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Do you know how much your pension is worth?

Archive for the ‘Pensions’ Category

Do you know how much your pension is worth?

Wednesday, September 13th, 2017

Recent research from Royal London has found that around five million people in the UK have ‘forgotten’ pension pots from final salary schemes of former employers. What’s more, many of these deferred members of defined benefit funds don’t know how much a lump sum payout of this accumulated pension would be worth, thanks to a lack of communication from the provider of their old scheme. As people who transfer their pension pot are offered an average lump sum of between £158,000 and £190,000 – around 25-30 times the annual value of their pension – the collective amount held in these forgotten pots could reach a total of up to £800 billion.

As many people are unaware that they are holding valuable pension assets, potentially worth a six figure sum, the researchers emphasise that those who are members of these schemes should take steps to discover how much their pensions are worth, as well as seeking impartial advice on what to do with the money. Whilst taking a lump sum may seem attractive, it may not be the best option for many people, as doing so means sacrificing a guaranteed pension payment.

Nonetheless, more and more people are choosing to make use of pension freedoms in order to take lump sum payments from their retirement savings. The former pensions minister, Baroness Altmann, has suggested that whilst granting the freedoms was the right thing to do, the government should make consultation with the official financial advice service, Pension Wise, compulsory for those looking to take a lump sum. Doing so would ensure “people get financial advice before they make a decision that is irreversible”.

Making any big decisions about your pension can of course have significant ramifications for your future retirement, so if you are considering whether or not to take advantage of pension freedoms yourself, make sure you seek professional advice before doing anything. If you have any questions around this topic, please feel free to get in touch with us directly.

How much should you really be saving for retirement?

Sunday, July 23rd, 2017

Retirement should be the time in your life where you’re able to relax and enjoy the fruits of your labour throughout your working life. However, simply paying into your savings or a pension for when you retire might not allow you to do this if you’re not putting enough away. But what does “enough” look like? Here are a few questions to consider to help you get started.

  1. How old are you? – Clearly the earlier you start saving for your retirement, the more time you have to put money away. Conversely, the longer you leave it to start paying into your pension or savings, the more time – and money – you’ll need to make up. A good way to ensure your contributions are adequate for your needs later in life is to take the age you start paying into your pension, then divide it by two. This is the percentage of your pre-tax salary you need to put away every year until you retire. The earlier you start paying in, the lower the percentage; delaying will just mean you need to pay in more later on.
  2. How much is matched by your employer? – Contribution matching by employers can really help build up your nest egg, so it’s worth keeping up to date not only with how much your employer is currently matching but also how this figure will increase if you up your contributions. That said, it’s a good idea not to rely too much on contribution matching, focusing instead on reaching your savings goals on your own.
  3. What are my saving habits like? – Being honest about how good you are at saving will help you capitalise on your positive habits and combat those which might thwart your attempts to build up your pension. Make sure saving is the first thing you do: rather than putting away whatever you have left at the end of the month, make sure your savings leave your account as soon as you get paid. If you receive a pay increase, make sure you take the opportunity to bump up your contributions so that the extra money doesn’t all go towards the here and now. Most importantly, don’t give up. Even if you start saving below the rate you should be putting money away, this is better than not saving at all, and helps to make saving a habit for when you’re in a position to increase your contributions later.

What’s happening with Defined Benefit pension schemes?

Wednesday, June 21st, 2017

Defined benefit (DB) pension schemes continue to be a hot topic in the business and financial worlds as an increasing number of people seek to transfer their pensions from a DB scheme. Recent figures suggest that more than four out of five (83%) of financial advisers in the UK have seen an increased demand for such transfers over the last twelve months, with over half (54%) describing it as a ‘significant increase’. Additionally, 71% of UK advisers said they expected the demand to increase further over the coming year.

A major contributing factor to this higher demand for DB transfers is the introduction of pension freedoms in recent years. Demand is also being fuelled by the continued uncertainty created by the DB pension scheme deficit. The latest figures suggest that the shortfall has remained stable over the past year despite the political turmoil: the deficit shrank to £183 billion at the end of May 2017, down from £194 billion twelve months earlier. That said, this is still a significant negative amount of money, which is undoubtedly contributing to many looking to ditch their DB pension in favour of something which appears to be more stable.

Employers, too, appear to be moving themselves away from DB pension schemes. It was reported at the end of May that BT is looking to close its DB scheme for current employees, a move unlikely to be popular with its workers; a similar move by Royal Mail Group following the company’s privatisation which aimed to shut the scheme to its current workforce led to strike action in April this year.

