Pension Freedoms introduced in 2015 means you have far more flexibility. Freedoms mean that with the right financial planning, you can make your pension income match your retirement aspirations. Once you’re 55, you’re free to withdraw all the money from your pension should you choose, although usually, only the first 25% will be tax-free. Alternatively, you can leave the cash invested within your pension, buy an Annuity, use Flexi-Access Drawdown or create a hybrid retirement strategy that suits you.

6. You may pay Income Tax when you retire

How you take your retirement income will affect the level of Income Tax you need to pay. As a result, looking at the different options when it comes to withdrawing from your pension is important.

If you want to take a lump sum, the first 25% is tax-free. You can take more but this is often one of the most costly ways to access your pension in terms of tax. If you’re receiving an income from your pension, you’ll pay tax if the annual amount is more than the Personal Allowance, which will rise to £12,500 from April 2019. You should also note that other sources of income can use up your Personal Allowance too.

7. Your pension can be used for Inheritance Tax planning

Your pension can be an effective way to pass on wealth when you die. Most pensions allow anyone to inherit your pension, not just your spouse or civil partner.

Money that is still left in your pension can be accessed completely tax-free if you die before 75. After the age of 75, the money within your pension can still be inherited but will be subject to Income Tax. In many cases, a pension can still be an efficient way to pass on wealth as it may fall outside of your estate for Inheritance Tax (IHT) purposes.

If you have further questions about pensions or would like to discuss your retirement provisions with your goals in mind, please contact us. With our expertise, we can help set you on the right track for the retirement you want.

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.

Inheritance Tax (IHT) is one of the most controversial taxes and it’s one that can lead to much confusion. If you’re planning how you’ll pass your wealth on to loved ones, IHT can be difficult to get your head around. Once you throw in Nil-Rate Bands, you might be at a loss as to what your beneficiaries could pay and how to mitigate it if necessary.

First, the basics of IHT. It’s a tax paid on your estate when you die. The current standard rate of IHT is 40%. The complexity starts when assessing who will need to pay IHT. Your estate includes most of your assets, including cash, property, possessions and investments. If your estate falls under certain thresholds, known as Nil-Rate Bands, no IHT will be due.

If your estate is liable for IHT, there are steps you can take to reduce the bill, or in some cases eliminate it entirely.

Who needs to pay Inheritance Tax?

If you choose to pass on your wealth to a spouse or civil partner, you will be exempt from IHT. Furthermore, you can pass on any unused allowance from Nil-Rate Bands on to them, increasing the amount they can pass on to loved ones without IHT being due.

If you’re passing on wealth to anyone else, including children and grandchildren, IHT may be due depending on the value of your estate. There are two Nil-Rate Bands to be aware of:

The Nil-Rate Band: The basic Nil-Rate Band threshold is currently set at £325,000. If the value of your entire estate is below this amount, no IHT will be due.

The Residence Nil-Rate Band: If you’re leaving your main home to your children or grandchildren, you may also be able to take advantage of the Residence Nil-Rate Band. However, to do so, your estate must be worth less than £2 million. The current Residence Nil-Rate Band is £125,000. The threshold is increasing £25,000 a year and will reach a maximum £175,000 in 2020/21.

The two Nil-Rate Bands mean you can currently pass up to £450,000 to loved ones without IHT being due. Should you share your Nil-Rate Band with a partner, your family can inherit up to £900,000 without having to worry about an IHT bill.

IHT Nil-Rate Bands in practice

If IHT still seems complex, this scenario gives you an example of it working in practice:

David and Jane are a married couple with an adult son, Sam. The home the couple live in together is valued at £400,000. They also have additional savings and investments totalling £1 million. All their assets are jointly owned.

David dies in 2015, so ownership of all the assets pass to Jane without any IHT being due. David’s unused Nil-Rate Band and Residence Nil-Rate Band also pass to Jane.

Three years later, Jane dies leaving her entire estate to her son Sam. As Jane’s estate benefits from her own Nil-Rate Bands and David’s, £900,000 is exempt from IHT. The value above this threshold is liable for IHT at a rate of 40%. This means Sam will face an IHT bill of £200,000. In total, he receives £1.2 million from his parent’s estate, minus other costs for administering.

What to do if your estate may be liable for IHT

The combination of the two thresholds, plus the ability to pass unused allowances on to spouses or civil partners, means that many estates don’t pay IHT. It’s estimated that one in 20 people pay the ‘death tax’. However, HMRC collected a record £5.2 billion from IHT in 2017/18 following an increase of 8% (£388 million) from the previous year.

