Contact us: 01799 543222

3 pension changes you may have missed in the Budget

Archive for the ‘Pensions’ Category

3 pension changes you may have missed in the Budget

Wednesday, November 14th, 2018

There was scarcely a mention of the ‘P’ word in October’s Budget speech (believe us, we were listening closely for it!). Instead, Hammond used the Budget speech as an opportunity to unveil his ‘rabbit in the hat’ changes to income tax thresholds, an increase in NHS mental health funding and a ban on future PFI contracts.

However, we had a good read of the accompanying ‘Red Book’ for any mention of pensions. At 106 pages, this was no mean feat. Fortunately, though, it was time well spent as we found some changes to pensions you may otherwise have missed:

The pension dashboard

HM Treasury confirmed that the Department for Work and Pensions (DWP) would look at designing a pension dashboard which would include your state pension. The pensions dashboard will be an online platform that will let you see all of your pension schemes in a single view. The average worker is nowadays expected to work eleven jobs during their career and keeping track of so many pension pots could prove confusing to say the least.

There was an extra £5 million of funding for the DWP to help make the pension dashboard a reality. Commentators see the dashboard as a welcome sign that the government is committed to helping savers keep track of their funds.

Patient capital funding

The government announced a pensions investment package which should make it easier for direct contribution pension schemes to invest in patient capital. Patient capital refers to investments that forgo immediate returns in anticipation of more substantial returns further down the line.

The government may review the 0.75% charge cap and there is widespread speculation that it will be increased to allow more investment in high growth companies.

Cold calling ban

The government has promised to ban pensions cold calling as part of a drive against pension scammers. Almost two years since the government’s initial proposals to combat pension scams were announced, pensions cold calling will finally be made illegal.

Research by Prudential indicates that one in 10 over 55s fear they have been targeted by pensions scammers since the introduction of pension freedoms in 2015. Cold calls, with offers to unlock or transfer funds, are a frequently used tactic to defraud people of their retirement savings.

As much as these measures go a long way to making people’s pensions more secure, the government will be powerless to enforce cold calls made from abroad and not on behalf of a UK company. It is unclear how and if the government will work with international regulators to mitigate the dangers of such calls.

The longevity challenge and how to tackle it

Thursday, November 8th, 2018

The longevity challenge: In the UK, we are faced with the challenge of an ageing population. Many of us will live longer than we might have expected. Already, 2.4% of the population is aged over 85. Because of improvements in healthcare and nutrition, this figure only looks set to rise.

The Office of National Statistics currently estimates that 10.1% of men and 14.8% of women born in 1981 will live to 100. A demographic shift to an older population brings unprecedented change to the way the country would operate, from the healthcare system to the world of work.

In addition, a long life and subsequently a long retirement, bring challenges of their own from a personal financial planning perspective.

Firstly, it means you have to sustain yourself from your retirement ‘nest egg’ of cash savings, investments and pensions. You need to ensure that you draw from this at a sustainable rate so you don’t run the risk of outliving your money.

Secondly, there’s the question of funding long term care. If we live longer, the chance that we will one day need to fund some sort of care increases. Alzheimer’s Research UK report that the risk of developing dementia rises from one in 14 over the age of 65 to one in six over the age of 80.

Of course, there are many different types of care, ranging from full time care to occasional care at home, with a variety of cost levels. All require some level of personal funding.

The amount you pay depends on the level of need and the amount of assets you have, with your local council funding the rest. This means that it’s definitely something that you need to take into account in your financial planning.

Having the income in later life to sustain long term care really does require detailed planning. Because of the widespread shift from annuities to drawdown, working out a sustainable rate at which to withdraw from your ‘nest egg’ is essential.

There is no ‘one-size-fits-all’ sustainable rate at which to draw from your pensions and savings. Every person has their own requirements, savings, liabilities and views on what risks are acceptable.

There are some things which you will be able to more accurately plan when working out the sustainable rate to draw from your pension. These include your portfolio asset allocation, the impact of fees and charges and the risk level of your investments. Speaking with your financial adviser will help you on your way to working out the right withdrawal rate for you.