The AA has also recently confirmed that it will go ahead with proposed changes to its DB pension scheme, moving all members of the scheme to its existing career average revalued earnings (CARE) pension arrangement. The CARE scheme will also see amendments such as moving its indexation from the Consumer Price Index (CPI) to the Retail Price Index (RPI), likely to be more favourable for those receiving pension benefits.

It looks likely that the changes and discussions surrounding DB pension schemes will continue for some time. If you are a member of a DB scheme and you’re considering a transfer or you’re unsure of what to do, the most important thing to do before anything else is to seek financial advice to ensure you understand the choices available to you and which is best for you. If you have any questions around this topic, please feel free to get in touch with us directly.

Why retirement is worrying millennials

Wednesday, June 14th, 2017

A recent study by HSBC has revealed the main financial worries of the ‘millennial’ generation, recognised as those born between 1980 and 1997. As its title suggests, the ‘Future of Retirement’ survey focuses primarily on how millennials feel about how they are preparing for life after work, but also delves into the wider issues around money and modern life which are inherently linked to the subject.

In general, millennials see themselves as less fortunate than the generations which have come before them. Over half (52%) felt that they had seen weaker economic growth than previous generations, whilst 60% said they saw themselves as experiencing the consequences of decisions made by those older than them, including rising national debt and the global financial crisis. In relation to retirement, 65% of respondents are worried that they will run out of money when they retire, whilst 46% were concerned that employer pension schemes would collapse without any payout for their generation.

The average age that millennials begin saving for their retirement is 27, with just 13% admitting to not having begun putting money away for their pension yet. 76% said that curbing their current spending was difficult but necessary to save for later in life, whilst 68% are willing to do so. When it comes to investment, nearly half of those surveyed (48%) said they would go for a risky opportunity which had the potential for greater returns further down the line.

Expanding out to look at the concerns of all those currently working, which includes both Baby Boomers (those born between 1945 and 1965) and Generation X (born between 1966 and 1979), the survey found that only 17% were worried they wouldn’t be financially comfortable in retirement based on their current savings, with a worrying 14% admitting to having not been able to save anything. However, over half (52%) said they felt that due to the constantly changing financial climate, their current retirement plans would not be relevant.

When asked about back-up plans, around two thirds (67%) of working people said they would continue working in some way after they reached their retirement, whilst more than four fifths of people (82%) said they were intending to retire two years later than originally planned in order to give themselves greater financial stability. 41% also said they wouldn’t mind taking on a second job or working for longer to supplement their pension pot.

The key guidance from HSBC’s research is that starting to save early is the best way to ensure you have sufficient savings to support yourself after you’ve retired. Another key message is the importance of seeking advice, with many people now using technology to plan their retirement: almost half of those surveyed (49%) have used the Internet to research their options, 35% have used online retirement calculators and 27% have contacted advisers online. Online savings accounts are also popular, with 41% saying that they are using one to put money away.

Savings, investments & the political climate

Wednesday, June 14th, 2017

Whilst the country takes in the latest developments in the ongoing saga that is contemporary British politics, one question that many will be looking for answers to, is how the result of the general election is likely to affect them financially. It’s inevitable that savings and shares will be impacted upon in some way by Theresa May’s failure to convert her confidence in April into a larger majority in June and the resultant Conservative/DUP deal, as well as the wider ramifications the election outcome might have for the upcoming Brexit negotiations.

Following the election and the slight fall in the value of the pound, shares in many of the largest British companies went up. As companies dealing in dollars and other currencies benefit from a weakened pound, the FTSE 100 initially rose. However, ‘local’ companies dealing in sterling, such as Lloyds Banking Group, housebuilders Crest Nicholson and retailer Next all came out worse off, as did smaller companies linked to the UK economy.

As such, those with diversified pensions and ISA funds are likely to be no worse off than before the election, and doing significantly better than this time twelve months ago. However, it’s worth remembering that the uncertainty and volatility that are likely to be seen in UK politics in the coming days, weeks and months could result in shares and investments shifting further.

Whilst interest rates on both savings and mortgages were at historic lows before the election, capital markets pushed these still further down the day after polling day in order to absorb some of the shock of a result most had not predicted. This is just the latest setback for savers in a period which has seen rates declining consistently since the Bank of England lowered the Bank Rate from 0.5% to 0.25% in August 2016. With little competition between lenders, it’s more likely that rates will fall further than begin to climb any time soon.

The housing market too has been slowing since well before the election, making it a good time for those looking for a great deal on a mortgage to find one – but only if they meet the increasingly fastidious lending methods being used by lenders. The economic instability the country could potentially see in the coming months mean that criteria may tighten further, so those hoping to benefit from a low mortgage rate should do so sooner rather than later in order to avoid missing out.