As property prices have increased significantly over the last few decades, some families may be facing an IHT bill without realising it. Understanding the value of your estate and the thresholds is an important step. If IHT is likely to be an issue you face, there are some steps you can take to reduce liability, including:

  • Make a will: The first step you should take is to make a will, or, if you already have one in place, update your existing will. This will ensure that your assets are distributed according to your wishes, rather than intestacy rules. It also provides you with an opportunity to ensure you’re not paying IHT that could be avoided.
  • Use a trust: In some cases, it may be possible to put part of your wealth outside of your estate for IHT purposes by using trusts. For example, you can create a trust that will benefit grandchildren once they reach adulthood. This can be a complex matter and it’s not a solution that suits all situations. If you’d like to discuss using trusts, please contact us.
  • Gift assets now: You don’t have to wait until you pass away to provide financial support to loved ones. Gifting assets now can mean you get to see the benefits of your generosity and reduce IHT liability. There are some gifts that are immediately exempt from IHT, but others may not be should you die within seven years of them being received. Make sure you understand the gifting allowance before proceeding.
  • Leave some of your estate to charity: The standard IHT rate can be reduced if you leave 10% or more of your estate to charity. This would reduce the rate from 40% to 36%. Depending on the value of your estate, it can mean paying out less, as well as supporting causes that are close to your heart.
  • Take out life insurance: If your estate will be liable for IHT and you’re worried about how your loved ones will pay it, a life insurance policy can help. With the right set-up, it will pay out a lump sum on death, covering your IHT bill. As a result, the value of your estate can remain intact for your loved ones to inherit.

If you’d like to discuss the value of your estate and potential IHT liability, please contact us. We’ll help you understand the options open to you if IHT is a concern.

Please note: Tax and estate planning is not regulated by the Financial Conduct Authority.

When was the last time you reviewed your investment portfolio? It’s a task that can seem daunting and a one that’s easily forgotten about as life gets in the way. But it’s an important step to take to ensure your investments are on track with your personal goals in mind.

If these seven signs are familiar to you, it may be time to arrange an investment review.

1. You can’t remember the last time you reviewed your investment portfolio

While you don’t want to be constantly monitoring your investments and worrying about temporary market fluctuations, your portfolio shouldn’t be something you never look at either. If you can’t remember the last time you reviewed your investments, it’s a sign that it’s probably been far too long.

It’s advisable to undertake an investment review on an annual basis at least, aligning with other financial planning steps that you take. A yearly timeframe gives you an opportunity to look at the long-term trajectory of your investments and still take action when necessary to minimise negative influences.

2. Your investment objectives aren’t clear

Your investments should reflect your wider goals in life. Do you want to grow a nest egg to retire comfortably in 20 years’ time? Or are you saving for your child’s education and need access to the money in just five years? Your objectives will have a big impact on how the money is invested and the level of risk you may be comfortable taking.

Reviewing your portfolio is the perfect time to think about what your objectives are and clearly define how your investments will support this.

3. Your financial situation has changed

Over the years your financial situation will undoubtedly change. Your investment strategy should too. Receiving an inheritance, for instance, may mean you can grow the overall size of your portfolio more quickly. While an increase in salary could mean you’re willing to take on more risk with a portion of your investments. Alternatively, having retired, you may start to withdraw some of your investment to use as income and reduce the level of risk you are subject to.

Your financial situation has a direct impact on how your investment portfolio should be structured.

4. You’ve experienced a big life event

Throughout life, events will have an impact on how you view finances and investments. If since your last portfolio review you’ve started a family, married, divorced, or retired, it’s time to look at how this may have changed the best approach for you.

Life events can influence our outlook on life and, therefore, money. It’s natural that this will affect your investment too. If your priorities have changed, it’s a good idea to see how your investment strategy continues to support them.

5. You have no idea how your investments have performed over the last year

It’s important not to get caught up in the short-term volatility that investment markets experience. It’s natural for the value of your investments to rise and fall over time. However, that being said, you should have a reasonable idea of how your investments have performed, allowing you to adjust where necessary.

Committing to regularly reviewing your investment portfolio means you’re aware of potential opportunities and risks you can take steps to avoid. It’s a process that can help maximise the value of your investments with your goals in mind.