There are, however, some unknowns. These include the chance of developing a health condition later in life and exactly how long you’ll live. It is best to withdraw leaving plenty of room for these to change unexpectedly, improving your chances of having a financial cushion to cope with what life throws at you.

Kids off to Uni? Congratulations – but have you been saving enough?

Wednesday, October 10th, 2018

The Institute of Fiscal Studies suggests that the average total debt incurred by today’s university students over the duration of their studies will amount to £51,000. This figure comes as those in higher education saw the interest rate on student loans rise to 6.3% in September. Total student debt in the UK has now risen to £105 billion as of March 2018, a figure £30 billion higher than the nation’s total credit card debt.

The rising cost of higher education perhaps makes it unsurprising that 40% of parents are now beginning to save towards future university costs before their children have even been born, with one in five hoping to have saved £2,000 by the time the baby arrives. Frustratingly, however, around two thirds of those who are saving are doing so by simply placing the funds in an ordinary savings account, meaning their money is earning them very little in interest.

An alternative option to consider is a Junior ISA (JISA) in the child’s name, which they can then access when they turn 18. The account currently allows £4,128 to be saved every year, and the best rate market rate for a cash JISA offers 3.25%. Saving the maximum amount at that rate for ten years would result in a nest egg of £49,427 tax free to cover university fees with plenty left over for other expenses.

Whilst a cash JISA offers dependability, a stocks and shares JISA is also worth considering as the potential reward on your investment can be higher. Both types of JISA can be opened at the same time with the allowance shared between them, so spreading your savings between the two can pay off in the long run.

Using your pension to save towards your child’s university education is also an option, thanks to the pension freedoms of recent years. With the ability to take a lump sum to put towards fees and other costs when you turn 55, pensions offer a tax-efficient way of putting away for both your child’s future and your own. This is an option which needs careful planning, however, as you’ll need to make sure you have enough for your retirement before paying for your child’s education.

For those able to do so, it may also be worth speaking to your own parents about helping towards their grandchildren’s university costs. Rather than leaving money to a grandchild in their will, a grandparent might consider gifting towards fees and other expenses or placing the money in a trust, reducing their inheritance tax liability and allowing their grandchild to benefit from their legacy when they really need it.

Make sure you don’t lose out by shunning guaranteed annuities

Wednesday, October 10th, 2018

Since increased pensions freedoms were established in April 2015, the FCA says that £3 billion worth of annuities have been rejected by over 55s. Now, nearly three in five over 55s are refusing the guaranteed annuity rate (GAR) offered to them by their pension provider. Of these, nine out of ten are taking the cash instead.

A GAR means that if you use your pension to buy an annuity, you are guaranteed the rate that you get paid until you die.

Nowadays, a worrying proportion of pensions with large GARs are being cashed in, indicating that people might not be thinking through their decision because some GARs can provide a very generous income for retirements. Hargreaves Lansdown report that GARs are being rejected on 35% of applicable pensions worth more than £30,000.

If you have a GAR, you might be losing out over the course of your retirement if you decide to cash it in.

GARs were a common feature of pensions that date from the 80s and 90s. The rates on these are typically much higher than the best rates on the open market today, because they were set at a time when annuity rates were greater. In the 1980s and 1990s you could buy an annuity with a considerably higher rate than you could find today.

When making a decision to cash in your pension, doing the following will make you less likely to lose out:

  1. Check your paperwork. Although you probably feel like you have an unfeasible amount of pensions paperwork, take the time to sift through it to find out if you have a GAR. If you aren’t sure, call your provider to check. Remember that if you’re still unsure, you can get in touch with the Pensions Advisory Service for free help.
  2. Have a look at the terms. Even though a GAR could boost your retirement income, their terms can be a little rigid. Some GARs apply to your dependant’s pension, others don’t. Often, GARs are very inflexible about when you are able to take your income.
  3. Take an integrated approach. It’s unwise to consider all of your pensions in isolation. Instead, it’s best to consider them as individual building blocks that contribute to your overall retirement income. A holistic approach will help you consider in which order to draw on your different pension pots. Usually, it’s best to use a pension that doesn’t have any guarantees if you plan on retiring early.
  4. Get a requote. If you don’t think that the terms of the offer suit your circumstances, talk to your provider to try to find an alternative option. Chances are your provider won’t volunteer this option so it’s always best to ask.
  5. Think about a partial transfer. If you have a larger pension with a GAR, transferring out a portion of the money could be an option while buying a fixed rate annuity with the rest. This would mean that you maintain the benefit of higher annuity rates whilst getting a cash lump sum.