Pension Savings: a quick recap on your options

Wednesday, April 19th, 2017

It’s been two years since the government introduced pension freedoms, greatly expanding the options for how those who have saved into a defined contribution pension product can access their savings. There are now a number of different ways to take advantage of pension freedoms, so let’s have a look at each of them and the potential advantages and disadvantages of each.

If you can afford to do so, choosing not to access your pension at 55 can be one of the most beneficial options to take. You can continue saving into your pension if you want to, enjoying tax relief on all contributions until you turn 75. This also applies to any further gains you might make by leaving your pension pot invested. The main drawback is that you won’t be able to use your pension to support you, delaying your ability to retire. However, with many people choosing to continue working beyond the traditional retirement age, either part-time or full-time, this option is becoming increasingly popular.

The introduction of pension freedoms meant that everyone is entitled to take a tax-free 25% out of their pension pot. The benefits of doing this include being able to reinvest your money elsewhere in order to try and grow it further, to pay off a mortgage, or to have the freedom to splash out on home improvement, a holiday or anything else you want to treat yourself with. Obviously spending a quarter of your pension fund in one go means that you’ll have to stretch the rest of your savings to cover your retirement, whilst another drawback of taking the 25% is that any other withdrawals from your fund will be subject to income tax.

Another option is purchasing an annuity with your pension savings. Most annuities provide a guaranteed income until you die, but there are also fixed term annuities which last for a set period of time, or joint annuities which continue to pay a partner or dependant after your death. The main draw of annuities is the security and peace of mind they offer, but it’s essential to shop around for an annuity which gives you a good rate. Annuity rates depend on a number of factors including your age, health and lifestyle, and some are also linked to inflation.

‘Flexi-access drawdown’ is a further option which means you can withdraw your savings as and when you want, taking advantage of the 25% tax-free lump sum and reinvesting the remaining 75% into a number of investments outside of your pension pot. The advantage here is that you can adjust your income to reflect your needs, allowing as much of your savings as possible to remain invested and grow. The main drawback is that, like all investments, they can shrink as well as grow. Your income is also not guaranteed, and as your savings are finite, you’ll need to be able to support yourself once they’ve been used up.

With so many options available, the most important thing to remember is not to do anything without fully considering your circumstances. An option which works for one person might be a disastrous choice for another. Before making use of the pension freedoms available to you, seek professional advice and make an informed decision.

25% charge on QROPS transfers

Wednesday, March 29th, 2017

In the Budget earlier this month, the Chancellor Philip Hammond announced a 25% charge for people moving their pension abroad via a QROP (a Qualifying Recognised Overseas Pension Scheme). If you’re planning to spend your retirement somewhere warmer and sunnier than the UK then the news may have worried you somewhat – will it end up stalling your dreams of life after work spent overseas?

The charge will affect qualifying recognised overseas pension schemes (QROPS) and has been introduced in an effort to prevent people from moving their pension savings overseas in order to avoid paying UK tax. As such, there are a number of exemptions to the new rules, which should mean that anyone legitimately planning to move abroad when they retire will be able to do so without parting with a hefty sum from their retirement pot.

There are three situations where an individual will be exempt from paying the new 25% charge: if both the QROPS and the individual are in the same country following the transfer; if the QROPS is in a country within the European Economic Area (EEA); or if the QROPS is sponsored by an employer and constitutes an occupational pension.

HMRC has stated that “only a minority” of QROPS transfers will be subject to the new policy which further backs up the idea that the 25% charge has been introduced to deter people from abusing the QROPS system to avoid paying UK tax. As such, anyone with plans to retire to a warmer climate shouldn’t worry about losing a quarter of their pension to do so.

It’s also worth noting a further change to the QROPS system, however. HMRC has stated that “payments out of funds transferred to a QROPS on or after 6 April 2017 will be subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is resident”. It’s definitely worth seeking professional financial advice regarding QROPS if the changes to the rules surrounding overseas pensions are likely to affect you in any way, so please get in touch with us directly to ask any questions you have.

What could be the best way to provide for your grandchildren?

Wednesday, March 1st, 2017

With both property prices and the cost of living continuing to rise, as well as low interest rates making it difficult to save, the ‘Bank of Mum and Dad’ is increasingly becoming a partnership with the ‘Bank of Gran and Grandad’. If you have grandchildren, it’s only natural that you’ll want to provide for them in some way as you move towards your retirement years. But what’s the best way of supporting the younger members of your family in the long term as well as the short term?

One way that you could do this is to set up and regularly contribute to a pension in your grandchild’s name. As today’s younger generation are likely to miss out on the robust pension security enjoyed by their parents and grandparents before them, creating a pension for them early in their life will undoubtedly help them in the decades to come.