6. You haven’t considered changes that are out of your control

While your personal circumstances and goals should be at the centre of your investment portfolio, wider changes also need to be considered. How economies perform will influence your investment value too, as well as other factors that are out of your control. While difficult, it’s important for them to be factored into your decisions.

A portfolio review gives you a chance to consider what key factors have changed in economies you’re invested in and how this may affect your portfolio’s value. Brexit is a current example of politics influencing investment portfolios, while environmental issues are increasingly affecting company values.

7. Your portfolio is losing value over the long term

Investments are highly likely to experience dips in value as markets fluctuate. But when you take a long-term view, beyond five years as a minimum, the value should be steadily increasing. If you look at your investment portfolio and see a sustained decrease in value it may be time to reassess your approach.

While you look at value, you should also consider the amount you’re paying in fees. These can quickly eat into your returns if the service you’re using isn’t delivering value for money.

If you’d like to understand how your investments are performing and whether steps could be taken to improve the results, we’re here to offer our support. Whether or not your circumstances have changed, we can help assess if your current investment strategy is suitable for your goals.

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.

More retirees with a Final Salary pension are choosing to take their money out of schemes and transfer into a Defined Contribution (DC) scheme instead. But why are they choosing to give up an income that’s guaranteed for life?

A Final Salary pension, also known as a Defined Benefit pension, pays a pre-defined amount on retirement based on a set of criteria. Often this is how long you have been a member of a scheme and your salary when leaving. Final Salary pensions are sometimes referred to as the ‘gold standard’. They’re typically generous and the responsibility to ensure the pension is paid over your lifetime falls to the scheme trustees, rather than you.

The alternative is a DC scheme, which is now more common. If you’re a member of a DC scheme, you make contributions to your pension, which are then usually invested. This may be supplemented by employer contributions and tax relief. The amount you have when you retire will, therefore, depend on the contributions made and the performance of the underlying investments.

Growing numbers leaving Final Salary schemes

Despite the certainty of income that Final Salary pensions provide members with, more retirees are choosing to transfer out of them.

Figures released by the Financial Conduct Authority (FCA) show that between October and March 2016, 5,056 Final Salary members transferred their pension to a DC scheme. This increased sharply to 34,738 transfers during the same period in 2018; a rise of 587%.

While not all transfers are covered in the survey, the FCA estimates that it accounts for around 95% of DC contract-based pension schemes.

Why are Final Salary members transferring out?

When you’re a member of a Final Salary scheme, you essentially have two options when you reach retirement age. The first is to simply take the income the scheme provides. The second is to transfer out, taking the money offered and placing it with an alternative DC pension provider. The latter is a step you can take before retirement age, but the money transferred to a DC scheme isn’t usually accessible until you’re 55.

A few, but growing number, of Final Salary schemes, will also allow you to partially transfer. This would mean you take a lower guaranteed income and receive a lump sum transferred to a DC scheme, to compensate for the portion of income you’ve given up.

The growing number of retirees choosing to transfer can be linked to two main factors:

High values: When you approach a Final Salary pension provider to transfer, they will offer you a Cash Equivalent Value Transfer (CEVT). Operating Final Salary schemes is expensive for the pension trustees, and as life expectancy has increased, so has the cost of meeting responsibilities. As a result, many Final Salary schemes have been closed to new members and high CETVs are being offered to encourage existing members to leave. It’s now not unusual to receive a CETV that is 30 or even 40 times higher than your expected annual income. With such high sums available, it’s easy to see why some are tempted to cash out.

Pension Freedoms: In 2015, the government announced the biggest shake-up to pensions in decades with new Pension Freedoms. These changes aimed to provide more flexibility for those drawing an income from a DC pension, reflecting how retirement and lifestyles have evolved. From the age of 55, DC pension holders can now choose to access all their pension savings if they wish (although usually, only the first 25% is tax-free). They could also choose from purchasing an Annuity, providing a guaranteed income for life, or using Flexi-Access Drawdown, where money can be withdrawn from a pension as and when it’s needed.