How to stop children derailing your retirement plans

Wednesday, September 5th, 2018

The Bank of Mum and Dad is a well-known concept and we all hate to see our children struggle financially, which is why many parents continue to support their children well into adulthood. Instead of being ‘empty nesters’, many parents discover that their offspring return to the family home straight after university (that is if they ever left in the first place!) due to the problems of getting a foot on the property ladder.

The type of financial assistance given can take various forms, such as money towards a house deposit or a loan for a car or ongoing support towards rent or bills. While it’s natural to want to help, though, the hard truth is that it’s important not to put your child’s finances before your own retirement savings. Otherwise, in the long run, no one wins. We look at four key ways to help retain a sensible outlook.

Make sure you understand your own financial situation and your retirement goals

Before you leap in and promise to help your son or daughter, make sure you’re clear about your monthly budget. What are your regular commitments and your personal retirement goals? Will you still be able to lead the lifestyle you’re envisaging if you’re supporting your children financially too? As a general rule, you need to be able to replace at least 70% of your pre-retirement income once you stop work. You may also have plans to travel more or have a particular home renovation project in mind. It’s important that you remember to factor in any potential health costs as well.

Sit down with your child and have a frank discussion

If you’re open and honest about your own commitments and the level of your support, this actually sets a good example to your children at a time when they’ll just be learning to manage their own finances. It also gives you an opportunity to set boundaries, clarify expectations and fix timescales. Be specific: is the money to help with a student loan, rent, a mobile phone contract or food bills? The concept of an ‘independence fund’ can sometimes work well – a one-off payment to help an adult child as they enter the ‘grown-up world’.

An external perspective

Sometimes, it helps to involve a third party, such as a professional financial adviser who can offer some valuable objectivity in what can be an emotionally-charged situation. If you all sit down and review your financial plan together, it makes it easier for everyone concerned to see the impact giving a loan to your children would have on your own finances. Bear in mind that if you did overstretch yourself, you could end up having to turn to your offspring for financial support and the last thing anyone wants is to become a burden in later life.

Put it in writing

If you do decide to give your children some money, it does no harm to make the arrangement formal. This means they will take the loan seriously and it gives both you and them something to refer back to in the future. It also sets expectations in terms of any repayments and timeframes. Make sure you review the document regularly and that it is still appropriate. For example, circumstances will change – your child may get a promotion or you may have incurred some medical expenses.

The bottom line is you need to look after your own finances now to be able to look after theirs in the long run.

Are children’s pensions as good as they seem?

Wednesday, August 22nd, 2018

Pensions for children? Surely that’s taking planning ahead to a whole new level?

Nonetheless, if you can afford it, putting money aside in to a pension for your children or grandchildren can be a sensible option.

Under the current rules, you can put £2,880 a year into a junior self-invested personal pension (SIPP) or stakeholder pension, on their behalf. Even though the child won’t be a taxpayer, 20% is added to the amount in tax relief, up to £3,600 per annum. If you think about it, that can result in quite a significant amount over the years, taking compound growth into consideration.

The idea of contributing to a pension may tie in well with your sense of responsibility towards the next generation. You may feel sorry for the youngsters of today with their university fees to pay back and a seemingly impossible property ladder to climb.

However, on the downside a children’s pension can be quite frustrating for the recipient. The money is tied up until their mid fifties. This means that although the amount is steadily growing with no temptation to dip into it, it may not be much consolation for a twenty-five year old desperately trying to find the deposit for a house. Instead of making their financial future easier, you may have, in fact, impeded it.

There are other alternatives which will also give you the benefit of compound growth and help you to maximise tax relief, such as using our own ISA allowances and then gifting the money later. These may have more direct impact if the money is to help pay for a wedding, repay a student loan or enable them to buy a house or start a business.