A key plus point of paying into a pension is the tax relief your investment will enjoy. Including the 20% boost this relief will provide, you can pay in up to £3,600 annually to your grandchild’s pension even if they’re not yet earning an income. Adding £240 a month will achieve this sum, with £2,880 paid in by you and a further £720 in tax relief claimed by the pension provider automatically.

Doing this for fifteen years will mean that a 21-year-old grandchild today could have a pension pot of £220,000 by the time they reach 57, and that’s without including any additional contributions. Assuming an annual net growth of 5% after charges, if the pension remains untouched until they reach 67 it could grow further, to around £340,000.

However, this highlights the one potential drawback of choosing to pay into a pension: the money won’t be available to your grandchild until they reach their 50s. Whilst this does mean it can be left to mature, it also means that any money paid in won’t be available should it be needed. As there are likely to be other forms of expenditure you might want to help grandchildren with, such as paying for a deposit on their first home or going to university, you should think carefully about how much you want to put away for their future and how much you want to make available to them in the short term.

Keeping track of your pensions

Wednesday, March 1st, 2017

A recent study has revealed the worrying statistic that over a fifth of all people with multiple pensions have lost track of at least one, with some admitting to have forgotten the details of all of them. With around two thirds of UK residents having more than one pension, this amounts to approximately 6.6 million people with no idea how much they’ve put away for their retirement. Double the amount of people admit to not knowing how much their pensions are worth.

It’s an undesirable side effect of the modern working world. Whereas in previous generations someone might stay at a single employer for their entire working life, the typical worker today will hold eleven different jobs throughout their career, which could potentially mean opting into the same number of pensions through as many different providers. The new legal requirement for all employers to offer a pension scheme through auto-enrolment is likely to add further complexities.

As a result, the Pensions Dashboard is set to launch in 2019 in the hope that it will make it easier for savers to keep track of their pensions in one place. Until then, however, there are four relatively simple steps to help you track down information on any pensions you’ve forgotten about:

  1. Find your pension using the DWP Pensions tracing service at www.gov.uk/find-pension-contact-details. Start by entering the name of your former employer to discover the current contact address for them. You’ll then need to write to them providing your name (plus any previous names), your current and previous addresses and your National Insurance number.
  2. In the case of a pension scheme which hasn’t been updated for a while, you’ll be required to fill out an online form to receive contact details. You’ll be required to give your name, email address and any relevant information to help track down your pension details. This could include your National Insurance number and the dates you worked for the company.
  3. You can also receive a forecast of your State pension either online or in paper format by going to www.gov.uk/check-state-pension. After entering a few details to confirm your identity, you’ll be told the date you can access your State pension and how much you’ll receive.
  4. Finally, and most importantly, once you’ve managed to track down all of your pension information, get some advice. Consolidating your pensions might be tempting to make managing your savings easier, but you also want to make sure you don’t lose out on any benefits by doing so. Before you make any decisions regarding your pensions, seek professional independent advice on what to do next.

The new pensions minister’s savings tips!

Wednesday, January 25th, 2017

Richard Harrington, who was made pensions secretary by Theresa May soon after she assumed office as Prime Minister in July last year, recently wrote an article for This Is Money divulging his spending tips for 2017. It’s a piece littered with what could be called ‘financial advice’, so what does the new minister recommend we do with our wealth this year?

Harrington’s first piece of advice is to look at your pension, even if you’re not going to be retiring for many years to come. The government has set up a website called ‘Check Your State Pension’, which can be found at www.gov.uk/check-state-pension and allows you to see an estimate of your state pension’s worth and when you’ll currently be eligible to receive it. There’s also a Pension Tracing Service set up by the government at www.gov.uk/find-pension-contact-details to help you identify pension schemes you’ve paid into in the past of which you may have lost track.

The article also advises those already in retirement to look into whether the State Pension Top Up Scheme will benefit them. The scheme allows those who reached state pension age before 6th April 2016 to make a one-off payment to increase their retirement income by up to £25 a week, but it’s only available until the end of the current tax year.

Other key pieces of advice from Harrington include urging younger earners to leave their pensions alone to ensure contributions made now have decades to build up interest, and looking into whether your employer will match any increases in pension contributions you decide to make.

The pensions secretary also warns against the many pensions scams still operating within the UK, advising strong caution against anyone offering attractive rewards for investing pension savings. If it seems too good to be true, it probably is, so do your research thoroughly and check with the Financial Conduct Authority to avoid losing your hard-earned money.

Harrington ends his article with a reminder that the UK has no set retirement age and that over 1.2 million over 65s are still employed, so if you enjoy your job there’s no compulsion for you to retire immediately. Delaying your state pension if you choose to carry on working can give your income a healthy boost when you do decide to retire.