While transferring out of a Final Salary pension does offer you more freedom with how you access your pension, as well as potential Inheritance Tax benefits for passing on your pension when you die, there are some downsides to consider:

  • You’ll be giving up a guaranteed income: The impact of giving up a guaranteed income for life shouldn’t be underestimated. It gives you security throughout your retirement. You won’t have to worry about how investments perform or running out of funds in your later years. A lot of people underestimate their lifespan too, which is important to consider, as they may run out of DC pension income.
  • You will need to account for inflation: The income provided by a Final Salary scheme is usually linked to inflation. This means that your spending power is maintained over time. If you choose to transfer out, you’ll need to ensure that you’ve considered how inflation will affect your income over the course of your retirement.
  • You may also be giving up other valuable benefits: Depending on your personal circumstances, a Final Salary scheme may also offer other important benefits. These could include a pension paid to support a spouse, civil partner or dependent should you pass away.
  • You’ll need to take responsibility for investment performance: With a Final Salary pension, the trustees are responsible for investment decisions and ensuring they can meet obligations. If you choose to transfer out, you’ll need to take on that responsibility and poor investment performance or financial decisions would impact the income available to you.

The key thing to remember when deciding whether to transfer a Final Salary pension is that it’s final. Once you’ve left a Final Salary scheme, you won’t be able to reverse your decision. It’s important to carefully weigh up your options before you move forward. If you’d like to discuss your Final Salary pension and how transferring out would affect your finances, 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.

New Year is just around the corner, and what better time to make a commitment to improving your financial security in the future. Making a few financial changes next year could improve your finances in 2019 and beyond. A New Year’s resolution that turns into a good money habit can set you on the right path for the rest of your life.

With that in mind, here are some financial resolutions you could consider making to improve your prospects.

1. I will keep a spending diary

If you found you were overspending in 2018, a diary of where your money is going is a simple but effective place to start. Sometimes it’s easy to forget about those small purchases that add up, especially if you’re using contactless or shopping online. Having all your expenses in writing means you can keep track of where your money is going. If you prefer tech, there are plenty of apps and tools to help manage spending too.

Of course, keeping a diary alone isn’t enough. You should also be looking at where you can cut back, if necessary, and how to make the most of your money.

2. I will start/grow my emergency fund

If you don’t already have an emergency fund, starting one can significantly boost your financial security. The recommended amount to have in an easy-access savings account is between three and six months’ salary. This means you have a buffer to overcome financial shocks, from an unexpected bill to losing your job.

If you already have six months’ salary saved, it may be best to start looking at alternatives. Low interest rates likely mean your money is losing value in real terms. Alternatives to consider are investments or a fixed rate savings account where your money is locked away for a defined period.

3. I will reduce the amount of debt owed

Debt can mean your outgoings are much higher, and much of the repayment is likely to be paying off interest rather than the money you borrowed. If you’re at a stage in your life where you still have debt, such as credit cards or car finance, making a commitment to reduce this can vastly improve your financial security.

Overpaying by even a small amount can cut down the total amount of interest you’ll pay significantly. Reducing or eliminating debt altogether in 2019 can help put you on the right path for the future.

4. I will increase my pension contributions

When you make a New Year’s resolution, you often hope to feel the benefits relatively quickly. But looking to the future can mean the advantages are even greater. Giving your pension contributions a regular monthly boost can mean you reap the rewards when you retire. As the money is usually invested, you will hopefully see returns on your efforts that outweigh inflation and interest. Plus, you may also benefit from employer contributions and tax relief.

If you pay into a Workplace Pension already, be aware that minimum auto-enrolment contributions will automatically increase in April 2019.

5. I will overpay my mortgage payments

A mortgage is often one of the biggest financial commitments you make. It’s not unusual to plan to still be paying your mortgage 30 or even 40 years after you first purchased. As a result, the accumulated interest over the years is significant. Making regular overpayments or paying off lump sums can cut down the total interest paid and means you’ll own your home sooner.

It’s a resolution that can have more immediate benefits too. Paying extra means you’ll own more equity in your home, which typically means you’ll be able to access lower interest rates when remortgaging. Be sure to check your terms first though, some lenders may charge you for overpaying.

6. I will start/grow my investment portfolio

Investing can be an excellent way to grow your money. Once you’ve built up a savings account, putting regular amounts into investments can mean the opportunity to generate returns above interest rates. Ideally, you should be investing with the view of holding stocks and shares for at least five years, this helps to smooth out dips in the market.

When you’re investing, be sure to consider the level of risk you’re willing to take and how well-placed you are to withstand potential losses.

7. I will create a long-term financial plan

Don’t just focus on the immediate financial goals this year, look at your wider objectives too. The steps you take now could help them turn them from a dream to a reality. Thinking about what you want to achieve should be your first step. From here you can start to create a strategy that’s aligned with what you want.