Pension contributions are often referred to as ‘free money’ because of the the tax relief. In addition, 25% of the lump sum when the recipient comes to take their pension is tax free but it is equally important to remember that 75% of any withdrawals will be taxable. Another consideration is that children’s pensions have the lowest rate of tax relief but once in employment, your children may be higher rate taxpayers so would have benefited from higher rate relief.

One thing is for sure and that is that the rules around pensions and withdrawal rates are frequently changing. Given the extended timeframe involved, it’s likely that the regulations around accessing a pension pot will have altered considerably by the time a child of today reaches pension age. Their fund will have had time to grow handsomely, though. As with most things, it all comes down to a question of personal preference for you and your family.

Financial planning in your forties

Thursday, August 16th, 2018

It’s well known life begins at forty. Doesn’t it?

It should be an exciting decade, full of plans and aspirations. It’s also likely to be a time of optimum earning potential.

What’s more, it’s a crucial decade to take a step back and make sure your finances are on track to meet your goals.

There’ll be some decisions you’ll already have taken in your twenties or thirties, which will have had an impact. You may have bought your own home, for example, or put some savings away in cash, investments or pensions.

If things don’t look quite as rosy as you’d hoped, though, your forties are a good time to take stock, as there’s still time to make adjustments and give your investments time to grow.

Don’t forget, whatever savings you can make now will enable you to pursue your dreams later on.

Here are four key tips for shrewd financial planning at this important time of life.

Budget ruthlessly

Just because life may feel comfortable with regular pay rises and bonuses don’t fall into the temptation of spending more than you need. Do you really need that Costa coffee or M&S lunch every day?

Apps like Money Dashboard or Moneyhub can be helpful in showing you where your money’s going. Simple steps like cancelling subscriptions or switching bill providers can make a significant difference.

Historic studies show that investments usually outperform cash savings so any disposable income you can invest will be beneficial. If you can put money aside in a pension you’ll also be taking advantage of the tax relief available. Make sure you use your ISA allowance too for more accessible funds.

Carry out a protection audit

Think about what if the unexpected happened. Your forties are a time of life where you may find yourself part of what’s known as ‘the sandwich generation’ i.e. caring for elderly parents at the same time as looking after young children. This can put extra pressure on you. Make sure you’re protected should the worst happen by ensuring you have a good emergency fund in place. Also think about critical illness cover and life insurance.

Property plans

Your home will be a fundamental part of your financial planning at this time of life. If you feel you need a larger property, these are likely to be your peak earning years so now is the time to secure the best mortgage you can and find your dream home. On the other hand, if you’re quite happy where you are, it may be a good time to remortgage to get a better deal.

Family spending

Everyone’s situation is different. You may have children at university or you may still be having to pay for nursery fees. Whatever your position, make sure you budget accordingly and allow for inflation, especially if you’re paying private school fees. Work out the priorities for your family – the best education now or a house deposit in the future. It’s important not to derail your own life savings for the sake of your children as no one will benefit in the long run.

By doing some sound financial planning now, you’ll have more hope of continuing in the style you want to live, well beyond your forties.

Are you keeping track of your pension pot?

Wednesday, June 27th, 2018

Keeping track of your pension pots can feel like a full time job at times, particularly as we head towards a world where the average person will have eleven different jobs over the course of their career. It’s becoming increasingly uncommon for people to stay in the same job throughout their employment. In fact, we’re now seeing that 64% of people have multiple pension pots; that’s up 2% since October 2016. While that in itself is not a worry, what is more troublesome is that of that 64%, 22% have reportedly lost track of at least one of those pots.

Which means there are more than 7 million people who may not have access to the retirement funds they’ve worked hard to amass. To make sure you’re not one of them, it’s really important to keep on top of the bigger picture of what you’re owed.

Despite an increase in pension awareness, thanks to auto-enrolment, recent research has shown that 30% of people still do not know the value of their pension. Of course, if you’re not sure of the full value of your savings, it makes it hard to plan properly for retirement.