This is an area where financial advice can be invaluable. We’ll help you understand how your current finances are suited to your goals and the steps you should be taking to secure the future you want.

If you’d like help getting to grips with your finances in 2019, please contact us. We’d be happy to discuss steps that could improve your long-term financial security and how we can add value to your plans.

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 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.

We all know we should be saving for retirement. But research suggests many of us don’t know how much we’ve put aside for life after work, even as we approach the milestone.

Understanding your projected income for retirement is crucial for making important decisions, from when you can afford to give up work to how much you can sustainably take annually. Without this vital piece of information, you could be at risk of making a decision that may cause financial insecurity later in life. Or you may find you’ve saved enough to retire sooner than you thought. As a result, checking the figure is vital for your retirement plans.

If keeping an eye on your projected income isn’t something you’ve been doing, you’re not alone. Research from Aviva found:

  • Two in five employed 46 to 55-year-olds don’t know how much they have saved for retirement despite approaching traditional retirement age
  • This compares to 24% of employees aged 22 to 30
  • 49% of all UK employees believe they need to save more
  • And the most common emotion associated with people’s savings is worry (18%)

While keeping track of retirement savings is important throughout your working life, it’s particularly critical as you approach the date you want to give up working.

Alistair McQueen, Head of Savings and Retirement at Aviva, said: “Not knowing how much you have saved in your pension pots is like approaching retirement with a blindfold on. For those in their 40s and 50s, understanding retirement savings is especially critical. They can be accessed at age 55, at which point some big decisions might need to be made. Without knowing how much you have saved, it’s difficult to put a plan in place that could improve your retirement.”

If you’re among the workers that don’t know how much you’ve saved for retirement or what your projected income is, here are some steps you can take.

1. Gather information about all your pensions

Your first step should be to see just how much you already have stored away in pensions. You should get annual statements from pension providers, showing you the total value held. However, if you’ve moved and forgotten to update your address, you could have some ‘lost’ pensions.

With the average UK adult holding 11 jobs over their lifetime, it’s not surprising that we lose touch with a few of our pensions. But recent figures from ABI calculated the total amount in ‘lost’ pensions was almost £20 billion. You could have a nest egg that’s quietly been growing without you realising.

Once you have the information for all your pensions, you’ll need to decide what to do with them. You have two options. You can either keep them as separate pensions, which can be difficult to keep track of, or consolidate them. Whether or not consolidation is right for you will depend on your circumstances. You could face additional charges and you’ll have to decide which provider to transfer your other pensions into. Your existing pensions might also have special benefits that would be lost on transfer, so it’s important to get financial advice. If this is an area you need help with, please contact us.

2. Assess your other sources of retirement income

In addition to your Workplace and Personal Pensions, you’ll probably have income coming from other sources too.

For most people, the State Pension will provide the foundation of their retirement income. Assuming a full National Insurance (NI) record, the State Pension currently pays £164.35 per week. If you have less than 35 qualifying NI years but more than ten, you’ll receive a portion of the State Pension. You can see how much State Pension you can expect to receive here.

On top of this, you may have investments, savings and assets like property that will supplement your pensions. Gathering all this information together can seem like a time-consuming task but it’s one that’s worthwhile. It’ll help you plan for your future and could give you peace of mind if you have concerns.

3. Think about when you want to retire

The age you want to retire will have a big impact on the income you can sustainably take from your pension each year.

If you’re hoping to retire before the State Pension age, you’ll also need to factor in covering this shortfall in income initially. Alternatively, you may decide that you want to continue earning an income through employment or self-employment, giving you greater flexibility. Your retirement plans will play a significant role in what you can afford to take out of your pension both when you first retire and in the future.

While we’re on the topic of taking a sustainable level of income, it’s wise to consider your life expectancy at this step too. Many people underestimate how long they’ll live for and this can leave them struggling financially in later years.

4. Seek financial advice

Sorting through multiple income streams can be challenging, particularly if you have some complex assets. This is where seeking professional financial advice can help.

Using cashflow modelling techniques, we’ll be able to show you a visual representation of your finances and how they may change. As a result, you’ll be able to clearly see how your retirement provisions will be affected by making different decisions. For example, how would retiring five years early affect you? Or what difference would withdrawing 3% compared to 6% annually through Flexi-Access Drawdown make?

If you’re approaching retirement, please contact us. We can help you understand how your current retirement provisions align with your goals and the steps you can take to make your aspirations a reality.

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.

« Previous PageNext Page »