For some, the best way to get a clearer view of the situation is through pension consolidation. If you have a number of small, automatic enrolment pots, it could be worth bringing them together to make them more manageable. Consolidation isn’t necessarily the right choice in all circumstances, though. Certain pensions, particularly those of an older style, will come with great benefits that may be relinquished upon consolidation. Whether or not this is the right path for you will depend on your personal situation, so it’s always a good idea to consult an adviser to talk you through the process before making any decisions.

If you think you may have lost sight of a pension pot yourself, there is a pension tracker available through the Department for Work and Pensions that will help you locate it. Do feel free to get in touch with us directly, if you have any questions around this topic.

Is buying a state pension top-up worthwhile?

Wednesday, June 27th, 2018

As part of your overall financial planning, one item that is worth considering is your state pension and whether you are on track to get the full amount. If not, it is possible to buy top-ups, which could boost your payout by £244 a year for life.

The 2017/18 voluntary payment, under the Class 3 National Insurance top-up scheme, costs £741 and will get you nearer to, or over, the threshold for the maximum state pension payout – currently £164.35 a week. Such an opportunity can be particularly relevant for those who have contracted out of part of the state pension at some point previously during their working life.

A word of caution though before proceeding – some people have paid the top-up only to discover that it made no difference to their state pension and subsequently struggled to get a refund from HM Revenue and Customs.

Some of the confusion arose because of the major shake-up in April 2016 when the single-tier pension system was introduced. Under the old system you had to have 30 years of NI contributions to get the full basic £122.30 a week pension, whereas under the new one you have to have 35 years. The top-up system was letting some people pay for extra contributions when to do so was futile.

Despite the problems encountered by some, Steve Webb, former Pensions Minister, says it is still worth investigating whether the additional payment would boost your future state pension. ‘Ironically, I think it would be really unfortunate if lots of people who could now top up for 17/18 at incredible value were put off doing so or didn’t do so because they were still unaware of the option, and where the decision to top-up or not is much more straightforward and less likely to go wrong,’ he said.

To know where you stand, the first thing to do is to get an official state pension forecast from the Government website. This will highlight whether you have any gaps in your National Insurance record of contributions. The top-up scheme can be particularly relevant for women who took time out to look after children.,

If you reached state pension age before 6 April 2016, the old system will apply to you (that’s men who were born before 6 April 1951 and women born before 6 April 1953). However, if you reached state pension age before 6 April 2016 (men born before 6 April 1951 and women born before 6 April 1953), the new system will apply.

You also need to work out if 2017/18 was a qualifying year for you – when you were under state pension age for the whole year and in which you either paid or were credited with enough NICs to earn one year towards your state pension entitlement.

If you have any questions around this topic, please feel free to get in touch with us directly.

Record numbers making use pensions freedom

Thursday, May 24th, 2018

The people have spoken and they love freedom! Recent figures show withdrawals in the 2017-18 year were worth £6.7bn, the highest figure since the pensions freedom reforms were introduced in 2015.

Before the change in legislation, the majority of pensioners would purchase an annuity with their pension pot, which would guarantee them an income for life.The pension freedoms now mean that those over the age of 55 have access to their savings and more choice and flexibility over how they fund their retirement.

Clearly pensioners are beginning to embrace this opportunity, with a total of 220,000 making half a million withdrawals between them in the first quarter of 2018. That’s an increase of 20,000 from the previous quarter. Initially, there had been concern over isolated examples of pensioners blowing their entire savings on luxury goods and services, but responsible and widespread use of the reforms is now underway.

It’s true that although savers have more freedom and flexibility as a result of the reforms, it does mean they also have greater responsibility. This means that it’s more crucial than ever to follow sound financial advice. Samantha Seaton of Moneyhub, the budgeting app, shares this view stating, “While this flexibility is being embraced, it has also brought into sharp focus the importance of financial advice. But as customers find their finances increasingly fragmented across multiple providers, it can often be a real challenge for advisers to get a true picture of their clients’ financial situation.”

Research has shown that some savers lack the knowledge to enable them to make the right decisions regarding their pension pot. Policymakers and the wider financial sector are now working to address this.

If you have any questions around this topic, please feel free to get in touch with us directly.